Case Study about the Ikea Supply Chain Management.
IKEA was founded in Sweden in the year 1943 and has since then provided low priced home furnishings and auxiliaries of remarkable design and performance. The corporate’s vision is to fashion a better life for a majority of individuals every day. It aims to provide a broad scope of perfectly designed, high-performance affordable home furnishing commodities. Through the utilization of inexpensive materials in a unique manner, minimizing production, retail costs and distribution, their customers get to benefit from lower costs. The supply chain at IKEA has a worldwide spread that has growing purchasing and sales in all the major regions of the globe. Complexity in the supply chain is brought about by the fact that its stores are widely spread across a majority of countries (Jonsoon, et al., 2013). Their furniture is made by approximately 1220 suppliers located in about 55 countries. These stores are provided by about 31 main distribution facilities located in 16 countries or supplied directly by suppliers (Dudovskiy, 2012). This paper is concerned with analysing and evaluating the supply chain management at IKEA and also giving recommendations for its improvement.
The IKEA supply chain includes a flow of production. It comprises of raw materials, manufacturing, distribution, retailer and consumer. These are classified under three broad categories of primary, secondary and tertiary sector. The development of the raw materials occurs in the primary sector where, IKEA designs its commodities in Sweden (Dudovskiy, 2015). During the designing, IKEA verifies that the products do meet the requirements for function, quality, and efficient distribution. The main factor that IKEA considers during the production of home furnishing is low prices. As they source their raw materials, they bargain the prices with their providers, verify the condition and value of the materials, check on the working and social conditions of the supplier and also identify the environmental impacts brought about by the materials. The e- wheel is a tool that IKEA uses to determine the environmental impact during the four stages namely resource extraction, production, use, and recycling. About 50% of IKEA’s products come from wood (Tare, 2013). To reduce the use of materials, IKEA develops a majority of design solutions that includes the use of recycled plastic, material clippings among others. Commodities such as water cans have a unique design that enables them to be stacked increasing the number that can be transported thus saving on fuel costs as lorry journeys are reduced. IWAY is a code of conduct held by IKEA. It is the IKEA Way of buying home furnishing products. It basically comprises of guidelines and rules that assist manufacturers in the reduction of the negative impact to the environment.
A critical factor in the success of IKEA is communication. Communication between IKEA and its materials manufacturers and suppliers. Manufacturing takes place in the secondary sector where the value-added process occurs (Dudovskiy, 2015). To achieve this, IKEA designs its commodities in a manner that the least quantity of resources makes up the best products. Examples include the use of hollow legs in their furniture and also the use of filling material made from honeycomb paper for the table tops interior in the place of solid wood. IKEA retail shops also add value to the manufactured goods in the tertiary sector through the provision of a way of shopping that differs from the usual high street practice. In this way, the needs of consumers are met in several ways. A choice is presented to consumers where each IKEA store is huge enough to hold over 9500 products (Mittal , 2013). IKEA also provides home delivery and catalogues. It goes a long way in saving the time for customers.
Demand has also increased for IKEA products leading it to incorporate design to suit many customers. It has improved the safety and ergonomic aspects of its designs by using steel in its products. This has also reduced the weight of the commodities and also environmental impact. IKEA is so environmental conscious due to the fact that it consumes a lot of wood and may threaten the life of forests. The company does not accept illegally obtained wood. It supports about 13 projects that are ran by the World Wildlife Federation, WWF, to enhance sourcing wood from certified forests. IKEA pushes a hard bargain with its suppliers (Tare, 2013). It demands high quality for low prices but offers a long term business relationship. It also advises the suppliers on the ways to find the cheapest and best raw materials, the equipment to buy and how to establish and expand factories.
When it comes to logistics, in (SRM) storage and retrieval machines, IKEA depended on a new partner using innovative switching technology known as LTW. Initially, it installed three SRMs (Mangan, et al., 2008). Due to the dynamic development at IKEA, in two years, seven more SRMs developed. LTW has operated with IKEA and installed over 200 retrieval and storage machines in 11 countries. Consafe Logistics partnered with IKEA in the year 1997 and have ever since set up a majority of the new distribution centres opened up globally by IKEA. IKEA with Consafe Logistics help has also established the Astro warehouse management system. The system is being used in 15 of their distribution centres. IKEA chose to partner with them due to their reputation and expertise in high-quality integration, combining automated and manual warehouse management. SINO logistics, on the other hand, offers IKEA a total solution in the logistic industry. Clearing and forwarding, insurance arrangement, warehousing, transportation and offering logistic advice that assists IKEA in the efficient movement of trade and better management of the supply chain.
For effective and efficient distribution, IKEA calculates the exact quantity of products required to satisfy the demand. It ascertains that there is no wasted of resources for warehousing and production. They possess a worldwide distribution centre, can deliver large volumes, use flat packages and they offer low costs. This can be viewed as the hallmarks of their distribution as they aim to ensure that the right commodities are available for customers at the store always. IKEA reduces the cost of transport by having their products packed flat. It means that more packages can be transported at a single trip. Flat packages mean that customers assemble the products themselves. Distribution services act as the wholesaler for IKEA. They assist in securing regional storage space for stores and also buying products from suppliers globally.
A good IT system in also a key principle in supply chain management (SupplyChainOpz, 2016). For there to be perfect and efficient organization for the huge amounts of commodities that pass through the distribution centres, all commodities are electronically collected and matched up to the data saved in the IT system. It takes place, for example, in the IKEA BLG Retail Logistic distribution centre located in Erfurt, Germany (Henry, 2014). IKEA also has other distribution centres that include the BLG Retail Logistics at Doncaster, UK, the Tejon Ranch Commerce Centre at Bakersfield, CA, USA, and the NREP Logistics at Jonkoping, Sweden. Customers who are not satisfied with their purchase at IKEA can return the product through a collection centre situated at every city with an IKEA store. The collection centre verifies the product and then forwards it to the distribution centre that offered the commodity. For efficiency, the product is forwarded to the firm in Sweden for recycling and redistribution. A study indicated that 70% of products returned are recycled while 30% are disposed of.
Another key principle to supply chain management is outsourcing. IKEA outsources about 90% of its products and 10% is produced internally (Jens, et al., 2012). This has brought about many advantages that include IKEA’s low-cost structure and focus on the core business. Outsourcing makes it possible for the managers at IKEA to direct their energies and resources towards the key activities that are more likely to bring about value and competitive advantage (Hultman, et al., 2012). IKEA targets to be the best and leading home furnishing corporation. To get there it does not just mean developing marketing share and profitability. IKEA has taken a leading role in the creation of a sustainable approach to working. It educates suppliers to comprehend the critical essence of sustainable production. It has enabled IKEA to be trusted by consumers and suppliers, thus differentiating themselves from their competitors. From above, it is evident that IKEA focuses more on identifying suppliers who can offer materials at a lower price. It is also evident that it is using the best technique for inventory management and has a strong supply chain management. IKEA should change its policies so that they become more innovative in their products and also in their strategies. The corporate matches no other and its size and success to date is commendable. In its policy to lower costs, IKEA should improve on customer care through the training of employees to make them better qualified and efficient to make sales. IKEA has immense potential in both its existing countries and also other countries where it lacks stores. It should exploit these countries before other companies do.
Recommendation and Conclusion
IKEA should also engage in product differentiation. An opportunity exists where IKEA can significantly increase its revenues by practicing product differentiation. It is recommended that IKEA should follow Argos’ and Tesco’s strategies to provide services and products that range from international calling cards to several types of loans and insurances (Barua, 2011). The potential does exist to increase on revenues accordingly where IKEA already possess a securely established efficient and effective infrastructure and strategy. It can utilize this to increase its product ranges in a more effective way. It has also been noted that various markets where IKEA is currently operating are becoming saturated. International expansion would be a good idea. IKEA will increase its revenues when it engages in market expansion strategies. There should also be more focus on research and development before commencing any international business. For example, so as to enter a country and make profits fast they should focus on customer research and development. A good example is when IKEA began its operations in USA. It faced challenges of what the Americans preferred. They followed what they did in the Scandinavian market that led to a drop in sales. Later on, it introduced customized advertisements for the younger demographics and increased in sales. Though facing some challenges, the corporate matches no other and its size and success to date is commendable.
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