Supply Chain Improvement at IKEA
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Douglas et all (1996, p.1) defined supply chain management as the “management of material and information flowing in and between facilities like vendors, manufacturers, assembly plants and distribution centers”. Demand management, or determining what and when the customers will purchase, is an important part of supply chain and management. Forecasting future demand accurately helps the company plan its resources and production so as to be more cost efficient and ensuring that the customers get what they want when and where they want it.
Accurate forecasting is essential for maintaining an adequate inventory. Low inventory levels may result in stock outs, lost sales and even lost customers, whereas high inventory will increase cost of handling inventory, obsolescence costs, cost of capital, damages, shrinkage, insurance and management costs.
IKEA – An Overview
IKEA was founded as a retail store in Sweden in 1943 and has since grown into a 280 store strong chain, covering over 33 countries and employing more than 127000 people world wide. Today, IKEA is one of the world’s top furniture retail stores. IKEA’s philosophy has been to sell products at such low prices so as to make them affordable to the maximum number of people. It is for this reason that IKEA owns only a very small part of its production and mainly sources its production from suppliers in low-cost countries, at the same time, protecting its product rights legally. The company depends on close, long-term relationships with almost 1500 suppliers across the globe, with China contributing almost 22% of IKEA’s total supply. (IKEA, 2011)
Another reason for IKEA’s cost-effectiveness was the innovative cost-cutting measures they used, for example, flat packaging of goods to save freight cost and minimize damage of products in transit. (IKEA, 2011)
Germany, USA and France contribute the maximum (almost 37% in total) of IKEA’s annual sales of approximately 23.1 billion Euros. Since the scale and volume of business is huge and there are frequent changes in the product offerings at the stores, supply chain management is very challenging.
Current business issues and Problems at IKEA
Being a company with global operations, supply chain management is an extremely crucial department at IKEA. IKEA stores are spread across 33 countries and its suppliers are present in over 50 countries. Transportation and shipment of goods from the suppliers to the stores is not only expensive but also time consuming. Since different suppliers in an area produce different products, each store receives goods from multiple suppliers, increasing workload for the store logistics departments, but reducing lead-time required for the goods to reach the stores.
IKEA also has in place a JDA system for forecast and demand management, which operates at a global, national and regional level and is adjusted at local levels by demand planners and Sales Supply Support (SSS) teams. There is also a Sales Response System (SRS) at local store levels, which aids in maintaining adequate stock in stores based on the forecast. However, the SRS has a slow response time and often stores end up having higher or lower stock than required or the stocks and forecasts need to be manually monitored by the SSS.
Another issue is lack of communication and understanding between the head office (IKEA of Sweden) and the Sales Supply Support teams operating at regional level, and also between departments such as marketing and logistics. Also, the stores’ sales staff is not involved in forecasting and demand management despite being the actual customer interface. All these problems, if solved, can make IKEA an even bigger company than it already is.
Problems and needs under study
- The long lead time for goods to reach stores
- Slow reaction time of the Sales Response System
- Lack of understanding of forecasts made by IKEA of Sweden at local level
- Absence of healthy communication between departments
- Non-involvement of store sales staff in forecasting and demand management
Goals and objectives of the study
This study aims at highlighting the main issues faced by IKEA is its supply chain management and forecasting systems, analyzing the reasons behind these problems and wherever possible, suggesting appropriate solutions that might help overcome these problems and make operations easier or more cost-effective for IKEA.
The methodology of a research is a description of the means employed to study the topic in detail and obtain answers for the research questions. Data can be collected for the purpose of research in two different ways:
a)Primary research – Data that is collected for the first time, or first hand data collected by means of interviews, surveys, observation, etc.
b)Secondary research – Using data that has been collected and analyzed by someone else. This data can be obtained from research papers, books, the Internet and other similar sources.
The prerequisite for a sound and effective research is reliable, valid and verifiable data. It is essential to remain unbiased and objective while analyzing the collected data, so that the correct conclusion can be reached.
Once adequate data has been collected, this data needs to be segregated and analyzed so as to be useful in solving the research problems. Data analysis can be either qualitative or quantitative.
While analyzing data, it is important to keep in mind the purpose and type of study. Research can be classified into 4 different types:
a)Descriptive research – Systematically defines a situation, problem, process or program or describes attitudes towards and issue.
b)Correlational research – Attempts to discover a relationship/interdependence between two or more aspects of a situation.
c)Explanatory research – Attempts to clarify why and how a relationship exists between two or more aspects of a situation.
d)Exploratory research – Undertaken to explore an area where little is known or to investigate possibilities of undertaking a study.
Our paper about the Supply Chain Management at IKEA and the issues IKEA is facing is an exploratory research and is mostly based on secondary sources. Several research papers by other authors have been studied and their understanding about IKEA’s supply chain has been used to write an analytical paper.
After thoroughly understanding the problems and the reasons behind them, recommendations as to how the problems can be solved or reduced will be given.
It is to be noted that in this paper, it has been assumed that the forecasts made by the IKEA of Sweden are made keeping in mind all the usual factors and are accurate, apart from any unforeseen factors at regional or store levels that may affect demand. It is also assumed that the cost of providing short-term forecasting software at store level is negligible and the senior store staff can be trained to use this software correctly.
Analysis and results
With a chain of 250 company owned stores in 24 countries and 32 franchisees in another 16 countries, the supply chain requires a high degree of control to ensure low costs and prevent conditions of stock outs or obsolescence of goods. The stores receive goods either directly from one of the 1350 suppliers across 50 countries or through one of the 31 distribution centers that have been put in place. (The Economist, 2011)
IKEA has in place a strong, but slow, forecasting system. Instead of following a pure top-down or bottom-to-top approach for forecasting, IKEA’s strategy is a mix of both systems. The head office of IKEA in Sweden (IKEA of Sweden or IOS) rolls out a five year strategic plan, which includes new products that are to be introduced and desired sales for each product (both new and existing). Meanwhile, a national Service Office (SO) collects information about sales and demand at a national level.
IKEA uses a JDA data system with separate modules for demand and forecasting. This system plans a tactical forecast for 84 weeks, based on sales history, seasonal index and other factors. A demand planner manually checks if the sales history is reliable (undisturbed by rare extreme values or events such as some holiday period or festival that might affect sales). If the history is reliable, the forecast for the next 84 weeks is made based on it, otherwise, the demand planner may modify the forecast by removing extreme values, using other products’ history to get a better idea or by collecting information regarding the reasons behind the change in market scenario. (JDA)
The Service Officers of all countries then analyze and modify the forecasts to suit the market needs and demand once a year based on factors like product prices, advertising and marketing strategies employed for different products in different markets, merchandising and placement in stores, any changes in product range, etc.
When a new product is to be introduced, a primary business plan is made two years prior to its launch and the head office (IOS) makes an initial forecast 1 and a half year before the product is introduced into the market based on the business plan, budget, sales statistics, and proposed strategy. Demand planners further break down the global forecast into country level based on sale of similar products. Stores are informed about the predetermined (based on percentage of national sales volume coming from that store) percentage of these products that they will be sent eight weeks in advance. The logistic departments at the stores then adjust the forecast based on their predicted sales and may increase or decrease their demand by contacting the IOS. Based on the sales planning by the corporate management at IOS and demand planning for the 12 business areas by the 32 demand planners at IOS, the supplier capacity is planned and commitments for minimum production are given to suppliers. (Jonsson, Rudberg, & Holmberg)
At a global level, all IKEA’s products are divided into 4 distinct service levels, based on the importance of the product in terms of sales and service. Products placed in Service level 1 are top selling products that should always be in stock and easy for the customer to find and reach. Service level 2 products should have a minimum availability of 97%, service level 3 95% and service level 4 products should have a minimum availability of 90% in all stores. Forecasts for goods with service level 1 are rechecked weekly while the others are checked in decreasing frequency.
IKEA uses a Sale Response System (SRS) to control and maintain inventory levels at store level. The system uses the initial forecast given by the IOS, combines it with the store’s historical data and seasonality of sales, and calculates future demand. Based on this result, it automatically reorders the type and quantity of products required for the store. The sales staff at the stores cannot directly adjust inventory levels or forecasts and they must contact the Sale Supply Support team for any proposed change.
If sales are lower than the forecast and the stores have excess inventory, sales people are permitted to lower prices or change the placement of the product in the store. Sale Supply Support (SSS) teams exist at regional level to undertake weekly discussions with the sales departments of stores regarding stock level, forecast accuracy and any need to adjust forecasts.
A separate team of forecasting specialists later checks how accurate the forecasts were. IKEA’s forecast accuracy goals are 80% accuracy for short term (time span of 1 week) and 100% for long term (3 months).
One major problem faced because of this multiple tiered system is the long response time of the system. It takes almost 8 weeks for the system to respond to a change in demand. Employees at stores are only authorized to manually input a “sales jump” or an increased demand into the SRS for a short time period of between 4-6 weeks. Meanwhile, the demand and stock must be monitored manually.
Since the response time of the Sales Response System is very long, stores often have excess inventory after a period of peak demand (for example, festivals or holidays) and the system does not allow them to reduce this inventory fast enough. Similarly, in case of unforeseen increases in demand for longer periods of time, stores are often unable to fulfill large orders due to slow increase in forecast. The reason behind this long response time is that IKEA depends on low-cost suppliers in China, Poland, Russia, etc. and has monthly order commitments to most of its suppliers. So, not only does it take a long time to deliver goods through the long supply chain to the stores, but sometimes, IOS, in order to meet next month’s commitment to the supplier, tries to postpone the production of goods by some days. (Langley, Coyle, Gibson, Novack, & Bardi, 2009)
Since the SRS bases its forecasts on sales history of the stores, these forecasts are often inaccurate due to rare instances of high one-time sales that alter the average demand figures significantly.
Another important thing that is lacking in the Sales Response System is that it does not account for loss due to pilferage and damage of goods in the stores. This is a huge short-coming as IKEA stores usually comprise of walk-in aisles where customers often tend to accidently damage products by bumping their carts into them or dropping things while handling them.
Sometimes when the IOS’s forecast is not completely understood by the Sale Supply Support team, or the IKEA of Sweden (IOS) does not adequately understand the local market, demand and factors that affect sales regionally, and this makes it difficult for the forecasting to be accurately done or managed. At the store level, this could result in unnecessary inventory levels or stock-outs, causing losses in either case. Also, ineffective communication between the Sale Supply Support team and the logistics departments at the stores often leads to higher work-load for the store staff (in terms of excess inventory which takes a lot of time and space to manage) and inefficient operations.
Communication between the marketing and logistics teams is also essential so that the logistics team is aware of any promotional activities that might have been planned for specific products, so that they can increase inventory levels for products that are going to be promoted to match demand, so that the company does not end up “advertising for the competition” (when customers are unable to find a product and buy from a competitor instead).
Initially, we have assumed that IOS makes accurate forecasts except for any unforeseen or temporary factors that may affect demand at regional or store level. If this assumption were to prove to be inaccurate, the entire forecasting system at IKEA would fail, since the initial forecast always comes from the IOS. This would result in stock-outs, excess inventories and mis-managed supply chain, and huge losses in terms of trans-shipment costs, storage costs, product obsolescence, lost sales and customers throughout the network.
Another assumption that has been made is that IKEA has the infrastructure, human capital and the desire to incorporate any changes in software and train its people to use new software, to communicate better and work together towards making demand management not just an operational, but also a strategic requirement.