Another brick in the chain

If you’ve never stepped on a piece of LEGO, don’t worry, there’s still time. LEGO are considered to be such a common household hazard that you can actually buy LEGO slippers to prevent blunt injury to your feet.  This is just one of the many tangential products that LEGO have come up with over the years to accompany their core business of bricks for construction sets.

LEGO as a company was established in 1932, when a carpenter began manufacturing wooden toys. He chose the name LEGO  from the word LEG GODT,  or in English “play well” (in Latin it translates as ‘I put together’).  It would seem unreasonable that such a well-known and popular product could ever be considered as ‘on the brink of bankruptcy’, but back in 2004 LEGO was struggling to meet the costs of production and give consumers what they wanted (Feloni, 2014).  So where in the Four P marketing mix had things gone wrong?

There were certainly areas that needed to be addressed in the product, promotion and price, but the main overhaul was required with LEGO’s place, i.e the channels of distribution, logistics and location. LEGO has a great product, that promotes itself and will sell at a high price, but the important consideration at the time was the best way to get the product to the people.

figure-ioca-lego

Some manufacturers deal directly with their consumers, but most use distribution channels and it requires thought, effort and investment to create and maintain those channels (Mulky, 2013). This figure from Iocabucci (2014) shows what a distribution channel and supply chain can look like.  To elaborate on that, if there is direct distribution it means that the manufacturer delivers directly to the consumer without the help of intermediaries, and indirect distribution channels mean there are intermediaries who perform most or all of the functions of distribution (including wholesalers, retailers and distributors). Within these distribution channels there are also flows of ownership, cash, information and promotion (Fayaz and Azizinia, 2016).

In order to save the company, LEGO believed that getting the supply chain right was essential to meeting other business challenges (SCDigest Editorial Staff, 2007). In 2004, the LEGO Group had a new CEO, Mr Knudstorp, and among other decisions, the board of directors elected to cut one fifth of their costs for logistics by consolidating the majority of their distribution centres and warehouses in Europe into one location (Cooke, 2009). This optimisation of the supply chain, and reduction in the number of providers of logistics, allowed LEGO to work more closely with the external distributors and to target customer needs and behaviours more effectively (We Are Development Admin, 2012).

LEGO went through various processes to simplify the supply chain by firstly reducing the number of colour options that the bricks were available in, reducing the number of plastic resin suppliers they had, rationalising the production lines, and fixing the cycles of production to tier the manufacturing to the rest of the supply chain (SCDigest Editorial Staff, 2007).  They also reduced the number of logistics service providers from twenty six to four , and centralised distribution to the Czech Republic, closing centres in Denmark, Germany and France (Oliver et al, 2007).

lego-car-stackBy 2008 LEGO had an increase of almost nineteen percent in annual revenue with a profit margin of twenty one percent (Cooke, 2009). Since Knudstorp took over, Lego’s revenues have increased by 400%, and its operating profit margin has increased from -21% to 34%. That’s the power of shrinking to grow (Zook, 2016).

The 2015 Annual Report for LEGO shows that they are continuing to remain in profit, and their Annual Responsibility Report shows that supply chains are an ongoing important consideration in many aspects of the business. For example, in their environmental considerations  the report states “In the supply chain (any company that provides us with materials, equipment or transport services required to make and distribute LEGO products), we will work with our partners to reduce and eliminate their CO2 emissions through actions such as increasing energy efficiency, making production improvements and using renewable energy” (Lego Group, 2015).

Despite the occasional bottleneck in the supply chain, the overhaul and simplification of LEGO’s products and partnership appears to be working. Lofvers (2015) stated that “more companies – including Lego – are part of a growing Sales & Operations Planning (S&OP) ‘renaissance’ – either starting from scratch, starting over or building on existing initiatives”, and this appears to have been exactly what LEGO did to save their bricks.

 

 

 
References

Bologna, C (2015) ‘New LEGO Slippers Will Spare Parents The Unique Pain They Know All Too Well’, The Huffington Post [online] Lego Slippers

Cooke, J (2009) ’Lego’s Game-Changing move’
http://www.supplychainquarterly.com/topics/Logistics/scq200903lego/ <http://www.supplychainquarterly.com/topics/Logistics/scq200903lego/&gt;

Feloni, R (2014) ‘How LEGO came back from the brink of bankruptcy’, Business Insider [online] http://www.businessinsider.com.au/how-lego-made-a-huge-turnaround-2014-2?r=US&IR=T 

Iacobucci, D (2014) Marketing Management (MM), 4th Edition, South-Western, Cenage Learning, Mason, Chapter 10, Channels of Distribution and Logistics.

Lofvers, M (2015) ‘How Lego supply chain should prevent hitting a brick wall’ Supply Chain Movement [online] http://www.supplychainmovement.com/how-lego-supply-chain-should-prevent-hitting-a-brick-wall/

Oliver K, Samakh E and Heckmann P (2007) ‘Rebuiliding Lego, Brick by Brick’, Strategy + Business [online] www.business-strategy.com/article/07306?gko=99ab7

LEGO group (2015) ‘Annual report’ [online] www.lego.com/en-us/aboutus/lego-group/annual-report

LEGO group (2015) ‘Responsibility Report’ [online] www.lego.com/responsibility

Mulky A (2013) ‘Distribution Challenges and Workable Solutions’, IIMB Management Review, No. 25 pp. 179-195 [Available online: http://www.elsevier.com/locate/iimb%5D

SCDIgest editorial staff (2007) ‘Manufacturing Supply Chain News: Lego, the “Toy of the Century,” had to Reinvent the Supply Chain to Save the Company’, Supply Chain Digest [online] http://www.scdigest.com/assets/on_target/07-09-25-7.php?cid=

We Are Development (2012) ‘LEGO’s Approach to Customer-orientation’, We Are Development [online]
https://wearedevelopment.net/2012/07/11/legos-approach-to-customer-orientation/

Zook C (2016) ‘How to pull your company out of a tailspin’, Harvard Business Review [online] https://hbr.org/2016/09/how-to-pull-your-company-out-of-a-tailspin

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