Task 1a - The Choice of the Case Study and Sources
This paper discusses the supply chain and the sourcing approach of IKEA, the home furniture producer that operates in 26 countries having almost 280 stores (IKEA, 2010. In 2010, IKEA had 1,074 suppliers in 55 countries. The globally integrated network of the company makes it particularly interesting to examine how the supply chain and global sourcing are managed at IKEA.
For the analysis of the IKEA’s supply chain the author consults the firm’s reports, such as Annual Report 2010 and Sustainability Report 2010, several scientific papers and articles on the supply chain management and IKEA, and for the overview a movie on the IKEA’s manufacturing approach filmed by National Geographic Channel.
Task 1b - Position in the Efficiency/Responsiveness Spectrum
IKEA’s strategy is aimed at selling functional furniture at an affordable price. This approach involves cost efficient production and distribution processes. The supply chain of IKEA, therefore, has to be as less costly as possible in order to provide the goods at lowest prices.
At IKEA, customers choose the goods that they want to buy and then picked them up themselves at the warehouse. The most goods at IKEA are packaged in a way that that allows the customers to transport them without serious efforts (i.e. in the car or a van). Then in most cases, customers assemble the furniture themselves without the additional staff from IKEA or external contractors. Basically, it means the customer himself becomes a part of the supply chain. In other words, the customer fulfills the tasks that would usually be executed by the supply side.
Considering the way IKEA sells its goods, the supply chain can be defined as highly efficient. Almost the whole supply chain of IKEA is based on the push processes, which allows optimizing it for a high efficiency. In the furniture industry, pull processes have a significantly higher share in the supply chain than at IKEA. For example, in the case of cabinet purchase, the customer usually orders it at the store and then gets it shipped at home. In many cases, a certain degree of customization of the product is possible, i.e. color, design, material, etc. In the cases where this is possible, the supply chains are IKEA - Supply Chain and Sourcing Approach 2 more responsive, and the processes are rather pull-based. In contrast, IKEA has no responsiveness in its supply chain because customers buy already packaged products and collect them at the IKEA store.
However, the flexibility that is offered by the stores with more responsive supply chains can be partially fulfilled by the product properties. There is a certain amount of products that can be customized directly at the store. For example, a bookcase or a cabinet can be customized by the customer using special computers provided in the store. In this case, the computer program supplies the customer with the whole list of the components that are needed and with a complete instruction of the bookcase. This is a very good example of how the lack of responsiveness in the supply chain may be compensated by the characteristics of the product.
Task 1c - Reasons for the Current Position and Recommendations
IKEA drives a cost leadership strategy and it is the most important reason for the current position in the efficiency/responsiveness spectrum. IKEA has to ensure the lowest price for the customers, and additional responsiveness in the supply chain is too costly. About 600 Million customers visit IKEA worldwide stores every year (IKEA, 2010). To improve responsiveness of the supply chain would mean to increase inventory, shorten lead times, adjust the sourcing strategy and buy from more expensive sources. Responsive supply chains are generally more capital intensive and have more expenditure than the efficient supply chains. Therefore, from the supplier side, it is unreasonable to invest in the additional responsiveness of the supply chain.
From the customer side, there is also no big need in a more responsive supply chain of IKEA, since its target group seeks for the lowest price. Moreover, these customers look for a fast purchasing process, and they are willing to transport and assemble the bought items themselves. Therefore, the efficient and a rather unresponsive supply chain is a proper solution for IKEA.
Considering the development of IKEA during the next years, there is no need to make the supply chain more responsive.
Task 2a - Uncertainty, Complexity, and Transparency
IKEA as a global furniture producer faces challenges in every of the three dimension of uncertainty, transparency, and complexity triangle. Some of the challenges IKEA manages to overcome, but some of them are still problematic.
Uncertainty. Operating a global network of about 280 stores, IKEA has always been facing demand fluctuations and uncertainties. Since IKEA has a highly cost efficient supply chain and drives a global sourcing strategy, it has to cope with long supply lead times that may last several months. Higher lead times may cause problems when matching supply with demand. Longer lead times mean that the inaccurate demand planning could lead to a stronger negative impact on the sales because of stock-outs or on the inventory costs because of the overstock.
Uncertainty is a challenge not only for the demand planning; it may have strong negative impact in the supply management as well. Due to the lack of transparency and control, there is a certain amount of risk that the orders and shipments are not fulfilled on time, which may lead to stock-outs and impact the sales. For example, it could happen due to the low development of infrastructure or political instability in the region.
Complexity. 1,074 suppliers and 42 distribution centres worldwide imply a high degree of complexity of the supply chain. Particularly, it is challenging to control the distribution of the goods. In order to plan the distribution of the products properly, it is important to have recent information regarding the delivery status and location of the goods. Otherwise, the planning of the distribution along the supply chain may be inaccurate, what can lead to the undesired stock levels or to the overloads of the logistics centers.
Transparency. Transparency in the supply chain has also been a serious challenge for IKEA. The company has 1,074 first tier suppliers in 55 countries (IKEA, 2010). Logically, there are in reality even more second tier and third tier suppliers. The lack of transparency in the supply chain may lead cause uncertainty about the way the goods were produced. In this case IKEA has been facing several environmental and social issues. For example, in the 1980s and 1990s, in the IKEA’s furniture, especially in Billy (the most successful bookcase model), a too high amount of formaldehydes was found.