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
Then last year, after only a few months, we began to hear of problems.
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
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:
drops partnership with Flextronics – Quality and effectiveness have
simply not been good enough for the production that was outsourced to a
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.