IKEA

Introduction
Founded in 1943, by Ingvar Kamprad, IKEA is now reputed to be the largest furniture
retailer in the world, with outlets in 32 countries and plans to develop further.

IKEA offers a wide range of well-designed, functional home furnishing products at

prices so low that as many people as possible will be able to afford them. This is the
single idea at the heart of everything IKEA does, including the way it develops and
purchases products and the way they are sold in IKEA stores around the world.

IKEA is an internationally known home furnishing retailer. It has grown rapidly since it was
founded in 1943. Today it is the world's largest furniture retailer, recognised for its
Scandinavian style. The majority of IKEA's furniture is flat-pack, ready to be assembled by
the consumer. This allows a reduction in costs and packaging. IKEA carries a range of 9,500
products, including home furniture and accessories. This wide range is available in all IKEA
stores and customers can order much of the range online through IKEA's website. There are
18 stores in the UK to date, the first of which opened in Warrington in 1987. In July 2009
IKEA opened a store in Dublin too - its first in Ireland.

IKEA stores include restaurants and cafés serving typical Swedish food. They also have small
food shops selling Swedish groceries, everything from the famous meatballs to jam. Stores
are located worldwide. In August 2008 the IKEA group had 253 stores in 24 countries, with a
further 32 stores owned and run by franchisees. It welcomed a total of 565 million visitors to
the stores during the year and a further 450 million visits were made to the IKEA website.
IKEA sales reached 21.2 billion Euros in 2008 showing an increase of 7%. The biggest sales
countries are Germany, USA, France, UK and Sweden. In 2008 IKEA opened 21 new stores
in 11 countries and expects to open around 20 more in 2009 as part of its strategy for growth.

Low prices are one of the cornerstones of the IKEA concept and help to make customers
want to buy from IKEA. This low price strategy is coupled with a wide range of well
designed, functional products. IKEA's products cater for every lifestyle and life stage of its
customers, who come from all age groups and types of households. This is vital in times
when the retail sector is depressed, as it increases IKEA's potential market.
Since it was founded IKEA has always had concern for people and the environment. The
IKEA vision 'to create a better everyday life for the many people' puts this concern at the
heart of the business. IKEA has responded to the public’s rising concern for sustainability in
its choice of product range, suppliers, stores and communication. It has also spotted business
potential in providing sustainable solutions. IKEA's concern for people and the environment
encourages it to make better use of both raw materials and energy. This keeps costs down and
helps the company to reach its green targets and have an overall positive impact on the
environment.

IKEA IN UNITED ARAB EMIRATES

The world’s largest home furniture and furnishings store. Their operations in Dubai
commenced in 1991, with their first showroom located in Zabeel Road. In the year
1995 they moved to the Deira City Centre and closed in November 2005. This was to
pave the way on the same month to the opening of the new four times bigger IKEA
store at Dubai Festival City.
In March 2001, IKEA opened a new store in Marina Mall, Abu Dhabi. Marina Mall
overlooks the Abu Dhabi Marina, and is one of the most prestigious shopping malls
in Abu Dhabi.
The owner of IKEA in United Arab Emirates are Al-Futtaim Trading (Private) Limited
(Al-Futtaim).

IKEA Concept
The IKEA vision is "To create a better everyday life for the many people."
The business idea is "To offer a wide range of well designed, functional home
furnishing products at prices so low that as many people as possible will be able to
afford them."
The market positioning statement is "Your partner in better living. We do our part,
you do yours. Together we save money."

The IKEA Stores

IKEA stores sell the IKEA product range in room settings and self-service
areas and inspire customers with ideas, hints and tips for smart new home furnishing
solutions. To keep prices low, the stores buy and transport products in bulk. They’re
also located in less expensive areas of their market area. IKEA customers help to
keep prices low by picking their furniture up at their store’s warehouse, transporting it
home and assembling it themselves.
There are 202 IKEA stores in 32 countries. Of these, 180 stores belong to the IKEA
Group. The remaining 22 stores are owned and run by franchisees outside the IKEA
Group. By August 2005 IKEA will have opened further stores: 2 in Belgium, 1 in
Czech Republic, 3 in France, 3 in Germany, 2 in Italy, 1 in Netherlands, 2 in Spain, 1
in Sweden, 1 in United Kingdom and 3 in USA.

The IKEA marketing mix

The IKEA marketing mix consists of different areas of focus:

  The IKEA product range is the starting point. All other marketing
communication is used to amplify the product range.
 the store is the primary medium for presenting and communicating the range,
it's low price and the IKEA concept.
 Distribution - IKEA has 27 distribution centres in 16 countries. These centres
supply goods to IKEA stores, and they ensure that the route from supplier to
customer is as direct, cost-effective and environmentally friendly as possible.
 Efficient distribution plays a key role in the work of creating the low price
 the IKEA catalogue is the main marketing tool with around 70% of the annual
marketing budget being spent on this alone. It is produced in 38 different
editions, in 17 languages. 110 million catalogues were circulated last year the
IKEA advertising, PR and other types of communication are complements to
the IKEA range. The store and catalogue are used to spearhead the
penetration of the target market.

The aims of the organization include:

 To keep costs low and assist customers;
 Products should combine good quality, durability and be functional;
 Profit should be used to build and expand;
 Simple solutions should be found to product and company problems;
 A keen understanding of the company’s cost base must be maintained and
good results achieved with careful investment.

IKEA has also made a public commitment to be socially responsible through

the following objectives:
 To only use materials from appropriate, sustainable sources;
 To use the minimum of raw materials and energy;
 To reduce waste and emission levels in all production for IKEA;
 To treat all employees including subcontractors and suppliers with respect
and social concern - the use of child labour is not acceptable to IKEA.

I have come to the conclusion that they

are very excited on meeting a high standard of quality and to produce
long lasting products, which are very durable. I can also see that
enthusiastic to keep with trends in fashion and to make sure they're at the
cutting edge of design and technology.

Judging from IKEA's aims and objectives, I have gathered that they are
devoted on:
Looking after their customers by doing things right the first time,
ensuring that they find it easy to shop, seek help or complain,
regularly monitoring and seeking customer feedback on the businesses
performance, understanding what customers want and what they expect of
IKEA.

IKEA have proven to the public that they can, and do look after their
existing customers well, also while trying to accommodate for new
customers. Shopping at IKEA is very different to shopping at some of
their competitors' stores in the way that IKEA choose to stand back
and wait for the customer to come to them with any problems or what
they would like to purchase. This has obviously proven to be a well
thought through idea, as it appears to be working well. By looking at
the Ikea website you can tell that IKEA are interested in maintaining
a good relationship between themselves and the customers.

Problems with IKEA:

IKEA was successful with a different model of the value chain, but they had many
problems associated with multinational companies.

Strong corporate culture is too much for subsidiaries. The Swedes culture is an
informal management style with pragmatic problem solving and consensus based
decision-making as part of IKEA’s everyday practice. This ends up causing a rift for
international companies like IKEA because this approach might not be what the local
managers are used to doing.Examples:In Germany, this approach to management
was seen as ridiculous because the Germans were very disciplined and precise. For
example, the Germans would take informal suggestions as actual reality and over-
due simple tasks.
In France, the people were used to formal rules and strong hierarchy, so the
informality of the Swedes made the French managers feel like they could do
whatever they wanted, and most of the time work was not one of the choices.

Transnational strategy faults were clearly seen in the United States. IKEA was
very good at picking the right suppliers and the sales outlets were positioned well in
areas that were low cost, but the research and development was only done in
Sweden. Examples:Americans would purchase flower vases in the retail outlets
mistaking them for drinking glasses.
Americans slept in king size beds and the IKEA beds were five inches narrower.

Management and Human resource issues were prevalent also in the United
States. IKEA would hire managers who value job security, enrichment and long
vacations, but many managers in the United States did not want this. They wanted
to pursue career advancement rather than a five-week trip to the Bahamas. This
would all stem back to the Swedish approach to the work environment. Examples:
One American manager is quoted in saying, “A lot of people have left IKEA because
they can’t move up fast enough here.” Another young manager said, “Our
management needs to be much more professional in managing human resources.
We need to bring new people into the organization, and reward individual
accountability for results.”

External factors changed because baby boomers had become middle aged and
their desires changed. One result was fewer new homes were being built. The
competition was also adapting to IKEA’s supply strategy and making furniture better
for lower prices. This put direct pressure on IKEA’s sourcing advantages.
Too large of a multinational was another problem facing IKEA. The product range
grew from 10,000 to 14,000 items causing long production runs, and a lot of the new
managers were not versed well on IKEA culture. This caused the subordinates to
begin to act according to their own management practices and it opened a rift with
policies from the home company.

The Problem: IKEA was successful with implementing their long-term strategy of
cost leadership and product differentiation, but they were too Swedish for their own
good. When the company became a large multinational they started to experience
poor human resource development, and lack of communication with subsidiaries,
which gave their competition the time needed to began to mock their distribution
processes and product development.

Alternatives:
Gut the current centralized management strategy that is Swedish centralized.
Reorganize the management through a more international matrix type structure.

Do not pursue the United States market because it is too difficult to compete in, and
stick with Europe and more development in Asia.

Make the company management flatter by giving subsidiaries more freedom to

respond to local needs, and develop possible strategic alliances and joint ventures to
increase market reach and brand recognition.

Recommendation: Make the company management flatter by giving subsidiaries

more freedom to respond to local needs, and develop possible strategic alliances
and joint ventures to increase market reach and brand recognition.

Rationale for the Recommendation:

The recommendation for a flatter management style with more freedom to
subsidiaries is a necessity. The founder Ingvar Kamprad has the right ideas about
IKEA losing its way and a need to get to the basics, but that includes changing the
role of subsidiaries.

Firms within high power distance countries have a strong concern with hierarchy.
With high uncertainty avoidance the firms tend to have management systems and
processes that make organizations and employees dependable and predictable.

The informal method of management and lack of risk assessment was not accepted
in France, and not appreciated in Germany and the United States. This led to
problems with subordinates understanding their roles, and lack of production
efficiency. The larger IKEA became the more this type of management became a
problem. The Swedish managers used an organizational standard of adhocracy,
while the Germans were used to a professional bureaucracy, the French used to a
full bureaucracy, and the Americans a mix of all three.
The way to address these cultural problems is to change the organizational structure
and become flatter with the use of joint ventures and alliances. They will not only
help increase your market potential, but they will aid your subsidiaries in developing
more of a feel for the local markets and competition.

Implementation:
These ideas are drastic changes to a company that was begun on the
premise of Swedish culture and business ideals. IKEA became extremely successful
without changing the model of their business plan over many years. There must be
a team of consultants who are made up of many different cultures to assess the
situation. They need to do a study of the different cultural roles of the subsidiaries,
the possibility of strategic alliances, and the new flatter structure of worldwide
management. After a year, this study should conclude the appropriate specific
moves needed to adjust the Swedish model to work in this new era of globalization.

IKEA has the right value chain model, good relationships with their suppliers, a
strong customer base, and great company values. These positives need to be
worked in with the cultural specific, and alliance driven world to keep IKEA ahead. If
this is implemented correctly IKEA will become the world’s leading supplier of build-
it-yourself furniture in the near future.
SWOT analysis

IKEA's goals of sustainability and environmental design are

central to its business strategy. It has launched a new sustainability plan to take the company
through to 2015. This will combine social, environmental and economic issues.

IKEA uses SWOT analysis to help it reach its objectives. This is a strategic planning tool. It
helps the business to focus on key issues. SWOT is the first stage of planning and looks at the
Strengths, Weaknesses, Opportunities and Threats involved in a project or business venture.

Strengths and weaknesses are internal aspects. This means that they are within the control of
the business. They may refer to aspects of marketing, finance, manufacturing or organisation.
Opportunities and threats are external factors. This means that they are outside the control of
the business. These may include the environment, the economic situation, social changes or
technological advances, such as the internet.

A business can create opportunities and counter threats by making the most of its strengths
and addressing its weaknesses. For example, one of IKEA's key strengths is its strategic aim
to use no more material than necessary in the production of each item. In addition, it develops
its product plans to increase its use of waste or recycled materials.

 One particular table, the NORDEN table, uses knotty birch wood. The knots in this
wood usually mean it is rejected by other retailers and manufacturers as unsuitable for
use. However, IKEA has made the knots part of its design feature.
  OGLA chairs are made using wood waste from saw mills and LACK tables use a
'sandwich' of stiff card between wood sheets to reduce the amount of solid wood
needed.

Strengths

Strengths could include a company's specialist marketing

expertise or its location. They are any aspect of the business that adds value to its product or
service. IKEA's strengths include:

 a strong global brand which attracts key consumer groups. It promises the same
quality and range worldwide
 its vision – 'to create a better everyday life for many people'
 a strong concept – based on offering a wide range of well designed, functional
products at low prices
 a 'democratic design' – reaching an ideal balance between function, quality, design
and price. IKEA's 'Cost Consciousness' means that low prices are taken into account
when each product is designed from the outset.

These strengths contribute to IKEA being able to attract and retain its customers.

One way IKEA measures its strengths is the use of Key

Performance Indicators (KPI). KPIs help IKEA to assess the progress of its vision and long-
term goals by setting targets and monitoring progress towards these. An example of one of
IKEA's KPIs is the percentage of suppliers that are currently IWAY approved. The IWAY is
the IKEA Way of Purchasing Home Furnishing Products. This guideline defines the social
and environmental requirements IKEA expects of its suppliers.
IKEA has strengths right through its production processes:

 Increasing use of renewable materials – IKEA improved its overall use from 71% in
2007 to 75% in 2009.
 'Smarter' use of raw materials – IKEA increased the use of recycled or reclaimed
waste products in energy production across all stores from 84% in 2007 to 90% in
2009.
 Volume commitments – IKEA believes in creating long-term partnerships with its
suppliers in order to achieve this. By committing to buying large volumes over a
number of years IKEA can negotiate lower prices. This also benefits the suppliers
because they enjoy the greater security of having guaranteed orders.

 Economies of scale – for instance, bulk buying at cheaper unit costs.

 Sourcing materials close to the supply chain to reduce transport costs.
 Delivering products directly from the supplier to IKEA stores. This slashes handling
costs, reduces road miles and lowers the carbon footprint.
 Using new technologies – for example, IKEA's OGLA chair has been in its range
since 1980. The chair has changed through the years to reduce the amount of raw
materials needed.

Opportunities

A business uses its strengths to take advantage of the

opportunities that arise. IKEA believes that its environmentally focused business conduct will
result in good returns even in a price sensitive market. As the company states:
'There is a true business potential for IKEA in providing solutions that enable customers to
live a more sustainable life at home. IKEA is developing effective solutions for customers in
order to support them recycling or reusing used products, aiming at no products ending up at
landfill and the recycled materials used in producing new IKEA products.'

Some of the opportunities that IKEA takes advantage of through its sustainability agenda are:

 a growing demand for greener products

 a growing demand for low priced products. Trends in the current financial
climate may result in consumers trading down from more expensive stores
 demand for reduced water usage and lower carbon footprints.

IKEA has a number of areas of focus to its work with

sustainability, each of which it supports in various ways:

1. Solutions for a sustainable life at home – IKEA gives online tips and ideas for
this.
2. Sustainable use of resources. IKEA aims for zero waste to landfill, wastewater
treatment and programmes to reduce its use of water.
3. Reducing carbon footprint. IKEA aims to reduce energy use, use more
renewable energy, cut its use of air transport and reduce packaging. Its green
transport initiative includes an aim to reduce business flights by 20% in 2010
and 60% by 2015.
4. Developing social responsibility. IKEA's policy includes support for charities
such as the World Wildlife Fund, UNICEF and Save the Children.
5. Being open with all its stakeholders. This involves building trust through good
communication with consumers, co-workers, key opinion formers and the
press. Being sustainable is a central part of IKEA's image.

Weaknesses and threats

 Weaknesses

IKEA has to acknowledge its weaknesses in order to improve and manage them. This can
play a key role in helping it to set objectives and develop new strategies. IKEA's weaknesses
may include:

 The size and scale of its global business. This could make it hard to control
standards and quality. Some countries where IKEA products are made do not
implement the legislation to control working conditions. This could represent a
weak link in IKEA's supply chain, affecting consumer views of IKEA's
products. The IWAY code is backed up by training and inspectors visiting
factories to make sure that suppliers meet its requirements.
 The need for low cost products. This needs to be balanced against producing
good quality. IKEA also needs to differentiate itself and its products from
competitors. IKEA believes there is no compromise between being able to
offer good quality products and low prices.
 IKEA needs to keep good communication with its consumers and other
stakeholders about its environmental activities. The scale of the business
makes this a difficult task. IKEA produces publications in print and online (for
example 'People and the Environment') and carries out major TV and radio
campaigns to enable the business to communicate with different target
audiences.

Threats

If a company is aware of possible external threats, it can plan to counteract them. By

generating new ideas, IKEA can use a particular strength to defend against threats in the
market. Threats to IKEA may stem from:
  social trends – such as the slowdown in first time buyers entering the housing
market. This is a core market segment for IKEA products
 market forces – more competitors entering the low price household and
furnishings markets. IKEA needs to reinforce its unique qualities to compete
with these
 economic factors – the recession slows down consumer spending and
disposable income reduces.

IKEA addresses these issues in many ways. It manages weaknesses and threats to create a
positive outcome.

Social trends: IKEA is building online help to guide customers to a more sustainable life.
Here it can focus on home improvement in the slowing housing market. It supports customers
with tips and ideas on its website to reduce their impact on the environment. This will also
save them money. Staff are trained on sustainability, both on what IKEA is doing and how
they can take responsibility to become sustainable for themselves.

Market forces: IKEA is large enough to enjoy economies of

scale. This lowers average costs in the long run through, for example, better use of
technology or employing specialized managers. Economies of scale also give a business a
competitive edge if cost savings are then passed on to customers in the form of lower prices.
This puts up high barriers to entry for smaller companies entering the market.

Economic factors: IKEA's low prices create appeal amongst its customers in tough financial
times. It is vital to keep prices as low as possible when the retail sector is depressed. IKEA's
pricing strategy targets consumers with limited financial resources. Its products will also
appeal to those with higher budgets through good quality and design. The company must
ensure that it is always recognised as having the lowest prices on the market in the future.
Communication plays an important role here.
Following are the main departments in IKEA organization
1. Finance and accounts

2. Marketing and Sales

3. Human resource and administration

4. Technical / Operations

VALUE CHAIN ANALYSIS OF IKEA

IKEA has quickly evolved from a local Swedish home furnishing manufacturer into the
largest home furnishing company in the world; partly by convincing their customer to
perform the transport and assembly processes of the furniture manufacturing value chain.
They have executed their strategy by building a worldwide sourcing network of high quality
global manufacturers to support their growth.

IKEA Modified Value Chain

Ikea's role in the value chain is to mobilize suppliers and customer to help them
further add value to the system. Customers are clearly informed in the catalogs
of
what the firm's business systems provides, and what they are expected to add to
the final process.
In order to furnish the customer with good quality products at a low cost, the
firm
must be able to find suppliers that can deliver high quality items at low cost per
unit. The headquarters provides carefully selected suppliers with technical
assistance, leased equipment and the necessary skills needed to produce high
quality items.
This long-term supplier relationship does not only produce superior products,
but also add internal value to the suppliers . In addition, this value-chain
modification differentiates Ikea from its competition.
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.
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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.
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The article is structured as follows. First, the basics of supply chain planning
processes, centralized planning functions and supply chain planning software is
outlined. Then IKEA’s planning concept is described followed by a discussion
about the roles of the planning organization, data quality, software support and
project and change management in the concept and its implementation.
2. FRAME OF REFERENCES
2.1 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
planning
Master planning
Materials planning
Execution & control
Forecasting
Order fulfillment
Strategic/ Demand management
Long-term
Tactical/
Mid term
Operational/
Short term
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,
93
2007). Hence, companies typically look for ways to control these imbalances,
e.g. through coordination and/or centralization of planning responsibility.
2.2 Centralizing planning functions
Global supply chains are often discussed and analysed based on two major
aspects; the configuration and the coordination of the network. It has been
established that vertically focused networks striving for low cost production
typically should establish a centralised planning organisation (Rudberg, 2004).
This is due to the fact that vertically focused organisations operating on a global
scale normally have sales, productions and distribution facilities spread around
the globe. Under such configurations a centrally coordinated planning
organisation facilitates cost efficient material movements, replenishment and
order handling. Consequently, theory suggests that a vertically focused network
requires a relatively high level of coordination, and therefore relatively high
degree of centralisation of the manufacturing management. The corporate staff
must play a much more active role in making the vertically focused organisation
work and theory furthermore suggests that centralised management offers better
cost-effectiveness due to better coordination, possibilities of higher utilisation,
and avoidance of duplication of activities (Rudberg, 2004).
The performance of a supply chain as a whole is to a large extent determined by
the way the different planning processes are coordinated and synchronized
(Pibernik and Sucky, 2007). Supply chains coordinated on a central basis will
lead to better results in terms of, e.g., overall costs, compared to supply chains
with decentralised management (Rudberg, 2004; Pibernick and Sucky, 2007).
To facilitate the smooth coordination based on centralizing the planning
functions, companies typically develop common policies regarding
manufacturing structure, but also in terms of common (standardized) working
methods (Rudberg and West, 2008). Such common working methods also
facilitate the introduction of standardised software support, which is necessary
to support decision-making in global supply chains.
2.3 Software support
When it comes to coordinating a vertically focused but dispersed supply chain,
information and communication technologies can be of great help. Advanced
planning systems (APS) have been put forward as tools adopted to aid the
complex web of decisions that have to be made in a global network. APS is
designed to deal with multiple sites and also to include various supply chain
decisions in one central planning engine. Hence, stock replenishment,
distribution, production and sourcing decisions can be balanced in a centralized
function in order to avoid bullwhip effects and also to strive for the optimal use
of resources throughout the supply chain (Stadtler & Kilger, 2005). Combined
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with point-of-sales (POS), stock level, in-transit, current work load, and
capacity
information, APS can excel supply chain planning in the following ways;
• 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
established.
• 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
chain performance.
• 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.
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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.
3.2 Overview of the planning concept
As a first step in developing the new planning concept, IKEA centralised all
forecasting activities and need calculations to control stock levels and
replenishment throughout the whole supply chain (see Figure 2).
Operational/
short-term
Strategic/
long-term
Tactical/
mid-term
Suppliers
IKEA
IKEA of Sweden Distribution services Retail
5c.
Store
planning
5b.
Warehouse
planning
4. Supplier
capacity
planning
Production
planning
3.
Need planning
(DRP)
1.
Sales planning
(GM, BA, IoS)
Market
intelligence
In-stock
In-stock
Execution
In-transit
Delivery schedule 5a.
Transport
planning
Replenishment
orders
2. Forecasting
(Demand
planning)

Figure 2: IKEA’s global supply chain planning concept and planning

processes.
The new global planning process starts with the corporate sales planning (1)
which sets the frames for the tactical demand planning activities (2) at the 12
business areas. The forecasts are thereafter input to the global need planning
process (3), which in turn drives the supplier capacity planning process (4) and
the planning of the distribution supply chain (transport, warehouse, and store
planning; 5a-c). In the following, the sub-processes in IKEA’s centralised
global
supply chain planning process are described into more detail. Note that this
article does not cover the operational distribution supply chain, i.e. transport,
warehouse and store planning (5a-c). The global planning process is owned by a
central function at IKEA of Sweden (IoS), where decisions concerning the
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number of articles, purchasing, suppliers, distribution, store coordination, and so
forth, are made. As such, IoS is the centre of all planning activities in the new
planning process.
3.3 Sales planning
The sales planning starts with the overall sales forecast made by the corporate
management (Group Management, GM) at IKEA. The forecast is made on an
aggregate level in terms of total sales volumes in monetary units for IKEA in
total. It expresses the expected sales increase in percentages. The forecast is
related to the strategic business plan, involving business cycle and market
intelligence issues, and includes the remaining part of the current fiscal year
plus
five years into the future. The corporate sales plan is updated three times per
year. At the other end of the sales planning process, Demand Planners at IoS
provide forecasts for each of the 12 business areas in terms of sales volumes
taking into account the business areas’ (BA) growth plans and ambitions for the
future.
The responsibility for merging the two gross forecasts lies within IoS, where
Demand Planners explode the corporate management sales plan into BA sales
and compare the two forecasts. When any differences between the two forecasts
are reconciled the forecast is broken down into sales frames per regions (a
region is a group of countries), and further down into sales frames per product
area. These frames are thereafter compared to the forecasts provided at the
tactical demand planning level. The sales plan and the frames are reviewed
three
times per year, and the forecasts have to be adapted to the frames also three
times per year. If there is a difference between the forecast and the frame, the
Demand Planners should adjust the forecast accordingly. One alternative is to
adjust the forecast in a specific country. If this is not appropriate, the forecast is
proportionally adjusted in all countries.
3.4 Demand planning
Some 32 Demand Planners are active in the tactical demand planning process,
each responsible for forecasting a certain part of the assortment. The tactical
forecast resides with IoS and is done on a rolling 84 weeks planning horizon on
store level, with new historical sales data loaded once a week (see Figure 3).
The
operational forecast is a manual forecast (for the most of the time –
replenishment needs in the stores) registered by the respective sales unit (i.e.
store) for the coming three weeks, whereas a tactical forecast (based on sales
history) is used for weeks four to 84. The operational forecast and the tactical
forecast are combined to create a final forecast for each article on the selling
unit
level (i.e. the store level). Thereafter the forecasts on store levels are
aggregated,
reconciled, and compared with the sales frames on the retail forecast group level
(i.e. normally country level) and on the distribution services region level
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(several countries), cf. Figure 3. A Retail Forecast Group (RFG) consists of one
to several stores located geographically close to each other. In Europe, a Retail
Forecast Group normally corresponds to a country. The Retail Forecast Groups
are usually grouped and served by a fewer number of Distribution Services
regions, in Europe for example, there are six such regions. The market input on
the two upper levels concerns every country’s activity plan (for example
campaigns) and estimated price changes on product level. IKEA encourages the
individual countries and stores to have local campaigns and activities. But
country specific activity plans must be decided at least six months in advance.
Activities on store level can be planned on shorter notice.
Demand Planners review the forecast on the regional level each week in order
to
identify those products for which the forecast deviates considerably from actual
sales. In case that sales deviate considerably from forecasted figures, the
Demand Planner looks for the reason and adjusts the sales figures or forecast
model accordingly.
FC on region
level
FC on retail
unit level
FC on selling
unit level
Market
input
Market
input Need calculation
Statistical
forecast
Aggregate
sales history
Aggregate
sales history
Reconcile
forecast
Reconcile
forecast
Operational
forecast
Sales frames
Tactical demand planning
Figure 3: The tactical demand planning process.
3.5 Need planning
The need planning process follows traditional distribution requirements
planning
(DRP) principles (see Figure 4). The stores provide a forecast for each article
for
the coming three weeks (after the product lead-time), whereas weeks 4-84 are
the responsibility of the Demand Planner. The forecasts are netted against
current stock levels and safety stock requirements at the stores, and also netted
against goods in transit. Thereafter the stores net requirements are aggregated
into distribution centres (DCs) and also here netted against DC stock levels and
goods in transit to replenish the DCs. Each DC Group is thereafter aggregated
and the calculated forecasted demand for the coming 84 weeks is established, of
which the coming 26-52 weeks are communicated to the suppliers (depending
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on the quality of the plans). Volumes are divided between suppliers based on a
so-called Supplier Matrix that determines the split of volumes between different
suppliers (see Figure 4). One DC SKU could for example be sourced from two
or three predetermined suppliers.
The Need Planner is the person responsible for the need calculations, and also
takes care of the exceptions messages that might occur. Examples of exception
messages that the Need Planner must resolve are stock exceptions (low, high,
stock-out, etc.), transport exceptions (late-in-transit), and supplier exceptions
(capacity, commitment, etc.).
Store 1
Store 2
Store 3
Store 4
DC 1
DC 2
Sup 1
Sup 2
- stock
- in-transits
+/- safety stock
Store forecasts
- stock
- in-transits
+/- safety stock
Article 1
DC Group Forecast
DC Group
60%
40%
Article 2
Article n
Aggregated total IKEA need
Cap
Com

Figure 4: The need calculation process (simplified example).

3.6 Supplier capacity planning
The need calculation is used to plan capacity requirements at the suppliers. In
the general agreements between IKEA and its suppliers, IKEA often commits to
provide a certain volume to a supplier. This is to make the supplier willing to
invest in plants and equipment to produce the desired products. Furthermore,
the
supplier communicates a capacity limit to IKEA up to which the supplier can
guarantee delivery of volumes. The supplier capacity planning at IoS includes
load leveling between weeks to always fulfill the committed volumes (which
also includes shifting volumes between different suppliers), and also to stay
within the capacity limits (see Figure 4). This could be conducted by a load
leveling function in the planning system or manually by the supply planners.
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4. IKEA’S PLANNING PROCESS ENABLERS
In order to realize the new global supply chain planning concept, it has been
possible to identify four main enablers for the implementation; planning
organisation, data quality, software support and project and change
management, which all are described below.
4.1 Planning organization
The organizational design and function is a key for IKEA to carry out its global
planning concept in a standardized way world wide. The supply chain planning
responsibility has been centralized to IoS, and two specialized planning
positions (Demand Planner and Need Planner) were developed to take the
responsibility of the main processes in the global planning concept. There are
about 32 Demand Planners and their role is to secure that the sales planning is
translated into a sales forecast on article level with a global responsibility. The
responsibility includes the global sales forecast accuracy, involvement in the
sales planning process, product range changes and development of the sales
forecast methodology.
The approximately 70 Need Planners focus on securing that the need planning
continuously is matching the capacity planning with a global responsibility.
Need Planners are responsible for service levels and stock levels in stores and
DCs, the global need planning process, balancing the global need and capacity
per supplier/category/material, actions on capacity exceptions, supply plan
accuracy, and so forth. The more long term planning issues, such as checking
and securing supplier capacity, involve the strategic purchasing and trading
business support organizations.
The establishment of the two centralized planner positions is important for
creating necessary specialist competence in demand and need planning, but also
for making it cost efficient and practically possible to carry out the planning
processes in a standardized way, world wide. Despite of the centralized
planning
organization there have been some problems implementing the new global
planning concept and working methods, partly because of insufficient end-user
training and support, insufficient knowledge and involvement by line
management and that the planning software are not the main applications for
some organizations.
4.2 Data quality
The importance of improved data quality was early identified as an important
cornerstone in order to make the global planning concept successful. Several
data quality problems have been eliminated but IKEA still has some issues to
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deal with in order to further improve the planning and supply chain
performances. The most severe ones are discussed in the following.
Insufficient maintenance of lead time data gave wrong input to need calculation
and caused stock out problems in stores. Process improvement was difficult
because of incompatible data capture and lead time measurements throughout
the supply chain. As a response to these problems, a new lead time concept that
assigns clear responsibilities to different actors was implemented. Furthermore,
a work group was established with members across the supply chain deciding
on
working methods and lead time issues and a web-based application (based on a
data warehouse solution) was created to visualize lead times and exceptions on
missing lead time data.
There were also some problems with in-transit and stock data synchronization,
which sometimes resulted in double-counting of stocks. Status updates of
intransit
data were not always available throughout the supply chain. This resulted
in incorrect need calculations and delayed order generation which may result in
stock out risks. Also the master data quality was sometimes of insufficient
quality, for example, due to an incorrect updating process.
In summary, incorrect data figures resulting in poor planning accuracy, may
decrease the trust in the plans and also result in extra manual work. Extra
manual work may also lead to more manual intervention with plans, which is
counter productive to the main ideas with the common working methods
concept. As it is now, the supply plan accuracy is still quite low, mainly because
of low forecast accuracy of new products, manual intervention with plans, and
that everyone doesn’t follow the established working methods. Also, the project
is still in process, wherefore the concept so far only has been implemented for
parts of the supply chain (mainly for suppliers to DCs and partly for DCs to
store).
4.3 Software support
IKEA has an old and wild grown patchwork of systems and applications, and it
is difficult to change any of them. But to facilitate the new planning concept
APS software from JDA was implemented to support most of the planning
process in Figure 2. The JDA Networks Demand module was implemented to
support the forecasting processes. The software, in combination with
organizational changes, made it possible to reduce the number of forecasters
from 120 to around 30, and at the same time the average forecast accuracy
increased from 60 % to 80 %. The JDA Fulfillment was implemented to support
the 70 Need Planners in the need calculation and supplier capacity planning
process. It also support other roles in IKEA’s planning organization with
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accurate and up-to date information net requirements, stock levels, safety stock
calculations, and replenishment needs.
In summary, the demand and fulfillment software supported the forecasting and
the need calculation with functionality to carry out frequent quantitative
forecasting, distribution requirements planning, aggregating and disaggregating
forecasts, but also with a user friendly interface allowing for customized
visualization, report generation and exception based working methods.
4.4 Project and change management
IKEA has over time struggled with achieving consistent result from its
implementation efforts. Although several projects have resulted in successful
implementations, the opposite has also occurred leaving the organization with
some co-workers not fully adapted to new working methods and tools. The
Change Process has not been sufficiently recognized and the affected coworkers
have from time to time been brought in to the change process too late,
and left on their own too early by the implementing projects.
Part of the recent change efforts, the change process has been taken seriously. A
Four-Step model has been defined clearly recognizing the need to create
awareness in the first step, create interest in what is coming in the second step,
making users try out the solution in the third step and finally adopt the changes
in the fourth and last step.
The experience thus far is that the receiving organizations truly appreciate the
implementation approach and the result is very good. An approach like this
requires that a staff of resources skilled in Communication and Learning are
actively supporting the rollout resources. This might at first glance be perceived
as an extra cost, but the true belief is that making things right from the start
saves money at the end.
5. CONCLUDING REMARKS
Implementation of the global planning concept has lead to several
improvements
in IKEA’s supply chain, such as reduced stock levels and improved service
levels. Figure 5 illustrates characteristics of and main differences between the
old and new planning concepts.
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Old planning concept
• Functional orientation
• Limited transparency
• Reactive behaviour
• Extensive manual work
• Unreliable planning information
• Lack of trust
• Fluctuating goods availability
• Over stock
New planning concept
• One integrated planning process providing
reliable planning information
• A common ”working-together environment”
creating supply chain visibility
• Working methods and tools to detect and
deal with problems at an early stage
• A coordinated and ”balanced” Supply Chain