Building on a dynasty
Despite the success of its products, Lego has faced challenges in its manufacturing operation, as E&T discovered when he visited the factory in Denmark.
There are some quintessential memories from growing up that we all share - Christmas stockings, Jamboree bags, sparklers, sherbet fountains, and Lego bricks. The ubiquitous building toy has been around for over 50 years and today is stronger than ever, despite the apparent predilection of modern youth for computer games.
Anyone who has enjoyed the experience of building with Lego bricks can confirm that one of the primary joys is their ability to stay attached, yet be disassembled with ease. And such precision is a much valued manufacturing strength of the Denmark-based organisation.
Lego manufacture their bricks in three countries - Denmark, Hungary and Mexico - although the plant in Billund, Denmark produces over 80 per cent of the mouldings.
"If you break that down into the manufacturing skills, there are only two distinct capabilities that we have," Niels Duedahl, Lego vice president of manufacturing, explains. "The first thing is the tolerance on moulding.
"When we talk about the top and bottom of a Lego brick we are talking about tolerances of one-one hundredth of a millimetre in order to secure what we call the famous Lego snap, which means that you can put any two Lego bricks together easily and you can pull them apart easily, but they will hold securely while you build your fortress or police station.
"That is based on an enormous amount of experience in tooling technology, but also a deep understanding of plastic technologies - heating, cooling and deciding what kind of raw material works the best for what usage. All of the moulding processes revolve around pre-heating of the raw material going into the moulds and then cooling it down again."
The second capability is the ability to pre-pack different components in packs that ensures that all the correct parts are in the bag or the box. Imagine the disappointment of purchasing a Lego pack - and some of the more elaborate run into several hundred pounds - and finding that it couldn't be completed because a single brick, worth literally pence, was missing.
"These are the two distinct manufacturing capabilities that are unique to us because nobody in the world moulds 22 billion components a year at that tolerance level, or packs hundreds of millions of plastic packs," Duedahl says. "It doesn't exist outside our area."
But owning and manufacturing a market leading brand is no protection against difficult trading conditions and spiralling manufacturing costs. Like manufacturers around the globe, Lego have had to slim down their operation and reduce the complexity.
The current pallette for bricks has been reduced to 55 colours, down from the heights of 130 colours that were made a couple of years ago. That reduction, allied with a reduction in the number of brick shapes, has vastly improved the company's performance.
But the battle against complexity pales into insignificance when put alongside Lego's greatest challenge, that of seasonal demand. Because of the high pressure experienced at Christmas, over two-thirds of the demand for the product occurs in a single quarter.
"If you think about that, the problem is that we have an enormous peak and the second thing is that our products only live for 16 months, so the product lifecycle is extremely short," Duedahl explains.
"And on top of that our ability to forecast is extremely bad. We can only predict the sale of a box plus or minus 30 per cent. So if you think about this analogy; the short lifecycle and huge forecast inaccuracy, can you imagine how difficult it is to supply a market like that?"
Lego's saving grace is the drive to reduce complexity. "By reducing the complexity level enormously, we are ensuring that one brick can actually go into more than 50 products. That gives us the flexibility up to the last minute to put the brick into the box, in terms of setting up the consumer level. "
On a creative model, that war against complexity means that two-thirds of the options have been taken away from you in terms of colours and shapes. But as Duedahl explains: "Five years down the road we have managed to do so and create a stronger product offering.
"It was an enormous journey in complexity management to take complexity out and that has reduced our operational cost tremendously in the moulding operation especially."
All the systems at Billund run on SAP software, from finance to scheduling. The only thing that is not SAP is the warehouse management system, which is oddly an old legacy Lego system.
"Our entire master planning happens in SAP, where we break down the production from finished product back to the single individual components, and SAP does that for us. It allows us to understand what we need to mould.
"It is a very complex planning process because many components go into many different products. You might think that this is a planning opportunity and it is, but it adds complexity in the MRP [manufacturing resource planning] scheduling, because the forecasting accuracy is very low our demands shift week on week.
"One week you might see a box selling 500 per cent of what we thought, which is consuming enormous amounts of one particular brick, let's say the Indiana Jones brick for example, which is a new component. Then suddenly that component is a bottleneck, but at the same time common components in that box need to be used in other boxes, so their production suffers.
"So bottleneck management is the key challenge in our production planning because as the forecast shifts, one day you might have a reasonable plan and then the next day you have 60 bottlenecks."
The ultimate bottlenecks for Lego are the moulds themselves. There are 7,000 moulds that SAP can call on to produce bricks from any one of the 850 moulding machines at Billund - an amazingly intricate scenario.
Vital to the whole operation is the ability to change from one brick to another, both shape and colour. In moulding there are three distinct changeovers - a colour-only change, a shape-only change, and a combination of the two. In a standard week they will expect to perform around 450 changeovers, which is 100 changeovers per work day.
"We have a point system to manage this," Duedahl says. "All of the shift time is registered in SAP as well as in what we call routings, so when planning deploys the production modules we know exactly how much down-time a changeover costs in a 24-hour window."
As any Lean exponent will confirm, reducing non-productive time on machines - which is clearly what a changeover is - is of vital importance. Lego are constantly running Lean projects to reduce this down-time again and again.
"There is a bench time to do a colour change in Lego in five minutes, and we normally go from light colours up to dark to reduce the cleaning effort," Duedahl explains. "In the old days, a colour change might have taken 30 minutes. That was brought down by using Lean techniques." A mould change depends heavily on how intricate the mould is and can be anywhere from half an hour to two hours based on the complexity of the mould. "Then you have all kinds of combinations in between, but obviously this is where we really try to drive our operational expenses," Duedahl concedes.
"The challenge is how to continue to reduce lead time, because if you have a peak in seasonality, you only have short-term forecast accuracy. This is what we call from a manufacturing point of view, hostile demand.
"So we have to compress the time from granules to the moulding halls, to the packing process and assembly and decorating. Compress it more and more to sustain our responsiveness in the market place. That is why we run an enormous amount of lean projects to be sharper and sharper and faster and faster. Where the limit is, don't know because we keep pushing the bar ahead of us.
"Another challenge is internal goods movements in the factory. You can never move closer to the consumer so, in terms of flow, we still have lead time opportunities. The main challenge is to keep on finding ways to decrease lead time. That is our key focus."
The Lego factory
One thing that is instantly apparent when strolling around the factory at Billund is the lack of people. Duedahl confirms that the operation in Denmark is 100 per cent automated, although he adds that Lego's other factories in Hungary and Mexico have more manual input.
"The cost structure determines how automated we go," he says. "But at Billund at least, from the moment the raw material enters the factory to the time the bricks leave the factory they are untouched by hand." This is only true for bricks that leave the factory in bulk, for products that are packed on site some manual intervention is required.
The plastic arrives at the factory in granular form and is fed into giant silos. From here, it is fed through a network of pipes to the appropriate moulding machine. Bricks tumble from the moulding machines at a rate of two million an hour into plastic boxes - P boxes in Lego parlance. Lego have 850,000 P boxes in four sizes - to accommodate various quantities and sizes.
Automated guided vehicles are automatically called when a box is filled to transport these P boxes to one of four giant, high-rise warehouses where they are stored until called on by the SAP system for inclusion in a product or despatch to another Lego packaging plant.
"When the boxes leave the moulding machines they go to what we call our hybrid warehouse, which is a completely automated robot driven warehouse where these boxes are stored," Duedahl says. "They can contain 460,000 P boxes, which mean we can store three months of production. We use the low season to build up our stock of basic bricks and this is where they are stored ready for the high season.
"That warehouse and those P boxes are fundamental to our control - every P box has a unique bar code and nobody knows what is inside the box except the SAP and our in-house management system."
There are two levels of packaging at Billund: the pre-pack where the bricks are automatically bagged and the finished packs where the appropriate bags and accessories are put in cardboard product boxes.
"The pre-pack technology is one of the unique things about Lego because, in our pieces, every component is very carefully weighed to milligrammes, so when we compose a pack we know exactly the weight of the foil and all components going into the bag," Duedahl explains.
"If you have one component that is off weight, it will corrupt the total result. Every single one of the 20 billion components that we make every year is weighed before it is put into the pre-pack system. It will be rejected if the weight is not accurate."
Such are the high tolerances demanded from the manufacturing process that it was said that Lego buried their old moulds in the foundation of buildings. "It is true," Duedahl says. "In the old days there was a saying that the tolerance was really a competitive edge for the company, so when they built new factories, they took the old moulds, threw them on the floor and put concrete over the top. That has actually happened!
"For competitive reasons, you didn't put them anywhere. Now we have a more formal scrapping process, where we re-use or melt a lot of the stuff, so we don't put them into the floor anymore."
The fact is, it can truthfully be said that Lego's impressive factory at Billund is literally built on their past successes.