“To design a desk which may cost $1,000 is easy for a furniture designer, but to design a functional and good desk which shall cost $50 can only be done by the very best. Expensive solutions to all kinds of problems are often signs of mediocrity.” – Ingvar Kamprad, Founder of IKEA
Today, IKEA is the world’s largest furniture retail chain with 315 stores in 27 countries generating over $35 billion of revenue. At a time when online shopping is disrupting the traditional retail model, the Swedish retail icon has drawn more than 715 million visitors to its stores in 2014. IKEA has positioned itself in a highly competitive industry as the provider of affordable, high-quality furniture to the masses. But how does IKEA do it? How can it consistently offer innovatively designed furniture at such a low price?
IKEA’s business concept is “to provide well designed, functional home furnishings at prices so low that as many people as possible will be able to afford them.” Traditionally, people have viewed furniture as a meaningful investment and more of a permanent product within the household. IKEA has revolutionized the consumer’s way of thinking by introducing furniture that is well designed, but intended to be used immediately and disposed of in a shorter time frame (i.e. when worn out or when the user has moved on to a different taste level). This is achieved by producing home furnishing products with a focus on combining function, quality, design and value.
IKEA has successfully capitalized on a differentiated low price business model by having this vision permeate through every part of the organization, from design, sourcing, packing and distributing. Low prices require sustainable low cost and efficient operations at every step along the way. IKEA is a clear “winner” by its proven ability to consistently offer high quality products at affordable prices through optimizing its entire supply chain, operations, and inventory management to support a low price, value oriented product offering for the consumer.
IKEA is able to offer more than 9,500 products at low prices as a result of strategic supply chain processes, efficient back-end operations, and best-in-class inventory management techniques. These various functions work together to support IKEA’s distinctive value proposition.
Design & Packaging
The value chain begins at the very ideation and design of the product itself. IKEA excels at designing products that incur low manufacturing costs while meeting strict requirements for function, quality and efficient distribution. IKEA seeks to use as few materials as possible to make the furniture, without sacrificing quality, in order to make packing, handling, and transportation more cost efficient. Based on conscious design considerations, ready-to-assemble items are then provided to customers in flat-packed form which results in reduced cost of shipping, storing, construction and assembling.
As a high volume, global retailer buying products from more than 1,800 suppliers in 50 countries, IKEA understands the power of strong communications and relationship management with materials suppliers and manufacturers. This is clearly evidenced by its 43 local trading offices in 33 countries to manage relationships with suppliers and ultimately ensure more than 95% of inventory will be in stock. Given its size IKEA should foster competition and leverage its suppliers against each other, right? No. IKEA believes in making long-term business relationships with its suppliers by signing long-term contracts, thus realizing sustainably low cost of goods sold in a volume business. For IKEA, the suppliers are not simply an isolated function within the overall value chain, but instead viewed as a collaborator in which IKEA personnel can work side-by-side with individual suppliers directly at their factories. As IKEA describes, “With [the suppliers] help, we’re able to use the most efficient, cost-effective and creative ways to bring our designs to life. It’s this special spirit of togetherness that allows us to make advances in smart product design, packaging and distribution.”
At a typical IKEA store customers can browse for items in a comfortable showroom environment on the first and second floors and then obtain any desired product themselves from the ground floor pallet location. So why is IKEA different? IKEA is able to reduce the “cost-per-touch,” the idea that the more hands that touch the product the more it costs, by operating in a unique physical environment in which the retail store is also the warehouse itself. This is why IKEA wants as much self-service as possible and leaves the onus on the customer to obtain the product themselves from the ground floor location. The key to IKEA’s inventory system is to manage this retail-warehouse relationship via tightly controlled in-store logistics.
IKEA is able to store a large amount of inventory because the products are flat packed by automated machines which work 24 hours a day, 365 days a year. IKEA employs in-store logistics personnel (which is relatively rare in retailing) given the large amount of inventory and necessity of an efficient flow of goods to support high volume sales. There is an in-store logistics manager responsible for the ordering process and a store goods manager responsible for material handling logistics at all IKEA stores. The in-store logistics managers use an inventory replenishment management process developed by IKEA called “minimum/maximum settings” to strategically balance customer demand (minimizing stock outs) and warehousing (inventory/space management).
- Minimum settings: The minimum amount of products available before reordering
- Maximum settings: The maximum amount of a particular product to order at one time
A Model of Excellence
From the maze-layout of the showroom to the revolutionary idea of having your customer assemble the furniture themselves, IKEA has built a tightly aligned operating model to support its vision of “providing a range of home furnishing products that are affordable to the many people, not just the few.” These highlighted strategies, combined with the many other unique operating intricacies not mentioned here, have made IKEA the world’s most successful furniture retailer with high product demand and low operating costs.
- http://www.ikea.com (Company website)