The toymaker's bold decision to serve Europe and Asia from the Czech Republic cut logistics costs by 20 percent. But bringing the new operation up to Western European standards wasn't exactly child's play.
If you have children at home, then you probably also have Lego plastic bricks. The colorful, interlocking toys are loved the world over by youngsters who use them to design and construct buildings, vehicles, robots, and other imaginative toys. It's not unusual for children to amass thousands of pieces in all shapes and sizes.
Despite the product's popularity, The Lego Group found itself struggling financially a few years ago, and in 2004 the toymaker's board of directors decided that the company needed to cut 20 percent of its logistics costs. A key step in achieving that objective was consolidating most of Lego's European warehouses and distribution centers (DCs) into one facility located in the Czech Republic. It was a bold move: No other major company had consolidated its regional distribution in Eastern Europe; in fact, none other has done so to date, says Egil Møller Nielsen, vice president of global logistics for Billund, Denmark-based The Lego Group.
It also was a potentially risky decision, Møller Nielsen acknowledges. "To be the first mover had some benefits, but it also had some risks. We decided we wanted to be the first mover," he says.
It turned out to be a risk worth taking. The move to a single distribution center yielded savings that have helped the toymaker's bottom line. In 2008 the company recorded a nearly 19-percent jump in annual revenue to DKK 9,526 million (about US $1.8 billion) with a profit margin of 21 percent.
Given the worldwide economic downturn, sales are unlikely to be as strong in 2009. But Lego is well-positioned to ride out the economic storm, thanks in part to a distribution strategy that will continue to provide a high level of service at a significantly lower cost than in the past.
Advantage: Prague
In 1932 Ole Kirk Christiansen founded what is now the sixth-largest manufacturer of toys in the world. The name Lego is derived from the first two letters of the Danish words "leg godt," which means "play well." Today Lego products are sold in more than 130 countries, with principal markets in the United States and Europe.
Lego's financial problems in 2004 prompted the company to adopt a seven-year strategy called "Shared Vision" to revitalize its sales and profits. At the time, its products were manufactured in Denmark, Switzerland, and the Czech Republic. Lego had 11 warehouses and distribution centers in Denmark, Switzerland, France, and Germany that handled order execution and customer deliveries.
The Danish toymaker recognized that it could cut its logistics costs by consolidating all of its European distribution activities under one roof, save for the Billund, Denmark, warehouse that handles fulfillment of Internet orders. After considering a number of options, Lego settled on Prague in the Czech Republic—a highly unusual decision. "Not many companies have one DC for all of Europe. Normally, they have two, three, or four," observes Møller Nielsen. "If a company has only one DC, it's always located in Germany or the Benelux [BelgiumNetherlands- Luxembourg] area."
Lego chose Prague largely because of its low labor costs. The medieval city, known for its elegant architecture and vibrant arts scene, also offered a larger pool of skilled labor than other Eastern European locations. "We wanted to be close to Prague because of the [workers'] competencies," Møller Nielsen says. "If you were too far away, it would be difficult to get employees who know how to work a complex operation."
The company elected to forgo construction of its own warehouse and instead leased a one-million-square-foot building from the commercial realtor ProLogis. It also decided to hire a third-party logistics company, DHL Exel Supply Chain, to run the day-to-day distribution operation. The main reason why Lego decided to work with a contract logistics company was the seasonal nature of its sales—60 percent occur in the months leading up to the December holidays. "If we had to carry all that [warehousing] capacity ourselves, we would have eight months of a year with huge idle capacity. If you have an outsourcing partner, they can at least try to balance [available capacity] against other customers," Møller Nielsen explains.
It was important that the switch from many warehouses to the single distribution center go smoothly. As Møller Nielsen notes, "Customers and sales don't accept performance interruptions." To minimize the chances of service disruptions during the changeover, Lego conducted its warehouse consolidation in two phases, including a period when it ran parallel operations. In 2006, it closed down five DCs and transferred those operations to the Prague facility. A year later, it closed five more facilities and shifted their responsibilities to the new DC, which by that time was serving all of Lego's markets except the United States.
Transportation shakeup
The move to Prague required Lego to undertake an extensive analysis of its transportation network. Because the adoption of a single distribution hub would profoundly affect its delivery patterns, the company opted to make some changes in its carrier base prior to any relocation. Up to that point, The Lego Group had used 55 transportation providers for inbound and outbound shipments to its 11 warehouses in Europe. It trimmed those ranks to 10 international carriers that could serve not only Europe but also Asian markets. Today the toymaker has at least two carriers handling deliveries to every market it serves.
The carriers' representatives have offices in the Prague DC alongside those of Lego's and DHL's employees. "In our corporation, one day a year we negotiate. The rest of the year we work together," Møller Nielsen says.
Although DHL Exel Supply Chain manages the daily tendering of loads, Lego selects its transportation providers and handles contract negotiations with them. Initially there was some discussion within Lego about which party should handle various aspects of carrier management, says Møller Nielsen. The final decision was that this division of responsibility would be the best way to coordinate activities in the distribution center with inbound and outbound transportation.
Once the new transportation structure was in place, careful planning helped Lego achieve its goal of more efficient line hauls. Working around holidays was a special challenge, as most European countries prohibit truck movements on national highways on those days. "You cannot go from the Czech Republic to the United Kingdom without passing through Germany," Møller Nielsen points out. "So, when we have a delivery scheduled for the U.K., we need to take into consideration when are the [German] bank holidays, because on a bank holiday, you are not allowed to drive the trucks."
Lego also needed to change its shipment scheduling to improve load consolidation. To do that, Lego and DHL together developed a Web-based transportation management system. The software is used to tender loads to carriers, optimize loads, and route shipments, taking into account such factors as the aforementioned holidays to ensure that Lego meets its customers' delivery requirements. Lego and DHL decided to build their own solution to accomplish all this after careful review of the existing packaged solutions. "We couldn't find any solution that provided the things we wanted," explains Møller Nielsen. "We wanted one platform where three or four different parties could access it in real time."
The challenge of knowledge transfer
Transportation wasn't the only issue that Lego confronted when consolidating its distribution operations in the Czech Republic. The relocation meant that the toymaker would need to hire a large number of qualified workers for the new DC. That proved to be more difficult than anyone had anticipated. "We couldn't find people who knew how to drive a forklift in a complex operation," Møller Nielsen says.
Lego and DHL worked together to recruit and train some 400 year-round employees. (In the peak selling season, the labor force climbs to 900 workers.) The goal of the training was to educate the Czech employees, who had little distribution experience, about the ways Lego managed worldwide logistics and order fulfillment.
To collect that knowledge and transfer it to the Czech workers, Lego began to document the steps its existing distribution operations would normally take to meet sales commitments to customers. In many cases, that required the sales staff to describe in detail the obligations included in service-level agreements. "We said to the sales people, if you don't describe it, you won't get it," Møller Nielsen recalls. "If it is a campaign for a customer and we need to do special labeling, we need to describe it."
The process-mapping exercise had an unexpected side benefit. Lego discovered that it was providing customers with additional services that were not only expensive but oftentimes unnecessary. For instance, the toymaker found that it was not achieving complete cube utilization of truck shipments because some customers wanted special-sized pallets that hindered efficient stacking. Some customers had even requested that only one stock-keeping unit be placed on each pallet, even though that meant shipping partial pallet loads. "A lot of things came to the surface," Møller Nielsen says. "A lot of truckloads were only fifty-percent utilized because of [odd] agreements." Thanks to those discoveries, Lego was able to change some of the terms of its sales agreements to eliminate inefficient handling and distribution practices.
Unexpected cost savings
The rationalization of Lego's distribution network and the establishment of the distribution center in Prague turned out to be more successful than the company had originally predicted. For example, Lego now receives inbound loads from manufacturing plants and prepares them for shipment to customers more quickly than it could in the past. Moreover, the move not only achieved the target of 20-percent savings in distribution costs, but Lego could reach the 40-percent mark this year, according to Møller Nielsen.
The reduction in labor costs was only one of several reasons for those savings. Another is that the shift to a single distribution center eliminated unnecessary "touches." "In the old days, most of the product was handled in two or three DCs before it went to a customer," says Møller Nielsen. "Now it's only handled once."
In the past, moreover, several different DCs might have been required to provide a value-added service, such as applying price labels for a particular retailer. Now Lego only needs to train a single group of workers, who can efficiently perform value-added tasks again and again. "We can build the expertise to drive down costs," Møller Nielsen says. "When you bundle things together, you can be more efficient."
The change to a single distribution center also has helped Lego to reduce unnecessary inventory. "If the product was out of stock in one DC, you would fill it with product from another," says Møller Nielsen. "That increased safety stock."
Finally, carrier consolidation greatly reduced Lego's shipping expenses. The company used its leverage as a large-scale shipper to obtain lower freight rates, but it wasn't the only one that benefited from those deals. By committing to a steady volume of shipments to certain markets, Lego gave the transportation providers a base on which they could expand their services between the Czech Republic and other countries. "We asked for services to places like Italy or Norway, and that was new because the carriers had never served there on a regular basis," says Møller Nielsen.
Because it worked with competent partners and took the time to create an efficient operation without compromising service, Lego gained long-term cost benefits that any company would be happy to achieve. Yet, if the move to Eastern Europe has proved to be so successful for Lego, why haven't other companies followed suit and beaten a path to the Czech Republic and neighboring countries? Perhaps the amount of time, effort, and preparation involved are too daunting for most companies. As Møller Nielsen points out, Lego had to build its own foundation for the project's success: "Even when we did this, there were a lot of uncertainties because the competencies aren't there. We had to train people in the Czech Republic to do worldwide logistics."
The U.S. manufacturing sector has become an engine of new job creation over the past four years, thanks to a combination of federal incentives and mega-trends like nearshoring and the clean energy boom, according to the industrial real estate firm Savills.
While those manufacturing announcements have softened slightly from their 2022 high point, they remain historically elevated. And the sector’s growth outlook remains strong, regardless of the results of the November U.S. presidential election, the company said in its September “Savills Manufacturing Report.”
From 2021 to 2024, over 995,000 new U.S. manufacturing jobs were announced, with two thirds in advanced sectors like electric vehicles (EVs) and batteries, semiconductors, clean energy, and biomanufacturing. After peaking at 350,000 news jobs in 2022, the growth pace has slowed, with 2024 expected to see just over half that number.
But the ingredients are in place to sustain the hot temperature of American manufacturing expansion in 2025 and beyond, the company said. According to Savills, that’s because the U.S. manufacturing revival is fueled by $910 billion in federal incentives—including the Inflation Reduction Act, CHIPS and Science Act, and Infrastructure Investment and Jobs Act—much of which has not yet been spent. Domestic production is also expected to be boosted by new tariffs, including a planned rise in semiconductor tariffs to 50% in 2025 and an increase in tariffs on Chinese EVs from 25% to 100%.
Certain geographical regions will see greater manufacturing growth than others, since just eight states account for 47% of new manufacturing jobs and over 6.3 billion square feet of industrial space, with 197 million more square feet under development. They are: Arizona, Georgia, Michigan, Ohio, North Carolina, South Carolina, Texas, and Tennessee.
Across the border, Mexico’s manufacturing sector has also seen “revolutionary” growth driven by nearshoring strategies targeting U.S. markets and offering lower-cost labor, with a workforce that is now even cheaper than in China. Over the past four years, that country has launched 27 new plants, each creating over 500 jobs. Unlike the U.S. focus on tech manufacturing, Mexico focuses on traditional sectors such as automative parts, appliances, and consumer goods.
Looking at the future, the U.S. manufacturing sector’s growth outlook remains strong, regardless of the results of November’s presidential election, Savills said. That’s because both candidates favor protectionist trade policies, and since significant change to federal incentives would require a single party to control both the legislative and executive branches. Rather than relying on changes in political leadership, future growth of U.S. manufacturing now hinges on finding affordable, reliable power amid increasing competition between manufacturing sites and data centers, Savills said.
The number of container ships waiting outside U.S. East and Gulf Coast ports has swelled from just three vessels on Sunday to 54 on Thursday as a dockworker strike has swiftly halted bustling container traffic at some of the nation’s business facilities, according to analysis by Everstream Analytics.
As of Thursday morning, the two ports with the biggest traffic jams are Savannah (15 ships) and New York (14), followed by single-digit numbers at Mobile, Charleston, Houston, Philadelphia, Norfolk, Baltimore, and Miami, Everstream said.
The impact of that clogged flow of goods will depend on how long the strike lasts, analysts with Moody’s said. The firm’s Moody’s Analytics division estimates the strike will cause a daily hit to the U.S. economy of at least $500 million in the coming days. But that impact will jump to $2 billion per day if the strike persists for several weeks.
The immediate cost of the strike can be seen in rising surcharges and rerouting delays, which can be absorbed by most enterprise-scale companies but hit small and medium-sized businesses particularly hard, a report from Container xChange says.
“The timing of this strike is especially challenging as we are in our traditional peak season. While many pulled forward shipments earlier this year to mitigate risks, stockpiled inventories will only cushion businesses for so long. If the strike continues for an extended period, we could see significant strain on container availability and shipping schedules,” Christian Roeloffs, cofounder and CEO of Container xChange, said in a release.
“For small and medium-sized container traders, this could result in skyrocketing logistics costs and delays, making it harder to secure containers. The longer the disruption lasts, the more difficult it will be for these businesses to keep pace with market demands,” Roeloffs said.
Jason Kra kicked off his presentation at the Council of Supply Chain Management Professionals (CSCMP) EDGE Conference on Tuesday morning with a question: “How do we use data in assessing what countries we should be investing in for future supply chain decisions?” As president of Li & Fung where he oversees the supply chain solutions company’s wholesale and distribution business in the U.S., Kra understands that many companies are looking for ways to assess risk in their supply chains and diversify their operations beyond China. To properly assess risk, however, you need quality data and a decision model, he said.
In January 2024, in addition to his full-time job, Kra joined American University’s Kogod School of Business as an adjunct professor of the school’s master’s program where he decided to find some answers to his above question about data.
For his research, he created the following situation: “How can data be used to assess the attractiveness of scalable apparel-producing countries for planning based on stability and predictability, and what factors should be considered in the decision-making process to de-risk country diversification decisions?”
Since diversification and resilience have been hot topics in the supply chain space since the U.S.’s 2017 trade war with China, Kra sought to find a way to apply a scientific method to assess supply chain risk. He specifically wanted to answer the following questions:
1.Which methodology is most appropriate to investigate when selecting a country to produce apparel in based on weighted criteria?
2.What criteria should be used to evaluate a production country’s suitability for scalable manufacturing as a future investment?
3.What are the weights (relative importance) of each criterion?
4.How can this methodology be utilized to assess the suitability of production countries for scalable apparel manufacturing and to create a country ranking?
5.Will the criteria and methodology apply to other industries?
After creating a list of criteria and weight rankings based on importance, Kra reached out to 70 senior managers with 20+ years of experience and C-suite executives to get their feedback. What he found was a big difference in criteria/weight rankings between the C-suite and senior managers.
“That huge gap is a good area for future research,” said Kra. “If you don’t have alignment between your C-suite and your senior managers who are doing a lot of the execution, you’re never going to achieve the goals you set as a company.”
With the research results, Kra created a decision model for country selection that can be applied to any industry and customized based on a company’s unique needs. That model includes discussing the data findings, creating a list of diversification countries, and finally, looking at future trends to factor in (like exponential technology, speed, types of supply chains and geopolitics, and sustainability).
After showcasing his research data to the EDGE audience, Kra ended his presentation by sharing some key takeaways from his research:
China diversification strategies alone are not enough. The world will continue to be volatile and disruptive. Country and region diversification is the only protection.
Managers need to balance trade-offs between what is optimal and what is acceptable regarding supply chain decisions. Decision-makers need to find the best country at the lowest price, with the most dependability.
There is a disconnect or misalignment between C-suite executives and senior managers who execute the strategy. So further education and alignment is critical.
Data-driven decision-making for your company/industry: This can be done for any industry—the data is customizable, and there are many “free” sources you can access to put together regional and country data. Utilizing data helps eliminate path dependency (for example, relying on a lean or just-in-time inventory) and keeps executives and managers aligned.
“Look at the business you envision in the future,” said Kra, “and make that your model for today.”
Turning around a failing warehouse operation demands a similar methodology to how emergency room doctors triage troubled patients at the hospital, a speaker said today in a session at the Council of Supply Chain Management Professionals (CSCMP)’s EDGE Conference in Nashville.
There are many reasons that a warehouse might start to miss its targets, such as a sudden volume increase or a new IT system implementation gone wrong, said Adri McCaskill, general manager for iPlan’s Warehouse Management business unit. But whatever the cause, the basic rescue strategy is the same: “Just like medicine, you do triage,” she said. “The most life-threatening problem we try to solve first. And only then, once we’ve stopped the bleeding, we can move on.”
In McCaskill’s comparison, just as a doctor might have to break some ribs through energetic CPR to get a patient’s heart beating again, a failing warehouse might need to recover by “breaking some ribs” in a business sense, such as making management changes or stock write-downs.
Once the business has made some stopgap solutions to “stop the bleeding,” it can proceed to a disciplined recovery, she said. And to reach their final goal, managers can use the classic tools of people, process, and technology to improve what she called the three most important key performance indicators (KPIs): on time in full (OTIF), inventory accuracy, and staff turnover.
CSCMP EDGE attendees gathered Tuesday afternoon for an update and outlook on the truckload (TL) market, which is on the upswing following the longest down cycle in recorded history. Kevin Adamik of RXO (formerly Coyote Logistics), offered an overview of truckload market cycles, highlighting major trends from the recent freight recession and providing an update on where the TL cycle is now.
EDGE 2024, sponsored by the Council of Supply Chain Management Professionals (CSCMP), is taking place this week in Nashville.
Citing data from the Coyote Curve index (which measures year-over-year changes in spot market rates) and other sources, Adamik outlined the dynamics of the TL market. He explained that the last cycle—which lasted from about 2019 to 2024—was longer than the typical three to four-year market cycle, marked by volatile conditions spurred by the Covid-19 pandemic. That cycle is behind us now, he said, adding that the market has reached equilibrium and is headed toward an inflationary environment.
Adamik also told attendees that he expects the new TL cycle to be marked by far less volatility, with a return to more typical conditions. And he offered a slate of supply and demand trends to note as the industry moves into the new cycle.
Supply trends include:
Carrier operating authorities are declining;
Employment in the trucking industry is declining;
Private fleets have expanded, but the expansion has stopped;
Truckload orders are falling.
Demand trends include:
Consumer spending is stable, but is still more service-centric and less goods-intensive;
After a steep decline, imports are on the rise;
Freight volumes have been sluggish but are showing signs of life.
CSCMP EDGE runs through Wednesday, October 2, at Nashville’s Gaylord Opryland Hotel & Resort.