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LEGO Production Restructuring - Enfield and Billund Layoffs

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LEGO Production Restructuring - Enfield and Billund Layoffs

Postby architect » Tue Jun 20, 2006 5:48 pm

Today LEGO announced they are moving most of their brick production from Billund to the Czech Republic. All packaging of sets will be outsourced as well. This means many production jobs in Enfield and Billund will be lost. You can read the whole press release here:

LEGO Group to outsource major parts of its production to Flextronics

Earlier today, LEGO employees were notified that the greater part of the company’s production will be outsourced to an Electronics Manufacturing Services company, Flextronics, over the coming three-year period.

The decision to outsource means that present production at the LEGO Group’s US-based subsidiary in Enfield, Connecticut, will be phased out during the first quarter of 2007 and relocate to Flextronics’ production facilities in Mexico. Likewise, distribution in the USA will relocate. Altogether, the relocation will affect up to 300 employees.

Production of the technically more demanding products (LEGO Technic and BIONICLE) will remain located at the LEGO facilities in Billund, whereas production of the LEGO System products will relocate to Flextronics’ facilities in Eastern Europe. This relocation means that over the coming three years, up to 900 jobs of its present 1,200 at the Billund production facilities will be affected. The relocation will take place in stages between 2007 and 2010.
Lastly, Flextronics will take over operations at the LEGO Group’s factory in Kladno, the Czech Republic, beginning August 1, 2006. The factory will continue to play a key role in the production of the LEGO System products.

Upon implementation of the outsourcing, the LEGO Group’s headcount is expected to total approximately 3,000 employees as compared with a total workforce of 8,300 end 2003, which was the last year before the LEGO Group started its restructuring process. Other than the planned outsourcing of the production, the divestment of the LEGOLAND Parks also contributes to bringing down the number of total staff as do also the outsourcing of the European distribution, the closing of the Group’s production facilities in Switzerland and eventually also general cuts worldwide as a reflection of the reduced scope of the new business model.

The decision to outsource comes on the back of an in-depth analysis of the company’s total supply chain, and with a special view to cost structure considerations and geographic proximity to the major markets. Based on the decision, the company will in future take different lines of approach to manufacturing depending on the product category.
Hence, products characterized by multiple labor-intensive decorating and assembly or packing processes will be outsourced. These include, among other products, the DUPLO line which is already being produced at Flextronics’ in Hungary.
Going forward, the “standard” LEGO bricks, the LEGO System products, will also be produced and packed by Flextronics in Eastern Europe and Mexico, respectively, partly because their high degree of uniformity and large production volumes render outsourcing profitable, partly because the packing of these products is very wage-intensive. The company’s experience with relocating production tasks shows that both the automated and the more manual tasks can be successfully outsourced. Thereby, the LEGO Group will reap the full effect of lower wage costs across all production processes irrespective of the degree of automation within the individual areas.

The LEGO Technic and BIONICLE products, which are specialized and rather more competence heavy plus they are characterized by high technical requirements, will continue being manufactured by the LEGO Group at their Billund facilities.
The LEGO set-up in Billund will also continue to comprise a sizeable mechanical engineering unit as well as a production technologies R&D unit in order to ensure continued development of the technical competencies that are crucial to continuous product development.

Jørgen Vig Knudstorp, LEGO President and CEO, says about the decision:
“This is the last major step in our process of restructuring of the Group’s supply chain, which has been implemented since 2004 with the purpose of cutting total production costs by 1 billion DKK. So far, we have yielded savings by closing our factories in Switzerland and Korea, enhancing efficiencies via the introduction of LEAN processes, upgrading our procurement processes and trimming product complexity. With the restructuring process, we want to improve our profitability while at the same time strengthening our competitive edge in an increasingly competitive market.”

Says Jørgen Vig Knudstorp on the choice of Flextronics:
”We have come to know Flextronics as a very professional partner in connection with the outsourcing of our DUPLO products, which has taken place over the past year. They understand and appreciate the unique values that LEGO products represent, not least the importance of quality and safety which are fundamental to the good play experience.”
According to Jørgen Vig Knudstorp the decision should be considered a means to future-proofing the LEGO Group:
“We are beginning to see the first outlines of a new business model – moving from a traditional, integrated model towards a partnership model. In future, we will focus our own efforts on the key processes relating to our brand such as innovation and marketing and source expertise in other areas from strategic partners. In doing so, we will derive important financial benefits in the very difficult market in which we operate.”

Says Matt Ryan, Executive Vice President of Worldwide Operations for Flextronics:
“Our business relationship with the LEGO Group is characterized by intense supply chain collaboration that provides strategic and efficient cost-savings to help improve the company’s competitive market positioning. We are excited to expand our partnership with the LEGO Group as this allows Flextronics further market diversification and enhanced plastic moulding capabilities in low cost regions.”


--------------------------------------------------------------------------------


Background
During the past two years, the LEGO Group has overcome a serious financial crisis. In 2005, the Group’s result before tax had considerably improved to 702 MDKK as compared with its 1,688 MDKK deficit in 2004. It is against this background that the Group has defined its strategy for the coming years. One of the elements of this new strategy is to continually adjust the Group’s cost basis to the present – and future – difficult market conditions.

The traditional toy market is characterized by low or no growth, also as a result of the severe pressure from electronic products, and intense competition at retail level. Additionally, the vast majority of toys manufactured globally, come from production facilities in countries characterized by very low costs, especially in Asia.
In order to identify cost efficiencies, the LEGO Group initiated an analysis of its global supply chain in 2005. Since then, numerous cost savings and efficiencies have been identified throughout the Group. Final location of the future production is the last element in this comprehensive process of adjustment.

For further information, please contact:
Charlotte Simonsen
Head of Corporate Communications
The LEGO Group
Phone: +45 79 50 65 79
Last edited by architect on Wed Aug 09, 2006 12:10 pm, edited 1 time in total.
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Postby architect » Tue Jun 20, 2006 5:53 pm

My thoughts on the move:

This seems to be an extremely hard but necessary step for LEGO to take. Taxes and wages are so high in Denmark (some of the highest in Europe and the world) that it is next to impossible to turn a profit there. Since the toy industry is very stagnant, the move should increase profits if sales stay at the same level. As a fan I hope that quality does not suffer. That is my main concern.

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Postby Bruce N H » Tue Jun 20, 2006 6:17 pm

Hey,

Just to add a little bit to this thread, Steve Witt, LEGO Community Relations Coordinator, posts on this topic in the Lugnet thread Addressing concerns about Outsourcing LEGO Production. He writes:

This is the response Consumer Services is giving in response to today’s
announcement: “LEGO Group to outsource major parts of its production to
Flextronics”

Thank you for letting us respond to you regarding our recent announcement about
changes in our manufacturing locations. Please let me assure you that the focus
of the LEGO Group has always been and will remain on product quality and safety.
No matter whether our products are produced or packaged at our own factories in
Europe or by manufacturers elsewhere, they must comply with our high standards.

The LEGO Group has been purchasing electronic components, textile items and some finished product for the last several years from outside suppliers. This activity continues as production of some LEGO® items for the North American market transitions to an outsider supplier's facility in Mexico. Production of certain LEGO products will be maintained at LEGO owned and operated facilities in Denmark. This decision was not made lightly, but was necessary to maintain the company’s competitiveness in the toy industry.

The LEGO Group is recognized as a company observing high standards in ethical,
social and environmental matters. That will not change. All our suppliers,
whether in Mexico or elsewhere must successfully pass a Code of Conduct audit
and comply with international certification requirements established by the
International Council of Toy Industries (ICTI). The purpose of this Code of
Conduct is to ensure that vendors and their sub-contractors produce components
and supply services to the LEGO Group in a manner that respects the rights of
their employees and the environment. LEGO will monitor compliance with the LEGO
Group Code of Conduct, through our own internal audits or by use of independent
3rd party auditors such as Price Waterhouse Coopers. We will also have LEGO
employees present in the factory to verify product quality, safety and code of
conduct performance.


He's monitoring that Lugnet thread, so if anyone has any questions to direct to LEGO, you might get them answered if you post there.

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Postby Peppermint Pig » Tue Jun 20, 2006 10:52 pm

I agree architect. The cost of doing business in western nations is reaching a critical point. The move to less restrictive locations will boost those economies as well as provide that Lego will survive. Ultimately it reinforces the fact that a more free market is superior to the kind of protectionism that so-called developed nations are engaging in.

From what I recall, Duplo has already been outsourced, so this news isn't too surprising.

While it has nothing to do with set composition, it is nice to hear that quality and safety will remain priorities with Lego.

Now if only this means we'll see cheaper sets in the near future. I doubt it. :P
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Re: LEGO Production Restructuring - Enfield and Billund Layo

Postby Sir Nelson » Wed Jun 21, 2006 12:17 am

architect wrote:Jørgen Vig Knudstorp, LEGO President and CEO, says about the decision: “This is the last major step in our process of restructuring of the Group’s supply chain, which has been implemented since 2004 with the purpose of cutting total production costs by 1 billion DKK."
All I can say is that this is very sad news for the affected employees. To me, this means that TLG (or at least. certainly Mr. Knudstrop and their Board) knew about these job cuts for quite some time. I am wondering if Jake McKee or other LEGO employees somehow learned about these plans earlier, causing them to leave sooner?

I wish the very best for TLG to thrive and survive in the global toy market. But as a fan, I also worry about diminishing product quality. Let's hope for the best for both sides.
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Re: LEGO Production Restructuring - Enfield and Billund Layo

Postby architect » Wed Jun 21, 2006 12:59 am

Sir Nelson wrote:All I can say is that this is very sad news for the affected employees. To me, this means that TLG (or at least. certainly Mr. Knudstrop and their Board) knew about these job cuts for quite some time. I am wondering if Jake McKee or other LEGO employees somehow learned about these plans earlier, causing them to leave sooner?


Jorgen Vig spoke about the possibility of moving production at the last BrickFest. At that time supposedly the decision had not been made either way.

Jake has said several times in his posts that he was leaving to pursue new challenges in the Texas based marketing firm. His job still exists and is held by Steve Witt in North America (and Jan Beyer in Europe). I highly doubt the final decision to move production was made at that time. Community involvement is still extremely important to LEGO. As far as we know, the layoffs are for production jobs and not the community team or other areas of LEGO.

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Postby SavaTheAggie » Wed Jun 21, 2006 9:56 pm

I'm a capitalist piglet of the third degree. I think this is a good business decision.

Flextronics has already been making Duplo for LEGO for a year now, so they already know what LEGO is expecting. Plus LEGO must have a lot of faith and goodwill in Flextronics to even consider such a business decision. I'm firmly convinced that quality will not suffer.

LEGO has always said that making bricks is a pretty highly automated process, and assuming Flextronics follows the same production principle, the only real change labor-wise is the engineers and mechanics that work on the machines and the quality control personel.

And if this move is signifigantly cheaper for LEGO, then they might lower prices to be more competitive - and cheap LEGO is what I'm all about.

Besides... given the choice between laying off 75% percent of the workforce now or 100% of the workforce in a few years when the company goes bankrupt, I choose saving the company.

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Postby TwoTonic Knight » Thu Jun 22, 2006 1:08 am

What can you say? It's a competitive world. I presume that after a year of doing business with Flextronics, LEGO is satisfied with their production quality. I doubt any saving will be passed along on any short term basis - my bet would be that they will want to move out of the red and into the black to pay off any debts first.
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Postby Peppermint Pig » Thu Jun 22, 2006 6:48 am

I think that's the case TwoTonic, though there may be investment and company goal subtleties that we'll always be in the dark about. One can only hope set prices eventually normalize before people simply get used to them, or the rest of the economy continues in the bad direction it's been going in. Streamlining distribution can only do so much to keep the prices in check given rising fuel costs.

It's really sad to see Lego's home country gut production, despite it being sensible business. They can't really help it, but I would hope their government understands what kind of image they are portraying. It's kind of a sad hypocrisy all in an effort to provide securities for the workers.
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Postby timber_wolf899 » Sat Jul 29, 2006 2:35 am

sigh, well at least they are not moving ot china. I would enter a permanent dark age should that happen.

This is what big government and over regultion gets us. But people, and by extension their elected reps will not see this. Nothing is free.......You want big social programs, ok fine but your economy will suffer. America is vastly over taxed and over regulated, yet the public at large still th inks social programs can fix all problems!

The fiscal conservative has been forgotten!
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Postby Traveler » Wed Aug 09, 2006 5:32 am

To me, anything that keeps TLG alive is good. As we all know, they haven't been doing well lately, and I'm sure this move and the larger restructuring are an effort to cut costs and continue profitability. I hate to think what would happen to LEGO prices, new and used, should TLG close its doors.
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