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Lego taking back production

By: Bill Bregar

July 7, 2008

Toy maker Lego A/S announced July 1 it will end its 2-year-old outsourcing agreement with electronics manufacturer Flextronics International Ltd.

Lego, the Bellund, Denmark-based maker of the famous, colorful building blocks, outsourced production in mid-2006 to cut production costs.

During the complex transition, Lego moved a huge amount of machinery — hundreds of injection molding machines, and other equipment used to pack the parts into the final packaging — over to Flextronics-owned factories in Juarez, Mexico, and Nyíregyhaza, Hungary.

Lego continued to own the molding and packing machinery, while Flextronics ran the operations in its two plants, said Charlotte Simonsen, Lego's head of corporate communications, in a July 3 telephone interview.

But now, Lego officials will phase out that agreement with Flextronics during 2009 and bring the production back in-house.

``Jointly, we have now come to the conclusion that it is more optimal for the Lego Group to manage the global manufacturing setup ourselves,'' Iqbal Padda, vice president in charge of the global supply chain, said in a news release.

Lego is negotiating to purchase the Nyíregyhaza plant from Flextronics. Those discussions should be completed by the end of July, Lego said.

In Mexico, the dedicated Lego operation is located inside Flextronic's manufacturing complex at Juarez. During the first quarter of 2009, Lego will move the work from Juarez to Monterrey, Mexico. That new location should be in production in the second quarter of 2009.

Simonsen said Lego employees will work at both operations.

The move to outsource more production was part of Lego's seven-year strategy to rebuild the toy giant, which had lost money four out of the seven years from 1998 through 2004. Lego returned to consistent profitability in 2005, but officials still wanted to address the firm's supply chain.

Singapore-based Flextronics is best known as a huge contract manufacturer of cell phones, computer components, printers and medical products. Injection molded Lego blocks marked a new direction.

Padda said Lego and Flextronics have maintained high levels of quality during what he termed a ``complicated'' transition.

Flextronics did not issue its own statement about ending the arrangement and company officials did not return phone calls.

Hints that the relationship was changing came in March, when Lego took back work in a packing plant in Kladno, Czech Republic, that it had earlier outsourced to Flextronics.

``We think we could obtain more cost reduction through doing this ourselves,'' Simonsen said. ``We also feel that we could achieve some more synergies because we have control over the production facilities.''

Controlling its own production also will give Lego flexibility to meet changes in demand for its iconic toys, she said. A period of declining sales in 2003 and 2004 prompted Lego executives to take a hard look at production capacity. But then sales grew at a rate much higher than expected — prompting officials last year to postpone further outsourcing of molding for 12-15 months, according to Lego's 2007 annual report.

Lego also does production at its Billund headquarters and cooperates with third-party processors in Poland, Hungary and China.