What are IKEA’s best-kept secrets behind its smooth back-end operations and efficient supply chain processes?
The world’s largest home furnishing retailer has 298 stores in 37 countries. It ranks Number 41 on Forbes’ esteemed World’s Most Valuable Brands list, and took in 35.5 billion in sales in 2013. IKEA has certainly come a long way in its 60 years of business since its 1943 founding in Sweden.
This organisation impresses not just its consumers with affordable, high quality furniture, but also competitors and companies around the world – especially with its unique supply chain and inventory management techniques.
Each IKEA store is huge and holds more than 9,500 products! How in the world does IKEA offer so much at such a low price while always being able to keep items in stock?
IKEA’s Vision
To start off, IKEA has a clear vision – to provide well designed, functional home furnishings at prices so low that as many people as possible will be able to afford them. Its various functions (supply chain operations and inventory management included) work together to support its distinctive value proposition.
IKEA is distinctive by committing to a catalog of products that will be stocked for a year at a guaranteed price.
Cost Savings In Furniture Design
IKEA designs unique products that incur low manufacturing costs while meeting strict requirements for function, efficient distribution, quality, and impact on the environment.
According to a case study produced by The Times of London, more than 50% of the products are made from sustainable or recycled products. IKEA seeks to use as few materials as possible to make the furniture, without compromising on quality or durability. By using fewer materials, the company cuts down on transportation costs because it uses less fuel and manpower to receive materials and ship products.
Sustainable Relationships With Suppliers
A key part of IKEA’s success is credited to its communications and relationship management with materials suppliers and manufacturers to get good prices on what it procures.
IKEA is a very high volume retailer – it buys products from more than 1,800 suppliers in 50 countries, and uses 42 trading service offices around the world to manage supplier relationships. They negotiate prices with suppliers, check the quality of materials, and keep an eye on social and working conditions.
Although Ikea fosters competition among suppliers to ensure they attain the best prices and materials, it believes in making long-term business relationships with them by signing long-term contracts, thus lowering prices of products further.
For example, IKEA has a code of conduct called the IKEA Way of Purchasing Home Furnishing Products (IWAY), containing minimum rules and guidelines that help manufacturers reduce the impact of their activities on the environment. The requirements within IWAY raise standards by developing sustainable business activities and leaving positive impacts on the business environment in which the suppliers operate.
This also underlines IKEA’s commitment to the ‘low price but not at any price’ vision. Although IKEA wants its customers to enjoy low prices, this should not happen at the expense of its business principles.
Do-It-Yourself Assembly Lowers Packaging Costs
Most IKEA furniture is designed and sold in pieces for the customer to assemble. The pieces are placed into convenient and efficient, flat packages for low-cost transport because they take up less room in trucks, maximizing the number of products that can be shipped.
The unique packaging also take up less space in warehouse bins and reserve racks, allowing for more room to stock additional items for order fulfillment. What the company saves in fuel and stocking costs is passed on to customers.
Combining Retail And Warehouse Processes
Every IKEA store has a warehouse on the premises. On the main showroom floor, customers can browse for items. They then obtain the products themselves from the floor pallet location with racking as high as the typical person could reach, where furniture can be purchased and taken home. Additional products are stored in reserve racks above these locations.
Inventory is let down to the lower slots at night (forklifts and pallet jacks are not used during store hours for safety reasons). About one third of the lower level is comprised of a warehouse off limits to customers. This space contains items too bulky for customers to load without help from the staff. Since IKEA wants as much self-service as possible, it works to minimize the number of items in this bulk storage area.
Cost-Per-Touch Inventory Tactic
Having customers select the furniture and retrieve the packages themselves is an inventory management tactic called ‘cost-per-touch’. As a rule of thumb, companies find that the more hands touch the product, the more costs are associated with it.
For example, imagine when someone selects a piece of furniture to buy. The item is then ordered, sh