Supply chain to CEO: Bali Padda takes the helm at Lego
Lego, the iconic and highly profitable Danish toymaker, is the latest business to be headed by an executive rising out of supply chain to the role of CEO. Business press covering the story largely focuses on the departure of current CEO and ex-McKinsey consultant Jorgen Vig Knudstorp, whose 12-year stint at the top has to be one of the best turnaround stories in corporate history. Bali Padda, who joined Lego in 2002, takes over and, according to reporting by the BBC, approaches the challenge with the following mindset:
“The world is being disrupted in many ways. How do we become a lot more agile to face the challenges that will come to us tomorrow?”
It’s hard to imagine a more supply chain-savvy CEO quote than that.
Believe in the brick
Knudstorp’s brilliant performance as CEO includes a five-fold increase in revenue and a shift from losses of $1 million per day in 2004 to a 17% net profit in 2015. Much of this is of course due to smart investments in innovation and brand tie-ins that refreshed the product; however, such growth initiatives would have crashed and burned without an accompanying transformation in supply chain.
Before its transformation, Lego’s service level to retail customers was an abysmal 62%. Its cost structure included a three-level distribution network with 80% fixed costs and minimal process or system standardisation. From a logistics standpoint, the supply chain was anything but agile.
Five years later, Lego’s customers rated it “best in class”, with a service KPI of 96% on a two-hour window. Cost structures were converted to 85% variable and overall savings totalled 30% against a baseline set in 2005.
From a manufacturing standpoint, Lego’s leadership includes being well ahead of the curve on local-for-local supply chains, with plants in Mexico serving the American market, in the Czech Republic, Hungary and Denmark serving EMEA and, most recently in Jiaxing China serving Asia. We spoke to Mr Padda in early 2013 as part of our research on manufacturing footprints. The conclusions we drew at the time say a lot about how smart he is:
“…what has been successful at Lego is maintaining proximity and therefore short order cycle times for customers in each market. The company also uses a platform strategy with its product and manufacturing process design to protect IP and assure quality while still providing customer-specific localisations...”
What’s more, Lego’s investments in manufacturing automation and flexible production have been leading the industry in plastic injection moulding techniques. Plus, postponement tactics that save final application of images onto figures allow for maximum item variety with minimal inventory risk.
It’s perhaps poetic that one of the great innovators in platforming strategy is the very company we so often use to explain the concept. The Lego brick, after all, is our favourite analogy for the product and process engineering approach that allows BMW and Mondelēz to offer lots of end-product selections to customers with minimal finished goods inventory.
Why this matters
Business leadership is ultimately about profits, and the steadily rising profile of supply chain management as an equal partner to marketing, R&D and sales in delivering those profits has opened a new path to the top. Our recent Future of Supply Chain survey data shows continued gains in the stature of supply chain among C-suite executives.
For supply chain leaders, the advice is simple: stay true to your roots, but speak up about how your area of responsibility creates shareholder value. Looking ahead, digitisation is enormously disruptive to traditional concepts of how money is made. Asset-light, intellectual property-intensive businesses like Apple, Microsoft and Disney depend on supply chain management less because it helps make stuff cheaper and more because it allows the business to monetise IP.
For a final proof point, consider that Knudstorp’s post-CEO plans don’t focus on retiring to the beach somewhere, but instead to chair a new entity called the Lego Brand Group. This new group’s mission is to focus on “new and exciting opportunities for the brand”.
With Mr Padda guiding the flagship, the possibilities are endless.
By Kevin O’Marah, CCO, SCM World
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Driver shortages: Why the industry needs to be worried
While driver shortages are a global problem, with a recent survey from the International Road Transport Union suggesting that driver shortages are expected to increase by 25% year-on-year across its 23 member countries, the issue has very much made itself felt for UK businesses in recent weeks.
A perfect storm of factors, which many within the industry have been wary of, and warning about, for months, have led to a situation wherein businesses are suddenly facing significant difficulties around transporting goods to shelves on time, as well as inflated operating costs for doing so.
What’s more, the public may also see price rises as a result due to demand outmatching supply for certain product lines, which in turn brings with it the risk of customer dissatisfaction and a hit to brand and stakeholder reputation. Given that this price inflation has been speculated to hit in October, when the extended grace period on Brexit customs checks comes to an end, the worst may be yet to come.
"Steps must be taken to make a career in the industry a more attractive proposition for younger drivers, which will require a joint effort from government, industry bodies, and the sector as a whole"
That said, we have already been hearing reports of service interruption due to lack of driver availability, meaning that volumes aren’t being transported, or delivered, to required schedules and lead times. A real-world example of this occurred on the weekend of 4-6 June with convenience retailer Nisa, with deliveries to Nisa outlets across the UK affected by driver shortages to its logistics provider DHL.
But where has this skills shortage stemmed from?
Supply is the primary issue. Specifically, the number of available EU drivers has decreased by up to 15,000 drivers due to Brexit alone, and this has been further exacerbated by drivers returning to their home country during the COVID-19 pandemic, as well as changes to foreign exchange rates making UK a less desirable place to live and work. This, alongside the recent need to manage IR35 tax changes, has also led to significant inflation in driver and transport costs.
COVID-19 complications have also meant that there have been no HGV driver tests over the past year, meaning the expected 6,000-7,000 new drivers over the past year have not appeared. With the return of the hospitality sector we understand that this is a significant challenge with, for instance, order delivery lead times being extended.
It is little surprise, therefore, that the Road Haulage Association (RHA) earlier this month became the latest in a long line of industry spokespeople to write to the government about the driver shortage for trucks. The letter echoed the view held by much of the industry, that the cause of this issue is both multi-faceted and, at least in some aspects, long-standing.
So, many in the industry are in agreement as to the driving factors behind this crisis. But what can be done?
Simply enough, outside of businesses completely reorganising their supply chain network, external support is needed. In the short-term, the government should consider providing the industry with financial aid, and this can also be supported more widely with legislative change.
Specifically, immigration policy could be updated to place drivers on the shortage occupations list, which would go some way towards easing the burden created by foreign drivers returning to their home countries. Looking elsewhere, government should also look for ways to increase the availability of HGV driver tests after the blockage created by the coronavirus lockdowns.
Looking more long-term, steps must be taken to make a career in the industry a more attractive proposition for younger drivers, which will require a joint effort from government, industry bodies, and the sector as a whole. As it stands, multiple sources suggest that the average age of truck drivers in the UK is 48, with only one in every hundred drivers under the age of 25. We must therefore do more to increase the talent pipeline coming into the industry if we are to offset more significant skills shortages further down the line.
On the back of a turbulent year for the supply chain industry, it has become increasingly clear that the long-foretold shortage of drivers is now having a tangible and, in places, crippling effect on supply chains.
Drivers, and the wider supply chain industry, have rightly been recognised for the seismic role they played in keeping the nation moving and fed over the past year under unprecedented strain. If this level of service is to continue, we must now see Government answer calls to provide the support the sector needs, and work hand-in-hand with the industry to find a solution. If we do not see concrete action to this effect soon, we are likely to be in for a turbulent few months.
Rob Wright is executive director at SCALA, a leading provider of management services for the supply chain and logistics sector