Inventory Management – IKEA and H&M

Assignment 2: Inventory Management

The two manufacturing companies that have been chosen for analysis in this assignment are IKEA and H&M. IKEA was founded in 1943 in Sweden and it is the largest home furnishing retailer worldwide. The company has its branches in 37 countries across the world with a total of 298 stores. All IKEA stores are large enough to accommodate more than 9,000 products. In 2014, IKEA ranked number 41 on Forbes’ list of the World’s Most Valuable Brands. IKEA’s furniture are liked by many customers internationally because they are affordable and of high quality. The company impresses its competitors with its unique inventory management techniques. Being a global company, IKEA aspires to provide high quality and well designed home furnishing products at affordable prices to all customers worldwide (Lu, 2014)b.

H&M was founded in 1947 and it is the second largest clothing retailer in the world. In 2014, H&M ranked number three in the list of Top 15 best performing companies on Gartner’s Supply Chain. The company has its branches in 19 countries with 950 stores. H&M ensures that there is maximum stock control through a well established inventory management strategy. The main reason behind H&M’s retail inventory management technique is enable the company to get more promising markets, achieve cost-efficiency in production of goods, and to reduce the lead time for inventory.

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IKEA and H&M use different inventory management strategies which are determined by the types of inventories managed. Inventories are assets that company intends to use in the production of goods and services for sale, goods that are still in the production process, or finished products that are awaiting sale. This gives rise to three different types of inventories namely finished goods, work-in-progress, and raw materials. The types of inventories that are currently managed by IKEA are raw materials, work-in-progress, and finished goods. On the contrary, H&M currently manages finished products only.

The inventory characteristic chosen by each company enables them to reduce costs and maximize profits. IKEA uses two different types of inventory management strategies namely Cost-per-Touch Inventory management and in-store logistics personnel handling inventory management (Lu, 2014)b. Cost-per-touch inventory tactic is a strategy where clients are allowed to select the furniture that they need and retrieve the packages on their own. Companies feel that it is more costly to move products that have been selected by customers than to have clients retrieve the packages themselves. With the cost-per-touch inventory technique, IKEA manages to minimize costs because it does pay customers who decide to retrieve the furniture and transport it home (Lu, 2014)b.

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IKEA also uses in-store logistics personnel to mange inventories in its stores. The company has employed an in-store logistics manager who is charged with the responsibility of ordering furniture and a store good manage who handles materials at all IKEA stores. The in-store logistics personnel ensure that there is smooth flow of goods in all IKEA stores.  The company uses a system known as maximum/minimum settings system to ensure that products that products that have run out of stock are replenished. IKEA also uses high-flow and low-flow warehouse facilities to store goods that are in high demand and low demand respectively. This inventory management technique enables IKEA to store and retrieve products automatically from its stores to drive the cost-per-touch inventory management technique (Lu, 2014).

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Unlike in IKEA’s case, the success of H&M is largely bound to price economy. In its inventory management strategy, 80 percent of H&M’s inventory is manufactured in advance during the year, and 20 percent is introduced to the market depending on market trends. Maximum success is achieved through strong supplier relationship that helps the company to reduce lead times (Lu, 2014)a. H&M also adopts a modern Information Technology infrastructure that has helped to reduce lead times even further. The most admirable inventory characteristic of H&M is the company’s ability to collaborate with its partners to manage buying and production. The company buys garments from close to 700 suppliers, with production taking place in mainly in Europe and Asia. This helps H&M to ensure that high quality goods are produced at affordable prices (Lu, 2014)a.

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One of the ways through which IKEA and H&M manage to minimize production costs is unique product design. Through their inventories, both IKEA and H&M are able to enhance performance, operational efficiency, and customer satisfaction. The unique product design used by IKEA is associated with low manufacturing costs incurred by the company. In addition, the inventory enables IKEA to meet consumer needs by producing high quality goods at affordable prices. IKEA manufactures more than 50 percent of its products out of recycled products  (Lu, 2014)b. Most of the company’s furniture are designed and sold in pieces and customers are allowed finish the assembling process. This way, IKEA manufactures furniture using as few materials as possible while still maintaining durability and high quality. In this manner, IKEA improves customer satisfaction and enhances its performance. The fact that IKEA is able to use few materials to manufacture high quality and durable products contributes to operational efficiency because the company is able to cut down on production costs as it uses less fuel and labor to obtain materials and to transport finished products (Lu, 2014)b.

H&M offers lady clothing made in trendy styles and complex designs. The company uses a team of 100 designers who coordinate and collaborate with each other to produce clothing of highly complex designs more than a year in advance. The company designs and produces products season after season using its two-fold design process (Lu, 2014)a. Therefore, H&M manages to enhance customer satisfaction by providing a real-time design response that is linked with a customer-driven production strategy. When H&M manages its inventory properly, it helps to increase product flexibility and to reduce lead times, which eventually increase the probability of purchasing the right products. This gives H&M an opportunity to restock its stores quickly with bestselling products at affordable prices, thereby enhancing the company’s performance, and increasing operational efficiency (Lu, 2014)a.

In every manufacturing company, facility layout is created by configuring the plant site with building, lines, aisles, and other features that allow different operations to be carried out effectively in the company. The four different types of layout include process layout, product layout, fixed-position layout, and combination layout. Process layout is common in companies that manufacture low-volume products that may have different processing requirements. According to Gunasekaran, Patel and McGaughey (2004), product layouts are common in flow shops that produce high volume products prepared in very high standards. Fixed-position layout is used for products that are too heavy to be moved from one place to another. Products that need to utilize process, product, and fixed-position layouts are said to use combination layouts.

H&M uses both process and product layouts while IKEA uses product layout. Process layout used by H&M assists the company to manufacture clothing of high quality because clothes have different processing requirements that must be carried out in a sequential manner. Again, product layout will enable both IKEA and H&M to produce high volumes of furniture and clothing respectively at very high standards for the global market. Additionally, when IKEA may be required to use fixed-position layout, H&M does not need fixed-position layout. Fixed-position layout will assist IKEA to produce huge furniture than do not need to be moved from one place to another within the company. From these explanations, it is clear that neither H&M nor IKEA needs to use the combination layout.

With the fluctuating market forces and increasing competition, manufacturing companies rely very much on supply chain performance to formulate and implement strategies that will enable them to gain a competitive advantage. It is therefore important for companies to effectively evaluate their supply chain performance (Gunasekaran, Patel and McGaughey, 2004). Successful evaluation requires these companies to understand metrics that are used to measure performance. The two metrics that H&M and IKEA can use to evaluate supply chain performance include quality level and price/cost of the product. The quality level of a product as well as its price can help a company to evaluate whether its supply chain is performing well or not. High quality product is a sign on good supply chain performance while low quality is a sign of poor supply chain performance (Gunasekaran, Patel and McGaughey, 2004). A good supply chain performance will be demonstrated by affordable product prices while poor supply chain performance will be shown by extremely high product prices. Based on these two metrics, H&M and IKEA must make improvements to the design and operations of their supply chains in order to maximize their supply chain performance. Specifically, the two companies must employ highly skilled designers who can make good use of available materials to produce high quality furniture and clothing. This will help H&M and IKEA to ensure that they offer high quality products at affordable prices to customers (Gunasekaran, Patel and McGaughey, 2004).

Many companies now understand the importance of inventory management is operations management. Managers can only get to the right levels if they are able to control costs of operation while at the same time using available materials to produce quality products that will meet the needs of customers. After evaluation supply chain performance, a company can easily identify areas that need improvement in order to improve performance. One of the ways through which supply chain performance can be enhanced is by improving inventory management (Mukharji et al., 2011). IKEA and H&M can improve their inventory management without affecting operations and the customer benefit package in a number of ways. For instance, both IKEA and H&M should break down their operating inventory into three major areas when reporting stock levels. These three categories include safety of stock, replenishment requirements, and any excess stock. This breakdown will assist the two companies to make sound decision on how they should manage flow of inventory (Mukharji et al., 2011). Another way through which IKEA and H&M can improve their inventory management without affecting operations and the customer benefit package is by calculating the safety levels of stock regularly to ensure that they are up to date. This will assist the two companies to make decisions based on very accurate information (Mukharji et al., 2011).

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