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Gearing up

Spurred by sales, Lego does an about-face on Kladno outsourcing

By Michael Heitmann
Staff Writer, The Prague Post
March 5th, 2008 issue

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COURTESY PHOTO
The Kladno plant's 700 workers should experience a seamless transition from Flextronics to Lego.
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After years of financial trouble, the pieces seem to be fitting together for the Lego Group.
The Danish toymaker has called off an ambitious plan to outsource most of its production capacity, opting to take direct control of its large production center in Kladno, west Bohemia, beginning March 1.
Only two years ago, on Aug. 1, 2006, Lego had subcontracted its work at the facility to Flextronics, a Singapore-based company that operates mainly as a contract electronics maker.
Lego’s original plan was part of a major restructuring effort that would have brought its worldwide number of employees down to 3,000, compared with a high of 8,300, set in 2003. But when sales began speeding up in 2006 — well before last winter’s China toy scare — it took management by surprise: Instead of managing decline, the company was scrambling to fill orders.
“The outsourcing took place in a period with sales increases — despite expected declines in sales,” CEO Jorgen Vig Knudstorp said in Lego’s annual report for 2007, released Feb. 19. “In the course of 2006 and 2007, the outsourcing turned out to be more cost-consuming and more complicated than anticipated at the adoption of the plan.”
Industry publications were buzzing with rumors saying that Lego was putting heavy pressure on Flextronics, with some saying that Flextronics may have had doubts about the contract’s profitability.
In a story published Feb. 19 by the Danish engineering magazine Ingenioren, Knudstorp said that he was not satisfied with the production efficiency at Kladno, which is why Lego decided to take action.
Since Lego will continue its cooperation with Flextronics in Mexico and Hungary, it has taken a softer stance in public.
“Together with Flextronics, we have come to the conclusion that the best and most effective solution is for us to run the factory in Kladno,” said Charlotte Simonsen, a Lego spokeswoman.
“Flextronics has done a really good job in Kladno, doubling capacity while maintaining quality,” she added.
Lego already owns the Kladno factory, including its equipment, meaning that the facility’s 700 workers gained an old and new employer March 1, with working conditions expected to remain the same.
Brick focus
Lego does not actually mold any of its interlocking bricks in Kladno. Instead, the facility takes care of processing and packaging Lego’s products.
“Today, approximately 30 percent of our global packing takes place in Kladno. Long-term we expect that up to 50 percent of our global packing activity will take place in Kladno,” Simonsen said.
The factory was inaugurated in November 2000, with the location chosen because Lego wanted a central production facility in Europe with good infrastructure. The plant is also close to Lego’s European distribution center, located in the nearby town of Jirny, which handles all distribution to retailers outside of the Americas.
Meanwhile, Lego’s plans to outsource its molding activities, much of which still takes place in Denmark, have been postponed for at least 12 to 15 months, according to the company.
Lego does not have any plans to open factories in China, neither on its own nor in cooperation with Flextronics, Simonsen said. Lego purchases only a small portion of its total production volume in China, approximately 3 percent, she added.
Lego’s classic lineup of fire trucks, police cars, airplanes, trains and accompanying buildings are by far its best-selling products in the Czech Republic. This is in line with worldwide trends, though bricks themed after movies like Star Wars or shows like SpongeBob SquarePants score better in other countries.
This emphasis on classic Lego products is part of the company’s revamped strategy, which came after “some very hard years at the beginning of this century,” Simonsen said.
Lego went into the red during that time, after frantic attempts in the 1990s to incorporate computer technology and robots into its product lineup did not bear immediate fruit.
By the early part of this decade, “the market changed and grew increasingly competitive, and at the same time we lost focus,” Simonsen said.
“Since 2004, we have followed a strategy focusing on our core products and our core business, and that is key to our success in the past few years,” she added.

Michael Heitmann can be reached at mheitmann@praguepost.com


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