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February 25, 2010
STRATEGIC INSIGHT - GLOBAL LOGISTICS : EUROPE
LEGO game-changing move
By James A. Cooke
The toymaker’s bold decision to serve Europe and Asia from a single DC in the
Czech Republic cut logistics costs by 20 percent. But bringing the new operation
up to Western European standards wasn’t exactly child’s play.
If you have children at home, then you probably also have LEGO plastic bricks.
The colorful interlocking toys are loved the world over by youngsters who use
them to design and construct buildings, vehicles, robots, and more.
Despite the product’s popularity, The LEGO Group found itself struggling
financially a few years ago, and in 2004, the toymaker’s board of directors
decided that the company needed to cut its logistics costs by 20 percent. A key
step in achieving that objective was consolidating most of LEGO European
warehouses and distribution centers (DCs) into one facility located in the Czech
Republic. It was a bold move: No other major company had consolidated its
regional distribution in Eastern Europe; in fact, none other has done so to
date, says Egil Møller Nielsen, vice president of global logistics for the
Billund, Denmark-based LEGO Group.
It was also a potentially risky decision, Møller Nielsen acknowledges. “To be
the first mover had some benefits, but it also had some risks. We decided we
wanted to be the first mover,” he says.
It turned out to be a risk worth taking. Paring the network down to a single DC
yielded savings that have helped the toymaker’s bottom line. In 2008, the
company recorded a nearly 19-percent jump in annual revenue to DKK 9,526 million
(about US $1.8 billion) with a profit margin of 21 percent. Although it was
expecting more modest results for 2009, given the worldwide economic downturn,
LEGO still believes it’s benefiting from a distribution strategy that allows it
to provide a high level of service at a significantly lower cost than in the
past.
Advantage: Prague
In 1932, Ole Kirk Christiansen founded what is now the sixth-largest toy
manufacturer in the world. The name LEGO is derived from the first two letters
of the Danish words “leg godt,” which means “play well.” Today, LEGO products
are sold in more than 130 countries, with principal markets in the United States
and Europe.
LEGO financial problems in 2004 prompted the company to adopt a seven-year
strategy called “Shared Vision” to revitalize its sales and profits. At the
time, its products were manufactured in Denmark, Switzerland, and the Czech
Republic. LEGO had 11 warehouses and DCs in Denmark, Switzerland, France, and
Germany that handled order execution and customer deliveries.
The Danish toymaker recognized that it could cut its logistics costs by
consolidating virtually all of its European distribution activities under one
roof (the one exception is the fulfillment of Internet orders, which continues
to be handled out of the Billund warehouse). After considering a number of
options, LEGO settled on Prague in the Czech Republic-a highly unusual decision.
“Not many companies have one DC for all of Europe. Normally, they have two,
three, or four,” observes Møller Nielsen. “If a company has only one DC, it’s
always located in Germany or the Benelux (Belgium - Netherlands- Luxembourg)
area.”
LEGO chose Prague largely because of its low labor costs. The medieval city,
known for its elegant architecture and vibrant arts scene, also offered a larger
pool of skilled labor than other Eastern European locations. “We wanted to be
close to Prague because of the (workers’) competencies,” Møller Nielsen says.
“If you were too far away, it would be difficult to get employees who know how
to work a complex operation.”
The company elected to forgo construction of its own warehouse and instead
leased a 1 million-square-foot building from the commercial realtor ProLogis. It
also decided to hire a third-party logistics company, DHL Exel Supply Chain, to
run the day-to-day distribution operation. LEGO decision to work with a contract
logistics company was largely driven by the seasonal nature of its sales—60
percent occur in the months leading up to the December holidays. “If we had to
carry all that (warehousing) capacity ourselves, we would have eight months of a
year with huge idle capacity. If you have an outsourcing partner, they can at
least try to balance (available capacity) against other customers,” Møller
Nielsen explains.
It was important that the transfer of operations go smoothly. As Møller Nielsen
notes, “Customers and sales don’t accept performance interruptions.” To minimize
the chances of service disruptions during the changeover, LEGO conducted its
warehouse consolidation in two phases, including a period when it ran parallel
operations. In 2006, it closed down five DCs and transferred those operations to
the Prague facility. A year later, it closed five more facilities and shifted
their responsibilities to the new DC, which by that time was serving all of LEGO
markets except the United States.
Transportation shakeup
The move to Prague required LEGO to undertake an extensive analysis of its
transportation network. Because relocating its operations to a single
distribution hub would profoundly affect its delivery patterns, the company
opted to make some changes in its carrier base prior to the move. Up to that
point, The LEGO Group had used 55 transportation providers for inbound and
outbound shipments to its 11 European warehouses. It trimmed those ranks to 10
international carriers that could serve not only Europe but also markets in
Asia. Today, the toymaker has at least two carriers handling deliveries to every
market it serves.
Although LEGO selects its transportation providers and handles the contract
negotiations, DHL Exel Supply Chain manages the daily tendering of loads. Under
the current setup, the carriers’ representatives have offices in the Prague DC
alongside those of LEGO and DHL employees. “In our corporation, one day a year
we negotiate. The rest of the year we work together,” Møller Nielsen says.
Once the new transportation structure was in place, careful planning helped LEGO
achieve its goal of more efficient line hauls. Working around holidays was a
special challenge, as most European countries prohibit truck movements on
national highways on those days. “You cannot go from the Czech Republic to the
United Kingdom without passing through Germany,” Møller Nielsen says. “So, when
we have a delivery scheduled for the U.K., we need to take into consideration
when are the (German) bank holidays, because on a bank holiday, you are not
allowed to drive the trucks.”
LEGO also needed to change its shipment scheduling to improve load
consolidation. To do that, LEGO and DHL together developed a Web-based
transportation management system. The software is used to tender loads to
carriers, optimize loads, and route shipments, taking into account such factors
as the aforementioned holidays to ensure that LEGO meets its customers’ delivery
requirements. LEGO and DHL decided to build their own solution after a careful
review of existing software packages. “We couldn’t find any solution that
provided the things we wanted,” explains Møller Nielsen. “We wanted one platform
where three or four different parties could access it in real time.”
The challenge of knowledge transfer
Transportation wasn’t the only issue that LEGO confronted when consolidating its
distribution operations in the Czech Republic. The relocation meant that the
toymaker would need to hire a large number of qualified workers for the new DC.
That proved more difficult than anyone had expected. “We couldn’t find people
who knew how to drive a forklift in a complex operation,” Møller Nielsen says.
LEGO and DHL worked together to recruit and train some 400 year-round employees.
(In the peak selling season, the labor force climbs to 900 workers.) The goal of
the training was to educate the Czech employees, who had little distribution
experience, on how LEGO managed its worldwide logistics and order fulfillment
operations.
To collect that knowledge and transfer it to the Czech workers, LEGO began to
document the steps its existing distribution operations would normally take to
meet sales commitments to customers. In many cases, that required the sales
staff to describe in detail the obligations included in service-level
agreements. “We said to the sales people, if you don’t describe it, you won’t
get it,” Møller Nielsen recalls. “If it is a campaign for a customer and we need
to do special labeling, we need to describe it.”
The process-mapping exercise had an unexpected side benefit. LEGO discovered
that it was providing customers with additional services that were not only
expensive but oftentimes unnecessary. For instance, the toymaker found that it
was not achieving complete cube utilization of truck shipments because some
customers wanted special-sized pallets that hindered efficient stacking. Some
customers had even requested that only one stock-keeping unit be placed on each
pallet, although that meant shipping partial pallet loads. “A lot of things came
to the surface,” Møller Nielsen says. “A lot of truckloads were only 50-percent
utilized because of (these) agreements.” Thanks to those discoveries, LEGO was
able to change some of the terms of its sales agreements to eliminate
inefficient handling and distribution practices.
Unexpected savings
The rationalization of LEGO distribution network and the establishment of the
Prague DC turned out to be more successful than the company had originally
predicted. For example, LEGO now receives inbound loads from manufacturing
plants and prepares them for shipment to customers more quickly than it could in
the past. Furthermore, the savings in distribution costs have turned out to be
even greater than expected. Not only did LEGO achieve its target of a 20-percent
cost reduction in 2008, but the company was on track to achieve annual savings
of 40 percent at the end of last year, according to Møller Nielsen.
While lower labor costs account for part of the savings, enhanced efficiency has
also played a role. For example, the shift to a single DC eliminated unnecessary
“touches.” “In the old days, most of the product was handled in two or three DCs
before it went to a customer,” says Møller Nielsen. “Now, it’s only handled
once.”
In the past, moreover, several different DCs might have been required to provide
a value-added service, like applying price labels for a particular retailer.
Now, LEGO only needs to train a single group of workers, who can efficiently
perform value-added tasks again and again. “We can build the expertise to drive
down costs,” Møller Nielsen says. “When you bundle things together, you can be
more efficient.”
The move to a single DC has also helped LEGO reduce unnecessary inventory. “If
the product was out of stock in one DC, you would fill it with product from
another,” says Møller Nielsen. “That increased safety stock.”
Finally, carrier consolidation greatly reduced LEGO shipping expenses. The
company used its leverage as a large shipper to obtain lower freight rates, but
it wasn’t the only one that benefited from those deals. By committing to a
steady volume of shipments to certain markets, LEGO gave the transportation
providers a base on which they could expand their services between the Czech
Republic and other countries. “We asked for services to places like Italy or
Norway, and that was new because the carriers had never served there on a
regular basis,” says Møller Nielsen.
Because it worked with competent partners and took the time to create an
efficient operation without compromising service, LEGO gained long-term cost
benefits that any company would be happy to achieve. Yet, if the move to Eastern
Europe has proved to be so successful for LEGO, why haven’t other companies
followed suit? Perhaps the amount of time, effort, and preparation involved are
too daunting for most companies. As Møller Nielsen points out, LEGO had to build
its own foundation for the project’s success. “Even when we did this, there were
a lot of uncertainties because the competencies aren’t there,” he says. “We had
to train people in the Czech Republic to do worldwide logistics.”
(This story first appeared in the Quarter 3/2009 edition of CSCMP’s Supply
Chain Quarterly, a journal of thought leadership for the supply chain management
profession and a sister publication to Agile Business Media’s DC Velocity.)
Dcvelocity
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