SCM Innovation with IKEA, the Furniture Kingdom that Rules the World
IKEA is one of those companies that have succeeded in shattering a prejudice: low price means low quality. It comes in first among companies that have built success on such core capabilities as bulk purchasing and ordering, DIY, transport cost reduced by diminished volume, and simple timeless design.
IKEA is a global corporation that has 325 or so stores in some 40 countries in Europe, North America, and Asia, and hires about 130,000 persons around the world. The company makes the top forty on the list of 100 best global brands as disclosed by Interbrand, the world’s largest brand consulting group, and has come in second after Ferrero Rocher, the Italian chocolate maker, among “the World’s Most Reputable Companies” as selected by Forbes. Ingvar Kamprad, the founder of IKEA, was ranked fourth, after Bill Gates and Warren Buffet, among the World’s 20 Richest People as disclosed in 2012 by Bloomberg. The world’s most read book is the Bible, whereas the most read printed booklet is IKEA’s catalog. We’re going to look at the SCM innovation achieved by IKEA, a major global company that has written such innumerable records.
One of IKEA’s slogans is “IKEA sells inconvenience.” Customers come to a warehouse store where they browse and pick up products that they want. And unless they make a specific request for home delivery, the customers have to use their vehicle to carry a product to their place where they should finish its assembly. And that, for a pretty reasonable price. To perfect such a business model which is unique to the company, IKEA had to promote supply chain innovation in the furniture industry that registers a profit margin that is not too high.
Perfecting a logistics model through design innovation
One day, IKEA’s founder Ingvar Kamprad ran into an interesting scene on the street. A man was struggling to get a table into his car. Because of its legs, however, the table wouldn’t go into the vehicle, which wasn’t a truck. Taking his cue from what he witnessed, Kamprad came to design a prefab table that had its legs separated. Thus, IKEA’s signature flat package was born, and it remains as such. Since a finished product would be cumbersome to carry in a vehicle, they thought that it would work to get the legs separated from the table and let a consumer assemble them.
If put in flat packages, more products could be loaded into a vehicle, which naturally led to a supply chain revolution by IKEA. Provided customers carry and assemble products, it should reduce the workload for IKEA. In return, customers can buy products at lower prices, and this creates a natural win-win business model.
Furniture items are packaged as small and flat as possible to keep prices low.Compact package, which takes up a small space, can reduce transport costs and significantly diminish labor cost. In general, furniture pieces are bulky and require a lot of manpower, but when made into a small package, they can be carried in a single forklift.
Lovet Side Table, which marked the start of IKEA’s flat package, is shown here on IKEA US Instagram.
The hex key strategy
For this purpose, IKEA came up with hex wrenches. Hex wrenches are the most basic tools that people use in assembling IKEA’s furniture items. As IKEA does not consider itself a service provider, the company assigns to a customer 80% of the workload that occurs to the sales of a furniture item. Thus, customers buy products and assemble them at home. So, the system extends the conveyor belt as far as into the living room, thus boasting the advantage that a purchaser may deepen his or her affection for furniture by personally assembling it. This should be what leads the DIY culture, which is huge nowadays.
On the other hand, we often meet people who complain about the difficulty involved in assembly work. Still, the mode of operation can be understood as an element that has played a large part in establishing IKEA as a powerful brand by differentiating it from other companies. Furthermore, it is doubtless one of the factors that determine reasonable price, which is characteristic of IKEA furniture.
Efficiency and agility in supply chain management make IKEA’s competitiveness
Because IKEA’s logistics network characteristically deals with furniture, the company is predestined to pursue ever greater efficiency for its supply chain through economies of scale. It’s not just about economies of scale with the volume of its products and the size of its logistics centers. In fact, it is about reducing logistic costs and ensuring purchase of desired products anytime and anywhere through integrating and controlling its supply chain network, which masses the world’s suppliers, manufacturers, and distributors.
IKEA’s supply chain has three success factors. First, securing sufficient inventory lest short supply cause loss. Second, continuously developing products in reflecting consumer trends and securing flexibility to ensure their supply. Third, upgrading logistic efficiency and drastically lowering logistic costs.
For this purpose, IKEA develops over 1,000 products each year and gets materials from 1,300 or so suppliers in 55 countries. Major suppliers are based in China (18%), Poland (12%), Sweden (8%), Italy (7%), and Germany (6%), while its products supplied from all over the world are sold to consumers through 19 logistics centers in the Americas and Europe, and 28 logistics centers and 519 distribution centers around the world.
Now, IKEA guarantees next-day delivery for all its products sold online or offline to ensure their supply to the location and at the time desired by consumers. And for international orders, IKEA characteristically makes sure that products are shipped within three days from the day an order is placed.
When a consumer who lives in Northern Europe orders products, they are shipped from a logistics center and a distribution center in the most appropriate location in Northern Europe. Likewise, products sold in China are shipped to consumers through local delivery process, Shanghai logistics center, and distribution centers in different regions of the country.
‘Logistics innovation’ makes the core competitiveness for the IKEA brand
As bulky furniture items, which go from manufacturing to their home delivery, incur relatively high logistic costs and frequent damage, logistics comes as the biggest hurdle in furniture supply chain. To overcome this and achieve competiveness through reduction of logistics costs, IKEA considers logistic efficiency for all its operational stages of product design, production, and assembly.
Created in 1964, IKEA’s home logistics center in Stockholm, Sweden has storage facilities of 80,000 m2, composed of 50,000 m2 for a logistics center dedicated to automated storage and retrieval system (AS/RS) and 30,000 m2 for a logistics center for general distribution, where total 1,000 or so full-time employees work. The railway system installed in the logistics center automates all delivery in and out of the center, thus operating from 5:30 am to 11 pm to handle a yearly volume of orders tantamount to 230 million m3 which includes 12,000 m3 of small home furniture items.
Here also, IKEA’s flat-pack system cuts a figure, as it plays a crucial role in not only improving efficiency and reducing logistics costs, but also automating the operation of the logistics center. Flat-packing enables the use of trays, having thus drastically reduced to some 30 minutes the entire process of container packing as well as loading and unloading of containers that used to take minimum 3 or 4 hours.
Sophisticated IT system running IKEA’s home logistics center
IKEA has invested over 10 billion euros in its logistics system and IT system to build its 29 logistics hubs including its home logistics center. Currently, the WMS (Warehouse Management System) that is installed at IKEA’s worldwide logistics and distribution centers is said to register a system accuracy of 99.9% since 2006. When an order is placed through its OMS (Order Management System), it takes about 10 seconds at the minimum and 2 minutes at the maximum to complete a product search, which process is fully automated without human participation. Besides, to ensure high levels of loading ratio and inventory turnover ratio, product selection algorithm is used to allocate a 15% portion of storage space to those products that register high levels of demand.
Notably, IKEA’s WMS, linked to the safety management system of the logistics center, is designed to set off warning light and sound alarm when a palette is not loaded in the right position. It also comes with a full array of back-end, back-up, and security systems.
IKEA’s innovation in distribution one step ahead again
Now presenting a 3D app that exploits augmented reality (AR), IKEA realizes innovations in distribution. First Look, an app designed to help users place their furniture in their space, was released in 2013 and maintains popularity among consumers. The AR app serves to reinforce a consumer’s purchase experience by not only allowing a preview of furniture placement in one’s home, but also recommending different colors for specific IKEA furniture pieces or some other items that would go with them. For further details, please check the video below. You can see that the all-famous IKEA catalog is in use here, as well.
As we have seen, IKEA’s innovations have been realized in various areas such as design, customer experience, supply chain, logistics, and IT system. We see that the company has gone beyond the innovation of furniture as a product to upgrade the whole value chain of logistics stretching from production to consumer experience. Of course, such an achievement has required support from an IT system that could prop up the operation. Thus, SCM innovation is expected to increase the need for a system that presents a single view of the entire logistic flow.
The change will be accelerated with the rapid changes that are lately occurring in the logistics market, including the increasingly blurred boundaries as between online and offline, as described by Jin Cho, head of SCM Business Unit of CyberLogitec.