LEGOs Expectations from Flextronics and Outcome - Essay Example

?Case study analysis Table of Contents LEGO’s Expectations from Flextronics and Outcome 3 Key Challenges in Maintaining a Relationship 5 Handling theSupply Chain 7 Key Considerations for Outsourcing or Offshore Production 8 Competitive Environment 10 References 12 LEGO’s Expectations from Flextronics and Outcome LEGO group is well-known as the fifth largest toymaker of the world. The vision of the company was to inspire children and bring out their creativity. The company started its wooden toy designing business in the year 1932. Slowly the company developed and marketed a wide range of products in the market, but all their products were related to child learning and development. There are approximately 7000 employees working for LEGO round the world. According to LEGO’s income statement the revenue figure has increased consistently. The net profit and gross profit ratio of the company also reveals continuous growth and development of the company (Hoovers, 2012). In order to survive the financial crisis situation, LEGO wanted to outsource its production to a famous Singaporean electronics manufacturing company Flextronics. So in the year 2006 LEGO finalized the contract with Flextronics for producing the major parts of its toys. The idea was considered brilliant because the prices were locked for an extended period of time, so this would save the company from the risks of product price fluctuations. Flextronics was handed over the production sites of LEGO for production purposes. The phases started from 2004 to 2006, and throughout this phase the company was making efforts to reduce their production capacity to about 20 percent. They were aiming at keeping a target of 80/20 percent for outsourcing their production functions. Flextronics was preferred because of their vast experience and standardized processes. So the management of LEGO was totally convinced that Flextronics would be able to deal with the complexities of their production process. Flextronics on the other hand was very professional in their approach. They understood the values of the products and the company they are working with, but not the safety and quality issues associated with the products. Flextronics wanted to expand their partnership with LEGO, as it wanted to have more knowledge and competency about plastics. Flextronics was an electronic hoods manufacturing company, in which plastic plays an important role. This was the reason behind Flextronics’s interest to move for a long-tem relationship with LEGO. LEGO too found Flextronics to be professional and systematic to work with. However, their collaboration did not last long because of several issues that developed during their three years journey. LEGO’s goal was to optimize their global supply chain by outsourcing their production system to Flextronics. Similarly, Flextronics wanted to utilize the expertise of LEGO in plastics. It was found that LEGO was not satisfied with the quality of facilities provided by Flextronics. LEGO had created a complex framework for outsourcing external providers. This was also a reason why LEGO faced issues while working with Flextronics. LEGO was going through extreme transition, so it can be said that it became problematic for them to delegate authority and control their global network of production. Further, complexity occurred regarding the flawless transmission of production knowledge. LEGO and Flextronics have different organization structure. Though LEGO outsourced Flextronics, but it could not match its complex systems with that of Flextronics. On the other hand the company who was outsourced would be working according to its own process and framework. So problems of disagreement and misalignment were the result of what the outcome was (LEGO, 2006). Key Challenges in Maintaining a Relationship LEGO was a manufacturing company. It manufactured toys for children. The focus of the company was mainly on production and management of the supply chain. Never did the company feel the need of out sourcing or documentation before it was into deep trouble during the financial crisis. The company was on the verge of bankruptcy, so LEGO entered into strategic collaboration with Flextronics for optimizing the supply chain system, and outsourcing the production process. Flextronics is well known for its designs, capabilities in machines, plastic, metal fabrication, assembling, etc. Moreover, the company functioned in a very systematic manner, in which extensive documentation is also included. Both Flextronics and LEGO wanted to utilize each other’s strengths for their benefit, so they collaborated for production of plastic toys for LEGO. Challenges are bound to be present in such a relationship were both the companies hold significant position in their respective industry and both have different way to work. Firstly, the complication of the production system by outsourcing it to external suppliers was a complex international manufacturing footprint. Secondly, taking into consideration the extreme rate of transition, it ultimately turned out difficult for LEGO to synchronize and manage the increasingly global and complicated network of production facilities. It was also difficult to ensure a consistent and flawless transfer of production information between two companies (The Independent, 2010). Thirdly, the challenge of streamlining the seasonal fluctuations of LEGO’s products and impulsive demand clashed with the business model of Flextronics. Fourthly, LEGO’s need for elastic and market-responsive production solution was a misfit with Flextronics’ steady and conventional process in which economies of scale plays an important role. Fifthly, deviation and misalignments between LEGO and Flextronics was another major challenge for which both the companies had to suffer. Some of the challenges got created due to the failure of the companies in understanding each other’s way of functioning, such as representatives of LEGO commented that they were not satisfied with the efficiency of the outsourced facilities. They also negatively responded to the fact that more time was getting wasted in training people, which was not expected. The truth was that Flextronics’ contact terms with LEGO complicated the situation and acted as a major hurdle. It hindered the operations of Flextronics and its functioning in a sound manner. The supplier too like the producer wanted to be a part of a successful business model. Sixthly, the attempt of the company to cut down cost and reduce complexity in a very small span of time has complicated the situation for the worse, and thus delayed a beneficial groundwork for developing lucrative synergies. In short it can be said that the Flextronics attempt toward optimization failed. Lastly, LEGO became absolutely depended on external partners for its various major functions that are from production to documentation. In this situation, changes were unavoidable. The management of LEGO had to be more open minded for welcoming the change, which was not the real case. So clashes were bound to happen. So it the major challenges was solely related to optimization and stabilization of operations after the drastic transition process. The balancing issues related to the internal supply with the market demands were also one of the major challenges. Other related challenges when can be concluded in this relationship were related to managing new relationships, supply uncertainties, brand vulnerability, dependency on the partners, development of new capabilities, etc (LEGO, 2010). Handling the Supply Chain LEGO has always tried to optimize its cost by managing its supply chain efficiently. In order to reduce its cost in the countries like Europe and Asia, from Czech Republic LEGO cut its logistics cost by 20 percent. LEGO’s motive was to be present in all the countries in the world. Their motto was that if there are children in the house, then there has to be toys from LEGO. Despite the strong popularity of the products, the company found itself in the midst of financial crisis in the last few years. The board of directors of the company decided to cut down its cost by 20 percent at least. It was considered to be a bold move on the part of the company. It decided to consolidate its distribution centres into one location. It was risky but worth making because the company instantly recorded a profit of 21 percent in the year 2008 (Oliver, Samakh & Heckmann, 2007, p. 64-65). The LEGO group has built their fundamentals on the belief that the people should be treated with respect and dignity. So the vendors and the suppliers of the company are treated with care. Special care is given to their suppliers and they are allowed to join the trade unions of the company. LEGO was going through bad financial phase, so they decided to outsource 90 to 95 percent of their production system to Flextronics. Flexibility could be achieved by outsourcing or offshoring because in this way the responsibility gets divided. Moreover, Flextronics was a very stable company who had good amount of knowledge on such issues such as off shore producing and utilizing the supply chain to its optimum level. So it can be said that in this scenario outsourcing was the method which LEGO utilised to save their supply chain costs and production system (Simatupang, Wright, & Sridharan, 2002, p. 1-2). Key Considerations for Outsourcing or Offshore Production It has been seen that companies have increased their outsourcing and off-shoring dependency. These arrangements include both rewards and risks to the companies, but outsourcing and off shoring are not an easy task. There are certain steps with the help of which the risks can be minimised and rewards can be earned at each and every stage. The term outsourcing means contracting external providers for performing certain functions for the company. This includes services related to information technology, development, maintenance, support or production. There are BPO (business process outsourcing), call centres and human resources. Off shoring includes relocating the processes or the functions to different foreign locations for utilizing the facilities and services of that country. The key drivers that can be considered for outsourcing or off shoring functions are generally to reduce the operating cost, development, increasing sales and reduction of other internal costs of the company. The focus is more on the core competencies and when the company focuses on tapping the vendors to integrate the best practices and innovation. Increasing the scalability and the flexibility of the operations or for gaining access to low cost human capital might also be a driver for outsourcing or off shoring (Ernst & Young, 2005, p. 10-12). It should be kept in mind that most of the time outsourcing and off shoring fail due to various reasons. Both outsourcing and off shoring comes with certain combination of risk and benefits. If they are not well managed then both internal and external risks can adversely affect the performance of the business. In order to deal with the complex risks, companies must go for holistic risk management approaches. In this regard the issues of outsourcing and off shoring life cycle can be included. Each stage of this life cycle describes the specific tools and techniques for mitigating risks. The stages of the life cycle are as follows: Strategic assessment: It helps in deciding that in which way strategic management may support the business strategies and also regarding the internal capabilities and support initiatives. Development of business case: It helps in analysing the expected cost and the savings. The other financial and the operational benefits can also be understood by developing a business case. Selection of vendors: Selection of vendors is very important function, which requires strategic assessment and also the support of a strong business case. Contracting: Negotiation in contract is also essential as it contains the expectations and the need of both the parties in the contract, with respect to the risk assessments. Service alteration, Deliver and after transition management: This stage includes managing the migration process, initiation and development of the services in the off shore location. Moreover, monitoring the performance management and risk in accordance to the service level agreements and attaining the strategic objectives. In this case study, LEGO outsourced its production activities to Flextronics to optimise the supply chain cost and to save its position in the midst of financial crisis, but as discussed above if the risk management issues are not taken into account then, the collaboration would result in a failure. This is what happened in case of LEGO Flextronics case study. It was derived that the outsourcing and off shoring life cycle stages were not followed. Hasty decision-making system of both the companies resulted in a failure, though both of the companies were major players in their respective fields (Deloitte, 2005, p. 5-7). Competitive Environment The toys industry in UK has various product categories, which consist of threats and opportunities. Though the video games segment is growing, but the market of traditional toys still captures the major share in the UK toys industry. Specially learning toys have huge demand in UK, like the building blocks produced by LEGO. Due to the improvement in technology, the production of every type of toys in the toys sectors has increased a lot. Companies even do not hesitate to produce the products which resemble the motive characters, or super heroes. The international toy companies as well as local companies have registered better revenue than 2009. The growth of this industry was mainly because of LEGO Group, which has entered in the pocket money section with their LEGO minifigures. This toy was well received by the buyers in UK and its market share grows impressively in 2010. LEGO took outsourcing and off shoring decisions because they wanted to manage their global supply chain effectively. Moreover, survival was also becoming an issue for most of the companies in the financial crisis situation. LEGO was trying to protect their 70 years of existence. So it can be said that the fight was not only to grab market share but also for existence (Euromonitor International, 2011). LEGO is one of the iconic brands in the toy category of UK. If we conduct a strategic analysis of the company’s position in the market, it can be said that the level of rivalry was relatively intense for LEGO till 2004, as after the year this year LEGO occupied a strong position in the market of construction toys. Though after 2004 the electronic toys market segment increased, but the demand for building toys is there is remain because those are the basic toys for any children. LEGO also has high buying power and it is natural that they would have to bear low cost if they want to diversify or expand their toy range. The toys are mainly made of plastic and chemicals. Though LEGO can also move to electronics toy segment but their existing business is also the most popular product in the market. If we discuss the aspect of substitute, then it can be said that threats are there from not only tradition toy producers, but also from the electronic toys producers too. Moreover, the threat of liquidity crunch in the economy has reduced the buying power of the customers too. If we consider the weaknesses, we can assess the reason behind LEGO’s decision to outsource its producing to Flextronics. Firstly, they failed to understand and differentiate the new market demand and preferences of the children. Secondly, a lack of ability was seen in case of transferability of corporate strengths and implementation of the strategies. So these reasons were somehow responsible to lead the company to take some drastic decisions regarding production and other operational functions (Euromonitor International, 2010). References Deloitte, 2005. The Intelligent Approach to outsourcing and Offshoring. [e-book] Australia: The Institute of Chartered Accountants. Available through: Deloitte & Touche USA LLP and its Subsidiaries [Accessed 3 September, 2012]. Ernst & Young, 2005. Business Briefing Series: 20 Issues on Outsourcing and Offshoring. [e-book] Australia: The Institute of Chartered Accountants. Available through: Ernst & Young website [Accessed 3 September, 2012]. Euromonitor International, 2010. United Kingdom - Entering the Toys Market. [Pdf] Available at: < http://www.agentschapnl.nl/sites/default/files/bijlagen/Marktverkenning%20speelgoedmarkt.pdf. > [Accessed 3 September, 2012]. Euromonitor International, 2011. Toys and Games in the United Kingdom. [Online] Available at: [Accessed 3 September, 2012]. Hoovers, 2012. Lego A/S. [Online] Available at: < http://www.hoovers.com/company/LEGO_A/S/ctxkki-1-1njht4-1njfaq.html> [Accessed 3 September, 2012]. LEGO, 2006. Sustainability report 2006. [Online] Available at: [Accessed 3 September, 2012]. LEGO, 2010. Company Profile. [Pdf] Available at: < http://cache.lego.com/upload/contentTemplating/AboutUsFactsAndFiguresContent/otherfiles/download98E142631E71927FDD52304C1C0F1685.pdf> [Accessed 3 September, 2012]. Oliver, K., Samakh, E., & Heckmann, P., 2007. Structure+Building. [Pdf] Available at: < http://www.booz.com/media/uploads/RebuildingLego.pdf> [Accessed 3 September, 2012]. Simatupang, T. M., Alan C. Wright, A. C., & Sridharan, R., 2002. The Knowledge of Coordination for Supply Chain Integration. Business Process Management, [Online] 8(3) Available through: Emerald Insight [Accessed 3 September, 2012]. The Independent, 2010. Lego: If You Build It, They Will Come. [Online] Available at: < http://www.independent.co.uk/news/business/analysis-and-features/lego-if-you-build-it-they-will-come-2151993.html> [Accessed 3 September, 2012]. Read More