With LEGO you can build anything….except maybe a supply chain

LEGO Star Wars Millennium Falcon

LEGO Star Wars Millennium Falcon

There may be a few disappointed children come Christmas Day this year if the present they really wanted was LEGO. News is not awesome with supplies of the multi-coloured bricks once again lacking.

It’s a problem which isn’t borne out of anything nefarious- LEGO have just become a victim or their own popularity. With success from the LEGO movie, tie ins with movies popular with both adults and children (I’m looking at you Star Wars) and LEGO-themed video games, the company is seeing a peak demand which is larger than they had forecast. This has created an added strain on the supply chain and has left the company to admit that it may be unable to fulfil demand this side of the holiday season despite the fact LEGO is currently running its factories at full capacity, churning out 72 million bricks a day at its facility in Denmark alone.  However, this reaction is either just too small or too slow to mitigate the overall issue.

If you’re reading this in the States, you can relax.  LEGO have stated their factory in Monterrey, Mexico (which supplies North America) is expected to be fully supplied. However, those of us in Europe who were hoping to spend the day ‘helping’ the kids put together the Millennium Falcon may find ourselves having to dig out a board game or two instead.

How has this happened?

The problem faced by LEGO, which saw sales skyrocket by 23% H1 2015 to reach $2.03bn, is due to simple supply and demand and the forecasting which is done to predict peaks and how high they’ll be. This holiday season either the forecast was wrong or those in charge of supply did not believe the figure.

As for the rest of the supply chain, LEGO has spent years overhauling it and at considerable expense. In 2006 LEGO halved its number of regional distribution centres in an effort to create a more rounded overview of global demand while also reducing cost and inventory levels (the trend for lean inventory has been well documented in recent years). LEGO now relies on painting parts at the packaging plants in Czech Republic, Hungary and Mexico, completing a part once the order for it has been placed. CFO John Goodwin stated this approach allowed the company more reactive to demand with the ability to use the same pieces across different product lines “It allows us to be more responsive and flexible and minimised waste in our system from scrapped products”.

Will everything be awesome again?

In a word, yes.

LEGO has begun work on  increasing manufacturing and distribution ability with the company’s first factory in China; to supply China, South Korea, Japan and Southeast Asia, which is expected to reach full-scale production from 2017. Added to this, existing factories are due to been expanded with Hungary expected to double in size and Mexico adding another 2 million sq ft.

Forecasting models generally get better with more information and LEGO will likely use this holiday season issue as a learning process. Add to this the fact that the company is taking steps to increase capacity and tinker with the overall supply chain and you see a company which is striving to make changes and avert another shortage crisis next year. The biggest losers from this are likely to be small and independent toy shops who will struggle to fill the shelves with the most prized LEGO sets this year. Larger stores, such as Toys ‘R’ Us have already assured shoppers their LEGO supplies are unharmed.

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