The Supply Chain Strategies Of IKEA

IKEA is the well-known Swedish, privately-owned, multinational home products company that designs, constructs, produces, and markets ready for assembling furniture, encompassing desks, chairs, and the wide variety of home accessories and devices. Young Ingvar Kamprad, who is currently enlisted as the richest individual in Europe, established the company in 1943 (Monden & Minagawa, 2016, p. 522). This Swedish company, which pioneered flat-pack furniture at affordable prices, is presently regarded as the largest furniture retailer around the world, making it a global company that markets Swedish-designed products, majorly furniture. Despite being the successful global leader, this company requires restructuring its current processes structure in order to lower costs and elevate flexibility of supply chain.

The Processes and the Context

Fundamental activities, including sleeping, eating, storing items, socializing, etc create a demand for furniture and home accessories, which solve essential human requirements. IKEA operates in a context that meets these requirements by proposing a broad scope of well-designed functional home furnishing products at low/affordable prices, allowing targeting as many people as possible. In fact, IKEA’s range of products and processes incorporates items for each part of the home.

The company has three main processes, and their shared objective implies transforming customer requirement into customer success with the help of their individual missions. The first process involves creating the home-furnishing offer (Stenebo, 2012). This process requires creating and developing a product variety, which enhances everyday routine life at home. IKEA applied appropriate function and design for their customer to experience high product quality at a low price. The second process is supplying (Stenebo, 2012). This requires making IKEA product variety available for the customers. Thus, the company produces, distributes, and markets its goods at the highest possible customer-experience quality under ideal environmental and social settings at the lowest total cost possible. The third process concerns marketing and communication (Stenebo, 2012). The company constantly seeks for an inspiring way of assisting their customers to prepare, select, and acquire an item from a wide scope of available products presented in store catalogues or media sources.

IKEA’s Strategy

IKEA, being a global company, utilized its individual strategy with the objective of perceiving the sustainable competitive advantage. Thus, all processes designed and planned by the company are executed with a single idea of receiving desired outcomes. The operation strategy of the company is concentrated on the low cost (IKEA, 2016). However, traditionally, the majority of furniture items are available at much higher cost. IKEA processes are of large volume as their products are characterized by the elevated level of specialization and repeatability. In order to keep the prices low, the company ensures that production equipment and raw materials are utilized efficiently (Stenebo, 2012). Moreover, customer involvement contributes to low prices as well. IKEA depends on customers’ choice, allowing collecting, transporting, and assembling products themselves, offering home delivery service only at the additional cost (Stenebo, 2012). The company’s operations require creation of products variety, which encompasses both low and medium level in order to provide definite and standardized products. Thus, operations have to cope with the low level of operations’ variations, while the consumer demands and sales are quite predictable.

Nevertheless, operations differ for different global locations. For instance, in terms of valued network, IKEA produces stylish, functional products and home furnishings for the majority of European countries, while Asia countries require slight modifications of the product in order to suit the local market and reflect Asia-specific apartment sizes (Gillespie & Hennessey, 2011). Moreover, stores’ locations, prices, and promotions are also different for these regions. In terms of Europeans countries, stores are located in the suburbs, close to highways, allowing the easy car access. However, in case of Asia countries, stores are located on the outskirts of cities, close to rail networks, as the majority of clients utilize public transport (Gillespie & Hennessey, 2011). Products are marketed at the low cost in European countries, while, in terms of Asian region, prices are changed to affordable ones. Finally, company’s catalogues are the major marketing implement for European countries, while Asia requires advertisements on social media and micro-blogging on websites.

The analysis of operation strategy reveals that, even despite high raw material prices, expensive transportation, and high inflation, the company reduced its average prices by 0.9 percent during the last financial year (Monden & Minagawa, 2016). In fact, IKEA incessantly lowered its prices for customers over the last ten years (Monden & Minagawa, 2016). The company’s low-cost proposition is pivotal for its product offering, being the central driver for its customers. Low prices enable IKEA to hold a strong market presence, which eventually provides the company with considerable bargaining power and an advantage in terms of higher customer recall. Moreover, the company relies on the combination of cost reduction initiatives, the innovative design, the global supply chain strategy, and the close rapport with suppliers and customers in order to achieve its low-cost strategy.

The facts reveal that IKEA typically targeting strategy is aiming at different categories of customers. Their customers’ scope incorporates young people with low or middle income who might or might not have children and business clients who usually operate small or medium businesses (IKEA, 2016). It is obvious that the company’s target audience appears to be price conscious. Therefore, the company’s compatibility is grounded on the specifically created operation strategy that cooperates with other strategies creating performance aims, including quality, production speed, cost, operation flexibility, etc. All of these factors influence effectiveness and efficiency of IKEA’s strategies.

Another strategy adopted by IKEA implies offering unique services that are not proposed by the company’s competitors. The facts show that it is becoming highly complicated for the specialized retailers to find relevance, as grocers and mass-merchandisers broaden in order to capture a share of the home-ware market (Liu, 2012). Therefore, shopping experience facilitated via enhanced scope, price, ambience layout, and facilities could be one of the main differentiating factors for specialists, providing them with a competitive edge. Consumers score IKEA high in terms of loyalty, as grounded on enhanced scope, price, ambience, layout, and facilities (Liu, 2012). This reveals the significance of above-mentioned factors to consumers when making shopping decisions. The enhanced price perception and the shopping practice will elevate the customer base (Monden & Minagawa, 2016). Hence, IKEA’s superior shopping practice and prince variety provide it with a possibility to differentiate itself from other competitors, at the same time driving loyalty in a market, where customers appear to be more fickle than anywhere else.

Finally, IKEA has a powerful strategy connecting it with customers around the world. The company is ranked fourth, following three well-known technology companies, i.e. Google, Apple, and Samsung (Monden & Minagawa, 2016). This fact confirms the company’s capability to connect with its customers as it executes exactly what customers require, refreshing the brand in a way that is culturally appropriate and performing its business adopting the strategy that is line with its aims and objectives.

Logistics Processes

IKEA’s logistics is established to make products available to the customers at the time where they require it. Thus, all logistics processes at the IKEA can be presented as:

Large quantities + flat packs = decreased and efficient cost

The elements of such felicitous logistics can be obtained via a worldwide distribution network, huge quantities, flat packages, and decreased spendings. In fact, better efficiency presupposes lower prices (IKEA, 2016). Hence, the IKEA’s concept of marketing packed flat products provides the possibility of optimizing space storage and transportation. For instance, in case of kettles, the company stacks some of them upside down in a box, allowing using more space than usual (placing 10 kettles instead of 6 ones), leading to lowering packaging and distribution spendings. Another example is a three-seated sofa that the company was capable of packing more compactly, doubling the quantity of sofas that could be placed in a specific packaging. This allowed lowering the price tag by 100€, at the same time essentially reducing the level of carbon-dioxide emissions from transporting these furniture items (Monden & Minagawa, 2016).

How It Works

Being the largest furniture retailer around the globe, IKEA has about 1,600 suppliers in order to produce and deliver furniture items to 186 stores around the world. In addition, 28 company’s center warehouses and distribution centers in 16 countries control the transportation process (Monden & Minagawa, 2016). The logistics (distribution) center is utilized for collecting items from all over the world and dispatching them to other locations where they are required. One country typically has its unique distribution center as the company believes that the processes are more efficient when performed in such centralized manner. Nevertheless, the number of challenges will increase because the company’s distribution scale will incessantly become larger. As IKEA supports a holistic view of the whole supply chain from supplier to customer, it will have to lower the total delivery cost, secure product quality, and preserve environment influence at the low level at the same time. The company is already capable of increasing transport efficiency and lowering delivery costs. Hence, IKEA might also attempt at enhancing forecast caliber, which will allow improving the capacity planning, and its utilization. Meanwhile, information and communication within distribution processes can still be principal elements. Nevertheless, the greatest problem is the turnover rate in supply chain flow for elevating sales rate.

IKEA bases its operation management and logistics on customers’ flexibility of moving around stores, enabling them to select the item they require, at the same time eliminating the need of sales personnel. The main philosophy behind this approach implies allowing customers to make their shopping decisions at their own convenient time and not hassling them.

Current Processes Structure

IKEA has its individual system for in-store logistics, meaning that it can fully control store-level inventory. Hence, IKEA can forecast the inventory level at the distribution center in order to replenish the stock. The application of centralized distribution allows facilitating the control and forecasting the inventory. This provides the possibility of lowering the inventory level in center warehouses and increasing the turnover to each store (Trebilcock, 2011). It equips shorter and more reliable lead times for all markets and products. Nevertheless, due to the fact that IKEA has a large volume of products while stores operate as its warehouses, the company cannot have the low inventory level in stores. The company has to keep the high inventory level to be capable of providing products with the elevated demand. Otherwise, they will probably be out of stock. Nonetheless, the high inventory level can assist IKEA in reducing production lead-time, at the same time enhancing the delivery speed (Trebilcock, 2011). As IKEA holds inventory in the warehouses, customers can take products immediately. Thus, the waiting time is decreased, while sales and the reputation of the company consolidate.

In terms of information, IKEA utilizes warehouse management system that provides necessary data required for managing and monitoring the flux of items from reception to shipping time. Company’s supply chain management stimulates cooperation among purchases, suppliers, and customers, as it integrates IT systems (Stenebo, 2012). It means that supply chain management provides the speed advantage. The development of information technology allows the company to resolve the orders more effectively and efficiently. Supply chain management is appropriate for gathering data in order to obtain the good market positioning and to create appropriate production plans and projects.

The company’s warehouses and distribution centers control transportation process. Transportation in the company depends on road and this will obviously stimulate the development of future distribution channels (Stenebo, 2012). Currently, about 60 percent of IKEA’s transportation is performed by road on tracks, and only 1 percent or less is executed by air (IKEA, 2016). The transportation performed by trucks is much cheaper than airplane transporting, but it is also much slower. The accidents might also cause delays, and air transportation is a better choice for dealing with valuable items. Despite being more expensive, it is worth after all. This is explained by the fact that the company takes fewer risks during transportation, while customers are capable of receiving selected products in the expected time. The main transportation way requires the usage of containers. Nevertheless, containers might be too heavy to transport, even regardless the fact that they allow loading numerous items at one time, the volume and the weight might elevate the risks during the transportation process. Thus, IKEA might utilize railroads and trains for the container delivery as this is more secure and faster when compared to the truck usage. Furthermore, as flat packs are stackable, they can be transported in the large amount per one trip, resulting in enhancing efficiency and lowering delivery time.

Finally, in terms of location, IKEA has three distribution centers that are connected by rail lines (IKEA, 2016). This number and location are ideal for company managers as it allows transporting products rapidly for the customers to receive them as quickly as possible. Such a location strategy is the best for IKEA because the construction of warehouses in each city of its operation would increase the costs, complicating the simultaneous monitoring and control of warehouses (Liu, 2012). This would lead to entangling the supply chain management. In addition, it might provoke time delays and lower efficiency, leaving customers dissatisfied (Stenebo, 2012). As the lead-time performs the essential function in company’s distribution logistics, centralized warehouses and locations are considered the best choice for the company’s process structure.

Problems and Weaknesses

Firstly, the facts demonstrate that holding too much inventory sometimes provokes such problems as hidden operational issues and decreased inventory turnover. For instance, there was the situation, when the surplus of inventory did not allow the company to discover the issue of frequently supplier lateness in terms of delivery time. Secondly, IKEA has numerous issues in its attempt to find the compromise between incessant cost lowering and maintaining the analogous quality. Unfortunately, IKEA’s customers are sometimes less satisfied with company’s products quality when compared to average customers acquiring items in other stores. Therefore, company’s cost lowering resulted in the decreased product quality, which led to the greater quantity of product returning, eventually leading to brand damaging.

Restructuring of the Processes

In order to keep the prices low and preserve the quality, the company has to obtain items from suppliers to customers with a most direct and cost-efficient manner. The transportation should be restructured, paying more attention to trains and boats. The fact that major distribution centers have railway lines facilitates this restructuring. The costs can be lowered as more products can be transported using these methods. Because IKEA utilizes flat packs that actually facilitate the process, it is possible to pack transport more items and per one trip.

Nonetheless, logistics has to be adopted to each stage in the company’s supply chain, starting from the point when the product leaves the manufacturer and up to the moment when the customer receives its order. In addition, the distribution logistics can be enhanced through the integration of warehouse management information systems and transportation management systems (Gillespie & Hennessey, 2011). The last implies software that is specifically designed for handling transportation operations (Gillespie & Hennessey, 2011). This agglomeration will not only equip an affordable price for suppliers and end customers but will also lower overall costs, at the same time shortening and minimizing lead-time variations. As IKEA’s warehouses are simple, effective, stable, and comprehensive, such standardized planning and structure are appropriate. Warehouse management information system would allow IKEA to provide the higher amount of products faster, giving the company a possibility to deliver items more rapidly compared to its competitors. Moreover, the usage of these systems makes the company more flexible and dependable in terms of product service performance.

However, the transportation would not help to optimize cost, time, quality, and flexibility in case company’s logistics is not improved. In fact, distribution logistics can be enhanced and restructured through the centralized distribution center. This center has to be located in a core region with convenient transport connection as this would allow making transportation much faster and flexible (Gillespie & Hennessey, 2011). The centralized distribution center can enhance delivery performance and increase inventory turnover. Moreover, the inventory can be monitored and forecasted in order to impede the lack of products or shortfalls (Liu, 2012). This is highly important for IKEA as the company requires efficient and effective distribution logistics due to its solid dependence on the cost leadership strategy. Hence, this restructuring would allow lowering the cost without ruining or compensating product quality (Liu, 2012). Moreover, the combination of these changes would elevate flexibility in the distribution channel as such and the company’s supply chain as a whole.

Implementation of Changes

The time-based strategy considers different changes within restructuring company’s processes.

All changes will lead to the enhanced supply chain that should be viewed as a solid contributor to decreased prices and costs. The changes would provide the possibility of delivering the progressively higher quantity of products directly to IKEA’s stores. This would eventually allow the company to apply wooden pallets for containers during shipping. This change would lead to more efficient and effective filling of containers, saving costs and naturally lowering prices. All of these changes can be easily implemented as the company continuously alters the processes and redesigns the products in order to lower costs. Moreover, some of its products are redesigned to occupy less space during transportation. Therefore, all of these changes will be welcomed and easily implemented. The only change that can be met will resilience is WMS, as the company has already attempted to implement the system in the past. However, this attempt was unsuccessful. Nevertheless, the scope of IKEA’s performance demonstrates the necessity of this system’s implementation because it would help to manage and consolidate orders as well as comprehend the incessantly exploding list of product stock-keeping unit, provoked by the customer’s requirement of mass customization.

The changes will create a close relationship between suppliers and customers. Moreover, the operations and the data would become visible. The application of WMS and TMS would help the company to efficiently operate its supply chain management as it will provide affordable prices for suppliers and end customers and lower overall costs simultaneously shortening lead time. IKEA requires suggested changes as it bases its performance on the cost leadership strategy that stimulates the company to consider having efficient distribution logistics for the cost reduction and the enhancement of flexibility in the distribution channel. Moreover, alterations would assist the company in reaching supply chain competitive advantages as well.

Conclusion

The analysis of IKEA’s operational processes demonstrates that they are efficient and effective, and the company manages them on a high level making business process successful. Company’s policies and processes are designed specifically to control pricing approach and strategies, quality, time, flexibility, suppliers, and logistics. Company’s logistics and the supply chain spread globally, meaning that numerous factors and elements influence its operations. Despite the fact that IKEA manages to strive on the market and shows elevated profitability rates, the process structure has to be changed slightly in order to enhance operations on the global sourcing and delivering network. The implementation of WMS and TMS together with the transportation changes and the establishment of centralized distribution center would consolidate IKEA’s strategic position on the global market, enhancing communication, coordination, and integration. All proposed alterations concern IKEA’s weaknesses in the operation structure, allowing eliminating them. This would eventually result in the enhanced delivery performance, lowered lean time, decreased costs, and better cognition of demands and forecasts, leading to improving the planning system accuracy of the company.