LEGO

Hung Ai Dung ( s3372866)Le Thu Hanh ( s3372862)Nguyen Vu Dinh ( s3344177)Pham Ngoc Minh (s3372932)Le Quynh Chi (s3357755)

Table of Contents

OVERVIEW OF THE SUPPLY CHAIN............................................3

1. Introduction............................................................32. Role of the Player........................................................3

3. Product Flow (Channel map ):................................................44. Customer service value....................................................4

STRATEGY ANALYSIS.......................................................55. ORDER FULFILLMENT......................................................5

6. WAREHOUSING AND DISTRIBUTION...........................................77. DISTRIBUTION...........................................................8

8. PACKAGING............................................................11 RECOMMENDATION.........................................................12

9. MCDM (Multi-criteria decision matrix).........................................1210............................................................Argument Map

....................................................................13 REFERENCE..............................................................14

OVERVIEW OF THE SUPPLY CHAINIntroduction

According to Global logistics and Supply chain strategy (1998), the LEGOGroup is established in 1932 and produced “more than 170 billion LEGOelements and 11 billion DUPLO bricks for more than 300 million consumersworldwide”. The LEGO Group today is the fifth largest toy company in theword as well as the top one in Europe. The largest company manufacturerslocated at Billund which produce more than 50 percent of the LEGO’stotal product and test all the tool and molds. Moreover, “the company'ssecond-largest manufacturing site” placed at Switzerland which productcreates a quarter of all LEGOs products. The Factory in Enfield, Conn.creates 20 percent to sale product in North American market and theremaining 5 percent of production remaining come from the manufacturesin Brazil and Korea and “ninety-eight percent of LEGO's total productionis sold outside Denmark” (Global logistics and Supply chain strategy,1998). Europe is a biggest target of LEGO with 17 companies which salesmany types of the product. There are 3 companies in North America andonly one company in Japan.

Role of the Playero Owner: In 1932, the Kirk Kristiansen founded the Lego group and now “it

has approximately 10,000 employees, and it is the world's third largest manufacturer of play materials” (Jensen. M, 2012)

o Wholesaler (official distributor) in VN: VTA (viettinhanh)

o Consumers: 3 years old and aboveo Manufacturer: According to Lego Group (2011), the factory in the Czech

Republic together with the one in Denmark supplies the European market. Additionally, LEGO Group also has a factory in Nyiregyhaza, Hungary, producing LEGO DUPLO® sets for the global market, and American market is supplied by a factory in Monterrey, Mexico. Order execution and customer

deliveries are handled by 11 warehouses and distribution centers in Germany, Switzerland, France, and Denmark.

o Supplier (raw material):primal use ABS plastic, high gloss and color stability properties

Product Flow (Channel map ):

The materials such as color-stability properties, high gross and primarymaterial ABS plastic are transported to the manufacturers by thirdparty. After finishing production, the transportation companies bringthe finished product to the warehouses and distribution centers. Thedistribution centers shipping products from warehouses to thewholesalers such as VIETTINHANH in Vietnam. The retailers in mallreceive products from the wholesalers and the customers can buy theproducts in the shop, mall or order from the wholesalers

ABS PlasticHigh grossManufacturer(Czech Republic)Viet Tinh Anh Ltd Co (official distributor)MallMallMallMallColor-stability propertiesCUSTOMERS

Customer service value

Responsiveness in delivery is a value that Lego satisfied customers. Responsiveness is the speed of delivery that company or agency made to finish the selling process. According to Lego’s deal, shipment will be made within 5 days (excluding holidays) by YODEL. According to “Jorgen Eeg Sorensen, general manager of transportation and warehousing for LEGO”, LEGO use specific transportation company in specific area such as CARGEX A/S, Hapag Lloyd, “Maersk/Sealand and Mediterranean Shipping Lines” for US, Australia and New Zealand (Global logistics and Supply chain strategy, 1998). Items not in stock will be shipped as soon as they become available. Regardless of the shipment method, the order of confirmation will be sent through email to customers and they will estimate shipment date on the order. In Prague, the Lego's establishmentand distribution network is successful more than predicted. For instance, James (2009) states that “Lego is having inbound loads from manufacturing plants and shipment to customers are made more quickly than in the past”. In addition, in 2009 Lego achieved 20% of savings in distribution costs as well as 40% mark stated by Møller Nielsen (the Former Vice President in Global Distribution Logistics of Lego).With thetrust of the toys being delivered on time to their house, customers willcontinue to order toys from Lego. Therefore, the distribution will be working continuously and they will earn more revenue. Together with the packaging system, the speed of shipment is raised. "Our logistics organization currently is working on developing a more future-oriented packaging concept that will both reduce material consumption and make handling easier, from factory to shop," said Jorgen Eeg Sorensen ,General manager of transportation and  warehousing for LEGO inBillund, Denmark (Global logistics and Supply chain strategy, 1998)

STRATEGY ANALYSISORDER FULFILLMENT

Created value

Customer service value is the value that created by the company in theeyes of customer. Understanding this concern of customer, Lego has offer

an online order system in their main website to the customer. By doingthis, flexibility factor has been brought to the customer.

In the present time, Lego has to compete with many fake products thathave low quality as well as cheap price from China through black market.To solve this problem, Lego has created an opportunity for the customermaking order with the main office of Lego by using online website.Through this activity, consumer might have a change to avoid fakeproduct flow from back market.

Furthermore, in different countries Lego got different design for eachproduct. This activity might enhance customers’ satisfaction by offeringthem more affordable and high-quality toys for children. Customer mighthave a chance to experience their interest in satisfy way since they canown a unique design that does not available in their country.

Potential issue

According to Keely L. Croxton(2003), “Order fulfillment” is a businessprocess in supply chain management which makes sure that right productsare delivery on time. This activity can improve customer servicelevel.Since Order fulfillment is a process, it includes many activitiessuch as Warehousing, Transportation or Packaging. Therefore mistake inorder fulfillment can cause many problems to supply chain system.Wrongorder picking from warehouse can be consider as one of the mostpotential problem come from order fulfillment. If the worker picks wrongorder, that product will be returned and customer might have a badimpression with our company image.

For example, Toy-R-Us Company has received many complaints from customerabout online order mistake in the holiday (measured up, nd). That actionlead to the decrease in the satisfaction of customer and they tend tochange to another company’s product even though Toy-R-Us’ products arebetter.

This problem can be happened to Lego since they have to deliver a largeorder in Holiday. According to Jorgen Eeg Sorensen, "About 60 percent ofour sales are concentrated in November/December“(Supply chain brain,

1998), which means they have to manage a large amount of order fromcustomer. Therefore they can be in overload situation and easily makemistake in picking order for customers.

This mistake might cause a large problem to supply chain. Once thecustomer receive wrong product they would want to return the order andask for an answer along with their right product. If the company cannotgive them the reasons that satisfy their concern they decrease theirtrust to the company reputation. Moreover, if the product is beingreturned  the whole supply chain has to stop and check where is thatproduct belong as well as make sure one more time the product is deliverto right place. Therefore, it will create stagnation in the wholesystem.

Strategy

The potential strategy to solve Lego problem above is Voice pickingsystem which have been launched in many toy companies such as Mattel andHABA.

According to Tony Beales (nd), in voice picking system, order pickershave to rely on voice instructions from management to find” what itemsto pick and where to pick them” through headphones and a microphone,then confirm their activity back to manager verbally. By applying thisstrategy, the employees only need to focus on instruction from theirheadphone not the paper list like before.

This strategy not only solves the problem but also brings out manybeneficial to the Lego Company:

Maximize order-picking productivity, efficiency, and accuracy. Decreasing the rate of wrong order picking since their hands and

eyes are free => makes picking order easier. The managers can have faster report of catch weight since they

speak to their employee instead of writing.   Enhances and Extends Existing WMS Application Without

Modifications. High employees’ turnover for the company.

Reduce cost for paper work.

However, this strategy still contain some disadvantage to the company  

Because they have to purchase microphone and headphone foremployees => Cost involve

Might be confused in communication because different countries havedifferent accent.  

Voice picking system might create a distance between manager andemployees since they did not communicate with each other face toface

WAREHOUSING AND DISTRIBUTION

Created value

Warehouse: LEGO have eleven warehouses in Denmark, Switzerland, France,and Germany

Distribution: LEGO have one distribution center located in European,Prague, Czech Republic which is running by the third party name DHLExcel Supply chain. This distribution centers is the biggestdistribution in Europe with the size about 60,000 square meters. TheLEGO group uses 55 transportation companies to transport items betweenthe warehouses and distribution. The distribution center in Europeanserves throughout the world but except the North America.

Customer service value is flexible. The warehouse can be out of stocklead to the disruptions to customers because each warehouse has somekind of products not all. Therefore, the customer have to wait toreceive product caused satisfaction of customer reduce and waste time ofsupply chain. The distribution center link 11 warehouses together thismean the distribution center (EDC) storage different products. Thismeans customer can order many kind products at the same time andcustomer can receive the products quicker as well as lower price ofshipping. Moreover, if one warehouse is out of stock the distributioncan fill the order from other warehouses. Therefore, the customer haslow chance to have disruption.

It’s also has value to the supply chain from warehousing anddistribution. The value is cost saving. According to Møller Nielsen, thedistribution center in Prague, Czech Republic can reduce a distributioncost. The LEGO Group can close the unnecessary inventories to storage indistribution centers and reduce the transportation to shipping differentproducts from different warehouse to one customer. This mean thatproduct go through only one distribution center before go to thecustomer. In addition, the labor cost in Prague is lower than labor costin other countries such as America.

Potential issue:

There also have an issue of warehousing and distribution centers. Eachwarehouse have specific product which transport from the specificmanufacturer. Martin VangSandgaard Jensen said “the factory in the CzechRepublic supplies the European market in particular. In addition to thisthe LEGO Group also has a factory in Nyíregyháza, Hungary, producingLEGO DUPLO® sets for the global market, and a factory in Monterrey,Mexico, supplying the American market”. Distribution center link with 11warehouses so one distribution center storage many kind of products.This can cause the difficulty finding product in the right place in thedistribution center and make mistake cause the waste time of both supplychain and costumers. According to Oliver.K, Samakh.E, Heckmann.P, who isthe experts in logistic term state that “it was very difficult toposition the right product in the distribution center”. This mean thedistribution center have high level of inventory and can miss somesales. Hence, it can make loss in profit and customer satisfaction.Moreover, main distribution center placed in Prague is quite far to shipproducts to customer or retailer in Asian.

Strategy:

The solution to the issue is the decentralize distribution center.Decentralize is the separate the main distribution center into manydistribution. In the other words, the LEGO group should build moredistribution center and close unnecessary warehouses to reduce cost ofwarehouse. Each distribution center storage some specifics product tospecific area such as Africa, Asian, America and Europe. Additionally,

LEGO group can choose some countries such as Brazil or some countries inAfrica and Asian to have lower labor cost.  Another advantage is thatdecentralize could avoid the mistake about positioning product in onlyone main distribution center and new distribution center can reduce adelivery time to the customer in that countries. This leads to the savetime and reduce some loss of sales.

However, decentralize distribution center have some disadvantages. Onesignificant disadvantage is that LEGO Group has to spend a lot of moneyand time to build new distribution center. It also need a time find agood enough transportation company at poor countries. Moreover, thelabor force can has low skill level which can effect to the quality ofthe product. 

DISTRIBUTION

Created value

Distribution: “arranging for a product to pass from one business to another until it reachessomewhere, for people to buy it”,(Oxford University Press, 2005). Distributionperforms inventory handling, storage and processing activities. Withoutthe distribution, inventory can’t be released to the customers and bestuck in warehouse

The customer added value here is responsiveness: “speed at which supplychain provides products to the customer” (“Supply chain management – Alogistics perspective”, p153).This means the company having to make surethe distribution happen fast and accurately. With the speed ofdistribution Lego can provide enough goods to retailers and suppliers.According to Lego’s deal, shipment will be made within 5 days (excludingholidays) by YODEL. Items not in stock ship as soon as they becomeavailable. Regardless of the shipment method, customers will receive anorder confirmation email that estimated shipment date on the order andof any backordered item.

Potential issue

The distribution from the Lego is now responsive to deliver the goodsthe customers accurately and timely. However there was an issue raisedduring the transportation is that the small stores which are far fromthe warehouse were paid more attention than the stores located in theshopping mall, which cause quite a loss in the transportation. The issuehere is that the shopping mall has a fixed number of customers everyyear and it takes a longer time to sell out all of the goods. However,with the small shops around the city, customers find it easier and moreconvenient for them to buy those near their house or on their way towork. Therefore the goods may be sold faster and need more distribution.Lego distribute packages to small shops, which are far away from eachother. As mentioned above, the delivery to small shops have been maderegularly and continuously than those shop in large mall. However, theseshops account for small amount of revenue and we need to cut it off tothe most appropriate delivery times.

This result in labor - consuming and the company may lose opportunitycost when pay much attention to small shops. The shops are far away fromthe warehouse therefore the delivery is split into many ships andpeople. Then we need more distribution control to those retailers.

Strategy

Decentralized distribution center: which means the company will open acenter in central area of the shops and make delivery when needed. Fromone big distribution center, company will build some more small ones inremote areas to help bring the latest design of Lego to customers. 

The advantage are cost reduce and simplification in the delivery.

Reduce cost: distribution center is centralized and the delivery tofar shops may decrease. Which means the delivery agency doesn’tneed to go for a long way to those shops many times and theresponsiveness will be more efficient.  The labor used in theseshipments can be reduced and cost paid for delivery agency will be,too.

Simplify the delivery: the shipment made to those shops will be cutoff to a fixed number when distributing to the retailers and the

agency doesn’t need to go through a long way to deliver all thepackages.

The disadvantages:

Potential ordering delays: shipment to the small shops can bedelayed due to small order. Whenever the order is up to the limitof a shipment, the delivery is made. Customers need to wait alittle longer but it’s still within five days.

Opening cost: of course when Lego opens a new center, it cost morethan the loss from delivery. However, in long run, thetransportation to the retailer will be easier and more central.

INVENTORY

Created value

By having the new centralized distribution center in Jirny, CzechRepublic by the summer in 2008; Lego has been now able to improvecustomer value delivered to its retailers (Supply Chain Europe, 2009).Specifically, having the centralized warehouse rather than multiple onesis beneficial in term of better and thorough inventory and ordermanagement; which results in good on-time performance (the KPI is 96%).In addition, the role of new center is to supply elements and materialsto 14 regional Lego distribution centers worldwide accompanied with on-time delivery value have helped these centers to pull down the level ofsafety stock as well as reduce the risk of stock-out.

Potential issue

One of potential issue that could negatively affect Lego’s ordermanagement is the information management when processing orders fromretailers. According to Madsen, B et al. 2012, the stock allocation foroutlets is not revised and then forwarded directly to the process of“picking, packing and dispatch”. Errors during the process, therefore,could disrupt the on-time delivery value since it required more time torevise the ordered quantity for customers. “The queue of order”,moreover, is not processed until weekend which creates long time-lag forretailers who sending orders at the beginning of the week.

Strategy

The possible solution for Lego is to adopt the new Enterprise ResourcePlanning (ERP) strategy. Firstly, ERP is a kind of integrated managementusing effective resource in order to improve business’s efficiency. Thiscan be achieved by utilizing software in business activities (orderfulfillment, manufacturing…) (Leon, A 2008). Furthermore, the differencebetween the current and the proposed ERP strategy for Lego is installedsoftware for order management. Specifically, Lego now is utilizing ERPsystem called SAP ECC 6.0 for its operation but Madsen, B (2012)

recommends the multi-agent virtual world should be implemented. He alsohighlights that the current SAP ECC 6.0 requires long time to transitand process order information from retailers but the new software couldbe more effective in this case. Particularly, it takes less time as allthe data or information of orders could be processed and recorded at theend of the day

Implementing the new system has both advantages and disadvantages.Firstly, it is not only very expensive for Lego to adopt the newsoftware but also required to have qualified and skillful people managedit. However, the benefit of utilizing new system far outweighs the realcost. Madsen, B (2012) states that Lego can achieve “reduction of lostsale from 40% to 16%”, “increase in profitability 56% to 81%” and mostimportantly “increase in service level from 66% to 86%” thanks to Lego’sability to reduce error, provide better information, and resolve problemquickly when multi-agent virtual world is implemented.

PACKAGING

Industrial Packaging is defined as “the protective wrapping and boxing of finished industrial goods for shipment”. (Monash University).

Created value

In today society, environmentally friendly issue is being concerned by all companies over the world. Understanding this trend, Lego Company hasalso applied Green practice as one of its successful customer services values.

In the article” LEGO's Logistics Blocks Include 'Combi' Transport, Recyclable Packaging”, Sorensen, Lego’s CEO, had said that, Lego is currently developing its packaging concept which may both avoid materialwasting and make the handling from factory to shop easier. Specifically,the excess cardboard is removed or immediately separated to compress into bales spot. Additionally, Lego also apply returnable packaging program among Lego’s sales company and their major retailer chain.  After that, these packages will be returned back to suppliers to be recycled. Statically, there is 500- kilogram raw material had been returned by Lego Company to its suppliers. Cardboards are also recycled

in Lego’s warehouses. The carton is usually saved to be reused. Besides,the outers are cut into spices to make filters in packaged boxes.

Potential issue

Customers cannot recycle cartons by themselves. So, they have to returnit back to warehouse. (Supply Chain Brain, 2011). Therefore, it ispossibly seen that they need to make double shipments from distributionto customers. This activity will probably bring the doubletransportation cost for the company. Furthermore, the increasing indistance will cause the rise of carbon dioxide discarded from vehicles.As the result, it is probably seen that Lego is contributed in processof damaging the environment. In the far future, this is phenomenon willnot only causes harm for people health but also brings serious damage tocompany’s reputation. For that reason, profits of company will alsosignificantly fall. One of the best examples for the damage ofreputation by harming environment is the case of Vedan Company in ThiVai River. Base on the research of Luu Trong Tuan, in 2009, the Ministryof Natural Resources and Environment announced that Vedan had distractedmore than 110,00cu.m of untreated wastewater every month into the ThiVai River. As the result, in that year, Vedan had to pay more thanbillions dollar to cover that issue. However, the reputation of thiscompany could not be recovered until 2012.

Strategy

According to business dictionary, milk-run is “the delivery method for mixed loads from different suppliers”. In other words, instead of spending four vehicles every week from four distributions to meet weeklyrequirement of one customer, company just need to pay one vehicle to visit all four distributions and transfer all orders from these distribution to that customer.This strategy has both advantages and disadvantages.

Advantages:

Firstly, according to Saini, by using this strategy, the transportation will probably be reduced. For this reason, the amount of vehicles’ carbon dioxide being discarded also decrease considerably.  Secondly, itwill also reduce the risk level from mistake and error products. Based on this strategy, errors and mistakes may be easier and faster to be recognized and solved. Moreover, it also minimized the impacts on sales.Thirdly, by reducing distance, this strategy help company raise it reputation by ensure just in time products. Moreover, the preparation times is also shortened and help reduce the logistics of intermediate links. (Jingmao Express, 2011)

Disadvantages:

Besides advantages, this strategy also has some disadvantages:Firstly, in Transportation Management Report in 2011, Roy Leander has mentioned that in case of poor planning of the company, the distance might be significantly increased which lead to the soar in transportation cost and smog from vehicles. Secondly, according to Matteo, path is another negative aspect that might obstruct using this strategy. For example, if suppliers near each other, this strategy will effectively minimize transportation cost. However, if those suppliers far from each other the milk-run will be really long and expensive. 

 

RECOMMENDATIONMCDM (Multi-criteria decision matrix)Criteria Weight (%)

Slow order process and ineffective solving problem 25

Errors in picking orders 30

Increase transportation cost and harm environment 20

Difficulty finding product in the distribution center  10

Costly distribution in remote area 15

TOTAL > 100

Strategies Slow order process and ineffective solving problem (.25)

Errors in picking orders (.30)

Increase transportation cost and harm environment(.20)

Difficulty finding product in the distribution center (.10)

Costly distribution in remote area (.15)

Total

ERP (Installing new software)

8 (2) 2 (0.6) 3 (0.6) 1 (0.1) 3 (0.45) 3.75

Voice Picking

1 (0.25) 8 (2.4) 4 (0.8) 6 (0.6) 2 (0.3) 4.35

Milk-run 1 (0.25) 1 (0.3) 8 (1.6) 1 (0.1) 7 (1.05) 3.3

Decentralized distribution

1 (0.25) 4 (1.2) 5 (1) 6 (0.6) 4 (0.6) 3.65

Argument Map

because

because

because

because

because

because

Solve picking order and transportation problems

Voice instruction in detailed way reduces wrong picking hence avoiding redelivery .

Less expensive than other strategies

Less capital investment ( buying equipment vs building centre)

Less complex for implementation

Simple training for staffs and planning

Voice picking strategy

From the table above, voice picking system appears to be the best amongfour proposal strategy since it has the highest score as 4.35.Additionally, other quantitative factors also prove that theimplementation of voice picking system is beneficial. First of all, theimplementation of this strategy can assist to solve not only issue ofwrong order picking but also partly difficulty in finding product inlarge distribution center thanks to the voice instruction in detailedway. Reducing likelihood of wrong order picking, moreover, helps toreduce burden on transportation as wrong product or quantity deliveredto customers requires extra shipment (redelivery). In another word, itis possible to implement voice picking without harming supply chainintegration, even be effective for reducing transportation cost.Secondly, although it is expensive to implement voice picking system,the cost of buying headphones and microphones is far cheaper than costof building new distribution center (from decentralized distributioncenter strategy). Furthermore, ERP, milk-run and decentralizeddistribution strategies are more complex to implement than voice pickingsystem; specifically, ERP requires training for managers to run newsoftware smoothly and milk-run, decentralized distribution will beineffective if there is poor planning (e.g. cooperate with 3PL).

For example, Oriental Trading Company (OTC), which provides “partysupplies, toys and novelties” for the customer, has applied VoicePicking System for their supply chain management in 2007 and becamesuccessfully in 2011. In Modern Materials handling (2011), OTC showed asignificant improvement in picking product which is “45% increase inproductivity and a 60% reduction in pick errors”. This statistic hasemphasized the effectiveness of voice picking system in warehouse.Furthermore, the article also point out the change in order-pickingsince the rate of accuracy has risen from 99.25% to 99.9%. Additionally,OTC indicated that voice picking is easy to be implemented because itdoes not require many complex training and can be applied immediately bethe worker.

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