Lego's Gift for Forecasting and Managing Demand
Few companies have the luxury of constant and flat demand. Managing to deal with fluctuating demand can make all the difference between profit and losses. Lego is a high profile company that has managed to make a strong comeback after many years of problems and financial losses in the 1990's. Beyond its front end success of cutting deals with famous franchises like Star Wars, Disney and Marvel comics, a lot of its resurgence has its roots in its ability to master the toy market fluctuations. More than 70% of its sales occur in the few weeks preceding the Christmas and New Year holidays. So how does Lego deal with such a huge spike in demand in such a short period and how does it use it to its financial advantage?
Supreme Forecasting and Product Planning
On the surface, the winter toy market fluctuation is predictable. But Lego makes thousands of toy sets sold all over the world. The key to dealing with such complexity is knowing the game by carefully preparing each product in painstaking detail and analyzing the market by geographic region. On top of that, new products are released in January every year, after the end of the holiday period, and in the summer, well before the winter spike in demand. This way, forecasting without the very tight time pressure and a lot of market feedback data, provide a good base for planning production leading to the critical months of November and December.
Rationalized Supply Chain
For its size and product portfolio, Lego only has a handful of plants in Europe (Denmark, Sweden, Hungary), Mexico and China. The cornerstone of its supply chain strategy is a single, fully automated distribution center for the whole planet in the Czech Republic. This setup has a number of advantages. Firstly, close proximity of most plants with the distribution center offers simpler logistics and a single concentration point for all production resources. Secondly, all transport containers are standardized for a single distribution center's demands, with no exceptions. Thirdly, feeding world demand from a single plant may be demanding as far as numbers go, but at the same time there is no geographical ambiguity as to who gets served by which center and the channels to final customers are easier to control.
A Model of Constant Production
We recently wrote about the pros and cons of constant production. Using its efficient supply chain and precise forecasting models, Lego is then in a very good position to reap the benefits of flattening its production as much as possible. Stock stays at a minimum as it is all absorbed by the huge distribution buffer in the Czech republic, while the operational mechanism can run uncoupled from the market fluctuation, ramping up volume well before the winter holidays in a predictable manner.
Attention to Detail
Running the complete supply chain like a well oiled machine allows attention to minute details that all add up to company excellence. For example, before toy sets are temporarily stored for dispatch, precision weighing allows to check whether every box contains the correct number of pieces. It is the direct result of very accurate packaging operations and extremely reliable plastic injection molding processes that lean on high quality molds and regular maintenance to counter the wear of constant use.
Without question, the complexity and number of Lego's products demand a huge data management structure. By keeping a very tight grip on forecasting, operational performance and distribution, it is possible to successfully deal with the demand fluctuation of the toy marketplace. By reaping cost and market success benefits, Lego can then concentrate on seeking the highest profile partners and optimizing the toy construction experience at the core of its business. By efficiently managing resources, it even has the luxury to develop new innovative products in order to stay current with technological developments and deliver toys that modern kids crave.