In 2004 Lego, the sixth-largest manufacturer of toys in the world, manufactured its products in Denmark, Switzerland, and the Czech Republic. The company had 11 warehouses and distribution centers in Denmark, Switzerland, France, and Germany where order execution and order deliveries were handled. To overcome the financial problems, in 2004 the company decided to cut its logistics costs by 20 percent by consolidating all its European distribution activities under one roof (except for the Billund, Denmark warehouse that handles fulfillment of Internet orders). Lego settled on Prague in the Czech Republic, largely due to its low labor costs. Instead of constructing its own warehouse, the company leased a one-million-square-foot building and hired a third party logistics company DHL Exel Supply Chain to run the day-to-day distribution operation. The reason to utilize contract logistics company was the seasonal nature of the product (60% of sales occur in the few month prior to December holidays). The changeover was undertaken in two phases. In 2006, Lego closed down five DCs and transferred those operations to the Prague facility. A year later the remaining five DCs were also closed.
Before this shakeup, the company had used 55 transportation providers for inbound and outbound shipments to its 11 warehouses in Europe. It trimmed down to 11 international carriers who are capable of serving Europe as well as Asian markets. Although DHL Exel Supply Chain manages the daily rendering of loads, Lego selects its transportation providers and handles contract negotiations with them. With the new transportation structure, Lego engaged in careful planning to attain efficient line hauls. It changed its shipment scheduling to improved load consolidation by working with DHL and jointly developing a Web-based transportation management system. The software helps to tender loads to carriers, optimize loads, and route shipments.
Lego and DHL worked together to recruit and train 400 year-round employees (in peak selling season - 900 employees). To appropriately train these workers, a process-mapping exercise was undertaken to create a knowledge base of their current practices. The process-mapping exercise also revealed some inefficiencies inherent in their current mode of operation (e.g. additional services that were highly expensive yet at times unnecessary - example customer request of only one SKU to be placed on each pallet).
The consolidation of distribution center resulted in several advantages:
(i) Lego now receives inbound loads from manufacturing plants and prepares them for shipment to customers more quickly than it could in the past.
(ii) The company not only achieved the target 20 percent savings in distribution costs, but reached 40 percent mark in 2009.
(iii) Shift to a single distribution center eliminated unnecessary handling by multiple DCs.
(iv) Lego needs to train a single group of workers to perform value-added-tasks (such as application of price labels).
(v) Unnecessary inventory was reduced.
(vi) Carrier consolidation reduced Lego's shipping expenses.
Source: Cooke, J. A. 2009. Lego's game-changing move. CSCMP's Supply Chain Quarterly, Quarter 3, 38-41.