“For us, good design is the right combination of form, function, quality, sustainability and a low price. We call it ‘democratic design’, because we believe good home furnishing is for everyone. It’s why we’re constantly exploring smarter, thriftier ways to do things.” – IKEA Website
With revenue of over 29 billion euros in 2014, 315 stores in 27 countries, 9,500 product types, and 147,000 employees, IKEA Group is one of Sweden’s best-known companies. IKEA designs, manufactures, and supplies quality furniture at low prices to make it accessible to the majority of people. IKEA’s furniture products are designed to be sleek and minimalist, and manufactured to be easy to assemble and maintain.
IKEA is a great example of a company that effectively aligns it business model and operating model. In order to deliver on its customer promise of providing quality furniture at affordable prices, IKEA relies on its value chain to optimize its production and overhead costs, as exemplified below:
Product design process:
In order to reach the shop floor, a product must meet four criteria: affordability, sustainability, good design, and functionality. Interestingly, the design-planning of any product starts by first setting a price at which a product will be sold. As part of that, designers have to select which design elements, raw materials, and production techniques to use in order to reduce production costs. Furthermore, the designers often work on the factory floor, directly interacting with the manufacturing team in order to understand the capabilities and constraints of the manufacturing department, thereby streamlining the design process and minimizing the cost of the prototyping phase.
In addition to that, IKEA standardizes the production processes by using a limited selection of raw materials across the product ranges and it uses the same base design for different products (example: the chairs from the PELLO series have the same base design as chairs from the POÄNG chairs). This level of standardization results in lower rates of defect and scrap, therefore less waste and cost.
Production & Distribution:
IKEA has over 50,000 SKUs; in order to relieve the challenge of product variability, IKEA relies on extensive forecasting, and usually planning production five years in advance. Similar to Toyota’s Heijunka practice, IKEA relies on long-term planning to evenly balance production volumes across its network of more than 1,000 third-party manufacturers. As we learned in the TOM course, spreading out production demand allows for suppliers to have a uniform cycle time which ultimately leads to lower production costs per unit. Furthermore, with the help of an Advanced Planning and Scheduling software, IKEA allocates production to suppliers based on each supplier’s production capacity and raw material availabilities.
After productions, the products are transported to a network of 47 IKEA-owned, highly-automated distribution centers located in 17 countries. In order to optimize on warehousing and transportation requirements, the finished products are tightly packed into flat packages. This type of packages makes the finished goods easy to transport (leading to decreased transportation costs) and easy to store (leading to decreased warehousing costs).
After customers browse the shop floor and select the items to purchase, they head to the store’s warehouse to retrieve the packages themselves. Because the customers are responsible for picking up their packages, IKEA does not have to hire labor that would otherwise assume such a responsibility. This helps drive down IKEA’s labor cost.
Consumers play another role in IKEA’s low-cost strategy. Because the customers are responsible for transporting the furniture out of the store and assembling it, IKEA further saves on labor, shipping and overhead costs associated with furniture assembly and delivery.
Overall, I think IKEA effectively manages several key elements of its value chain from design-process to its retail stores, and it has access to customer’s demand patterns. With this information flow and control from one end of the supply to the other, IKEA is able to smoothen the bullwhip effect that other firms typically experience. This in turn helps IKEA drive operational efficiencies throughout the supply chain, resulting in reduced costs and lead times. Given IKEA’s strong financial performance with profit margins of over 11%, I believe that that IKEA’s business and operating models are strongly aligned with one another.
- IKEA Group Website (ikea.com)
- IKEA Group FY2014 Yearly Summary (http://www.ikea.com/ms/en_US/pdf/yearly_summary/ikea-group-yearly-summary-fy14.pdf)
- “Anatomy of an IKEA product” (http://www.cnet.com/news/anatomy-of-an-ikea-product/)
- “IKEA’s Inventory Management Strategy: Why It Works” (http://www.supplytimes.com/inventory-management/ikeas-inventory-management-strategy-why-it-works)
- “How is IKEA so inexpensive?” (https://www.quora.com/How-is-IKEA-so-inexpensive)
- “IKEA as an Innovator: The Right Combination of Execution and Ecosystem Innovation” (http://faculty.tuck.dartmouth.edu/images/uploads/faculty/ron-adner/17EIS_Main_Project_-_IKEA_-_Final.pdf)
- Lean Management of Global Supply Chain (Japanese Management and International Studies), a book by Yasuhiro Monden and Yoshiteru Minagawa, which can be find through Google Scholar (https://books-google-com.ezp-prod1.hul.harvard.edu/books?hl=en&lr=&id=qtqiCgAAQBAJ&oi=fnd&pg=PA65&dq=ikea+fabless&ots=YKAwVPF5JG&sig=flyn7qcY9IYSid6gzEi6S_ZnoJs#v=onepage&q=ikea%20fabless&f=false)