Lego Figures It Out

What a wild ride it's been at Lego.  First in mid-2006 Bill told us about their initial decisions to outsource manufacturing.

The only trick the ponies from McKinsey know is outsourcing, which is exactly what [CEO] Jørgen Vig Knudstorp did.  The work in the U.S. plant in Connecticut is being sent off to Mexico.  The Danish town of Billund where Lego is headquartered and the factory has long been the biggest employer in town, is being decimated as most of the work is being farmed out to Flextronics to do in the Czech Republic.

Then last year, after only a few months, we began to hear of problems.

The Lego corporation's large scale outsourcing has created so many problems that there will not be any downsizing of jobs in Danish factories in 2007. The plan was to cut the workforce in Billund from 1200 to 300, and outsource the jobs to their partner Flextronics in Kladno Czech Republic.

It then appeared one of the final chapters of Lego's outsourcing adventure may have been written. One of our long-time readers from across the pond sent us the following news:

Lego drops partnership with Flextronics - Quality and effectiveness have simply not been good enough for the production that was outsourced to a Czech factory.

Now it appears that they have completely gotten religion.  Once again, thanks to our Danish correspondent Peter,

The recipe for the good result is, according to Lego's CEO Jørgen Vig Knudstorp two significant ingredients: Insourcing and intellectual capital.

Holy camoly.  Insourcing and the power of knowledge.  Could it be they actually get it?  Three years of destroying the lives of thousands of employees and their families, but I guess better late than never.  Well, maybe I better qualify whether they really understand what has transpired...

"After the fact that we, 4-5 years ago, had a rehearsal of the financial crisis that the world is having now, Lego was trimmed hard and now we focus on our core output. The result is mainly due to optimized management of costs, but especially the ability to quickly react to the demand. Insourcing of the previously outsourced prodction has contributed to this" says Jørgen Vig Knudstorp.

No, I think it would be more accurate to say you experimented with traditional McKinsey solutions, they failed miserably, and you were at least smart enough to realize they had failed and you figured out how to save your company.  In other words, you screwed up, but caught it in the nick of time.  Actually, Mr. Knudstorp comes right out and admits this screwup, which is far more than most CEO's will do.

"If we go out and search for someone to make bricks for us then they will say: 'Yes please, how much of your equipment can we have?' and then you are in a situation where you are paying someone to produce on your own machines. You have to scratch your head a bit for that math to work out." Says Jørgen Knudstorp, who acknowedledges that he made a mistake with Flextronics that Lego has now stopped working with, after a lack of fulfillment of quality and efficiency targets.

"I should maybe have discovered that a long time ago. But now when our contract is running out, I am glad that we are running the production again. But it has been a ok experience where we have learned a lot about where we have our competencies and where we lack them."

He does seem to have a pretty good idea of the limitations of oursourcing, something those among you who still bow to the siren song of outsourcing should use as a lesson.

When we make 22 billion bricks all year, or 30.000 per second i around 7.000 variations, in 115 million boxes. And these boxes have to be at a retailer in a given city in a give country by 17.15 next wednesday. And these boxes are not there, then they will not enter the distribution. Then we need to keep track of all the elements and how they are placed in giant storage facilities. To produce exactly what is needed in exactly the right qualities is extremely demanding of our planning and data-integration.

You can have suppliers like smaller satellites that supports your production and whom you get into the system, but you have to be like the spider in the web and control all your master data. We couldn't do that while we were outsourcing 70 percent of our (finished goods)production. It just didn't work. So now we have optimized by taking everything back.

Lego learned a very painful lesson.  Hopefully others can learn from Lego.

Comments

[C.Wittum]

It is to bad that even articles like this only portray one or the other outsourcing verses internal lean) being mostly the correct solution. There are many ways to put a good model together and combinations of both ideas can be the right thing to do. One must consider their core competency and do the homwork up-front making sure they pick the right suppler and that supplier can perform to the quality and other expectations that make them an extension of the company outsourcing, that the logistics (along with an expedite plan is incorporated into the cost structure for emergancies)and that any outsourcing is incorporated into the parent plants lean initiatives. Both can work and work well when done properly and planned well.

[Paul Todd]

Out of curiosity, what happened in Mexico? Was that an outsourcing situation, or a rush to cheap labor in a Lego facility with the same management system?

[Luis]

They (Lego) is oppening a facility in Monterrey moving the production from Lego Juarez fecility.

[Bill Waddell]

Paul: First Lego outourced in Mexico to Flextronics in Juarez. The big change they are making is that they are pulling everything back in house, but not necessarily to Denmark. Lego built a factory of their own in Mexico last year (Monterrey, I believe) and is now running their own show, albeit in the wrong place vis a vis their customers in order to get cheap labor.

As far as Kevin's post is concerned, well said except for the last line: "Lego learned a very painful lesson". It doesn't appear as if they learned much. The McKinsey genius who argued so eloquently for outsourcing is now equally eloquent about insourcing, and sounds as though this was his plan all along. He was named Business Person of the Year in Denmark just a few months ago and is riding high.

There is no humility whatsoever for the thousands of human lives he trashed in Denmark.

[Jason Morin]

"He does seem to have a pretty good idea of the limitations of oursourcing, something those among you who still bow to the siren song of outsourcing should use as a lesson."

Kevin, Kevin. Outsourcing is NOT evil as you like to portray it, but it can result in disaster if not planned and executed properly. I'm on board that outsourcing one's production off or near shore for the sake of cheap labor is not a wise long-term strategy, but please stop with this generalization that outsourcing leads to nothing but failure.

Outsourcing CAN work and HAS worked for many companies that do it right.

[martinb]

Lego is a real outsourcing horror story. It shares a characteristic of most such stories here on Evolving Excellence. They concern existing factories that were closed and production moved to China. It is easy to see the cost in lost expertise.

But what of the case where no manufacturing facilities exist yet? There is no expertise to lose, so the case for building a green-fields site in China must be stronger than the case for moving an existing facility to China.

A case in point is Tesla's discussion on where they should build their proposed Model S. The case for China looks good.

See Darryl Siry's blog.
http://www.darrylsiry.com/2009/03/high-quality-affordable-evs-made-in.html