Lego Case Study
Lego, Consolidating Distribution02 October 2015Case QuestionsWhat was the rationale behind the original distribution setup? LEGO’s motto “Only the best is good enough” had contributed to an emphasis on creating, selling and delivering toys at any cost, without regard for practicalities. There was little rationale behind the original distribution system. LEGO was focused on creativity, innovation and superior quality. Over time it created a complex supply chain. Lego tried to establish itself as a just-in-time delivery company at a very high cost. It accepted customer orders with immediate or next day delivery. Of these orders, 67% were for less than a full carton and only 62% could actually be delivered “on time”.To support the just-in-time delivery concept LEGO needed to be geographically close to their customers. LEGO used four regional distribution centers (DCs): two in France, operated by a third-party logistics provider and serving primarily the UK and southern European markets; one in Germany for the Central and East European markets; and one in Denmark for Scandinavia and the Benelux. What are the advantages of a fully integrated centralized distribution in an Eastern European location?Proximity. A location in Eastern Europe allowed LEGO to be close (16 to 18 hours’ drive) to their main production facilities and largest single markets, Germany and the UK. For Møller Nielsen, the focus was on distribution to customers in Europe and Asia as well.
Cost savings. A fully integrated centralized DC would help reduce the number of required transportation companies from 55+ to a maximum of seven global suppliers. The centralized DC concept already existed in the US and Canada and had proven its efficiency. Furthermore, reducing the number of transportation companies to seven would result in DKK 40 million ($6.8M) savings per year and the consolidation of operations into another DKK 75 million ($12.75M).Support customer requirements. Having all services under one roof allows proper focus on each service of the “customer brief”: Standard orders, value-added services, and customized orders. What are the critical changes that Møller Nielsen made or pushed outside distribution that allowed him to substantially improve the performance of the supply chain?One of Møller’s first actions was to establish a solid logistics cost baseline. This allowed him to identify that yearly logistics cost were roughly 10% of sales or DKK 650 million ($110.5M). Transportation costs accounted for half of total cost. His research drove the decision to reduce the number of transportation companies. This had the direct effect of substantially improving the financial performance of the supply chain by saving DDK 45 million ($7.65M) in transportation related costs.He also established a direct communication link with LEGO’s key customer base to understand their real requirements. Through questionnaires and interviews Møller learned that most customers did not require daily or next-day deliveries. Immediate delivery required higher inventory levels and closeness between DCs and customers. This discovery coupled with the key corporate driver to build a sustainable profitable platform allowed Møller to consolidate all logistics and distribution operations to a single, central DC managed by a third party, DHL. This was the biggest critical change Møller executed as part of his new strategy. DHL also got to manage the LEGO assortment packs, assembled customer value packs and prepared customized deliveries all in one location.