EXECUTIVE SUMMARY
Operating in over 40 countries, IKEA is a worldwide destination for ready-to-assemble furniture, household furnishings and appliances, kitchen and office accessories. IKEA is recognized as the largest furniture retailer in the world holding at least 302 stores and 30 franchised units in various countries. IKEA was founded by Ingvar kamprad in 1953 and its first store was established in Almhult, Sweden. The company has grown to become an international giant with whom other furniture retailers have to compete against.
With reference to academic theories and thorough research, this report analysis the existing internal and external process flows in the operations management and logistics of furniture retailer IKEA. It further goes on to critically evaluate the advantages and disadvantage of IKEA’s operations using tools such as SWOT, operations performance objectives, and characteristics of operations process. Finally, suggestions for improving efficient business logistics and operations management of the company will be provided.
Operational process:
As a multinational corporation, IKEA adopts a strategy that varies from their competitors with the sole aim of achieving a sustainable competitive advantage. The operation strategy of IKEA emphasizes on its vision of creating furniture with high quality and durability at affordable prices for its consumers. IKEA founder, Ingvar Kamprad saw that most people have a simple lifestyle and live economically. This shows that people would only buy the things that they feel are more of a necessity to them and majority of the customers would deliberate over purchasing not so luxurious and high price things. And from that observation, he came up with an innovative idea that furniture can be expertly designed and most importantly prices are set low and can be affordable to the customers, in that way customers surely will find a way to fit in their budget but also providing them with a lot of choices. The component of the IKEA business strategy include; designing and creating appealing furnishings, rational quality furnishings, flat packaging, maintaining low cost, limited variety, self-assembly, young adult and business person oriented, mega stores with nursery, restaurants and adequate parking space at stores, and catalogue-driven self-service. These various elements retain expenses and maintain low prices as they reinforce each other. Hence, the mode of flat-packaging saves space in transportation, distribution and storage in warehouses. Sub-urban locations and large stores cuts down delivery expenses also making transportation easy for young adults and business persons with cars(miller and miller 2005). Catalogue sales and limited variety makes it easier to interact with lesser amount of sales personnel. IKEA is selecting two groups of customers respectively. The first target group is the young demographic (18-34) from low to medium income earners who may or may not have children. And on the contrary, the business also targets the business owners who run small to medium size of offices. The target segments possess dissimilar lifestyles, trusting their own perception to mix and match their furniture from the stores. As the target market are inside the range of the low to middle income class or run small to medium size of offices, they are more price conscious and require unique information, support and services.
IKEA resorts to the self-service model to lay out their products in store, where the customers can try out the furniture which are earlier on decorated. Also, there is a warehouse that makes it consistently possible for the customers to collect their selected products. The company has other services that makes it possible for the customers to place their orders by phone without physically being present at the store; and these orders are often delivered by various methods like air freight, UPS home delivery.
IKEA adopts a ‘maze-like’ concept in its store layout to part its customers from their money, such that a confused customer while zigzagging through the labyrinth design of the store come across other products and feels impelled to purchase some more furniture in addition to their intended purchase. This helps increase sales significantly.
IKEA’s supply chain is based on make-to-stock and hence, the whole supply network depends on forecasts. Consequently, the company applies an advanced IT system-Radio Frequency Identification (RFID) that is integrated widely into the company’s supply chain. The RFID tag is attached or placed on the inventories which makes it possible to handle and record inventories simultaneously, thereby making forecasting more efficient and reliable. Moreover, RFID keeps check on the volume of sales in the retail stores, amount of stocks available at the warehouse and real time operations at the retail stores, it helps the company eliminate shipping errors, reduce documentation and paper works, provides reliable information and communication with suppliers and business associates and also provides accuracy in forecasts for a particular product in regards to its previous sales. It is easier to control the inventories using this program.
SUPPLY CHAIN MANAGEMENT AND GREEN
The supply chain management encompasses every movement and storage of raw materials, work processing, stock, finished products and the distribution from the point of origin through intermediaries till it gets to the final consumers. IKEA has distribution centres all over the world which all play a vital role in its supply chain network. As stated by Yearly summary report of FY2013(IKEA,2014), the company has about 32 distribution centres in 16 countries that supply products to its stores, when infact 60% of its production happens in Europe. IKEA’s home accessories and furniture are designed in Sweden, but the products are widely produced in developing countries in order to minimize cost. Industrial group ‘Swedwood’ located in Sweden is a subordinate organization and sole supplier of IKEA that manages the production of all IKEA’s wood-established goods. Due to an increasing demand for raw materials and products, IKEA was forced to search for other suppliers. The IKEA suppliers send goods to the store straightaway for sale or to the distribution centres where inventory and store deliveries are handled. In most cases, IKEA sources materials nearest to its supply chain with the aim of cutting down on transportation expenses. Most IKEA distribution centres are located close to the seaports which implies that IKEA distributes its products by sea more often than it does by land. Delivery products directly to the stores help IKEA cut down cost and lower carbon footprint. IKEA uses flat-packs to save space and also maintain low transportation prices when distributing goods from suppliers to consumers. The supply chain of IKEA cuts down on its expenses so that its products can be sold at low prices as well. IKEA suppliers allow third part logistics companies to move their goods to its different stores. Maersk is an international logistics service company in charge of managing IKEA’s distributions in Valls, Spain.
At IKEA, the consumers choose the desired products that they can purchase and then collect these products from the warehouse by themselves. Almost all the home accessories at IKEA are packaged in a manner that makes it easier and less tedious for the customers to transport them(i.e wagon or car). And often at times, the customers assemble the furniture themselves without assistance from the store personnel due to the catalogue-driven self-service at the store. Technically, the customer significantly becomes a part of the supply chain. That is to say that the customer fulfills the responsibility that’s ordinarily carried out by the supply side. Taking into account, the approach IKEA takes to sell its products, the supply chain can be deemed as profoundly efficient.
IKEA rigorously examines and takes up responsibility for its operations in regards to the impact on the environment. IKEA mainly uses raw materials such as wood, cotton, metal, plastic and glass seeing that these materials can be renewed and recycled. The company designs its own products and during the design phase, IKEA ensures that products fit into defined requirements for function, effective distribution, product quality and how it affects the environment. The company produces various design resolutions to cut down the wastage of materials. For instance; several IKEA chairs are produced out of recycled plastic. A number of carpets are produced out of material clippings that would have been wasted contrarily. These processes ensures the viability of the company and tackles the effects of its operations on the environment. At time of production, IKEA communicates to its manufacturers specifically that waste should be eliminated at all cost but at the eventuality of waste, the waste should be used to produce other items. The company holds a code of conduct known as the IKEA Way of Purchasing Home Furnishings (IWAY) that encompasses basic rules and guidelines which sees that production activities have a low impact on the environment; the commitment to recycling, cutting down on waste and carbon footprints, operating under national and international laws. IKEA has over 302 stores in 40 countries, by way satisfying the needs and providing better services to its customers. IKEA has established a number of local UK initiatives to maintain its sustainable operations; IKEA UK recycled about 70% of its waste products in 2014. Eventually, IKEA started charging for carrier bags, consequently scaling down on the use of carrier bags by customers. The company introduced LED light technology to its entire UK workforce and has diverted from its fleet of company cars to low-emission hybrid vehicles as an approach to minimize carbon emissions. IKEA ensures collection points are available for customers to return their waste such as unwanted packaging, for recycling. Unused products returned to IKEA stores with proof of purchase are sent back to manufacturers for re-manufacture and sold through a different supply network.
SOURCING PROCESS: IKEA deems outsourcing as a strategy that provides cost or value advantage. About 85% of IKEA’s finished goods are outsourced and the remaining 15% is in-house production which is an advantage based on its low-cost structure. IKEA builds up competition between its suppliers and subsequently, products/raw materials are procured at the lowest available prices. The effectiveness of the logistics operation helps cut down transportation expenses and prevents other undesirable interruptions as goods are transported immediately from the suppliers to the IKEA stores (inter IKEA systems B.V., 2016b).
SWOT ANALYSIS
STRENGTH: IKEA’s low-pricing strategy and reputation as a strong multinational business attracts key target groups. Furthermore, IKEA reduces logistics cost by making the consumers a part of their supply network. It operates on a catalogue-based system where the customers collect and assemble the furniture themselves from the self-service area without requiring assistance from store personnel. The IWAY helps manage the suppliers and supervise their operations in compliance to social and environmental requirements. IKEA saves money by buying in bulk, and it sources its products/raw materials near to the supply chain consequently saving time, reducing carbon emission and minimizing transportation costs. Additionally, IKEA has so many suppliers to buy products from.
WEAKNESSES: The size and scale of its international operation affects the management process because it could be challenging to regulate principles and quality. Furthermore, it’s difficult to maintain the balance between production quality and price, as it’s not easy to keep up the pace in competitions with rivals and simultaneously remaining different.
OPPORTUNITIES: IKEA engages in charitable activities and supports World Wildlife Fund(WWF). This gives consumers the sense that IKEA contributes to society and operates for a better course. By these, IKEA builds up trust amongst its consumers, employees and other stakeholders.
THREATS: External factors such as a poor economy or recession in the country of operation slows down consumer spending, hence low demand leading to reduced business sales. Additionally, Competitors in the furnishing retail sector like Argos, John Lewis, Ashley Furniture Home stores, etc are threats to the company and in order to have a competitive advantage, IKEA should consistently come up with unique innovations/ideas.
TQM entails the efforts a company makes to create an environment where the company continuously develops, sustains and improves high quality products/services to satisfy its customers. IKEA applies TQM when manufacturing their products such that the output meets the specific high quality and safety requirements of the customers.
Just-In-Time: This is when a business satisfies the needs of its customers without delay. IKEA outsources the manufacture of most of its products and a few are manufactured in-house. The subordinate organization, Swedwood sees to the manufacture of a large volume of products strengthens IKEA’s supply network such that at the occurrence of any rift or unavailability of stock between suppliers, IKEA can always rely on Swedwood for emergency supplies so that products will constantly be made available for the customers at the stores. Additionally, IKEA delivers products to the customers’ homes directly.
Lean Management involves termination of ‘muda’-activities that entails wasted materials, achievements and time in order to increase efficiency of the transformation process through production volume management. Process begin as soon as an earlier process is concluded, hence IKEA’s production process is operated specifically on avoiding waste thereby dissolving delay in-between stages of production. The products are moved directly to the retail stores immediately after manufacture, this prevent goods hoarding, thereby freeing up inventory and shortening supply lead time.
The company’s compatibility focuses on uniquely created operation strategies which in conjunction relate to the five performance objectives and characteristics of operation process.
DEPENDABILITY: IKEA ensures that the vast variety of products they offer are consistently made available to customers on time by launching local offices near to their suppliers in order to observe their operations. The reorder process ensures the quantity of out-of-stock product is reduced, by hastening the arrival of new stock at the occurrence of stock-out or alteration in the sale pattern. The company has foreseeable opening and closing times and also provides consistent car parking space at stores so customers don’t have to worry about where to park their cars.
FLEXIBILITY: IKEA allows mix flexibility and ensures a vast mix of product/services; from household furnishings to office accessories, supporting establishments from childcare to restaurants and crèche. Wheelchairs are made accessible and also lifts ensure disabled customers have a way to the upper floor.
IKEA considers volume flexibility hence, the global sourcing operation manages volume and has the ability to alter the level of output, as it is up to each store management to decide stock-level of every product. Additionally, operations allow change in delivery times.
SPEED: Consumers can sharply pinpoint the stores from its conspicuous bright yellow and blue distinctiveness. There’s a wide acre of industrial land where customers can park their vehicles without wasting time searching for parking space. Customers can also drop-off their children at the crèche so that they can’t be distracted and left to focus on products. Shoulder bags or trolleys are provided for fast selection of products. Thereafter, items selected are quickly moved through large conveyor belts to the check-out points in order to reduce waiting times and long queues. Finally, the customers transport the items home themselves. The operation encourages a smooth flow of customers and is compatible with the time-conscious target audience who demand fast services.
COST: IKEA attracts consumers by setting low prices for their products. In order to maintain low prices, IKEA minimizes manufacture and distribution cost. The company uses flat-packages to manage space and spend less money on distribution. Also, IKEA has a variety of suppliers giving it a range of price options for production. IKEA stores are situated at the sub-urban areas because the rents are much cheaper than the city centre areas.
QUALITY: IKEA ensures the safety and functionality of their products. Its product quality is contingent on the international standard ISO 17025. IKEA has introduced test laboratories to test their products in accordance to customer’s needs not only regarding design, function and financial value, but further considering longevity and safety. Store personnel maintain low contact with customers but are available and friendly when requested. IKEA stores are kept clean and products are presented attractively to entice customers. Furthermore, their supporting establishments like self-service restaurants and childcare which takes care of customer’s children while they shop ensures quality services to customers.
VOLUME DIMENSION: IKEA’s warehouse based operation allows furnishings and accessories that can be self-assembled to be produced in a large volume. IKEA operates globally which permits economy of scale, therefore IKEA has the ability to cut down cost with its large volume production. The drawback could be that products may not be distinctive and customers may complain about having similar product.
VARIETY DIMENSION: IKEA’s furnishings are cost based and stores hold about 9,500 furnishings providing a vast variety of options. Furnishings are designed to be sold as a flat-pack but customers have the liberty to assemble the products themselves.
VARIATION IN DEMAND: IKEA stores aren’t situated at the city centres, hence making it not easily accessible to customers without vehicles. In winter, customers may be fewer as they may feel discouraged to travel miles outside town in the cold to purchase furnishings. Stores are situated in sub-urban regions, therefore stores would be congested with shoppers during the weekends as customers have more time and may likely visit the stores than at weekdays. The down side to this is that customers are often discouraged by the congested crowd of shoppers over at the weekends.
VISIBILITY DIMENSION: This entails the relationship between IKEA’s operation and customers. Personnel are always available to customers. Customers are provided with catalogs highlighting items in-store, shopping memos with pencils for recording and check-listing and tape measures for measuring. Moreover, IKEA provides family shopping experiences with its establishments like its Swedish and local food restaurants and crèche.
RECOMMENDATIONS
IKEA stores’ maze-like structure concept has been proven to work as it affects the psychology of confused customers and may increase sales. However, it has its downsides; the concept wastes store space. Also, it irritates customers that are searching for a specific item and have to walk through the whole store for it which is often deemed as a waste of time and should be avoided as the customers are time-conscious. To prevent this, IKEA should choose a grid layout to avoid confusing customers while shopping and saving their time. Also this will provide space in stores.
Additionally, IKEA focuses on attracting low-medium income earners looking to purchase products at affordable prices. Hence, the higher income group may not be interested in IKEA because of its reputation as a low-price furniture retailer. IKEA should likewise concentrate on attracting high-income earners, as this would increase sales significantly. IKEA provides modern and top-notch products that will definitely meet the requirement of high-income earners.
Furthermore, stores are located in sub-urban regions making it not easily accessible to customers without cars. IKEA should also consider establishing some of their stores at the city centres where it’d be easily accessible to most customers.
IKEA employs the same category of people, which obstructs diversity and infusion of new ideas. IKEA should see that its employment policies are broadened and at the same time not altering fundamental competencies needed of key personnel. It is significant that people from mix cultures and personalities should be employed as it promotes diversity and innovations in the company.
CONCLUSION:
Regarding the evaluation in this report, IKEA considers cost as its most significant objective, while it aims to minimize the cost of output in its processes. IKEA applies mass production in its processes and operates internationally so as to achieve economy of scale. Moreover, IKEA pioneered the flat-packaging concept in its operations that minimizes transportation cost and conserve space. Nonetheless, IKEA also emphasizes on quality and visibility, which meets the needs of customers. All through IKEA’s huge dedication to innovation, they are capable of providing modern, stylish furnishings that fulfills the customers’ needs regarding flexibility. Additionally, with the ISO 17025 standard, the company guarantees the safety and functionality of their products.
Generally, IKEA has adopted processes which successfully sees to customer satisfaction, likewise gave the company a competitive advantage over its competitors. IKEA has the ideal strategy and will prevail to an excellent performance in the future.
