Successful Implementation of Supply Chain Management at IKEA Stores - Case Study Example

Running head: Supply Chain Management: A case study of IKEA Supply Chain Management: A case study of IKEA s ] Executive Summary: Perhaps the foremost social and economic responsibility levied upon private and public organisation in recent decades is the maximisation. This responsibility is being increasingly codified in law and various governmental orders. Its influence is becoming increasingly pervasive through a constant series of federal court decisions as well as steady enlargement in the size and scope of administering agencies. Despite the pressure from the competitors IKEA will undertake effective supply management as the cutting edge. Higher number of satisfactory customers and efficient services will maximise the profitability of IKEA by attracting a large number of customers. It is argued that the supply chain standards are not fixed at a uniform level or universal conditions cannot be established. Several factors should be taken into consideration while implementing a supply chain implementation or improvement plan. Factors contributing to the effective development of supply chain management are many and varied, which include: Careful analysis of economic conditions. Evaluation of technology and skills. Consideration of climatic and cultural conditions. Competitive advantage in international market. The report contains practical recommendations for the effective and successful implementation of supply chain management at IKEA stores. Table of Contents S. No. Title Page no. 01. Executive Summary 02 02. Introduction 05 03. IKEA and UK Distribution 06 04. Proposed changes in Supply Chain 07 05. Comparison with present Supply chain 13 06. Conclusion 14 08. References 15 Introduction: The main source of competitive advantage in services industry is efficient service for the customers. Supply chain plays an important role in the efficient service provision to the customers. "The goal of a supply chain should be to maximise overall supply chain profitability. Supply chain profitability is the difference between the revenue generated from the customer and the total cost incurred across all stages of the supply chain. Supply chain decisions have a large impact on the success or failure of each firm because they significantly influence both the revenue generated as well as the cost incurred. Successful supply chains manage flows of product, information, and funds to provide a high level of product availability to the customer while keeping costs low." (Chopra & Meindl, 2004; 44) The IKEA should undertake the approach of goods flow on supply chain according to their shelf life and not just on the time they've been in the supply chain. "For instance, products with long lead-times that have been exposed to high temperatures during distribution would be sent to the retail shelves before those with short lead-times but distributed under more favourable conditions". (Roberti, 2005) The international sourcing policy effects the corporate, marketing, purchasing, and other strategies. It is important for the Management of IKEA to connect the future objectives with corporate objectives and strategy. IKEA and UK distribution: IKEA is a worldwide name with some 175 stores worldwide in locations as far apart as Singapore and the Czech Republic. It works with approximately 1800 suppliers and 55 countries, and its range is made up of around 10,000 products. Swedish furniture retailing giant IKEA's massive newly opened Peterborough distribution center is fast becoming a familiar landmark on the city's outskirts. With over 57,000 square meters of storage space, and boasting an underground geothermal heating system, the 21.3 million warehouse will employ some 250 people by the summer -- all newly created jobs. It will help the company service its 11 existing British stores, which occupy over 26,000 square meters apiece. 20 more outlets should be opened by 2010, leading to a huge increase in current annual UK sales of almost 750m. Proposed alternative: "The term 'Value Chain' was used by Michael Porter in his book "Competitive Advantage: Creating and sustaining superior Performance" (1985). The value chain analysis describes the activities the organisation performs and links them to the organisations competitive position. Value chain analysis describes the activities within and around an organisation, and relates them to an analysis of the competitive strength of the organisation. Therefore, it evaluates which value each particular activity adds to the organisation products or services. This idea was built upon the insight that an organisation is more than a random compilation of machinery, equipment, people and money. Only if these things are arranged into systems and systematic activates it will become possible to produce something for which customers are willing to pay a price. Porter argues that the ability to perform particular activities and to manage the linkages between these activities is a source of competitive advantage. Porter distinguishes between primary activities and support activities. Primary activities are directly concerned with the creation or delivery of a product or service. They can be grouped into five main areas: inbound logistics, operations, outbound logistics, marketing and sales, and service. Each of these primary activities is linked to support activities, which help to improve their effectiveness or efficiency. There are four main areas of support activities: procurement, technology development (including R&D), human resource management, and infrastructure (systems for planning, finance, quality, information management etc.). The term ,Margin' implies that organisations realise a profit margin that depends on their ability to manage the linkages between all activities in the value chain. In other words, the organisation is able to deliver a product / service for which the customer is willing to pay more than the sum of the costs of all activities in the value chain. Some thought about the linkages between activities: These linkages are crucial for corporate success. The linkages are flows of information, goods and services, as well as systems and processes for adjusting activities. A typical value chain analysis can be performed in the following steps: Analysis of own value chain - which costs are related to every single activity Analysis of customers value chains - how does our product fit into their value chain Identification of potential cost advantages in comparison with competitors Identification of potential value added for the customer - how could our product add value to the customers value chain (e.g. lower costs or higher performance) - where does the customer see such potential. (Dagmar, 2001) IKEA serves a very high density of customers scales to the Peterborough, it is best for the firm to own a fleet of trucks that are used with goods originating at the Peterborough to supply customers because this scenario makes very good use of the vehicles. If customer density is high but distance from the warehouse is large, it does not pay to send goods from the warehouse because trucks will gravel a long distance empty of the return trip. In such a situation it is better to use a public carrier with large trucks to haul the shipments to a cross-dock center close to the customer area, where the shipments are loaded onto smaller trucks that deliver product to customers. In this situation, it may not be ideal for IKEA to own its own fleet. As customer density decreases, use of an LTL carrier or a third party doing transportation is more economical because the third-party carrier can aggregate shipments across many firms. If IKEA wants to serve an area with a very low density of customers far from the warehouse, even LTL carriers may not be feasible and the use of package carriers may be the best option. IKEA can design a transportation network consistent with following table. Transportation Options Based on Customer Density and Distance High density Private Fleet with milk runs Cross-dock with milk runs Cross-dock with milk runs Medium density Third-part milk runs LTL Carriers LTL or package carrier Low density Third-part milk runs or LTL carrier LTL or package carrier Package carrier Customer density and distance also needs to be considered when IKEA decides on the degree of temporal aggregation to use when supplying customers. IKEA should serve areas with high customer density more frequently because these areas are likely to provide sufficient economics of scale in transportation, making temporal aggregation less valuable. To lower transportation costs, IKEA should use a higher degree of temporal aggregation when serving areas with a low customer density. IKEA must consider customer size and location when designing transportation networks. Very large customers can be supplied using a TL carrier, whereas smaller customers will require an LTL carrier or milk runs. When using milk runs a shipper incurs two types of costs: Transportation cost based on total route distance Delivery cost based on number of deliveries The transportation cost is the same whether going to a large or small customer. If a delivery is to be made to a large customer, including other small customers on the same truck can save on transportation cost. For each small customer, however, the delivery cost per unit is higher than for large customers. Thus, it is not optimal to deliver to small and large customers with the same frequency at the same price. One option firms have is to charge higher delivery cost for smaller customers. Another option is to tailor milk runs so that they visit large customers with a higher frequency than smaller customers. Firms can partition customers into large (L), medium (M), and small (S) based on the demand each. The optimal frequency of visits can be evaluated based on the transportation and delivery costs. If large customers are to be visited every milk run, medium customers every other milk run, and low-demand customers every three milk runs, suitable milk runs can be designed by combining large, medium, and small customers on each runs. Medium customers would be partitioned into two subsets (1. M2) and small customers would be partitioned in the three subsets (S1, S2, and S3). IKEA can sequence the following six milk runs to S2), (L, M1, S3). (L, M2, S1), (L, M1, S2). (L. M2,S3). This tailored sequence has the advantage that each truck carries about the same load and larger customers are provided more frequent delivery than smaller customers, consistent with their relative costs of delivery are. The degree of inventory aggregation and the modes of transportation used in a supply chain network should vary with the demand and value of a product The cycle inventory for high-value products with high demand is disaggregated to save on transportation costs because this will allow replenishment orders to be transported less expensively. Safety inventory for such products can be aggregated to reduce inventories and a fast mode of transportation can be used if the safety inventory is required to meet customer demand. For high-demand products with low value, all inventories should be disaggregated and held close to the customer to reduce transportation costs. For low-demand, high-value products, all inventories should be aggregated to save on inventory costs. For low-demand, low-value products, cycle inventories can be held close to the customer and safety inventories aggregated to reduce transportation costs while taking some advantage of aggregation. Cycle inventories are replenished using an inexpensive mode of transportation to save costs. A comparison with the original strategy: As well as Peterborough, IKEA has distribution centers at Doncaster -- a 14 million complex opened in 2001 -- and Thrapston in Northamptonshire. Although it's not all that far from Peterborough, there are no plans to shut the smaller Thrapston warehouse and move its activities to the new building. All three sites will have a role to play in our supply chain strategy. As the company sell a lot of products which come in through the east coast ports tailored sequence will have the advantage that each truck will carry about the same load and larger customers will be provided more frequent delivery than smaller customers, consistent with their relative costs of deliver. Through designing the combination of milk runs the average of seven deliveries can exceed to the desired demand by the customers daily. Usually three to four days elapse between the order being created by the store, and the items arriving. With tailored route the days elapse will also reduce. Although road congestion makes delivery times difficult to achieve but the tailored route according to the customer's demand will make the delivery more prompt and easy. This will reduce the pressure on the centers to operate as efficiently as possible to offset the impact of traffic hold-ups. For the items IKEA retails that do not passes through the warehouses on time and prompt delivery will be possible without interruption. Rather than depending upon other companies for the quality of the delivery service IKEA needs to provide a high enough standard in the full load season. Conclusion: IKEA can also introduce the service of transporting the gift items on behalf of the buyer. This will also help in transporting the things that are too big to get into a family car. The customer distribution center will also become able to effectively handle the delivery of bulky and complicated items by tailored routes from Peterborough site. Some of the goods that come in to Felixstowe go by train to an Intermodal terminal not far from Doncaster, then by road to the Doncaster distribution center. By serving the areas with high customer density more frequently IKEA will provide sufficient economics of scale in transportation, making temporal aggregation less valuable. References Chopra, S., & Meindl, P., (2004). Supply chain Management: Strategy, Planning and Operation, Second Edition, Pearson Education, Inc. United Kingdom, pp. 44. Roberti, M., (2005). RFID Will Help Keep Perishables Fresh, Aug. 3, 2005, available at http://www.rfidjournal.com/article/articleview/1775/1/1/ Read More