Logistics & Supply Chain Management

Of
Furniture Retailer IKEA

AIDANA MUKAZHANOVA
A4077225
Report

Logistics and Operations Management

Module code: LOG9014M
MIB
12.09.2014

London School of Business and Finance

University of Lincoln
2014

CONTENTS

I.
II.
III.
IV.
V.
VI.
VII.
VIII.

Executive Summary..........................................................................................................3
Supply Chain Management Introduction to IKEA........................................................4
Operational Processes.......................................................................................................6
Advantages and Disadvantages of IKEA Business..........................................................9
Inversed Business Processes............................................................................................11
Analysis of Multidimensional Operational Issues...........................................................14
Conclusion.......................................................................................................................16
References........................................................................................................................18

EXECUTIVE SUMMARY

The retail industry has gone through important and diverse changes and now after
centuries of development, it is still evolving by creating best practice of business processes.
Industry of retail is one of the biggest sectors with the highest rates of employment; world
economy is depended on it and to manage this huge machine of processes industry applies all
new techniques and approaches to maximize profitability and to reach effective and efficient
results. Swedish company IKEA designs and sells ready-to-assemble furniture, home accessories
and appliances and is one of the largest trader of furniture in the retail industry. Therefore, it is
presented in this report to cover topics related to the logistics and supply chain management.
Presented report is about IKEA itself and its supply chain management. Operational
processes of the company are shown in detail; also advantages and disadvantages related to the
business of IKEA are exposed. Inversed business processes portray gap between the evaluation
and implementation of business processes. Operational processes are covered in the section
Analysis of Multidimensional Operational Issues, where analysis is foreseen as a tool for future
improvements.
Methodology used during the research of this topic is different. Materials gathered from
previously made researches and secondary data are utilized, articles from journals and other
literature of the topic of logistics and supply chain were applied.

SUPPLY CHAIN MANAGEMENT INTRODUCTION TO IKEA

In modern business, supply chain management has already transformed to a wide

concept, where operational processes are more than only logistics and where these processes run
the whole mechanism of business itself. So, this is the way how supply chain becomes a value
chain, where competitive performance leads to the success, which is not easy to reach in the
global competitive environment, where changes happen all the time and sometimes, even
unpredictably. Logistics is about planning direction and scope of the plan that is required to be
followed by business to control flow of information and products related to it. As to the supply
chain management, it is built upon this scope to achieve tight relationship and coordination
between the processes of other sides/bodies in the pipeline. Suppliers and consumers of the
company could represent these entities. Martin Christopher (2011) in his book adopted definition
of supply chain management: The management of upstream and downstream relationships with
suppliers and customers in order to deliver superior customer value at less cost to the supply
chain as a whole. Additionally, he suggests that supply chain management as a term should be
changed to demand chain management; and moreover, considering fact that market should be
main driver of the chain and not suppliers, he proposes word chain to replace with network
due to the fact that there are different suppliers and consumers. Industry of retail deals with all
presented ideas and approaches, so management of relationships is very important; it is
connected with profit for all parties involved in the business and operational processes. Without
supply chain management achieving economy of scale would be almost impossible. Besides,
companies as IKEA going globally and seek more ways leading to expansion all over the world;
they go through different steps while entering new markets, these could be acquisitions, mergers,
third parties. New market is new consumers, new demands and new products all is bounded. To
remain high quality service everything should be satisfied on time so supply chain management
is so needed tool for such a big companies like IKEA.
Scandinavian company IKEA was founded in 1943 by young Ingvar Kamprad, who is
listed as the richest person in Europe (Bloomberg, 2013). Today, it is a globally retailing
company that sells Scandinavian designed products, mainly furniture. Corporate structure is a
little bit complicated because company is owned by for profit and nonprofit companies. Also,
corporate structure consists of two parts: operations and franchising. IKEA is presented in 45
countries with 361 stores. Recently, on Augusts 28, 2014 new store was opened in Miami, USA,
4

store size is 38,648 m2 (IKEA, 2014). INGKA Holding is private, for profit Dutch organization
that oversees almost all operations of IKEA. It decides how to manage stores, design issues and
furniture manufacturing topics, whom to choose as a supplier and all purchasing subjects. About
50 stores of IKEA are managed outside the holding as well as they represent franchisees. IKEA
remains to be one of the worlds top employers, actually for new grads (CNN, 2013). In 2013
company reached record profit (3.3 billion Euros) and increased market share in countries where
it operates (BBC News, 2013), emerging markets played vital role as the sources of profitability.
IKEA went through different changes while developing as an international business.
Nowadays volatile consumer demands impacts this process greatly. The supply chain of the
company is designed the way to meet all requirements of global market so company operations
could be spread globally, both sales and purchasing. IKEA work with its suppliers in two phases
first is identification and second is execution. The identification stage is about producing set of
outcomes, which is helpful in designing proper plan aimed to the improvements of business
(Supplier Portal IKEA, 2014); and second phase is about application of resources from both
sides to the suggested improvements, followed by execution. This approach, gives company to
put low prices on their production, besides company puts effort in bringing suppliers and
customers closer, IKEA creates low price by shortening the distance between the needs of its
consumers and the possibilities of its suppliers. Additionally, since 2002 company has its own
code of conduct name IWAY, which includes guidelines and all requirements placed on suppliers
of services and products; details what to expect in return from IKEA are also included (IKEA
Code of Conduct, 2008).This document covers working conditions, topics regarding child labor
prevention, the environment issues, responsible forestry management, etc. Suppliers of IKEA are
responsible for communicating this code of conduct by UKEA to their own employees and subsuppliers, so all these easements are used in all operations.
Generally, IKEA builds a sustainable supply chain which is vertically integrated.
Sustainability is good opportunity for investment and rising profitability. Esty and Winston
(2009) discuss the business opportunities occurred from sustainability. Sustainability on itself
evolved and tightly integrated into the business concept in 21 th century; there is concern
regarding environment conditions like global warming, which adversely affects our planet. The
5

Brundtland Commission's report of 1987 defined sustainable development as "development

which meets the needs of current generations without compromising the ability of future
generations to meet their own needs" (UNECE, 2014). It means that IKEA deals with
environment, society, economy, reduction of remains, reuse of recycled materials, transportintensity reduction, the impact of congestion and other sustainability related issues. IKEA across
its integrated value chain contributes to the peoples life quality improvement; company strives
to outputs more rather it takes. It promotes renewable energy, safe chemicals, and responsible
stewardship of forests, farmlands and waters.

OPERATIONAL PROCESSES
IKEA as global company uses its own strategy with the purpose to achieve sustainable
competitive advantage. All activities planned by IKEA are produced with the single idea to
receive desired results. However to measure effectiveness and efficiency of this results
operational processes should be evaluated with the help of specifically designed tools.
The operation strategy of IKEA is focused on low cost while traditionally furniture is
available more at higher costs. IKEA deals with the large volume due to their products high level
of repeatability and specialization. Operation needs to create products variety from low to
medium to offer standardized and definite products. The variation that operations have to cope
with is somehow low as well as consumers demand and sales are predictable.
IKEA uses different strategies. For example, here is the figure 1 showing difference
between strategies of IKEA in Europe and China.

EUROPE
CHINA
VALUE PROPOSITION
Good quality, stylish furniture at low and Good quality, western-styled aspiration brand
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affordable prices
Stylish,

functional

products

for the middle-class population

VALUED NETWORK
PRODUCT
and home Slight modifications to products to suit the

furnishings

local market and reflect Chinese apartment

sizes
STORE LOCATION
The suburbs, next to highways so that access The outskirts of cities, next to rail networks as
by car is easy

most customers use public transport

PRICE
Low-cost
Affordable prices
PROMOTION
IKEA catalogue is the main marketing tool
Advertising on Chinese social media and
micro-blogging website Weibo has been
popular
LOGISTICS
Products are sourced and made in developing Raw material and products are sources loally.
nations like China and Malaysia and then IKEA also built two factories in Shanghai to
shipped to Europe

avoid high import taxes

Figure 1 - How IKEAs Strategies differ in Europe and China (Business Today, 2014)
IKEA generally targets different groups of customers. Young people with low or middle
income whom might also have kids; and contrary, business consumers whom usually run small
or medium businesses. It is obvious that IKEA target audience is price conscious. Companys
compatibility is based on specially created operation strategy which also deals with other
strategies and together they link performance objectives like quality, cost, speed of production,
flexibility of operations and all other aspects affecting effectiveness of IKEAs strategies.
Operations related to the logistics also affect operation processes (Bowzarth, C. and Handfield,
R, B., 2008). For instance, IKEA widely uses its outbound logistics, when consumers pick up
and deliver products on their own. Besides, self-assembly furniture makes this process more
convenient; and their packaging is comfortable, there is no wasted space. Furniture designers
form product design even logistically. This approach is useful for the company in terms of
warehousing because this type of design gives possibility to save space and better use the stock.
Daily, IKEA handles thousands of products and it is important to control this movement of goods
7

because products should always be available for consumers in store. 20-25% of each stores
employees work in logistics and they impact operations directly. That is why IKEA is focused on
controlling its space and a volume of product, company is maintaining uninterrupted operational
processes (IKEA, 2014). According to Intertek (2014), it provides quality check of IKEA
operations. This is multinational company, so it serves IKEA in China and Asia. Therefore, IKEA
by having local partner who checks companys operations in China saves on the difficulties
related to the long-distance collaborations and remanufacture.
IKEA distribution centers are all over the world and they are strategic part in supply chain
management. According to the Yearly Summary report of FY 2013 (IKEA, 2014), IKEA has 32
distribution centers in 16 countries, whereas 60% of production takes place in Europe. Trading
service offices support the process of buying products from suppliers. Suppliers send products
directly to the store for sale or to the distribution centers, where stock and store deliveries are
managed. Furnishing suppliers number is 1, 046 and they come from 52 countries. Most of them
started relationship with IKEA as an independent small entrepreneur. Generally, IKEA sources
materials close to its supply chain and this way it reduces transportation costs. Almost all IKEA
distribution centers are situated near the seaports and it means that company uses more sea
transport rather then read transportation. Suppliers who deliver products directly to the stores
help company to reduce costs and lover carbon footprint. Retail stores have their own
warehouses and this process also brings success to the company; it is traditional model that is
utilized for a long time. According to Parikh and Nielsen (2009), traditional models use power
systems like Geographic information systems (GIS) and real-time devices that help to measure
load flow situation, and help to improve the whole distribution system operations and planning
process. Moreover, IKEA started to use flat packs to keep prices low. This is a cost efficient way
of getting product from supplier to customers and besides environmental harm is lower. This flat
pack influences goods transportation by boats, trains or trucks and allows IKEA to transit more
products per trip. So, as it is seen logistics at IKEA affect supply chain operations at every stage.

ADVANTAGES AND DISADVANTAGES OF IKEA BUSINESS

Business within IKEA has its own advantages and disadvantages; some of them are
discussed here in the scope of logistics and supply chain management. Figure 2 portrays pros
and cons of supply chain at IKEA.
ADVANTAGES

DISADVANTAGES

Low-cost Furniture

Extended Planning Cycle

Special Design

Less Flexibility

Volume Business

Long Lead Time

Stability in Supply Chain

Instability of Supply Chain

Consist Quality

Discontinuous Split

Figure 2 Pros and Cons of IKEA Supply Chain

Companies like IKEA are looking for sustainable competitive advantages and in this case
strategy is to be defined too. Porters generic strategies (Porter, 1980) are a good tool to find
IKEAs position.
PORTERS GENERIC STRATEGIES
Target Scope
Broad
(Industry Wide)
Narrow

ADVANTAGE
Low Cost
Product Uniqueness
Cost Leadership
Differentiation Strategy
Strategy
Focus Strategy

Focus Strategy

(Market Segment)

(Low cost)
(differentiation)
Figure 3 - Porters generic strategies chart

According to Christopher (2011), most profitable companies plan to be low cost goods
producers in the industry because it is seen as the guarantee of success. IKEA is one of these
companies, its strategy is cost-based and directed to the narrow market segment. Basic
consumers are young people who chose to pay less for the furniture. To display its products
IKEA uses self-service model, when consumers can test the furniture, which is already decorated
and this approach is like a tip to the consumers about how it is possible to decorate particular
furniture without the help of decorator. Additionally, there is always one warehouse where
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consumers are able to pick up desired products, those packed in the boxes and spaced on pallets.
Company offers roof racks to consumers who can buy and during the next visit return back and
refund money. Renting van is another advantage; local delivery service also supports this
process. In case all vans are busy, it is possible to make a reservation for the further purchase.
Moreover, IKEA has additional service allowing consumers to place order by phone without
going to the actual store; and shipping of such orders happens by different methods like UPS or
freight, home delivery. Self-assembled products or so called RTA furniture also bring an
advantage to the consumers because flat pack is comfortable during the exploitation like
shipping and delivery; saving space is like saving money. This brand new concept of design is
democratic design which represents combination of design and manufacturing (Haig, 2006).
Most of IKEAs products are standardized globally.
According to Larsson and Qviberg (2004), IKEA has a holistic view of operations; it
needs reduction of whole costs related to the delivery processes, product quality check and
remain green company. As to the supply chain it is mostly make-to-stock and therefore, whole
supply chain relies on forecasts. IKEA had an online IT system, which is integrated into the
whole network of the company and it is developed and managed by the department that supplies
inventory. Mainly, this program has 4 parts serving management of inventory, entering order,
routing order and order fulfillment system. This program gives possibility to manage the stock
and also reorder it with the company vendors, hence forecasting becomes more efficient. IKEA
IT system also tracks volume of sales in the retail stores, amount of inventories in the warehouse
and real time operation in retail store; with these features controlling stock is easier. In case when
stock volume is high till reorder point, it could be seen from the program and followed by
replenishment. IKEA logistics has complications as long led times; hence company faces
challenge to control levels over the vendors. IT system is strong tool helping company to deal
with the operational processes. Employees of the company access this program to make a
forecast of sales and orders.
All business processes by IKEA consider environmental issues, those so important for the
planned performance of the company. According to the sustainability report 2013 (IKEA, 2014),
IKEA has made distinctive progress. For instance, since 2010 it strengthened energy efficiency
10

approach and saved $54 million. There is one very important component solar systems integrated
into the roofs of the IKEA newly built stores. This is a sensible advantage, giving IKEA
possibility to isolate itself from the volatilities of energy power industry, which is considered to
be one of the most unstable businesses globally. Another clever approach is LED lights
technology usage in the production that helped IKEA consumers to save electricity costs about
$9.45 saved per one bulb in one year. Totally, $116.1 million dollars were saved by using LED
bulbs. Company almost doubled cotton usage by investing 1.35million in project aiming
farmers to improve the income and cotton production with the less usage of water and chemicals.
So received cotton from 110,000 suppliers helped IKEA to increase cotton usage from 34% in
2012 to 72% in FY 2013. In the same report of sustainability, president and CEO of IKEA, Peter
Agnefjll says that Everyone, including IKEA, has a part to play in finding solutions. With our
vision of creating a better everyday life for the many people I know there is no other way of
doing business than in a sustainable way. Forbes (2014) states that IKEA has an aggressive
sustainability approach however it creates high potential and new opportunities.

INVERSED BUSINESS PROCESSES

This part of the report explores and analysis the gap between the evaluation and
implementation of operational and business process improvements of IKEA. Companies
extending their supply chain globally need to solve the issues related to the structure of their
global logistics scheme. One approach unifies all multinationals, to achieve good results in
international logistics they rely on centralization tactic (Fernie and Sparks, 2004).
As well IKEA is a global company; sometimes it faces challenges related to the cultural
differences from markets of entry. China represents good example, because it is considered by
multinationals as a major component of their supply chain. It is always essential to make sure
that suppliers from this country act in the scope of companys sustainability scopes; otherwise
there could be differences in energy efficiency approaches, strategies and green reputation.
Multinationals entering China have to be accountable towards local circumstances, it could be
local sustainability programs designed to foresee safety issues or employees health. In case of

11

IKEA, company shares its experience, which shows that full compliance with the standards took
it long in China because there is still a gap between reality and legislation in the country.
Company generated its own pragmatic approach by providing maximum working hours 60 hours
per week; and additionally employees had 36 hours as an overwork time per month. Economy of
China is constantly changing therefore bringing many challenges for companies to face. In this
condition it is hard to deal with monitoring and enforcing environmental compliance. Quality
and independence of third party companies as EHS auditors is crucially important, otherwise it
would be hard to determine if suppliers respond to the environmental standards and this way
decrease level of risks like shutdown of business or financial penalties (PWC, 2014).
Multinational companies like IKEA consider outsourcing as an activity providing cost or
value advantage. This is widely accepted approach and dramatically increasing in practice of
almost all industries. Strong economic logic lies beyond that kind of decisions, thought
companies need time to say good-bye to the in-house performance because there are some
complexities to go through. Supply chain becomes more compound and requires stronger
relationship management. After applying outsourcing business boundaries become wider and
value chain expansion goes beyond it. This is the process of changes, when supply chain
transforms into the value chain; and all entities connected to each other are involved in this value
chain network. This approach could be related to the competitive advantages such increased
profitability or could even bring bankruptcy/lost (Christopher, 2011). In addition, low prices on
good in low-cost countries not often mean considerably low total cost of ownership (Steinle and
Schiele, 2008). Global sourcing has its own approaches, see Figure 4.

INTERNATIONAL
I Level

PURCHASING
II Level
III Level

GLOBAL SOURCING
IV Level

V Level

Domestic

International

International

Global Sourcing

Global Sourcing

Purchasing Only

Purchasing Only

Purchasing as

Strategies

Strategies

as Needed

Part of

Integrated Across Integrated

Sourcing

Worldwide

12

Across

Strategy

Locations

Worldwide
Locations and
Functional
Groups

Figure 4 Five Stages of Sourcing (Trent and Monczka, 2003)

Strategic outsourcing for IKEA is more like an idea that allows other companies to put
their effort in value chain activities or to perform for value chain itself; Moreover companies also
could be function in value chain and act as independent specialists whom concentrate all skills
and knowledge on IKEA value chain. Almost 90 per cent of IKEA products are outsourced and
the rest 10 per cent is internal production. This is beneficial to the company in terms of low cost
structure and focus on the main business. This type of vertical integration is useful as well as it
creates constantly growing economies of scale; and it is very important to achieve it because
IKEA structure is generally based on high fixed cost. Company spreads its high fixed cost in
large volumes of production and as a result receives average cost per unit, which is lower.
Strategic outsourcing gives possibility IKEA to gain benefit such as keeping focus on its core
business because it allow management employees to direct their resources and energy on their
performance and therefore bring up efficiently those activities with the highest potential which
created competitive advantage and better chain of value.

ANALYSIS OF MULTIDIMENSIONAL OPERATIONAL ISSUES

Multinational companies like IKEA operating in retailing industry deal with
multidimensional operational issues and to resolve all of them they use different techniques;
however notwithstanding of their hard work and endless effort to achieve flexible operations,
there are still problematic areas in their supply chain. Those areas concern strategies, enterprise
resource planning (ERP), lack of skills, poor management of inventory and logistics, problems

13

with planning and control, etc. This part of the report evaluates IKEAs operations with the help
of SWOT analysis.
Strengths With its vision 'to create a better everyday life for many people' IKEA creates
profitability oriented plans. Brand with the strong image worldwide offers consumers high
quality service in lower prices compared to rivals in the retail industry who sell furniture.
Strategically chosen locations help company to manage supply chain with better results in
performance. Wide range of choice satisfies taste of its target audience and functional design of
the products at a low price seems to very attractive. IKEA uses its strengths characteristics to
retain and attract consumers. Besides, company is always on check and has a look into the future.
Key performance indicators (KPI) allow company to measure its progress and long-term aims,
also company plans target according to these indicators. An IWAY code of conduct also is good
feature helping company to manage their suppliers and guide them in social and environmental
requirements which are expected by IKEA from them. Company knows how to used renewable
materials and sustainability report portrays it quite well. IKEA uses recycled waste products and
produces energy. Long-term partnership with its suppliers creates volume commitments; that is
the way how IKEA negotiates lower prices, hence suppliers implement guaranteed orders. By
purchasing in bulk company saves money; and by sourcing materials located close to the supply
chain leads company decreased costs of transportation. Suppliers could deliver products directly
to the stores and here IKEA gets benefits as reduced time, cost and less carbon footprint.
Opportunities To take advantage and use opportunities companies usually rely on their
strengths. In case of IKEA business is focused on sustainability and therefore environmental
issues. Company considers this approach as a high potential for increased returns. IKEA
develops solutions for minimizing recycling of products. For instance, in 2013 company
introduce ENASTNDE dishwasher that saves 9/10 the water, Induction hobs that uses 40 per
cent less energy compared to ceramic hobs, energy saving refrigerator and other products.
Demand for green products is growing, IKEA uses this opportunity and by creating that kind of
products company attracts new segment that supports environment. Company is oriented
efficiently to use energy saving possibilities and to reduce carbon footprint. Moreover company
supports World Wildlife Fund (WWF) and participates in charity activities. It deals with UNIEF
14

project and also supports Save the Children organization. This is the way how IKEA uses its
opportunities and builds trust among its stakeholders, consumers, employees, suppliers.
Weaknesses Finding weaknesses within the business operations could be useful for the
company in setting new goals and objectives. Also, by excluding weakness companies could
develop new strategies. IKEA has to pay attention to the size, scale and volume of its global
business because these sides impact management process and it could be difficult to control
quality and standards. IKEA can not control fully its own IWAY code of conduct, as well as in
particular countries where it has suppliers legislation is different and affects requirements of
IKEA, so company have to back up some rules during trainings and inspections. Another
weakness is the balance between production quality and price, it is not easy and at the same time
keep up in competitions with rivals and remain different. IKEAs consumers are not informed
well regarding companys activities and green policies.
Threats Timely knowing treats and eliminate them is essential to any business. IKEA
could use strength to overcome treats and aggregate new ideas to fix and make stronger its
position on global market. IKEA should expect threats from competitors; and to differentiate
itself from rivals company should constantly think over new and unique approaches/ideas.
IT technologies play significant role in the management of processes within IKEA
company. According to Business Wire (2008), Lawson Opportunity Analyzer helped company to
prioritize and set new targets for better ERP implementation and also to improve other business
processes. Another case is K3 ERP solution to the supply chain operations, which software is
delivering multichannel solutions helping companies in retail industry to create integrated
shopping experience for the consumer (Bloomberg, 2010). Since 2010, As it is published in the
press release of Better Online Solutions (B.O.S.), it delivers logistic management solution for
IKEA Israel (BOS, 2010.) This is successful development of the projects that gives company
possibility to collect data regarding inventory stocks, receiving goods, inventory transfer, etc.
There are other software systems integrated into the operations of IKEA and it is evident, IKEA
makes progress in adaptation of technology into business processes. In addition, company also

15

uses Radio Frequency Identification (RFID) system and according to RFID Journal (2012), it
helps IKEA in eliminating shipping errors.

CONCLUSION
IKEA has effective and efficient operational processes, by managing them on high level
where control and analysis of business processes creates success. Policies within the company
are designed to control pricing approach, quality, logistics and suppliers. Long lasting
partnership with the suppliers is mutually valuable aspect for both sides. There are key elements
in these relationships: communication, cooperation, coordination and interaction. Without these
elements it would be hard to deal with such a big network of sourcing. Timely action and
reflection upon the issues arising among both parties strengthens strategic position of IKEA on
the global market. IKEA follows trends of market, being aware of what is needed makes
company progressive. So it gives possibility to consumers pay money for the products which are
valuable to them and at the same time they have a benefit as a lower price if compared to the
rivals from furniture retailing industry.
IKEAs logistics and supply chain spread globally so therefore a lot of factors affect
operations, however company still manages to strive on the market and moreover, to show such
high profitability results. IKEA trademark is well-known globally; consumers visit IKEA store in
all over the world and behind this brand there is huge mechanisms working as an hour that
creates effect of everything under control. IKEA performance is based on the efficient use of its
strength; and by eliminating weaknesses company creates better future for itself. IKEA
objectives rely on a single supply chain plan; however there should be better plans with more
potential of efficiency and reliability, better transportation and replenishment options. Increased
delivery performance, better understanding of demand and forecasts could bring more accuracy
into the IKEA planning system.
In our era of globalization it is hard to make any predictions, thought observation of the
trends and other indicators gives us imaginary scenario that portrays challenges, and those could
16

be faces by supply chain. Ecologically efficient business courses will impact on supply chain and
logistics decisions. This idea is understood and foreseen by IKEA, that is why creation of the
future supply chain is so important for the company, which is concerned with the sustainability
issues, so it has already developed strategic plan People and Planet Positive for 2020.

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