Alexa Novoa

BPS 4305.002
15 October 2014
LEGO: Building Blocks of Success
Introduction
In its inception, Lego was a leader amongst toy brands when it came to
innovation. Coined as a system of play, these small plastic bricks made for a smart
business model as well since the value of play expands exponentially the more elements
you have.1 One would have thought the company would have continued to thrive
through the years not face the reality of an estimated loss of $337,000 in value every
day.2 So, why did they face so many difficulties, and how should they move forward to
overcome those barriers? The answer lies in supply chain management, geographic
expansion, and continual focused innovation.
Analysis: Opportunities for Improvement
Currently, Lego has weaknesses in a few areas, the first being their supply chain
management. Legos operations are sub-par. Originally, the company had decided that
they wanted their brand to be authentic, and therefore could not outsource production.
Their approach to manufacturing was stubborn and they did not take its consequences
into account. This missed opportunity caused Lego to fall behind its competitors in terms
of cost reduction. According to the Strategy+Business article, Rebuilding Lego, Brick by
Brick, Poor customer service and spotty availability of products [are] eroding the
companys franchise in key markets.2 When other giants in the industry such as Hasbro

and Mattel began to outsource, Lego continued with their original custom delivery type
of model, catering to the smaller retailers dominant only in the toy market.2
Second, as profits declined more rapidly, the ultimate strategy became growth.
This massive push to expand and innovate beyond their traditional walls was great in
theory. It did, however, result in skyrocketing costs. As Knudstorp recalled, they had
3,560 different shapes, 157 colors and 10,900 elements in [their] assortment.1 Each of
these shapes requires a unique mold, which range in cost from $64,000 to $382,000. As
Supply Chain Digest put it, Lego was more focused on product innovation than the
impact on supply chain costs.3 As they grew, they did so without properly developing an
efficient, easy to understand cost system. Due to this oversight, they lost money that they
did not even realize they were losing. As the Executive VP of Global Supply Chain put it,
My inventory costs were exploding, we had a lot of write-offs and obsolescence, and I
couldnt explain anything!1 The company failed to align their supply chain with their
strategy of releasing new products each year.3 Clearly, Lego has expanded and innovated,
but at a high cost with no strategy to act as a safety net.
Recommendations: Supply Chain
In order to resolve Legos supply chain management problems, a more
comprehensive cost system should be implemented, distribution policies should be
clearly defined and geared toward high-revenue accounts, and manufacturing should be
carried out in the most cost effective location.
First, comprehensive cost and manufacturing systems are needed for Lego to be
successful in the future. They need to replace their current confusing, messy system with
one that clearly defines costs, and therefore profits. Harley Davidson is an excellent

example of a company that successfully implemented a Just In Time (JIT) system within
their manufacturing. According to Jack Wilson, author of Real-Life Examples of
Successful JIT Systems, when JIT was put into practice, process problems could no
longer be hidden by costly inventory that helped to meet ship dates.4 When companies
like Mattel and Hasbro began implementing this, they analyzed and optimized every
cost driver.2 Their current system allows them to operate in a haze without having a clear
grip on what components or products are costing them more than they will earn in
revenue. Once they adapt to this change, however, they will have the ability to closely
watch their costs, resulting in the removal of unprofitable items, a more reliable
availability of products, and ultimately, an increase in overall profit.
Next, Legos distribution policies should be clearly defined and geared toward
high-revenue accounts. As a result of Mattel and Hasbros JIT implementations, they
gained the ability to provide service to the big-box retailers that dominate the market.
Lego is in need of the same system. Currently, the company is catering mainly to smaller
retailers specific only to the toy industry, resulting in a huge loss of opportunity. Big-box
retailers dont view them as being able to compete on their stage. By implementing JIT,
Lego will be able to resolve inefficiencies, delivering the ability to provide just-in-time
service to the behemoths.2 With these changes implemented, they will increase not only
efficiency, but also build a reputation for providing great service to large retailers.
Last, Lego should consider where the most cost-effective manufacturing location
might be. Outsourcing would introduce the possibility of not only cuts in cost, but also a
strategic partnership. According to Forbes, outsourcing can create real sustained value
when companies utilize them to gain capabilities that they dont have in-house, or to

strengthen capabilities they do have.5 Legos initial concern was keeping the integrity of
their brand strong, and as a result, did not believe outsourcing would be the right choice
for the company. Hasbro, a major competitor, was able to keep their brand integrity while
also taking full advantage of the benefits of outsourcing their manufacturing. They
accomplish this by viewing their external relations as strategic partners tightly integrated
with their domestic operations, and ensuring that quality management systems are still
in place. 5
Recommendations: Innovation
Lego has always been an innovating company, and they should continue to
capitalize on that innovation. The company must be careful, however, not to over-grow
beyond its capacity as it is currently doing. They have thousands of different products, all
with unique shapes, requiring unique molds, which come at an extremely high cost to the
company. As Strategy+Business puts it, such intricacy and attention to detail reflected
the firms culture of craftsmanship, but also its disregard for the costs of innovation.2
After implementing more efficient cost, manufacturing, and distribution strategies, Lego
should be able to identify which products are pulling in the least amount of revenue.
Once this is done, they should cut those from their manufacturing process, and continue
to focus on innovation that falls in line with products that have successfully profited. This
more streamlined innovation will be effective in cutting costs and sustaining a mindset of
efficiency.
Conclusion
Its no doubt that Lego has made a great name for themselves in the toy industry.
Between their clever innovation, signature craftsmanship, and attention to detail, the

company has been quite successful at their craft. Of course, they have faced many
challenges and pitfalls. Their current supply chain management strategy is unorganized
and inefficient, and they have over-innovated past their capacity. These two simple
aspects of the company are undermining one another a small business, unclear supply
chain model for a company with endless creativity and possibilities. By aligning their
supply chain with their business strategy for growth and innovation, Lego will create a
safety net for itself to grow within its means. Then, it can again focus on what is really
important: creating its signature space for constructive play.

Endnotes
1

Rivkin, Jan W.. LEGO: (A): The Crisis. Harvard Business School. 5 Feb. 2013. Web.

Oliver, Keith. "Rebuilding Lego, Brick by Brick." Strategy+Business. 29 Aug. 2007.

Web. http://www.strategy-business.com/article/07306?pg=all.

"Lego, the "Toy of the Century," Had to Reinvent the Supply Chain to Save the
Company." Manufacturing Supply Chain Digest. 25 Sept. 2007. Web. Web.
http://www.scdigest.com/assets/on_target/07-09-25-7.php?cid=1237.

Wilson, Jack. "Examples of Successful JIT Systems." Brighthub Project Management.

29 June 2013. Web. http://www.brighthubpm.com/methods-strategies/71540-reallife-examples-of-successful-jit-systems/.

Heric, Michael. "Outsourcing Can Do Much More Than Just Cut Costs."Forbes.15 June
2010. Web. http://www.forbes.com/2010/06/15/outsourcing-capability-sourcingleadership-managing-bain.html.