LEGO Group: An Outsourcing Journey - Essay Example

LEGO Group: An Outsourcing Journey Discuss the competitive environment of the toy industry, andhow it relates to LEGO’s strategic choice Unlike in the past century when the competitiveness of business environment was defined on the basis of the assets that firms owned, competitiveness in the present century is defined by intangible capabilities (Gottfredson, Puryear, and Phillips 133). Just like other industries, toy industry has witnessed changes in its competitive environment. Cost of production has been central in shaping the competitive environment in toy industry, a situation that has led to toy companies cut their costs through various initiatives. The dynamic nature of toy products and markets has made the business environment of toy industry to be more competitive and complex. The issues of pricing and meeting customers’ expectations have also formed crucial aspect of the competitive environment of toy industry as pricing strategy and quality of products determine the competitiveness of a toy company. The general competitive environment of toy industry relates directly to LEGO’s strategic choice. Due to the challenge of managing the global supply chain effectively and which had greatly eroded its competitiveness, LEGO decide to outsource and offshore its major chunk of production to Flextronics, a Singaporean electronics manufacturing services (EMS) provider. The aspect of cost of production that determined the competitive advantage of toy companies affected LEGO and resulted to it pursuing cost-cutting sourcing advantages (Larsen 2). The dynamic nature of toy products and markets had drawn LEGO into a crisis that drew the company to near bankruptcy. The company was losing confidence in its core product: the LEGO brick and its market were shrinking, which made the company to make significant economic losses in the period from 1998 to 2004 (Larsen 3). 2. What were LEGO’s main expectations and leanings from the relationship with Flextronics? In its pursuit of rapid short-cutting sourcing advantages, LEGO entered into a relationship with Flextronics, a large Singaporean EMS provider. LEGO expected Flextronics to outsource and offshore a major chunk of its production. From its analysis of the Flextronics work with other global companies, LEGO believed that Flextronics’ industry-leading capabilities in packaging, assembly, moulding, and distribution would give it a competitive edge in the global supply chain. Also, since Flextronics had vast size and experience with original equipment manufacturers, LEGO had expected that Flextronics would have been effective in outsourcing its large amount of production (Larsen 6). The expectations and leanings of LEGO from the relationship with Flextronics were fed by what can be said to be the evaluation of the strategic functions of outsourcing such as product distribution and advertisement. Companies try to identify outside partners with greater scale and expertise; that is, partners who could provide capabilities more effectively (Gottfredson, Puryear, and Phillips 135). From its relationship with Flextronics, LEGO expected that it would be able to eliminate the production price fluctuations risk. In addition, LEGO had expected that due to Flextronics’ vast experience and long history in documenting and standardizing work processes and routines to move business activities from one site to another, it would excel in reducing its organization and production complexity (Larsen 6). These expectations were expressed in LEGO’s various communication in regard to their relationship with Flextronics. For example, in one of the instances, it stated that Flextronics understood and appreciated the unique values of LEGO, as well as the quality and safety of products which is fundamental in LEGO’s operations (Larsen 7). 3. What are the key challenges in maintaining a relationship like the one between LEGO and Flextronics? The decision of LEGO to get into a relationship with Flextronics proved to be too hasty after a short period (of three years) into the contract. After three years after the contract was signed, the management of LEGO announced that it would entirely phase out its collaboration with Flextronics. The management announced that they had come into conclusion that it was more optimal for the company to manage the setup themselves. They believed that by doing so their supply chain would develop faster through going for the leanest, highest, and best solution at all times (Larsen 4). As a result of these happenings, the question arises as to what were the challenges in maintaining a relationship like the one between LEGO and Flextronics? It emerged that attempting to overcome and manage the complexity of production network through outsourcing to external providers was more complex than initially imagined. The relationship experienced rather unexpected and daunting challenges. It turned out that the extreme pace of transition was problematic for LEGO to control and coordinate due to the increasingly complex and global production facilities network. As a result, there was difficulty in ensuring seamless and reliable transfer of production knowledge between LEGO and Flextronics. LEGO was unable to effectively align its products’ seasonal fluctuations and new and unpredictable demand that arose due to the business model introduced by Flextronics. Since nearly 60 percent of the production of LEGO was made in the second half of the year, the uncertainty of demand fluctuated with about 30 percent. Rigidity and non-responsive business solutions on the part of LEGO presented a strategic misfit with more predictable and stable operations of Flextronics. In a nutshell, the main challenge to this relationship was misalignments and divergence between the two firms (Larsen 7). 4. How can LEGO handle the supply chain complexity to improve knowledge sharing, flexibility, and coordination? It is clear that some of the main challenges in the relationship between LEGO and Flextronics were in regard to poor knowledge sharing, coordination, and flexibility. Therefore, it is imperative upon LEGO that it applies strategies that would effectively handle the complexity in order to improve knowledge sharing, flexibility, and coordination. As the management of LEGO had stated when announcing the end of their relationship with Flextronics, process documentation would be critical in addressing the challenges of complexity to improve coordination and flexibility (Larsen 8). Also, standardizing of the business processes would help address the challenge of complexity as standardization would result to extreme accuracy which is required in improving knowledge sharing and coordination (Larsen 9). Furthermore, LEGO can handle the supply chain complexity to improve knowledge sharing, flexibility, and coordination by identifying the components of its business that represents its “core of the core”. This will enable it to handle the supply chain complexity by focusing on the activities that it is doing better and cheaper compared to its rivals (Gottfredson, Puryear, and Phillips 137). Additionally, LEGO can to improve knowledge sharing, flexibility, and coordination by considering the following two factors: whether the capabilities are proprietary and if the capabilities are common enough that external suppliers could achieve advantages by supplying it to various companies. Also, it should determine which functions would have the highest outsourcing potential and which ones should remain under their control. LEGO can handle the supply chain complexity to improve knowledge sharing, flexibility, and coordination by aligning its model with that of the outsourcing company (Gottfredson, Puryear, and Phillips 138). Works Cited Gottfredson, Mark., Puryear, Rudy, and Phillips, Stephen. “Strategic Sourcing: From Periphery to the Core”. Harvard Business Review, 2005: 132-141. Larsen, Marcus. LEGO Group: An Outsourcing Journey. Ivey Publishing, 2010. Read More