LASA 2 – Company Analysis Report – IKEA

IKEA Strategic Overview

Founded in 1943 by Ingvar Kamprad, IKEA is a multinational corporation that specializes in the design and sale of ready-to-assemble furniture, home accessories, and appliances. The company has grown in leaps and bounds to become the largest furniture retailer in the world. The headquarters of the company are in Delft, Sweden. IKEA credits its success in the furniture retail industry to offering low prices. Its founder used to sell furniture through a mail order business. In the 1930s, the prices of furniture rose than the prices of other products. Kamprad responded to the changes by creating a line of business that enables people to afford furniture at a low price. Since then, the company has continued to offer furniture and other products at a lower price, which has helped in improving its competitiveness. IKEA is a privately owned company. It is owned by Stiching INGKA Foundation, a non-profit organization. Since the company is a non-profit organization it pays an income tax of only 3.5% instead of the normal 18%. The Kamprad family still controls the company through the foundation. Kamprad’s three sons are tasked with the duty of the day to day running of the company (Ayers & Odegaard, 2007).

Customers associate the company’s brand with high quality products that are not expensive. However, the products are not too cheap. The price of its products is perfect among its target market.

IKEA has improved its competitiveness in the industry by creating nicely designed products that could be used immediately or disposed if they wore out. The ability to assemble the company’s products easily makes the company be popular among its customers. IKEA targets young people. Its products are clean and have a simple aesthetic. Having “whimsical” names also increases the popularity of the products among young people. Transparency of the company’s production process also improves the competitiveness of the company. IKEA also strives to improve the shopping experience of its customers. The rise in e-commerce necessitated the IKEA to provide an incentive for customers to visit the company’s stores. IKEA’s stores have an elaborate showroom and cafeteria (Ayers & Odegaard, 2007).

IKEA Supply Chain Management

IKEA ensures that it designs unique products that incur low manufacturing costs. It also ensures that the products meet strict specifications on quality, efficient distribution, and environmental impact. The company manufactures more than 50% of its products from sustainable or recycled products. It uses as few materials as possible in making its products. However, it ensures that this does not compromise the quality and durability of its products. Using as few materials as possible helps in reducing transportation costs as it enables the company to use less fuel and manpower in the transportation of the materials.

The company also strives to form sustainable relationships with its suppliers. This is one of the major factors that give the company a competitive edge over other companies in the industry. IKEA has efficient communications and relationship management with its suppliers and manufacturers. This enables the company to get good prices on the products it sources from the above parties.

IKEA buys products in bulk. The company purchases its products from more than 1800 suppliers who are located in more than 50 countries worldwide. It has more than 40 trading offices located across the world to manage its relationship with suppliers. The company negotiates with its suppliers and checks materials to determine whether the materials meet its recommended quality. It also monitors the social and working conditions of its suppliers. It severs its relationship with companies that do not treat their employees fairly.

IKEA strives to ensure that there is competition among its suppliers. This enables the suppliers to attain the best prices and highest quality of materials. IKEA values long-term business relationships with its suppliers. It signs long-term contracts with the suppliers. This ensures that the suppliers provide them with products at lower prices. IKEA has a code of conduct, which is referred to as the IKEA Way of Purchasing Home Furnishing Products (IWAY). The code of conduct details the minimum rules and guidelines that suppliers should adhere to reduce the environmental impact of their activities. The code of conduct has a positive impact on the business environment in which IKEA and its suppliers operate in. It enables the suppliers to add value to their operations. It is also vital to note that despite the fact that IKEA highlights the importance of low price, it does not accept just any price. It ensures that the quest to provide customers with low prices does not jeopardize its business principles.

IKEA designs and sells a significant proportion of tits furniture in pieces that customers assemble. These pieces are placed in convenient and efficient packages that help in reducing transportation costs since they occupy less space in transportation trucks. This helps in maximizing the number of products that the company can ship. The unique packaging of the company’s products also ensures that they occupy less space in warehouses. This facilitates the storage of additional stock, which helps in order fulfillment. This enables IKEA to make significant savings in fuel and storage costs, which are ultimately passed to the customer in the form of cheap products.

IKEA combines its retail and warehouse process. All IKEA stores have a warehouse in addition to a showroom. Customers can browse items in the showroom. Once they make a purchase, the items are taken from the floor pallet, which has many racks. Additional items are stored in reserve racks. The company stores items that are too bulky that they would require customers to seek the help of staff in one location of the store. The company strives to minimize the number of items stored in this area as it would like to encourage self-service among customers as much as possible. All the other items are stored in small pallets that customers can easily access. This reduces the need to employ additional staff in the company’s stores (Asefeso, 2015).

Making customers select and retrieve packages themselves is a common inventory management technique. It is referred to as “cost-per-touch.” Generally, the more hands that touch a product, the higher the costs associated with the product. For instance, when a customer orders an item, the item is shipped from the manufacturer to the collection point where it is loaded on to the customer’s vehicle, retailer, or home. Each time the product moved it incurs an additional cost. The fewer times the product moves the less costs of transportation it incurs. In addition, the more an item is transported or the more people touch it, the higher the risk of damage. IKEA saves money by ensuring that customers select and fetch their own items. Therefore, it does not have to pay the customer to retrieve the item as it would to an employee of the company (Ayers & Odegaard, 2007).

In-store logistics also helps in improving the efficiency of IKEA’s supply chain. Logistics personnel are tasked with inventory management in the company’s stores. The company has an in-store logistics manager who is responsible for the ordering process. The company also has a store goods manager who is tasked with material handling logistics in all stores of the company. The logistics personnel help in monitoring and recoding deliveries. They also check delivery notices, sort goods, and ensure that various products reach their desired overstock locations. Therefore, they ensure that there is an efficient flow of goods with the company’s stores. This is critical in ensuring that the company maintains its high level of sales (Martínez-Jurado & Moyano-Fuentes, 2014).

IKEA has developed an inventory management process referred to as ‘minimum/maximum settings.’ The process helps in the management of the store-level inventory reorder points and reorder products. According to the process, minimum settings refer to the minimum level of products that should be available before reordering. On the other hand, maximum settings refer to the maximum amount of a certain product that a company can order at one time.

IKEA inventory is only stocked at night. Therefore, the minimum/maximum settings enable the company to stock its products based on the products from the reserve stock that have been sold during the day or within two days. Therefore, the minimum/maximum settings ensure that the company can meet customer demand without ordering too much or too few products.

Use of high-flow and low-flow warehouses also helps in improving the efficiency of IKEA’s supply chain. Products stored in high-flow warehouses have a high demand. Therefore, the company uses an automatic storage and retrieval system in the high-flow warehouses. This helps in reducing the cost-per-touch of the company’s products. On the other hand, products stored in low-flow warehouses have low demand. Therefore, the storage and retrieval system in low-flow warehouses is more manual since employees would not have to move products too much.

Cost and time are the key performance measures of the company’s supply chain. Strategic partnerships with suppliers and purchase of various products in bulk help in reducing the costs of the supply chain. Do-it-yourself also helps in reducing the company’s packaging costs. The minimum/maximum settings, which the company uses to manage its inventory ensures that the company reorders the right products at the right time (Brown, ‎Bessant & Lamming, 2013). Most big supermarket chains sell furniture. Therefore, Target, Walmart, and Tesco are some of the largest competitors of IKEA. However, the company’s perform poorly on the performance measures. This is due to the fact that they do not specialize in the sale of furniture.

Improvement in Operating Processes

IKEA should strive to improve quality by adopting total quality management in its operations. It should ensure that it spends money on its processes as the returns for this expenditure would be significant higher than the costs. Adoption of the six sigma approach to management would enable the company improve the quality of it services and products. The company should strive to simplify its transportation and logistics methods to facilitate the tracing of each consignment. This would enable the management predict the whereabouts of the product and prevent loss during transportation. The company should also ensure that more deliveries are done by rail. IKEA should also change its inventory management process. It should start using the Just-In-Time strategy. This would help in waste reduction and lead to continuous improvement. Use of JIT would enable the company increase its throughput and its production scheduling (Tracey, Lim & Vonderembse, 2005).

Improvement of the above operating processes should be undertaken systematically. To change its transportation and logistics the company should first undertake an extensive study on various transportation and logistics systems and their potential impact on the company if they are adopted. Prior to changing the transportation and logistics system, the company should ensure that it trains employees on how to use the new system. It should also ensure that employees know the importance the new logistics and transportation system. To change its means of delivery to mainly rail, the company should enter into long-term contracts with rail companies for the delivery of its products. For IKEA to JIT, it should ensure that it alters its supply chain operations to conform to the principles of JIT. It should also that it trains its employees on how to adhere to the principles of JIT in undertaking their activities.

Simplification of the transportation and logistics would enable IKEA to use its supply chain more efficiently by reducing costs and avoiding wastage of time. It would enable the company keep track of the location of various products. This would prevent loss of products, which may be expensive to the company. Keeping track of the location of various products would help in improving the efficiency of the supply chain as it would help in the detection of time wastage within the supply chain. This would also help in improving the speed of movement of items in the supply chain (Ganesan et al., 2009).

Rail is one of the cheapest means of transport. Therefore, change of the transportation means to mainly rail would enable IKEA increase reduce its transportation costs. The company may pass these benefits to the customers, which would improve its competitiveness. Use of rail transport would also improve the speed of movement of items in the supply chain as rail transport is not prone to traffic jams, which may occur in road transport. Rail transport is generally faster over longer distances that road transport. Therefore, it would improve the speed of movement of items in the supply chain. Rail transport is also more dependable than other means of transport as it is not affected by weather conditions. Therefore, it would help in improving the efficiency of the supply chain. Rail transport would also enable the company to transport bulky and heavy goods economically (Tracey, Lim & Vonderembse, 2005).

Use of JIT inventory system would necessitate IKEA to keep low levels of inventory and produce just what is necessary to meet customers’ orders. This would help in reducing inventory costs. JIT would also enable IKEA maintain minimal inventory. The high rate of inventory turnover would prevent the obsolescence of inventory. This would improve the efficiency of the supply chain. JIT would also enable IKEA to detect production mistakes quickly. Therefore, it would enable the company reduce the number of products that have defects. This would ultimately improve the productivity of the company (Monden & Minagawa, 2015).

Implementation of JIT inventory system would necessitate IKEA to ensure that all its operations align with the principles of JIT. It would necessitate the company to implement statistical controls. IKEA would have to train its suppliers to assure deliver and ensure that they also maintain quality. This may necessitate IKEA to terminate the services of certain suppliers who do not meet this condition (Monden & Minagawa, 2015).

Implementation of JIT would enable the company to detect problems in its processes more efficiently. This would enable IKEA to implement measures that would tackle the problem or reduce the impact of the problem (Monden & Minagawa, 2015).

Results of Performance Improvement

Simplification of transport and logistics would also enable IKEA to capitalize on its capabilities to reduce costs and increase profitability. It would enable the company to leverage on real-time information on the location of various items to gain insights on its supply chain and transport and logistics management capabilities. It would help in improving the company’s visibility of all orders, shipments, and global inventories. This would help in improving the efficiency of the supply chain.

Simplification of transport and logistics would enable IKEA to communicate more effectively with customers, suppliers, and transport provides. This would help in improving efficiency and accuracy. It would also ensure that the deliveries are on-time. It would enable IKEA to organize shipments in such a manner that it would help it save costs and also make the customer save costs. For example, it may enable the company to combine two shipments to one customer to one shipment. This would reduce the shipment costs to both the customer and the company.

Simplification of the shipment plan would also enable the company to formulate a more efficient shipment criterion while working jointly with the carriers. It would enable the company to determine the speed with which certain products should be delivered and the modes of transport that the carrier should use. This would enable IKEA to develop the most affordable delivery plan, which would help in reducing its transportation costs.

Use of rail transport would enable the company benefit from economies of scale and economies of distance. IKEA would benefit from economies of scale due to the fact that rail transport would enable the company transport a greater amount of product. Shipping products in bulk would be more economical to the company. This would enable the company products reach more customers at a faster rate. Rail transport is highly efficient when goods are moved for a longer distance instead of a shorter distance. Moving goods over a long distance helps in reducing the fixed costs and overhead costs, which include loading and offloading of cargo. This strategy would enable the company reduce its transportation costs. Therefore, it would enable the company reduce the prices of its products even further, which would help in improving its competitiveness as price is the major factor that gives the companies a competitive edge in the industry (Tracey, Lim & Vonderembse, 2005).

Use of rail transport would also reduce the number of carriers that IKEA uses. This is due to the fact that rail transports would facilitate the movement of goods for long distances using a single train instead of contracting different carriers to move the products over the distances. Therefore, it would help in improving the efficiency of the company’s operations.

JIT would not simply be a process. It would be a philosophy that the company would employ in managing its supply chain. JIT would enable IKEA view inventory as being wasteful. Therefore, it would strive to reduce the amount of inventory. Implementation of JIT would necessitate the company to change various supply chain management practices to improve its efficiency. Implementation of JIT would enable the company improve the quality of services it offers its customers. JIT would help in improving the productivity of the company. This would reduce the delays customers experience to receive their orders. JIT would enable IKEA to make products meant for specific orders (Tracey, Lim & Vonderembse, 2005).

Implications on HR

Implementation of the above changes in IKEA would necessitate the company to undertake certain changes in the roles and responsibilities of employees of the organization. Departmental managers would help in implementing the changes. They would be trained on how to implement the changes effectively. They would delegate various activities to their subordinates. This would necessitate the organization to modify the roles and responsibilities of various employees.

The HR manager would monitor the implementation of the changes. Therefore, the HR manager would own the process. The HR manager is a top level executive of the company. Therefore, he would have the authority to implement the changes that would be necessary to ensure that the operations of the company are not negatively affected by the changes.

The employees of the organization have the right skills to implement the changes. The company would also conduct training to equip employees who may not have the right skills to implement the changes with the right skills.

Changes

IKEA would have to undertake certain changes in its compensation and incentives. The company would provide bonuses to employees who implement the above changes more effectively. The bonuses would be dependent on the savings that the company would make due to the implementation of the changes. The incentives would motivate employees and other stakeholders of the organization to adhere to various conditions of the changes. The company would conduct regular meetings with employees and other stakeholders to determine strategies that would help in improving the efficiency of the company’s operations. This would help in ensuring that there is continuous improvement within the organization. The company would also train its employees regularly to reinforce the changes.

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