Unit 6 LEGO Group: An Outsourcing Journey Case Study Analysis
MT460 Management Policy and Strategy
LEGO Group: An Outsourcing Journey Case Study Analysis
Company Name: LEGO Group.
Topic of the Week: Management policy and strategy.
Synopsis of the Situation
LEGO Group is a multinational toy manufacturer headquartered in Billund, Denmark. The company has established operations in other countries such as the United States, London, Shanghai, China, Singapore, and the United Kingdom. In 2004, LEGO Group experienced the worst financial crisis in its entire operational period. The crisis was largely due to reducing demand for its traditional LEGO Brick line of toys, which were its main products. Other factors contributing to the crisis include complexities in the company’s production process, inefficient supply chain, and the decision by the company to outsource a large part of its production to an outside company, known as Flextronics.
With the new outsourcing strategy, LEGO Group was unable to keep track of the new expanded production network. This created inefficiencies in the production network. The transfer of production knowledge between LEGO Group and Flextronics did not occur as scheduled, which resulted to production inefficiencies. For example, Flextronics employed a rigid production model in contrast to LEGO Group model that was flexible and hedged on the global demand and supply. The outsourcing strategy that LEGO opted for therefore proved ineffective in taking LEGO Group back to profitability.
<Create at least three alternative solutions that are original and not from the case study itself.>
- LEGO Group should consider changing its logistics plans in the production process. LEGO Group should employ just-in-time production methods to ensure that manufacturing of products depends on demand.
- Eliminate the production of poorly performing brands: LEGO Group had greatly diversified its product portfolio. Most of the new product lines were not profitable, and therefore required to be scrapped off.
- LEGO Group should consider moving the distribution channel closer to its consumers. This would enable the company reduce its distribution costs.
Selected Solution to the Problem
<Choose one of the Alternative Solutions that you created that will best fit and describe it.>
The best solution to this problem would be to stop the production of poorly performing product brands. For a period, LEGO Group embarked on diversifying its product line in order to meet the needs of consumers and to overcome competition by new products in the toy market. The diversification plan did not work successfully. In fact, the increased line of products created more complexities in the production process. In addition, majority of these products were not profitable. The new product lines added costs without returning any profits.
LEGO Group should have focused on production of a few products that were highly marketable. It could have been easier to push a few products through the distribution chain as opposed to pushing multiple products for which their demand was low. Multiple products resulted in confusion along the supply chain, and ultimately the failure to turn in a profit. Lack of careful planning contributed to failure of the different lines of products that the company had introduced.
<Discuss a plan in how you intend to implement the Selected Solution on behalf of the company featured in the case study.>
Implementation of the aforementioned solution will have an impact on all product brands that yielded small profit margins. The first and most important step is to conduct an analysis of the brand profitability. It is important to establish the worst performing and the best performing brands in order to make a decision on what brands to eliminate from the production line. Product lines that have continually made losses will the first to be receive elimination from the production process. Products having a low profitability margin will also be eliminated from the production line, leaving only those with average to high profitability margins.
The level of product loyalty among consumers will also be one of the important considerations in determining the product brands poised for elimination. Vulnerability to other products brands by competitors will also be considered. Products that competitors may easily copy or those for which there is high competition will be eliminated. The product brand to be retained should be perceived differently by consumers and should also support brand extensions.
Recommendations and Conclusion
<Discuss one of the alternative solutions not chosen and express why this would be a good choice as well and wrap up the analysis.>
An alternative method might be employing the right logistics in production. Application of management philosophies such as just-in-time concept can greatly help in improving the current logistical issues. Just-in-time (JIT) manufacturing is a concept that advocates for six core aspects in the production process, which include having the appropriate items, having them at the right quantity, having them at the right quality, and having them at the right place and right time (Cheng, Podolsky, & Jarvis, 1996). This could reduce the high stock holding costs that the company experienced.
From the cases study, it is possible to see that lack of a proper diversification strategy can lead to poor performance of the new brand of products. A diversification strategy may present various risks and challenges to a company. LEGO Group’s diversification strategy resulted in high production complexities that led to low profitability of the new line of products.
Cheng, T. C. E., Podolsky, S., & Jarvis, P. (1996). Just-in-time manufacturing: An introduction. London, Angleterre: Chapman and Hall.
Figure 1. SWOT Analysis based upon the topic of the week for the company case.
- LEGO Group has a strong brand name in many parts of the world.
- LEGO Group produces games having education features for children.
- The company has a strong product portfolio.
- High costs due to product diversification.
- Supply chain management issues.
- Loss of identity because of shifting away from its core LEGO Brick product.
- Additional branding can enable LEGO Group to identify new and profitable segments of the market.
- The company can diversify in new areas such as fashion, TV, and video games.
- LEGO Group’s licensed characters such as Harry Potter and Star Wars may be profitable in the long-run if it continue their production.
- Loss of market share to video games.
- High competition from substitute products that are cheaper compared to LEGO Group’s products.
- Similar companies.