Supply chain management is very important for all businesses in today’s highly competitive world. Implementing an effective supply chain process is essential for any business to be successful and efficient (Dawn Szajda, 2017). Ellram and Cooper (1993) defined supply chain management as “an integrating philosophy to manage the total flow of a distribution channel from supplier to ultimate customer.” According to Chopra and Meindl (2007) a supply chain “consists of all parties involved, directly or indirectly, in fulfilling a customer request.” It is important to note that the supply chain does not only include the manufacturer and suppliers. The supply chain also includes transporters, warehouses, retailers and the customers (Chopra and Meindl, 2007).
IKEA is a Swedish company. It is in the furniture retail industry. It specialises in designing and selling ready to assemble furniture. It is the world’s largest furniture selling company (Mohammed Abouhenidi, 2014). IKEA has implemented a centralised supply chain (Jonsson, Rudberg and Holmberg, 2013). In a centralised supply chain, there is a central authority responsible for decision-making. Whereas in a decentralised supply chain structure the individual entities can make their own decisions (Jonsson, Rudberg and Holmberg, 2013). In a large company like IKEA having a centralized supply chain makes more sense (Jonsson, Rudberg and Holmberg, 2013).
IKEA’s excellent supply chain model allows the large company to reduce prices without losing product quality, increasing any financial burden, or causing irreversible damage to the environment (Mohammed Abouhenidi, 2014).
2Analysis of the Processes being evaluated
IKEA’s top priority is to “continue to be the largest furniture retailer in the world” (Mohammed Abouhenidi, 2014). IKEA also has a firm belief in contributing positively to the environment. IKEA ensures it does as little harm to the environment as possible (IKEA, 2012). Ensuring the company is environmentally friendly begins at the design stage of each product. IKEA sources recycled plastic and textile clippings to produce its products. It also designs all their products so they can stack easily on top of one another to maximise the amount of products that can fit in shipping containers, lowering amount of ships needed and in turn reducing fuel emissions (Hultman et al., 2010).
Environmental considerations are of the utmost importance when you produce as much furniture as IKEA does. The company has approximately 9,500 products, with over half of these products created from wood or wood fibres (IKEA, 2017). To more closely manage its production of wood-based products, the company formed a subsidiary called Swedwood that sources all of its wood from legal logging operations (Mohammed Abouhenidi, 2014). Likewise, IKEA has established strict criteria for the suppliers it chooses to work with (IKEA, 2017).
IKEA has cuts costs through their sales process. The retailer has pioneered an alternative model where customers browse a warehouse-like space for products which require assembly at home. The retailer has chosen to sell their products based on “cost-per-touch”, a common business principle governing that for every hand that touches the product, the costlier it will be (TradeGecko, 2018). Consequently, IKEA store staff specialize in recording and monitoring incoming products to ensure that all deliveries are directed to the right place in the store, giving customers a quick and easy shopping experience that boosts both customer loyalty and sales numbers (TradeGecko, 2018).
But perhaps the smartest part of IKEA’s model is the final stage: the purchase and assembly of its products. During a visit to the showroom floor of an IKEA store, customers are able to choose products for themselves and place them on a trolley. The company’s warehouse-style stores are stocked with compactly packaged products to ensure that customers can easily transport their purchases home (IKEA, 2017). This has the allowed each IKEA store to stock a larger inventory and reduce its shipping costs. Last stage is the most famous part of IKEA’s business model: the DIY assembly of nearly every piece of furniture they sell. It’s only the finishing touch on a long, eccentric, and deeply innovative supply chain that has helped what was once a tiny Swedish furniture maker grow into one of the most recognizable brands in the world (SupplyChain, 2017).
3Engagement with Theory as a Basis for the Analysis
Companies like IKEA structure their supply chain around these four elements; buy, make, move and store (Sweeney, 2007). The first stage is the buying stage. IKEA must source their raw materials needed for the design of the products. IKEA must select the most suitable suppliers that meet the company’s expectations and needs (IKEA, 2018). After picking the suppliers, agreements and contracts must be established. The next step is the designing of all the products. As IKEA is a large company, making over 9,500 products they must have countless ideas and designs for products in order to minimise waste (IKEA, 2018). The next steps move and store involves the handling and management of distribution channels.
The supply chain at IKEA involves a flow of production and processes through each of the three industrial sectors; the primary, secondary and tertiary sectors (The Times, n.d.).
The primary sector involves the development of raw materials (BBC, n.d.). IKEA designs its own products in Sweden (IKEA, 2017). Low price is one of the main factors that IKEA considers while producing home furnishings. At the design stage, IKEA checks that products meet strict requirements for function, efficient distribution, quality and impact on the environment (IKEA 2017). They negotiate prices with suppliers, check the quality of materials, analyse the environmental impacts that occur and also keep an eye on social and working conditions of suppliers. IKEA creates many design solutions to minimise the amount of materials wasted (IKEA, 2018).
Each of these ideas helps IKEA’s products to be more sustainable and reduce the impact on the environment.
Manufacturers within the secondary sector create IKEA products from raw materials (Business LLP, n.d.). As products move through the supply chain, the process of value-added takes place. IKEA designs many of its products so that the smallest amount of resources can make the best products (IKEA,2018).
In the tertiary sector, IKEA’s retail stores add value to manufactured goods by providing a form of shopping different to the usual high-street experience (BBC, n.d.). IKEA works in various ways not only to rationalize and simplify distribution, but also to minimise the impact this part of the business has on the environment (Business LLP, n.d.). Distribution services operates as the wholesaler for IKEA. The distribution services secure local storage capacity for stores and purchase products from suppliers across the globe. Products are shipped from suppliers to distribution centres, where they are stored, and then loaded onto transport vehicles when ordered by stores (IKEA, 2017). The fundamental goal is to handle goods as efficiently as possible (Business LLP, n.d.). IKEA achieves affordable prices for their store customers by placing an emphasis on efficiency (Business LLP, n.d.).
4Development of an Overall Supply Chain Analysis/Process Analysis
The supply chain of IKEA has been developed to great effect in a bid to increase profit margins, reduce cost and create an environmentally friendly sustainable company (IKEA, 2012). Innovation in the supply chain can lead to reduced costs as well as greater resource availability and control (Dempsey, 2018).
IKEA has been developing its supply chain over the years through their management (Business LLP, n.d.). Supply chain management plays an important role in implementing change in their supply process.
IKEA wants customers to know they are an environmentally friendly company.
IKEA has ensured the raw materials they use are environmentally friendly (IKEA, 2017). They formed a subsidiary, Swedwood. Swedwood sources all of its wood from legal logging operations (Inter IKEA Group, n.d.). Forming this subsidiary has allowed the company to ensure they are collecting wood so they do not harm the environment. IKEA also sets strict criteria for the suppliers it chooses to work with (Inter IKEA Group, n.d.). They have developed their own tool: the e-Wheel. E-Wheel helps to assess the environmental impact of every product to ensure it meets stringent quality control criteria for efficient distribution, quality and social impact (Inter IKEA Group, n.d.).
IKEA also reduces costs during the sales process. It has invented an alternative model where customers browse a warehouse-like space for products that can be assembled at home, reducing costs for the company (Jonsson, Rudberg and Holmberg, 2013). Another clever design by IKEA is they flat pack all products. The flat packages make it easier to store and ship from the manufactures to stores. With less space being taken up per item more items can be shipped. Therefore, reducing shipping costs. While IKEA is reducing costs their profit margins are increasing (Jonsson, Rudberg and Holmberg, 2013).
5Evaluation of the Appropriateness of the Particular Supply Chain Dynamics / Process Dynamics
The supply chain is what causes IKEA to succeed. Implementing centralised supply chain planning in an appropriate planning context led to several operational performance improvements (Jonsson, Rudberg and Holmberg, 2013).
The first step in developing the new centralised concept was to create a standardised planning process and implement standardised working methods that had a common supply chain objective (Jonsson, Rudberg and Holmberg, 2013). Following standardised working methods, IKEA was able to organize both supply chain and hierarchical integration for all supply chain planning processes. This change connected demand with supply all the way from the stores to the suppliers (Jonsson, Rudberg and Holmberg, 2013). The new processes reduced safety stock levels, increased supply chain visibility and increased forecast accuracy. The new planning processes enhanced the hierarchical integration. This forced planners to comply to established working procedures (Jonsson, Rudberg and Holmberg, 2013).
Even with the positive effects of centralisation, supply plan accuracy was still low in 2011. This happened mainly because the forecast accuracy was not high enough, particularly for new products. According to Jonsson, Rudberg and Holmberg (2013), most obstacles faced when implemented a centralised supply chain relate to human and organizational issues.
6Discussion of how the Supply Chain / Process Fits into the Overall Business
The supply chain is what allows IKEA to succeed or causes the company to fail. The supply chain is highly significant in the creation and manufacturing of products (Holden, 2006).
The nature of a supply chain is such that it encompasses many of the elements involved in the flow of the construction of a product and its involved processes; including the “manufacturing and assembly, warehousing and inventory tracking, order entry management” (Holden, 2006). As a result, it is the structure from which numerous amounts of activities can arise from.
When IKEA evaluated its old planning situation, the company identified several problems with its approach. The supply chain had limited transparency between functions and sub-processes (Holden, 2006). This lead to reactive planning behaviour. Several different planning systems were being used parallel to each other. Due to the lack of standardised software support planners were forced to do a large amount of manual work (Holden, 2006). This made it difficult to secure high planning information quality and stock balances. This also led to a lack of trust and communication between different parts of the supply chain (Ellram and Cooper, 1993).
7Conclusion
From this analysis of the supply chain of IKEA conclusions can be made. One of IKEA’s key competitive advantages is that the company has a vast understanding about their customers (Statista, 2018). The company recognizes the purchasing factors that lead customers to buy their products from their brand. IKEA enforces the best procedures to encourage that decision and, as a result of this, IKEA has “become one of the most loved companies worldwide” (Statista, 2018).
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