Over the past few years we've been chronicling a very expensive journey by Danish toymaker Lego. A hat tip to regular reader Peter for helping us stay up on this story.
First, back in June of 2006, Lego decided to drink the McKinsey Kool-Aid and outsource manufacturing to Flextronics. Actually it asked Flextronics to come in and manage its own factories.
The only trick the ponies from McKinsey know is outsourcing, which is exactly what [CEO] Jørgen Vig Knudstorp did. The work in the U.S. plant in Connecticut is being sent off to Mexico. The Danish town of Billund where Lego is headquartered and the factory has long been the biggest employer in town, is being decimated as most of the work is being farmed out to Flextronics to do in the Czech Republic. Lego already owns the plant in Kladno in the Czech Republic where the work from Denmark is being sent. The plant, the employees and the equipment are merely being turned over to Flextronics to run.
Actually it was even more bizarre than that.
Even more curious is that Jørgen has outsourced the plastics and packaging work to Flextronics, but has retained the little bit of electronic work Lego does for their Technic and Bionicle product lines. The 'tronics' part of Flextronics denotes that they have long been primarily an electronics contract manufacturer. Yet Jorgen's insight led him to keep that work in house, and have an electronics company with a track record of failure in the Czech Republic take over management of an injection molded plastics plant.
Sure, why not? Have an electronics manufacturer make the plastics, and a plastics manufacturer keep on making the electronics. That's bound to succeed, right? Uh, no. Just a few months later, in August of 2007, we began to hear of problems.
The Lego corporation's large scale outsourcing has created so many problems that there will not be any downsizing of jobs in Danish factories in 2007. The plan was to cut the workforce in Billund from 1200 to 300, and outsource the jobs to their partner Flextronics in Kladno Czech Republic, so writes the newspaper Børsen.
Then in February of this year Lego finally gave up on Flextronics at the Czech factory.
Lego drops partnership with Flextronics - Quality and effectiveness have simply not been good enough for the production that was outsourced to a Czech factory.
“We have talked about how we can be more effective and decided to run the factory ourselves. We would rather do that which is the most effective that stick to a decision that is two years old, even though it of-course sends a signal about a shift in strategy” says CEO Jørgen Vig Knudstorp.
Now the final shoe has dropped. Lego has taken back production control at the remaining Flextronics-controlled factories in Hungary and Mexico.
The LEGO Group and Flextronics have worked together for almost three years, but during the past year “it has become increasingly obvious to the two parties that it would be more optimal for the LEGO Group to manage its global manufacturing set up." The parties jointly decided that the LEGO Group will take over LEGO production from Juárez, Mexico and Nyíregyháza, Hungary.
A long and expensive journey. Besides the direct quality and production costs, imagine the number of meetings, the hours of engineering and executive time, and the loss of employee morale that was sunk into this fiasco.
But I'm sure executives on all sides got bonuses, right?