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Supply Chain Management of IKEA -
December 29th, 2010
IKEA (Ingvar Kamprad Elmtaryd Agunnaryd) is a privately held, international home products company that designs and sells ready-to-assemble furniture, appliances and home accessories. The company is now the world's largest furniture retailer.
IKEA was founded in 1943 by 17-year-old Ingvar Kamprad in Sweden, named as an acronym comprising the initials of the founder's name (Ingvar Kamprad), the farm where he grew up (Elmtaryd), and his home parish (Agunnaryd, in Småland, South Sweden).
The groups of companies that form IKEA are all controlled by INGKA Holding B.V., a Dutch corporation, which in turn is controlled by a tax-exempt, not-for-profit Dutch foundation. The intellectual property of IKEA is controlled by a series of obscure corporations that can be traced to the Netherlands Antilles.
INGKA Holding B.V. owns the industrial group Swedwood, which sources the manufacturing of IKEA furniture, the sales companies that run IKEA stores, as well as purchasing and supply functions, and IKEA of Sweden, which is responsible for the design and development of products in the IKEA range. INGKA Holding B.V. is wholly owned by Stichting INGKA Foundation, which is a non-profit foundation registered in Leiden, Netherlands. The logistics center Europe is located in Dortmund, Germany and Asian Logistic center is located in Singapore along with its IT base.
Inter IKEA Systems B.V. in Delft, also in the Netherlands, owns the IKEA concept and trademark, and there is a franchising agreement with every IKEA store in the world. The IKEA Group is the biggest franchisee of Inter IKEA Systems B.V. Inter IKEA Systems B.V. is not owned by INGKA Holding B.V., but by Inter IKEA Holding S.A. registered in Luxembourg, which in turn is part of Inter IKEA Holding registered in the Netherlands Antilles. The ownership of the holding companies has not been disclosed.
The company which was originated in Småland, Sweden, distributes its products through its retail outlets. As of October 2010, the chain has 313 stores in 38 countries, most of them in Europe, North America, Asia and Australia. The IKEA Group itself owns 276 stores in 25 countries and the other 37 stores are owned and run by franchisees outside the IKEA Group in 16 countries/territories. 2006 saw the opening of 16 new stores. A total of at least 15 openings or relocations are planned for 2010.
In some languages (such as Swedish, Danish, Norwegian, Dutch, German, Greek and Spanish), "IKEA" is pronounced something like [iˈke.a], but in English it is /aɪˈkiː.ə/, similar to the word "idea." As such, IKEA brought action in the Supreme Court of British Columbia successfully preventing a competitor in Victoria from using the name "Idea." Its Chinese name is "宜家" (yíjiā), which literally means "fit for home" in written Chinese and sounds like the phrase "right now" in Cantonese pronunciation.
IKEA’s supply chain is global with sales in more than 250 own stores in 24
countries and 32 external franchisees in 16 countries. The stores are supplied
through 31 distribution centres, or directly from the 1,350 suppliers in more than
50 countries. IKEA’s supply chain consequently has a global spread with both
sales and purchasing in all major regions of the world. IKEAs growth has been
tremendous and sales are still growing. Currently IKEA plans to open 10-20
new stores every year with a goal to double sales within the coming five year.
Considering the pace of growth in sales, the many stores and warehouses, and
the fact that some business areas change up to 30% of its assortment every year,
supply chain planning is a real challenge. The supply chain needs tight control
and high levels of visibility to keep costs down and avoid obsolete inventory
and/or stock outs.
The IKEA supply chain is mainly make-to-stock (MTS) and only a few products
are made to customer orders. Consequently, the entire supply chain is heavily
dependent on forecasts. The regions and the stores have traditionally had a
strong power and a high degree of local freedom in terms of planning and
placing replenishment requests. This has led to a fragmented supply chain
planning with local optimization and a lot of manual intervention with plans
throughout the supply chain. Furthermore, due to frequent shortage situations
some regions have purposely overestimated demand to ensure delivery, which in
turn has led to imbalance in terms of demand coverage. Hence, some markets
have suffered from stock outs during long periods, whereas other markets have
ended up with obsolete inventories. Forecasting has been done on a regional
level with approximately 120 users striving for different goals and using
different methods. Part of the explanation to this is that IKEA has lacked a
common and structured tactical planning of demand and replenishment. In terms
of capacity planning, all different parts of the supply chain (stores, warehouses,
regions, etc.) tried to optimize its own part of the supply chain, leading to a set
of imbalanced supply plans with a low and unstable total throughput with long
replenishment times for the supply chain as a whole.
The above mentioned situation led to a number of problems with direct impact
on performance in a number of ways. First of all, the supply chain had a
functional orientation with limited transparency, leading to a reactive behaviour
with fluctuating goods availability (sometimes stock out situation and
sometimes over stock). IKEA has also used extensive manual work in its
planning processes and the planning was based on fragmented and unreliable
planning information. Hence, there was a lack of trust between different parts of
the supply chain, which even further have enhanced the bullwhip effects in the
IKEA supply chain. Other problems related to the supply chain performance was
difficulties to get enough attention of data maintenance, the lack of proper
follow-up tools to monitor forecast deviations, hard to change mindsets among
users, no synchronization of order and stock data, to name but a few.
To overcome the difficult situation, IKEA initiated a program (cluster of
projects) aiming to taking better control of its supply chain, and enhance
performance in terms of delivery service and costs. A new global planning
concept was developed and is currently being implemented. Its cornerstones are
mutually integrated planning processes, a centralized planning organization,
focus on data quality and use of advanced software support. The purpose of this
article is to outline IKEA’s global supply chain planning concept and describe
the roles of the planning organization, data quality, software support and project
and change management in the concept and its implementation.
Supply chain planning processes
Planning is conducted on different time horizons and levels of detail. In practical
terms, the problem of different time perspectives and the level of detail required
are dealt with by planning material flows and production successively in a
hierarchical structure of planning processes. For long-term planning, a
somewhat lower precision and detail levels may be acceptable, while short-term
planning demands a high precision and level of detail. The planning structure
often used in manufacturing companies contains four planning processes; sales
and operations planning, master planning, materials planning, and execution and
control of material flows. Forecasts and customer orders are important input
information to the planning processes. Figure 1 illustrates the relationships
between the four basic planning processes.
Sales & operations
Execution & control
Strategic/ Demand management
Figure 1: Relationships between basic planning processes.
Several of the planning processes consequently have mutual relationships. From
a supply chain perspective, there are also relationships between different
functional and organizational planning processes. For example, the forecasting
process may integrate individual forecasts from several markets and products,
the sales and operations planning and master planning processes may involve
several production and distribution sites, the materials planning may integrate
several warehouses, for example by the use of distribution requirements
planning. However, these decisions are often distributed among a multiple
number of independent decision-makers along the supply chain which leads to
incongruence and imbalances on a global perspective (Pibernik and Sucky,
2007). Hence, companies typically look for ways to control these imbalances,
e.g. through coordination and/or centralization of planning responsibility.
• Establish integrated supply chain planning processes since it addresses
activities throughout the supply chain.
• Handle vast amounts of data at reasonable run times, and the possibility to
run multiple scenarios and “what-if”-analyses before a central plan is
• Present results in an easy-to-understand environment through
visualisation of KPIs, stock and load levels, and so forth; hence increasing
the understanding of the effects that the decisions will have on the supply
• A higher degree of automation of planning, which leaves more time for
the decision-maker to analyse the supply chain and the actual decisionmaking
instead of using the time to find a feasible plan.
Since APS used in supply chains have to deal with multi-site environments and
is based on a standardised planning process with a high degree of automation,
the quality of input data (both master data and transaction data) is even more
important than in other types of planning systems. Hence, the organisation has to
put a lot of effort into safeguarding that planning data is of high quality.
In terms of planning, information is normally distinguished from data, where
information is the content and meaning of the data. Information quality is a
generic term and has several different dimensions. Normally, distinctions are
made between the extent to which information is valid, reliable, up-to-date,
complete and straightforward to understand and use (e.g. Jonsson and
Gustavsson, 2008). APS requires high data quality to work properly, and in such
cases provides the possibility to provide information of good quality to the
decision-makers which thereby can make better informed decisions.
3. IKEA’S PLANNING PROCESSES
3.1 The supply chain
IKEA is one of the leading home furnishing companies in the world. With its
vision to ”create a better everyday life for the many people”, the company has
reached annual sales of close to €20 billion (FY 2007) and has close to 120,000
employees. IKEA has more than 522 million visitors per year in its stores all
over the world. In addition to the visitors in the stores, some 450 million visitors
are tracked entering the IKEA website. IKEA’s main marketing channel is its
catalogue that is distributed world-wide in 191 million copies (in 56 different
editions and 27 different languages) displaying some of IKEA’s 9,500 selling
articles. IKEA’s growth has been tremendous and sales are still growing.
IKEA’s supply chain is global with sales world wide. The stores, which are
divided into three geographical areas, are supplied through 31 distributions
centres, which in turn are supplied by some 1,350 suppliers in more than 50
countries. In terms of supply (purchasing), Europe stands for 69% (Poland being
the largest purchasing area with 16% of total purchasing), followed by Asia with
28 % (China 22%), and North America with 3%. The majority of sales is in
Europe (82%) with Germany as the top selling country (16%), whereas North
America accounts for 15% of sales (USA 10%). Asia and Australia together
account only for 3% of total IKEA sales.