IKEA'S Supply Chain Strategies and Practices

IKEA'S Supply Chain Strategies and Practices To create a better everyday tife for the many people' Page I Executive Summary IKEA was established in 1943 in Sweden (Moon, 2004) and the company is working in designing and se[[ing of furniture ready to be assembled (Abouhenidi, 2014). Following to its success in [oca[ market, the company expanded its business to internationa[ market. Nowadays, IKEA is a world leader in furniture retait business (Jonsson, 2008) The organisation has gtobat business operations in 48 countries incorporating 389 IKEA stores. IKEA's production range include 9500 different products and the company was able to sett its products worldwide and achieved a totat sates of EUR 34.2 Bittion in 2016 (1KEA,2016). The company adopted muttiple Suppty Chain Management "SCM' strategies that enabled to offer !KEA's customers with stytish and high-quatity products at [ow-prices, in [ine with its ctear vision " to create a better everyday [ife for the many people' (lKEA, 2016) and the company is distinctive via strict commitment to its catalog of products that witt be stocked for one year at a guaranteed price (Ctara, 2014). IKEA realized the fact that to become competitive and stand in a strategic position in the market both loca[[y and globatly, it is Page 2 essentiaI to improve the SCM to be more efficient and effective than the market rivats and in the meantime, achieve competitiveness and maximize profits (Chitdhouse & Towitt, 2003; Moberg et at., 2002). This report demonstrates IKEA's suppty chain management, its components and the key relationships across the entire suppty chain. The report witt analyze the current suppty chain strategies and practices adopted by IKEA and contributed to its success to achieve competitive advantages over the market rivals. ln the meantime, the report explains alternative strategies and practices that can be implemented within IKEA's suppty chain that enabte its growth and efficiency and recommend a set of strategies to etevate Performance. Page 3 Tabte of Contents IKEA's Gtobat Suppty Chain Management......... .......d 1.1 1.2 1.3 2 The Key Relationships of IKEA's Suppty Chain .....13 2.1 IKEA's Sustainabte Relationships With Customers...........14 2.2 IKEA's Sustainable Relationships With Supp[iers.............. 2.3 IKEA's Sustainable Partnerships 3 IKEA's Current Suppty Chain Management Strategies and Practices.............. 3.1 3.2 3.3 3.4 3.5 3.6 17 .............18 .....20 Atigning Suppty Chain with IKEA Structure Strategy ......20 Strategy Sourcing Strategy Lean Suppty Chain Strategy lnventory Management Strategy Logistics Strategy IKEA's Low Price ..........2'l .........22 ......25 .............26 .........28 Page 4 Alternative Strategies to lmprove IKEA's Suppty Chain...................30 4.3 Management.......... Outsourcing "Buy-or-Make" Retationship and lntegration.. 4.4 Time-Based Strategy in Distribution Logistics..................35 4.5 Push-Based 4.1 4.2 Agite Suppty Chain Strategy ...30 .....32 ...34 .................38 5 lmplementing Relevant Set of Suppty Chain Strategies to Elevate Performance ...........40 Page 5 IKEA's Gtobat Supply Chain Management Cox (1999) and Hartand (1996) viewed the Suppty Chain Management (SCM) as a process to manage the interconnected business network for supply of goods and services to the end-customers, and that severaI organisations realized the importance of the SCM as a key for buitding sustainabte competitive edge for products and services in the gtobal business (Jones, 1998). Abouhenidi (2014) deemed IKEA's SCM as a process to run the entire organisation function in a chain and the ftow of the goods is retiant on the SC that uses the raw materiats, processes them and produce the goods for detivery since the company is not only engages in distribution of a wide range of unique furniture products, but also IKEA offers many other househotd products that meet the customers needs. According to Clara (2014), effective SCM is significant important for IKEA to improve the organisationaI performance and remain competitive among the market rivats (oayyum et E[., 2013; Chitdhouse & Towitt, 2003), as IKEA's suppty chain is performing efficientty and the company is abte to design differentiated products at low manufacturing costs, white strictly obtiged with function, high quality, efficient distribution and positive environmentaI impacts. Researchers and practitioners argued that the practices of SCM have direct implications on the Page 6 organization's overall performance and the effective SCM practices lead to enhancement of market share and increase the R0l (Shin et at., 2000; Prasad & Tata, 2000). ln addition, the efficient SCM practices etevate the organisation's competitive position in the market (Carr & Person, 1999; Stanety & Wisner, 2001) i.e. the partnership with the strategic suppliers proved to be a key for maximizing benefits and performance improvement Cl'an et E[., 1998; Stuart, 1997; Carr & Person, 1999). Today, IKEA is the [argest gtobat furniture retailer, it has its own SCM strategies aliened with its capabitities that contribute to offering people a better-tiving and devetopment of a more sustainabte world, via efficient utilization of resources utitizing resource more efficiently and promoting more environmenta[friendty product design. The organisation's suppty chain functions are operated attogether and support IKEA's unique vatue proposition (Ctara, 2014). and the figure-l shows the components of IKEA's SC that can be divided into three different sectors, that involves Primary Sector for acquiring the needed raw materiats, Secondary Sector for manufacturing and Tertiary Sector for the rest of SC tike distribution and retaiter. IKEA aims to have a sustainabte SCM through organizing operations within each of the three SC sectors to pose positive imptications on the environment (Yu, 2014). Page 7 0uhril: Corrumerhry's pmduct I i,6e<cnOanT C,usionl Figure l.l 1 - IKEA's Suppty Chain, (Adapted from Yu,2014) The Primary Sector The primary sector is mainly responsible for producing and detivering the raw materia[ need to devetop the products and since IKEA is not a primary sector company, it maintains a close-relationships with the primary sector supptiers to ensure the suppty of the raw materiats and ensure sustainabitity (Ctara, 2014).lKEA procures materials from over 1300 vendors and suppliers in 50 countries through using number of trading offices that spread worldwide. IKEA's suppty chain ptays a vital role in negotiating the materiats'prices, appties poticies, processes and procedures to check the quatity of the supptied materiats and in the meantime, anatyses the imptications on the Page 8 environment, while keeping an eye on the social working-conditions at the suppliers'facitities. IKEA is using the "e-Wheet" to assess the imptication of its products on the environment, where the e-WheeI is a tool with specific checkpoints for the raw materiats, manufacturing, distribution, use and product end of tife as shown on figure-2. In addition, IKEA is working on suppliers'devetopment to enhance their capabitities and improve their understanding of the impacts of supplied materials on the environment (Velez, 2011). "q dr'* do c tfl Figure 2 IKEA is - IKEA's Wheel I f d e-WheeI Too[ (Velez, 2011) communicated successfutty with materiats' suppliers and manufacturers and focuses on lean suppty to etiminate waste "non- - t;;., Added Vatue" and enabte professional suppty through shortening the distance between its customers and suppliers via acting as "0neIKEA-Purchasing" in line with IKEA's core processes and functions and stresses on people invotvement and buitding [ong-term retationships with the strategic supptiers (lnter IKEA System, 2015). Additiona[[y, IKEA appties the "IWAY" code of conduct, which complies with the InternationaI Legistation, and helps IKEA's suppliers to the implications of their business activities on the environment and in the meantime, enables to buitd [ong-term minimize relationships with supptiers and grow the shared values. (lKEA, 2016). 1.2 The Secondary Sector The secondary sector uses the supptied raw materials for manufacturing of IKEA products and as the materials and products are moving within IKEA's suppty chain, the added-values take ptace. The company designs a wide range of products based on the market demands and that the organisation commences vatue creation through utitizing resources and the supplied materials. During to improve the productivity with high environmentaI standards and low [eveI of energy manufacturing, the organisation strive consumption and keep performing IWAY audit to ensure supptiers' Page l0 commitment to its code of conduct, which contribute to buitding sustainabte business that have positive implications on both peopte and environment (Yu, 2014'). IKEA paid attention to efficient use of resources in order to maximize the benefits and prepare a welldesigned and high quality product at low prices to meet the customers' needs. ln the meantime, IKEA is obliged with maintaining its partnership with WWF and UNICEF to support promoting of sustainable use of the natural sustainable environment through resources and various green practice around the wortd such as devetopment of forestry ptans in China (lKEA, 2015). 1.3 The Tertiary Sector Businesses in the tertiary sector or service sector provides services to customers that includes banking, transportation or retailing. ln this sector, IKEA provides different services to futfitt the customers needs such as the detivery services of IKEA products to save time for the customers and providing vans for lease that can be used by customers who use public transportation to reach IKEA stores (Lu, 2014).lKEA paid attention to services as a way to enhance customers' satisfaction and get better understanding of people's [ife-styles and home aspiration, the company conducted home visits, surveys, and Page I I focus groups, besides an annual market capital tracking study about f KEA's products, the se[[ing prices and the service leve[ (Klein, 2011). Within the tertiary sector, the company plays an important rote in innovation of retailing and logistics such as design and compact packing to enabte delivery of more products with every carrying-toad, minimizing the emissions and shipping costs, using different transport methods like sea-freight and raitway and recycle materiats from its waste products (Lu, 2014). Page 12 2 The Key Relationships of IKEA's Supply Chain According to Lu (2014), SC relationship is retated to the inter-firm retations across the entire SC and that the key re[ations within the suppty chain is mainty focusing on the 0EM and its first-tier customers and first-tier suppliers as shown on figure-3. Therefore the SC retationships can be deemed as "Arm's Length" if the parties exchanged business volume and prices, and on the other side, the SC retationships can be regarded as "close-partnerships" if the SC parties exchanged their vision, objectives, planning, processes and financiat information. Retailen Consumer Supplier Figure 3 - Suppty Chain Modet (Lu, 2011) Page 13 2.1 IKEA's Sustainable Relationships With Customers As suggested by Tan et a[., (1998), sustainable relationships with customers has shown to etevate the organisation's performance and according to Lu (2014), the fundamentaI reason of SC's existence is serving the end-customer, which ultimately define the organisation's competitive advantages between the market-rivals. The close- relationships of SC are influenced by the leveI of sharing success, long-term expectation, muttipte point of contact, joint coordination of activities, information transparency trust and joint problem-sotving (Stack et. a1. 2010). IKEA adopted a strategy to expand its customer network gtobatty and extracting customers' insight via ongoingcommunication, observations and market research which was found beneficia[ for !KEA's product design and a source provides valuable knowtedge about the production volume and the needed materials. This enabtes IKEA to coordinate better with its supptiers by providing them information and ultimately decreases procurement cost associated with purchasing and transportation of raw materials. Reinartz (2010) suggested that the [ong-term customer loyalty cannot be buitt with customer bonus or rewards but it shoutd be viewed as f unction to a provide the customer with true value and often incorporates etements such as [eve[ of customer involvement in product category and visibitity or product's value expressive nature. Page 14 ln the meantime, IKEA is not just se[[ing its products to end-customer but atso it targets business customers "Retai[-To-Business" and develop strong customers' retations. With adoption of Retai[-To- Business approach, IKEA [aunched a business ctub in a number of countries tike Japan and Germany and provided the ctub members with a number of benef its such as payment scheme, ontine communication and bonus points (Ritey 2013) and according to lnterbrand statistics (2014), IKEA was ranked as the second most vatuable retait-brand in Europe as shown on figure-4. 20 !8 15 t4 6 o ll t, 4ro E E E8 h 6 il=,; i 2 0 "s Figure 4 t' +'rd .", *F C d - fl o.C."C 3 - r'67 1s4 r'42 1.2a 1,27 1.P d uo/ d *n rrs d{"n.r, Retait-Brand with the highest brand-vatue in Europe (lnterbrand, 2015) Page 15 IKEA developed sustainabte relationships with its customers and made them aware of the organizations'commitments to sustainabitity through its involvement with many other companies [ike WWF and UNICEF and that IKEA is regarded a responsible organisation trusted by both suppliers and customers alike. As a way to maintain steady retationships with the customers, the organisation offered its customers with extra services that are not offered by other market- rivats and they IKEA has about 9.500 different products that are manufactured and transported to its 280 IKEA stores wortdwide (lKEA, 2016).lKEA in-store promotes greater consumers' interest and facilitates their purchasing behaviors, even the product disptay is sold in room-[ike settings that enables customer to imagine how to put and arrange the pieces altogether (Mittat, 2013). The customers visit the stores for inspiration and to get valuable advices from !KEA's coworkers on shopping experience, or they may spend time with their famities and eat in the restaurant and exptore new products (lKEA, 2016). Additiona[[y, implementation of IKEA's "ShareSpace" website ensured online presence for its existing customers and buitding sustainable customer relationships (Benner, 2011). Page 16 2.2 IKEA's Sustainable Relationships With Suppliers IKEA has gtobat business operations and that in each country, in which IKEA is operating, the organisation has a trading company working to match the suppliers' capabitities and capacity to IKEA of Sweden's needs and terms, and in the meantime, the trading company communicates the requirements of IKEA to the suppliers and working towards buitding [ong-term relationships (Ctaesson & Wennersten, 2007). As a way to support its gtobat business operations, IKEA undertook a leadership rote in creation of sustainable supptiers' relations, where the organisation educated vendors and suppliers to understand how, why and the importance of to differentiate itsetf the key part of IKEA's sustainable production, which enabled IKEA from the market competitors. ln addition, success is related to the effective communications and relationships with the supptiers and manufacturers that enabled IKEA to obtain high quatity materiats at good prices on what it purchases. ln the meantime, since IKEA is a very high volume gtobat business retailer, the organisation procures products from more than 1,800 sources in 50 countries and uses 42 commerciaI service offices worldwide to enable managing the suppliers' relationships. Additiona[ty, IKEA fosters competition among its suppliers in order to attain high-quatity materiats with good prices and the organisation stresses on buitding Page 17 log-term relations with the supptiers via conctusion of [ong-term agreements and thus obtain further reduction on the product prices. IKEA implemented its code of conduct catled IKEA Way of Purchasing Home Furnishing Products 'IWAY" which invotves the standards, rules and guidelines to enable suppliers and manufacturers to avoid the negative imptications of their activities on environment within which they operate. IKEA has strong procurement power as a result of its partnership retationships with the manufacturers and suppliers, which constitutes barriers for its market competitors (lKEA, 2016). However, the IWAY code of conduct underlines IKEA'S commitment to maintain the low-prices, however white IKEA attempts to enable its customers to enjoy [ow-prices, it should not occur at the expenses of IKEA's business principtes (Clara,2014). IKEA buitt a great suppliers' retationships, where their greatest strengths are ties in the effective communications and the retations fostered over the time working with supptiers, which enabted IKEA to obtain high quatity materials at best prices (Rushto et at., 2010). 2.3 IKEA's Sustainable Partnerships IKEA worked on the direction to build sustainable partnerships as it formed a partnership with UNICEF to work on a community program Page 18 in North lndia to prevent child-[abor via addressing the root-causes and raising awareness. !n addition, IKEA formed a partnership with the Wortd Witdtife Fund "WWF'for promoting the sustainabte use of the naturaI resources. The organisation worked with other companies to support the sustainable partnerships such as WWF, which led to several training programs in China, Russia, Romania and Butgaria on Responsible Forest Management. Besides, IKEA worked with the Forest Stewardship Council UFSC" to achieve its targets and transform the industry (lKEA, 2015). IKEA worked on buitding collaborations and partnerships with other companies, suppliers, NG0s and UN organisations to work towards becoming peopte and planet positive and contributing to change in society in order to influence the poticy devetopment and key stakeholders that support the positive change in the society, contribute to the economic, environmenta[ and socia[ development and strive on buitding [ong- term partnerships with the locaI communities where the business operates (lKEA, 2014). Page 19 3 IKEA's Current Global Supply Chain Management Strategies and Practices IKEA succeeded to achieve competitive advantages over the market rivals thanks to the adoption of retevant supply chain strategies and the company is reliant much on these advantages to support its gtobat expansion and devetopment of domestic market. 3.1 Aligning Supply Chain with IKEA Structure Strategy According to Antley (2013), it is significant important to tink the suppty chain with the company structure otherwise, the entire organisationaI system witt be disturbed. !n the meantime, the organisation's strategies are its assets that can be utilized to produce maximum outcomes such as IKEA the targest suppty management worldwide (IKEA, 2016). IKEA owned chain a ftat-structure within which the company gave preference to its employees and there are senior managers for att organisation f unctions in att [ocations that support the in-flow and out-ftow of the materiats and thus enable running the suppty chain smoothly. IKEA atigned the suppty chain with its structure in order to achieve sustainable competitive advantage (Antley, 2013). Page 20 3.2 IKEA's Low Price Strategy The [ow-price strategy is an important cornerstone of IKEA concept as it is coupted with IKEA's wide product range with innovative designs and functionalities and that when the furniture retail sector is depressed, IKEA wi[[ gain potentiaI opportunities in the market. IKEA succeeded to provide its customers with high-vatue products with respect to creative designs, functionatity, high-quatity and low prices that enhanced its capabitities to stake-out a unique strategic position since IKEA is performing suppty chain practices different from its competitors (Mittat, 2013). IKEA focuses on generating design creativity by internat competition among a huge network of freelancer and staff designers. Freetance designing provides a great degree of ftexibitity and a valuable source of creativity. The network of freetance designers and the team work of people from a wide range of professionaI and personaI backgrounds provides some of the most significant design creativity which IKEA demonstrates in its furniture. IKEA's designers provide innovative designs and multipte functionalities to the user. They also focus on using materiaI as efficiently as possibte without comprising on sturdiness and quatity of the product. IKEA is targeting customers who have preference for value at low-price and witting to carry out a pit of work and the company has the capabitities to suppty high-quatity products at [ow- Page 2l prices by making trade-offs such as using setf-services models at its stores' disptays instead of retiance on sates work-force and it designs low-cost modular's that can be easity assembled instead of reliance on third-party manufactures, besides IKEA provide ftatpacked products that enable to lower the costs associated with shipping, storing and assembting (Mittat, 2013). 3.3 Sourcing Strategy Trent and Monczka (2005) studied the processes [eading to sourcing and proposed a model of S-stages classified into two groups that incorporates gtobat sourcing strategy integrated with gtobal locations and globaI sourcing strategies integrated with gtobat [ocations and functionaI groups, Internatioral Purrhasittg Ler,el I Dorrrestic Rrclrasing Only Level 2 Iuteoratioml Purchasitg Ouly asNeeded Level3 Global Soulcing Level 4 Lerrel 5 International Global Sourcing Global Sourcing Purchasing as Part ofSourcing Strategy Strategies Shategies Integrated Acmss Integgated Across Worldrvide Locatioos Woddrvide Locations aud Functional Groups Figure 5 - The Five-Stages Sourcing Modet (Trent & Monczka, 2005) Page 22 According to this model, the company needs extensive coordination of the requirements and implement strategies among its gtobat business units (Irent & Monczka, 2005). Bozarth (2013) suggested that the supptiers are deemed the backbone of the organisation's business operations and any company must coordinate outside prior to starting any business and also coordinate inside the company's functions such as human capital, logistics, marketing, procurement, [ogistics and production in order to buitd a chain within a[[ functions and link these functions with each other. IKEA is facing issues to meet demand on the international [eve[ and that IKEA is reliant much on the relevant policies to that enabte meeting the demand on both domestic and internationa[. Additiona[ty, IKEA faced some issues retated to supplier setection, because the supptiers did not supply IKEA with the goods efficientty and there is [ack of co[[aboration and which are needed among alt the partners to enabte deating easily with att functions and improve IKEA's productivity coordination, (Abouhenidi, 2014). Therefore, the company implemented the "IWAY" and conducts IWAY audit to monitor suppliers' performance and carried out site-visits to its supptiers and manufacturers to ensure their adherence to IWAY standards and suppty the materiats and provide services at an internationa[ [evet, which enabled to develop Page 23 sustainabte business activities. A key component of IKEA's low-cost strategy is to own sma[[ proportion of production means and IKEA's products are sold through its stores and outlets and a [ack of few products are sourced from its suppliers' network gtobatty. In the meantime, The company improved the experience of the people and with support of IKEA's supply chain management, the company resolved the issues via co[[aboration with the supptiers and coordination among atl partners and become able to deat easity with att functions and improve productivity (Jonsson,2012). The company embraced sustainabitity within its SC strategies since many of its products are recycled and the packaging manufactured f rom polystyrene with recyctabte using sustainable f iber-based materiat. IKEA embraced sustainabitity in its strategy, where most of its products are recycted, even the packaging is made of potystyrene with recyctable and more sustainable fiber-based materiats (lKEA, 2016) and invested in green-energy (Marketing Teacher, 2015) aiming to achieve sourcing wood, paper and cardboard materials f rom sustainable sources (lKEA, 2016). Page 24 3.4 Lean Suppty Chain Strategy Lean SC achieves suppty of high quatity products with optimal synchronization to customers' demand white etiminating the waste (Stack et. a[. 2010) and according to West (2008), the tean concept is to etiminate the whole waste and develop effective operation (West, 2008) and there are 7-types of waste within the operation as shown in figure-2 (Pinterest, 2011). Motion Waiting .n f O til I .-L. lF) Overproduction \ al Defects Transportation In 'ar-,ot OverProcessing + Figure 6 - The 7-Wastes of Lean SCM (Pinterest,2017) to support its gtobat business operations (Dahtvig, 2012) and lean manufacturing enabled IKEA to achieve positive outcomes such as sharing information via effective !KEA adopted lean SCM communication, reduce operation accidents, enhance quality, Page 25 continuous improvement, reduce operation down-time enhancement and of employees' morale and customers' satisfaction (Hobbs, 2011).IKEA designed its suppty chain network to enhance the overall efficiency for example, IKEA is [ocating the suppty of products ctose to its production and the production ctose to sales and strategicatty plans the [ocations its distribution units which enabtes to save the transportation costs (lkea.com). 3.5 lnventory Management Strategy IKEA has a wide customers' network who are impressed with the company's offerings not just the high-quatity products at low price, but also with IKEA's unique inventory management and that its suppty chain cannot be affordable by market rivals. Each IKEA store has a range of 9500 products and the company is always being able to keep the products avaitabte on stock and commit to the price for a year (Clara, 2014). Further, IKEA combined retai[ and the warehouse processes as in every IKEA store, there is a warehouse on its premises and on the main showroom, the ctients can browse the available products and obtain the needed items from the floor-patlet [ocation with racking and that the products can be procured and taken home. Page 26 The company imptemented cost-per-touch inventory technique to enable customers to select the products and retrieve the packages by themsetves with low-cost associated since IKEA saves costs due to less hand touches the products. !n the meantime, the company much on in-store logistics management for re-ordering items via emptoyment of personneI to handle the inventory records at stores and monitor the deliverables "Minimum-Maximum Settings", which contribute to eff icient low within stores, meeting customers' f demands, saving costs, enhancing customer satisfaction and loyatty white achieving high sales (Clara, 2014). This strategy also ensures that IKEA has ready inventory to meet customers' demands, lowering the cost of lost sales. Additiona[[y, the company's store operations is reinforced by high-ftow facilities and low-flow warehouses, where in the high-ftow warehouses 'the company is reliant on automatic storage and retrievaI systems to drive-down the cost per touch and the items are stocked in a [ow- flow facilities that are not in high demand and operations depend on manual processes as staff wi[[ not be shifting and moving inventory around too much. These techniques enabtes IKEA to be a successfuI gtobat furniture retailer with low-cost for operations and high demand for products Page 27 and thus stay in a very competitive position from its peers within the industry (Clara, 2014). 3.6 Logistics Strategy IKEA succeeded to devetop a globat distribution network to ensure the detivery of its products to the stores a[[ over the world on timety manner, The company has suppliers located in 50 different low-cost nations close to the raw-materials and distribution channets enabling to obtain industria[-knowtedge, eff icient information f low and operations. IKEA's supplies provide standardized products needed for the internationaI market and that the organisation is able to respond to the gtobaI emerging customers' preferences (Mitta[, 2013). IKEA uses multiple transportation means that promotes profitabitity since the products are offered to IKEA's customers at low-prices. Nowadays, the company has 9500 products manufactured by 1074 different suppliers and transported to its stores that spread around the wortd and the objective of IKEA's Logistics strategy is to shorten the route of the products between the manufacturer and the stores. IKEA owned 389 retait-stores in 48 countries and the company had 22 Pick-up and Order Points in 11 countries, besides 41 Shopping Page 28 Centers in 15 countries and 38 Distribution [ocations in 18 countries, which contributed to achievement of EUR0 34.2 Bittion totaI sates by end of 2015 (lKEA, 2016). The company continues building modern and convenient logistics and having more distribution centers to cope with its gtobaI expansion, enabtes better distribution of products at low cost and doubte its sates. IKEA's implemented [ogistics strategy enabled to set-up the products avaitable for customers whenever needed and at the convenient time since the company depends in its logistics on gtobal distribution network, large volume, flat-packages and cost savings (Jonsson et a[. 2009). Page 29 4 Alternative Strategies to lmprove IKEA's Globat Suppty Chain 4.1 Agile Suppty Chain Management According to Stack et. at. (2010), the SCM is facing a criticaI issue as there is a sma[[ disturbance at the SC downstream due to understandabte demand by different links within the SCM to manage the production and inventory [evels, which leads to large disturbance and votatitity when it works its way upstream and such effect is catted "butlwhip effect" and the concept of Agite SCM indicates how the SCM can cope with these disruptions such as defects, quatity issues, lack of information and [ate delivery. "Lean" works best in high volume, low variety and predictable environments. Hi o l.- (o "Agility'is needed in less predictable environments where the demand for variety is high. Lo Lo Hi Volurne Figure 7 - Volume and Variety 0bservation (Lu, 2014) Page 30 Agite SCM is flexibte to cope with changes either the nature of customers' demands or the SC operations capabitities within the chain. 0n the other hand, lean was implemented from a forecastingbased mass production, while the market differentiator is retiabitity and cost, however the international market is variety dominated and the differentiator is the speed and response, therefore [ean cannot be deemed as a cure-a[[ approach (Lu, 2014). ln the renewed competitive arena, "the [onger the suppty chain, the more complexity and increased risk of "bullwhip effect", IKEA needs to be more agite to be abte to respond quickty and efficientty to increasingly customers' demands that are [ess predictabte and the demand for variety is high. Agite SCM implies a virtuaI integration via shared-goats across the SC and f texible dynamic relationships between the divisional units and different sectors of the SC and such virtuaI integration supports the overatt SC. Further, it needs a high teveI of internaI integration among the operationaI processes and thus any change in market trends witt trigger a chain response through other operations within the SC. ln terms of performance measures and operational improvement, agite SC is setting-up a high level of market sensitivity to sense the sudden changes in market behaviors and thus capturing the emerging trends and listen to Page 3 I customers. Finatly, the involved members of agite SC witt be best other and a dynamic network-based is preferred as it enables to leverage the partners' capabitities and connected with each focus on core competences (Harrison et at., 2001). Agile Sr]DI irnplies a r.irtual integration r.ia shmd-goals across tlu Sll ard flexible dyranir r elationsldps between tIE divisiorEl mits md diffelelt sertors of the SC. The vttul a hfuh lavel of lntsmal lntegradon among tlle operadonal procsssss and thus any change ln market tren.ls will trigger a chain resporce through otheropentioro ilitldnthe Chain. Agile SCM will provide ViftUal I / integmtion supports the overall SC / I -^ .. * -. .. I --&@ Agile SCM embles setting-up a high level of lmket b sffie tlp sudden chmges in mket behrion md thu captuing the ernetging E€nds ild listen to semitiYity cutomE Network Based Pro€6i l&nmcm The hrwlved members of agile SC will be best corurected witlr each otlet ud a dFmic neh{olk-based is prefenEd il it ---enablps to levqage tlE piltreN'capahilities ard focus on core cornpetences Figure 8 - Agite Suppty Chain Framework (adapted from Harrison et a[., 2001) 4.2 0utsourcing "Buy-or-Make" Outsourcing can viewed as "buy-or-make" strategic decision as the of its in-house operations such as marketing, production components and manufacturing to external company may contract some manufacturers or suppliers and such strategy wit[ enable to achieve higher quatity and cost saving (Lu, 2014). According to Slack et a[. Page32 (2010), there is no single business can make everything needed to produce its products and outsourcing some of the SC activities witt create the most value for the customers. 0utsourcing witt enable achieving potential advantages such as differentiated competitiveedge, synchronization of SC capacity, further development of the organisation's core competences, reduce verticaI integration and thus increased SC ftexibitity and agile, improved SC responsiveness, a[teviate "bu[[whip Effect", cost minimization and consequentty enhancement of the R0l and R0E (1u,2014). IKEA is foltowing Porter's competitive advantage strategy to achieve cost advantage through focusing on quality improvement and functional products at low-prices and that outsourcing of SC activities to foreign partners wi[[ enable minimizing the operations' costs and boosting the profit margins. However this strategy might be threaten by two factors, the first is economic where the suppliers under the regutations are influenced to provide better working-environment for their workers and that it witt become hard for IKEA to get best prices from its suppliers, the second factory is IKEA's focus on its implemented business model to pass-on the cost saving to IKEA's customers as most of IKEA's products are made of plywood and particte-boards with veneer finishing, which enabtes IKEA to provide quality products at low-prices, however the veneers are tend to peel-off which Page 33 require to seek more atternatives and IKEA's dominance in the market may be threatened (Pang, 2014). 4.3 Relationship and lntegration SCM retationships can be viewed as a strategic dimension through which diverse relations postures can be identified such as shortterm contract relations and [ong-term partnerships and it may take different values. However, the traditionaI supplier-purchaser relationship is timited to the Singte-Point-of -Contact and that relationships tend to be adversariat, on the other hand, the close partnership can be measured based on the contents of the exchange and it includes many aspects of SCM such as reduce supply base, form tiered SC network structure, buitd trust and good-witt intention through using long-term contracts, taking advantages of volume consotidations and moving towards quatity-driven procurement instead of price-based procurement. !n the meantime, formation of strategic a[[iances witt result in sharing market's risks, joint cotlaboration, sharing resources, achieve economy of scale, cost saving, customers' value-adding and reducing the impact on the environment (Lu, 2014). The SC close retationship is an indispensibte part of SC integration and such SC integration is an indispensibte part Page 34 of business success since the [ega[ly participating organisations in SC integration witt coltaborate seamlessly together and act as one company to achieve the strategic objectives. The manufacturing was isolated activity in the past and was [ocated close the end of SC without involvement titt the product is designed and devetoped and the planning is completed but this modet witl not suffice today where the customers have demands and need responsiveness to their inquires, therefore it is essentiaI for manufacturing integration into the SC and the integration of the entire SC itsetf (Blanchard, 2007). ln the SC integration, the performance of the SC is atways the integrated performance of the SC members and thus the coordination and collaboration between SC members are needed to improve the performance as shown on figure (Croxton et a[. 2001). As IKEA has concern for people and environment, and atways encourages optimal use of raw materiats and energy, the company can rely heavily on close relationships and strategic a[[iances and working on the to buitd sustainable partnerships, which witt resutt in sharing market's risks, joint coltaboration, sharing resources, direction achieve economy of scate, cost saving and customers'value-adding. Buitding cotlaborations and partnerships with other companies, suppliers, NGOs and UN organisations to work towards becoming peopte and ptanet positive and contributing to change in society in Page 35 order to influence the poticy development and key stakehotders that support the positive change in the society, contribute to the economic, environmentaI and sociaI development and strive on buitding long-term partnerships with the local communities where the business operates (lKEA, 2014). The integration of IKEA's entire SCM wi[[ enable to stay on top of the demand and IKEA witt be better positioned to predict the customers' demands and the business wi[[ become more adequately responding consequentty, IKEA to demands changes and witt be able to maintain and increase sales revenues and profit margins (Khurana ,2016). 4.4 Time-Based Strategy in Distribution Logistics The [ogistics means integration of materials' management and distribution and it plays a significant role for the company in the internationaI environment (Rushton et at., 2010). According to Water (2004), the most important trend in togistics incorporates cotlaboration across the SC, shorten the materials lead-time and direct detivery and the customer satisfaction witt be determined by receiving the products on time. As IKEA has gtobat business operations, it needs to change the distribution system based on time and that adoption of time-based strategy in distribution [ogistics wi[[ Page 36 be hetpfuI for IKEA since it enables to lower the costs, enhance the customers'services, improve efficiency and create values (George & Thomas 1990). Rafele (2004) proposed that the effectiveness of the organisation can be impacted by the warehouse management through the receiving, transportation and service performance. Many organisations have locaI distribution center "traditionaI model" located geographicatty close to materiat and customers and they are not witting to change the traditionaI distribution structure in order to avoid any negative impact on cost saving, materiats supply and customer service (Parikh & Nietsen, 2009). However, the sourcing from different suppliers of [ow-cost countries is a criticaI factor that increases the SC complexity when the centratized distribution is concerned and in the meantime, the sourcing strategies can [ead the company to achieve SC competitive advantage (Kumar & Samad, 2008). Therefore the company must concentrate on new approaches to save time and cost and improve service performance. According to Hou and Liu (2011), IKEA's centralized distribution center should be located in core-region with convenient means of transportation so that the company can dispatch its products easity, faster and more ftexibility and thus increase the performance of delivery. Page 37 ln the meantime, IKEA's inventory can be managed and forecasted to avoid out-of-stock and that the Centralized distribution center can improve delivery performance. 4.5 Push-Based Strategy IKEA faced some issues within its suppty chain which negatively affected the relationships with its customers and partners as a result of high-leveI of demand uncertainty which require the company to manage its suppty chain on basis of realized demands. Adoption of push-based strategy witl ensure IKEA's customer loyalty and maintain steady relationships with IKEA's customers, as wett as coltaboration with its partners and the other suppty chain members within the company. The push-based strategy witl enabte IKEA to anatyze the customers' needs which contribute to planning to make the company's outlets and products'designs in a way meeting the customers' needs. IKEA is imptementing the supply chain strategy which is buitt to stock and the customer-segment is online and the products'designs are based on smat[ number of configurations designed for market with huge production size. Page 38 Additionatty, IKEA can cut the cost since the production is smooth and stock the products for the mass distribution on multinationa[ [eveI (Handfietd, 2013). The push-based strategy within IKEA's suppty chain witt be hetpfut for the company since the lead-time f rom manufacturing process to IKEA's locations to stock is high and the [ead-time to customers' locations is short ( Abouhenidi, 2014). Page 39 5 lmplementing Relevant Set of Supply Chain Strategies to Elevate Performance It is significant important for IKEA as a pioneer gtobaI retaiter to rety on retevant suppty chain strategies that enable its growth and eff iciency. However, when identifying the relevant supply chain strategies, it is essentiaI to start with defining the "way to play" in order to be able to create vatue for customers who procure the products and thus achieving growth and performance efficiency. Kauffetd et a[., (2011) suggested that the organisation's suppty chain capabitities must be atigned with the organisation's strategy "way to ptay" in order to achieve superior performance and steady market position., where there are six business modets' strategies "generic archetype" that incorporates Innovators, Premium Ptayer, Customizer, Differentiated Green, Aggregator and Value Ptayer. IKEA is deemed as a value player since it implements low-cost suppty chain'strategy in order to pass saving to its customers and IKEA cannot a[tow the low-cost to affect the product quatity and services. IKEA as a gtobaI retaiter can support its way to play "Value ptayer" via focusing on 3-5 of the SCM levers to maximize the outcomes shown in figure-9 (Kauffetd et at., 2011). Page 40 Go-to-market model Process effectiveness/execulion Product launch/ life-cycle management AGII,E SUPPLY TJ}L\IN Network policies PUSH-BASED Process technology STRATEGY choices Make-vs.-buy assessment Systemic planning/replenishment TI]\,IE-BAS ED STRA. TE C Y IN DISTRIBUTION --'4 Figure 9 - IKEA's flsquirsdhr$4, to phy Curenlcompany capabiBle = Best ln class. Capabitities and Archetype "Value Ptayer" (Kauffetd et a[., 2011) Agite SCM to enhance IKEA's responsiveness to customers'demands for products or new services via setting-up a high [eve[ of market sensitivity to detect sudden changes in market behaviors and thus capturing the emerging trends and listen to customers (Harrison et at., 2001). 0utsourcing witt enable IKEA to achieve potentiaI advantages like differentiated competitive-edge, synchronization of SC capacity, further devetopment of organisation's core competences, reduce Page 4l vertical-integration and thus increased SC f texibitity and agile, improved SC responsiveness, a[[eviate "buttwhip Effect", cost minimization and consequentty enhancement of the ROl and ROE (Lu, 2014). Development of ctose-relationships and strategic a[[iances and working on the direction to buitd sustainabte partnerships to ensure suppty of materiats from susyainabte resources, wi[[ result in sharing market's risks, joint coltaboration, sharing resources, achieve economy of scale, cost saving, customers'value-adding and reducing the impact on the environment (!KEA, 2014). Integration of IKEA's entire SCM wi[[ enable to stay on top of the demand and IKEA witt be better positioned to predict the customers' demands and the business wi[[ become more adequately responding to demands changes and consequentty, IKEA witt be able to maintain and increase sales revenues and profit margins (Khurana, 2015). Adoption of time-based strategy helpful for IKEA since it enables in distribution togistics witt be to lower the costs, enhance the customers'services, improve efficiency and create values (George & Thomas 1990) and IKEA's centralized distribution center shoutd be located in core-region with convenient means of transportation so Page 42 that the company can dispatch its products easily, faster and more ftexibitity and thus increase the performance of delivery (Hou & Liu, 2011). The push-based strategy wi[[ enabte IKEA to analyze the customers' needs which contribute to planning to make the company's outlets and products'designs in a way meeting the customers' needs and the company can cut the cost since the production is smooth and stock the products for the mass distribution on muttinationa[ leveI (Handfietd, 2013). ln the meantime, to atign IKEA's capabitities with its archetype, IKEA can use the SC capability profiter that works as a relevant tool to diagnose and identify the essentiat suppty chain characteristics for IKEA's strategy "ways needed to ptay" and proposes relevant SC [evers to improve the coherence and overcome the chattenging gaps. Additionatty, IKEA should assess the ongoing-heatth of its suppty chain and be alert for any circumstances that may cause the SC to become out of synchronization with IKEA's strategic aspiration and IKEA should identify and track the key drivers for the value and SC performance. Page 43 IKEA can devetop specific measuring metrics to evaluate the adopted suppty chain levers at the peak-levels, i.e. IKEA as a value player can be deemed successful in case the gross margin and the perception of its brand-image were high, reflecting the lean manufacturing costs, product design and quatity and enhanced customers' loyatty (Kauffetd et a1., 2011), customer satisfaction, product avaitabitity in market, cost-to-serve, design to market time (Lu, 2014). Page 44 6 . References Abouhenidi, H. (2014). The Suppty Chain of the IKEA Company. of lnternationaI JournaI Scientific & Engineering Research, Volume 5, lssue 3, March -2014 . Antley, T. (2013). Sustainabte Suppty Chain Management. Retrieved March a 5, rt ictes/a rt i cte/susta i 2014, n a b te f rom http://scm.ncsu.edu/scm- -su pp [y- ch a i n - ma nage me nt - education-entertainment-hotels-temporar . Blanchard, D. (2007). Suppty Chain Management, Best Practices. Pubtished by John Witey & Sons, lnc., Hoboken, New Jersey. . Bozarth, C. (2013). 0perations and Suppty Chain Management. Retrieved March a 2014, rt i ctes/a rt i cte/i nve nt o ry-f su pply-cha . 5, from undamen http://scm.ncsu.edu/scm- ta [s - o p e rat i ons-and - in-management. Benner, E. (2011). IKEA, A brand; a lifestyte. [0ntine]. Avaitable on h tt p ://e m i lyb enne r.we e b [y. co m/u p t o a ds/7 17 /5 /1 /7 7 5 10 I 9/i ke a f i n at.pdf (Accessed 09 March 2011). ' Burt, D.N., Starting, S.L., Dobter, D.W. (2003). World class suppty management: the key to suppty chain management. McGraw- Hit[, Boston. Page 45 Carr, A. S., & Persqn, J. N. 0999). Strategica[ly managed buyers setler retationships and performance outcomes. JournaI operations management, 17 of (5), 497-519. Chitdhouse, P., & Towitt, D. R. (2003). Simptified materiaI ftow hotds the key to suppty chain integration. 0mega, 31 (1),17-27. Ctara, L. (2014). IKEA suppty chain- how does IKEA manage its inventory. h tt ps://www.t [Ontine]. Retrieved Tradegecko. ra degec ko. c o m/b 1o g/i kea s - i nve nto f rom: ry- management-strategy-ikea (Accessed on 20 November 2017). Claesson, E., & Johnssoh, C. (2007). Apptication for measuring suppty chain performance for Persontig worktops at IKEA of Sweden AB. Department of IndustriaI Management and Logistics. Engineering Logistics. LUND University. Ferriols, F., Mula, J., Madronero, M. (2013). Suppty Chain as the Company Engine in Automotive Manufacturing. 7th IFAC Conference on Manufacturing Management Modelting, Management, and Controt. lnternationaI Federation of Automatic Control. June 19-21,2013. Saint Petersburg, Russia George, S, JR &Thomas M, H., (1990). Competing against time. The free press. Page 46 Cox, A. (1999). A Research agenda for suppty chain and business management thinking. Suppty Chain Management: An lnternational Journal, a(4: 1999. Handfield, R. (2013). Trends and Strategies in Logistics and Suppty Chain Management: An Interview with Robert Handfietd. Retrieved March a rt i c 5, 2014, f rom http://scm.ncsu.edu/scm- les/a rt i cte/t re n ds - a n d - st ra te g i es - i n - [o g ist i cs - a n d - s u p p ty- chain-management-an-interview Hartand, C. (1996). Suppty chain management: Relationships, chains and networks. British Journal of Management, 7 (Speciat lssue): 53-80. Harrison, A., Van Hoek, R. 1., & Christopher, M. (2001). Measuring agile capabilities in the supply chain. InternationaI JournaI of Operations and Production Management, 21 (1-2),125-147. Hobbs, D, P. (2011), Lean Manufacturing lmplementation: A Complete Execution Manual for Any Size Manufacture, Florida: J. Ross Pubtishing, Incorporated. Hong, P. (2015). 5 Examples of lnnovative Marketing Strategies. [0ntine]. Retrieved from: g b/i n ked/i nn ovat ive - ma rket i ng https://www.[inkdex.com/en- -st rat eg i es - exa m p tes/ (Accessed on 14 October 2017). Page 47 Hou, Y. & Liu, J. (2011). Time -based strategy in distribution logistics, Gaining competitive advantages f in IKEA. Retrieved rom https ://p d f s. s e m a n t i c s c h o I a r. o rglc f10/ 51 a 4009 a7 8 a26 b b d a 5 4 f 7 d e84cfe4eOael4a.pdf (Accessed on 30 November 2017). IKEA, (2015). IKEA Group Yearty Summary FY2016. [0ntine]. Retrieved f ://www. i ke a. c om I ms lp t- PTlp d f/ye a rty-s u m m a ryll h tt G roup-Yea rly-Su mma ry- FYl 5.pdf (Accessed p 11 K EA 0ctober rom: - 2017). Jonsson, A. (2008). A transnationa[ perspective on knowtedge sharing: Lessons learned from IKEA's entry into Russia, China, and Japan. The lnternationaI Review of Retait, Distribution and Consumer Research, 18, 1, p.17-44. Jonsson P and Rudberg M &Hotmberg S (2009) "GlobaI suppty chain planning at IKEA". at IKEA. Jonsson, P. (2012). Gtobat suppty chain planning [0ntine]. http ://www. Retrieved re s e a rc h g a t e. n et/p u b t i c ation 12 420827 58-G f rom to b a [-s u p ply-chain-planning-at-IKEA (Accessed on 01 November 2017). Kauffeld, R,, Mue[[er, C. & Michaels, A. (2013). Designing the Right Suppty Chain. [Ontine]. Retrieved f rom: Page 48 https ://www. st ra t e gy- b u s in ess. co m/a rt i c le / 001 60? gko =5 8a 1 4 (Accessed on 15 November 2017). Khurana, M. (2015) Top 4 Benefits of An lntegrated Suppty Chain. Retrieved f rom http://www.inspirage.com 12016/09 /top-4- benefits-integrated-suppty-chain/ (Accessed on 12 November 2017). Lin, F., Huang, S., & Lin, S. (2002). Effects of information sharing on suppty chain performance in eletronic commerce. IEEE Transactions on engineering management, 49 (3'), 258-268. Lu, D. (2011). Fundamentals of Suppty Chain Management. Dr. Dawei Lu & Ventus Pubtishing ApS. bookboon.com Marketing Teacher (2016). lkea Marketing Mix. [0ntine]. Ret rieve d f rom: http://www. ma rket marketing-mix/ (Accessed on in gtea ch e r.com/ikea - 10 October 2017). Mittat, N. (2013). lkea's Low Price Strategy. [0ntine]. Retrieved from: http://cmuscm.blogspot.my/2013llzlikeas-[ow-price- strategy.htmt?m=l (Accessed on 10 November 2017). Moberg, C. R., Cutler, B. 0., Gross, A., & Speh, T. W. QA04. identify antecedents exchange within suppty chains. lnternational Journal of Physical Distribution and Logistics management , 32 (9),755-770. Page 49 Moon, Y. QAlq. IKEA invades America. Harvard Business School. Harvard Business SchooI Press. Boston. Parihk, P, A & Nietsen, T, 0., (2009).Transforming Traditional Geographic lnformation System to Support Smart Distribution System. Co[[aborative Technologies and Systems CTS 09 lnternationaI Symposium, pp,l 6-84. Pinterest (2017). The 7 Wastes h tt ps of Lean. [0ntine]. Avaitabte from: ://www. p i n t e re st. co m I pin/318911217 3 45319 683I (Accesse d o n 0 1 November 2017). Prasad, S., & Tata, J. (2000). lnformation lnvestment in suppty chain management. Logistics Information Management, 13 (1), 33-38. Qayyum, N., Muhammad, Ali, M., Shazad, K., (2013). The lmpact of on the Overa[[ SchooI of Business and Suppty Chain Management Practices Performance of the 0rganization. Economics. University of Management and Technology, Lahore, Pakistan. https Retrieved tOntinel. ://c g r. u m t. e d u. p k/i co bm2013/p ape rslP ape rsll C3 - f D e rom: c-2012 - 053.pdf (Retrieved on 15 November 2017). Rafele, C., (2004). Logistic service measurement: a reference framework, JournaI of Manufacturing Technology Management Vot. 15, No.3, pp. 280-90. Page 50 Reinartz, W.J. (2010): Understanding Customer Loyalty Programs. ln Krafft, M. & Mantrata, M. (Eds.), Retailing in the 21st Century: Current and Future Trends, 2nd edition (pp. a09-429). Berlin et a[.: Springer. Riley, J. (2013): Strategy: IKEA's Gtobat Brand & Local Knowtedge Drives Expansion into Emerging Markets. Rushton, A., CroucherP. & Baker, P., (2010). The Handbook of Logistics and Distribution Management. Shin, H., Co[tier, D. A., & Wilson, D. D. (2000). Suppty Chain management orientation and supptier/buyer performance. JournaI of operations management, 18 (3), 317-333. S[ack N., Chambers S., and Johnston R. (2010). 0perations Management. 6th ed. Pearson Education Limited. Stanely, L. I., & Wisner, J. D. (2001). Service quatity atong the suppty chain : implications for purchasing. JournaI of operations management, 19 (3), 287-305. Stuart, F. I. (1997). suppty chain Strategy: 0rganizational influence through supplier a[[iances. british acadmy of management, I (3'), 223-236. Tan, K. C., Kannan, V. R., & Handfield, R. B. (1998). suppty chain management: Supptier performace and f irm performance. lnternational JournaI of Purchasing and materiats management, 34 (3), 2-9 . Page 5 I Trent, R.J. and Monczka, R.M. (2005), Achieving exceltence in gtobat sourcing, MIT Stoan Management Review, 47 (1'),24-32. Vetez, N. (2010). Ethics and Social Responsibitity. IKEA. [Ontine]. Retrieved from: http://ikeal943.btogspot.my /zUA/09/week- three-ethics-and-sociat.htmt (Accessed on 10 November 2017). Waters, D., (2004). Gtobat logistics and distribution planning, 4th edition, pp 10-14. West N., (2008). Using Lean Principtes for Ctinicat Quatity lmprovement. CFMC website. [Ontine]. Retrieved from: htt p ://www. cf m c. o rgfi i tes/h o s p it a t/g wt g-p res e n t a t io n s/u s i n g %2 0 t e a n%20in%20quatityimprovement.pdf (Accessed on 25 October 2017). Yu, K. (2014). How IKEA makes its suppty chain sustainable? [0nline]. Retrieved htt p://cm uscm. b Iogs pot. myl2014/01/h ow- ikea - ma kes- its f rom - Page 52