Country factors, Outsourcing risks, JIT approach, and Ikea's strategy in India

Country factors in manufacturing locations

(a) Describe the country factors that need to be considered when deciding on manufacturing locations. 

b) Examine some of the risks associated with outsourcing. 

(c) Discuss the effectiveness of the Just-in-Time (JIT) inventory approach.

Read the case below and answer the questions that follow.

IKEA in Hyderabad, India

Six years after it was first planned, the 400,000-square-foot Ikea store in Hyderabad is the first step toward fulfilling Ikea’s ambitions in India, with more outlets scheduled to debut in Mumbai, Bangalore and the Delhi area in the next two years. By 2025, the company hopes to have 25 stores in India, some of them in a new, small format.

Ikea’s opening in India — and its subsequent success or failure — is likely to become a case study for other international retailers. India’s retail landscape is complex. With a growing middle class, its 1.3 billion people buy about $30 billion a year of furniture, lighting and household items like bed linens and cookware, according to Technopak, an Indian consulting firm. Ikea representatives visited about 1,000 homes in major Indian cities to understand how people lived and what they needed. Indian families spend a lot of time together, with relatives frequently popping in, so the company added more folding chairs and stools that could serve as flexible seating.

But despite the efforts of a few local chains, 95 percent of those goods are sold through small shops that offer custom-built products, usually specialising in one category such as wooden furniture or lamps, and offer free assembly and delivery. “The consumer in India is kind of pampered,” said Ankur Bisen, who heads Technopak’s retail and consumer products division.

Ikea stores are the polar opposite. Part showroom and part warehouse, they are sprawling outlets that are far from city centers with mazes of giant bins and floor-toceiling shelves. Ikea’s brand signals affordable, mass-produced and functional, and its design aesthetic is lightweight and lean, in contrast to the heavier, bulkier furniture traditionally favored in Indian households.

Yet Ikea, with its reputation for good value, also appeals to the bargain-hunting nature of the Indian shopper. “In India, a lot is driven by the price of the goods and not so much about the quality,” said Anil Talreja, a partner at Deloitte’s India arm who works with retailers.

All of this has forced Ikea to rethink its product lineup and store operations for India. Although the Hyderabad store has the classic Ikea layout, what’s on display is somewhat different. G\ven India’s lower income levels, the store features hundreds of products — from dolls to spice jars — priced at less than 100 rupees, or $1.45. In some cases, Ikea is selling a product in India for less than it charges elsewhere. In other instances, the company is tailoring it for local tastes. For example, most Indians do not use knives to eat and primarily want spoons, so the company ditched its children’s plastic cutlery packs and instead sells four spoons for 15 rupees, or 22 cents.

Indian women, on average, are also shorter than Europeans and Americans, so the company decided to showcase some cabinets and countertops at lower heights. As Indian children often sleep in the same room as their parents until they are in elementary school, its model bedroom squeezes in a child’s bed amid all the other furniture

“Even the cafeteria caters to Indian tastes, with biryani, samosas and vegetarian Swedish meatballs on the menu and 1,000 available seats, more than any other Ikea in the world, to accommodate the more leisurely dining style of Indian families

Figuring out how to adapt Ikea’s furniture was more difficult. Some items popular in the United States, such as untreated pine furniture, do not endure in south India’s hot and humid climate. Metal or wooden furniture needs small risers to lift it off the floor since people frequently clean their floors with water. Import duties and other taxes can raise the cost of an Ikea chair or cabinet by 30 to 50 percent. That forced the company to price many imported products higher than it does elsewhere in the world. 

The quest to keep lowering its prices in India has prompted Ikea to seek new local suppliers. The company is getting carpets, pillows, mattresses and even some of its popular Ektorp sofas from local manufacturers. India’s government is also pushing the company to “buy Indian,” since it requires foreign-owned, single-brand retailers to tap local suppliers for at least 30 percent of the value of the goods they sell in the country

(a) Explain Ikea’s strategy in India with regards to :

(i) Customization vs standardization

(ii) Culture

(iii) Economic development.

(b) Do you think Ikea’s should use a similar a strategy implemented in India in other countries as well? Support your answer.