Strategic Supply Chain Management Practices of IKEA - Research Paper Example

 Strategic Supply Chain Management Practices of IKEA Introduction IKEA which stands for Ingvar Kamprad Elmtaryd Agunnaryd was founded in 19 43 in Sweden as a furniture corporation. The company has more than 200 stores spread in more than 30 countries across the globe. The company has more than 127,000 employees across the world with more than 25 Billion Euros in average sales for the past five years and a net income of 2.7 billion. The firm is known for its innovativeness, cost control and superb management skills which makes it competitive across the globe. It provides a modern and low cost furniture and boast for more than 12,000 unique products; both home and office furniture. The company is also known for its sensitivity with regards too environmental issues. The Sweden based multinational was ranked third in the Readers choice award for the international brand with the most impact. According No. 1 brand channel, IKEA is ranked first in Africa and Europe. The success of the company has been attributed on its experience in the making of stylish furniture, cost effectiveness and differentiation. The products are sold to the customers in kits and they are expected to assemble the products at home. The company’s record gross was in 2005 when its profits went up by 15% at US$17.9 Billion. In 2008, the sales of the company reached 21.2 Billion Euros representing an increase of 7%. Some of the biggest sales include Sweden, UK, France and USA. The United Arab Emirates office is also known for its effectiveness and adoption of super supply chain management. The company’s market share is more than 10% in 5regions in operates. (IKEA, 2014) Below us the market share for firms The company has a well developed online system that makes it easy for customers to do online shopping and they have kept some of the best products they are associated with. The e-shopping makes it easy for one to conduct online shopping by viewing catalogue without looking at items individually or zooming to view. Currently, the company has more than 17 categories, making it even easier for the shoppers to analyze the products they intend to buy. The vision of the company is to create a better everyday life for the many people with its key business idea being “We shall offer a wide range of well-designed, functional home furnishing products at prices so low that as many people as possible will be able to afford them.” Market Analysis The market size in the furniture industry has been growing with the continuous growth in the GDP in a number of countries across the world. The sales are analyzed going by the current size of the sales compared to the past sizes. The market share of the company has drastically grown even in times when companies in Dubai were affected by recession. Home centre and Pan Emirates are some of the key competitors whose sales have been affected by changing environmental crisis. By March 2010, the sales in the industry grew by 7% with its main customers being the middle class and the upper class in the society. The IKEAs sales not only grew because of its excellent customer’s restaurant, but also because of its superb supply chain management which is pushed by its management. (Trent, & Monczka, 2003) The distribution channels include the receiving of products from Sweden and are received in the gulf region where goods are received at the port. The goods are then transferred to the Warehouse in Rashadiya in Dubai where they are stocked in IKEA and sold directly to its customers. The main aim of the company is to reduce the manufacturing, distribution and selling costs. The management argues that it is only possible to realize that through a reasonable distribution idea, rational development of unique products and the adopting of product conditions. The company is also keen on the management of costs. The concept of IKEA intends to ensure that there is the reduction in the distance between the customers and supplier. This will ensure both cost reduction and the enhancement efficiency in the operations. Some of the factors to the success and its strategic strengths are The reduction in the distribution costs through the production of products in a flat package A distribution system that is cost effective. Ensuring of direct deliveries Encouraging transit deliveries with reduced handling. The market positioning statement is to ensure that they put the partner in a better living. They hold that they do their part and the customer does his. The company believes that they can make money together with the customer. (Fernie, & Sparks, 2004) Some of the key objectives of the company is to ; Ensure the production of reasonable products for the customers and public. To provide a better living for the customers who are unable to afford existing expensive products To ensure that the customers are able to find what they are looking for in the retain sales To offer completive prices compared to other companies in the market. The Supply Chain The supply chain of IKEA has a global interconnected spread across the globe with both purchasing and selling in a number of countries across the globe. The company is currently operation more than 33 distribution centers and 11 distribution centers to customers. The firm has also more than 30 trading service offices in more than 30 countries. Besides, it has about 1,084 suppliers in more than 50 countries across the globe. Of its employees, about 14,500 work in the whole sale, purchasing and distribution sectors. The company began outsourcing products during 1950s from Poland. The decision to run a small range of various products helped the company in keeping its entire supply chain manageable. The success of the company has been attributed on its ability to properly coordinate and control the entire supply chain. The chain starts from the availing of raw materials, manufacturing of the products to the distribution through the retail stores. The company currently owns the supply chain system that is vertical in nature. (IKEA, 2014) During the 1990s, the strategy of the company with regards to purchasing includes the reallocation of the manufacturing activities to a number of re-emerging markets mainly in Asia. This saw the expansion of the production offices in Dubai. The strategy resulted to the reduction of the number of suppliers and facilitates the creation of competition internally and avoiding competition its external rivals. The main focus was to enhance internal efficiency especially in its supply chain. The internal competition was created between the purchasing term sin different countries across the world. In 1991, the strategy resulted to the acquisition of Swedwood which was one of the leading manufacturers with offices in Europe. In the turn of century, there were a number of silos and other disconnections that existed within IKEA’s supply chain management. The company dealt with this by transforming the company from a functionality oriented to a more robust and strategy process oriented organization. Transforming IKEA into a process oriented is regarded as one of the biggest change that the company has ever recorded in its history. The change in the company was anchored on the concept that “Small steps of change are less risky than giant leaps”. Value to Customers and monitoring The maintenance of a competitive advantage to customers is a balance between doing the right things and the creation of value to customers. The costs are which the products remain low. The key behind the retention of customers is the ensuring that high quality products are offered. The value chain comprises the design of products and services to the customer support. The objective of supply chain management is to link the entire chain together, delivering products that meat customer demands. The value chains in IKEA I s customer driven and therefore it is important to connect the distribution, production and resource links. The company uses the customer road map tool that helps in customer differentiation. It ensures that there are quick deliveries to customer destinations. The company also maps its resources on a Just in Time basis, and only delivers materials and resources when they are needed. The first part is the designing of the product. The company uses a simple parts and design. The company ensures that the cost is kept down by ensuring that the products are assembled home in parts and they assemble them from home. The process facilitates the elimination of the non-value added links within the chain. The company also sells its products of very high quality. It leverages the image of Scandinavian image and technology to ensure they get a competitive advantage through marketing and inventory management. The management believes that leveraging some main competencies is important inn the squeezing of the supply chain. The company believes in adding value to the customers. They get an opportunity to assemble the products from home and therefore they have the feeling of being part of the making of the product. Through its strategies of reducing the chain in the supply process, the company ensures that its customers get the products in a timely manner. The return business and getting customers feedback is another mechanism used to get customers response. Customer Segmentation Customer segmentation is delineated as the practice of dividing the bases of the customer into various ways. The division is done in a way that is relevant to the customers. IKEA uses age as one of the method to reach its customers. There are products which are designed for people of all ages. IKEA expects that customers will buy their products depending on the value they add. (Christopher, 2011) The gender basis is another way of segmenting the customers. The company sells products which appeal to both sexes. At also uses the interest as the basis of segmentation. There are people who sell their products depending on their interests and what appeals to them. The last one is the spending habits of the customers. In nations where the spending habits are high like Dubai, the company sells a lot of products. In region where they are reluctant to spend on furniture like in Latin America, the firm often reduces the quantity it sells to those regions. SWOT ANALYSIS IKEA has managed to maintain close partnership with some of its key suppliers. Close tier ensures that materials and products supplied are of very high quality. The firm has a robust and well managed supply chain system IKEA employees thousand of professionals specialized in supply chain management to facilitate the process of distribution of goods and services. The company has also a superb strength in its home planning and contract sale services The company has a strong customer service in Dubai even people from head office Sweden travel to Dubai to visit the office. Weakness Being a global company, it has been quite difficult to maintain the standards. The faults production decreases the quality of product. Opportunities The firm can continuously invest in the technology related with supply chain management to enhance efficiency The company can capitalize on the customer desire to the environmental impact and green movement The new store in Abu Dhabi will be an opportunity to meet the demands of the people. Threat The competition and adoption of technological informed supply chain management by other companies is a threat to the growth of IKEA and expansion Issues in IKEA like quality and faults might result to the reduction in customer base. One of the main forces of change that is currently influencing the strategies in IKEA is the continuous growth in technology. The firm must ensure that it adopts the growing technology besides keeping its current best practices. Supply chain processes thinking and order fulfillment The company believes that there is a need to ensure that the supply chain management should be reduced and cost effective. The large scale store sizes ensure that the firm keeps all the products which are demanded by the customers. The hierarchical organizational structure also helps the management to make some of the key decisions. Its high commitment to the best HR practices across the globe ensures that the best staff members are given opportunity to handle the supply chain management. The company also ensures that it trains its staff on various training programs. Being keen on technology, the Dubai office has kept close collaboration with the headquarters. Finally IKEA keeps strategic relationship with some of the strategic suppliers. SCOR Model Supply chain operations reference model us a management tool that is adopted to help in addressing, improving and communicating various decisions in the company’s supply chain management. IKEA adopts five primary sources in its operations. Plan The company includes the planning of the demand and supply. It balances the resources and determines the communication in the chain. It determines the rules to ensure that it measures and improves the efficiency in chain through aligning the supply chain with the financial plan of IKEA. (Esty, & Winston, 2009) Source The firm in its strategy describes the acquisition of the material and sourcing of the infrastructure. It stipulates the management of the inventory, supplier network, performance and the agreements. Make The company emphasis on the goods sold to customers. It entails the production, packaging, staging and releasing of the entire furniture in the company. Deliver This is very important to IKEA. It includes the management of the orders, warehousing and transportation. It entails the receiving of order and invoicing customers Return IKEA applies this step as it always prepared in receiving all the goods return. It ensures that business rules are followed. Outsourcing is very important to the daily operations and success of IKEA. The selection of the suppliers is transparently packed with the support of the headquarters to ensure that the quality is maintained. The management ensures that the transaction is within the existing regulation. A stipulated communication configuration strategy helps the management ensure that the company keeps close contact with the suppliers. This will ensure that quality suppliers are received. The main goal of the company is to ensure that it maintains a cost effective operations. The supply chain management strategy is to ensure that the company gets the best at a reduced cost. Through the chain reduction, the firm has been able to transfer the products to the customers in a timely manner. Besides, it follows the above stipulated values in its success. PHASE 2 IKEA adopts seven main cost management principles in ensuring that it controls costs. Some of these costs include; The provision of clear and consistent performance of the aims and objectives of the people Provision of tools and knowledge to succeed Understanding of the true cost Focusing on excellence which is the only acceptable performance target Reduction of organizational complexity Commitment to a broad based and knowledge driven involvement Various decisions in management impact the organizational cost. There are a number of tools that IKEA has used in the past to facilitate the management of cost in the company. These tools include; estimation of the capabilities Budgeting and the forecasting of the future Project performance measurements A variety of reporting options As it reduces the cost, the company appreciates and recognizes the need to appreciate the role played by its suppliers in growth. Without the supply of quality products from the customer, it is not easy to grow as a company. It will be tricky for the firm to provide quality materials for the processing of products. The company ensures that briefs are always conducted with the suppliers to ensure that they understand the need for cost reduction and apply some of the best tools to manage their costs. (Larsson, & Qviberg, 2004) The IKEA’s sourcing strategy is as below Through the above strategy network, IKEA has been able to measure the effectiveness of the customers. Cash conversion cycle IKEAs cash conversion cycle is currently at 5 which is far much better compared to other players in the industry. Inventory days of supply The average DSI in IKEA is 3 which is far better than for other companies. Core competencies and outsourcing The company has in the past focused mainly on competencies that has been leveraged as part of the strategy of profit sustainability. It develops its capabilities as a global retailer through adding value to the supply chain management. It is also able to construct a low cost business model that makes it possible for customers to reap the benefits of its high quality design furniture at very low process. It has been able to build brand equity via peculiar promotions and pioneering advertising campaign that is able to recognize diversity Development of a business culture that is unique and designed around a good lifestyle for both employees and the customers. Encourage a corporate social responsibility that is dedicated to ethical practices, environmental protection and following labor laws. Outsourcing is delineated as a practice that is adopted by different companies to reduce the costs through the transfer of the work portions to the outside suppliers as opposed to completing it internally. Given that IKEA does not manufacturer, it outsource some of the main parts to ensure its efficiency. Some of the reasons why it has outsourced as part of its supply chain management includes; Reduction of the control and operating costs as witnessed in Dubai offices. Improvement of the company focus Facilitate gaining of access to the world class capabilities To ensure that internal resources are freed to enable them to be used in other areas. Given that some products are not available internally, outsourcing will ensure availability of the same to ensure business continuity. Finally it enables companies to enjoy the benefits of engineering. (Bowzarth, & Handfield, 2008) Make-or-buy analysis in IKEA This is the act of choosing whether to manufacture a product in house or purchasing from an external supplier. The two considerations that IKEA has always taken into consideration is the availability of the production capacity and the cost. As indicated in the above, IKEA finds it cheaper buying a number of the suppliers as opposed to making. The supply chain is also reduced when they buy the products from other people. Supply Chain rationalization Supply chain rationalization refers o the activity of picking the right number of suppliers and those who are very suitable within the number. One of the most considerations when it comes to rationalization in IKEA is the evaluation of the entire supply chain in the perspective of tier level. The first tier in IKEA provides some of the major components of its operations. The IKEA staff therefore is only managing few suppliers who are delivering some of its complex products. Supply base optimization which is one of the rationalization processes refers to a process of determining a right number and a combination of suppliers to be maintained. It ensures that the number of suppliers used is reduced to a manageable level. IKEA especially Dubai offices has seen the reduction in the number of its suppliers. The company holds that, the reduction of its supplies is the only way of ensuring an effective supply chain management. Part 3 Supply chain relationship One of the reasons why IKEA has succeeded is the way it’s communicating with its customers and the relationship management with some of its leading manufacturers and suppliers to ensure that they get competitive prices for some of the key products. IKEA is one of the high volume retailers across the globe and buys products from a number of suppliers in at least 50 countries. It uses the 42 trading services stores and offices across the globe to manage its suppliers. The offices help in the negotiation of prices with its suppliers, check working conditions and also analyze the quality for products. Despite the fact that it focuses on suppliers competition to achieve the best materials and process, the company believes in enhancing long term relationships with the suppliers by ensuring that they sign long term contracts. (Steinle, & Schiele, 2008) The company has a code of conduct which is referred to as IKEA Way of Purchasing Home Furnishing Products (IWAY) which contains guidelines and rules that help the suppliers ensure that there is reduction in the impact of their activities on the environment. The intention of the company is to ensure that they leave a positive impact when they are doing business. There are two main relationships; vertical relationships and horizontal relationships. IKEA adopts the vertical relationship when dealing with its suppliers. It is delineated as the traditional linkages between various firms within the supply chain industry. Within IKEA, there are also range of relationship types which includes transactional, collaborative and strategic relationships. IKEA holds that the best way to creating a proper working relationships is through collaboration. The management believes that the goal of having a superb supply chain management is when there is close collaboration with the company. A close collaboration therefore requires that there is a good negotiation between the company and the vendors. The intention of the company is to ensure that at the end of the day, everyone should go home celebrating. A close collaboration will ensure that the competition is directed outside and not amongst the current suppliers. At the end of the day, both IKEA and the suppliers will win. Technology in sustainable supply chain management The focus of the company is ensuring the supply chain is efficient and cost effective. It should be able to urgently respond to the needs of the customers. The Track and trace is one of the technologies that have been applied by IKEA to ensure that everyone is kept in the system. It tracks information from the point of procurement to the point when the goods are sold. Track and trace is used by IKEA to ensure the reduction of risks and improve the sustainability within the supply chain. It adopts the use of an interactive metrics system that encourages information sharing and competition against suppliers. The system collects the entire supply chain sustainability via its scorecards on some of the existing standards like the sustainability consortium and GRI. Technology is very important to the growth of the company and therefore e-commerce and internet is at the centre of the growth in IKEA. (Bowzarth, & Handfield, 2008) PART 4 Supply chain mapping The discussion in this paper marks the supply chain management as indicated in the below diagrams. The company believes in the imperatives when mapping its supply chain processes. The first level is the factories, containers and inland transport that ensure that all the goods are transported in time. The second level is the ocean shipping that ensures that the IKEA products are transported and reaches the destination as indicated. The last section is the ports, inland transport and the distribution centers. This will ensure that all the goods received are distributed to the customers and other distributors. The process includes the selection of some of the key suppliers in the company besides investigating the baseline. The company then builds the capacity, verify the performance and finally rate the performance of the suppliers against the criteria. (IKEA Code of Conduct, 2014) Conclusion and recommendation It is axiomatic b to squabble that the growth in IKEA is attributed to its superb supply chain management. The company has efficient and effective operational process through proper management with good control and the analysis of processes that helps in creating success. The company policies are properly designed to control approaches towards quality, suppliers, pricing and logistics. This paper therefore recommends below for the continuous operations of the company; Partnership is very important to the success of a company. One of the most important partners is the suppliers. The company should keep long term partnership with its suppliers to builds on mutual trust and understanding. When a supplier is engaged on long term basis,, it is likely that they will understand the company ideologies. The company should consider some of the key elements of the relationship which includes; cooperation, communication, interaction and coordination of the stakeholders. The above elements will ensure that they deal with thee large sourcing network. The company should be keen on following the market trends. Constant research and development will ensure that it follows some of the market needs and items which are on high demand. Being aware of the customer demands will make IKEA effective and progressive. Variety of unique products will also be produced. Technology plays an important role in the growth of any economy. The level of appreciation of technology is an important factor in the global market. IKEA should invest more on technology to enable it reach the global market. The supply chain management can be cost effective further when an efficient technology is adopted. References Bowzarth, C., & Handfield, R, B. (2008). Introduction to Operations and Supply Chain Management. 2nd edition. Prentice Hall. Christopher, M. (2011). Logistics and Supply Chain Management. FT Press; 4 edition. ISBN-10: 0273731122. Esty, D., Winston, A. (2009). Green to Gold: How Smart Companies Use Environmental Strategy to Innovate, Create Value, and Build Competitive Advantage. Wiley; Revised & Updated edition Fernie, J., & Sparks, L. (2004). Logistics & Retail Management. Kogan Page Limited Publication. 2nd edition, ISBN: 0 7494 4091 0 IKEA. (2014). Logistics [ONLINE]. Available at: http://www.ikea.com/ms/en_US/jobs/business_types/stores_retail/logistics.html IKEA Code of Conduct. (2014). Code of Conduct [ONLINE]. Available at: http://www.ikea.com/ms/en_GB/about_ikea/pdf/SCGlobal_IWAYSTDVers4.pdf. Larsson, B., & Qviberg, O. (2004). Evaluation and Justification of an RFID, Implementation-Pilot at IKEA Customer Distribution Centre, Linköpings universitet/Ekonomiska institutionen. Steinle, C., & Schiele, H. (2008). Limits to global sourcing?: Strategic consequences of dependency on international suppliers: Cluster theory, resource-based view and case studies. Journal of Purchasing & Supply Management. Trent, R.J., Monczka, R.M. (2003). Understanding integrated global sourcing, International Journal of Physical Distribution & Logistics Management. 33 (7). 607-29 Appendix DECLARATION: We, the undersigned, declare that this is our own work and that each one of us contributed to the project. We have quoted all the relevant sources and we have not merely copied and pasted all the work into the project. Student ID: _______ Student Name: __________Signature: Student ID: _____________ Student Name: ___________Signature: Student ID: _____________ Student Name: ___________Signature: Student ID: _____________ Student Name: ______________Signature Read More