.

1. LEGO® Group
An outsourcing journey

2. Main issue
The origins of the deal: Lego VS Flextronics
Pre and Post Flextronics: Expectations and Learnings
Key Challenges in the relationship
Production Value Chain & Supply Chain
Outsourcing VS Offshoring
Financial Analysis
Recommendations
Agenda

3. Issue
WHY IS OUTSOURCING NOT ALWAYS THE BEST
SOLUTION?
The partnership ended up
sooner then what they
expected.
“Even though everything points at outsourcing, it might still not be the best
solution“.
Even though the goals
have not been reached,
Lego has learned a lot
from this “ failure”.
Organizational and
managerial differences
impacted the
collaboration

4. The deal: Prologue
Adventurous journey
Too hasty
Confidence with the prospect of the new partnership

5. Production cost cutting by
producing in low-cost countries
Potential economies of scale
Reduce production complexity:
standardization
Benefit from Flextronics’ capabilities
Better management of the supply chain
Expectations
Increase their market presence

6. “We have learned that we are
more special than we expected
to”
“We are still more
effective in Billund”
Awareness of the
company’s processes
and structures
Understanding of the
importance of
documenting and
standardizing the
production
(transparency and
control)
Although their relationship ended, Flextronics gave Lego the input to
improve its global production network and to serve important markets.
Learnings

7. The business models should match one another
Importance of coordination between the companies
Consider not only the reputation in the partner’s choice
Take in consideration different business cultures
A balanced power of negotiation
Focus on the core competences
Key challenges

8.  Family business;
 Customer and quality
oriented through
diversification;
 Focus on new products
 Very unpredictable
and seasonal demand
 Flexibility and speed in
the supply chain
 Worldwide network of
production facilities
 Focused on 6 core
areas
 Precise planning and
prediction of the
operations
These challenges have been harsh for both companies due to their
substantial differences in strategy and internal organization:

9. Value Chain
DISTRUBUTION
POST-
PACK
PRE-
PACK
ASSEMBLIN
G
MOLDING
DEVELOPMENT OF
MOLDING
MACHINES
DEVELOPMENT
FUNCTION
has decided to keep in-house
two core competences:
molding and packing. The
group has planned to license
out 80% of its production
chain.

10. o Develop contingency plans
in order to have different
alternatives and to mitigate
the risks.
o Product standardization in
order to fix demand
fluctuations (ex. Reduction
policeman)
o Develop an internal and external
monitoring system with the aim of
highlight the potential
weaknesses and strengths
o Identify Key Performances
indicators of in-house production
and comparison with similar
companies in the sector
o Develop global educational
programs in order to spread
core competencies of LEGO
through all factories.
o Local experts to improve level o
communication with production
facilities abroad
Supply Chain

11.  Take advantage of
specialized skills
 Cost efficiencies
 Labor flexibility
Outsourcing
“ When a company contracts out a part of a business process or a
service to a third party “
It does not necessarily mean that the product is outsourced
abroad.
 Misaligned interests
 Increased reliance on third
parties
 Lack of in house knowledge
of critical business operations

12.  Lower costs
 Better availability of
skilled people
 Getting work done
faster
Geopolitical risks
criticized for transferring
jobs to other countries
Poor communication
Language differences
“When a company shifts the location of a service or production
of a part to a location abroad”
It doesn’t necessary mean outsource the job.
Offshoring

13. Financial Analysis

14. 2004
I. Revenues – 7%
II. Drop of the USD
III. Asset decreased
IV. Free Cash Flow increased despite the net
loss
2007
I. Profit before tax +10%
II. Growth in Sales
III. Revenues +29%
IV. Change in accounting principles
and adoption of IFRS
I. Increase in global sales
II. Higher equity of ca. 10%
III. ROE +15% and ROS +31%
IV. Net profit +57% due to
back sourcing
2009

15. Recommendations
 Choosing the right partner : according to complementarity and compatibility of business
model
 Building trust and commitment between the two parties
 Looking at prior experiences of both parties and comply with it (special units handling
coordination, dealing with an adviser…)
 Investing in constant communication and feedback with each partner
 In the special case of Lego and Flextronics :
-Standardization (of processes and products) to facilitate the coordination
-Improving the documentation process
-Organizing facilities according to the market rather than the products

16. THANK YOU!
 Francesco Acri
 Aude Babakissa
 Olga Gioacchini
 Eleonora Manfredi
 Chloe Rollet
 Beatrice Romani