Critiques-wal-mart IKEA

UNIVERSITAS INDONESIA

SUPPLY CHAIN MANAGEMENT PRACTICES

IN WAL-MART AND IKEA

KARYA AKHIR

Michelle

0906645432

FAKULTAS EKONOMI

KELAS KHUSUS INTERNASIONAL

MELBOURNE

MARET 2014

Supply chain ..., Michelle, FIB UI, 2014

Universitas Indonesia

UNIVERSITAS INDONESIA

SUPPLY CHAIN MANAGEMENT PRACTICES

IN WAL-MART AND IKEA

KARYA AKHIR

Diajukan sebagai salah satu syarat untuk memperoleh gelar

Sarjana Ekonomi

Michelle

0906645432

FAKULTAS EKONOMI

KELAS KHUSUS INTERNASIONAL

MELBOURNE

MARET 2014



HALAMAN PENGESAHAN

Karya ilmiah ini diajukan oleh:

Nama : Michelle

NPM : 0906645432

Program Studi : Management

Fakultas : Ekonomi

Jenis Karya : Makalah Non Skripsi

Nama Mata Kuliah : Supply Chain Management

Judul Karya Ilmiah : Supply Chain Management Practices in Wal-Mart and

IKEA

Telah berhasil diselesaikan dan dianggap lulus dengan nilai 78 oleh dosen pembimbing

Vikram Bhakoo dari universitas partner, University of Melbourne. Hak cipta atas karya

ini tetap menjadi milik penulis, pembimbing dan University of Melbourne. Telah juga

diterima sebagai bagian persyaratan yang diperlukan untuk memperoleh gelar Sarjana

Ekonomi pada Program Studi Management Kelas Khusus Internasional Fakultas

Ekonomi Universitas Indonesia (KKI FEUI).

Kepala Program KKI FEUI,

Harryadin Mahardika Ph.D

NUP: 060703079

Ditetapkan di : Depok

Tanggal : 5 Maret 2014



HALAMAN PERNYATAAN ORISINALITAS

Karya ilmiah ini adalah hasil karya saya sendiri,

dan semua sumber baik yang dikutip maupun dirujuk

telah saya nyatakan dengan benar.

Nama : Michelle

NPM : 0906645432

Tanda Tangan :

Tanggal : 5 Maret 2014



HALAMAN PERNYATAAN PERSETUJUAN PUBLIKASI

TUGAS AKHIR UNTUK KEPENTINGAN AKADEMIS

Sebagai sivitas akademik Universitas Indonesia, saya yang bertanda tangan di

bawah ini :

Nama : Michelle

NPM : 0906645432

Program Studi : Kelas Khusus Internasional

Departemen : Management

Fakultas : Ekonomi

Jenis Karya : Makalah Non Skripsi

demi pengembangan ilmu pengetahuan, menyetujui untuk memberikan

kepada Universitas Indonesia Hak Bebas Royalti Nonekslusif (Non-exclusive

Royalty-Free Right) atas karya non ilmiah saya yang berjudul:

Supply Chain Management Practices in Wal-Mart and IKEA

beserta perangkat yang ada (jika diperlukan). Dengan Hak Bebas Royalti

Nonekslusif ini Universitas Indonesia berhak menyimpan,

mengalihmedia/formatkan, mengelola dalam bentuk pangkalan data (database),

merawat, dan memublikasikan tugas akhir saya selama tetap mencantumkan nama

saya sebagai penulis/pencipta dan sebagai pemilik Hak Cipta.

Demikian pernyataan ini saya buat dengan sebenarnya.

Dibuat di : Tangerang

Pada tanggal : 5 Maret 2014

Yang menyatakan,

(Michelle)



ABSTRAK

Nama : Michelle

NPM : 0906645432 (Universitas Indonesia)

NPM : 550453 (University of Melbourne)

Program : Kelas Khusus Internasional Fakultas Ekonomi, Universitas Indonesia

Faculty of Economics and Business, The University of Melbourne

Judul : Supply Chain Management Practices in Wal-Mart and IKEA

Abstrak

Penelitian ini bertujuan untuk mendalami bagaimana proses supply chain management dijalankan

di Wal-Mart dan IKEA, sebagaimana keduanya dikenal karena praktik supply chain yang

dirancang dengan baik. Penelitian ini juga mengungkapkan tentang teknologi yang digunakan

Wal-Mart dan IKEA dalam praktik supply chain-nya, strategi pengadaan logistik, serta strategi

lingkungan dan Corporate Social Responsibility yang dimiliki keduanya. Wal-Mart menggunakan

sistem cross-docking untuk mencapai strategi “Everyday Low Prices” mereka, di mana IKEA

menggabungkan Vendor Managed Inventory dan Consignment Stock untuk mencapai efisiensi

tinggi dan skema cost-sharing.

Namun, kami menemukan beberapa masalah yang terjadi dalam usaha mereka untuk memperluas

perusahaan masing – masing secara global, contohnya seperti masalah birokrasi dan masalah

perpajakan, serta masalah dengan supplier. Wal-Mart dan IKEA telah berhasil mengatasi beberapa

masalah tersebut melalui praktik - praktik supply chain dan strategi logistik yang inovatif dan

fleksibel.

Kata Kunci:

Cross-docking; IKEA; Supply Chain Management; VMI; Wal-Mart

vii



ABSTRACT

Name : Michelle

NPM : 0906645432 (Universitas Indonesia)

NPM : 550453 (University of Melbourne)

Program : Kelas Khusus Internasional Fakultas Ekonomi, Universitas Indonesia

Faculty of Economics and Business, The University of Melbourne

Title : Supply Chain Management Practices in Wal-Mart and IKEA

Abstract

The purpose of this study is to identify how the supply chain management practices performed in

Wal-Mart and IKEA, as both of them is known for their well-designed supply chain practices. It

also reveals Wal-Mart and IKEA’s usage in technology, their procurement strategy, as well as their

environmental strategy and Corporate Social Responsibility. Wal-Mart emphasizes on their cross-

docking technology to achieve their “Everyday Low Prices” strategy, meanwhile IKEA combines

Vendor Managed Inventory and Consignment Stock to attain higher efficiency and cost sharing

scheme.

However, we found several problems occurred in their attempt to expand globally, such as

bureaucracy and taxation problem, as well as problems with the suppliers. It is revealed that they

have managed to overcome these challenges through innovative and flexible supply chain

management practices and logistic strategies.

Keyword:

Cross-docking; IKEA; Supply Chain Management; VMI; Wal-Mart

ix



DAFTAR ISI

Halaman Judul……………………………………………………………………………...i

Halaman Pengesahan……………………………………………………………………..iii

Halaman Pernyataan Orisinalitas…………………………………………………………iv

Halaman Pernyataan Persetujuan Publikasi……………………………………………….v

Abstrak…………………………………………………………………………………...vii

Daftar Isi…………………………………………………………………………………..xi

Daftar Gambar……………………………………………………………………………xii

1. Executive Summary………………….…………………………………………1

2. Introduction…………………………………………………………………......2

3. Analysis………………………………………………………………….…..….3

3.1. Supply Chain Management at Wal-Mart………………………….…….....3

3.1.1. Network Configuration and Strategic Partnering…………………….........3

3.1.2. Procurement and Outsourcing Decisions…………………..,.………..…...5

3.1.3. Technology Application……………………………………..……….........7

3.1.3.1. RFID…………………………..……………………………………...7

3.1.3.2. EDIINT AS2……………………………………..……………….......7

3.1.4. Environmental Strategy for Sustainability…………………..………….....8

3.2. Supply Chain Management at IKEA……………………………………..10

3.2.1. The Supply Chain Strategy……………………………………………….10

3.2.2. Integration and Strategic Partnering……………………………………...11

3.2.3. Sourcing, Procurement, and Inventory Decisions………………………..14

3.2.4. Logistics………………………………………………………………….17

3.2.5. Information Technology and Decision-Support Systems………………..18

3.2.6. Green Strategy and Corporate Social Responsibility…………………….19

4. Wal-Mart and IKEA Supply Chain Decisions: Critiques and Solutions………20

4.1. Wal-Mart: Conquering the Chinese Market……………………………...20

4.2. Criticising IKEA: from the Suppliers’ Perspectives……………………..21

5. Conclusion……………………………………………………………………..22

6. References……………………………………………………………………..25

xi



DAFTAR GAMBAR

Figure 1. IKEA and its industrial network ......................................................... .10

Figure 2. Illustration in the IKEA-Sapa sourcing process. ................................. .13

Figure 3. IKEA’s Ladder Model for Supplier Interactions and IT/Logistics……15

xii



1. Executive Summary

This document is made to assess the supply chain management process in

Wal-Mart and IKEA. It includes the analysis of Wal-Mart’s and IKEA’s Supply

Chain Practices, Supply Network Configuration, Strategic Alliance with Trading

Partners, Procurement and Outsourcing Strategies, Green and Corporate

Responsibility Strategy, as well as the Technology Application in order to

improve Wal-Mart’s and IKEA’s supply chain management. It will also provide

the Critiques towards both companies’ supply chain decisions.

In this document, it could be found that in order to actualize Wal-Mart’s

“Everyday Low Prices” policy, the company implements highly-automated

distribution centres and cross-docking technology, which reduces Wal-Mart’s

operating costs to further benefits the customers with low-priced products. Wal-

Mart also adopts direct sourcing in order to find the lowest price offered by

suppliers, to further benefit the customers in the form of lower-priced products.

Moreover, Wal-Mart applies the Continuous Replenishment Strategy in order to

cut out-of-stock rate and operating costs, as well as to obtain a high level of

customer satisfaction.

This document also analyses how IKEA is able to provide consumers with

low-price, adequate designs, and functional home furnishings. The cost reduction

is gained from IKEA’s extensive network of suppliers and the company’s

outsourcing decisions. To manage inventory, IKEA combines Vendor Managed

Inventory and Consignment Stock which provides IKEA with higher efficiency

and cost sharing scheme. Furthermore, this document also explains IKEA’s

unique logistics and technology application to ensure supply chain accuracy.

1



2. Introduction

IKEA and Wal-Mart are two retail giants with their own principles and

business ideals. Both companies were established in two different, competing

continents. IKEA, a Scandinavian retail heritage from Sweden, was first

established in 1943 by a 17 year-old, Swedish teenager, Ingvar Kamprad. The

company started to take shape in 1980s as it expanded dramatically to

international market. IKEA’s vision is to offer people with wide range and well

design, functional home furniture at low prices, making them affordable to many

people (IKEA, n.d.). On the other hand, Wal-Mart, an American retail giant, was

established 19 years later, in 1962, by a 44 year-old, middle-aged Arkansas man,

Sam Walton. The Wal-Mart concept has been unchanged since its first

establishment, ‘lowest price anytime, anywhere’. Wal-Mart vision, compare to

IKEA, is to help people to save money and live better (Wal-Mart, n.d.).

Nowadays, the companies have expanded to regions of the world,

connected to thousands of suppliers and production sites in various countries. In

accordance to that, their expansions rely on the supply chain managements.

Supply chain management incorporates the company’s activities from the strategic

level to the operational level, through the tactical level; and initially aims to be

efficient and cost-effective across systems through proper integration of suppliers,

manufacturers, warehouses, and stores (Simchi-Levi, Simchi-Levi, & Kaminsky,

2008).

This paper will evaluate the design of the Supply Chain for Wal-Mart and

IKEA, in regards to industry network, inventory management, and outsourcing

decisions. This paper will also evaluate both companies are able to reach their

current and potential customers all over the world through the supply chains given

the risks and challenges. In addition, this paper will compare the sustainability

strategies adapt by the two companies.

2



3. Analysis

3.1. Supply Chain Management at Wal-Mart

In general, supply chain management in Wal-Mart focuses on

implementing an ‘Everyday Low Prices’ (EDLP) policy, which means that the

products were displayed at a steady price and not discounted on a regular basis

(Johnson, 2006). In order to actualize EDLP, Wal-Mart focuses on procurement

strategy of finding the lowest price offered by vendors, as well as its logistic

network, aiming to cut transportation costs and lead-time; thus, results in reduced

out-of-stock rate and continuous replenishment.

3.1.1. Network Configuration and Strategic Partnering

Wal-Mart is known for its fast and responsive logistic system. Company’s

highly-automated distribution centres, which operate 24-hours a day and are

serviced by private company’s truck fleets, are the foundation of Wal-Mart’s

supply network (Alyea, 2012). Each distribution centre supports approximately 75

to 100 retail stores within a 250-mile area. Thus, the fleet trucks do not have to

travel so far to retail stores to make deliveries (shorter distance), which lead to a

decrease in transportation cost, lead time, and safety stock required. If a shortage

occurred, replenishment can be made quickly as retail stores receive daily

deliveries from distribution centres (Alyea, 2012).

According to Supply Chain Digest (as cited in Alyea, 2012), the trucks are

used to pick up goods directly from manufacturers’ warehouses, which eliminates

intermediaries and increases responsiveness. However, the use of trucks increases

transportation costs, but is justified in terms of reducing inventory costs. Wal-

Mart is also known as a pioneer to adopt cross-docking technology, where the

products are routed from suppliers’ to Wal-Mart’s warehouses and then shipped to

3



the stores without sitting for long periods of time in their inventory, which reduces

Wal-Mart’s costs significantly and passed the savings on to the customers with

highly competitive pricing (University of San Fransisco, n.d). Therefore, Wal-

Mart also has store-specific orders packed and shipped directly to the stores by

manufacturer.

Strategic supplier alliances aim to build long-term, cooperative

relationships to improve strategic and operational capabilities that provide

ongoing benefits for participating companies. Strategic alliances can be formed

under joint research and development, joint marketing, long-term sourcing

agreement, equity investments, and non-subsidiary joint ventures (Monczka,

Petersen, Handfield, & Ragatz, 1998). One form of strategic alliances applied in

Wal-Mart is Retailer-Supplier Partnerships (Simchi-Levi, Simchi-Levi, &

Kaminsky, 2008). Retailer-Supplier Partnerships are implemented in order to

increase product flow efficiency, to further increase Wal-Mart’s profitability.

One form of Retailer-Supplier Partnerships is Continuous Replenishment

Strategy, which refers to a program that triggers the manufacturing and movement

of product through supply chain management when the identical product is

purchased by end user (Al-Balushi, 2009). In order to achieve continuity in

replenishment, Wal-Mart implements Quick Response Strategy, a partnership

strategy where suppliers and retailers work together to respond more rapidly to the

consumer by sharing point-of-sale scan data, enabling both to forecast

replenishment needs, in order to reduce retail out-of-stocks, forced markdowns,

and operating expenses (Al-Balushi, 2009). Through Retail Link, Wal-Mart shares

its sales and inventory data of suppliers’ goods in retail stores with each supplier

in order to improve suppliers’ forecasting (3.1.3.). In exchange for providing

suppliers the access for the data from Retail Link, Wal-Mart expected suppliers to

monitor and replenish the products on a continual basis (Johnson, 2006), so that

the suppliers will react quickly when out-of-stock is indicated in each store.

Therefore, Wal-Mart’s out-of-stock rate and operating expenses will be decreased.

4



3.1.2. Procurement and Outsourcing Decisions

In order to identify with the company’s decisions to outsource, it is crucial

to determine the factors that encourage trade of intermediate goods (Bartkus &

Jurevicius, 2007). It is essential to examine the interactions between the costs of

transportation and the costs of services (Bartkus & Jurevicius, 2007). However,

economists tend to ignore the trade barriers to make the models simpler and easier

to be elaborated. This propensity would result in the elimination of important

features of international trade that involves the costs of production, transportation,

and services (Bartkus & Jurevicius, 2007).

By choosing the suitable procurement strategy, Wal-Mart could reduce its

cost by 1% of revenue, which will affect the net profit of the company directly

(Chandran & Gupta, 2003). Wal-Mart sources goods directly from manufacturers

(Chandran & Gupta, 2003). The purchase decision is made based on price

comparison between vendors. The vendor that can offer the lowest price will be

chosen by Wal-Mart, and if Wal-Mart is satisfied with the services, the company

will consider a long-term relationship with the vendor. Relationship between Wal-

Mart and suppliers play crucial in building strategic networks, as a strong

relationship between suppliers and client will constitute benefits such as

minimizing supplier-related risks, reducing costs, as well as maximizing

customers’ satisfaction (Black, n.d.).

Although Wal-Mart’s procurement strategy is to purchase directly from

manufacturers, the company still relies on intermediaries for most of its bulk of

global sourcing (Supply Chain Digest, 2010). To solve this problem, Wal-Mart

needs to move on to more direct procurement by implementing centralisation of

its sourcing operations through the direct sourcing model. Direct sourcing is a

structure where the firm directly chooses and administers the suppliers under the

conventional relationship-based sourcing practices (Belavina & Girotra, 2010). As

a start, Wal-Mart established four global merchandising centres for general goods

and clothing, including an office in Mexico focused on emerging markets. In

5



addition, Wal-Mart acquired ASDA in 1999, the grocery chain in the UK, and has

been in operation ever since. ASDA’s expertise in direct sourcing helps Wal-Mart

to reduce cost of purchasing goods, as well as to improve the company’s supply

chain efficiency (Supply Chain Digest, 2010).

6



3.1.3. Technology Application

Wal-Mart’s investment in technology has helped the company to establish

a more efficient supply chain management. Retail Link serves as the first database

that provides data on every sale made at the company in two-decade period. Retail

Link gives suppliers access to real-time sales data on the products they supply,

down to stock-keeping in each store levels (Johnson, 2006).

3.1.3.1. RFID

In late 2004, Wal-Mart started the RFID Mandate (Radio Frequency

Identification) to enable inventory tracking in order to increase in-stock rates at

store level and reduce tracking-cost. RFID tag readers are placed in parts of the

stores such as on the receiving docks and on the doors, from stockroom to sales

floor. RFID tags are proven to be efficient, as Wal-Mart stores with RFID have

shown an improvement of 16% fewer out-of-stocks on RFID tagged products that

were tested (Johnson, 2006).

3.1.3.2. EDIINT AS2

Recently, Wal-Mart improves its technology by investing in EDI over the

Internet (EDIINT), an improved working group of Internet Engineering Task

Force (IETF) enabling the transport of EDI and XML data over the Internet in a

secure manner. It also enables Wal-Mart and the counterparty to exchange

documents in a real time environment, while the traditional EDI provides a batch

driven process that creates a wait-time between submitting and receiving a

submitted document (Effective Data, n.d.). Thus, by enabling an integrated supply

chain, it will reduce Wal-Mart’s inventory costs (IBM Software Group, n.d.).

7



3.1.4. Environmental Strategy for Sustainability

On October 24, 2005, the president and CEO of Wal-Mart launched the

sustainability program, consists of three main goals: for Wal-Mart to be supplied

by 100% renewable energy, create zero waste, and sell products that sustain

people and the environment (Wal-Mart, 2012). In addition, Wal-Mart has

developed several strategies to actualize an improved environment, such as

Sustainable 360, a strategy developed to engage suppliers, associates, and

customers in their efforts to develop a better environment, and Sustainable Value

Networks (SVNs), utilized to help integrate sustainable practices into all parts of

the business, implemented to all levels of organization inside and outside Wal-

Mart, including leaders of the company, suppliers, academia, government, and

NGOs (Wal-Mart, 2012). For instance, as an implementation of SVNs, Wal-Mart

tries to reduce its greenhouse gas (GHG) emission and they are working with

suppliers to do the same.

Wal-Mart generates power naturally by producing renewable energy using

solar and fuel cell installations, and purchasing green energy to power the stores

(Wal-Mart, 2012). Wal-Mart also uses LED freezer case lightings in stores and

secondary loop refrigeration, as it reduces energy consumption by 70% and GHG

emissions by 95%.

To create zero waste, Wal-Mart focuses on recycling cardboard, paper,

aluminium, plastics, etc.; donating food to food banks around the country; and

creating animal feed, energy, or compost from expired food and other organic

products (Wal-Mart, 2012). For electronic waste, Wal-Mart encourages customers

to join recycling programs with its alliances for its customers’ convenient (Wal-

Mart, 2012). Wal-Mart also uses slimmer packaging to cut unnecessary waste and

saving customers money.

8



Lastly, Wal-Mart maintains its sustainability by developing a standard for

products, including agriculture and seafood products (Wal-Mart, 2012). In

addition to the standards made, Wal-Mart supports Fair Trade program through

Private Label Coffee and Sustainable Palm Oil (Wal-Mart, 2012).

9



3.2. Supply Chain Management at IKEA

3.2.1. The Supply Chain Strategy

Supply chain principles at IKEA remain the same as it was in 1960s

regardless the complexity of the networks (Baraldi, 2008). IKEA aims to design

and purchase products that involve low production and transportation costs

through upholding long-term relationships with the designated suppliers as their

peripheral sources of offerings (Baraldi, 2008). In addition, IKEA is considered as

an innovative and unique firm by the industry selectors (Hultman, Johnsen,

Johnsen, & Hertz, 2012); therefore, both IKEA’s focus on low-cost-but-

reasonable quality products and the perceived brand image have encouraged the

company to put higher emphasis on the constant product and technical

development that rely heavily on the internationalisation and the supply chain

network (Baraldi, 2008; Hultman et al, 2012).

Figure 1. IKEA and its industrial network. Reprinted from “Strategy in Industrial Networks:

Experiences from IKEA,” by E. Baraldi, 2008, California Management Review, 50(4), p. 100. Copyright

2008 by University of California Berkeley. Reprinted with permission.

10



3.2.2. Integration and Strategic Partnering

The concept of supply chain network structure involves levels of suppliers,

in which they interact in order to reach their consumers – immediate and/or

secondary – to deliver the products (Lusch, Vargo, & Tanniru, 2010). Planning the

supply chain network is believed to help firms to find the balance between

inventory, transportation, and manufacturing costs (Simchi-Levi et al, 2008).

Network planning also benefits firms to maximise the utility of their resources by

sourcing products from the manufacturing facility that may increases the

effectiveness of the firms’ supply chain activities (Simchi-Levi et al, 2008).

IKEA adapts mostly the direct sourcing model as its supply chain structure

(Belavina & Girotra, 2010). The IKEA industry network contained 550 business

units specialising in different fields and spread over more than 50 countries

(Baraldi, 2008). The organisation has 1,300 direct suppliers and 10,000 sub-

suppliers, spread over 60 countries (see figure 1). The stores are spread over 30

countries, including China and Australia. IKEA’s wholesale and logistic

operations are controlled by 26 distribution centres that are located in 12

countries, linked by hundreds of logistic partners that administer the transportation

facilities (Baraldi, 2008).

IKEA applies a long-term approach and aims to build sustainable

relationships based on mutuality with its suppliers (Balardi, 2008; Hultman,

Johnsen, Johnsen, & Hertz, 2012). In accordance to the direct sourcing model as

explained by Belavina and Girota in 2010 (see section 3.1.2.), IKEA manages its

interactions centralised all the way to raw material suppliers (see figure 1), by

intensively collaborates with these suppliers to guarantee the quality and to fulfil

IKEA’s promises on sustainability (Baraldi, 2008). IKEA relies on comprehensive

task delegations to its suppliers, and this decision has brought mutual trust and

commitment into more crucial roles in the interaction mechanisms (Baraldi,

2008).

11



In determining its network, IKEA considers factors such as geographic

point as an important aspect as it determines total cost, quality and environment

requirements, production capacity, and technical competence; as well as the

potential suppliers’ readiness to invest with and for IKEA (Baraldi, 2008). The

mutual trust between IKEA and suppliers has created powerful yet dependent

relationships (Baraldi, 2008; Hultman et al, 2012). In addition, suppliers’ control

over information on technical development and/or volume of products requires

IKEA to depend on them in order to plan strategic decisions (Baraldi, 2008).

One of the advantages that IKEA may gain from building long term

relationships involves the reduction of biased opportunistic behaviour due to

profit-relevant non-contractible actions of sourcing partners, such as capacity and

inventory level (Belavina & Girotra, 2010). Many studies have shown that

building long term relationships can resolve the traditional relegation losses

(Belavina & Girotra, 2010). An example of the mutually beneficial relationship

between IKEA and its suppliers is shown by Hultman et al (2012) in their research

on the production process of PAX wardrobe system.

The sliding doors for the PAX wardrobe system are built of aluminium

profiles and other accessories that are sourced by Sapa, one of IKEA suppliers.

Hultman et al (2012) stated that the PAX wardrobe project was the largest single

contract in Sapa’s history and the contract has opened a new business and

introduced Sapa with a different way of doing business. Sapa leveraged IKEA’s

knowledge to establish relationships with other suppliers (Figure 2), and

according to Hultman et al (2012), Sapa stated that IKEA’s supports played as an

important bridging role.

12



Figure 2. Illustration in the IKEA-Sapa sourcing process. Adapted from "An Interaction Approach to

Global Sourcing" by J.Hultman, T. Johnsen, R. Johnsen, & S. Hertz, 2011, Journal of Purchasing &

Supply Management, 18(1), p. 18. Copyright 2011 by Elsevier Ltd. Adapted with permission

Sapa incorporated and coordinated the global supply based on IKEA’s

behalf which both parties were made mutually dependent (Hultman et al, 2012).

The study by Hultman et al (2012) has shown that the relationships among the

players, both focal relationship – the relationships between IKEA and Sapa – and

the relationships between IKEA and the supply network affect the global sourcing

process. In addition, according to Hultman et al (2012), the interactions among

players in a supply network may result in internationalisation. In the case of PAX

wardrobe system, the relationship with IKEA had speed up Sapa’s growth in

volumes significantly from the exploitation of IKEA’s knowledge on sourcing

market based on IKEA’s experience and presence in China, in exchange of

knowledge on products and materials (Hultman et al, 2012).

13



3.2.3. Sourcing, Procurement, and Inventory Decisions

IKEA’s internationalisation was first driven by the conflict between the

company and Swedish furniture industry, where IKEA’s cost-reduction strategy

was not facilitated by the industry (Hultman et al, 2012). Jonsson and Foss (2011)

mentioned in their study that the internationalisation process at IKEA was initially

highly explorative and based on trial and error mechanism. IKEA, through

international expansions, aims to fuse standardisation with local adaptation

(Jonsson & Foss, 2011). Internationalisation is theoretically based on the

interaction between networks of internationalising firm and the external players,

such as the suppliers that may provide sourcing for the firm (Hultman et al, 2012).

To outsource, IKEA perceives geography location as one of the crucial

factors as it heavily affects costs, competences, and delivery times (Baraldi,

2008). The production of PAX wardrobe system provides an example of IKEA

outsourcing decisions. The sourcing decision for PAX was done by Sapa – as the

supplier, but greatly influenced by IKEA (Hultman et al, 2012). In the production

process, there were three assembly units, Sweden, Slovakia, and China. The

sourcing was obtained from the three countries, supported with local backup

suppliers except Slovakia, as it obtained the supports from supplier in Sweden

(Hultman et al, 2012). Other components of PAX were also sourced from different

places such as the sliding profiles from Germany, rubber components from

Sweden, bristle seals from China, and the assembly fittings from Slovakia

(Hultman et al, 2012). This decision to apply the on-site assembly model in the

sourcing countries aimed to optimise the production process and to eliminate

ineffective time used to transport the materials from various places to a single,

large assembling unit, as well as reduce the transportation cost (Li, Guo,

Skibniewski, & Skitmore, 2008; Hultman et al, 2012).

14



In terms of inventory management, the approach that IKEA uses to unify

information is the top-down approach where the forecasting is done at the highest

level across continents and eventually move down to countries’ forecasts

(Scheraga, 2005). IKEA adopts the Vendor-Managed Inventory combined with

Consignment Stock (CS), or known as the Ladder Model (Baraldi, 2008). Vendor-

Managed Inventory (VMI) places the inventory decisions to suppliers (Baraldi,

2008), including placing orders on behalf of the buyer (in this case, IKEA). The

Consignment Stock, on the other hand, requires buyer to decide the order quantity

and shipment frequency (Ben-Daya, Hassini, Hariga, & Al-Durgam, 2013).

The Ladder Model is composed of three stages: the Call-Off stage, Order-

Point Distribution Centre, and Vendor-Managed Inventory (see figure 3).

Figure 3. IKEA’s Ladder Model for Supplier Interactions and IT/Logistics Capabilities. Reprinted

from “Strategy in Industrial Networks: Experiences from IKEA,” by E. Baraldi, 2008, California

Management Review, 50(4), p. 109. Copyright 2008 by University of California Berkeley. Reprinted

with permission.

15



The Call-Off stage basically the CS stage where IKEA releases orders

every fourth week and decides that suppliers must deliver within the next 4 weeks.

The next stage is the Order-Point Distribution Centre (OPDC), where IKEA

orders daily and requires suppliers to deliver within the next 12 days. The OPDC

often delegates a team that handles only IKEA’s orders due to the extensive

product requirements. The next stage, the VMI stage is where only a handful of

suppliers (1%) decide IKEA’s order quantity and when to deliver. In the

combination of VMI and CS, both ordering and holding costs are shared between

suppliers and buyers, making the combination of two more cost-effective and

better coordinated (Ben-Daya et al, 2013).

16



3.2.4. Logistics

IKEA’s attempt to reduce logistics cost is through Design for Logistic

(DFL) model (Li, Guo, Skibniewski, & Skitmore, 2008). The DFL principle

considers not only the function and manufacturability, but also the convenience of

packaging, transporting, and assembling the product (Mather, 1992). To further

reduce costs, IKEA also implements the customer self-service through the do-it-

yourself assembling system. In addition, IKEA also implements the system inside

the stores, allowing customers to locate and transport the purchased furniture (Li,

Guo, Skibniewski, & Skitmore, 2008). However, IKEA does not leave the

customers alone. To support the self-service system, IKEA provides 3D assembly

instructions set, and also include the product name, price, size, composition, and

possible usage and alternative decorating idea (Li, Guo, Skibniewski, & Skitmore,

2008).

To further support the supply chain efficiency, IKEA uses an innovative

unit load carrier in a form of a loading ledge. The loading ledges allow various

size and design, compare to traditional unit load carriers where the dimensions are

fixed so that products and packaging are design and made accordingly (Hellstorm

& Nilsson, 2011). Using this loading ledge, the cube utilisation of transport units

may be increased as well as allowing the unit load dimensions to be adjusted to

the products to eliminate empty spaces, thus increases the space utilisation

(Hellstorm & Nilsson, 2011).

17



3.2.5. Information Technology and Decision-Support

Systems

The information technology at IKEA is mostly revolves around to support

supply chain accuracy. The attempt to improve accuracy through IT is done by

IKEA in the application of track-and-trace solution (Chartered Institute of Logistic

and Transport UK, 2008). The need arose when IKEA identified tracing system to

increase stock visibility from the time products leave the Central Distribution

Centre (CDC). IKEA installed mobile computer in the delivery trucks, connected

to the IKEA Home Delivery Management System. This will enhance

communication between the drivers, customers, and the Home Delivery

Management.

In addition, IKEA installed the in-truck printers to print customer’s receipt

as well as helping drivers to label damaged and returned goods with warehouse

barcode, to help speeding up the return process when the truck returns to the

warehouse. This system, according to Central Institute of Logistic and Transport

UK (2008), has helped to create audit trail of every item loaded on to a truck and

ensuring the correct deliveries. Moreover, the system has reduced the cost of call

centres and after-sales administrations (Chartered Institute of Logistic and

Transport UK, 2008).

18



3.2.6. Green Strategy and Corporate Social

Responsibility

IKEA’s effort in sustainability presents in the knowledge exchange

between IKEA and suppliers (Martucci, De Felice, & Schirone, 2012). Through

People & Planet Positive strategy, IKEA aims to offer customers with products

that help customers to save money through product designs and material decisions

that enable customers to use less energy and water, as well as reducing waste

(IKEA, 2012).

Because IKEA’s sustainability strategy incorporates product designs and

materials, IKEA encouraged its suppliers to apply the same concept. Moreover,

IKEA also continuously supports the development of a good place to work,

throughout the supply chain, asking suppliers to not only focus on professional

responsibilities, such as employee’s obedience, but also the presence of shared

value in the working environment (IKEA, 2012).

19



4. Wal-Mart and IKEA Supply Chain

Decisions: Critiques and Solutions

4.1. Wal-Mart: Conquering the Chinese Market

Wal-Mart’s operation has been expanding since its first store opened in

China in 1997. However, the company faced several challenges from China’s

distribution sector, and by overcoming these challenges through innovative and

flexible supply chain management and logistics strategies are vital to Wal-Mart’s

success in China (Huffman, 2003).

Like other Multinational Corporations in China, Wal-Mart confronts the

consequences of provincial autonomy and self-sufficiency, such as difficulties for

road commercial and private trucking (Huffman, 2003). However, with advanced

communication and infrastructure, it managed to diminish the rationale for

regional self-reliance. The company believes that the use of distribution centers

and back-haul trucks is efficient and allows Wal-Mart to maintain control over

most of its distribution chain, yet still can provide the customers with “Everyday

Low Prices” products (Huffman, 2003). Even though the trucking is contracted

out, Wal-Mart still manages the rest of supply chain directly.

As the goal of logistic managers is to create a seamless flow of product

going and payment made to suppliers, China’s banking, finance, insurance, and

taxation; however, were bureaucratic and agitating for managers to achieve the

goal (Huffman, 2003). However, Wal-Mart manages to work with the Chinese

government to set up a holding company to consolidate joint venture distribution

and finance, in order to overcome this challenge with China’s financial matter

(Huffman, 2003).

20



4.2. Criticising IKEA: from the Suppliers’ Perspectives

IKEA’s requirement for global standardisation is seen as a threat for

suppliers regarding the traditional value and competence of the suppliers might be

undervalued and neglected (Ivarsson & Alvstram, 2011). Suppliers also see

IKEA’s sourcing model as too bureaucratic, and resources have been wasted on

constant and time consuming inspections for IKEA’s auditing purposes. Beside

inspections, decision-making at IKEA is seen to be unclear and involves too many

people, at global and local level (Ivarsson & Alvstram, 2011). This lack of clarity

has resulted in information asymmetry which may eradicate small but important

margins among the suppliers (Ivarsson & Alvstram, 2011).

However, the way IKEA response to the critique is rather simple. From

IKEA’s point of view, it is a waste of time to deal with suppliers who do not want

to cooperate well, and IKEA is ready to terminate such relationship (Baraldi,

2008). One advantage of IKEA from its readiness to terminate (and build)

relationships is that the heterogeneous network resulted from the dynamics is one

of the key sources of development (Baraldi, 2008).

21



5. Conclusion

In conclusion, supply-chain management is an important factor to

determine whether or not a company is effective enough in utilising its resources,

as well as whether a company has incurred unnecessary costs or not. In today’s

global market, it seems that retail companies choose to apply price-leadership

strategy which involves reducing cost in the chain process, which Wal-Mart and

IKEA apply according to their own ways.

With respect to its policy, Wal-Mart tries to cut its operating costs to

further benefit the customers with lower-priced products. In order to actualize the

policy, Wal-Mart implements highly-automated distribution centres, which

operate 24-hours a day and are serviced by private company’s truck fleets. These

distribution centres each supports 75 to 100 retail stores in 250-mile area, so that

each truck fleet will not have to travel so far, which will reduce its transportation

cost, lead time, and safety stock required. Wal-Mart also adopts the cross-docking

method to cut inventory holding costs, which also will benefit the future

customers.

Wal-Mart adopts Continuous Replenishment Strategy, as a form of

Retailer-Supplier Partnership, aiming to increase product flow efficiency and

satisfy customers, to further increase Wal-Mart’s profitability. As for its

procurement strategy, Wal-Mart adopts direct sourcing strategy. However, for

most of its global sourcing, Wal-Mart still relies on intermediaries.

Wal-Mart adopts Retail Link, RFID, and recently EDIINT for its

technology application, aiming to cut operating costs and improve information

sharing with suppliers, which lead to a better forecast results for the suppliers.

Moreover, the company develops a green strategy, consists of three main goals: to

22



be supplied by 100% renewable energy, create zero waste, and sell products that

sustain people and the environment.

IKEA, on the other hand, attempt to reduce logistics cost is through Design

for Logistic (DFL) model and the application of innovative unit load carrier in a

form of a loading ledge. This load carrier has proven an increase in space

utilisation in trucks, therefore it helps to increase efficiency. In terms of

technology, IKEA installs mobile computer to increase communication efficiency.

IKEA’s sourcing decisions has managed to benefit the company in terms of

eradicating unnecessary cost and maximising profit through various ways of

outsourcing.

In addition, IKEA’s strategy for sustainability starts at the suppliers’ level.

IKEA encourages suppliers to apply certain principles and to make sure that

suppliers create a work-friendly environment as well as choosing product

materials that can be recycled and support the environment sustainability.

Despite the difference in the supply chain strategies, both Wal-Mart and

IKEA have achieved their desired goals in reducing cost, as well as keeping their

principle of providing low-cost products for consumers, while still committed to

their promises to maintain environment sustainability.

23



6. References

Al-Balushi, Z. (2009). Supply Chain Management Terms and Glossary.

Alyea, J. (2012, February 11). Analyzing Wal-Mart's Distribution and Logistics

System. Retrieved February, 11, 2013, from Jimmy Alyea, MBA:

http://jimmyalyea.blogspot.com.au/2012/02/analyzing-wal-marts-

distribution-and.html

Baraldi, E. (2008). Strategy in Industrial Networks: Experiences from IKEA.

California Management Review, 50(4), 99-126.

Bartkus, E. V., & Jurevicius, V. (2007). Production Outsourcing in The

International Market. Engineering Economics, 51(1), 59-68.

Belavina, E., & Girotra, K. (2010). Sourcing through Intermediaries. INSEAD

Working Papers Collection, 82, 1-44.

Ben-Daya, M., Hassini, E., Hariga, M., & Al-Durgam, M. M. (2013).

Consignment and Vendor Managed Inventory in Single-Vendor Multiple

Buyers Supply Chains. International Journal of Production Research, 51(5),

1347-1365.

Black, J. C. (n.d.). Effective Supplier Relationship Management. Northeast Supply

Chain Conference.

Chandran, P. M., & Gupta, V. (2003). Walmart's Supply Chain Management

Practices.

Chartered Institute of Logistic and Transport UK. (2008, September). IKEA

Improves Supply Chain Accuracy with Track-and-Trace Solution. CILT

Retail, pp. 21-23.

Effective Data. (n.d.). EDIINT - EDI Over the Internet. Schaumburg, Illinois,

United States of America.

25



Hellstorm, D., & Nilsson, F. (2011). Logistic-Driven Packaging Innovation: A

Case Study at IKEA. International Journal of Retail & Distribution

Management, 39(9), 638-657.

Huffman, T. P. (2003, September - October). Wal-Mart in China: Challenges

Facing a Foreign Retailer's Supply Chain. The China Business Review.

Hultman, J., Johnsen, T., Johnsen, R., & Hertz, S. (2012). An Interaction

Approach to Global Sourcing: A Case Study of IKEA. Journal of

Purchasing & Supply Management, 18(1), 9-21.

IBM Software Group. (n.d.). Meeting Wal-Mart Supplier Challenges: Business-to-

Business Solutions from IBM and IBM Business Partners.

IKEA. (2012, October 23). IKEA Group Unveils New Sustainability Strategy:

People & Planet Positive. Business Wire (English).

IKEA. (n.d.). About IKEA. Retrieved February 12, 2013, from IKEA:

http://www.ikea.com/ms/en_GB/about_ikea/index.html

Ivarsson, I., Alvstam, C.G. (2011). Upgrading in Global Value-Chains: A Case

Study of Technology- Learning among IKEA Suppliers in China and

Southeast Asia. Journal of Economic Geography, 11, 731-752.

Johnson, P. F. (2006). Supply Chain Management at Wal-Mart. Richard Ivey

School of Business The University of Western Ontario.

Jonsson, A., & Foss, N. J. (2011). International Expansion through Flexible

Replication: Learning from the Internationalisation Experience of IKEA.

Journal of International Business Studies, 42, 1079-1102.

Li, H., Guo, H., Skibniewski, M. J., & Skitmore, M. (2008). Using the IKEA

Model and Virtual Prototyping. Construction Management and Economics,

26, 991-1000.

Lusch, R. F., Vargo, S. L., & Tanniru, M. (2010). Service, Value Networks, and

Learning. Journal of The Academy of Marketing Science, 38(1), 19-31.

26


http://www.ikea.com/ms/en_GB/about_ikea/index.html


Martucci, I., De Felice, A., & Schirone, D. (2012). Knowledge Exchange Between

IKEA and Suppliers Through Social and Environmental Strategy.

Proceedings of The European Conference on Knowledge Management. 1,

pp. 699-707. Academic Conferences, Ltd.

Mather, H. (1992). Design For Logistics (DFL): The Next Challenge for

Designers. Production and Inventory Management Journal, 33(1), 7-10.

Monczka, R. M., Petersen, K. J., Handfield, R. B., & Ragatz, G. L. (1998).

Success Factors in Strategic Supplier Alliances: The Buying Company

Perspective. American Institute for Decision Sciences.

Scheraga, D. (2005, June). Balancing Act at IKEA. Chain Store Age, pp. 45-46.

Simchi-Levi, D., Simchi-Levi, E., & Kaminsky, P. (2008). Designing and

Managing the Supply Chain: Concepts, Strategies, and Case Studies (3rd

ed.). New York, NY: McGraw-Hill.

Supply Chain Digest. (2010, January). Global Supply Chain Focus. Supply Chain

Digest.

University of San Fransisco. (n.d.). Retrieved from University of San Fransisco.

Wal-Mart. (2012). 2012 Global Responsibility Report. Retreived February 12,

2013, from Wal-Mart: http://www.walmart.com

Wal-Mart. (n.d.). Our Story. Retrieved February 12, 2013, from Wal-Mart:

http://corporate.walmart.com/our-story/

Wong, C. Y., Lai, K.-H., & Cheng, T. (2011). Value of Information Integration to

Supply Chain Management: Roles of Internal and External Contingencies.

Journal of Management Information System, 28(3), 161-200.

27


Critiques-wal-mart IKEA

Documents

Transcript of Critiques-wal-mart IKEA