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Study IKEA as a case study on the optimisation of their operations and/or supply chain in Malaysia, and illustrate how the senior management in IKEA can implement the improvements proposed

(1) conduct a gap analysis on their manufacturing operations/purchasing/warehousing/inventory management/retail/restaurant based on analysis of real data;

(2) propose operations and/or supply chain decisions to resolve critical gaps found and;

(3) propose a set of key performance indicators for the organisation to control the performance of the operations and/or supply chain.

IKEA Malaysia's Competitive Advantage

IKEA Malaysia designs and sells household appliances, furniture, and household accessories. According to a survey conducted in the year 2008, IKEA is the world's largest furniture retailers. The innovative architectural design adopted by the company is a major competitive advantage for the company over other firms in the domestic moreover in local markets. The company also focuses more on the interior designs work and is always striving to stay green. IKEA operates in Malaysia at a low price so that most people can afford it. In order to meet the company's vision of providing better quality and cheaper services for everyone in the world, the company works very hard to achieve quality for its customers at a reasonable price. This is done by orderly following many business functions. The organization not only provides consumers with high-quality furniture at an affordable price but also impresses its competitors around the world especially with its strong inventory management technology and supply chain. KUALA LUMPUR - IKEA, a Dutch-based furniture retailer, will invest 890 million ringgit ($211.2 million) to establish one of its largest regional distributions and in supply chain centers in Malaysia. The Supply Chain Centre will manage inventory of RM6.6 billion yearly to meet IKEA's growth in Asian regions. The 100,000 square meters long warehouse will supply 12 existing retailing stores in the area. IKEA also plans to increase its number of retailing stores in Malaysia by 2026. But despite all this, there are several gaps in IKEA Malaysia operations and supply chain management. The company is facing issues in manufacturing operations, purchasing, warehousing, inventory management. This study includes a case study on the optimization of IKEA Malaysia operations and supply chain in Malaysia, as well as also illustrates how the senior management in IKEA Malaysia can implement the improvements proposed.

Malaysia has been encouraging large local business groups and multinational companies to use the country as a gateway to the region through various initiatives, including a major hub program that allows companies to focus on global activities such as procurement and distribution. The company network that makes up IKEA has recently focused on the retail business of the IKEA Group, including shopping centres and food retail.  In IKEA Malaysia, there is a huge gap in benchmarking knowledge that can easily lead to the wrong approach, which leads to errors that not only limit manufacturing, operations, procurement, warehousing, inventory management, retail, and restaurant improvements, but can actually be harmful and also leading to higher than necessary supply chain costs and erroneous improvement efforts.

IKEA Malaysia's Challenges

Logistics issues, such as customer satisfaction, forecasting systems and the like are some of the issues IKEA Malaysia face. Also IKEA?s distribution centre has to serve more markets in coming 5 years which means that they need their own big warehouses in Malaysia and a very effective warehouse management system which is missing in IKEA. Second issue IKEA faces are low inventory management because IKEA has a very large volume of goods and products. There is a need of extremely high inventory level in order to provide the products and items with high demand. Otherwise IKEA is probably out of stock (Rohsto Hou and Liu, 2011).

IKEA Malaysia lacks sufficient benchmark knowledge in its manufacturing operations, warehousing, inventory management, and retail stores; benchmarking can really do more harm than good. Errors include:

  1. IKEA draw wrong supply chain performance and cost conclusions
  2. IKEA compare itself with the wrong peer organization
  3. Compare the wrong performance areas
  4. IKEA set unrelated or unnecessary goals
  5. IKEA choosing inappropriate performance metrics

All of these mistakes may point to the improvement work to the wrong direction, spend money instead of saving.  IKEA has documented that their supply chain strategy has not been integrated for many years and is aligned with a broader business strategy. This is a huge mistake that can only be caused by insufficient knowledge unless IKEA considers the possibility of vandalism (very unlikely). When companies are involved in helping clients to improve their performance, the misalignment of the supply chain strategy is a common problem for logistics bureau consultants (Rohsto Hou and Liu, 2011). The problem is not the lack of understanding of strategic needs, but the need to link it to the corporate vision and mission. IKEA often sees that the core of the supply chain strategy is to stick to some best practices or track trends. Instead, the focus should be on developing a plan to support the business, or more importantly, the needs of the business customer (Acharyulu, 2014).

Warehouse managers at IKEA Malaysia face big challenges of maximize performances while balancing the trade-offs below some uncertain condition. It is difficult for IKEA to maximize the performance of the organization and to attain more customers in the Malaysian market.

Redundant processes: Traditionally, warehouse employees may process products multiple times because of the nature of the inventory stores or warehousing processes. This trend still exists in the current practice.  Notable redundancy procedure in the warehouse is that the warehouse worker passes the same tickets through several hands. Although in some cases, this redundant procedure is time-consuming and increases labor costs (Ketchen, Wowak & Craighead, 2014).

Poor layout of facilities: Ineffective use of the space is a major issue IKEA warehouses face. Insufficient storage space as well as ineffective use of accessible storage is some common issues in the warehouse and inventory management, and facilities are poorly laid out. Poorly configured inventory management is also a major concern for managers of IKEA because they can have a negative impact on profits. This optimal layout affects the footprint and the space available (Botha, Grobler & Yadavalli, 2017).

Warehouse and Inventory Management Issues

Seasonal in demand: Inversion in demand Warehouse managers have to face serious challenges. Due to the recent global financial crisis due to the increase in the level of payload due to the plunging in the sale of warehouses, big cost problems occurred (Vilko & Ritala, 2014). Although it does not affect the whole company equally the problem places the light on the challenge of volatility in demand because of forces outside IKEA’s warehouse control. Seasonal management of demand needs accurate and timely information about manufacturing, retailing and industry which is missing in IKEA warehouse and inventory management. The ability of the information interval distributor between the IKEA’s warehouse moreover other relevant institutions or industry effectively limits the ability to monitor as well as to respond towards changes in customers demand. It is essential to use the precise and timely information to provide supply chain visibility along with demand for planning and forecast for warehouses (Aqlan, Lam & Ramakrishnan, 2016).

There should be a warehouse in the premises in every IKEA store. On the main showroom floor, the customer will easily browse for items. Then they get the product from the place of the floor pallet, as normal person can reach, where the furniture may be taken or bought. Additional goods or products will be placed in reserved rack above the places. IKEA stock has been left on the lower slot (Smith, 2011). Approximately one-third of the lower level includes the range of warehouses for customers. Items in this location are very heavy for customers to load with no assistance from employees. The use of barcode technology simplifies the warehousing procedure, removes redundant processes, and maximizes resource utilization. The use of automated systems are rapidly evolving, a supply chain management trend that has forced warehouse managers or supervisors to maintain the latest systems to attain the desired outcomes. In addition to maximizing space, good layouts maximize the uses of labor and equipment, the accessibility of every item moreover items security. Maximize horizontal and vertical space configuration with a forklift that reaches the top of the warehouse (Akalin, Huang & Willems, 2016). The complementary solution is to ensure easy access by placing the best-selling inventory in the most accessible location.

In-store Logistic Manager uses the list redistribution management process developed by Ikea to answer store-level inventory reader points and resale products. Since all IKEA stocks are stocked only after business hours at night, the logic of their maximum/minimum setting is depend on number of product that will be sold in warehouse stock in a day or two. This process caters to the needs of the customers, while very few or too many orders are ordered to reduce the number of products. The strategies ensure that the list of IKEA is prepared to meet customer requirements, reducing the costs of the lost sale. Using the IKEA's inventory system proprietary, Logistics manager understand products that are sold throughout point-of-sale data or the amount of inventory that directly enters a store through transport and the distribution center from the warehouse system management enters the data (Bhakoo, Singh & Sohal, 2012). Using this data, they may predict sales in the next some days as well as can order the products in the right quantity to meet the demands. If sales data does not match required amount of the goods sold on that day, then logistics managers goes straightforwardly to the pallets and the bins for the manual list.

Proposed Improvements and Strategies

IKEA's store functions and operation is supported by very traffic services (focusing on 20% of SKUs, accounting for eighty percent of transactions) and fewer traffic warehouses, all of which are manuals. IKEA uses the automatic storage and recovery system in its high traffic warehouse to reduce per-touch costs. The demand for products stored in low flow facilities is small, and operations rely on manual procedures because employees are not transferred and move the list (Botha, Grobler & Yadavalli, 2017). These strategies surely made IKEA the successful furniture retailers in Malaysia with very short operating cost moreover high product order. With this, the business continues to seek more advanced strategies or methods to streamline SCM to maintain competitiveness. IKEA must have a clear vision for supplemental cross-function logic support. It not only separates IKEA from the company's peers, however it provides very competitive advantages or profit that it is complex to repeat in other organizations.

Strategy 1: Demand-driven schemes and company operating models are based on the real-time demands insights or shaping of demand (Reimann & Ketchen, 2017). Proper contingency and forecasting plans will ensure a complete visual and effective reaction to risks for example stoppage of the supplier, political upheaval and natural disaster that are also affecting manufacturing equipment. Companies may adjust promotion and pricing strategy to shape demands, to move other products rapidly, to increase revenue development as well as to expand profitability of high demand products with limited market supply (Golicic & Smith, 2013).

Strategy 2: IKEA must build a very adaptive and tight supply chain through rapid planning moreover integration. Once the managers are able to completely understand as well as shape the requirements and threats, they require to adjusting their supply chain to suit market opportunity in addition to events to change. To ensure responsible agility for meeting the changing needs of the companies, deployment of dynamic planning capabilities and continuous steering should be done. In order to give a rapid response to the market model, the new model requires a more consistent, dynamic supply chain adjustment (Raki, 2014). It can also reduce or eliminate shocks in the supply network. The results surely include better visibility to increase collaboration in the IKEA’s value chain, including trustworthy and estimated purchases and supplies, manufacturing, transport, distribution, and warehousing and make quick decisions through better support and analysis. At present, it is easy to achieve market response compared to cloud technology moreover right people, technical and processes capabilities (Golicic & Smith, 2013).

Conclusion

Continuous review system: With a continuous review system, IKEA usually orders the same order of each ordered item. IKEA has to calculate the inventory level, as well as whenever quantity of item falls below a certain level, IKEA will then compensate the stock.

Periodic Review: While using the periodic review systems, IKEA order product at same time for every phase. At the ending of every period, IKEA decides how much order based on the level of order at the ending of every period. There is no set reader level for this kind of system (Christopher, 2016).

It is recommended to keep the stock level low to reduce the cost of the operation. On the contrary, cash flows increase as IKEA does not have a high level of stock maintenance for a long time. The Inventory Management System will help IKEA get information about how much IKEA's unique business flow is. IKEA can track important information, severity, sales patterns, and with the previous turnover and take more educated business decisions with the company's growth (Marodin, Tortorella, Frank & Godinho Filho, 2017).

Order Fill Rate: The order rate is described as a percentage of orders based on a list. Evaluating the order filling rate helps IKEA to determine the balance of the list and helps predict sales. In general, high fill rates indicate a superior ability to meet sales requirements and maintain high customer satisfaction (Rexhausen, Pibernik & Kaiser, 2012).

On time delivery or shipment: Depending on the company's specific business, shipments may be more important than the other when delivered or delivered on time. But the reason for measuring them is the same. The goods were once classified as shipments at the time of shipment and were in transit as scheduled. On-time delivery is the timetable for reaching the payee. The requirements for this KPI’s may be most obvious: customers need timely delivery and delivery (Pulles, 2017). Therefore, it is the best interest to make sure that accurate and on-time delivery is as much as possible to ensure smooth operation of the supply chain and high levels of satisfaction.

Cost-effectiveness is another set of important KPIs that help to measure the IKEA’s supply chain performance. Cost metrics enable organizations to better measure and manage their cost-effective performance both externally and internally. This is not a comprehensive list of indicators through process efficiency metrics. In order to properly manage the supply chain, a strong series of KPI’s are needed to adjust its related deficiencies. Many key performance indicators also reduce IKEA’s ability to address important issues and improve their importance (Pasupuleti, 2015). A good or strong KPI should serve as a compass that can help IKEA and team to understand that IKEA is taking the correct path for the strategic goals and objectives. To be effective, key performance indicators should:

  1. Defined clearly and quantitatively.
  2. Communicate in your organization and department.
  3. It is important to achieve the goal.
  4. Apply to your business unit (LOB) or department (Marr, 2012).

Conclusion:

The end-to-end visibility of the distribution network provides continuous tracking of product distribution. A solid distribution strategy ensures optimal utilization of available assets and also checks on production facilities, inventory, suppliers, places, and warehouses. It is sure to improve customer service through fast delivery time and a waste of existing stock. It is important that your distribution chain will be aligned with IKEA’s business goals to help IKEA to stay on top of every process for delivery and efficient supplier management from time to time. The company has its own strength of hybrid strategy which is successful in simulating competitive people and both are difficult. The company has stood ahead of the competitors because they target people of the middle class and provide them with different products at an affordable price. This is especially true in any business where customers are bound in contract or contract. In particular, service level agreements will be monitored, through KPI; there may be a consensus between a business and its client when fines can be imposed on the performance level.

References:

Aqlan, F., Lam, S., & Ramakrishnan, S. (2016). A framework for inventory transhipment in integrated supply chains. International Journal Of Supply Chain And Inventory Management, 1(2), 118.

Acharyulu, G. (2014). Supply Chain Management Practices in Printing Industry. Operations And Supply Chain Management: An International Journal, 39. doi: 10.31387/oscm0170106

Akalin, G., Huang, Z., & Willems, J. (2016). Is Supply Chain Management Replacing Operations Management in the Business Core Curriculum?. Operations And Supply Chain Management: An International Journal, 119.

Bhakoo, V., Singh, P., & Sohal, A. (2012). Collaborative management of inventory in Australian hospital supply chains: practices and issues. Supply Chain Management: An International Journal, 17(2), 217-230.

Botha, A., Grobler, J., & Yadavalli, V. (2017). System dynamics comparison of three inventory management models in an automotive parts supply chain. Journal Of Transport And Supply Chain Management, 11.

Christopher, M. (2016). Logistics and supply chain management. Harlow (England): Pearson.

Golicic, S., & Smith, C. (2013). A Meta-Analysis of Environmentally Sustainable Supply Chain Management Practices and Firm Performance. Journal Of Supply Chain Management, 49(2), 78-95.

Golicic, S., & Smith, C. (2013). A Meta-Analysis of Environmentally Sustainable Supply Chain Management Practices and Firm Performance. Journal Of Supply Chain Management, 49(2), 78-95.

How Does IKEA’s Inventory Management Supply Chain Strategy Really Work? - Supply Chain 24/7. (2014). Retrieved from https://www.supplychain247.com/article/how_does_ikeas_inventory_management_supply_chain_strategy_work

Ketchen, D., Wowak, K., & Craighead, C. (2014). Resource Gaps And Resource Orchestration Shortfalls In Supply Chain Management: The Case Of Product Recalls. Journal Of Supply Chain Management, n/a-n/a.

Marodin, G., Tortorella, G., Frank, A., & Godinho Filho, M. (2017). The moderating effect of Lean supply chain management on the impact of Lean shop floor practices on quality and inventory. Supply Chain Management: An International Journal, 22(6), 473-485.

Marr, B. (2012). Key performance indicators. Harlow, England: Pearson Financial Times Pub.

Pasupuleti, V. (2015). Inventory Policies Across Echelons of Supply Chain and Variance of Supply Chain Inventory. SSRN Electronic Journal.

Pulles, T. (2017). Did the UNFCCC review process improve the national GHG inventory submissions?. Carbon Management, 8(1), 19-31.

Raki, H. (2014). An application of RFID in supply chain management to reduce inventory estimation error. Uncertain Supply Chain Management, 2(2), 97-104.

Rohsto Hou, Y. and Liu, J. (2011). Time –based strategy in distribution logistics Gaining competitive advantages in IKEA.

Rexhausen, D., Pibernik, R., & Kaiser, G. (2012). Customer-facing supply chain practices—The impact of demand and distribution management on supply chain success. Journal Of Operations Management, 30(4), 269-281.

Reimann, F., & Ketchen, D. (2017). Power in Supply Chain Management. Journal Of Supply Chain Management, 53(2), 3-9.

Smith, A. (2011). Inventory management and ABC analysis practices in competitive environments. International Journal Of Procurement Management, 4(4), 433.

Slotnick, S., & Sobel, M. (2018). Collaboration with a Supplier to Induce Fair Labor Practices: Risk, Reputation, and Profit. SSRN Electronic Journal.

Vilko, J., & Ritala, P. (2014). Service Supply Chain Risk Management. Operations And Supply Chain Management: An International Journal, 114.

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