Logistics & Supply Chain Management

Of

Furniture Retailer IKEA

AIDANA MUKAZHANOVA

A4077225

Report

Logistics and Operations Management

Module code: LOG9014M

MIB

12.09.2014

London School of Business and Finance

University of Lincoln

2014

CONTENTS

I. Executive Summary..........................................................................................................3

II. Supply Chain Management – Introduction to IKEA........................................................4

III. Operational Processes.......................................................................................................6

IV. Advantages and Disadvantages of IKEA Business..........................................................9

V. Inversed Business Processes............................................................................................11

VI. Analysis of Multidimensional Operational Issues...........................................................14

VII. Conclusion.......................................................................................................................16

VIII. References........................................................................................................................18

2

EXECUTIVE SUMMARY

The retail industry has gone through important and diverse changes and now after

centuries of development, it is still evolving by creating best practice of business processes.

Industry of retail is one of the biggest sectors with the highest rates of employment; world

economy is depended on it and to manage this huge machine of processes industry applies all

new techniques and approaches to maximize profitability and to reach effective and efficient

results. Swedish company IKEA designs and sells ready-to-assemble furniture, home accessories

and appliances and is one of the largest trader of furniture in the retail industry. Therefore, it is

presented in this report to cover topics related to the logistics and supply chain management.

Presented report is about IKEA itself and its supply chain management. Operational

processes of the company are shown in detail; also advantages and disadvantages related to the

business of IKEA are exposed. Inversed business processes portray gap between the evaluation

and implementation of business processes. Operational processes are covered in the section

‘Analysis of Multidimensional Operational Issues’, where analysis is foreseen as a tool for future

improvements.

Methodology used during the research of this topic is different. Materials gathered from

previously made researches and secondary data are utilized, articles from journals and other

literature of the topic of logistics and supply chain were applied.

3

SUPPLY CHAIN MANAGEMENT – INTRODUCTION TO IKEA

In modern business, supply chain management has already transformed to a wide

concept, where operational processes are more than only logistics and where these processes run

the whole mechanism of business itself. So, this is the way how supply chain becomes a value

chain, where competitive performance leads to the success, which is not easy to reach in the

global competitive environment, where changes happen all the time and sometimes, even

unpredictably. Logistics is about planning direction and scope of the plan that is required to be

followed by business to control flow of information and products related to it. As to the supply

chain management, it is built upon this scope to achieve tight relationship and coordination

between the processes of other sides/bodies in the pipeline. Suppliers and consumers of the

company could represent these entities. Martin Christopher (2011) in his book adopted definition

of supply chain management: ‘The management of upstream and downstream relationships with

suppliers and customers in order to deliver superior customer value at less cost to the supply

chain as a whole’. Additionally, he suggests that ‘supply chain management’ as a term should be

changed to ‘demand chain management’; and moreover, considering fact that market should be

main driver of the chain and not suppliers, he proposes word ‘chain’ to replace with ‘network’

due to the fact that there are different suppliers and consumers. Industry of retail deals with all

presented ideas and approaches, so management of relationships is very important; it is

connected with profit for all parties involved in the business and operational processes. Without

supply chain management achieving economy of scale would be almost impossible. Besides,

companies as IKEA going globally and seek more ways leading to expansion all over the world;

they go through different steps while entering new markets, these could be acquisitions, mergers,

third parties. New market is new consumers, new demands and new products – all is bounded.

To remain high quality service everything should be satisfied on time so supply chain

management is so needed tool for such a big companies like IKEA.

Scandinavian company IKEA was founded in 1943 by young Ingvar Kamprad, who is

listed as the richest person in Europe (Bloomberg, 2013). Today, it is a globally retailing

company that sells Scandinavian designed products, mainly furniture. Corporate structure is a

little bit complicated because company is owned by for profit and nonprofit companies. Also,

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corporate structure consists of two parts: operations and franchising. IKEA is presented in 45

countries with 361 stores. Recently, on Augusts 28, 2014 new store was opened in Miami, USA,

store size is 38,648 m2 (IKEA, 2014). INGKA Holding is private, for profit Dutch organization

that oversees almost all operations of IKEA. It decides how to manage stores, design issues and

furniture manufacturing topics, whom to choose as a supplier and all purchasing subjects. About

50 stores of IKEA are managed outside the holding as well as they represent franchisees. IKEA

remains to be one of the world’s top employers, actually for new grads (CNN, 2013). In 2013

company reached record profit (3.3 billion Euros) and increased market share in countries where

it operates (BBC News, 2013), emerging markets played vital role as the sources of profitability.

IKEA went through different changes while developing as an international business.

Nowadays volatile consumer demands impacts this process greatly. The supply chain of the

company is designed the way to meet all requirements of global market so company operations

could be spread globally, both sales and purchasing. IKEA work with its suppliers in two phases

first is identification and second is execution. The identification stage is about producing set of

outcomes, which is helpful in designing proper plan aimed to the improvements of business

(Supplier Portal – IKEA, 2014); and second phase is about application of resources from both

sides to the suggested improvements, followed by execution. This approach, gives company to

put low prices on their production, besides company puts effort in bringing suppliers and

customers closer, IKEA creates low price by shortening the distance between the needs of its

consumers and the possibilities of its suppliers. Additionally, since 2002 company has its own

code of conduct name IWAY, which includes guidelines and all requirements placed on

suppliers of services and products; details what to expect in return from IKEA are also included

(IKEA Code of Conduct, 2008).This document covers working conditions, topics regarding child

labor prevention, the environment issues, responsible forestry management, etc. Suppliers of

IKEA are responsible for communicating this code of conduct by UKEA to their own employees

and sub-suppliers, so all these easements are used in all operations.

Generally, IKEA builds a sustainable supply chain which is vertically integrated.

Sustainability is good opportunity for investment and rising profitability. Esty and Winston

(2009) discuss the business opportunities occurred from sustainability. Sustainability on itself

5

evolved and tightly integrated into the business concept in 21 th century; there is concern

regarding environment conditions like global warming, which adversely affects our planet. The

Brundtland Commission's report of 1987 defined sustainable development as "development

which meets the needs of current generations without compromising the ability of future

generations to meet their own needs" (UNECE, 2014). It means that IKEA deals with

environment, society, economy, reduction of remains, reuse of recycled materials, transport-

intensity reduction, the impact of congestion and other sustainability related issues. IKEA across

its integrated value chain contributes to the people’s life quality improvement; company strives

to outputs more rather it takes. It promotes renewable energy, safe chemicals, and responsible

stewardship of forests, farmlands and waters.

OPERATIONAL PROCESSES

IKEA as global company uses its own strategy with the purpose to achieve sustainable

competitive advantage. All activities planned by IKEA are produced with the single idea to

receive desired results. However to measure effectiveness and efficiency of this results

operational processes should be evaluated with the help of specifically designed tools.

The operation strategy of IKEA is focused on low cost while traditionally furniture is

available more at higher costs. IKEA deals with the large volume due to their products high level

of repeatability and specialization. Operation needs to create products variety from low to

medium to offer standardized and definite products. The variation that operations have to cope

with is somehow low as well as consumers demand and sales are predictable.

IKEA uses different strategies. For example, here is the figure №1 showing difference

between strategies of IKEA in Europe and China.

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EUROPE CHINA

VALUE PROPOSITION

Good quality, stylish furniture at low and

affordable prices

Good quality, western-styled aspiration brand

for the middle-class population

VALUED NETWORK

PRODUCT

Stylish, functional products and home

furnishings

Slight modifications to products to suit the

local market and reflect Chinese apartment

sizes

STORE LOCATION

The suburbs, next to highways so that access

by car is easy

The outskirts of cities, next to rail networks as

most customers use public transport

PRICE

Low-cost Affordable prices

PROMOTION

IKEA catalogue is the main marketing tool Advertising on Chinese social media and

micro-blogging website Weibo has been

popular

LOGISTICS

Products are sourced and made in developing

nations like China and Malaysia and then

shipped to Europe

Raw material and products are sources loally.

IKEA also built two factories in Shanghai to

avoid high import taxes

Figure №1 - How IKEA’s Strategies differ in Europe and China (Business Today, 2014)

IKEA generally targets different groups of customers. Young people with low or middle

income whom might also have kids; and contrary, business consumers whom usually run small

or medium businesses. It is obvious that IKEA target audience is price conscious. Company’s

compatibility is based on specially created operation strategy which also deals with other

strategies and together they link performance objectives like quality, cost, speed of production,

flexibility of operations and all other aspects affecting effectiveness of IKEA’s strategies.

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Operations related to the logistics also affect operation processes (Bowzarth, C. and Handfield,

R, B., 2008). For instance, IKEA widely uses its outbound logistics, when consumers pick up

and deliver products on their own. Besides, self-assembly furniture makes this process more

convenient; and their packaging is comfortable, there is no wasted space. Furniture designers

form product design even logistically. This approach is useful for the company in terms of

warehousing because this type of design gives possibility to save space and better use the stock.

Daily, IKEA handles thousands of products and it is important to control this movement of goods

because products should always be available for consumers in store. 20-25% of each store’s

employees work in logistics and they impact operations directly. That is why IKEA is focused on

controlling its space and a volume of product, company is maintaining uninterrupted operational

processes (IKEA, 2014). According to Intertek (2014), it provides quality check of IKEA

operations. This is multinational company, so it serves IKEA in China and Asia. Therefore,

IKEA by having local partner who checks company’s operations in China saves on the

difficulties related to the long-distance collaborations and remanufacture.

IKEA distribution centers are all over the world and they are strategic part in supply chain

management. According to the Yearly Summary report of FY 2013 (IKEA, 2014), IKEA has 32

distribution centers in 16 countries, whereas 60% of production takes place in Europe. Trading

service offices support the process of buying products from suppliers. Suppliers send products

directly to the store for sale or to the distribution centers, where stock and store deliveries are

managed. Furnishing suppliers number is 1, 046 and they come from 52 countries. Most of them

started relationship with IKEA as an independent small entrepreneur. Generally, IKEA sources

materials close to its supply chain and this way it reduces transportation costs. Almost all IKEA

distribution centers are situated near the seaports and it means that company uses more sea

transport rather then read transportation. Suppliers who deliver products directly to the stores

help company to reduce costs and lover carbon footprint. Retail stores have their own

warehouses and this process also brings success to the company; it is ‘traditional model’ that is

utilized for a long time. According to Parikh and Nielsen (2009), traditional models use power

systems like Geographic information systems (GIS) and real-time devices that help to measure

load flow situation, and help to improve the whole distribution system operations and planning

process. Moreover, IKEA started to use flat packs to keep prices low. This is a cost efficient way

8

of getting product from supplier to customers and besides environmental harm is lower. This flat

pack influences goods transportation by boats, trains or trucks and allows IKEA to transit more

products per trip. So, as it is seen logistics at IKEA affect supply chain operations at every stage.

ADVANTAGES AND DISADVANTAGES OF IKEA BUSINESS

Business within IKEA has its own advantages and disadvantages; some of them are

discussed here in the scope of logistics and supply chain management. Figure №2 portrays pros

and cons of supply chain at IKEA.

ADVANTAGES DISADVANTAGES

Low-cost Furniture Extended Planning Cycle

Special Design Less Flexibility

Volume Business Long Lead Time

Stability in Supply Chain Instability of Supply Chain

Consist Quality Discontinuous Split

Figure №2 – Pros and Cons of IKEA Supply Chain

Companies like IKEA are looking for sustainable competitive advantages and in this case

strategy is to be defined too. Porter’s generic strategies (Porter, 1980) are a good tool to find

IKEA’s position.

PORTER’S GENERIC STRATEGIES

Target ScopeADVANTAGE

Low Cost Product Uniqueness

Broad

(Industry Wide)

Cost Leadership

StrategyDifferentiation Strategy

Narrow

(Market Segment)

Focus Strategy

(Low cost)

Focus Strategy

(differentiation)

Figure №3 - Porter’s generic strategies chart

9

According to Christopher (2011), most profitable companies plan to be low cost goods

producers in the industry because it is seen as the guarantee of success. IKEA is one of these

companies, its strategy is cost-based and directed to the narrow market segment. Basic

consumers are young people who chose to pay less for the furniture. To display its products

IKEA uses self-service model, when consumers can test the furniture, which is already decorated

and this approach is like a tip to the consumers about how it is possible to decorate particular

furniture without the help of decorator. Additionally, there is always one warehouse where

consumers are able to pick up desired products, those packed in the boxes and spaced on pallets.

Company offers roof racks to consumers who can buy and during the next visit return back and

refund money. Renting van is another advantage; local delivery service also supports this

process. In case all vans are busy, it is possible to make a reservation for the further purchase.

Moreover, IKEA has additional service allowing consumers to place order by phone without

going to the actual store; and shipping of such orders happens by different methods like UPS or

freight, home delivery. Self-assembled products or so called ‘RTA’ furniture also bring an

advantage to the consumers because ‘flat pack’ is comfortable during the exploitation like

shipping and delivery; saving space is like saving money. This brand new concept of design is

‘democratic design’ which represents combination of design and manufacturing (Haig, 2006).

Most of IKEA’s products are standardized globally.

According to Larsson and Qviberg (2004), IKEA has a holistic view of operations; it

needs reduction of whole costs related to the delivery processes, product quality check and

remain ‘green’ company. As to the supply chain it is mostly make-to-stock and therefore, whole

supply chain relies on forecasts. IKEA had an online IT system, which is integrated into the

whole network of the company and it is developed and managed by the department that supplies

inventory. Mainly, this program has 4 parts serving management of inventory, entering order,

routing order and order fulfillment system. This program gives possibility to manage the stock

and also reorder it with the company vendors, hence forecasting becomes more efficient. IKEA

IT system also tracks volume of sales in the retail stores, amount of inventories in the warehouse

and real time operation in retail store; with these features controlling stock is easier. In case

when stock volume is high till reorder point, it could be seen from the program and followed by

replenishment. IKEA logistics has complications as long led times; hence company faces

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challenge to control levels over the vendors. IT system is strong tool helping company to deal

with the operational processes. Employees of the company access this program to make a

forecast of sales and orders.

All business processes by IKEA consider environmental issues, those so important for the

planned performance of the company. According to the sustainability report 2013 (IKEA, 2014),

IKEA has made distinctive progress. For instance, since 2010 it strengthened energy efficiency

approach and saved $54 million. There is one very important component solar systems integrated

into the roofs of the IKEA newly built stores. This is a sensible advantage, giving IKEA

possibility to isolate itself from the volatilities of energy power industry, which is considered to

be one of the most unstable businesses globally. Another clever approach is LED lights

technology usage in the production that helped IKEA consumers to save electricity costs about

$9.45 saved per one bulb in one year. Totally, $116.1 million dollars were saved by using LED

bulbs. Company almost doubled cotton usage by investing €1.35million in project aiming

farmers to improve the income and cotton production with the less usage of water and chemicals.

So received cotton from 110,000 suppliers helped IKEA to increase cotton usage from 34% in

2012 to 72% in FY 2013. In the same report of sustainability, president and CEO of IKEA, Peter

Agnefjäll says that “Everyone, including IKEA, has a part to play in finding solutions. With our

vision of creating “a better everyday life for the many people” I know there is no other way of

doing business than in a sustainable way.” Forbes (2014) states that IKEA has an aggressive

sustainability approach however it creates high potential and new opportunities.

INVERSED BUSINESS PROCESSES

This part of the report explores and analysis the gap between the evaluation and

implementation of operational and business process improvements of IKEA. Companies

extending their supply chain globally need to solve the issues related to the structure of their

global logistics scheme. One approach unifies all multinationals, to achieve good results in

international logistics they rely on centralization tactic (Fernie and Sparks, 2004).

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As well IKEA is a global company; sometimes it faces challenges related to the cultural

differences from markets of entry. China represents good example, because it is considered by

multinationals as a major component of their supply chain. It is always essential to make sure

that suppliers from this country act in the scope of company’s sustainability scopes; otherwise

there could be differences in energy efficiency approaches, strategies and ‘green’ reputation.

Multinationals entering China have to be accountable towards local circumstances, it could be

local sustainability programs designed to foresee safety issues or employees health. In case of

IKEA, company shares its experience, which shows that full compliance with the standards took

it long in China because there is still a gap between reality and legislation in the country.

Company generated its own pragmatic approach by providing maximum working hours 60 hours

per week; and additionally employees had 36 hours as an overwork time per month. Economy of

China is constantly changing therefore bringing many challenges for companies to face. In this

condition it is hard to deal with monitoring and enforcing environmental compliance. Quality

and independence of third party companies as EHS auditors is crucially important, otherwise it

would be hard to determine if suppliers respond to the environmental standards and this way

decrease level of risks like shutdown of business or financial penalties (PWC, 2014).

Multinational companies like IKEA consider outsourcing as an activity providing cost or

value advantage. This is widely accepted approach and dramatically increasing in practice of

almost all industries. Strong economic logic lies beyond that kind of decisions, thought

companies need time to say good-bye to the in-house performance because there are some

complexities to go through. Supply chain becomes more compound and requires stronger

relationship management. After applying outsourcing business boundaries become wider and

value chain expansion goes beyond it. This is the process of changes, when supply chain

transforms into the value chain; and all entities connected to each other are involved in this value

chain network. This approach could be related to the competitive advantages such increased

profitability or could even bring bankruptcy/lost (Christopher, 2011). In addition, low prices on

good in low-cost countries not often mean considerably low total cost of ownership (Steinle and

Schiele, 2008). Global sourcing has its own approaches, see Figure №4.

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INTERNATIONAL

PURCHASINGGLOBAL SOURCING

I Level II Level III Level IV Level V Level

Domestic

Purchasing Only

International

Purchasing Only

as Needed

International

Purchasing as

Part of

Sourcing

Strategy

Global Sourcing

Strategies

Integrated

Across

Worldwide

Locations

Global Sourcing

Strategies

Integrated

Across

Worldwide

Locations and

Functional

Groups

Figure №4 – Five Stages of Sourcing (Trent and Monczka, 2003)

Strategic outsourcing for IKEA is more like an idea that allows other companies to put

their effort in value chain activities or to perform for value chain itself; Moreover companies also

could be function in value chain and act as independent specialists whom concentrate all skills

and knowledge on IKEA value chain. Almost 90 per cent of IKEA products are outsourced and

the rest 10 per cent is internal production. This is beneficial to the company in terms of low cost

structure and focus on the main business. This type of vertical integration is useful as well as it

creates constantly growing economies of scale; and it is very important to achieve it because

IKEA structure is generally based on high fixed cost. Company spreads its high fixed cost in

large volumes of production and as a result receives average cost per unit, which is lower.

Strategic outsourcing gives possibility IKEA to gain benefit such as keeping focus on its core

business because it allow management employees to direct their resources and energy on their

performance and therefore bring up efficiently those activities with the highest potential which

created competitive advantage and better chain of value.

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ANALYSIS OF MULTIDIMENSIONAL OPERATIONAL ISSUES

Multinational companies like IKEA operating in retailing industry deal with

multidimensional operational issues and to resolve all of them they use different techniques;

however notwithstanding of their hard work and endless effort to achieve flexible operations,

there are still problematic areas in their supply chain. Those areas concern strategies, enterprise

resource planning (ERP), lack of skills, poor management of inventory and logistics, problems

with planning and control, etc. This part of the report evaluates IKEA’s operations with the help

of SWOT analysis.

Strengths – With its vision 'to create a better everyday life for many people' IKEA creates

profitability oriented plans. Brand with the strong image worldwide offers consumers high

quality service in lower prices compared to rivals in the retail industry who sell furniture.

Strategically chosen locations help company to manage supply chain with better results in

performance. Wide range of choice satisfies taste of its target audience and functional design of

the products at a low price seems to very attractive. IKEA uses its strengths characteristics to

retain and attract consumers. Besides, company is always on check and has a look into the future.

Key performance indicators (KPI) allow company to measure its progress and long-term aims,

also company plans target according to these indicators. An IWAY code of conduct also is good

feature helping company to manage their suppliers and guide them in social and environmental

requirements which are expected by IKEA from them. Company knows how to used renewable

materials and sustainability report portrays it quite well. IKEA uses recycled waste products and

produces energy. Long-term partnership with its suppliers creates volume commitments; that is

the way how IKEA negotiates lower prices, hence suppliers implement guaranteed orders. By

purchasing in bulk company saves money; and by sourcing materials located close to the supply

chain leads company decreased costs of transportation. Suppliers could deliver products directly

to the stores and here IKEA gets benefits as reduced time, cost and less carbon footprint.

Opportunities – To take advantage and use opportunities companies usually rely on their

strengths. In case of IKEA business is focused on sustainability and therefore environmental

issues. Company considers this approach as a high potential for increased returns. IKEA

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develops solutions for minimizing recycling of products. For instance, in 2013 company

introduce ENASTÅNDE dishwasher that saves 9/10 the water, Induction hobs that uses 40 per

cent less energy compared to ceramic hobs, energy saving refrigerator and other products.

Demand for ‘green’ products is growing, IKEA uses this opportunity and by creating that kind of

products company attracts new segment that supports environment. Company is oriented

efficiently to use energy saving possibilities and to reduce carbon footprint. Moreover company

supports World Wildlife Fund (WWF) and participates in charity activities. It deals with UNIEF

project and also supports Save the Children organization. This is the way how IKEA uses its

opportunities and builds trust among its stakeholders, consumers, employees, suppliers.

Weaknesses – Finding weaknesses within the business operations could be useful for the

company in setting new goals and objectives. Also, by excluding weakness companies could

develop new strategies. IKEA has to pay attention to the size, scale and volume of its global

business because these sides impact management process and it could be difficult to control

quality and standards. IKEA can not control fully its own IWAY code of conduct, as well as in

particular countries where it has suppliers legislation is different and affects requirements of

IKEA, so company have to back up some rules during trainings and inspections. Another

weakness is the balance between production quality and price, it is not easy and at the same time

keep up in competitions with rivals and remain different. IKEA’s consumers are not informed

well regarding company’s activities and ‘green’ policies.

Threats – Timely knowing treats and eliminate them is essential to any business. IKEA

could use strength to overcome treats and aggregate new ideas to fix and make stronger its

position on global market. IKEA should expect threats from competitors; and to differentiate

itself from rivals company should constantly think over new and unique approaches/ideas.

IT technologies play significant role in the management of processes within IKEA

company. According to Business Wire (2008), Lawson Opportunity Analyzer helped company to

prioritize and set new targets for better ERP implementation and also to improve other business

processes. Another case is K3 ERP solution to the supply chain operations, which software is

delivering multichannel solutions helping companies in retail industry to create integrated

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shopping experience for the consumer (Bloomberg, 2010). Since 2010, As it is published in the

press release of Better Online Solutions (B.O.S.), it delivers logistic management solution for

IKEA Israel (BOS, 2010.) This is successful development of the projects that gives company

possibility to collect data regarding inventory stocks, receiving goods, inventory transfer, etc.

There are other software systems integrated into the operations of IKEA and it is evident, IKEA

makes progress in adaptation of technology into business processes. In addition, company also

uses Radio Frequency Identification (RFID) system and according to RFID Journal (2012), it

helps IKEA in eliminating shipping errors.

CONCLUSION

IKEA has effective and efficient operational processes, by managing them on high level

where control and analysis of business processes creates success. Policies within the company

are designed to control pricing approach, quality, logistics and suppliers. Long lasting

partnership with the suppliers is mutually valuable aspect for both sides. There are key elements

in these relationships: communication, cooperation, coordination and interaction. Without these

elements it would be hard to deal with such a big network of sourcing. Timely action and

reflection upon the issues arising among both parties strengthens strategic position of IKEA on

the global market. IKEA follows trends of market, being aware of what is needed makes

company progressive. So it gives possibility to consumers pay money for the products which are

valuable to them and at the same time they have a benefit as a lower price if compared to the

rivals from furniture retailing industry.

IKEA’s logistics and supply chain spread globally so therefore a lot of factors affect

operations, however company still manages to strive on the market and moreover, to show such

high profitability results. IKEA trademark is well-known globally; consumers visit IKEA store in

all over the world and behind this brand there is huge mechanisms working as an hour that

creates effect of ‘everything under control’. IKEA performance is based on the efficient use of its

strength; and by eliminating weaknesses company creates better future for itself. IKEA

objectives rely on a single supply chain plan; however there should be better plans with more

16

potential of efficiency and reliability, better transportation and replenishment options. Increased

delivery performance, better understanding of demand and forecasts could bring more accuracy

into the IKEA planning system.

In our era of globalization it is hard to make any predictions, thought observation of the

trends and other indicators gives us imaginary scenario that portrays challenges, and those could

be faces by supply chain. Ecologically efficient business courses will impact on supply chain and

logistics decisions. This idea is understood and foreseen by IKEA, that is why creation of the

future supply chain is so important for the company, which is concerned with the sustainability

issues, so it has already developed strategic plan “People and Planet Positive” for 2020.

17

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