IKEA operations management
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Operations Management is how organizations produce goods and services (Slack et all, 2010).
Organizations must be able to align their processes to fulfill customer requirements and ensure they are satisfied, which leads to careful planning and if successful to a competitive lead.
This reports focus on IKEA, and how IKEA operations management has made them one of the leaders in retail in the world, with a deep analysis of IKEA corporate organization and operations management.
IKEA is the most successful furniture retailer in the world. The product line consists of well-designed furniture at low prices. During 2011, IKEA has reported 25.2Billon Euro total revenue and 2.966Million Euro net income. This success was not achieve in one day; it took long time and careful planning in order to achieve customer requirements
COMPANY PROFILE AND SITUATIONAL ANALYSIS
IKEA’s is global organization with sales in more than 250 own stores in 24 countries and 32 external franchisees in 16 countries. The stores are supplied through 31 distribution centers, or directly from the 2000 suppliers in more than 50 countries. IKEA’s supply chain consequently has a global spread with both sales and purchasing in all major regions of the world. IKEAs growth has been tremendous and sales are still growing. Currently IKEA plans to open 10-20 new stores every year with a goal to double sales within the coming five year (IKEA, 2012).
Considering the pace of growth in sales, the many stores and warehouses, and the fact that some business areas change up to 30% of its assortment every year, supply chain planning is a real challenge. The supply chain needs tight control and high levels of visibility to keep costs down and avoid obsolete inventory and/or stock outs.
The IKEA supply chain is mainly make-to-stock (MTS) and only a few products are made to customer orders. Consequently, the entire supply chain is heavily dependent on forecasts. The regions and the stores have traditionally had a strong power and a high degree of local freedom in terms of planning and placing replenishment requests. This has led to a fragmented supply chain planning with local optimization and a lot of manual intervention with plans throughout the supply chain.
Furthermore, due to frequent shortage situations some regions have purposely overestimated demand to ensure delivery, which in turn has led to imbalance in terms of demand coverage. Hence, some markets have suffered from stock outs during long periods, whereas other markets have ended up with obsolete inventories. Forecasting has been done on a regional level with approximately 120 users striving for different goals and using different methods. Part of the explanation to this is that IKEA has lacked a common and structured tactical planning of demand and replenishment. In terms of capacity planning, all different parts of the supply chain (stores, warehouses, regions, etc.) tried to optimize its own part of the supply chain, leading to a set of imbalanced supply plans with a low and unstable total throughput with long
Replenishment times for the supply chain as a whole. The above mentioned situation led to a number of problems with direct impact on performance in a number of ways. First of all, the supply chain had a functional orientation with limited transparency, leading to a reactive behavior with fluctuating goods availability (sometimes stock out situation and sometimes over stock). IKEA has also used extensive manual work in its planning processes and the planning was based on fragmented and unreliable Planning information.
Hence, there was a lack of trust between different parts of the supply chain, which even further have enhanced the bullwhip effects in the IKEA supply chain. Other problems related to the supply chain performance was difficulties to get enough attention of data maintenance, the lack of proper follow-up tools to monitor forecast deviations, hard to change mindsets among users, no synchronization of order and stock data, to name but a few.
To overcome the difficult situation, IKEA initiated a program (cluster of projects) aiming to taking better control of its supply chain, and enhance performance in terms of delivery service and costs. A new global planning concept was developed and is currently being implemented. Its cornerstones are mutually integrated planning processes, a centralized planning organization, focus on data quality and use of advanced software support.
GROWTH AND PROFITABILITY
Global sales in Fiscal Year 2011 were 25.2 Billion Euros (23.5Billion Euros in FT 2010).
The operating income in FT 2011 was 2.9 Billion Euros, an increase of 0.2 Billion Euros of FY 2010.
Fig: IKEA Operating Income
Fig: IKEA Revenue
IKEA generates 79% of its sales in Europe, 15% in North America and only 6% from Asia.
The main financial principles of IKEA are financial stability, independence and flexibility, as a result, most of their profits are reinvested in the company in order to grow
IKEA’s success is directly linked to its culture, which encourages all employees to share values like togetherness, cost-consciousness, respect and simplicity (IKEA, 2012).
IKEA has also a high commitment to human resources practices in order to identify the employee needs, ambitions and capabilities. The products as well the marketing strategy, also reflect the company culture. The products are named after Swedish cities or famous Swedish people, and IKEA’s colors are yellow and blue, the colors of the Swedish national flag.
IKEA’s collaborators are very important, and without them IKEA was not able to invent and produce its products. Nowadays, 10000 products are manufactured by 2000 suppliers and transported to IKEA stores. IKEA has introduced local offices to their suppliers in order to monitor them but also to help creating new products in cooperation with them (IKEA , 2012). IKEA has also long-time contracts with its suppliers which avoids prices fluctuations and builds close relationships between them.
IKEA does not have real competitors.
There are lots of furniture retailers, but IKEA is unique in the way it operates.
It operates worldwide with well-designed products at low cost.
Wide range of well-designed products
Focus on innovation
Large network of suppliers
Economic of scale
Strong brand image
Sales via Internet
Global expansion – Asia and Latin America
Product standardization – problems doing business in Asia
Low level of customer service
Products unsuitable for older people
Stores layout – just one entrance and just one exit
Competitors trying to operate like IKEA
Replace/Substitute/Repair products or parts
Economic recession in Europe
Demographic factors – Aging in Europe
As part of the national or global trends and changes, IKEA is just one example of firms that are successful in both domestic and international business. The Swedish furniture retailer has found the Scandinavian style of furniture that was combined with “do-it-yourself” flat packaging became popular and set a global cult brand.
IKEA due to the economic changes and trends is adopting different kind of strategies that will take an appeal on their customers and aiming to own the customer loyalty. The strength of IKEA grew from the ownership transfer of the business to the Stitching Ingka. It made the company adopt other furniture style such as dinnerware, lightings and even rugs. Yet, the economic conditions affected the company’s market performance and declared a slowdown because of lacking the strategic direction. In order to generate the high performance of the business, IKEA considers exchange rates, low cost suppliers, lean manufacturing.
The IKEA used quality technology and systems to promote the shorter queues, proper scheduling, tracking and trading patterns, and staffing. It aims to be more productive and establish employee preferences. The system made the IKEA in a position to ensure the right number of staff in a right place and in a right time to match the unique trading pattern s at each stores of IKEA. The company view in optimizing everything from the supply chain is also optimizing and managing the workforce to create an efficient store environment and keep customers happy
IKEA contributed much in the society as they provide opportunities in people and the employees are entitled in different benefits such as insurance and pensions. Moreover, the company promises to provide more high quality furniture that sticks to their original concept – stylish furniture at low prices.
The legal compliance of IKEA is strictly implemented with the relevant and applicable laws and regulations that pertain to the environment, social and working conditions. The company also scheduled the most demanding requirements to be specific in maintaining the list of laws and regulations and with the procedures
With regards to the environmental factors such as the air, noise, and water, inspections are implemented to ensure the company provides corrective actions within the stipulated time. The environmental inspection is part of the legal documentation and environmental authorities as the business operations are on-goings and maintains the competence
Recycled and Renewal materials
Finished products(beds, sofas, etc.)
Good business behavior
Prevent child labor
Realistic room settings
Specified retailer centers
Delivery of products
As per Slack (2010) , there are five basic performance objectives that apply to all organizations: quality, speed, dependability, flexibility and cost .
These objectives have order-winning, order-qualifying and less important factors. “Order winning factors are those things which directly and significantly contribute to winning business. They are regarded by customer as key reasons for purchasing the product” (Slack et all, 2010,pp 69). Simplified it is what a company does in order to make customer buy their products and not from their competitors. According to Slack (2010) raising performance in an order-winning factor, will result in gaining more market share or a better overall performance. Order-qualifying factors are “those aspects of competitiveness where the operation’s performance has to be above a particular level just to be considered by the customer” (Slack et all, 2010, pp.69). Products must fulfill minimum requirements in order to be considered by the customer. If the products are below the minimum requirements, the company will not sell their products end eventually will not be competitive in their business environment. Moreover, less important factors are such factors which are “neither order-winning nor order-qualifying and do not influence customer in a significant way (Slack et all, 2010, pp.69).
“Quality is a major influence on customer satisfaction or dissatisfaction” (Slack et all,2010,pp.40). Quality for IKEA means that their products are functional and safe to use. The quality of IKEA’s products is subject to the international standard ISO 17025. Due to this, IKA has established test laboratories, where the products are tested in order to meet the customer’s demands, not only in terms of design, function and price, but also with regards to safety, stability and durability (IKEA Right Quality, 2010). As per IKEA slogan , : Is is our customers that we want to come back – not our products! ” (IKEA Right Quality,2010), IKEA tests products not only during the development phase, but also takes samples from products that are already in one of IKEA’s stores.
Quality in this case is an order-qualifying factor for IKA, because if the safety and function is not guaranteed, customers would not consider buying one of IKEA’s products. Nevertheless, quality can be seen under a different aspect, the customer have to go all the way through the store before they can pay for the products, therefore, IKA needs to present their products within the stores in an attractive and appropriate way. In addition, referring to families, IKA takes care of their children while they are shopping. This additional service leads to more quality for the families as well to customer satisfaction. In this case, quality is an order-winning factor for IKEA.
“Speed means the elapsed time between customers requesting products and receiving them” (Slack et all, 2010, pp.40). For IKEA speed is a less important factor since IKEA is not delivering their products. Customers chose their products and pick them up by themselves. Customers also take over the transportation from the store to the home. The speed is depending on the customer and not IKEA.
“Dependability means doing things in time for customers to receive their goods exactly when they are needed or at last when they were promised” (Slack et all, 2010, pp.42). For IKEA dependability means to assure that the wide range of products that IKEA offers is available for customers on time. Every August IKEA publishes its catalogue to millions of customers in 31 countries (The Ikea catalogue, 2011). IKEA must be prepared to handle the run on its products. To ensure that all products are sufficient available on time, IKA has introduced local offices close to their suppliers in order to monitor them.
In addition, IKEA has long-terms contracts with its suppliers, which has the advantage that the processes between them run more smoothly due to the experience and consequently the improvements they have made it in the past (Baraldi, 2008, pp.99). Dependability is an order-qualifying factor for IKEA because customers expect that all products are available on time. A customer who goes to IKEA and does not find the product as showed in the catalog, will be frustrated and may consider not to buy further products of IKEA.
“Flexibility means being able to change the operation in some way. Specifically, customers will need the operation to change so that it can
provide four types of requirement” (Slack et all, 2010, pp.46):
Product flexibility – the operation’s ability to introduce new or modified products;
Mix flexibility – the operation’s ability to produce a wide range of products
Volume flexibility- the operation’s ability to change its level of output, to produce different quantities of products
Delivery flexibility – the operation’s ability to change the timing of delivery
For IKEA product flexibility is essential for the company’s success. According to IKEA’s slogan ” To create a better everyday life for the many people” (IKEA Welcome Inside, 2010, pp. 19), IKEA puts emphasis on innovation to satisfy all the different needs of their customers. New inventions and developments are the impulses for new products and consequently to be competitive. Furthermore, IKEA has the ability to produce a wide range of products. There are about 10000 products in the total IKEA product range. The flexibility of IKEA regarding product and mix flexibilities are order-winning factors for IKEA.
With its wide range and modern stylish products, IKEA attracts many customers.
“To the companies which compete directly on price, cost will clearly be their major operations objective. The lower the cost producing their goods, the lower can be the price to their customers. Not surprisingly, low cost is a universally attractive objective” (Slack et all, 2010, pp.48).
The main goal of IKEA is to offer a wide range of well-designed, functional home furnishing products at prices so low that as many people as possible will be able to afford them (IKEA Welcome Inside, 2010, pp.7). This goal reflects the importance of the cost objective to IKEA. As multinational company, IKEA benefits of economic of scales. IKEA offers their products at low prices, which attracts more customers as IKEA would offer their products at high prices. Because of this, the costs to produce one product are going down, which allows IKEA to offer them at low prices. Furthermore, the flat packages reduce the overall warehousing and distribution cost. The common packages have most of the time space between the surface of the package and the product inside. This space or unnecessary air cost money. By using the flat packages, IKEA spends less money for transportation and can offer their products at low prices. Moreover, the customer contributes to IKEA’s low prices.
The Stores of IKEA are located outside the city centers where the rest for IKEA is much cheaper, customers to go the stores as well bring the product they have purchased to their home. In addition, customers also put the product together by themselves. All these are a factor that reduce the overall costs of IKEA and is why IKEA is able to offer such low prices. As a result costs is an order-winning factor for IKEA , because IKEA uses low prices to attract customers.
The polar representation shows the relative importance of IKEA’s performance objectives to its products. According to Slack (2010) it is called polar representation because the scales which represent the importance of each performance objective have the same origin.
The bold line describes the relative importance of each objective. The close the bold line is to the common origin, the less important is the objective to IKEA
Fig: IKEA polar representation
As can be seen in the polar representation the objectives cost, quality and flexibility are the order-winning factors for IKEA. Dependability is an order-qualifying factor and speed does not influence IKEA’s customers in a significant way and is therefore a less important factor.
Cost can be seen as an order winning or qualifying factor. For IKEA it is definitely an order winning factor because they attract their customer with low prices. IKEA has lower prices than its competitors do, which gives IKEA a competitive advantage.
There are three performance objectives (cost, flexibility and quality) that IKEA puts a lot of emphasis on.
In the following sections, IKEA processes will be identified, and analyzed how the processes meet the performance objectives with the interrelation between product design and process design.
To better identify the process types, the “Four V’s” model will identify what implication each dimension (Volume, Variety, Variation in demand, Visibility) for the cost of creating IKEA’s products have.
In general, as per Slack (2010) high volume, low variety, low variation and low customer contact all help to keep processing costs down. With 10000 different products, IKEA produces a high volume of products. Due to the economics of scale the units’ costs are low. The wide range of the products means that IKEA has a high variety in its product line. Moreover, the demand is rather predictable for IKEA. Therefore, the variation in demand can be seen as low. Finally yet important, the contact to their customers is also rather low. Customer choose their products and pick it them up by themselves, there are some staff and information desks where customers can ask for help , but overall IKEA has low contact with the customers.
Fig: IKEA 4 V’s
Based on the “Four V’s”, it can be seen that IKEA manufactures a high volume and a high variety of products:
Fig: IKEA Variety Vs Volume
Although IKA produces 10000 variants of products, IKEA is using mass production to produce its products, the different variety of its products do not affect the basic process of production (Slack et all, 2010, pp.93) .This means that the variety is high to customers but the variety in the production process is low.
There are advantages as well disadvantages of mass production. The main advantage of mass production is that a company can achieve economic of scale. “Economic of scale in production mean that production at larger scale (more output) can be achieved at lower cost (i.e., with economies or saving)” (Hussain, 2010, pp. 149) . Since IKEA is producing a high volume of products, the company is achieving economic of scale as illustrated in the graphic below, which is in fact a competitive advantage:
Fig: IKEA average Costs Vs Output
Furthermore, it has the advantage that it reduces nonproductive activities such as preparing materials and tools and it diminishes human errors due to standardization of the operations, in addition, workers perform simples work, as the tasks are repetitive.
This allows companies to hire workers with limited technical or mechanical skills after a short training period and will reduce the employees’ costs in the long term (Dolgui & Proth, 2010, pp. 197).
Nevertheless , there are some disadvantages, the rigidity of mass productions systems is one, which makes any production change very costly, and the variety of products that can be produced on the same system is limited (Dolgui & Proth, 2010, pp. 197).
Mass production , in one hand, has the advantage that IKEA can achieve economic of scale, as already mentioned in order to meet the performance objective cost, in the other hand, it has the disadvantage that the inventory level is high which in particular means that the products of IKEA are make-to-stock (MTS). “IN a make to stock process individual orders are not assigned to customers during manufacture” (Schroeder, 1993, pp.174). This in particular means for IKEA that the company must align their processes in a way that reduces their overall stockholding cost.
To reduce the costs for storing the products, IKEA uses flat packages that do not waste unnecessary space. Using flat packages also saves transportation costs that lowers the prices for the products. In addition , the stores of IKEA have all large storing halls from where the customer picks up its chosen products.
This means that the products will be delivered right away from the suppliers to the stores. There is no between storage. Referring to IKEA’s stores, they are also located outside the city centers, where the rent for IKEA is much cheaper. Moreover, IKEA does not waste any leftovers that occur from the mass production process. For instance, leftover from a table will be used to produce a chair.
Finally yet important, the customer has a significant influence on the production costs, IKEA produces the components of the furniture; the installation does the customer. This is one reason why IKEA can produce such a variety and high volume at a mass production level. Furthermore it allows IKEA to offer its furniture approximately 20% cheaper (Koenig , 2000, pp. 67).
Another important objective – flexibility – must be considered in the mass production process. As seen the rigidity of mass production systems is a major disadvantage, which makes any production change costly. Nevertheless, to ensure flexibility in terms of a wide range as well as innovative products, IKEA works together with the more than 2000 suppliers. Most of the production occurs at the facilities of the suppliers. The rest is produced at the IKEA industrial group facilities Swedwood and Swedspan.
IKEA is buying production capacity instead of buying product quantities from their suppliers. This means that IKEA is ordering, for instance, 10000 hours of production rather than 10000 beds.
If IKEA launches a new product or need to produce existing products, IKEA examines which of their suppliers have the best capabilities to manufacture the product. The next step is that IKEA orders production capacity and 24/7 production at the suppliers facilities can begin, because IKEA cooperates with such a high number of different suppliers, IKEA can provide such a high variety and high volume to their customers an can eventually be flexible.
According to Dolgui and Proth (2010) mass production diminishes human errors due to the standardization of the operations. In addition, the quality of IKEA’s products is subject to ISO 17025. Due to this, IKEA has test laboratories, where products are tested in order to meet customer’s demands in terms of function, price and also safety, stability and durability (IKEA Right Quality, 2010).
PROCESS DESIGN – PRODUCT DESIGN
Process design and product design are interrelated. Usually it is common for manufactures that they fist manufacture or designs a product and then will target a price for the product and set up process that endure that the product will be delivered to the customer. IKEA is going it the other way around (Margonelli, 2002). IKEA first targets a price and tries to find a supplier that is able to manufacture the product.
Fig: Process Design relation with Product Design
For example, IKEA is planning to design a new chair; they will target a price (for instance, 10 Eur). Afterwards, IKEA chooses a manufacture that has the capability to manufacture the chair, and then designers of IKEA will design the chair according to the customer trends. Finally the chair will be manufactured in large quantities to lower the unit costs and eventually distribution centers will deliver the chair to IKEA stores. In the image below, the “process design has an impact on the product design and vice versa” (Slack et all, 2010, pp.88)
Fig: Process Design – Product Design
Today, IKEA is one of the most successful furniture retailers in the world. This means the operations management of IKEA has been set up processes, which meets the performance objectives in many ways, therefore it is difficult to find many areas for improvement, especially regarding the mass production process. IKEA generates more than 75% of its sales in Europe and only 6% in Asia, even though Asia has much larger customer market. IKEA has its background in Sweden, but IKEA should be interested in increasing its sales in Asia.
The key reason why IKEA is not successful is that the “Do it yourself” culture, among Asian customers does not exist in the same way as in Europe. Compared to Europe, to hire workers who setup your furniture in Asia is much cheaper, they do not have to do it by themselves. However as already mentioned IKEA produces only the components of the furniture; the installation does the customer. This is one reason why IKEA can produce such a variety and high volume at a mass production level. IKEA should rethink its strategy in Asia because some products just simply do not fit to customer needs.
Maybe IKEA should provide finished furniture to the Asia customer, but the question is if IKEA could provide finished furniture at such low prices. The production process must be redesigned in particular for Asia. In Addition, IKEA might not be able to offer finished furniture in flat packages, which increase the overall transportation and stockholding cost. Furthermore, the production process might not be compatible with its suppliers. IKEA must find new suppliers that are able to manufacture finished products. These are all expense factors, which lead to the assumption that it is not feasible to adjust IKEA’s processes in order to meet the needs of Asian customers. Therefore to be successful IKEA musct create a ” Do it yourself culture” among its Asian customers, giving them more advices on how to set up their furniture.
In long term it can provide good results in the Asian market.
Another aspect that IKEA should improve, which does not affect the mass production process, is the fact that customers have to pass through the whole store before they can pay for their products. This distracts customer who want to buy only one product. IKEA should provide more exits and/or cash desk allowing customers to pay more quickly.
Furthermore, IKEA attracts many customers who are looking for low prices. IKEA’s marketing strategy is based on this. This means that high income customers might not regard to buy at IKEA , because IKEA is seen as a low price furniture retailer. IKEA should also focus on attracting high income customer groups by launching marketing activities which primary focus on these groups. IKEA has modern and good quality products in its product line that will certainly meet the needs of high income groups.
In addition, as Europe’s population is aging, it’s important for IKEA to focus also on older population, having furniture to fulfill their needs.
Based on the analysis in this report, the most important objective of IKEA is the cost, the processes objectives are to reduce the costs of the final product. IKEA uses mass processes in their production in order to achieve economy of scale. Furthermore IKEA is pioneer in using flat packages that reduces transportation costs as well stockholding costs. However, IKEA also focuses in flexibility and qualitity, which further satisfy the needs of the customers. Thorught IKEA’s high commitment to innovation the company is able to provide modern, stylish furniture that satisfies customers in terms of flexibility, and with the ISO 17025 standard, IKEA guarantees that their products have quality (are functional and safe).
Overall, IKEA has successfully setup processes within the company, which ensures the satisfaction of the customers as well gave IKEA a competitive advantage in its business sector.
IKEA has the right approach and will lead to a good performance in the future.
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