Not-So-Lean Lego

Bill and Kevin have blogged in the past about the efforts of new Lego CEO, and former McKinsey partner, Jorgen Vig Knudstorp to remake the company. (Read the posts here and here.)  They questioned the wisdom of his strategy, which seemed to involve (all together now) outsourcing and layoffs.  While it's hard to applaud those tactics, it seems that there's more to the story.

Booz Allen Hamilton's magazine, strategy+business, just published a lengthy analysis of Knudstorp's efforts, in which the authors assert that the main problem facing Lego was an obsolete supply chain.  (The article is available for free here.)  According to their analysis, Lego's supply chain was designed to service the mom & pop stores of the 1950s and 1960s, not today's retail behemoths.  Fixing the supply chain (which includes product design and development, in their definition) to deal with the realities of today's marketplace would be the key to success.

Many of Knudstorp's changes make solid business sense: he reduced the number of SKUs, after realizing that only 30 products generated 80% of sales.  He cut back the number of suppliers from 11,000 -- nearly twice as many as Boeing uses -- to about 2,500 in order to simplify purchasing and increase Lego's buying leverage.  And he created a process by which designers could see the costs associated with product design and material choices.  So far, so good.  The financial results reflect this: the company has saved approximately 50 million Euros since 2004 and in 2005 recorded its first profit -- 61 million Euros -- since 2002.

But other changes make little sense from a lean perspective.  The strategy+business article states that Lego 

also considered the manufacturing footprint. The Lego Group had already outsourced 10 percent of its production to Chinese contract manufacturers, but the team decided against sending more work to Asia. Instead, building on its successful experience moving some production to Kladno, Czech Republic, the company concluded that it could actually boost efficiency by locating its factories near its most important markets.that Lego decided it could actually boost efficiency by locating its factories near its most important markets.

Hmm.  Is the Czech Republic so much closer to the European market than Denmark?  Is that proximity worth the loss of years of manufacturing experience?  And as Bill noted, Lego closed its US facility in Connecticut and moved production to Mexico.  I'm guessing that the US market is larger than the Mexican one, which makes this logic more than a bit tortured.

Moreover, in a move that really makes you scratch your head, Lego decided to fly in the face of manufacturing everywhere and make themselves less flexible in their ability to respond to changes in customer demand.

Cutting the number of elements and colors in production made it easier to take the next step — rationalizing production cycles. The team started by halting the time-honored practice of making every machine available to produce any element, an approach that necessitated constant, costly retooling. Instead, the team assigned specific molds to specific machines, and set up regular four- to 12-week production cycles. The group then deemed that sales and operations would set orders at a regular monthly meeting, reducing the need for constant changeovers.

Having learned nothing from the lessons of the US auto industry, Lego seems to have taken it as an inviolable rule of nature that machine changeover is time-consuming and costly.  They've opted instead to have their factories run in pure batch mode.  Maybe SMED isn't possible for their machines, but even without knowing the intricacies of the toy market, I can predict that four- to 12-week production cycles guarantees that they won't have the right product mix at the right time for their customers.  I wonder if some of the laid-off workers in Denmark had some ideas about how to make machine switchover faster and cheaper. 

Finally, according to the article,

The company further minimized the cost of serving each account by providing discounts for early orders and refusing to ship less-than-full cartons.

So much for giving the customer what he wants.  Lego is now forcing retailers to purchase products they don't want or need.  Talk about muda. Talk about alienating your customers.  Talk about a recipe for filling the market with closeouts.  Now, I'm no manufacturing whiz, but couldn't the company stock two or three different-sized cartons?  Would that incremental cost really outweigh the benefit of meeting customer needs?

Knudstorp has achieved impressive financial results so far.  But I'm not convinced that Lego is really on the right path for the long term.  Cost-cutting measures --even comprehensive and strategically sound ones -- rarely solve a company's long term problems in delivering value to the customer.