Profitability Case

Outsourcing occurs when Lego finds a problem in organizing its increasingly complex product facilities. Lego established a working agreement with Flextronics. As part of the agreement, Flextronics custom produces parts or other materials on behalf of LEGO. In this case, LEGO was having difficulty in transferring production knowledge to Flextronics.

In the value chain model, primary activity is divided into inbound logistics, operation, outbound logistics, marketing and sales and sales. All these work together effectively to create margin, which adds value to the whole value chain system. In the inbound activity, since LEGO has reduced the in-house production capacity from 90/95% to 20%, and outsource them to Flextronics, LEGO, as a result, does not have to maintain manufacturing so much facilities, purchase raw materials, or hire labor in order to produce the finished goods. However, problems occur when the value chain process moves to operation part. Because the extreme pace of the transition, production know-how knowledge transfer has been a fundamental problem between these two companies. What LEGO expected to get is different from what Flextronics produce. This situation has caused asymmetric information between these two companies, which greatly lowered the efficiency of supply chains. This problem could be stemmed from the inefficient operating system in the supply chain. The manager in this level did not communicate with Flextronics in a timely and consistent manner.

Additionally, this outsourcing policy which originally developed to reduce the cost of the supply chain and complexity of LEGO' product system has the opposite effect. With the implementation of this strategy, the cooperation between these two companies increases its difficulty and complexity in transition and coalescence of two product modes. As a result, it becomes problematic for LEGO to coordinate and control the increasingly global and complex network of production, which made the operation of LEGO more difficult. Moreover, despite reducing the in-house production capacity from 90/95% to 20%, the company tried to retain molding and packaging in-house. When the product was produced and assembled in Flextronics, the finished product should be transported back to LEGO in order to finish the remaining steps: molding and packing. This time consuming process not only made the entire product producing process more complex and costly but also possibly resulted in delaying the production delivery to the customer. This situation has broken timeliness and efficiency in the outbound logistics activities.

More importantly, the major challenges the LEGO faced in maintaining the relationship with Flextronics are the difference of operation system between the two. Up to 60% of the LEGO production is produced in the second half of the year, the lifespan of the product range from 16 to 18 months, and the demand fluctuation has an average of 30%. In response to