What do you suppose the cost of a Lego block is when it pops out of an injection molding machine? A penny, maybe? Two at the most. It takes an extraordinary amount of waste for that penny toy to become a premium priced addition to your kid’s toy box.

It will be palletized and un-palletized three or four times, at least. It will move in and out of three massive, automated distribution centers, tracked by two different RFID systems, roll down miles of conveyor, shrink wrapped, un-shrink wrapped and re-shrinkwrapped, scanned into and out of two ERP systems and one MRP system. Since the time to move that plastic block that many times through that many systems across a continent or two is pretty substantial, the fraction of a second it takes to actually make the block has to be planned and scheduled months in advance using globally integrated forecasting technology.

By the time the ‘Global Supply Chain In The Information Age’ folks get done with it, that toy with value measured in pennies has a cost measured in dollars. The Lego company was doing OK until a few years ago. They were under competitive pressure, of course, and they were working on building their market in a lot of innovative ways - some worked and others didn’t. Then something happened that is awfully hard to explain, but the Lego folks swapped ‘nurture the child’ for ‘nurture the semiconductor’ in their corporate culture. Oracle and IBM were very well nurtured, but it seems that just about anyone peddling warehouse, planning or tracking technology got at least a warm hug.

If anyone bothered to map the process a Lego block follows from start to finish, they would have to be insane to miss the reason why Lego found themselves losing money after all of this technology was deployed. It was so ludicrous that at one point, they were making blocks in their factory in Connecticut, packing, palletizing, shrink wrapping and loading it into trailers - then hauling it across the parking lot to their distribution center to undo all of it and put it into warehouse racks. If the product has to go to Walmart or Target - Lego’s largest customers - it is unwrapped and labeled with an RFID tag, then re-wrapped.

The ERP mindset is so ingrained at Lego that their customers had to hack into their system to get what they wanted. Their ‘Lego Factory’ product offered customers a tool to go online and design the structure they wanted to build with Lego blocks, then Lego would convert that into requirements for each little plastic block it took to make it. When customers found they were paying for more blocks than they needed, always having several left over, they hacked into Lego’s system and found that Lego was calculating the block requirements in lot sizes. If the true requirement was for, say 23 pieces, and Lego batched them in lots of 10, the system would calculate demand for 30 then ship and bill that many. Customers found they could go into Lego’s system and figure out the real demand using little more than logic and common sense.

Lurching from one strategic fad to the next, rather than taking a long look at the exorbitant waste in the system, management’s next move was to outsource. The problem, they determined, was high labor cost. People could be had for 20-35% less in the Czech Republic, said the CFO, so off they went. The operation in the U.S. is being closed and that work sent to Juarez, Mexico. It has apparently never occurred to them to simply stop doing much of this non-valued added shuffling of little plastic blocks and save 100% of the labor cost.

Automating a process without first getting the waste out of it simply enables you to waste money at speeds you previously though to be impossible. Outsourcing to get 1/3 off of something you don’t need in the first place is hardly a bargain.

Management at Lego and everywhere else has to have a very clear vision of their value steam from start to finish, and a firm strategy to optimize that value stream. Being driven by labor costs, rather than the critical metric of the ‘Value Added Ratio’ – the time during which the product is having its value increased in the eyes of the customer, as a percentage of the total time – leads to stories like the Lego tale.

Inventory is waste – and inventory management systems are Waste Management Systems. In moving it all to the Czech Republic and Mexico, Lego has simply found cheaper garbage men.