Making quality toys: no child’s play Traditional toy manufacturing is not what it used to be. Fierce competition from discount producers and electronic games has led to flat growth and deteriorating profit margins. As in other industrial sectors, toymakers need to meet this challenge by producing innovative high-quality products at low cost. For Danish toy manufacturer Lego, part of the answer was to rethink its procurement operations. 
Jesper Ovesen COO Lego Lego’s Chief Operating Officer Jesper Ovesen came to Lego in 2003 from Danske Bank. “Lego was in financial difficulties and I was appointed to the newly created post of COO because the company realized they had to rethink operations,” he explains. In 2003 an action plan was put in place to counter losses. After two years heavily in the red, the company managed to show a healthy profit in 2005. “Now this was by no means easy – we focused intensively on efficiency at all levels, mainly in production and procurement,” Ovesen says.
Strategic level thinking
In 2003, there was little or no strategic focus on procurement within the company. That was the first thing to change, Ovesen recalls. “Most purchasing functions reported to manufacturing units and had a second-rank position. So in 2004 we restructured the purchasing function (see Facts below) and had it reporting directly to the management team through me.”
According to Ovesen, giving the purchasing function a new, more strategic function doesn’t only improve operations. It also sends a clear message through the rest of the organization about the importance and contribution that this area can bring to the company.
“The foremost challenge was to bring down our EUR 650 million spend. When we reorganized the procurement function, our target was to bring down spend by ten percent. We’ve actually achieved this goal now, in less than two years,” he says.
Involving everyone
Next, Ovesen and his team implemented an e-procurement system to take full advantage of negotiations with suppliers. The third step was to bring more spend under management. “We had to change the way the organization buys and what they buy. The purpose was to make people come to procurement for advice. Thus you can make purchasing more systematic and stop maverick buying. I see procurement as having two vital missions: the obvious external sourcing function with suppliers but also an internal function, teaching all concerned within the organization to do it right and to understand purchasing’s impact on profitability.”
Knowledge about spend within the company follows with the status of procurement, Ovesen points out. “Therefore it’s important for this area to be well publicized. If everyone knows how much we spend on plastics or packaging, it makes it all the easier to inspire them in becoming more efficient themselves.” Change your ways, or else
One of the many initiatives to make procurement more efficient was the implementation of a company-wide e-procurement system, called “Easy Buy”. However, introducing new tools that force people to change routines is not easy, Ovesen warns. “You absolutely need a mandate from top management; otherwise you’re bound to fail. It’s in human nature to resist change, but sometimes you have to force it on an organization. We needed more compliance and an effective way to stop maverick buying. At one point, we had more suppliers in this company than we had retail customers!”
But in order to succeed you need to translate lofty visions into clear goals and targets, Ovesen points out. One such target was to bring down the number of suppliers. “At the start of our restructuring plan, Lego Group had some 11,000 suppliers. Our ultimate goal is to have not more than 2,000 suppliers – we’ve already brought the number down to 4,500,” he explains.
Changing the whole outlook on purchasing brings fundamental changes also to other aspects of operations within a company. “For example, we took a hard look at costs associated with raw materials, packaging and plastics. The result was a decreased number of sizes and types of boxes and more self-coloring (instead of keeping a large variety of colored plastics in stock). By integrating purchasing with production and development at an early stage we also changed the way we manufacture our products.”
Another big spend area for a toy company like Lego is marketing. For Ovesen, there is no basic difference when sourcing services or commodities. “Some people consider it difficult, some say even impossible to source creative services in the same way as commodities. Personally, I don’t agree. We have done this successfully at Lego when sourcing marketing services. What you need to do is to be perfectly clear with suppliers about what you want to achieve and to translate these goals into detailed specifications. Even though this means quite a lot of homework for the buyer, once this is done you can be completely open with suppliers. Comparing different offerings also becomes much easier. We’ve actually managed to bring down costs for television commercials by 25 percent.” Prove your value
Not surprisingly for a toy manufacturer, marketing has always had a very prominent position within Lego. “In such an environment, raising the status of procurement is not done overnight. You have to prove that your contribution and suggestions can really add value. I was aware of this culture issue when I started, but the challenge was bigger than I anticipated. One must remember that our brand and products have very high quality content. If procurement wants to change specifications to save money, you’ll have to prove that quality won’t be affected,” Ovesen says.
Experience shows that this is a boundary that procurement shouldn’t cross. “You have to understand your own limitations as a cost-cutter. If there’s a risk that the proposed changes will harm quality or brand perception, they should be avoided. Therefore, involving procurement in quality, brand building and marketing has been tough but has also led to a very constructive dialogue.”
But even in a quality-conscious company there are some initiatives that meet with general approval. “More and more, we are moving manufacturing of our more standardized products to suppliers which already produce large volumes of molded plastics. This makes sense because such a manufacturer can leverage the advantages of large volume production and produce this standardized product with the same quality, but at lower prices,” Ovesen explains.
Toys also have a seasonal sales cycle, 60 percent of sales are done over a four month period, with the Christmas season making up the major peak. “This means that a large plastics molder with a wide range of products can optimize production over the year in a more cost-effective way than we could,” Ovesen says.
Neither is there any fear that know-how could be transferred to a potential future competitor. “We are very aware of our core skills. One such skill is advanced molding, which is a high precision business. Such knowledge will probably stay here at our facilities in Billund in Denmark. All R&D and test manufacturing will continue to be done in-house.”
Ovesen continues: “But unfortunately, we won’t be competitive if we just keep on manufacturing our products in Western Europe. We simply must move outside Denmark, mainly to Eastern Europe. We’re also looking at production in Mexico to supply our US markets. We haven’t at this stage decided exactly how much and what to outsource, but it’s something we will have to do eventually.”
One worry for Lego is the steady rise of oil prices. “As a large plastics buyer we can postpone certain price hikes, but we can never avoid them. We try to use our leverage to negotiate long-term contracts, but severe price increases on your raw materials prices can only be met by savings somewhere else. One thing we can’t do in the present market situation is to raise our own prices.” No quick fix
Today, Lego is in a better financial position than it has been for many years, but this, Ovesen warns, doesn’t mean that the company can slow down its pace of change. “We live in a competitive environment with little or no growth, so we need to become more efficient in operations from year to year just to maintain our position. Involving procurement at all levels is not just a temporary ‘quick fix’ if you’re in financial trouble, it’s also a strategic necessity for future stability and growth.”
At the end of the day, Ovesen sees operational excellence as a precondition for success: “We simply can’t afford not to be efficient – we need to have a good cost structure, because the revenues from improved margins are needed for investments in marketing and development.
First and foremost, we have to be creative and produce great toys with a high level of brand recognition. But we also have to face the fact that our main competitors (US toy giants like Mattel and Hasbro) have a lot more purchasing and marketing clout. Therefore Lego also needs to be superbly efficient when it comes to operations. Ultimately, we want everyone at Lego to understand that discipline and innovation go hand in hand, because in the long run you can’t have one without the other.”
FACTS
Building better procurement brick by brick
Total spend 2005: EUR 650 million
Direct spend EUR 180 million • Resin/plastics
• Packaging
• Printed matters
• Parts and finished goods Indirect spend EUR 470 million • Marketing • Distribution • IT • Facility, HR, Finance and MRO Organization
50 employees working in eight global categories, each
headed by a category manager. Placed at four different sites
in Denmark, Czech Republic, USA and Hong Kong.
Total addressed spend EUR 400 million
Expected realized savings by mid 2006, EUR 40 million.
All saving initiatives are tracked to the bottom line.
This article was published in Efficient Purchasing Magazine No.2.
www.EfficientPurchasing.com
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