Ikea Supply Chain

Introduction: IKEA is a privately held, international home products company that designs and sells ready-to-assemble furniture such as beds and desks, appliances and home accessories. The company is the world’s largest furniture retailer. It was founded in 1943 by 17-year-old Ingvar Kamprad in Sweden. As of October 2010, the chain has 313 stores in 38 countries, most of them in Europe, North America, Asia and Australia. The word IKEA was an acronym of his name and address: Ingvar Kamprad and Elmtaryd, Agunnaryd–the name of his farm and the name of the village it was located within.

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IKEA’s Business Model: IKEA’s competitive advantage is its business model which strives on continuous improvement, best prices, quality products, self-service, production centric design, proactive partnership with suppliers (1500 suppliers in 46 countries) and an integrated global supply chain. IKEA was pioneer of designing and selling ready-to-assemble furniture and practicing flat-packaging. IKEA introduced the concept of flat pack furniture which is a form of furniture that is purchased in multiple pieces and requires assembly.

IKEA’s furniture generally arrives in a box and contains instructions for the buyer to follow in order to assemble it after purchase. For that IKEA depends upon the wide array of suppliers who are skilled and have got good natural resources. IKEA also publishes an annual catalog in 55 editions, in 27 languages for 36 countries and is considered to be the main marketing tool of the retail giant, consuming 70% of the company’s annual marketing budget. The IKEA stores are large and customers can pick their own purchases.

Further services are provided through the IKEA catalogue and home delivery. When IKEA entered Russia, the company noticed that wherever a store was opened, the value of the nearby real estate increased dramatically. Hence IKEA explored two business models simultaneously: selling through stores and capturing the appreciation in real estate values through mall development. IKEA’s new division: Mega Mall makes more profit on developing and running malls in Russia than on its traditional standalone retail business.

IKEA Distribution Services is reacting to the growing number of online orders with a new Order Tracking System to help it manage deliveries. Also IKEA works with suppliers to reduce waste or use waste products in further manufacture. To help it has a Code of Conduct called the IKEA Way (IWAY). Supply Chain Model: The global planning process is owned by a central function at IKEA of Sweden (IoS), where decisions concerning the number of articles, purchasing, suppliers, distribution, store coordination, and so forth, are made.

As such, IoS is the centre of all planning activities in the new planning process. The phases of supply chain of IKEA are: 1)Sales Planning: The sales planning starts with the overall sales forecast made by the corporate management (Group Management, GM) at IKEA. The forecast is made on an aggregate level in terms of total sales volumes in monetary units for IKEA in total. The forecast is related to the strategic business plan, involving business cycle and market intelligence issues, and includes the remaining part of the current fiscal year plus five years into the future. 2)Demand Planning:

Some 32 Demand Planners are active in the tactical demand planning process each responsible for forecasting a certain part of the assortment. The tactical forecast resides with IoS (IKEA of Sweden) and is done on a rolling 84 weeks planning horizon on store level, with new historical sales data loaded once a week. The operational forecast is a manual forecast (for the most of the time – replenishment needed in the stores) registered by the respective sales unit (i. e. store) for the coming three weeks, whereas a tactical forecast (based on sales history) is used for weeks four to 84.

The operational forecast and the tactical forecast are combined to create a final forecast for each article on the selling unit level (i. e. the store level). Thereafter the forecasts on store levels are aggregated, reconciled, and compared with the sales frames on the retail forecast group level (i. e. normally country level) and on the distribution services region level (several countries). 3)Need Planning: The need planning process follows traditional distribution requirements planning (DRP) principles. The stores provide a forecast for each article for the coming three weeks (after the product lead-time).

The forecasts are netted against current stock levels and safety stock requirements at the stores, and also netted against goods in transit. Thereafter the stores net requirements are aggregated into distribution centres (DCs) and also here netted against DC stock levels and goods in transit to replenish the DCs. Each DC Group is thereafter aggregated and the calculated forecasted demand for the coming 84 weeks is established. Volumes are divided between suppliers based on a so-called Supplier Matrix that determines the split of volumes between different suppliers.

One DC SKU could for example be sourced from two or three predetermined suppliers. 4)Supplier capacity planning: The need calculation is used to plan capacity requirements at the suppliers. In the general agreements between IKEA and its suppliers, IKEA often commits to provide a certain volume to a supplier. This is to make the supplier willing to invest in plants and equipment to produce the desired products. Furthermore, the supplier communicates a capacity limit to IKEA up to which the supplier can guarantee delivery of volumes.

IKEA’s planning process enablers: 1)Planning Organization: Two specialized planning positions were developed to carry out the main processes in the global planning concept: Demand planners (sales planning) and Need planners (to match need planning with the capacity planning). 2)Data Quality: The importance of improved data quality was early identified as an important cornerstone in order to make the global planning concept successful. Insufficient maintenance of lead time data gave wrong input to need calculation and caused stock out problems in stores.

Process improvement was difficult because of incompatible data capture and lead time measurements throughout the supply chain. As a response to these problems, a new lead time concept that assigns clear responsibilities to different actors was implemented. Furthermore, a work group was established with members across the supply chain deciding on working methods and lead time issues and a web-based application (based on a data warehouse solution) was created to visualize lead times and exceptions on missing lead time data. 3)Software Support: The JDA Networks Demand module was implemented to support the forecasting processes.

The software, in combination with organizational changes, made it possible to reduce the number of forecasters from 120 to around 30, and at the same time the average forecast accuracy increased from 60 % to 80 %. 4)Project and change management: Part of the recent change efforts, the change process has been taken seriously. A Four-Step model has been defined clearly recognizing the need to create awareness in the first step, create interest in what is coming in the second step, making users try out the solution in the third step and finally adopt the changes in the fourth and last step.

References: •http://www. plan. se/files/Jonsson_Rudberg_Holmberg_08. pdf •http://www. businessweek. com/magazine/content/05_46/b3959001. htm •www. tejonranch. com/tic/img/tenants/ikea/ikea_case_study. pdf •www. jda. com/file_bin/casestudies/IKEA_casestudy_022610. pdf •www. impgroup. org/uploads/papers/7227. pdf •http://martonhouse. wordpress. com/2007/06/25/the-ikea-business-model/ •http://khookaypeng. blogspot. com/2007/03/ikea-business-idea. html

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