Supply Chain System of IKEA Essay Example

key factor for the success of the company.

The company considered factors like carriers used for transportation and pallets used in warehouses to base its decisions like furniture design and packaging.As a result, IKEA was managing its costs better than its competitors and was able to offer products at 30% lower costs. IKEA maintained a long-term relationship with its suppliers and assisted them in improving their processes so that it would help in cutting costs further. The company did not offer free home delivery as other furniture retailers did and expected its customers carry the products with them in their vehicles and assemble the products themselves.

This helped IKEA cut down on a part of its transportation costs and pass on the benefit to its customers in the form of low priced goods.

Background Note

IKEA was founded by Ingvar Kamprad (Kamprad) in 1943 in Agunnaryd, Sweden, when he was 17 years old. Kamprad started by selling goods like pencils, wallets, jewelry, picture frames, and watches. Kamprad tried to keep costs low by purchasing goods in large quantities and passed on a part of this benefit to his customers.

In 1947, Kamprad introduced furniture in his product line and found that there was a good demand for it. He sourced furniture from manufacturers in local forests so that he could keep the costs low.As the scale of business grew, Kamprad found it difficult to make individual sales calls and so started advertising in the newspapers. In 1951, he designed a product catalogue and distributed it to potential customers who lived near his store. IKEA opened its first furniture showroom in Almhult, Sweden, in 1953 where customers could see, touch, and

feel IKEA s furniture before they placed orders. As IKEA was selling furniture at very low costs compared to its competitors, the competitors forced their suppliers to boycott supplying to IKEA.

That led IKEA to design and engineer its furniture and then outsource the manufacturing to Eastern European countries, particularly to Poland, from 1955. IKEA designed its furniture to cost less, look stylish and also be functional. In the same year, one of IKEA s co-workers decided to remove the legs of a table so that he could fit it in his car and minimize any damage in transit. That idea led IKEA to test flat packing in 1956. IKEA realized that flat packing could bring down the costs of transportation and storage drastically.

The company started designing its furniture to support flat packaging.In 1958, IKEA opened its first store in Almhult. The store, spanning 6,700 square meters, was then the largest furniture retail store in Scandinavia. IKEA saw an opportunity to cut costs by letting the customers transport and assemble the products themselves. The company was thus able to sell furniture at around a 30% lower cost than other furniture retailers. In 1963, IKEA opened a store in Oslo, Norway, its first store outside Sweden.

In 1965, it opened a store in Stockholm, Sweden. This was then the largest IKEA store and covered 33,000 square meters. The company introduced the self-serve concept in the store.Customers were provided with information about the products on display through written material and information desks. They were invited to check out the products and select them but there were no sales staff.

That enhanced the customers shopping experience at the store as there

were no salespersons who were constantly urging customers to make purchases. Customers were given tickets for the goods they purchased and were asked to collect the goods at the delivery docks. There was no door delivery service available and the customers were asked to provide for their own transportation.Car racks could be bought and self-driven vans could be rented.

IKEA expanded into more European countries and by 1974, it had 10 IKEA stores in five European countries. IKEA shifted its headquarters from Almhult to Copenhagen, Denmark, as it felt Copenhagen s central location made it a better choice to support its European expansion plans. IKEA became highly successful in Germany where it opened its first store in 1974. The company realized the huge growth potential it had in Germany and expanded aggressively.

By 1980, it opened 10 more stores in Germany. In 1975, IKEA entered Australia by opening a store in Sydney.It continued to expand globally by opening stores. However, this did not work because of the difference in the lifestyles of American and Europeans.

For instance, the size of beds used in the US was larger than the size of beds used in Europe. IKEA realized that it had to modify its products to suit the local needs and hence made certain modifications to products like beds and kitchenware. By the year 1990, IKEA had 89 stores in 21 countries. Along with global expansion through its Stores, IKEA also expanded the sources of supply to include countries like China. In its early days,IKEA sourced most of its products from Eastern Europe but as it expanded its business, its dependence on Eastern Europe came down to a certain

extent. In the 1970s, around 25% of its supplies were from Eastern Europe .

This came down to 15% by 1990. In the same way, IKEA revenue dependence on Scandinavian markets also came down from 85% in 1975 to 26% in 1990. In 1991, IKEA started a furniture manufacturing subsidiary, Swedwood, to manufacture wooden furniture and components. In the 1990s, IKEA further expanded into countries like Taiwan, Malaysia, Spain, and China.In 1997, IK EA launched its website www. ikea.com where it provided its customers with an online product catalogue. In the mid-1990s, IKEA launched a separate line of products specially designed for children. During the mid-2000s as the European markets were getting saturated for IKEA, it started focusing more on the Asian, Russian, and the US markets. It entered Japan in 2006 by opening its first store in Tokyo. At the end of IKEA s fiscal year 2008 in August 2008, IKEA was operating 254 stores in 24 countries.

Managing Supply Chain

IKEA first established a target price before designing a product. This practice was in contrast to the generally followed method of designing the product first and then pricing it according to the cost and markup by other furniture manufacturers. Designers at IKEA had to accommodate all the costs like raw material, manufacturing, and transportation till the product reached the stores within the given target price. IKEA followed such a practice to develop a good quality product at a low cost so that more people could afford it. The company s objective was to provide low cost, good quality goods to its customers. IKEA had adopted a flat packaging system for packing its furniture to reduce the

amount of air i. e. free space in its transportation and storage. It laid special focus on designing functional furniture that could be disassembled and transported to its stores. In the case of those products which could not be fitted into flat packs, IKEA worked on making them stackable. Transporting in parts in flat packs allowed IKEA to optimize the carrier space and hence cut down on costs compared to other furniture retailers which transported assembled products.While the company focused on selling affordable furniture, it did not compromise on the innovation in designing its products and the utility they offered. The flat pack design also helped IKEA in optimal utilization of warehouse space and minimizing the types of pallets used to store the products.

IKEA s global supply chain involved 1,380 suppliers in 50 countries, 41 trading service offices in 30 countries, 31 distribution centers (DC), and 11 customer DCs in 16 countries as of 2008. The company s corporate structure was divided into three parts – Retail, Distribution and Trading Areas. IKEA of Sweden (IoS) handled the product design and marketing functions.

The planning process started with sales planning where the group management (GM) team at IK EA made forecasts for various products for the current fiscal year and five years after that. This was a strategic forecast and was done on an aggregate level to include all IKEA stores. The forecasts were based on IKEA s strategic business plan which involved business cycle and market intelligence reports. Forecasts were made for all business areas (BA) like sofas, chairs, and beds.A tactical forecast was done by Demand Planners at IoS who provided forecasts for all BAs

based on the growth plans and targets of each BA. The two forecasts were compared for any deviations.

If significant deviations were found, then the forecasts were divided into sales frames per regions and further into sales frames per product area. These frames were compared with the forecasts provided at the tactical level of demand planning. The demand planners had to adjust their forecasts to eliminate the differences found between the sales frames and sales plans. All the forecasts were reviewed three times a year. Strategic and tactical forecasts were made at IoS.

Operational level forecasts were made at store levels based on the replenishment orders from the stores. The operational and tactical forecasts w ere combined to form a forecast for each product at the store level. The store level forecasts were then aggregated and compared with sales frames on retail forecast group level (RFG) and at the distribution services region level. RFG consisted of all the stores in a geographic region, usually a country.

A few RFGs were grouped and were served by some distribution service regions. For instance, in Europe, all the stores in one country formed an RFG and all the countries in Europe in which IKEA operated were served by six distribution service regions at the end of 2008. Stores provided sales forecasts for each product for the next three weeks on a rolling basis whereas demand planners forecast sales for four weeks to 84 weeks on a rolling basis. Most of IKEA s products had lengthy life cycles and hence demand planning was done for as long as 84 weeks.This helped the suppliers to plan their production.

Need planning for products was done

based on these inputs. The need planning team netted these forecasts with the current stock levels in stores, their safety stock requirements, and also with the goods in transit to calculate the final store requirements figure. Thereafter, the store requirements were aggregated at the DC level and netted against the respective DC stock levels including goods in transit to replenish the DC. The DC groups were aggregated for the demand to be forecast for 84 weeks.Suppliers were informed about the forecasts for the coming 26 to 52 weeks.

Then, IKEA divided the requirements among the suppliers using a supplier matrix developed based on the capacities and lead times of each supplier. IKEA used information technology which provided accurate data and other tools to support its planning process. For instance, it partnered with JDA Software Inc7 in 2001 and implemented JDA Demand and Fulfillment solutions which provided the company with better visibility in the sales patterns of its products.This further helped in improving the accuracy of the forecasts.

Supplier Relationship Management

After the design of the product and material to be used was decided, trading offices across the world were instructed to find the suppliers in their respective regions and invite bids from them. The trading offices of IKEA competed among themselves to win the bid for the product or product line that IKEA was outsourcing.

The trading offices helped suppliers in their region in formulating competitive bids for a product s landing price which included material, manufacturing, and logistics costs.They then sent the most competitive bids to IoS. IoS selected the most competitive bidders from the bids it had received from the trading offices for outsourcing the manufacturing of

the product. As IKEA s suppliers had to adhere to IWAY, parameters like quality of product and the product s impact on the environment due to manufacturing were the same for all the suppliers.

Thus, IKEA could choose its supplier on the basis of costs. The company also considered the production capacity and capabilities of the supplier before outsourcing so as to ensure no supply shortages in future.IKEA had most of its stores in the Western countries but had its suppliers spread across the world. The company believed that it had to be close to its suppliers so that it could have a better and a longer relationship with them.

To maintain a long-term relationship, IKEA chose its suppliers after proper due diligence. IKEA s officials at its trading offices frequently visited the suppliers manufacturing facilities to ensure compliance by the suppliers to IWAY. IKEA also hired individuals with expertise in fields like manufacturing and production management for its trading offices.These experts often helped IKEA s suppliers with any assistance required to increase the efficacy of their manufacturing processes and also to cut costs wherever possible.

IKEA supported its suppliers by offering assistance in the form of leased equipment, credit facilities, extending guarantees for a supplier s bank loans, etc. It also supported its suppliers occasionally by purchasing some of their excess inventories. In return, IKEA benefited by getting goods at low cost and increased loyalty from its suppliers.With loyal suppliers, IKEA could be certain about the supply of goods and hence was able to plan its replenishment strategy efficiently. IKEA laid emphasis on gradually shortening the lead time taken by its suppliers.

The company started off with a

new supplier with a call-off8 greater than 4+4. This meant that the supplier would be given more than four weeks notice for a four-week delivery window . IKEA then helped those suppliers to improve their processes to bring the call off down to just 4+4. The company worked further with its suppliers to increase their manufacturing efficiency to bring down the lead time from weeks to days and make them capable of producing goods as and when orders were generated. IKEA further enhanced the supply chain efficiency by implementing Vendor Managed Inventory (VMI)10 for some of its key suppliers. Apart from furniture retailing, IKEA also designed its own furniture and had its own manufacturing subsidiary named Swedwood.

This gave IKEA an advantage over its competitors.Most of the times, IKEA used the Swedwood facilities for manufacturing those goods for which it could not find suitable suppliers or a more cost effective way of production. At Swedwood, IKEA manufactured most of its wooden furniture and components. As IKEA s suppliers were spread across the globe, the company often hired some independent quality auditing a gencies operating in the vicinity of the supplier to perform quality checks on the products manufactured. For instance, IKEA hired Intertek, a testing and certifying firm, to check the quality of products manufactured in some of the Asian nations like China.By having the products checked at a location proximate to the manufacturing facility, IKEA could cut the costs of transporting products that did not meet the quality standards.

In addition to providing technical and financial assistance, IKEA also provided its suppliers with support in logistics and IT. Each trading office had its own transport manager.

Once goods were ready to be dispatched to either IKEA s DC or stores, transport managers from the concerned trading office would find out the optimal mode of transportation and other terms like delivery time and costs involved.These services were provided to those suppliers who were not able to extract the same or better terms from transporters as IKEA s transport manager could. IKEA used a combination of ocean, rail, and road transport for transporting its goods. The company constantly looked for ways to reduce the use of road transport, which had a higher adverse impact on the environment as compared to ocean and rail transport.

IKEA s packaging was also designed in such a manner as to fit the maximum possible products into containers used for transportation.This further improved the efficiency and brought down the overall landed costs of products. IKEA also took special care while loading products on containers for transportation so that there would be minimal damage during transit. The company captured the loading process in videos or photographs at the suppliers end.

If any goods were damaged in transit, IKEA could review the faulty loading methods from the videos or photographs. It could then provide appropriate feedback to make sure that these methods were not repeated either by it or by its suppliers.The products were then shipped to either the DC or direct to the store. IKEA preferred to build its DCs at places which were closer to seaports so that it could use more of ocean transport and less of rail and road transport. However, it also considered proximity of the DC to its existing or planned stores when it chose a

location for the DC.

Products that were fast moving were either delivered directly to the stores or to DCs which were closer to the stores. Products that were relatively slow moving were delivered to DCs which were centrally located and covered a large region.

Warehouse Management

IKEA s DCs were highly automated, using systems like automated storage and retrieval system (AS/RS) and conveyor belts. Using AS/RS improved the efficiency of IKEA s warehousing operations significantly.

The AS/RS used sophisticated cranes which could handle pallets without any damage and also could reach racks that were very high. Most of IKEA s DCs had racks as high as 100 ft which allowed it to stock more products and each crane in AS/RS had the capability of handling 60 pallets an hour.Conveyors were used to feed the AS/RS with pallets that needed to be stored in racks or to transfer out pallets that had been retrieved from the racks. The use of conveyors helped IKEA in reducing traffic in the form of heavy lift trucks in the warehouse.

In the case of IKEA s Georgia DC in the US, the containers were received at the receiving docks. The products were processed to decide where they would be stored in the warehouse based on the product specifications and demand. They were then loaded onto pallets used in the warehouse were verified to check if the product quantity and its supplier were accurate. After they were verified, a pallet label, a bar code, was printed and applied on the pallet. The lift truck driver who had been assigned to pick up the pallet would then scan the label to know whether it should be cross

docked or be stored in the conventional racks of the warehouse.

If the pallet was to be cross docked, then the lift truck driver was directed to the floor storage near a dock door.The driver deposited the pallet and scanned the bar code embedded in the floor so that Warehouse Management System (WMS)1 1 would be updated with the area where the pallet had been deposited. If a pallet was to be retrieved from the conventional rack of the warehouse, the AS/RS would be instructed to retrieve the pallet from that particular rack and deliver it at a station12 where a forklift driver would pick it up. The AS/RS system retrieved the pallet from the rack and delivered it to the station as instructed using the conveyor.The lift truck drivers scanned the barcode on the pallet to confirm that the right pallet was being delivered and then transferred it to floor storage as instructed by the WMS.

If a pallet was to be stored in the warehouse, then the lift truck driver carrying it scanned the barcode of the pallet at a station from where AS/RS took the responsibility for storing it. The WMS worked in a way to minimize the empty travel time by lift drivers by assigning tasks depending on when and where the previously assigned task got over. For example, a lift driver leaving goods at a station to feed AS/RS would be instructed to deliver the goods from the nearby station that were to be delivered in floor storage for filling an order from the individual stores. The cranes of AS/RS were also programmed to operate in a task interleaving manner so that

a crane storing a pallet on a rack would simultaneously retrieve a pallet from other racks to fill any matching order. These measures optimized the warehousing activities.

IKEA followed the same design, technology, and operations at all of its facilities so that the processes were standardized across the chain and employees at any facility could be moved from one facility to the other, if required. The standardization was taken to the level of pallets that were used in DC. IKEA used only three varieties of pallets – a standard Euro pallet, a half pallet, and an IKEA pallet which was an oversized Euro pallet. These pallet sizes were also considered as a factor when IKEA designed its products.Jim Leddy, IKEA s Expansion Manager for North America, said, “We control our product pipeline, so we design our products around these three standard pallet sizes.

The idea is that no matter where our product is manufactured, it can be shipped to any of our facilities anywhere in the world. ” Standardization also helped IKEA to conduct pilot projects at one DC and if they were found successful, apply them across the chain. This standardization helped Ikea save considerably on costs and time. IKEA was able to benchmark the performances of different DCs as all worked on the same operating procedures.

As some of the jobs in warehousing like transferring goods in fork lifts were mundane, it was tough to retain employees doing such tasks. Automation helped IKEA address the issue of tightening labor markets. The DCs filled the orders for replenishment of stores in the carriers designated for them at the shipping docks. On an average, the IKEA store received

two to three replenishments per week based on the sales at the store and its warehouse size.

Store Design

IKEA chose its store location on the city outskirts as the company s stores were large and required huge parking spaces. IKEA realized that its customers were visiting stores in their cars and that resulted in higher carbon emissions.

Hence, the company made sure that the store location chosen was well connected through public transport so that environment conscious customers could visit IKEA stores using public transport. IKEA s stores were designed in such a way that furniture was displayed in a real room setup, along with the details of each displayed product.Customers were given pencils and papers at the store entrance to list down product details like item code and respective aisle number in the store s warehouse. The store layout was designed in such a way that customers passed through all the products on display.

IKEA s intention was to take customers through all of its products so that even a customer who entered the store with a planned shopping list would check out other products which might interest him/her.However, shortcuts were also provided at a few places and these were mentioned on the floor maps that were made available to the customers. The store had another area called „market hall where customers could pick up small furniture and furnishing products like flower pots, cutlery, cookware, paintings, and photo frames. Customers had to pick the products displayed in the showrooms in the form of disassembled flat packs in the furniture warehouse of the store.Customers were provided with flat trolleys for carrying their goods from the warehouse Some of

the goods which were either not fast moving or were too bulky were stored in the external warehouse and customers were told to collect them from there. Customers, after collecting their merchandise from the warehouse, would check out by paying cash.

There were a few loading zones provided at the store s exit to which the customers could bring their vehicles and load the merchandise they had bought. Most of the IKEA stores had a section called.As Is where IKEA sold returned goods that had minor damages and had been repaired, at a discounted price. All IKEA stores had restaurants, which predominantly sold Swedish dishes at low prices, and had play areas for children. Even though IKEA expected certain tasks like transportation and assembling of products to be done by its customers, it also offered assistance in assembling products at a reasonable price. Certain items like complex and bulky kitchens were assembled and delivered to the customer directly from the warehouse.

The Road Ahead

Industry experts felt that IKEA could further improve its supply chain efficiency by using Radio Frequency Identification (RFID)15 technology. They felt that the visibility of the supply chain could improve drastically with the use of RFID. However, some analysts opined that IKEA was a family run business and to implement RFID throughout the entire supply chain would require a huge amount of funds. They felt that IKEA might need to compromise on its expansion plans if it had to implement RFID in its supply chain operations without external funding. They argued that IKEA had achieved market leadership by improving the efficacy of its operations and could take time to accumulate funds to implement RFID.

Some

critics argued that IKEA s strategy of following the same product line globally might not work in future when it expanded its operations into nations with diverse cultures. However, according to some analysts, IKEA was targeting young and middle-aged consumers, most of whom were exposed to global trends. They said that IKEA was designing products which were high on functionality and quality and at a low cost which would tradeoff any other concern of the customers. Exhibit I Note on IKEA Way of Purchasing Home Furnishings (IWAY) Legal

Requirements: Suppliers must comply with national laws and regulations and with international conventions concerning social and working conditions, child labor, and the protection of the environment.

Social & Working Conditions: IKEA expects its suppliers to respect fundamental human rights, to treat their workers fairly and with respect.

Suppliers must agree to:

• Provide a healthy and safe working environment,
• Pay at least the minimum legal wage and compensate for overtime,
• Ensure reasonable privacy, quietness, and personal hygiene, in those instances where housing facilities are provided.

Suppliers may not:

• Make use of child labor,
• Make use of forced or bonded labor,
• Use illegal overtime,
• Prevent workers from associating freely with any workers association or group of their choosing or collective bargaining,
• Accept any form of mental or physical disciplinary action, including harassment.

Environment and Forestry:

Suppliers must agree to:

• Work to reduce waste and emissions to air, ground, and water,
• Handle chemicals in a safe way,
• Handle, store, and dispose of hazardous waste in an environmentally safe manner,
• Contribute to the recycling and reuse of materials and products,
• Use wood from known areas and, if possible, from sources that are well managed and preferably independently
  

certified as such.

Suppliers may not: Use wood originating from national parks, nature reserves, intact natural forests or any areas with officially declared high conservation values, unless certified.

IWAY Implementation: IKEA suppliers must communicate the content of the “The IKEA Way on Purchasing Home Furnishing Products” to co-workers as well as sub-contractors and ensure that all measures required are implemented accordingly.

Via a network of Trading Service Offices, IKEA supports their suppliers to improve their operations and practices.Believing in long-term relationships, IKEA does not break off relations due to non-compliance only, as long as there is a willingness to improve in the right direction with an agreed plan of action to comply with the IKEA requirements within an agreed time frame. Repeated violations of the IKEA requirements will result in the termination of business with the supplier concerned.

Support and Monitoring: IKEA Trading Service Offices have the direct responsibility to support and monitor the suppliers. To ensure compliance with the requirements and to support and follow up developments on a global basis, IKEA has formed a global Compliance and Monitoring Group.

Through the General Purchasing Conditions for the supply of products to he IKEA Group of Companies, IKEA has reserved the right to make unannounced visits at any time to all places of produc tion (including their sub-contractors) for goods intended for supply to IKEA.