Supply Chain Management and IKEA Argumentative

Since first founded in 1940s, with its mission statements to “create a better everyday life for the many people”, IKEA’s business idea has achieved great success. In this report, we would mainly focus on IKEA’s logistics function, We begin by analyzing IKEA’s supply chain, adopted strategy, the internal and external environment. Second, we investigate into IKEA’s logistics operations. At the last part, we discuss the problems of business and logistics aspect IKEA faces, and give our advices to solve them. IKEA’s Supply Chain Analysis

For the IKEA’s supply chain, it includes suppliers, manufacturers, retailers and customers. Firstly, IKEA has thousand amounts of suppliers provide raw materials and components for the manufacturing acticities globally. It also has cooperation with a number of suppliers as joint owners or financiers in Poland, Slovakia, Russia and China such as Konakovo factory (Russia) providing four different items for IKEA’s Moscow store, Priozersk factory (Russia) providing five different chair models, RPOFIm (Poland) providing three different types of office chairs etc.

This can ensure the continuous flow of manufacturing services and maintain a better customers service to keep existing customers. Secondly, for the design and manufacturing parts, IKEA owns its whole of the design part and outsources a part of manufacturing process to other companies to produce. Swedwood is one of the outsourcing company to manufacture wooden furniture and components for IKEA to sell. Thirdly, IKEA cooperates with third parties logistics firms that transport a part of products to different countries globally. For example Cardinal’s logistics develops and implements innovative solutions to use the shortest route and time to deliver products to retail stores in United States.

IKEA’s Logistics Activities
1. WAREHOUSING
Warehousing is a part of the physical flow of goods and materials which is talking about to store, repackage, stage, sort and centralize goods or materials. Having an efficient way in warehousing can bring a lot of benefits to business such as reduce transportation costs, improve operational flexibility,shorten customer lead times and lower inventory-related costs. Ikea already did a great job in warehousing, it is using three types of systems to enhance the efficiency of warehousing. First, assortment warehousing that means the warehouse is held close to the source of demand in order to shorten the customer lead time. For the ikea , its warehouse attached to their retail stores. In some countries, Ikea would have showroom upstairs with the marketplace and warehouse downstairs in order to provide products in the shortest time.

Second, postponement warehousing that means the firm put off final assembly of goods until the last possible moment. So that ikea’s product is designed to be assembled by the customers rather than being sold before assembled. Its products provided with flat packages in order to minimise the space of store and delivery. The system of postponement warehousing will reduce the transportation costs and increase the flexibility of products. Third, break-bulk warehousing which is a form of cross-docking that means break the inbound shipment into some small outbound shipment. For the ikea, it uses cross-docking to receive large shipments from different suppliers and resort the goods into small shipment, which is meet the requirement of the individual store, to individual stores. This type of system achieves the benefits of reduce the transportation costs and enhance the customer satisfaction due to the customized shipment would shorten the lead time and increase the efficiency in transportation. These are warehousing systems used by ikea in order to reduce the transportation cost and have a better manage of inventory level.

2. DISTRIBUTION CHANNEL
Distribution channel is the process of moving and storing products from the supplier stage to the customer stage in a supply chain. The designing of the distribution channel is influencing the customer satisfaction and the cost of meeting customer needs. For the ikea’s designing of distribution network that is using two types of systems. First, retail storage with customer pickup that means the firm store products in the retailer stores and the delivered by the customer rather than the firm provides home delivery service. Ikea’s warehouse attached to their retail stores and it is a open-shelf warehouse and provide the shelf serve to customers. This type of distribution channel can shorten the lead time and reduce the transportation cost and inventory cost. Second, in-transit merge network that means the products would deliver to warehouse and customers from factories when the order had made. Ikea offers mail order in Europe and Canada. So this distribution channel is using for the mail order in order to increase the flexibility and lower the inventory level. So it is the why that ikea being good in distribution network design.

3. INVENTORY MANAGEMENT
For inventory management, IKEA employs an in-store logistics manager to manage the order processing. Using a proprietary system which is developed by IKEA, therefore, manager can set and response to stock level inventory reorder points. IKEA will collect the point-of-sale data and warehouse management system data to manage the inventory and distribution center level through their unique system. In the past most retailers forecasted the inventory level based on the minimum order quantity before reordering and maximum amount of a particular product to reorder at any one time. However, IKEA applies the proprietary system which catches anomalies to control inventory. If manager forecasts wrong demand, this system can direct in-store logistics to go the location and conduct the manual stock checking. This proprietary system can match the actual demand and avoid the higher level on safety stock to store. Therefore, IKEA will have more accurate data and forecasting than the traditional replenishment process. Let’s IKEA can save costs on the over or under demand problem and level of inventory control.

4. MATERIALS HANDLING
Apart from inventory management, IKEA also hires store good manager to respond the materials handling logistics. It can ensure that the process of materials handling is smooth and control effectively. One of the main actions is IKEA introduces the paper pallets to secured the load of multiple goods to destinations instead of wooden pallets. Since paper pallets are lighter than wooden pallets, it can reduce transportation cost on the weight if products ship to other area. Also, paper pallets can 100% recycling that can bring out less impact on the environment. It may help IKEA build up a good reputation and get market share due to eco-environmental friendly.

IKEA’s Internal Environment
1. IKEA’s Business Strategy
IKEA is a world-wide home furnishing manufacturer and retailer over the world. Many people are attracted by its innovative design of the products and Swedish style of home design. IKEA uses a hybrid strategy to run its business including cost leadership and product differentiation. First of all, the goal of IKEA is to sell Swedish deign together with high quality and low price. As IKEA source the materials most in developing countries such as China, IKEA could maintain a lower materials cost. Also, many of IKEA’s product are standardized which can adopt the advantage of economies of scale in producing a large volume of products. Due to many orders with high volume products, suppliers may lend a big discount to IKEA. As a result, IKEA could maintain low price products due to minimizing the manufacturing cost. Second, IKEA owns indirect differentiation base on different needs of people in different region. Those products could adapt to local market can be an attractiveness to customers. Above mentioned are the strategies let IKEA getting success in the home furnishing industry.

2. SWOT analysis – Strengths and Weakness
IKEA owns its strengths in home furnishing industry. IKEA has a large product variety which bases on offering different kinds of products in different regions. Those products are well designed, functional products at a low price and available for end users to have immediate purchasing. Also, IKEA’s product has a special design called ‘democratic design’ which means products reach the level of balancing three dimensions including price, quality and function. As we know that, IKEA can minimize manufacturing costs in two ways. From economies of scale as the demand of its product is very high and those products are standardized.

They can purchase a large quantity of materials to get a price discount.Second, IKEA has a contracted manufacturer SWEDWOOD could provide a low-cost source of supply to IKEA. However, there are weaknesses on IKEA’s business. IKEA is focus on cost leadership as their strategy which may be the attractive aspects that people shift to buy furniture from IKEA. Moreover, there is a conflict between high quality products and low price because high quality leading to high cost. Thus, the furniture retail segment is highly fragmented and IKEA is flanked by competitors in high-end specialty retailer and low-end discount retailers. Also, the scale of IKEA’s business is really large that causing hard to control the standards and quality of products. 3. BCG Portfolio Growth Matrix

For a company doing strategic planning, business portfolio analysis is indispensable. Boston Group growth-share matrix can be useful to help a company for positioning. IKEA’s strategic business unit is separated by region here. It is hard to divide IKEA by product line since the number is quite large.

European market is mature, which contributes 80% of IKEA’s turnover. Till 2012, there are only 28 IKEA retail store in Asia while compared with 245 in Europe. For Russia, IKEA entered this market only since 2000. IKEA allocates more resources to strengthen the U.S. market and develop the Asia and European market.

IKEA’s External Environment
1. SWOT analysis – Opportunity and Threats
Opportunity still gives chance for IKEA to do the improvement. Some customers are called budget shopper whose market is growing to provide opportunity to IKEA. The young families are looking for low-priced but attractive designed products so IKEA could further expand its target customer group to this type of people. For the threats, as more competitors enter into the home furnishing market and promote lower price than IKEA which may steal the market share of IKEA and reduce the competitiveness. Competitors may not only provide lower cost products, they may provide a better service like free delivery and free set up of furniture rather than IKEA charges the additional costs for the services. Aside from value-added services, competitors may copy the business model of IKEA like following the flat packed design in packaging the products. 2. Porter’s Competitive Force Model

For industry competitors, number of big DIY stores for home improvement selling, e.g. B&Q and Home Depot increases. And some hypermarkets try to diversify by selling furnishings, e.g. Wal-Mart. But they have achieved limited success till now since it is not their core competency. More retailers enter the furnishing marketby using e-marketplace, e.g. e-aution. But still not a big concern since IKEA has a quite large and well-established distribution network and has economies of scale. Broadly of furnishings and appliances are provided by IKEA. And being a necessity in daily life, furnishing has few substitutes. There are a lot of sources due to timber and other raw materials are not somewhat very special item. And due to global sourcing, suppliers have little bargaining power. There are alternatives and options provided by other furnishing retailers in the market. Customers can switch to other providers.

Problems and Solution
1. IKEA’s packaging difficulties
Although IKEA is a successful and popular company over the world, it still has some problems around the operating and logistics activities which may affect the business profitability. Owing to some products’ size are big and the packing is difficult to disassemble and combine such as sofa. When these products are put on the trucks, the truck’s capacity is not fully use and some space will be wasted. But IKEA lets this situation happen and does not have any measures to improve it. It causes the inefficiency in delivery the products and needs more trucks or transit times to transport the items to the destination. It makes higher transportation cost and earning profit will decrease. This problem is IKEA not fully use and waste the capacity of the truck. We suggest that when transporting the big size of items which cannot easily disassemble and combine during the transportation time, it can use light weight products to fill up the truck in order to transport the maximum volume of the products. This can expedite the transportation speed and save cost such as fuel cost. Therefore the company can provide higher customer service value and earn more profit from existing and potential customers.

2. Less Customization
Not enough customization, ikea provides standard products to customer which is lack of flexibility. Ikea’s strategy that is provide combination products for customer rather than provide customize products. So that ikea would not change their product design to fulfill customers’ special requirements, customers could only assembly product by themselves. For example, ikea’s product designed for the west, it may not fit for Asia such as Hong Kong due to the living space. For the improvement of this problem, ikea has to build up a closer relationship between customers in order to obtain feedback from customers. That information can help ikea be more understand the requirement of customer needs. It helps to reduce the cost of production and increase the variety of products.

3. Conflicts on low price and product quality
Since IKEA’s one of the organization mission is mentioned low cost and high quality. This mission can align to their business strategy. IKEA can be balance between cost and quality and be the leader in furniture industry. However, since there is the conflict between cost and quality, if IKEA expects to expand their market share and earn more profit, they need to consider their resources to balance both of them. If not, they need to make trade-off. We suggest that IKEA can more focus on quality keeping rather than cost issue. Since IKEA has already get large market share, customers loyalty and brand reputation, we believe that if IKEA increase the cost and provide higher quality, most of the customers would not shift to other competitors due to customer good experience. Finally, If IKEA can do well on this problem, it can attract and retain their customers as well as keep the profits.

4. Supply Chain is difficult to manage
IKEA is a popular world-wide home furnishing owning enormous product line. Each type of products may need a supply chain so maintaining a good supply relationship is very important. IKEA aims to opening more stores in the future, the supply chain may be too large to manage. After analyzing the whole business of IKEA, we find that it is difficult for IKEA to manage a tight control on growing scale of supply chain. Not only is a tight control, higher visibility also needed. Although their business strategy is centralized, their operations will be differences depending on the region of the stores. IKEA offers the local freedom for stores to plan their supply chain manage their replenishment system. Also, they base on the forecasting system on manage their inventory. As the supply chain is not integrated as a whole, IKEA may sometimes face overestimated or stock-out.

We think that IKEA’s information system may not powerful enough to afford tons of transaction data to meet the increasing supply chain. From our point of view, we suggest IKEA increase the capability of its information system in order to manage the transaction data to have more accurate forecast on the products’ demand. Or they can try to integrate the system of IKEA’s stores over the world. IKEA’s headquarters should have a deeply understanding on the region’s performance in supply chain process. If headquarters have found out any loopholes or problems, they can communicate to the region’s managers to improve and smooth the process. Therefore, IKEA should have a good information flow with suppliers. They should maintain a good Electronic Data Interchange through all of the IKEA stores in the world, suppliers could realize the demand accurately to decrease the opportunity in stock-out or over-estimated the demand.

5. Most suppliers are from developing countries causing problems IKEA has shift a great part of procurement from Asia to Europe for lower cost. And some of factory is opened in these developing countries. 31% of IKEA’s products are manufactured in China. It brings about some problems. Labor in developing countries lacks skills, which results lower productivity. Moreover, the infrastructure in developing countries is poor. Transportation is inconvenient, e.g. there may be no highway. The lead time should be higher, and thus transportation cost increases. IKEA may provide education to workers to increase their working skills. Also, IKEA can have more communication and build up closer relationship with suppliers to have better control of suppliers’ working process and performance. Moreover, IKEA may have supplier visit to give consultation and help them identify ways to increase quality. To ensure the quality, a defect rate should be indicated in contract terms and conditions.

Conclusion
Being a primary activity in an organization, logistics plays an important role in a company’s value chain. In IKEA’s case, the cost-effective performance on logistics operations helps it to achieve the cost leadership strategy. But there still have existing problems, including the supply chain network and product developing issues to be solved. Looking into the future, IKEA may have more innovative design on product and better utilize the power of e-business to keep growing in nowadays hypercompetition environment.

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