Lego’s Outsourcing Adventure, Part Trois

Over the last few years we’ve chronicled the travails of Lego, the Danish maker of plastic children’s toys.  I like the product and have credited my early experiences with it with turning me into an engineer, whether that’s good or bad, but the company leadership could use a little help.  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.

Lego already owns the plant in Kladno in the Czech Republic where the work from Denmark is being sent.  The plant, the employees and the equipment are merely being turned over to Flextronics to run.  If McKinsey folks know any other tricks besides outsourcing, manufacturing management apparently is not one of them.  The only change is who is going to manage the plant.  The McKinsey management expert obviously thinks that Flextronics is the better manager than himself.

Even more curious is that Jørgen has outsourced the plastics and packaging work to Flextronics, but has retained the little bit of electronic work Lego does for their Technic and Bionicle product lines.  The ‘tronics’ part of Flextronics denotes that they have long been primarily an electronics contract manufacturer.  Yet Jorgen’s insight led him to keep that work in house, and have an electronics company with a track record of failure in the Czech Republic take over management of an injection molded plastics plant.

Sorry, I tried to snip that quote down a bit, but it was just too good.  You can’t make that stuff up.  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, so writes the newspaper "Børsen" [A paper akin to the Wall Street Journal].

We’ve never been big fans of the large consulting houses, but recently I’ve given McKinsey some kudos for their focus on lean.  Too bad some of their folks, or at least their alumni, don’t practice what they preach.  Jorgen’s focus on outsourcing has led to problems throughout Lego.  Core competencies were moved to a contract manufacturer that had failed with previous projects.  The inability to remove people, perhaps luckily, led to outsourcing not achieving cost reduction goals.

Now it appears one of the final chapters of Lego’s outsourcing adventure may have been written. One of our long-time readers from across the pond found the following news:

Kvaliteten og effektiviteten har simpelthen ikke været god nok på den produktion, som man har outsourcet til en fabrik i Tjekkiet.

Oops… sorry.  I guess I shouldn’t assume all of you know how to read Danish.

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

“We have talked about how we can be more effective and decided to run the factory ourselves.  We would rather do that which is the most effective that stick to a decision that is two years old, even though it of-course sends a signal about a shift in strategy” says CEO Jørgen Vig Knudstorp.

It’s Lego, who owns the factory in the Czech Republic, but Flextronics who has managed the operation the last two years. In that period it has in vain tried to reach the quality- and efficiency goals that Lego has arranged. Flextronics however still handles production for Lego in Hungary and Mexico, but also here Lego dissatisfied with the cooperation, and they are working energetically on quality- and efficiency improvements.

Pretty amazing since Flextronics is one of the world’s largest contract manufacturers and should be able to figure out how to manufacture plastic toys.  But what’s even more amazing, or sad, is the turmoil and cost this adventure created.

When will they learn?