Improving Supply Chain Management in the UK Furniture Industry Case Study IKEA Trading Area Poland Think of furniture

e and customers in most parts of the world think of IKEA, the low cost Swedish furniture retailer with its quirky flat-pack designs. We have focused on IKEA for our benchmarking of best practice because, although primarily a retailer, it has developed a distinctive competence in supply chain management. And we have focused on its operations in Poland because it is one of the fastest growing furniture manufacturing regions in the world. Critics may say that a mass-market retailer targeting the lower end of the market has little relevance for them. However, we believe that the broad principles of the IKEA operation will translate readily into any other business in the furniture, furnishings and interiors market. It happens to be a retailer but in many industries, indeed in many parts of the furniture industry, the dominant player with the coordinating role in the chain is the manufacturer. Introduction Go into an IKEA store and you will notice that it is essentially self-service and, once you get your purchase home, self-assemble. Most business commentators have held this up as an example of a clever retailing operation many of the usual costs have been passed to the customer, such as finding the item in the warehouse. However, a close look at the whole IKEA operation reveals that the layout and service in their stores is just the outward, customer-facing evidence of a highly efficient supply chain that goes right back to the raw material in the forest. What is striking about IKEAs business model is the analysis in minute detail of all costs in the value chain from the tree on the root through sawmilling, plank or chipboard production, component manufacture, packing, storage and transport at every stage in the chain through to the customers trolley. It is seen as irrelevant whether the materials are in IKEAs ownership or in the hands of their suppliers and sub-suppliers at any particular stage. The supply chain is the entity and all the legal trading entities that participate in the delivery of any particular product do so in a boundary-less way. For example, accompanying an IKEA team around one of their suppliers factories one is struck by the familiarity the team members have with the layout and processes on the shop floor, the stocks of raw material and where they come from, the outbound logistics down to the way that the lorries are packed. They greet their opposite numbers as if they are colleagues in the same firm and there is no trace of wariness or the traditional adversarial customer-supplier relationship. The IKEA Structure IKEAs structure is designed to optimise the efficacy of the design and supply processes. It is split into 4 distinct parts that operate as a type of internal market. IKEA of Sweden (IOS) has the headquarters function. It is split into 12 Business Areas aligned to products (e.g. sofas, dining furniture, beds etc.). Under IOS the Retail Division controls all the

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Improving Supply Chain Management in the UK Furniture Industry stores, the Distribution Centres are likewise grouped under distribution and the Trading Areas deliver the purchasing and supplier support functions.

IKEA of Sweden ( IOS) Headquarters, design and marketing functions

Retail

Distribution

Trading Areas (Purchasing, logistics & supplier support

The way that the internal market works is that the Business Area Manager commissions a product using an integrated project team that includes a designer (either freelance or from one of IKEAs 2 design schools in Sweden), a technician and a product developer. The Istra (the marketing decision maker in the Business Area) will then set up a competitive tender to decide the country of production. The trading areas compete to win the contract to supply that product or product range, either globally or regionally, in a tender process. Thus Trading Area Poland will cooperate with manufacturers in Poland to supply it at the best possible price, the criteria being the landed price at IKEA stores taking into account all materials, processing and logistics costs along the way. This sourcing system manages to be highly competitive and un-adversarial at the same time. The TA Poland team are in effect on the same side as the suppliers in the Central European region: they are helping them to put the tender together to win the competition against manufacturers in the Far East or elsewhere. This will involve looking not just at price but searching for production capacity and economies in raw material supply and efficient logistics. Case Study: The Alve Office Furniture Range IKEA logistics Experts have manufacturer Formaplan have TA Poland and pine furniture also assisted with advice on the packaging and to packing of items in the containers, range of worked together thewin the business of supplying a new focusing on a 60% filling globally. The project has involved developing new office furniturerate. staining and lacquering skills to win the confidence of IOS that Formaplan will start brown pine furniture to a an OPDC basis they can produce the to supply the furniture onhigh standard. (Order Point Distribution Centre) Istra with a 20 They had to submit prototypes for basis approval. working days lead time initially. Once the test run on the product has happened and sales of the concentrate production on a short supply rate They have had to product settle down to a more predictablechain inthe intention is for Formaplan to climb be able to deliver a to a pine forest area south of Warsaw to the supplier ladder shorter delivery times, initially to that competes favourably landed price anywhere in the world15 working days. IKEA will determine the other regions. The Alve chain is as short as 30with suppliers inservice level for thewholerange that equates to the required availability of the product in the retail stores, usually 9060km, depending on where the timber is sourced, from the forest 99%. This will in turn dictate the 2 quantity of buffer stocks that Formaplan have to hold. The expectation is that as the accuracy Pye Tait 2003 of forecasting improves the requirement to hold stock will go down. Formaplan will have complete transparency of all IKEAs stockholding of the product at warehouses and stores to assist

Improving Supply Chain Management in the UK Furniture Industry

Once the Istra gives the go-ahead the Business Area is responsible for the product. The product supply manager takes on responsibility for a first-buy test run of the product. If this is a success the supply planner will then be responsible for ensuring continuous supply. Supplier Support TA Poland will continue to act as the regional eyes and ears on the ground acting as the interface between IOS and the supplier. The purchaser will be responsible for regular reviews of the supply contract. The technical staff will help with continuous improvements on the design. The business support section will give advice on IT and logistics. And the IKEA transport manager will book all transport rather than the supplier, unless the supplier is able to extract the same terms. That achieves maximum purchase leverage on hauliers and the best possible price for the movement of goods by road or rail. Lead times Great emphasis is put on the ordering and distribution methods. IKEAs suppliers are categorised according to the lead time that they work on. IKEAs policy is to try to shorten lead times gradually. IKEA staff refer to the supplier ladder. A supplier may start to supply goods on either a long warning fixed time delivery basis or a call-off >4+4 basis, in other words he will be given over 4 weeks notice of a 4 week window in which he must deliver the goods. IKEA will then help the supplier to develop his business processes to the point where he can progress to call off 4+4. Call offs are time based methods and once the supply chain is functioning smoothly the supplier will progress to an order driven method: Order Point Distribution Centre (OPDC) at progressively shorter lead times, from weeks down to days, with the manufacture and delivery of goods being triggered by orders. Once a supplier is able to achieve this they explore the possibilities 3
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Improving Supply Chain Management in the UK Furniture Industry of cutting the distribution link out of the chain so that retail stores deal directly with factories (Vendor Managed Inventory or VMI) perhaps with goods bypassing the distribution centres altogether and going direct to retail stores, or going via distribution centres but only on a transit basis so that there is not time for them to be booked in and out of the warehouse. This is supply chain management in its purest form. All links in the chain work together to shorten the cycle time and cut out logistical costs so that products reach the customer at the lowest possible price. The progression up the ladder is gradual and reached by agreement with suppliers. The speed imperative has to be balanced against the dependability of supply and the maintenance of high percentage availability of the product in the stores. It is an IKEA mantra that customers cannot buy products if they are not available on the shelves.

Direct to store LEAD TIME deliveries

VMI Quick Response (2-5 days)

Distribution Centre deliveries

VMI OPDC

CALL OFF 4+4 CALL OFF >4 + 4

FIX

IKEAs Supplier Ladder 4

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Improving Supply Chain Management in the UK Furniture Industry The Supplier Perspective The degree of support is impressive. The manufacturer acknowledges that the margins he earns from the products he sells to IKEA are far lower than from other customers but the support he receives and the nature of the relationship he has with IKEA far outweigh this disadvantage. This includes: Contractual Trust. He knows that he will always be paid within 30 days. He knows that in all probability IKEA will stick with him and that, if for any reason the relationship or a product is discontinued, he will not be disadvantaged and any stock in the pipeline will be bought from him. Product Life Cycles. IKEA tries to keep product life cycles as long as possible. Typically they range from 3 years out to 20 years. This helps manufacturers to plan for the long term. Investment. If he has an opportunity to generate extra capacity that will allow him to manufacture products more cheaply for IKEA they may assist with credits to allow him to pay for the plant now and pay IKEA back with his goods later. If he goes to a bank IKEA may help him to gain a loan by guaranteeing a certain level of future business. Focus on profit rather than volumes or margins. In his sales negotiations with the IKEA purchasers he will be dealing with people who understand his business, particularly the cost drivers. Whilst this could be viewed as a disadvantage when it comes to price negotiations, it means that the IKEA traders will work with him to lower his costs so that they can buy at an acceptable price and he can sell at an acceptable profit. This contrasts with the poker playing take it or leave it approach that characterises many such negotiations in the industry. Ultimately IKEA want to keep the same suppliers for a long time so that they can develop them and to avoid the expense of starting new relationships with suppliers. Technical advice. IKEA staff are on hand to give advice on a number of aspects of the business from the layout and flow on the factory floor to the design of packaging. This allows the supplier to develop distinctive competences in, for example, the application of veneers and lacquers. IT. The supplier will be linked to ECIS, IKEAs own system. This will allow him to have total transparency of the supply chain so that he can see IKEA sales forecasts and view inventory levels in distribution centres and stores. This helps him to anticipate orders. Upstream, the system facilitates JIT from his sub-suppliers. As the system becomes more refined additional benefits are coming on-stream such as a worldwide trading domain for IKEA partners to allow them to find the cheapest sources of raw materials and components. Logistics. IKEA has a strong logistics competence that it spreads to its suppliers. This comes partly in the form of advice. The IKEA logisticians will work through every 5
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Improving Supply Chain Management in the UK Furniture Industry element to find the most cost effective option from the packaging, through the filling rate of containers to the route and choice of transport system. It also comes in the form of a railhead, if it is viable, that gives a cost reduction of around 10/m3 for all goods leaving the factory. From a suppliers perspective a solid relationship with IKEA gives his operation a critical mass and the development of expertise and best practice that can be put to good use in winning business from other customers. The Purchaser Perspective IKEAs commitment to an HR policy that gives its managers a broad training is a contributory factor to the effectiveness of its purchasers. The purchaser will have gained valuable experience in other areas, such as supplier support, that gives him a powerful insight into the cost drivers in the price equation. However, his brief is not to focus exclusively on price but on the future potential of supply relationships and the generation of capacity. If price is a problem he will work with the supplier to reduce the costs rather than looking for a different supplier. This is the essential difference between IKEAs approach and many others in the industry. The Design Perspective IKEAs commitment to design is illustrated by the fact that the companys biography of its founder Ingvar Kamprad is entitled Leading By Design1. It is core to the companys philosophy that they should design products that are functional, simple, well made and cheerful with a distinctive IKEA image and at a price that everyone can afford. This means a commitment to design that not only concentrates on aesthetics but also on economy of effort in materials, assembly, storage and transport. IKEA is an exemplar of lean design. Designers have to understand the whole supply chain process and tailor their products accordingly. The integrated project team (IPT) approach ensures that all these aspects are covered. And the internal market ensures that prototypes from aspirant supply chains are rigorously tested through the manufacturing and logistics phases of production. The Logistics Perspective The Logistics Manager and the Transport Manager run logistics audits of their suppliers together to identify bottlenecks and improve processes. In TA Poland there is a clear structural distinction between transport and logistics. The essential difference is that transport deals with the present and logistics deals with the future. Interestingly the Army makes the same distinction. The Transport Manager deals with the physical movement of goods and the actual booking of carriers. The Logistics Manager focuses on continuous improvement and the progression of suppliers up the supplier ladder. He will search for new ideas to smooth the flow of goods through hub and spoke systems using best sources of rail or road options. He will try to put railheads into factories and warehouses where
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Leading by Design The IKEA Story by Bertil Torekull Harper Collins 1998.

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Improving Supply Chain Management in the UK Furniture Industry possible to give an alternate option to road transport. A comparison of the two transport systems in Poland is shown below: Road Rail 19/m3 to Sweden Faster Less Reliable Eco-unfriendly 80 m3 capacity per lorry 9/m3 to Sweden Slower More Reliable Eco-friendly 200 m3 capacity per waggon

Smart logistics at IKEA also includes a very rigorous analysis of the way products are packaged in the famous flat-pack boxes and then loaded into containers. Damage in transit is kept to a minimum by strict guidelines and templates for loading. Photographs of damage incidents are taken and lessons learnt and disseminated. It is not uncommon to see video cameras at IKEA suppliers factories monitoring the loading of containers (and ensuring that there is no smuggling of illegal cargoes out of Poland). IKEA apply the SCM doctrine to picking. There is acknowledgement that the task of picking items from shelves to make up orders has to be done somewhere in the supply chain. They analyse the respective efficiencies in the suppliers warehouses and the distribution centre warehouses before making a decision. The development of highly organised hub-and-spoke distribution systems allows minimum order quantities to be kept low. It is possible for a carton, rather than a pallet or a container, to be despatched from the factory to the distribution centre where loads are then consolidated before being transmitted as containers to destinations around the globe. The Quality Perspective It is a tenet of the IKEA creed that they do not chase after quality for its own sake. Their products are not over-engineered to give a greater finish than the customer requires. Nevertheless quality is taken very seriously and the whole supply chain participates. Their definition of quality is that the product must first be available in the store and secondly it must match up to the customers expectations: it must be complete, free from defects and easy to assemble. Returns to stores are analysed and each product is carefully monitored. TA Poland then runs Project OCTOPUS. This entails a team made up of people from all parts of the supply chain, TA Poland staff as well as suppliers, going to IKEA stores, possibly overseas, and carrying out rigorous inspection of the products there. When they find defects they then track back to see where in the supply chain they have occurred and how they can be prevented from happening again. In this way problems with damage in transit or poor factory quality control are discovered and put right. Quality is also assured by the frequent interaction between TA Poland staff and their suppliers. Purchasers often go into factories and carry out inspections of IKEA products being made there. 7
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Improving Supply Chain Management in the UK Furniture Industry The Green Perspective IKEAs green credentials are ingrained in its culture and an important part of the corporate image that is marketed to its customers. The company has a special agreement with Greenpeace that its policies will be environmentally friendly and therefore it relies on taut SCM to comply with FSC2 and other codes of practice. The obsession that IKEA has with the detail of fuel and materials usage in their manufacturing and logistics systems also reflects their desire to minimise the impact on the environment and they make the business case for green policies, arguing that it saves on costs anyway. Every light switch in the IKEA office in Warsaw appears to have a notice next to it reminding people to switch it off. IKEA suppliers are also encouraged to recycle their waste products. Formaplan has kilns to dry their timber powered by the burning of sawdust briquettes. Excess energy is sold to heat local houses. The Corporate Responsibility Perspective IKEA also has a firm commitment to social policies, not just to its own employees but also to anyone producing IKEA products. This means that suppliers have to conform to IWAY and there are audits to ensure that they are complying. IWAY provisions include commitments to high standards of health and safety, employee conditions such as access to rest areas and toilets, working hours and a minimum wage. IWAY is enforced worldwide but the criteria may be varied according to local culture and employment legislation. The Performance Measurement Perspective IKEA focuses on the following key measures: Measure Service Levels Description Target (where known or applicable) Measures the availability of the product Depending on the specified on the shelves. This reflects the accuracy service level for the product of forecasting and the ability of the varying from 90-99%. supply chain to keep stock levels topped up. On-time deliveries % Accuracy and timeliness of information being put on the system. Quality of communication. This relates to customs clearance Details put on system certification. within 2 days. Time materials spend in the supply chain No specific benchmark but

Delivery Security Information Security Quantification Quality Lead times

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Forestry Stewardship Council. Certification assures that timber has come from renewable sources that are being responsibly managed.

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Improving Supply Chain Management in the UK Furniture Industry from order point to store delivery they will always strive to make the lead time as short as possible with continuous improvement. Defects The focus is on returns to the stores. % These are analysed to determine whether Labour in Poland is cheap when compared to Western Europe standards these are due to defects or assembly but not by global standards. A factory worker is paid Zl 2000 per month (330) gross instructions that are hard to understand. working week is or Zl 1200 net (198). The Polish Stock Levels Measurement of stock values at all constrained by law to 40 hours and the trend is Annual stock turns against downwards. The factory stages of the 0600 to 1400 and 1400 sales works 2 x 8 hour shifts; supply chain to 2200 hours. Logistics Capacity utilisation of transport as 60% filling rate Efficiency measured by Poland can no longer They acknowledge that filling rates of containers compete with the Far East on price. We feel the yellow breath on our backs! as they say. The deduction is that sofa manufacturer Case Study CIMIRthey must compete on the efficiency of their logistics and the service they are able to give in terms of short lead times and small minimum order quantities, Warsaw, quality. CIMIR in Brodnica, 2 hours north ofas well as is an IKEA supplier on the inside track. The companys founder was an IKEA manager in Sweden CIMIR has just set up a manufacturing company in Poland, 2 quality who then left to appointed a quality manager and they have serving the control inspectors. They are implementing a TQM programme and European market, and Mexico, serving the North American market. hope to have ISO 9000 accreditation next year. In 10 years the companys turnover in Brodnica has grown to 20m on The business process is as designed as far as possible on JIT pull not 16000 m2 of factory floor with a headcount of 400. The capacity is 500 push lines. CIMIR has full visibility of IKEA forecasts just changed sofas today with a surge capability of 600. They have and inventory holdings and they have IKEA. Previously they were manufacturing on their supply contract withdeveloped their own forecasting model based on a trend analysis. Components arrive in exacta 2 week lead time.in the case JIT basis and delivering direct to stores on quantities, pre-cut They of now working on an OPDC basis with afoam as well; although fabric are wooden components and sometimes 5 day lead time, this purchasing is not possible stock; basis. It is noticeable in the in-bound necessitates holding limited on a JITno more than one weeks worth storage area that the components destined for IKEA products are depending on the season and the proximity to a catalogue launch. The efficiently to move to a 3 day the time space on the shelves. where next step is packaged to take uplead least using a transit methodThere is no barcoding as yet and the scheduling is still done manually being the sofas will be routed via distribution centres without actuallybut the goal is to have taken into store. a fully computerised enterprise resource planning system (ERP). The shop floor is laid out in cells rather than on a process flow A basis. Teams of 5-6 people assemble one remarkable lead times has critical success factor in achieving these complete sofa frame at a time from its decision to is a conscious decision the covers so that they are been the parts. This divorce the sofas from to give teams ownership and pride in their work. The individuals are all only marry and enjoy greater manufactured and delivered separately andmulti-skilled up when they variety of their respective boxes in the customers living room. kanbans come outof tasks than in a conveyor belt process. They have triedThis without much success but are keen to try again. allows simplicity in the manufacturing process as they are all one colour: white. That is not to say that the product is mass produced. The is a batch then moved into for covers - and a product range of There frames aresize of one eventhe upholstery shop where again it is a cellular different styles. We could make 500 different sofas in a day over 700 layout. Teams fit the foam padding and the covers and wrap, pack and barcode manager, it would be difficult but we could do says the production the products for onward despatch. Special fire it! resistant foam is are for products destined for the British market. The Normal batch sizesused25-50. whole factory is conspicuous for its lack of work in progress, scrap or buffer stocks. The complete cycle components coming from most sofas The supply chain is taut with all the is well under 24 hours and a go out the 2 hours away. Although some inputs have been imported. maximum ofsame day. For example polypropylene fibre comes from Korea. Most of their The warehouse at the back of the9factory is set up to load straight onto either trains or lorries. Video cameras look straight into the containers to Pye Tait 2003 check on the loading for damage or smuggling. The containers are then sealed. Barcoding facilitates computerised recording of outgoing loads. In a small office in the corner clerks work on IKEAs ECIS system to