Supply Chain of IKEA:

1.    Introduction

IKEA or Ingvar Kamprad Elmtaryd Agunnaryd is a value driven company that has the passion to bring quality life at home. According to IKEA (2017), it is a multi-national organization that has it’s headquarter in Netherlands. IKEA deals in home accessories, kitchen appliances and ready-to-assemble home furniture. Since 2008, IKEA has gained first position in furniture retailing in the world, just after 70 years of its inception in 1943. The company has vision of creating a better routine life for people across the globe. In order to achieve its mission, company offers a wide range of functional and well-designed products of furnishing a home at a price that is affordable for majority of people. For delivering quality products at low prices, IKEA works hard, invests in the products that are highly automated, produces large volumes of products and maintains long-term and healthy relationship with its suppliers; all of these steps enable it to optimize its entire value chain (IKEA, 2017). This report will be discussing different aspects of supply chain of IKEA, in order to evaluate its systems and study impacts of its supply chains and systems on customer value. In addition, it will explore IKEA’s supply chain structure and study influence of postponement, buggering mechanism, uncertainty and variation on company’s supply chain. Lastly, it will be discussing some chosen competitive priorities that have been set by IKEA.

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2.    Supply Chain and Customers Value

According to Hines (2013), supply chain strategies in an organization are designed to develop a system where all activities are linked in a chain, so that works can be performed in an integrated form to deliver final product or services to customers. Processes are integrated to increase customer value by delivering efficient products and services to them. Hines (2013) asserts that value can be added by decreasing costs, so that price can be reduced and customers’ can have more choice. Logistic Planning Associates (2017) also assert that supply chain strategies are developed to increase customer values and satisfaction, by fulfilling their demands in a cost-effective and efficient manner. It should be noticed that decisions about supply chains have gained significant importance in field of businesses’ administration. According to Flint and Larsoon (2008), nowadays manufacturers from different industries have identified the fact that supply chain is a complete process and activities of each member involved in this process determine profitability or loss of whole process.

Hines (2013) mentions that strategic choices refer to different sets about “what to do” and “how to do”. These strategic choices which determine if a business is an order winner, order qualifier or order loser include: 1) low-cost strategy, 2) market segmentation, 3) market differentiation, and 4) product differentiation. According to Jacobs and Chase (2008), order winners are those organizations that differentiate their services or products from other organizations on the basis of a criteria. Order winner criteria may include differentiating on the basis of price of product, its quality, its reliability, etc. On the other hand, order qualifiers are products and services of firms that only reach the criteria of being considered as substitute or candidate products in market, and they don’t have a particular feature which differentiates them to add value for customer.

2.1.           IKEAs Strategic Choice:

Regarding supply chain of IKEA, as far as its strategic choices are concerned, the company has two value-driven strategies i.e., producing and selling products at low cost/prices and product differentiation. According to Hines (2013), low cost includes achieving economies of scale, designing efficient operations and competitive purchasing and sourcing from suppliers. In order to maintain low prices of its products, IKEA has adopted several strategies, as explained below:

  • Firstly, it has the strategy stating, “You do your part. We do our part. Together we save money” (Leinwand and Mainardi, 2016, pp. 22). To illustrate, IKEA does not hire sales personnel to provide sales services to customers, rather it has developed a system of self-service. Customer have to choose their product, collect it, transport it and assemble it. Henceforth, IKEA decreases its costs of hiring human resources required for performing these tasks, thereby allowing it to decrease price.
  • Secondly, according to Scilly (2017), IKEA maintains its low prices by sourcing resources from low-wage countries and countries where resources are cheaper like China.
  • Another cost reduction strategy of IKEA is discussed by Ruddick (2016), who stated that the company has started using new raw material like bamboos that is considerably helping it to maintain low cost and hence the prices of its products. So, the basic differentiation of IKEA from its competitors is its pricing strategy that makes it an order winner.

3.    Competition

According to Natasha (2015), there are two main competitors of IKEA in furniture industry including Wal-Mart and Target. These firms can be compared on three attributes that create value for customers including cost, accessibility and customer support. Natasha (2015) explains that best pricing strategies among three of these firms has been adopted by Wal-Mart, which has reasonable prices and shipping. Regarding pricing, Natasha (2015) ranks IKEA at second position. As far as accessibility and product choices are concerned, IKEA has better performance and strategies than competitors. The positioning of competitors of IKEA can be seen in figure given below.

FIGURE 1 – Competitors of IKEA, Wal-Mart and Target (Adapted from Natssha, 2015)

Figure-1 shows that as compared to its competitors, Target has more customized designs, but it offers products at higher prices. On the other hand, IKEA’s products are more customized than Wal-Mart with approximately same prices. Hence, Wal-Mart is the biggest competitor of IKEA, which focuses on low prices of its products. However, IKEA needs to be more determined towards lowering its prices to maintain its position in market and focus on customization, so that more value could be added to customers’ preferences.

4.    Variations and Uncertainty in Supply Chain of IKEA

The variations in the supply chain occur due to three reasons that include demand variation, process variation, and supply variation. Demand variation is considered as the most important challenge by experts (Thomas, 2012). The demand is estimated through forecasting process, and the products are made according to forecasts. In some of the business regions of IKEA, there are some variations in demand of the product and the products are demanded more than that was forecasted, which leads to a shortage in supply chain of IKEA in those regions. In addition, due to shortages in supply of products in recent past in some of IKEA business regions, demand was overestimated which resulted in surplus products and heavy finished products inventories (CIPS, 2013).

IKEA is operating business globally and has almost 280 stores worldwide. Hence, it has vast business operations and there are always some fluctuations and uncertainties in demand of IKEA’s products. As the purpose of business of IKEA is to provide cost effective products, it has to manage supply over long periods of time probably several months. Pertaining to long time period, a gap occurs in supply and demand. Higher lead times imply that there is inaccuracy in the planning of demand and this situation can lead to two issues. Firstly, it affects the sales due to stock-outs; and secondly it increases inventory due to low sales than planned. Another issue faced by the supply chain of IKEA is uncertain behavior of suppliers. It should be noticed that suppliers are backbone of such industry, and a lack of commitment in fulfilling supply needs would lead to creating a supply-demand gap (Abouhenidi, 2014).

4.1.           Buffering Mechanism

In order to reduce the loss from variations, buffering mechanism can be used in manufacturing businesses. Buffering can be considered as a process to maintain enough supplies to successfully run business operations. Buffering can be of three types that are: the capacity buffer, inventory buffer and time buffer (Watson, 2013). Capacity buffering can be of different shapes. The business of IKEA depends largely on make-to-stock strategy and there is less need of capacity buffer. However, to some extent the business deals in made-to-customer strategy and the shipment of supplies take time to become available. In this regards, IKEA needs to go for speedy shipment. Furthermore, it should focus on capacity planning to meet demand needs.

Inventory buffering refers to stocking inventory to cover the additional demands than forecasted demands. Regarding supply chain of IKEA, the company is working on make-to-stock strategy, so its supply chain heavily depends on forecasts. The inventory is buffered according to demand forecast in supply chain of IKEA. There should be large inventory buffers to meet the additional demands from customers. Time buffer is used when there is a lack of capacity or inventory buffers and in time buffer customers have to wait to get their desired products. However, as IKEA has a strong supply chain system, time buffering is not applicable.

4.2.           Postponement

            Postponement refers to delaying in making of final goods until the final order is received from the customer (Metthews and Syed, 2004). To maintain an efficient supply chain, IKEA largely deals in make-to-stock with a little focus on make-to-order. This means that the inventory is used to make the products, and all products are made according to demand forecast before customers place their orders. However, to deal with the customized orders, semi-finished goods can be used under the procedure of postponement and final goods can be prepared as the customer demands them (CIPS, 2013).

4.3.           Supply Chain Management Practices

IKEA has faced some problems due to the variation and uncertainty in demand and supply processes. These variations also cause stock-out and can also results in surplus inventories. Now-a-days, the management of IKEA is trying to overcome these issues of demand variations and supply availability, through buffering process.  A program has been initiated by the management of IKEA that aims at developing a control on supply chain and to overcome this issue. The aim of the program is also to enhance performance in terms of service and quality. Postponement process is also supported by the management of IKEA to meet the customized demand on time.

5.    Supply Chain Structure of IKEA

Structurally, the Supply chain of IKEA has five main phases including:

1) Purchasing raw material

2) Manufacturing furniture

3) Distribution

4) Retailing and

5) Reaching the final consumers.

There are three sectors involved in managing the whole supply chain of IKEA successfully. These include primary sector (first phase), secondary sector (second phase) and tertiary sector (third and fourth phase).

5.1.           Primary Sector

The primary sector includes first phase that is development or sourcing of raw material including oil, timber, textile product, wood, steel and chemical required for production (IKEA Raw Materials, 2017). Figure-2 shows complete process of sourcing raw materials in detail. According to Contreras et al. (2005), IKEA believes in sourcing environmental friendly and sustainable raw material for its products. IKEA designs its own products that are involved in the primary sector, and this design is based on raw material collected from 1300 suppliers of IKEA from approximately 50 countries (Business Case Study UK, 2017). Four types of raw materials are being outsourced by the company including 1) iron ore and limestone, 2) forestry and timber, 3) raw leather and textile and 4) chemicals. For the purpose of gathering iron ore and limestone, IKEA has two main suppliers; one of them is from China, while other is from Taiwan. Baosteel Co. Limited of China provides iron ore to IKEA while Stell Stone Co. Limited supply steel stone (Fastener World Inc., 2017). On the other hand, forestry and timber raw material are supplied by Vietnam and Karelia from Russia to Swedwood Group of IKEA as discussed by FSC Watch Organization (2011). Royal Leather Limited of Pakistan is the main supplier of leather products to IKEA. All these sourced materials are gathered in IKEA’s manufacturing unit where IKEA manufacture its own products as shown in figure-2.  

Figure-2: Supply Chain of IKEA

5.2.           Secondary Sector

In secondary sector, IKEA utilizes the raw material sources from different suppliers in order to develop, build or manufacture its finished products. According to IKEA (2017), its main production units are situated in Germany, Poland, UK, USA, and Sweden. All these units help to manufacture products and add value for customers of IKEA. IKEA focuses on using the smallest possible amount of raw material for manufacturing, in order to make its production sustainable and less costly. For instance, IKEA is saving timber and wood by making hollow legs for furniture like in its one of the product is OGLA dining chairs (Business Case Studies UK, 2017). For ensuring quality and value added to products, IKEA has set minimum requirements through its code of practices called IWAY. According to IWAY Standards (2017), the manufacturing units need to abide by code including 1) following international and national laws, 2) not utilizing child labor forces, 3) taking care of employees, 4) becoming environmentally friendly, 5) following requirements of safety and health, 6) making contributions to recycling, 7) reducing emissions and waste and 8) using glues and woods from sustainable forests only. 

5.3.           Tertiary Sector

Tertiary sector of supply chain of IKEA provides the required services for meeting needs of final consumers. The parties involved in this sector include: 1) customer service, 2) insurance, 3) distribution and 4) retailing. In this sector, IKEA delivers the final product to the consumer through its distributors or retailers. These retailers set finished goods in a realistic room setting and help the customer to do self-service and handpick products by utilizing trolleys.

These processes of IKEA is clearly portraying two main focuses of the company, which are sustainability and low prices. As in the first question, it was discussed that IKEA’s competitive and preferential strategy is to make the products from sustainable materials with lowest possible cost. These two factors are helpful to add value to customers’ preferences for furnishing choices.

6.    Impact of Pricing Strategy of IKEA

It has been discussed in the first question that competitive priorities of IKEA include product differentiation and pricing strategy. However, the main focus of the company is on lowering its product’s prices. These competitive preferences of IKEA impact different components of its supply chain process. The major impact can be seen on three of the factors including global/local sourcing logistics and sustainability.

According to Lu (2017), as sustainability and prices are a major focus of IKEA, so its pricing strategy impacts all of its decisions. For instance, in order to maintain its low pricing strategy, IKEA maintains good relationship and communication with its suppliers for sourcing. The low prices can be retained only when IKEA outsource raw materials in bulk and have many suppliers who supply same products in order to lower bargaining power of suppliers (Inderst and Wey, 2007). This decision of IKEA to source raw materials from 50 countries is dependent on its strategy of keeping the prices down because the material is being outsourced from the country where it is available in abundance and at low prices. An example of this strategy is sourcing leather from Pakistan, where prices are low but the quality is high.

Secondly, decisions of IKEA about its logistics is also based on its pricing strategy. According to IKEA Logistics (2017), its logistic approach is decided to keep the prices low. Hence, in order to maintain its low prices, the products are being produced and supplied to customers in a cost-effective and direct way. IKEA decides whether to use train, boat or truck for transporting the product. For instance, its flat pack’s policy helps its logistics to deliver more products in a single trip of transport. In order to keep its prices low by lowering its product cost, IKEA uses a unique inventory management system that is minimum/maximum settings (Lu, 2017). In this setting, IKEA has a large number of products available for the customers for 2-3 days, however, inventory is not being kept too high to cost the stores more. This saves the cost of arranging too many products in store and difficulty of managing them.
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Thirdly, in order to increase the efficiency of its operations for offering low price products, IKEA deploys technology as well. For instance, according to RIS News (2013), IKEA has installed 12000 Electronic Point-of-Sales (EPOS) across 25 countries’ i 300 IKEA stores. It utilizes Wincor Nixdorf EPOS system. According to CIO of IKEA, “Wincor Nixdorf, means not only less coordination in equipping our stores worldwide but also significantly lower rollout and operational costs” (RIS News, 2013). It can be seen that IKEA has molded all of its supply chain matters just for achieving its objective of providing low-cost products to its customers.

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