Case Study

Read the following case study and answer ALL the following questions:

LEGO: Restructurinq, brick by brick

For over 50 years, Lego products have populated toy store shelves globally, creating a massive toy empire. Lego generated $520-million in net profit, outpacing the aggregate profit of both its main competitors, Mattel and Hasbro

With expansion operations to facilitate international growth already in place, the concerns facing Lego seem to identify a lack of new revenue channels as the company's major problem. In reality, repairing its unresponsive supply chain is critical to satisfy the increasing unmet demand. While Lego .no longer faces the difficult task of stimulating demand, the operational problems from its past have resurfaced to an even greater scale. With then entry into digital devices, and a foray into video games with Lego Dimensions, Lego is projected to surpass 900 different SKUs by 2017.

There is an imbalance among Lego's global supply chain, potentially exposing Lego's existing European facilities and ongoing Latin American operations developments to the risk of overstretched regional supply chain capabilities. Bottlenecks in Lego's supply chain hinder production capacity, with the problem being magnified in light of the company's current expansion efforts. Additionally, it is crucial that Lego's supply chain infrastructure investments be evenly distributed globally to avoid bottlenecks in certain markets, resulting in stagnate growth and additional expenditure. Within these facilities, production is done in independent teams based on products, which results in 70 per cent utilization. 60 per cent of the production has to be completed in third quarter to prepare for the holiday season. Due to growing demand, Lego is forced to invest in working capital to expand inventory to meet the production capacity.

Both Hasbro and Mattel adapted to developing markets by out-licensing its brand and production to third party vendors and factories in these markets. Historically, Lego attempted to outsource its simpler production to improve efficiency and focus its resources on growth and innovation in developing markets. However, Lego was not able to maintain product quality, and experienced outsourcing. With fewer production facilities in place across the globe, raw materials and finished products have to be transported over long distances to reach their target market and drives up transportation costs by 12 percent increase in sales and distribution expense in the past year.

Lego's current supply chain is not up to par with competitors Hasbro and Mattel in developing markets such as Asia and Latin America, creating inefficiencies in inventory management. Specifically, Lego's days of inventory in these markets is 102 days, which is significantly higher than that of Hasbro or Mattel, which are 59 days and 71 days respectively. Lego's high standards of quality control could be the cause of high days of inventory. However, the rapid improvement in Lego's production technology rather implies the culprit to be poor inventory management due to management's inability to accurately predict sales, seeing as work-inprogress inventory increased by 30 per cent in 2016. Lego must improve its ability to forecast demand in these areas and produce according to demand in each market. With developing markets in Latin America and Asia offering different makeup of local vendors, Lego will face significant difficulties in adjusting its service level between vendors. Lego lacks infrastructure to allow timely information flow to its vendors. This forced Lego to develop a multi-tiered inventory system which put further strain on its distribution channel and increased working capital investment. Work-in-progress inventory consisted of 47 per cent of Lego's total inventory, while only 18 per cent for competitor Mattel. Investing in a more localized supply chain infrastructure will give Lego more areas to improve their supply chain globally.

Sourcing from local suppliers will allow Lego to reduce costs for transporting raw materials, work-in-progress inventory, and finished product inventory, thereby decreasing lead time and improving inventory management. Each facility would have the ability to satisfy local customers' needs for customization without affecting the capability of other production facilities to supply other markets, thereby allowing Lego to have more flexibility in production across each of their markets across the globe and ultimately, able to operate on a more real time demand while holding minimum inventory. By constructing two new production facilities in Latin America and APAC, Lego can relieve the demand pressure from its existing Mexico and China facilities, respectively allowing Lego to align its supply chain structure to better position itself for continuous growth in the global toy industry.

End of Case Study

The case study js adapted from Jerry Wang and Eden Ip, (2017); Restructuring Lego's supply chain ensures successful growth in newer markets: http://iveybusinessreview.ca/cms/5757/lego-restructurinq-brick-bricW

Question 1

Identify the inventory management issues Lego encountered from the above case. [10 marks]

Question 2

Describe how Lego addresses those inventory issues.

[10 marks]