IKEA Case Study

Read the following case carefully and answer the questions at the end

IKEA is known as the place to go to for cheap, reliable furniture. IKEA has been open for a
staggering 70 years and is now one of the most recognisable brands in the world. IKEA operates
in almost 43 countries. IKEA has always been known for their labyrinth type of stores. There are
jokes about how people get lost in IKEA for days on end and in any case a trip to IKEA takes
almost a whole day. What are IKEA’s best-kept secrets behind its smooth backend operations
and efficient supply chain processes? It ranks Number 41 on Forbes’ esteemed World’s Most
Valuable Brands list, and took in 35.5 billion in sales in 2013. (Clara Lu, 2014). Each IKEA
store is huge and holds more than 9,500 products! How in the world does IKEA offer so much at
such a low price while always being able to keep items in stock? Logistics is the integration of
materials management and distribution (Rushto et al., 2010)

IKEA basis its strategy on providing low priced home furniture so that they can cater to every
possible person in the market. IKEA goes about with a time based strategy. Time based strategy
applied in company’s can reduce costs, improve efficiency and increase customer services, even
create much values for the organization (George, S, JR & Thomas M, H., 1990). Therefore, it’s
imperative that their supply chain operations and inventory management work together as closely
as possible. IKEA has a policy that keeps their manufacturing costs to a minimum while
adhering to strict guidelines for function, efficient distribution, quality, and impact on the
environment. According to a case study produced by The Times of London, more than 50% of
the products are made from sustainable or recycled products. IKEA tries to live by using as little
materials as possible in their manufacturing process. Hence the company can keep their
transportation costs low as it uses less fuel and manpower to receive materials and ship products.

A key part to any good supply chain management or distribution strategy is a sustainable
relationship with ones suppliers. IKEA has a great working relationship with their suppliers.
Their greatest strength lies in the communication and relationship fostered through the years
working with their suppliers. This has allowed them to gain the best prices from the suppliers
on what they need to manufacture their products.

Where IKEA’s most innovative process comes from combining their retail and warehouse
processes. Almost every store has a warehouse on the premises. This helps the company
reducing transport costs. For example, imagine when someone selects a piece of furniture to buy.
The item is then ordered, shipped from the manufacturer, moved from the delivery truck into
storage in the warehouse, moved from the warehouse to the customer’s vehicle or delivered by
the furniture retailer to the customer’s home. Every time the product is shipped, moved, and
loaded, it costs money. IKEA does not have to do this as they all their products under one roof
which is accessible to their customers.

Another important function is their in-store logistics personnel which have the important job to
maintain store-level inventory reorder points and reorder products. This strategy also ensures that
IKEA has ready inventory to meet customers’ demands, lowering the cost of lost sales.
These days it seems never enough to stress the importance of data for smooth functioning of
supply chain activities. Not any data is useful of course, but here is where companies are playing
the ultimate competitive game, being able to correctly collect and prepare the right data for
analysis is what gives a company a fast start. IKEA has a proprietary system that shares the data
collected from its POS

. Now, you can also see that this is much easier when the company has proprietary wholesale and
retail shops. This said, it is also rather difficult to maintain such network with your own
resources. Hence, IKEA has an extensive network of suppliers and strives to maintain long term
relationships by actively working with them on improvements aimed to lower costs. This kind of
commitment is full of obstacles but the payoff is much higher. Working closely allows to build
trust, which lead as well to information sharing.

These practices make it easier to create an accurate production planning, clarify what to keep in
stock and results into higher visibility on the downstream of your chain to prevent disruptive
waves on the upstream part of the chain. To conclude, in its stores, IKEA managed to tame the
vulnerability in demand within its supply chain thanks to better goal alignment and less steps in
the chain, providing almost real-time data on sales, which provides better insight in inventory
management. This success does not come easily, and even if IKEA is virtuous in implementing
these best practices, many challenges remain. After all, supply chains are evolving at light-speed
and as many other aspects in business: it remains a matter of the survival of the fittest.

Questions:

1- At what level of supply chain integration maturity is IKEA? (Refer to supply chain
maturity model in chapter 6). Explain your answer with evidence from the case?

2- Explain the distribution strategy that IKEA follows, with evidence from the case?

3-

A. What are/is your suggestion(s) to improve IKEA distribution strategy?

B. How these/this suggestion(s) will improve IKEA distribution?

4-

A. Explain how IKEA solves the problem of bullwhip effect with evidence from the
case?
B. What do you suggest to IKEA to do in order to better solve the problem of
bullwhip effect?