IKEA Supply Chain Study Case

Introduction

IKEA Stores is the largest furniture retailer in the world, this makes its logistics and supply chain activities very complex. The company has therefore invested a lot of resources in streamlining its supply chain activities, revamping its operational details and undertaking continuous product improvements so as to meet the demand for modern architectural furniture designs. This will be key for the success of the 351 stores scattered across 43 foreign markets in the highly competitive market. This paper analyzes the supply chain capabilities of the IKEA stores in terms of its supply chain and logistics, sourcing and supply management, customer service and demand management. It also highlights on the retailer’s inventory management, transport management and its supply chain relationships & outsourcing, performance measurement and strategies for logistics and supply chain management.

Part 1

Supply chain and Logistics

A Supply Chain chart of the IKEA stores indicating the flow of information, goods and services, and finances in the supply chain

The forces driving the rate of change at IKEA are the growth in complexity of the market due to the complex customer designs. Also, the excessive demand means that the company will have to alter its supply chain activities so as to avoid shortages in demand or break down of its supply chain and logistics.

Sourcing and supply management

The Different types of buys for the firm

The company’s has different types of buys, the main one being wood used to manufacture IKEA’s furniture products. The company also procures artificial board and a number of secondary manufacturing materials such as bamboo, foam, fabrics that are used for making cushions, glass and rubber & plastic material. Most of the timber is sourced form one major supplier located in Hultsfred, South Sweden and most of the original timber is sourced from South Poland. The firm also purchases raw materials for making of furnishings for the manufacture of house and office appliances. Examples include paper furnishings, table mats and nails for fixing the timber.

A specific supplier of the firm and the strategic sourcing processes as applied in the firm

With this regard, the supplier that is selected is the home furnishing suppliers. Theses suppliers are important given that furnishings are the most important raw materials after wood. The suppliers have distribution areas located in over 53 nations making the strategic sourcing process simpler and cheaper. The first step in the strategic sourcing process of home furnishing suppliers is data collection and spend analysis. This involves the gathering of relevant data on the spending levels of the group in terms of the amount of raw materials used to manufacture home furnishings for the ready-to-assemble furniture, home appliances and accessories. The second step is the market research step which involves carrying out of the opportunities and threats that exist in the market. Thirdly is the go-to-market step which involves approaching IKEA’s suppliers in the market. This is followed by extensive negotiations, contracting and then finally, implementation and then carrying out continuous improvement by handling returns and providing after sales support.

Customer service and demand management

IKEA delivers its products from the point of manufacture to the point of consumption through relying on its stores. The products, which are designed to be self-assembled are displayed in the showrooms from where customer can view them and make the purchasing decision. Also, the food market products which serve Swedish branded delicacies are located in restaurants within the stores. This makes it easy for customers to access the restaurants and purchase the IKEA food products. The various dimensions of customer service include tangibles, empathy, assurance, responsiveness and reliability. Tangible dimension encompasses the physical appearance of items, empathy encompasses the individualized and customized attention that it offers to the customers and assurance is the dimension that relies on the courtesy and knowledge of the employees to convey confidence and trust. These are applied at IKEA given the personalized customer services that are offered with regards to return policies, buying guides and home or office delivery.

The three elements of customer service used at IKEA are respect, responding and listening. The company holds each customer in high regard by appreciating them as the reason for being in business, it also responds effectively in order to meet the changing customer needs. It also considers greatly the importance of feedback by allowing commentaries on the quality of its products, suggestions and constructive criticism. The company should however, improve on the manner in which they handle returns from customers given that it is a complex process. IKEA has a well formulated store strategic to meet outages in demand, orders are made to the manufacturing warehouses where production is scaled upwards in case of surge in demand. Order management is done through an integrated electronic model where orders are placed over the website, and shipping made after confirmation of receipt of payment from the customer merchant bank.

Part 2

Inventory management

The company maintains a lot of inventory in its stores especially in the furniture showrooms. The inventories in these furniture showrooms is not pre-assembled so as to minimize on storage space and costs of transportation. It is therefore designed to be self-assembled and then kept at the stores or showrooms with an exception of certain sofa items which are shipped directly from the warehouses to the customer homes. The living room inventory comprises of items like sofas and armchairs, TV and media furniture, coffee and side tables, living room lighting furniture and living room storage items. It also includes bedroom furniture, kitchen and appliances like kitchen cabinets & fronts, wall panels and step stools & step ladders. It also keeps inventory relating to office inventory for office, hospitality and retail inventory. The company’s inventory is classified based on the nature of the inventory and the household part in which it is used which can be bedroom inventory, living room, kitchen, children or business.

The EOQ model represents the optimal quantity to order so as to minimize the total costs of the firm’s inventory. It is comprised of three components, which are ordering costs, holding costs and purchase costs. Ordering costs represents the cost of placing an order for example the costs incurred by IKEA to place an order for the supply of timber. Holding costs include the storage costs and other related costs of holding the inventory in the company’s stores. IKEA incurs holding costs in terms of the costs of holding the various furniture items in its stores. Purchase costs is the cost incurred to change ownership of the items from the supplier to the company. It is the price paid for the acquisition of raw materials such as timber and other processing items.

Transportation management

The transportation planning decisions that will be considered in the decision to make importation into the UAE should be made in consideration to the company’s competitive strategy. The company should consider the transportation costs, the level of customer responsiveness and ability of the company to sustain the shipping requirements. The transportation costs should be considered as the ordering costs given that transportation decisions affects the level of inventory costs. In terms of shipping requirements, the company should consider the viability of outsourced transportation to use of company-owned transportation modes. Again, the responsiveness of customers to the company meeting the customer demands within the UAE will also be analyzed. This will be integrated for IKEA in the purchase of timber products from abroad.

IKEA relies mainly in shipping to transport its inventories of finished products of furniture and furnishings to the intended target markets and stores. This represents a cheaper option as compared to air transport given that a large number of items can be shipped at cheaper costs. The firm also utilizes intermodal transport given that after the inventories have been shipped, they are placed in trucks and then transported by road to the IKEA stores which are located inland. The company relies on these modes of transportation given their efficiency in meeting the demand at cheaper cost. They are also easily accessible and manageable. The company uses to measures of performance to measure the effectiveness of its transportation modes, which include responsiveness and economical nature. Responsiveness is measured in terms of visibility of the distribution networks while economical nature is measured in terms of the costs incurred to maintain the transportation systems. 

Distribution management

The major role of distribution channels within an organization is to act as an intermediary between the production function and consumption by customers. Within IKEA, distribution plays a role in gathering and dissemination of information in the supply chain, spreading and developing promotional initiatives in the supply chain and ensuring the physical distribution of the company’s furniture products. It also plays a role in holding the inventories thus absorbing risks, creating contact with potential buyers of the company’s products and ensuring that there are enough funds to maintain the distribution channel. 

IKEA warehouses

IKEA has a major warehouse located in Leiden, Netherlands where the major manufacturing processes take place. Key strategic decisions have been made with regards to the expansion of the company’s stores within Asia and North America especially on the venturing into the IKEA-branded food markets. IKEA has a number of 351 warehouses and stores which are located in 43 countries. These warehouses play an important role in storage of the raw materials majorly timber and the final products which include home and office appliances. The storage activities are performed inside the warehouses in addition to packaging and loading activities. The firm also uses cross-docking especially with respect to its storage of timber. This minimizes the storage costs and space which minimizes the costs of inventory. 

Packaging is used at IKEA to differentiate its products from those of the competitors. Given that the major products are furniture, packaging is done with designs that are flexible so as to occupy less storage space. The company has a big warehouse, the IKEA-Brooklyn-Warehouse located in Aisles. The higher the number of warehouses, the higher the costs of maintaining them such as holding costs for inventory, security and land rates. However, locating warehouses at strategic areas will minimize on transportation costs thus lowering the total inventory costs. It will also improve on demand efficiency due to the ability to meet demand effectively. The company has a flexible material handling technique whereby the items are designed in a flexible manner rather than being pre-assembled. This is meant to reduce the risk of the furniture getting damaged during transportation and display at the display rooms and storage at the warehouses.

Number of warehouses that IKEA should have

The firm should maintain a limited number of warehouses as they stand at the current number of 351 stores. This is because it is costly to maintain the warehouses in terms of the increased number of stores personnel. However, increasing the number of warehouses will increase the accessibility of materials thus reducing the transportation costs. This is because suppliers will have less distance to deliver the raw materials such as timber which is very costly to transport. However, this move will increase the storage costs given that stores personnel will be required in each store in addition to the lighting and security costs. Increasing the number of warehouses will also reduce the probability of stock outs given that enough stock will be available in the increased number of stores. The firm will have to make a tradeoff between transportation costs and storage costs.

PART 3

Supply chain relationships and outsourcing

The supply chain processes at IKEA is influenced heavily on the connections and relationships that exist within the organization and outside the organization. Such relationships have a big influenced on a company is it is to achieve its supply chain objectives. A transactional relationship exists between the company and its customers or buyers of its furniture products. As a result of the better transactional relationships that are pegged on the provision of high quality furniture products, houses and flats, family mobile services, catalogue and manufacturing, IKEA leverages on transactional relationship to facilitate its business transactions and lower costs of delivery.

Strategic relationships are also evident in the company which are aimed at achieving a set of specified objectives. An example of a strategic relationship within IKEA is the strategic partnership with a number of international hoteliers which was meant to run its chain of 100 hotels of economy class in Europe. The strategic partnership entered in 2012 does not involve the utilization or sale of the company’s brand of furniture products. The importance of supply chain relationships within a supply chain cannot be underestimated. These relationships, especially buyer-seller transactional relationships and strategic partnerships play a big role in ensuring that the company’s raw materials such as timber are shipped from the suppliers timely and efficiently. They are also important since they reduce supply chain costs due to reduced costs of maintaining the supply chain processes and streamlining the supply chain activities.

Outsourcing at IKEA

The company fully owns and operates its stores and therefore, it has a limited instances of outsourcing for its stores. Outsourcing is advantageous to a company given that there is reduced costs and internal labor force requirements that are needed to perform certain tasks. It also leads to increase in efficiency of the outsourced processes given the high level of technical capacity available by the consultancy companies. It is however, disadvantageous because of the breach of confidentiality and security in addition to the loss of management control over the most important projects. IKEA has outsourced the design of home furnishings and appliances to independent suppliers. This reduces the costs of material handling in addition to improving the efficiency of the production processes.

Supply Chain Performance Measurement

The performance of a supply chain cuts across the boundaries of a given company and the various functional lines. A company can effectively measure its supply chain performance by analyzing its ability to meet the growing number of customer orders in a more efficient and faster way than its closest competitors. The ability of the company to ensure timely delivery of the products and services that it provides will be key in a company being highly competitive in its supply chain. Specific aspects of measurement that can be used to evaluate the supply chain performance of a company will include its responsiveness, reliability, credibility, communication, security and competence. With regards to IKEA, the company uses an integrated set of performance metrics which include financial performance measures, logistics quality performance, logistics productivity performance and logistics cycle time performance measures. A good example is the company’s high level of customer responsiveness which is assured through the provision of prompt services and furniture products to its customers.

Strategies for Logistics and Supply Chain Management

The supply chain principles have effectively been utilized by IKEA throughout the organization and within the stores. These supply chain principles include adapting the supply chain with regards to the nature and needs of a market segment that the company is serving, aligning the demand across all areas of the supply chain, customizing supply chain logistics in each customer segment and undertaking product differentiation nearer the customer base. Other supply chain principles that have been used in the company include outsourcing strategically, integrating a stable system of information technology and adapting the company’s financial metrics to the service provision and superior product delivery. IKEA has fully integrated all these supply chain principles for instance by outsourcing strategically with regards to foreign and unstable markets. The company has undertaken a lot of supply chain differentiation especially in the food market with the introduction of IKEA-branded foods and the promotion of IKEA food label so as to align demand across the supply chain.

The company has adopted diverse supply chain strategies in order to stay ahead of the highly competitive furniture industry and home appliances market. The differentiation strategy that has been adopted the company is evident in the differentiation within all stages of the supply chain in the various products that the company offers in its stores over the 27 countries. This differentiation is evident with regards to products ranging from living room, bedroom, kitchen and appliances, products for children and for business in addition to textiles and rugs products. The financial strategies adopted are meant to strengthen the structures within the supply chain which utilizes the company’s own resources. The company has re-invested heavily in its supply chain to create and sustain relationships by investing heavily in the IKEA stores. The company has also adopted technology-based supply chain processes that are centered on sustainable solutions and product development.

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