Presentation

On IKEA Inventory
Management
Practices

By Group 10
Tuhin Banerjee
Pratyush Samantaray
 Inventory Management decisions have a direct
bearing on company's balance sheet.

Company’s
reformulate their
inventory strategies
to stay ahead in the
competition in
challenging times
 Inventory

• Inventory generally refers to the materials

in stock. It is also called the idle resource
of a company.
• The main objective of inventory control is
to achieve maximum efficiency in
production & sales with minimum
investment in inventory.
 Source & Types Of Inventory

 Raw Material Inventory Anticipation Inventory

 Work-in-Progress Inventory Decoupling Inventory
Cyclic Goods Inventory
 Finished Goods Inventory
MRO Inventory
 Transit Inventory
 Buffer Inventory
Why Raw Material Inventory ???

• Meet Variation In Production Demand

• Cater To Cyclical and Seasonal Demand
• Economies of Scale Of Production ( Big
Lot)
• Take Advantage expected Price Increase
and Quantity Discounts
• Reduce Transit cost and Transit Time
• Long Lead ( At supplier ) and high
demand items need to be held in
inventory.
Why Finished Goods Inventory ???

• Market and Supply Chain Demand

• Production Strategy Necessitates
Inventory Holding
• Market Penetration
• Transportation and Physical Barrier
• Production Lead Time
• Speculative Gains
• Avoiding Certain Cost
– Stock Out Cost
– Transportation Cost
 Reasons Against Inventory

• Excess inventory results in incremental costs of maintaining

inventory and blocks working capital.
• Under inventory can seriously hamper the market share.
• Inventory Build-up Can be a Sign of Hidden Problems
– To cover inefficiencies in the internal systems.
– To cover up supplier inefficiencies
– Rejected Inventory on account of inconsistency in
quality at production.
– To cover production delays attributed to layout
inefficiencies, breakdowns, lengthy process time etc.
• Any non-moving inventory is a cause for concern.
• Inventory over a period of time is susceptible to loss, theft,
pilferage and shrinkage. It can also become obsolete and
deteriorate over a period of time if not used within the
shelf life.

Inventory Levels are always on radar of financial controller as well as Top Management
 Costs Relevant to Inventory Management

• Procurement costs
– Price of the goods
– Cost of preparing the order
– Cost of order transmission
– Cost of production setup if appropriate
– Cost of materials handling or processing
at the receiving dock
• Carrying costs
– The primary cost is the cost of money
tied up in inventory, but also includes
obsolescence, insurance, personal
property taxes, and storage costs
• Out-of-stock costs
– Lost sales cost
– Backorder cost
 Inventory Management Objectives

• Good inventory management is a careful balancing act between stock

availability and the cost of holding inventory.
• Service objectives
– Setting stocking levels so that there is only a specified probability
of running out of stock
• Cost objectives
– Balancing conflicting costs to find the most economical
replenishment quantities and timing

Customer Service, Inventory Holding costs

i.e., Stock Availability
Inventory Management At IKEA
 Benefits of VMI
VMI is a business relationship where a
manufacturer takes over management of
inventory for a retail or wholesaler using EDI

• Increased Customer Service-

Improved Channel Communication
and co-operation
• Better Planning- Provides right
information to optimize supply
chain
• JIT Inventory- Inventory Levels can
be optimized for manufacturers as
well as customers
• Reduction of sales cost- Reduction
in the cost incurred for waiting an
order
 Disadvantage of VMI

• Supplier that can’t deliver

– Constraints of not having software,
infrastructure or expertise
• Unscrupulous Partners
– Requirement to share sensitive
information to partners.
• Limited Options
– Difficult to make changes whenever
required
• Market Responsiveness
– Inability to meet market demand
owing to lack of supply diversity from
vendors.
 Inventory Management At IKEA’s DC

• Takes into account the distribution and handling patterns of items from stores.
• Important when obsolescence is to be controlled.
F – Fast moving
1. Average Stay of the item in inventory
S – Slow moving 2. Consumption Rate Of the item
N – Non moving
• High Flow and Low Flow DC - IKEA’s store operations are supported by high-flow
facilities (focused on the 20% of SKUs that account for80% of the volume)
 Pull vs. Push Inventory Philosophies
PUSH - Allocate supply to each PULL - Replenish inventory with
warehouse based on the forecast order sizes based on specific needs
for each warehouse of each warehouse

Demand
forecast
Warehouse #1
Q1

A1

A2 Q2 Demand
Plant forecast
Warehouse #2
A3
Q3

A = Allocation quantity to each warehouse

Q = Requested replenishment quantity Demand
by each warehouse Warehouse #3 forecast
 Inventory Management At IKEA Stores
Simple Two Bin Pull Method
Maximum/minimum Settings to Reorder:

Minimum settings: The minimum amount of

products available before reordering.
Maximum settings: The maximum amount
of a particular product to order at one time.
Two Bin System to Track Inventory
1St Bin – Usable Stock
2nd Bin – Safety/ Buffer Stock
FIFO system to switch between bins.

Inventory and restocking is only done at night

The minimum and maximum settings are based
on the number of products that are available in
the store’s reserve stack of bins
 Optimizing Inventory Carrying Cost At IKEA

 Do-It-Yourself assembly lowers packaging costs &

Holding Costs
 Flat packages for low-cost transport & less
space in warehouse bins and reserve rack.
 Every IKEA store has a warehouse on the
premises
 Cost-per-touch inventory tactic
Customers select the furniture and retrieve the
packages themselves
“Companies find that the more hands touch the
product, the more costs are associated with it.”
 In-store logistics
IKEA employs in-store logistics personnel to
handle inventory management at its stores
 Channelized Reverse Logistics
 Store Format - “One Way Layout”
 Optimizing Inventory Carrying Cost At IKEA

133 fewer truckloads per year

66,500 miles of transit eliminated
Decreased transit costs by $133,000
9,500 fewer gallons of diesel fuel consumed per year
Over $175,000 in reduction of material costs
146 tons of corrugate and paperboard material
eliminated
Supply Chain Operations Reference (SCOR®)
model Of IKEA
Rapid assessment of supply chain
performance
• Clear identification of performance
gaps
• Efficient supply chain network
redesign and optimization
• Enhanced operational control from
standard core processes
• Streamlined management reporting
and organizational structure
• Alignment of supply chain team skills
with strategic objectives
• A detailed game plan for launching
new businesses and products
• Systematic supply chain mergers that
capture projected savings
Financial Performance Of IKEA
 Inventory Turnover Ratio of IKEA

The higher the inventory turnover, the better

company is selling goods very quickly and that
there’s demand for their product.
Low inventory turnover
weaker sales
declining demand for a company’s products.
Inventory turnover also shows whether a company’s
sales and purchasing departments are in sync
Inventory = Sales.
Inventory turnover provides insight as to whether
a company is managing its stock properly.
Low Turnover - Overestimated demand and
purchased too many goods.
High Turnover – Underestimate demand ,not
buying enough inventory and may be missing
out on sales opportunities.
 Inventory Turnover Ratio of IKEA
Cost of Goods
Financial Annual Inventory(in Millions Inventory Turnover
Sold(in Millions
Year Turnover of Euro) Ratio
of Euro)
2012 27628 15723 4664 3.37
2013 28506 15786 4257 3.71
2014 29293 16372 4927 3.32
2015 32658 18221 5498 3.31
2016 35691 20260 1713 11.83
2017 36295 23730 1924 12.33
40000 Annual Turnover Cost of Goods Sold Inventory
35691 36295
35000
32658
30000 29293
27628 28506
25000
23730
20000 20260
18221
15723 15786 16372
15000

10000

5000 4664 4927 5498

4257
1713 1924
0
2012 2013 2014 2015 2016 2017
Thank You