IKEAs International Purchasing Processes

2396 words (10 pages) Essay

11th May 2017 Marketing Reference this

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Introduction to IKEA

The Swedish home furnishing company IKEA was founded by Ingvar Kamprad in the region of Småland in Sweden in 1943. The first IKEA store was opened in Älmhult, Sweden, in 1958; the first store outside Sweden was established in Norway in 1963; and the first store outside Scandinavia was established in Switzerland in 1973 [2] . Over the last few decades, IKEA has steadily grown in terms of turnover by around 10 to 15% annually. In 2007, IKEA’s annual turnover reached €19.8 billion and the number of IKEA stores worldwide, including those run by franchisees, was 260 [3] . At present, IKEA offers a range of around 9,500 products that are all mainly the same at all the IKEA stores around the world [4] . The business idea that has motivated the company during the years has been to “offer affordable home furnishings at prices that make it possible for as many people as possible to afford them” and “to grow through duplication of a global market offering” [5] .

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Background of International Purchasing

In 2010 IKEA had 31 trading service offices in 26 countries and this allows them to be close to their suppliers which are about 1,220 in 55 different countries [6] . This allows them to monitor production, test new ideas, negotiate prices and check quality whilst being able to observe and manage the social and working conditions [7] . The top countries from which IKEA purchases are: China 20%, Poland 18%, Italy 8%, Germany 6% and Sweden 5% [8] .

At IKEA, CSR is referred to as environmental and social responsibility which goes beyond the legal requirements [9] . The supply chain is therefore one of the focus areas of IKEA’s CSR and Ivana Hrdlickova (Information Director at IKEA Sweden) stated that IKEA deliberately chooses company’s and countries to purchase from with this in mind and therefore IKEA is striving to make the greatest positive impact by providing jobs and improving employee working conditions [10] .

History of internationalization

There are two important dates in IKEA’s manufacturing Internationalization history, the first one is in 1961. This was when IKEA started its supplier’s internationalization by ordering 20,000 chairs from a Polish factory [11] . This was IKEA’s first contact with a non-Scandinavian supplier done in response to the increases in product demand.

The second date, 1991, was when they decided to buy the industrial group Swedwood, which has since been responsible for IKEA’s manufacturing strategy. [12] In 1995, SwedWood bought its first factory outside of Sweden, The Old Door factory, in Poland where the first Ikea wall unit, Kubist, was produced. After that IKEA developed itself by building or integrating existing factories.

IKEA as a firm is well known for purchasing in bulk, in order to bring prices down and take advantage of economies of scale. In addition, IKEA invented a way of transporting its goods in the most economical way possible , which is called the flatpacking method. Another way of cutting costs for IKEA is by making it the norm for consumers to assemble the products themselves. Of course, the consumer can pay for someone to install the product in their homes, but that is at an additional cost. By eradicating the assembly component of the manufacturing process, IKEA is able to further reduce its costs, by not having to hire workers, run a factory, or incur the costs of transporting a larger, non-flatpacked good; thus lowering the transportation and storage costs IKEA contracts. [13] 

Current degree of Internationalization of IKEA’s Purchasing

IKEA is heavily internationalized in all facets of its business. In terms of purchasing, IKEA currently procures its production inputs and furniture designs from all over the world, as “purchasing teams are located around the world and work with suppliers in more than 50 countries. [14] ” The suppliers that IKEA works with are cultivated by IKEA in order for them to maintain its high level of product consistency and environmental consciousness, meaning they “actively support suppliers in their work to improve working conditions and minimize negative environmental impact.” [i] This cultivation of the suppliers is comprehensively detailed in IKEA’s:

“IWAY, a long standing supplier code of conduct. Improvements in IWAY included more stringent requirements for suppliers. This action resulted in reducing the negative environmental impact on supplier production and operations. Since IWAY was introduced in 2000, IKEA has made more than 100,000 improvements.”

The speed of supplier development has been very high for IKEA since the 1960’s and therefore they have introduced IKEA’s IWAY Standard [15] . This defines what suppliers can expect from IKEA and specifies what IKEA requires from its suppliers and it includes working conditions, the prevention of child labour, the environment, responsible forestry management and more [16] .

All suppliers with whom IKEA is continuously striving to better the working practices, socio-economic situation and quality of life of its employees. Especially in South Asia, IKEA’s “suppliers show significant improvements in better working and living conditions, as well as better chemical and waste management. Additionally, this region has many textile industries in which IKEA specialists support these suppliers with improved water treatment management.” [17] 

Socially, IKEA also takes a heavy hand in its suppliers labour relations, as it is a firm that is adamant that child labour be prevented [18] . IKEA has taken many strides in hopes of preventing the strong IKEA name from being tarnished by slander concerning their labour practices, or the labour practices of their suppliers, and will not conduct business with those that fail to meet their requirements [19] .

In terms of future plans for IKEA’s internationalization, IKEA is working on expanding where its suppliers exist to best take advantage of the production abilities of firms all over the world, forcing its suppliers to implement best practices, as well as adopt the required habits set out in IKEA’s supplier code of conduct dictum. One area IKEA is specifically is looking to procure more from is India, as “IKEA plans to double the amount of goods it buys from India, including textiles, in the next three to four years, to 1 billion euros, or $1.3 billion. [20] ” Such large dealings would quickly become substantial in terms of IKEA’s comparative transactions with other countries, but the strategy makes sense as India is well known for their textile industry, especially in terms of quality of materials and meeting specified price points. The way IKEA operates is that “[IKEA] identifies an unmet customer need (say a certain style of table at a given price point), commissions in-house and outsourced designers to compete for the best design, then its manufacturing partners worldwide compete for the rights to manufacture it. [21] ” [ii] This way they are able to take advantage of the competiveness of their international suppliers.

SWOT ANALYSIS

Strengths

-IWAY

-World wide supplier networks

– economies of scale, enables them to purchase at low price points

-suppliers fight/compete on price/ quality

-help suppliers with efficiency training for access to the companies electronic database which increases production, reduces cost & enhances their relationship

-low price of points

– many suppliers have ISO 9001 certification, accentuating the importance of the supplier relationships

-hold regular meetings and check up with suppliers

Weaknesses

-IWAY

-overreliance on a small number of suppliers

-suppliers concentrated geographically (See extra info segment)

-standardized product selection, lack of adaptation. Proves to be a problem when regional adaptation is required. Ex/when IKEA opened its first stores in the United States, it quickly discovered that their kitchen cabinets were too small for typical American home ware, such as plates. Having to augment their product offering causes them not to be able to make use of the economies of scale.

international purchasing leads to high transaction costs with suppliers as well as high management costs

Opportunities

-Open more stores giving more customers access to their goods, mandating

that they increase their purchasing quotas to make up for the increases in demand

-backwards integration (buying more of their highly valued suppliers) for better

quality control and lower distribution costs.

Threats

-thefts, and lost shipments

-outsourcing of their design work

-companies that are cheaper (not as valued CSR policy’s in other firms reduces other firms supplier costs)

-natural disasters

-crashes of financial markets

Recommendations

In hopes of improving IKEA’s purchasing process, there are three considerations to make:

Firstly, IKEA could backward integrate by acquiring some of its more valuable suppliers in hopes of lowering costs, and ensuring that the suppliers are meeting IKEA’s high production, social and labour requirements for its workers. By doing this, IKEA could rank its suppliers based on consistency of products purchased, current business relations, price points, quality of goods purchased, and the vitality of the good to the production process (for example, IKEA’s heavily oriented on furniture production, especially wooden furniture, therefore it would be ideal to own the leading producers of wood. As mentioned before, IKEA has already done this for the wood example, by purchasing Swedwood.)

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Secondly, IKEA in its IWAY supplier conduct requirements, IKEA states that if a supplier fails to meet any of their demands, they will immediately cease any business relationship with that partner. This is a costly approach as any products that are in mid production with a supplier would not be bought and it would take time and resources for IKEA to find a replacement supplier, as it currently relies on operating with as few suppliers as necessary. Therefore, instead of immediately cutting off their suppliers when failing to meet their requirements, IKEA could implement a warning system, of warning suppliers that they must change their ways otherwise halting the relationship is inevitable. This enables the supplier to remedy their wrongdoings while maintaining the production and relationship, and if they fail a second time, then they could be cut off full stop.

Thirdly, as mentioned before, IKEA’s top suppliers are China, Poland, Germany, Italy and Sweden. Sweden and Germany are some of the most costly places to produce, especially in terms of wage rate. Yes, the employees employed are likely to be of the intellectual workforce, but it is likely that IKEA could purchase from suppliers outside of these high cost countries, while still remaining in the geographical proximity of Sweden for final amalgamation of the parts, and goods to be flatpacked and shipped to the various IKEA stores/ warehouses. Perhaps national pride is preventing IKEA from ceasing its supplier relations in Sweden, but there is little reason to purchase such a high amount in Germany, when it is likely for Poland, Hungary, the Czeck Republic, or North-eastern Europe will be just as capable of producing the same materials for cheaper.

Introduction to IKEA

The Swedish home furnishing company IKEA was founded by Ingvar Kamprad in the region of Småland in Sweden in 1943. The first IKEA store was opened in Älmhult, Sweden, in 1958; the first store outside Sweden was established in Norway in 1963; and the first store outside Scandinavia was established in Switzerland in 1973 [2] . Over the last few decades, IKEA has steadily grown in terms of turnover by around 10 to 15% annually. In 2007, IKEA’s annual turnover reached €19.8 billion and the number of IKEA stores worldwide, including those run by franchisees, was 260 [3] . At present, IKEA offers a range of around 9,500 products that are all mainly the same at all the IKEA stores around the world [4] . The business idea that has motivated the company during the years has been to “offer affordable home furnishings at prices that make it possible for as many people as possible to afford them” and “to grow through duplication of a global market offering” [5] .

Background of International Purchasing

In 2010 IKEA had 31 trading service offices in 26 countries and this allows them to be close to their suppliers which are about 1,220 in 55 different countries [6] . This allows them to monitor production, test new ideas, negotiate prices and check quality whilst being able to observe and manage the social and working conditions [7] . The top countries from which IKEA purchases are: China 20%, Poland 18%, Italy 8%, Germany 6% and Sweden 5% [8] .

At IKEA, CSR is referred to as environmental and social responsibility which goes beyond the legal requirements [9] . The supply chain is therefore one of the focus areas of IKEA’s CSR and Ivana Hrdlickova (Information Director at IKEA Sweden) stated that IKEA deliberately chooses company’s and countries to purchase from with this in mind and therefore IKEA is striving to make the greatest positive impact by providing jobs and improving employee working conditions [10] .

History of internationalization

There are two important dates in IKEA’s manufacturing Internationalization history, the first one is in 1961. This was when IKEA started its supplier’s internationalization by ordering 20,000 chairs from a Polish factory [11] . This was IKEA’s first contact with a non-Scandinavian supplier done in response to the increases in product demand.

The second date, 1991, was when they decided to buy the industrial group Swedwood, which has since been responsible for IKEA’s manufacturing strategy. [12] In 1995, SwedWood bought its first factory outside of Sweden, The Old Door factory, in Poland where the first Ikea wall unit, Kubist, was produced. After that IKEA developed itself by building or integrating existing factories.

IKEA as a firm is well known for purchasing in bulk, in order to bring prices down and take advantage of economies of scale. In addition, IKEA invented a way of transporting its goods in the most economical way possible , which is called the flatpacking method. Another way of cutting costs for IKEA is by making it the norm for consumers to assemble the products themselves. Of course, the consumer can pay for someone to install the product in their homes, but that is at an additional cost. By eradicating the assembly component of the manufacturing process, IKEA is able to further reduce its costs, by not having to hire workers, run a factory, or incur the costs of transporting a larger, non-flatpacked good; thus lowering the transportation and storage costs IKEA contracts. [13] 

Current degree of Internationalization of IKEA’s Purchasing

IKEA is heavily internationalized in all facets of its business. In terms of purchasing, IKEA currently procures its production inputs and furniture designs from all over the world, as “purchasing teams are located around the world and work with suppliers in more than 50 countries. [14] ” The suppliers that IKEA works with are cultivated by IKEA in order for them to maintain its high level of product consistency and environmental consciousness, meaning they “actively support suppliers in their work to improve working conditions and minimize negative environmental impact.” [i] This cultivation of the suppliers is comprehensively detailed in IKEA’s:

“IWAY, a long standing supplier code of conduct. Improvements in IWAY included more stringent requirements for suppliers. This action resulted in reducing the negative environmental impact on supplier production and operations. Since IWAY was introduced in 2000, IKEA has made more than 100,000 improvements.”

The speed of supplier development has been very high for IKEA since the 1960’s and therefore they have introduced IKEA’s IWAY Standard [15] . This defines what suppliers can expect from IKEA and specifies what IKEA requires from its suppliers and it includes working conditions, the prevention of child labour, the environment, responsible forestry management and more [16] .

All suppliers with whom IKEA is continuously striving to better the working practices, socio-economic situation and quality of life of its employees. Especially in South Asia, IKEA’s “suppliers show significant improvements in better working and living conditions, as well as better chemical and waste management. Additionally, this region has many textile industries in which IKEA specialists support these suppliers with improved water treatment management.” [17] 

Socially, IKEA also takes a heavy hand in its suppliers labour relations, as it is a firm that is adamant that child labour be prevented [18] . IKEA has taken many strides in hopes of preventing the strong IKEA name from being tarnished by slander concerning their labour practices, or the labour practices of their suppliers, and will not conduct business with those that fail to meet their requirements [19] .

In terms of future plans for IKEA’s internationalization, IKEA is working on expanding where its suppliers exist to best take advantage of the production abilities of firms all over the world, forcing its suppliers to implement best practices, as well as adopt the required habits set out in IKEA’s supplier code of conduct dictum. One area IKEA is specifically is looking to procure more from is India, as “IKEA plans to double the amount of goods it buys from India, including textiles, in the next three to four years, to 1 billion euros, or $1.3 billion. [20] ” Such large dealings would quickly become substantial in terms of IKEA’s comparative transactions with other countries, but the strategy makes sense as India is well known for their textile industry, especially in terms of quality of materials and meeting specified price points. The way IKEA operates is that “[IKEA] identifies an unmet customer need (say a certain style of table at a given price point), commissions in-house and outsourced designers to compete for the best design, then its manufacturing partners worldwide compete for the rights to manufacture it. [21] ” [ii] This way they are able to take advantage of the competiveness of their international suppliers.

SWOT ANALYSIS

Strengths

-IWAY

-World wide supplier networks

– economies of scale, enables them to purchase at low price points

-suppliers fight/compete on price/ quality

-help suppliers with efficiency training for access to the companies electronic database which increases production, reduces cost & enhances their relationship

-low price of points

– many suppliers have ISO 9001 certification, accentuating the importance of the supplier relationships

-hold regular meetings and check up with suppliers

Weaknesses

-IWAY

-overreliance on a small number of suppliers

-suppliers concentrated geographically (See extra info segment)

-standardized product selection, lack of adaptation. Proves to be a problem when regional adaptation is required. Ex/when IKEA opened its first stores in the United States, it quickly discovered that their kitchen cabinets were too small for typical American home ware, such as plates. Having to augment their product offering causes them not to be able to make use of the economies of scale.

international purchasing leads to high transaction costs with suppliers as well as high management costs

Opportunities

-Open more stores giving more customers access to their goods, mandating

that they increase their purchasing quotas to make up for the increases in demand

-backwards integration (buying more of their highly valued suppliers) for better

quality control and lower distribution costs.

Threats

-thefts, and lost shipments

-outsourcing of their design work

-companies that are cheaper (not as valued CSR policy’s in other firms reduces other firms supplier costs)

-natural disasters

-crashes of financial markets

Recommendations

In hopes of improving IKEA’s purchasing process, there are three considerations to make:

Firstly, IKEA could backward integrate by acquiring some of its more valuable suppliers in hopes of lowering costs, and ensuring that the suppliers are meeting IKEA’s high production, social and labour requirements for its workers. By doing this, IKEA could rank its suppliers based on consistency of products purchased, current business relations, price points, quality of goods purchased, and the vitality of the good to the production process (for example, IKEA’s heavily oriented on furniture production, especially wooden furniture, therefore it would be ideal to own the leading producers of wood. As mentioned before, IKEA has already done this for the wood example, by purchasing Swedwood.)

Secondly, IKEA in its IWAY supplier conduct requirements, IKEA states that if a supplier fails to meet any of their demands, they will immediately cease any business relationship with that partner. This is a costly approach as any products that are in mid production with a supplier would not be bought and it would take time and resources for IKEA to find a replacement supplier, as it currently relies on operating with as few suppliers as necessary. Therefore, instead of immediately cutting off their suppliers when failing to meet their requirements, IKEA could implement a warning system, of warning suppliers that they must change their ways otherwise halting the relationship is inevitable. This enables the supplier to remedy their wrongdoings while maintaining the production and relationship, and if they fail a second time, then they could be cut off full stop.

Thirdly, as mentioned before, IKEA’s top suppliers are China, Poland, Germany, Italy and Sweden. Sweden and Germany are some of the most costly places to produce, especially in terms of wage rate. Yes, the employees employed are likely to be of the intellectual workforce, but it is likely that IKEA could purchase from suppliers outside of these high cost countries, while still remaining in the geographical proximity of Sweden for final amalgamation of the parts, and goods to be flatpacked and shipped to the various IKEA stores/ warehouses. Perhaps national pride is preventing IKEA from ceasing its supplier relations in Sweden, but there is little reason to purchase such a high amount in Germany, when it is likely for Poland, Hungary, the Czeck Republic, or North-eastern Europe will be just as capable of producing the same materials for cheaper.

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