The Function of IKEA Supply Chain

Analyse how the current structure of IKEA’s supply chain contributes to the business objectives of the organization?

Introduction

A supply chain is massive group that constitutes of retailers, distributors, transporters, storage facilities and suppliers who give a hand for the production delivery and sale of a product.

Mainly supply chain is consist of three main parts

Supply

Manufacturing

Distribution

Supply: A supply is focussed on raw materials that are supplied for manufacturing a product including how, when and from what location.

Manufacturing: It is a process of converting the raw materials in to a finished product.

Distribution: An organised network of distributors, warehouse, and retailers. In order to maintain the customer satisfaction, by delivering the product to them.

Supply chain manager goes beyond the suppliers where the connection helps in enhancing requirements. This consist of reducing cost, increase the quality, ensure ethical, social and environmental issues.(Alder.H, 1994).

IKEA is a privately owned company that sells everything from furniture to accessories. They started manufacturing furniture’s at affordable prices and is now it is one of the largest furniture in the world. It has a global supply chain with the growing sales and purchasing in major regions of the world. It has global sales in over 250 stores. And these stores are owned by IKEA itself. They have totally 31 distribution centres along with this they have 1350 suppliers all around the globe. For the past decade they have shown tremendous increase in sales every year and they have planned to open 10-20 stores every year in order to increase their sales. “There should be a tight control and high levels of visibility to keep cost down and avoid obsolete inventory and/or stock outs” (Patrik J, Martin R. Stefan H).

IKEA’s Supply Chain

Supply chain Management was the key source in IKEA in cost management which gave it a cutting edge among its competitors as it products where charged 30% lower than the cost of its rivals .Before the Product is made IKEA fixes a an achievable price which was in contrast with the earlier pattern. They are more into MTS (Make-to-Stoke), and only few products are made on behalf of customers order. They rely on forecast. Traditionally IKEA stores have their own planning and placing the replenishment request. This has led to a fragmented supply chain planning with the local optimization and lot of manual intervention with plans. IKEA used to transports in parts in flat packs  unlike other furniture retailers .Thus by transporting it through separate parts IKEA got an cutting edge in reducing the cost of the product.(Harish. A,2009). In this environment, purchasing undertakes number of significant activities which includes selecting the right supplier, check the working of proper procedures and there performances, location, providing accurate information for sales and demand forecast, outsourcing etc. Also providing with best logistics to increase the efficiency (Alder, 1994)

Basic view of IKEA Supply chain System.

Primary Division

Agents

Supplier

Output Consumer buy’s Product

Retailer

Manufacturing

Distribution

Input: Received Raw Materials

Tertiary Div

Sec Div

Question 2 Evaluate the risks within the IKEA supply chain and discuss how these risks are currently managed.

IKEA – A Risk Management Overview:

Introduction:

Risk management in supply chain is one of the most important aspects on any business spot. It is very important to maintain the effective system in order to operate a well designed flow of information, materials, cash and functionalities (Mentzer, 2001). IKEA, being a well organized and automated firm, the chance to identify the risk causing factor and scaling it is straight forward due to the systematic format (Harland, 2003). As per Kleindorfer (2004), risk that affects supply chain can be classified into two broad categories. (1) Risk due to the supply and demand co-ordinations of the business, and (2) risks caused due to the day to day activities of the supply chain. According to Williams (2008), in a supply chain highly related organisations like IKEA, there are large number of risk factors like accidents, disasters, supply demand maintenance, labour issues, etc., which disrupts their business operations. The factors causing risk in IKEA and the effective management skills maintained within its supply chain to overcome those risks will be analysed in this paper.

Risk Identification in IKEA:

It is obviously important to understand and analyse the conception behind the small firm (Domestic) handling their supply chain and a large firm (International) operating their business functions in order to identify the risk and proceed further (Walker, 2003). IKEA being a large firm handling international supply chain, its various risk factors can be identified from the case study given. Being an extensive supply chain, IKEA has launched its foot prints in 28 countries with 270 stores worldwide. While expanding their operations globally, IKEA has come across many issues in organising supply and demand maintenance (Bowersox and Calantone, 1998a). Their expansions in terms of growth (demand) are vast and hence their supply chain develops fast because as the newly launching stores count rises by 10-20 every year which is an important factor of risk in their supply chain. As per the information available in the case study, IKEA’s entire supply chain planning is based on their early prediction or forecast, which expands the intricacy of risk in depth. Though IKEA employed a larger group to forecast their demand, they fail to use any reliable source of information. IKEA seems to be lacking a tactical planning and replenishment in their supply chain as they go behind the strategy ‘Make a Store’ which takes to a state of over estimating their demand resulting in imbalanced demand maintenance and even to run out of stocks in some of its own stores (Johnson, 2008). As per Svensson (2000), supply chain is hard to operate due to the risks involved in it which he classifies into two types as Atomistic and Holistic risks. From their definitions, we can conclude that the risk involved with IKEA supply chain is Atomistic, as the industry deals with the product that are easily reachable by anyone in the market. But according to Harland’s concept of calculating the risk, it is a flip to estimate the factors causing risk due to the fact that the system used in IKEA is automated with the advanced technologies. According to Johnson et al (2008), there are issues in IKEA in data observation and lack of follow up tools in order to improvise the clarity over their supply chain process worldwide.

Effective management of Risk in IKEA:

IKEA’s profit maximization is one of the perfect examples of their effective risk management ability (Hise, 1995). IKEA has also observed the perfect balance between the effectiveness and the efficiency in their supply chain globally which is one of the key factors for their successive risk management (Mentzer and Firman, 1994). According to Johnson (2008), IKEA has developed a systematic approach to sort out their supply chain risks which is called as ‘Cluster of Programs’, which concentrates on integrating and centralising their supply chain by focusing on the development of software (updated) in order to control and maintain their data effectively. IKEA has organized a system of network with various departments in it to ensure the proper flow of materials, information, etc., throughout the year which is cost effective (Rudberg, 2004). More importantly, IKEA concentrates on maintaining a common frame work of business policies for all areas of its business to run a systematic operation. IKEA also tries and makes its supply chain as compact as possible by locating and utilising the suppliers available in the host country directly which avoids the major transportation worldwide that also reflects on cost and efficiency. Recently from the work of Stadler (2005), it was expected that in July 2006 a new technology ‘Demand Planning Software’ will be implemented (which has been implemented) to cover around 12,000 products which will further reduce the resources for planning.

Conclusion:

From the study, it is evident that the risk is being effectively reduced and managed in IKEA by the highly automated and technological advancements like the bar codes, AS/RS and RFID technologies. Hence with the increased error free demand forecasting applications and the improved centralised data visibility, the accuracy of the forecast has been dropped down to zero or negligible error. Hence, it is concluded that the risk management techniques used in IKEA are more efficient and also the risk is being effectively managed.

Question 3

Evaluate the advantage and disadvantages of IKEA using RFID within it’s supply chain.

Many Qualified individuals have the opinion that RFID if used in IKEA supply chain it can enhance the efficiency of its supply chain and the performance of the organisation at the whole.( Harish.A,2009). RFID a new technology in this new era is now a days a latest technology which is inspiring many large firms to buy and invest. Because of its advantages in supply chain top performing organisations are ready to take the risk to buy it in spite of the fact that it is not cost effective.( Michael,K; McCathie,L,2005) Currently In Warehousing bar code system is been used by IKEA in Warehouse Management System and as a technology other than RFID. RFID is a latest and emerging new technology after bar code where Line of sight scanning is not needed but it’s quite expensive than the bar code.

One of the main disadvantages of using a RFID is it requires a huge amount of investment and cashes to utilize it and keep going its functioning. There is big amount of risk for a large company like IKEA to use it as yet it hasn’t proved itself. They have already invested a huge amount of capital on earlier technology of bar code system and again investing on a new technology requires a careful understanding. One of the most catching experience of using RFID is that its communication to tags can be done in the fraction of second and it can also scan many items at one time ( Michael,K; McCathie,L,2005) .

The most of the task in supply chain in IKEA is quite labour oriented. Use of labour is specially required as IKEA has a huge amount of inventory which needs to be checked and taken care of. Apart from this RFID helps for clear picture of stock levels and it also helps it to cut the cost of inventory. All of this helps the firm to cut down the expenses. RFID also leads to the cut down of the manpower in an organisation which helps to cut down the expenses in distribution by around 50-80%.IKEA uses more of water transport and its Distribution centres are located near the ports so that it could use more of water transport and less of road transport. IKEA products are either directly shipped at DC or to the stores ((Haris,A,2009) By using RFID it decreases labour savings up to 36% and also a reduction in verification cost by 90% for shipping processes. This leads to save of capital for an organisation as well it also saves enough time in checking and waiting for other processes (Mills, K, 2004.4)

Qualified experts in IKEA have a very strong opinion about RFID advantage of visibility. They feel that RFID in the supply chain will help in improving the visibility of it. IKEA been a largest furniture retailer has many retail stores around the world. There is a big loss of revenue on the part of big firms like IKEA and 42% of its come from the goods which is not been there on the retails shelf. “The visibility offered by RFID could help to reduce this loss, by reducing waste, lowering inventory levels and improving safety. Improving visibility in the supply chain can help lower distribution and handling costs and reduce Inventory levels” [Zebra Technologies]. This is how it helps the retailers as it removes the labour to handle their stocks in the stores. Another advantage it can be used as in asset tracking, to identify items, to do inspection (Albright, B., 2005), It also helps in theft detection because it also deals with item level tracking. As IKEA operates in many places around the world RFID would be useful to them to identify and check if the goods is been stolen by anyone.

Further it also helps in quality control and regulation not only internally but also with as their goods move along the supply chain. Thus reliability on the goods is maintained wherever in the world it operates ( Michael,K; McCathie,L,2005). One more advantage with RFID is it is impossible to copy it and hence can also be used as security tool. The biggest disadvantage of working the technology like RFID is to heavy investment and capital for it to function in the market. It is in millions of dollars. Even the cost of technology is huge in implementing RFID. Though RFID saves cost but as it is very expensive organizations thinks twice before implementing this technology (Frontline Solutions,n.d) Especially IKEA is actually a family run business and to run it throughout a huge capital is required. If IKEA considers RFID which is going to cost huge its other expansion plans might be hindered as they might not be having enough funds to simultaneously spend on both RFID and international expansion.

International expansion is necessary to be a carry its position of market leader as it needs to enter new market whenever possible. For the competitive advantage in this globalization funding required to enter new markets can be more fruitful than taking external funding for RFID. IKEA is already a successful because of it efficient operation and supply chain management. IKEA should wait for some time to go ahead with RFID as it has many benefits and can make wonders. Even IKEA believes in standardization of its products and goods. It follows same technology, design and operations to all of its facilities (Harish.A, 2009). “There is an apparent lack of standards in RFID hindering the technology’s adoption and support for widespread use in supply chains”

Even the RFID technology is not been educated among the all the consumers. So the consumers’ does not know how to untag their product. This can be a huge privacy concerns for the consumers of IKEA as even after purchasing the product they might be continued to be tracked. This might be a concern for human rights too and IKEA products could be boycotted if they interfere in anybody’s privacy (Want, R.2004) Thus if RFID tag is put on common goods of IKEA it can be in a danger. “Data synchronization, integration, transformation, and communication are huge barriers in making this technology work for organizations” Previous endeavours to collaborate across organizations have been unsuccessful as information could not be readily extracted and shared. Hence it is not easy to operate for supplier and retailer cooperation. ( Michael,K; McCathie,L,2005)

Hence after all this advantages and disadvantages of using RFID we conclude that any organisation would like to enhance and optimize its supply chain and so even IKEA. RFID is important as it reduces the labour cost, increases visibility and improves investment management.

But at the same time it is very costly to implement which lets the firm to compromise in many things. It also has some privacy issues and difficult to handle. Apart from all this IKEA has already a successful supply chain and has invested heavily on bar code systems. (Michael,K; McCathie,L,2005).