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 DCs 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 virtually all of its European
distribution activities under one roof (the one exception is
the fulfillment of Internet orders, which continues to be
handled out of the Billund warehouse). 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
[Belgium - Netherlands- 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 com-
plex operation.”
The company elected to forgo construction of its own
warehouse and instead leased a 1 million-square-foot
building from the commercial real estate developer
ProLogis. It also decided to hire a third-party logistics com-
pany, DHL Exel Supply Chain, to run the day-to-day distri-
bution operation. Lego’s decision to work with a contract
logistics company was largely driven by 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 [ware-
housing] 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 transfer of operations 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 relocating its operations to a single distribution hub would
profoundly affect its delivery patterns, the company opted to make some changes in its
carrier base prior to the move. Up to
that point, The Lego Group had
used 55 transportation providers for
inbound and outbound shipments to its 11 European warehouses. It trimmed those ranks to 10 international carriers
that could serve not only Europe but also markets in Asia.
Today, the toymaker has at least two carriers handling deliveries to every market it serves.
Although Lego selects its transportation providers and
handles the contract negotiations, DHL Exel Supply Chain
manages the daily tendering of loads. Under the current
setup, 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.
Once the new transportation structure was in place, care-
ful 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 says. “So, when we have a
delivery scheduled for the U.K., we need to take into consid-
eration 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
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