Ikea Management Analysis Essay

Abstract: This article is an analysis of the IKEA’s supply chain. IKEA’s supply chain is globally with sales in more than 250 own stores in 24 countries and 32 external franchisees in 16 countries. It has special supplier management, store design, and warehouse management. IKEA Supply Chain system includes IOS, TSO, material and suppliers, DC and IKEA store. IKEA global planning has seven processes. Sale planning and demand planning are in this article. IKEA’s supply chain was operated really successful, however, it still exist some problems, like lack of central coordination, inaccurate sale forecasts, and high inventory costs. In the end, this article will provide some recommendations to solve those problems. Introduction IKEA, founded in 1943, is one of the best home furniture company in the world whose, and its vision is â€Å"To provide better life for everyone†. IKEA provides modern and fashionable low cost furniture for over 38 countries with 301 stores. It is the largest furniture retail chain in the world and boasts a range of 12000 products, including home furniture, accessories and some other stuff. What’s more, it’s concern for people and environment lead to excellent use of raw material and energy, which result in their green targets and the overall environment. A supply chain is a network of retailers, distributors, transporters, storage facilities, and suppliers that participate in the production, delivery, and sale of a product to the consumer. The supply chain is typically made up of multiple companies who coordinate activities to set themselves apart from the competition. A supply chain has three key parts: Supply focuses on the raw materials supplied to manufacturing, including how, when, and from what location. Manufacturing focuses on converting these raw materials into finished products. Distribution focuses on ensuring these products reach the consumers through an organized network of distributors, warehouses, and retailers. Ikea is a worldwide company and its supply chain also deserves us to study. In this paper we are going to analyze the IKEA’s supply chain in the market and we will also analysis the strategy and plan of the company. In addition, we would give our proposed recommendation in the end. IKEA Supply Chain Strategy IKEA’s supply chain is global 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 countries, or directly from the 1,350 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. IKEA’s 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. 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 custo mer 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. 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. The purpose of this article is to outline IKEA’s global supply chain planning concept and describe the roles of the planning organization, data quality, software support and project and change management in the concept and its implementation. Supply Chain Management of IKEA Supplier Management IKEA has about 1400 suppliers from 33 countries, 64% of them are from European countries, with largest supplier markets in China and Poland. IKEA maintains lasting relationship with suppliers, and it has its own way to select suppliers from worldwide. After decide what product and material to be used, trading offices would find the suppliers in their respective regions and invite bids from them. IKEA has a principle, which is to choose suppliers of lowest cost at the same time, guarantee the quality. By placing orders directly on line, IKEA can always receive the deliveries within one to two weeks. On the other side, they ask suppliers to take inventory, so that suppliers can clearly know about the time, category, and amount of goods they have to fill up. IKEA also asks suppliers to deliver some of the goods straight to their stores, and this kind of managing would possibly save time, energy, and money considerably. They have formed a certain role to evaluate the performance of suppliers and point out standards and grades. Under such pressure, IKEA’s suppliers would be serious about their job and try their best to make sure the goods are of best quality and fastest delivery. By this kind of supplier management, IKEA would absolutely has high efficiency and quality. Store Design IKEA chose its store location on the city outskirts as the company’s stores were large and required huge parking spaces because IKEA realized that its customers were visiting stores in their cars. There is a typical feature of IKEA stores. [pic] The picture above is a map of some IKEA stores, in this, one can obviously see that customers entered into the stores, they would follow the arrow printed on the floor, and see through all products they exhibit. This kind of layout is called Racetrack layout, which has a main section that directs towards various section of the store, loops through the store and returns customers to the front of the store. It draws customers around the store and is commonly used in department stores. IKEA uses this to encourage customer to explore and move around IKEA at ease. The Racetrack Layout leads customers throughout the whole IKEA passing through different department. It makes sure that no section is missed out as the Racetrack Layout is design in a way that customer will have to follow the path in order to get to the end. The Loop allows customer to have different viewing angles and to catch a glance of every item in the store within a look. This encourages exploration and impulse buying. Thus this is strategic for IKEA as to capture customers. Warehouse Management IKEA has large warehouses like â€Å"DC008†, it has 19 input doors and 22 output doors. This separation makes the warehouse operation more effective. In the warehouses, there are many forklifts and they run fast and flexible. This also improves efficiency. Besides, IKEA seriously considered the safety of warehouses. It built a perfect security system. If some materials are not in right position, the red light will turn on and there will be an alarm ringing. Another significant warehouse management is space management. A system numbers every area, and all of them will be in the computers, so workers can clearly see wherever there is a vacancy. That ensures turn-around speed. The WMS (Warehouse Management System) in IKEA is so mature that it is used in every warehouse of IKEA’s. However, now IKEA need to figure out how to reduce inventory in order to save money. As for IKEA, there is a special kind of warehouse, which is self-serve warehouse. It is just in stores and keeps some inventory to give customers more choices. It can as well make customers enjoy pleasant about self-purchase. IKEA Supply Chain IKEA Supply Chain System (From the tree to the living room) IKEA is one of the leading home furnishing companies in the world and is expanding globally and fast gaining market share. Also IKEA’s supply chain has a global spread with both sales and purchasing in all major regions of the world. In IKEA Supply Chain system, firstï ¼Å'IOS is IKEA of Sweden, where decisions are made, such as the number of items, purchasing, suppliers, distribution, store coordination, and so on. Second, TSO (Trading), trading is responsible for the relationship with suppliers. Within trading there are 43 trading service offices in Europe, Asia and North America. Third is material and suppliers. They provide raw materials and manufacture the products. Co-workers in this area form a bridge between the factory floor and the products on the shelves at IKEA stores. They are responsible for ensuring reliable production methods that lead to high quality results, but which at the same time involve the min imum waste and maximum efficiency. Although not the most visible role within IKEA, this area is incredibly important for the company. The suppliers of IKEA and the good relations IKEA enjoy with them are among the company’s greatest assets. Fourth, in DC (Distribution centers), trucks, boats and trains are all needed to move products around. Coordinating these different means of transport to make the movement of goods as quick and efficient as possible is a real art. And DC are not enough just to make sure the goods arrive at the right stores and customers at the right time; they must also arrive in good shape, ready to be sold at the lowest possible price. Fifth is store. IKEA has more than 250 own stores in 24 countries and 32 external franchisees in 16 countries. To simplify, chart 1 shows the whole IKEA Supply Chain system described above. [pic] Chart1 IKEA Supply Chain system Moreover, in fifth part, In-store Logistics are also an important part in IKEA supply chain. In-store Logistics have seven steps (chart 2): Step1, create commitment with clear and qualified goods. Step2, develop an in-store logistics organization based on knowledge and competence. Step3, create balance between the space to range relation. Step4, place rational and correct orders. Step5, sales space management. Step6, establish routines for the most efficient goods flow. Step7, follow-up on performance. [pic] Chart 2 IKEA Supply Chain-In-store Logistics IKEA Supply Chain Planning Planning Concept Overview. According to IKEA’s characters, such as offer a wide range of home furnishings with good design and function and provide low prices, Ikea’s supply chain is in constant flux, with improvements being made whenever they are required or new technology appears. But generally, Ikea’s 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. IKEA focus on all forecasting activities and need calculations to control the entire supply chain inventory levels and replenishment. The global planning process (Chart1) is made by the central function of IKEA of Sweden. From the IKEA’s global supply chain planning (Chart1), we can figure out there are seven major processes (1) Sale planning; (2) Demand planning; (3) Need planning; (4) Supplier capacity planning; (5) The distribution supply chain planning (transport, warehouse, and store planning; 5a-c) and (7) Replenishment orders. In the following, we will talk about the processes separately into more details. But we will only focus on two parts Sales planning and Demand planning. [pic] Chart1 IKEA’s global supply chain planning concept and planning processes. Sales planning. The first step of sales planning is the corporate management of IKEA makes the overall sales forecast. The forecast is made on an aggregate level in terms of total sales volumes in monetary units for IKEA in total. It shows the expected sales increase in percentages. Ikea’s sales plan will be updated three times a year. The forecast is mainly determined by the strategic marketing plan and the remaining part of the current fiscal year plus five years into the future. So the current strategic business plan of Ikea is important for sales planning. At the end of the sales planning process, in order to achieve the business areas’ growth plans and expectation for the future, Demand Planners at IKEA of Sweden provide the data and information of forecasts for each of the business areas. Demand planning. In Ikea, there are 32 Demand Planners work in the tactical demand planning process, each one responsible for forecasting a certain part. The tactical forecast attach to IKEA of Sweden and is done on a rolling 84 weeks, with new historical sales data loaded once a week. In the end the forecasts on store levels are aggregated, reconciled, and compared with the sales frames on the retail forecast group level and on the distribution services region level. IKEA also has Retail Forecast Group, including one to several stores located geographically close to each other. In Europe, a retail Forecast Group normally corresponds to a country. IKEA in different countries own the right to have local event and activities. But, to let Demand Planners review the forecast on the regional level each week, the specific activity plans must be told at least six months in advance. In case that the forecast deviates considerably from actual sales, the Demand Planner looks for the reason and adjusts the sales figures or forecast model accordingly. Problems Lack of Central Coordination All we know IKEA is a hug international company. It provides modern and fashionable low cost furniture for over 38 countries with 301 stores. It emphasizes on local autonomy rather than a centralized coordinator. This method is easier for regions and store to plan and replenishes their own inventories. However, it also causes hundreds of subsystems inside the IKEA. Those subsystems include product design system from the headquarters; orders to suppliers system, orders to transport to the mall system, store management system and some accessory systems in each region or store. There are at least four hundreds complex subsystems inside the IKEA. These system’s databases is not well integrated, and do not have unified communications platform, that resulting in information separation, the low quality of information transmission, it is not conducive to the efficient operation of the supply chain. Lack of Accurate Sale Forecasts Due to changes in demand, sales forecasts data of the Swedish headquarters get deviation, if the forecasting data is bigger than the real, and this led to the warehouse overstock directly. If the mangers do not adjust the place orders plan that will cause serious problems by global warehouse overstock, retail shopping centers will immediately face to increase sales efforts to absorb the backlogged inventory. The other hand, in order to avoid some seasonal items out of stock, IKEA place large quantities of orders to suppliers, the mall immediately changed the stage from the under stock to overstock, However, the shopping center cannot sell them all, therefore, pass the season, there are still a lot of inventory backlog. Inventory Costs are too high IKEA purchases and sales too much, and often use the strategy of expand the inventory to cope with the uncertainty situation. IKEA worried about the inventory cannot be well satisfied the needs of the shopping centers, and if IKEA keep a low inventory level, it will increase the risk of lost sales opportunities, Therefore, IKEA maintain a high level of inventory to avoid the risk of under stock, That cause the shopping malls, the distribution center, and the central warehouse to maintain a considerable amount of inventory. Recommendations The urgent need for IKEA is to spend a large investment in the supply chain systems integration, make a great effort to integrate internal business systems, to achieve the company internal information sharing, built unified communications platform to make sure each subsystem can easy get the information from others, particular in transportation information and warehousing information. Ultimately achieve the comprehensive integration of manufacture, procurement, inventory, sales, financial and human resources management, logistics. That can make the ideal supply chain operations to become a reality. The supply chain systems integration can make each subsystems get the other subsystems information easily that really helpful for IKEA to forecast the sales in the future. In addition, IKEA also can get information from the date of the past sales, the public economic information, from customer and from suppliers. The supply chain systems integration also can help IKEA use those two strategies to reduce the cost of inventory. Firstly, IKEA requires the supplier to transport the production directly to the shopping malls, omitting the middle stage of the warehouse storage and handling. Use this strategy, IKEA do not have to establish the inventory and also do not have to maintain a safety stock to satisfy the demand of the shopping center. The delivery period becomes short, and easy to control. It also reduces the broken rate of the goods that ultimately improve the service level of the mall shopping centers. Secondly, IKEA also can use the strategy of vendor-managed inventory. It means suppliers according to IKEA’s the actual sales demand and safety inventory requirements to place the order to them. This strategy requires mutual trust between IKEA and supplier. IKEA can establish appropriate oversight mechanisms to make this strategy works well. This strategy can make both the IKEA and the suppliers’ benefit. References Laura Spinney (2011) The secret of IKEA’s success: we do the hard work, New scientist. Retrieved from: http://0-ehis.ebscohost.com.leopac.ulv.edu/eds/detail?vid=2&hid=23&sid=0dbc6e03-427b-4dec-9711-136b9cfedca8%40sessionmgr14&bdata=JnNpdGU9ZWRzLWxpdmU%3d#db=edselp&AN=S0262407911631783 Jonsson, P. and Gustavsson, M. (2008) â€Å"The impact of supply chain relationships and automatic data communication and registration on forecast information quality†, International Journal of Physical Distribution and Logistics Management, 38 (4), 280-295. Steve Banker (2009 Nov) In-Store Logistics at IKEA. Retrieved from: http://logisticsviewpoints.com/2009/11/05/in-store-logistics-at-ikea/ IKEA’s Cost Efficient Supply Chain. Retrieved from http://www.icmrindia.org/casestudies/catalogue/Operations/OPER084.htm NYP IKEA: Merchandising Presentation and Store Design (Part 3), May 18 2012. 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