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ICMR Center for Management Research

IKEAs Cost Efficient Supply Chain

This case was written by Harish. A, under the direction of Vivek Gupta, ICMR Center for

Management Research (ICMR). It was compiled from published sources, and is intended to be

used as a basis for class discussion rather than to illustrate either effective or ineffective

handling of a management situation.

2009 ICMR Center for Management Research

ICMR, Plot # 49, Nagarjuna Hills, Hyderabad 500 082, India

Email: info@icmrindia.org.

www.icmrindia.org

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IKEAs Cost Efficient Supply Chain

Assembled furniture is expensive to transport and store because you end up paying for a lot of

air. By flat packing unassembled furniture and getting customers to pick their own products in

store, Ikea dramatically reduced its transportation and warehousing costs and passed the savings

to their customers1

- Carter McNabb, Partner, GRA2, November 2008.

INTRODUCTION

On January 01, 2009, Modern Material Handling announced that IKEA Group3 (IKEA), worlds

largest furniture retailer4, had won the Moderns Productivity Achievement Award

5 for the

Warehousing/Distribution segment for the year 2008-09.

Founded in 1943, in Sweden, IKEA focused on offering a wide range of good quality, stylish, well-designed, and functional furniture at a low cost so that more people could afford it. IKEA kept cost reduction at the center of any decision making. It made efforts to improve its internal supply chain processes like packaging, warehousing, and transportation which contributed to its cost cutting objective. Its most differentiating factor was its flat packaging system which had significantly improved its operational efficacy.

IKEA was ranked 35th in the list of the top 100 brands by Business Week

6 for the year 2008-09.

The companys brand value was estimated to be US$ 10.9 billion in 2008. For the financial year 2008, IKEA registered sales of US$ 28.8 billion. According to industry experts, IKEAs supply chain management was the key factor for the success of the company. The company considered factors like carriers used for transportation and pallets used in warehouses to base its decisions like furniture design and packaging. As a result, IKEA was managing its costs better than its competitors and was able to offer products at 30% lower costs.

IKEA maintained a long-term relationship with its suppliers and assisted them in improving their processes so that it would help in cutting costs further. The company did not offer free home delivery as other furniture retailers did and expected its customers carry the products with them in their vehicles and assemble the products themselves. This helped IKEA cut down on a part of its transportation costs and pass on the benefit to its customers in the form of low priced goods.

1 Jasmine Smith, Achieving Supply Chain Efficiency, Inside Retailing, November 17, 2008.

2 GRA is an Australia based supply chain consulting company founded in 1997.

3 Inter IKEA Systems BV located in the Netherlands is the owner and franchisor of IKEA concept. The

IKEA concept focuses on the companys commitment to product design, customer values and solutions. According to the company, IKEA concept: At the IKEA store you pick up what you want, take it home and put it together yourself. You do a little work so you dont have to pay someone else to do it for you. And we design our products so they can be made at a low price and then constantly work to push this price even lower.

4 Based on the revenues.

5 Modern Material Handling (MMH) honors companies with Moderns Productivity Achievement Awards

every year for making outstanding strides in material handling and related information systems. For the year 2008-09, awards were presented for Manufacturing, Warehousing/ Distribution, and Modern Thinker segments.

6 BusinessWeek is a business magazine published by New York based McGraw-Hill Publishing Company.

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BACKGROUND NOTE

IKEA was founded by Ingvar Kamprad (Kamprad) in 1943 in Agunnaryd, Sweden, when he was

17 years old. Kamprad started by selling goods like pencils, wallets, jewelry, picture frames, and

watches. Kamprad tried to keep costs low by purchasing goods in large quantities and passed on a

part of this benefit to his customers. In 1947, Kamprad introduced furniture in his product line and

found that there was a good demand for it. He sourced furniture from manufacturers in local

forests so that he could keep the costs low. As the scale of business grew, Kamprad found it

difficult to make individual sales calls and so started advertising in the newspapers. In 1951, he

designed a product catalogue and distributed it to potential customers who lived near his store.

IKEA opened its first furniture showroom in Almhult, Sweden, in 1953 where customers could

see, touch, and feel IKEAs furniture before they placed orders. As IKEA was selling furniture at

very low costs compared to its competitors, the competitors forced their suppliers to boycott

supplying to IKEA. That led IKEA to design and engineer its furniture and then outsource the

manufacturing to Eastern European countries, particularly to Poland, from 1955. IKEA designed

its furniture to cost less, look stylish and also be functional. In the same year, one of IKEAs co-

workers decided to remove the legs of a table so that he could fit it in his car and minimize any

damage in transit. That idea led IKEA to test flat packing in 1956. IKEA realized that flat packing

could bring down the costs of transportation and storage drastically. The company started

designing its furniture to support flat packaging. In 1958, IKEA opened its first store in Almhult.

The store, spanning 6,700 square meters, was then the largest furniture retail store in Scandinavia.

IKEA saw an opportunity to cut costs by letting the customers transport and assemble the products

themselves. The company was thus able to sell furniture at around a 30% lower cost than other

furniture retailers.

In 1963, IKEA opened a store in Oslo, Norway, its first store outside Sweden. In 1965, it opened a

store in Stockholm, Sweden. This was then the largest IKEA store and covered 33,000 square

meters. The company introduced the self-serve concept in the store. Customers were provided with

information about the products on display through written material and information desks. They

were invited to check out the products and select them but there were no sales staff. That enhanced

the customers shopping experience at the store as there were no salespersons who were constantly

urging customers to make purchases. Customers were given tickets for the goods they purchased

and were asked to collect the goods at the delivery docks. There was no door delivery service

available and the customers were asked to provide for their own transportation. Car racks could be

bought and self-driven vans could be rented. IKEA expanded into more European countries and by

1974, it had 10 IKEA stores in five European countries. IKEA shifted its headquarters from

Almhult to Copenhagen, Denmark, as it felt Copenhagens central location made it a better choice

to support its European expansion plans.

IKEA became highly successful in Germany where it opened its first store in 1974. The company

realized the huge growth potential it had in Germany and expanded aggressively. By 1980, it

opened 10 more stores in Germany. In 1975, IKEA entered Australia by opening a store in

Sydney. It continued to expand globally by opening stores in Vancouver, Canada, in 1976,

Singapore in 1978, Canary Islands in 1980, Iceland and France in 1981, Saudi Arabia in 1983, and

Kuwait in 1984. In 1982, a family controlled charitable foundation named Stitchting INGKA

Foundation (SIF) was formed in the Netherlands and ownership of IKEA was transferred to that

foundation. This was done to ensure the continuation of business, maintain the family control on it,

and minimize taxes as trusts and foundations had tax benefits.

IKEA entered the US in 1985 by opening a store in Philadelphia, Pennsylvania. As the company

followed the same products assortment and specifications in all of its stores globally, it decided to

follow the same in the US. However, this did not work because of the difference in the lifestyles of

American and Europeans. For instance, the size of beds used in the US was larger than the size of

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beds used in Europe. IKEA realized that it had to modify its products to suit the local needs and

hence made certain modifications to products like beds and kitchenware. Though the products

were modified, the Scandinavian touch was maintained in the style and design. In 1986, Kamprad

stepped down from the post of CEO and made B.V. Anders Moberg (Moberg) the President and

CEO of IKEA. Kamprad became the advisor of SIF.

By the year 1990, IKEA had 89 stores in 21 countries. Along with global expansion through its

stores, IKEA also expanded the sources of supply to include countries like China. In its early days,

IKEA sourced most of its products from Eastern Europe but as it expanded its business, its

dependence on Eastern Europe came down to a certain extent. In the 1970s, around 25% of its

supplies were from Eastern Europe. This came down to 15% by 1990. In the same way, IKEAs

revenue dependence on Scandinavian markets also came down from 85% in 1975 to 26% in 1990.

In 1991, IKEA started a furniture manufacturing subsidiary, Swedwood, to manufacture wooden

furniture and components.

In the 1990s, IKEA further expanded into countries like Taiwan, Malaysia, Spain, and China. In

1997, IKEA launched its website www.ikea.com where it provided its customers with an online

product catalogue. In the mid-1990s, IKEA launched a separate line of products specially designed

for children. In 1999, Anders Dahlving replaced Moberg. On October 09, 1999, IKEA celebrated a

Big Thank You event to recognize its co-workers. It distributed IKEAs global sales of that day

amounting to 84.85 million, among all its co-workers.

In the year 2000, IKEA launched a Code of Conduct for its suppliers, The IKEA Way on

purchasing Home Furnishing Products (IWAY). It defined certain issues like minimum wages,

prevention of child labor, amenities for workers at the suppliers end, and external environment

and forestry management (Refer to Exhibit I for a note on IKEA Way on purchasing Home

Furnishing Products [IWAY]). In 2001, IKEA moved its headquarters to Leiden in the

Netherlands. During the mid-2000s, as the European markets were getting saturated for IKEA, it

started focusing more on the Asian, Russian, and the US markets. It entered Japan in 2006 by

opening its first store in Tokyo. At the end of IKEAs fiscal year 2008 in August 2008, IKEA was

operating 254 stores in 24 countries.

MANAGING SUPPLY CHAIN

IKEA first established a target price before designing a product. This practice was in contrast to

the generally followed method of designing the product first and then pricing it according to the

cost and markup by other furniture manufacturers. Designers at IKEA had to accommodate all the

costs like raw material, manufacturing, and transportation till the product reached the stores within

the given target price. IKEA followed such a practice to develop a good quality product at a low

cost so that more people could afford it. The companys objective was to provide low cost, good

quality goods to its customers.

IKEA had adopted a flat packaging system for packing its furniture to reduce the amount of air i.e.

free space in its transportation and storage. It laid special focus on designing functional furniture

that could be disassembled and transported to its stores. In the case of those products which could

not be fitted into flat packs, IKEA worked on making them stackable. Transporting in parts in flat

packs allowed IKEA to optimize the carrier space and hence cut down on costs compared to other

furniture retailers which transported assembled products. While the company focused on selling

affordable furniture, it did not compromise on the innovation in designing its products and the

utility they offered. The flat pack design also helped IKEA in optimal utilization of warehouse

space and minimizing the types of pallets used to store the products.

IKEAs global supply chain involved 1,380 suppliers in 50 countries, 41 trading service offices in

30 countries, 31 distribution centers (DC), and 11 customer DCs in 16 countries as of 2008. The

companys corporate structure was divided into three parts Retail, Distribution, and Trading

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Areas. IKEA of Sweden (IoS) handled the product design and marketing functions. The retail

division handled all the stores, the distribution division controlled the DCs, and the trading areas

took care of the purchasing and supplier support functions (Refer to Figure I for IKEAs

Corporate Structure).

Figure I

IKEAs Corporate Structure

Adapted from www.plan.se.

SUPPLY CHAIN PLANNING

IoS played a key role in decision making at IKEA. Most of the supply chain planning process

happened at IoS (Refer to Exhibit II for Supply Chain Planning Process at IKEA). The

planning process started with sales planning where the group management (GM) team at IKEA

made forecasts for various products for the current fiscal year and five years after that. This was a

strategic forecast and was done on an aggregate level to include all IKEA stores. The forecasts

were based on IKEAs strategic business plan which involved business cycle and market

intelligence reports. Forecasts were made for all business areas (BA) like sofas, chairs, and beds.

A tactical forecast was done by Demand Planners at IoS who provided forecasts for all BAs based on the growth plans and targets of each BA. The two forecasts were compared for any deviations. If significant deviations were found, then the forecasts were divided into sales frames per regions and further into sales frames per product area. These frames were compared with the forecasts provided at the tactical level of demand planning. The demand planners had to adjust their forecasts to eliminate the differences found between the sales frames and sales plans. All the forecasts were reviewed three times a year. Strategic and tactical forecasts were made at IoS.

Operational level forecasts were made at store levels based on the replenishment orders from the stores. The operational and tactical forecasts were combined to form a forecast for each product at the store level. The store level forecasts were then aggregated and compared with sales frames on retail forecast group level (RFG) and at the distribution services region level. RFG consisted of all the stores in a geographic region, usually a country. A few RFGs were grouped and were served by some distribution service regions. For instance, in Europe, all the stores in one country formed an RFG and all the countries in Europe in which IKEA operated were served by six distribution service regions at the end of 2008.

Stores provided sales forecasts for each product for the next three weeks on a rolling basis whereas demand planners forecast sales for four weeks to 84 weeks on a rolling basis. Most of IKEAs products had lengthy life cycles and hence demand planning was done for as long as 84 weeks. This helped the suppliers to plan their production. Need planning for products was done based on these inputs. The need planning team netted these forecasts with the current stock levels in stores, their safety stock requirements, and also with the goods in transit to calculate the final store requirements figure. Thereafter, the store requirements were aggregated at the DC level and netted against the respective DC stock levels including goods in transit to replenish the DC. The DC groups were aggregated for the demand to be forecast for 84 weeks. Suppliers were informed

Ikea of Sweden

Retail Distribution Trading Areas

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about the forecasts for the coming 26 to 52 weeks. Then, IKEA divided the requirements among the suppliers using a supplier matrix developed based on the capacities and lead times of each supplier.

IKEA used information technology which provided accurate data and other tools to support its planning process. For instance, it partnered with JDA Software Inc

7 in 2001 and implemented JDA

Demand and Fulfillment solutions which provided the company with better visibility in the sales patterns of its products. This further helped in improving the accuracy of the forecasts.

SUPPLIER RELATIONSHIP MANAGEMENT

After the design of the product and material to be used was decided, trading offices across the

world were instructed to find the suppliers in their respective regions and invite bids from them.

The trading offices of IKEA competed among themselves to win the bid for the product or product

line that IKEA was outsourcing. The trading offices helped suppliers in their region in formulating

competitive bids for a products landing price which included material, manufacturing, and

logistics costs. They then sent the most competitive bids to IoS. IoS selected the most competitive

bidders from the bids it had received from the trading offices for outsourcing the manufacturing of

the product. As IKEAs suppliers had to adhere to IWAY, parameters like quality of product and

the products impact on the environment due to manufacturing were the same for all the suppliers.

Thus, IKEA could choose its supplier on the basis of costs. The company also considered the

production capacity and capabilities of the supplier before outsourcing so as to ensure no supply

shortages in future.

IKEA had most of its stores in the Western countries but had its suppliers spread across the world.

The company believed that it had to be close to its suppliers so that it could have a better and a

longer relationship with them. To maintain a long-term relationship, IKEA chose its suppliers after

proper due diligence. IKEAs officials at its trading offices frequently visited the suppliers

manufacturing facilities to ensure compliance by the suppliers to IWAY. IKEA also hired

individuals with expertise in fields like manufacturing and production management for its trading

offices. These experts often helped IKEAs suppliers with any assistance required to increase the

efficacy of their manufacturing processes and also to cut costs wherever possible. IKEA supported

its suppliers by offering assistance in the form of leased equipment, credit facilities, extending

guarantees for a suppliers bank loans, etc. It also supported its suppliers occasionally by

purchasing some of their excess inventories. In return, IKEA benefited by getting goods at low

cost and increased loyalty from its suppliers. With loyal suppliers, IKEA could be certain about the

supply of goods and hence was able to plan its replenishment strategy efficiently.

IKEA laid emphasis on gradually shortening the lead time taken by its suppliers. The company

started off with a new supplier with a call-off8 greater than 4+4. This meant that the supplier would

be given more than four weeks notice for a four-week delivery window9. IKEA then helped those

suppliers to improve their processes to bring the call off down to just 4+4. The company worked

further with its suppliers to increase their manufacturing efficiency to bring down the lead time

from weeks to days and make them capable of producing goods as and when orders were

7 JDA Software Inc is one of the worlds leading supply chain solutions providers. It was founded in 1978

and is headquartered in Arizona, US. It reported revenues of US$ 390.3 million and a net profit of US$ 3.1 million for the fiscal year 2008.

8 Call off is a delivery schedule for products supported by a purchase order. Usually, a call off message is

sent by a buyer to the seller regarding delivery schedules but it can also include specifications of products in the purchase order.

9 A delivery window is defined as the difference between the earliest acceptable delivery date and the latest

acceptable delivery date.

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generated. IKEA further enhanced the supply chain efficiency by implementing Vendor Managed

Inventory (VMI)10

for some of its key suppliers.

Apart from furniture retailing, IKEA also designed its own furniture and had its own

manufacturing subsidiary named Swedwood. This gave IKEA an advantage over its competitors.

Most of the times, IKEA used the Swedwood facilities for manufacturing those goods for which it

could not find suitable suppliers or a more cost effective way of production. At Swedwood, IKEA

manufactured most of its wooden furniture and components. As IKEAs suppliers were spread

across the globe, the company often hired some independent quality auditing agencies operating in

the vicinity of the supplier to perform quality checks on the products manufactured. For instance,

IKEA hired Intertek, a testing and certifying firm, to check the quality of products manufactured in

some of the Asian nations like China. By having the products checked at a location proximate to

the manufacturing facility, IKEA could cut the costs of transporting products that did not meet the

quality standards.

In addition to providing technical and financial assistance, IKEA also provided its suppliers with

support in logistics and IT. Each trading office had its own transport manager. Once goods were

ready to be dispatched to either IKEAs DC or stores, transport managers from the concerned

trading office would find out the optimal mode of transportation and other terms like delivery time

and costs involved. These services were provided to those suppliers who were not able to extract

the same or better terms from transporters as IKEAs transport manager could.

IKEA used a combination of ocean, rail, and road transport for transporting its goods. The

company constantly looked for ways to reduce the use of road transport, which had a higher

adverse impact on the environment as compared to ocean and rail transport. IKEAs packaging

was also designed in such a manner as to fit the maximum possible products into containers used

for transportation. This further improved the efficiency and brought down the overall landed costs

of products.

IKEA also took special care while loading products on containers for transportation so that there

would be minimal damage during transit. The company captured the loading process in videos or

photographs at the suppliers end. If any goods were damaged in transit, IKEA could review the

faulty loading methods from the videos or photographs. It could then provide appropriate feedback

to make sure that these methods were not repeated either by it or by its suppliers.

The products were then shipped to either the DC or direct to the store. IKEA preferred to build its

DCs at places which were closer to seaports so that it could use more of ocean transport and less of

rail and road transport. However, it also considered proximity of the DC to its existing or planned

stores when it chose a location for the DC. Products that were fast moving were either delivered

directly to the stores or to DCs which were closer to the stores. Products that were relatively slow

moving were delivered to DCs which were centrally located and covered a large region.

WAREHOUSE MANAGEMENT

IKEAs DCs were highly automated, using systems like automated storage and retrieval system

(AS/RS) and conveyor belts. Using AS/RS improved the efficiency of IKEAs warehousing

operations significantly. The AS/RS used sophisticated cranes which could handle pallets without

any damage and also could reach racks that were very high. Most of IKEAs DCs had racks as

high as 100 ft which allowed it to stock more products and each crane in AS/RS had the capability

of handling 60 pallets an hour. Conveyors were used to feed the AS/RS with pallets that needed to

be stored in racks or to transfer out pallets that had been retrieved from the racks. The use of

conveyors helped IKEA in reducing traffic in the form of heavy lift trucks in the warehouse.

10

Vendor Managed Inventory is an IT product where the buyer of the product provides details like point of

sales data to the supplier of the product and supplier takes the responsibility of maintaining the stock

levels at the store level of the buyer.

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In the case of IKEAs Georgia DC in the US, the containers were received at the receiving docks.

The products were processed to decide where they would be stored in the warehouse based on the

product specifications and demand. They were then loaded onto pallets used in the warehouse

(Refer to Figure II for the layout of IKEAs Georgia DC). At the receiving area, the products

were verified to check if the product quantity and its supplier were accurate. After they were

verified, a pallet label, a bar code, was printed and applied on the pallet. The lift truck driver who

had been assigned to pick up the pallet would then scan the label to know whether it should be

cross docked or be stored in the conventional racks of the warehouse.

Figure II

Layout of IKEAs Georgia DC

Adapted from www.mmh.com, IKEAs New Style: Automation, February 01, 2008.

If the pallet was to be cross docked, then the lift truck driver was directed to the floor storage near

a dock door. The driver deposited the pallet and scanned the bar code embedded in the floor so that

Warehouse Management System (WMS)11

would be updated with the area where the pallet had

been deposited.

If a pallet was to be retrieved from the conventional rack of the warehouse, the AS/RS would be

instructed to retrieve the pallet from that particular rack and deliver it at a station12

where a forklift

driver would pick it up. The AS/RS system retrieved the pallet from the rack and delivered it to the

station as instructed using the conveyor. The lift truck drivers scanned the barcode on the pallet to

confirm that the right pallet was being delivered and then transferred it to floor storage as

instructed by the WMS. If a pallet was to be stored in the warehouse, then the lift truck driver

carrying it scanned the barcode of the pallet at a station from where AS/RS took the responsibility

for storing it (Refer to Exhibit III for pictures of AS/RS in IKEAs Warehouse).

11

Warehouse Management System is an IT system that assists in warehouse operations in tasks such as

tracking inventory, assigning tasks to warehouse personnel, etc. 12

Stations were located at four ends of the conveyors.

Receiving/Shipping Docks

Receiving/Shipping Docks

Floor

Storage

Receiving/Shipping Area Floor

Storage

Floor

Storage

Receiving/Shipping Area

Floor

Storage

Conventional

Racks

Conventional

Racks

C

o

n

v

e

y

o

r

C

o

n

v

e

y

o

r

AS/RS

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All the processes in the warehouse were managed by IKEAs WMS. The WMS used task

interleaving13

to assign tasks to fork lift drivers. The WMS worked in a way to minimize the empty

travel time by lift drivers by assigning tasks depending on when and where the previously assigned

task got over. For example, a lift driver leaving goods at a station to feed AS/RS would be

instructed to deliver the goods from the nearby station that were to be delivered in floor storage for

filling an order from the individual stores. The cranes of AS/RS were also programmed to operate

in a task interleaving manner so that a crane storing a pallet on a rack would simultaneously

retrieve a pallet from other racks to fill any matching order. These measures optimized the

warehousing activities.

IKEA followed the same design, technology, and operations at all of its facilities so that the

processes were standardized across the chain and employees at any facility could be moved from

one facility to the other, if required. The standardization was taken to the level of pallets that were

used in DC. IKEA used only three varieties of pallets a standard Euro pallet, a half pallet, and an

IKEA pallet which was an oversized Euro pallet. These pallet sizes were also considered as a

factor when IKEA designed its products. Jim Leddy, IKEAs Expansion Manager for North

America, said, We control our product pipeline, so we design our products around these three

standard pallet sizes. The idea is that no matter where our product is manufactured, it can be

shipped to any of our facilities anywhere in the world.14

Standardization also helped IKEA to conduct pilot projects at one DC and if they were found

successful, apply them across the chain. This standardization helped Ikea save considerably on

costs and time. IKEA was able to benchmark the performances of different DCs as all worked on

the same operating procedures. As some of the jobs in warehousing like transferring goods in fork

lifts were mundane, it was tough to retain employees doing such tasks. Automation helped IKEA

address the issue of tightening labor markets.

The DCs filled the orders for replenishment of stores in the carriers designated for them at the

shipping docks. On an average, the IKEA store received two to three replenishments per week

based on the sales at the store and its warehouse size.

STORE DESIGN

IKEA chose its store location on the city outskirts as the companys stores were large and required

huge parking spaces. IKEA realized that its customers were visiting stores in their cars and that

resulted in higher carbon emissions. Hence, the company made sure that the store location chosen

was well connected through public transport so that environment conscious customers could visit

IKEA stores using public transport.

IKEAs stores were designed in such a way that furniture was displayed in a real room setup, along

with the details of each displayed product. Customers were given pencils and papers at the store

entrance to list down product details like item code and respective aisle number in the stores

warehouse. The store layout was designed in such a way that customers passed through all the

products on display. IKEAs intention was to take customers through all of its products so that

even a customer who entered the store with a planned shopping list would check out other products

which might interest him/her. However, shortcuts were also provided at a few places and these

were mentioned on the floor maps that were made available to the customers.

The store had another area called market hall where customers could pick up small furniture and

furnishing products like flower pots, cutlery, cookware, paintings, and photo frames. Customers

had to pick the products displayed in the showrooms in the form of disassembled flat packs in the

furniture warehouse of the store. Customers were provided with flat trolleys for carrying their

13

Task interleaving is a term used in warehouse management which refers to assigning labor and equipment

with tasks that are pending in the system to improve their utilization. 14

Bob Trebilcock, IKEA Thinks Global Acts Local, www.allbusiness.com, February 01, 2008.

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goods from the warehouse (Refer to Exhibit IV for Picture of Flat Trolley Used in IKEA

Stores). Some of the goods which were either not fast moving or were too bulky were stored in the

external warehouse and customers were told to collect them from there.

Customers, after collecting their merchandise from the warehouse, would check out by paying

cash. There were a few loading zones provided at the stores exit to which the customers could

bring their vehicles and load the merchandise they had bought. Most of the IKEA stores had a

section called As Is where IKEA sold returned goods that had minor damages and had been

repaired, at a discounted price. All IKEA stores had restaurants, which predominantly sold

Swedish dishes at low prices, and had play areas for children. Even though IKEA expected certain

tasks like transportation and assembling of products to be done by its customers, it also offered

assistance in assembling products at a reasonable price. Certain items like complex and bulky

kitchens were assembled and delivered to the customer directly from the warehouse.

THE ROAD AHEAD

Industry experts felt that IKEA could further improve its supply chain efficiency by using Radio

Frequency Identification (RFID)15

technology. They felt that the visibility of the supply chain

could improve drastically with the use of RFID. However, some analysts opined that IKEA was a

family run business and to implement RFID throughout the entire supply chain would require a

huge amount of funds. They felt that IKEA might need to compromise on its expansion plans if it

had to implement RFID in its supply chain operations without external funding. They argued that

IKEA had achieved market leadership by improving the efficacy of its operations and could take

time to accumulate funds to implement RFID.

Some critics argued that IKEAs strategy of following the same product line globally might not

work in future when it expanded its operations into nations with diverse cultures. However,

according to some analysts, IKEA was targeting young and middle-aged consumers, most of

whom were exposed to global trends. They said that IKEA was designing products which were

high on functionality and quality and at a low cost which would tradeoff any other concern of the

customers.

15

Radio Frequency Identification (RFID) is a method of remotely storing and retrieving data from objects

called RFID tags using radio frequency waves. RFID tags usually have an integrated chip for processing

and storing data and an antenna to transmit and receive signals.

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Exhibit I

Note on IKEA Way of Purchasing Home Furnishings (IWAY)

Legal Requirements: Suppliers must comply with national laws and regulations and with

international conventions concerning social and working conditions, child labor, and the

protection of the environment.

Social & Working Conditions: IKEA expects its suppliers to respect fundamental human

rights, to treat their workers fairly and with respect. Suppliers must agree to:

Provide a healthy and safe working environment,

Pay at least the minimum legal wage and compensate for overtime,

Ensure reasonable privacy, quietness, and personal hygiene, in those instances where housing facilities are provided.

Suppliers may not:

Make use of child labor,

Make use of forced or bonded labor,

Use illegal overtime

Prevent workers from associating freely with any workers association or group of their choosing or collective bargaining,

Accept any form of mental or physical disciplinary action, including harassment.

Environment and Forestry: Suppliers must agree to:

Work to reduce waste and emissions to air, ground, and water,

Handle chemicals in a safe way,

Handle, store, and dispose of hazardous waste in an environmentally safe manner,

Contribute to the recycling and reuse of materials and products,

Use wood from known areas and, if possible, from sources that are well managed and preferably independently certified as such.

Suppliers may not:

Use wood originating from national parks, nature reserves, intact natural forests or any areas with officially declared high conservation values, unless certified.

IWAY Implementation: IKEA suppliers must communicate the content of the The IKEA

Way on Purchasing Home Furnishing Products to co-workers as well as sub-contractors and

ensure that all measures required are implemented accordingly. Via a network of Trading

Service Offices, IKEA supports their suppliers to improve their operations and practices.

Believing in long-term relationships, IKEA does not break off relations due to non-compliance

only, as long as there is a willingness to improve in the right direction with an agreed plan of

action to comply with the IKEA requirements within an agreed time frame. Repeated violations

of the IKEA requirements will result in the termination of business with the supplier concerned.

Support and Monitoring: IKEA Trading Service Offices have the direct responsibility to

support and monitor the suppliers. To ensure compliance with the requirements and to support

and follow up developments on a global basis, IKEA has formed a global Compliance and

Monitoring Group. Through the General Purchasing Conditions for the supply of products to

the IKEA Group of Companies, IKEA has reserved the right to make unannounced visits at any

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IKEA of Sweden Retail Distribution Services

Strategic/

Long-term

Tactical/

Mid-term

Operatio

nal/Short

-term

Market

Intelligence

5c. Store

Planning

2.

Forecasting

(Demand

Planning)

Delivery

schedule

1. Sales Planning

(GM,

BA, IoS)

3. Need

Planning

4.

Supplier

capacity

planning

Production

Planning

5b.

Warehouse

Planning

5a.

Transport

Planning

Replenishment orders Execution

time to all places of production (including their sub-contractors) for goods intended for supply

to IKEA. IKEA Group furthermore reserves the right to assign, at its sole discretion, an

independent third party to conduct inspections in order to ensure compliance with our code of

conduct.

Source: www.ikea-group.ikea.com.

Exhibit II

Supply Chain Planning Process at IKEA

Adapted from www.plan.se, Global Supply Chain Planning at IKEA.

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Exhibit III

Pictures of AS/RS in IKEAs Warehouse

Crane of AS/RS under operation in between racks.

Conveyor of AS/RS

Source: www.viastore.ru.

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Exhibit IV

Flat Trolley Used in IKEA Stores

Source: www.ikea.com.

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References and Suggested Readings:

1. An Effective Procurement Lesson from IKEA, Supply Chain Europe, May 2004.

2. Robert Malone, Logistics by IKEA, www.forbes.com, September 29, 2005.

3. Splatty, IKEA Logistics, www.3plwire.com, September 30, 2005.

4. IKEA: How the Swedish Retailer Became a Global Cult Brand, Business Week, November 14, 2005.

5. Optimizing Outdoor Logistics, www.logisticsit.com, May 03, 2006.

6. Bob Terbilcock, IKEA Thinks Global Acts Local, Modern Materials Handling, February 01, 2008.

7. Bob Terbilcock, IKEAs New Style: Automation, Modern Materials Handling, February 2008.

8. Jasmine Smith, Achieving Supply Chain Efficiency, Inside Retailing, November 17, 2008.

9. IKEA Looks to Local Sourcing, www.procurementleaders.com, March 26, 2009.

10. Gerri Hunt, IKEA: Euro Success Story Makes Big Impact in US, www.kidtodayonline.com, June 01, 2009.

11. Jenny G, The Story of IKEA Furniture, http://hubpages.com.

12. Building Piece by Piece: IKEA Becomes an Industry Leader, www.evarcarmichael.com.

13. www.ikeafans.com.

14. www.ikea.com.

15. www.mmh.com.

16. www.ikea-group.ikea.com.

17. www.plan.se.

18. www.viastore.ru.

Book

1. Jason Jennings, Less is More: How Great Companies Improve Productivity without Layoffs, Portfolio Trade, December 30, 2003.

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IKEA SCM Practices COVERPAGE.pdfIKEA SCM Practices Final