Lego Case
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What were LEGOs main expectations and learnings from the relationship with Flextronics?
The Lego group had highly optimistic expectation of the outsourcing relationship with their chosen partner Flextronics with some of their main expectation detailed below
It would the lock the prices over a longer period, and thus eliminated the risk of production price fluctuations
Reduction in LEGO Group in-house production capacity from 90-95% to the set targets of approximately 20% and to achieve the target of 80/20 %t [outsourcing/in-house] ratio set Right from the beginning.
The LEGO management was convinced that Flextronics will reduce the complexity of the LEGO production process and organization
The intense supply chain collaboration will Provide strategic and efficient cost-savings to help improve the companys competitive market positioning
However as the outsourcing collaboration adventure progressed post signing the contract agreement in year 2006, it did not last for long. Despite its promises of optimizing the global supply chain, the outsourcing collaboration was cancelled after merely three years. But the outsourcing collaboration adventure with Flextronics enhanced LEGO Group with key learning such as
The cost of the outsourcing collaboration adventure such as global distributors training and education needs and competent knowledge transfer requirement were underestimated by the LEGO management team as highlighted by management statements “It takes more time to educate time to educate people than we had expected and that means that we are still more efficient in Billund” (Pedersen, 2010, 7)and “you need a clear plan for training and educating” (Pedersen, 2010, 9).
Having the above LEGO statements in mind it might appear as decision with negative output but in fact LEGO recognized that they have learned from their bad experience with Flextronics and improved their framework for outsourcing decisions and their documentation and system standardization process.
There was clear challenge with the misalignments of the LEGO products seasonal fluctuations and unpredictable demand with Flextronics business model which was based on semi steady demand forecast.
The LEGO Groups need for flexible and market responsive business solutions presented a strategic misfit to Flextronics more stable and predictable operations in which economies of scale was a key word.
The result of attempting to manage and overcome the complexity of the production network by outsourcing it to external providers was actually only a more complex global manufacturing footprint
Following the analysis of the preparing for outsourcing stage, it was evident that that there could have been some other aspects LEGO group could have taken