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Dansk version



June 20 2006


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



Jørgen Vig Knudstorp, CEO of the LEGO Group.

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Enfield, USA.

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Kladno, Czech Republic.

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Billund, Denmark.

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LEGO Technic elements.

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LEGO System elements - also known as "standard LEGO bricks".

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Facts about Flextronics.


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The LEGO Group is a privately held, family-owned company, based in Billund, Denmark. It was founded in 1932 and today the group is one of the world's leading manufacturers of play materials for children, employing approximately 4,500 people globally. The LEGO Group is committed to the development of children's creative and imaginative abilities. LEGO products can be purchased in more than 130 countries.

LEGO and the LEGO logo are trademarks of The LEGO Group. ©2007 The LEGO Group.

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