IKEA’s Operations Management
Category : Ikea Case Studies, Management Samples, Operations Management
IKEA’s Operations Management
Operations Management is the set of activities that create goods and services through the transformation of inputs into outputs. Operations management is the activity of managing the resources which are devoted to the production and delivery of products and services.
IKEA was created by Ingvar Kamprad 60 years ago. The Swedish company was based on the idea that as long as the price was right, customers would be prepared to travel out of town locations, queue, collect their purchases and assemble the furniture themselves (Doole and Lowe 2005).
IKEA’s mission was formulated by its founder, Ingvar Kanprad. The company’s mission is to offer wide variety of functional furniture for the house, of a quality and at a price affordable by a majority of people. The core principles of IKEA that seeks to achieve the mission are quality and economy. The principle of quality is applied at three points in the life of the IKEA products – creation, range and use.
1. Creation – IKEA designs its own products. Each product has a name rather tan a code because IKEA wants its products to be part of the family.
2. Range – Each item for sale in the stores, whether furniture or other products, is part of a coherent whole, designed in accordance with the expectations of a specific segment which can be young or old, high or low income, modern or classic, etc.
3. Use – IKEA furniture is submitted to three types of trial which test strength and workability as well as surface and resistance (Duquis and Dawson 1999).
Operations Management at IKEA
- Design products which can be flat-packed efficiently
- Site stores of an appropriate size in the most effective locations
- Design a store layout which gives smooth and effective flow
- Maintain cleanliness and safety of storage area
- Arrange for fast replenishment of products
- Monitor and enhance quality of service to customers
- Continually examine and improve operations practice
- Ensure that the jobs of all staff encourage their contribution to business success
IKEA’s Transformation Process
Transformation processes are used in all types of businesses. A transformation process uses resources to convert inputs into some desired output. Inputs may be raw material, a customer, or a finished product from another system. The different types of transformation processes are:
- Physical (as in manufacturing)
- Location (as in transportation)
- Exchange (as in retailing)
- Storage (as in warehousing)
- Physiological (as in healthcare)
- Informational (as in telecommunications)
IKEA’s Operations Strategy
Operations strategy is the total patterns of decisions and actions which set the role, objectives and activities of the operation so that they contribute to, and support, the organization’s business strategy.
The operations strategy of the company is founded on its mission of creating high quality products in affordable prices. IKEA’s business model is based on a simple idea: Furniture, if well designed, can be cheap without being ugly. The elements of the model include: attractive, low-cost, reasonable quality furnishings, limited variety, self-assembly; young-family-oriented suburban mega-stores with nursery and plenty of parking space; catalogue-driven self-service; and no costly advertising. These elements all keep expenses and prices down and they reinforce each other. Catalogue sales and limited variety make it easy to get along with fewer sales personnel. Standardization and focus on the product line make it possible to rely on suppliers that can be closely monitored and controlled by IKEA. Flat packages save space in transportation and warehousing. Suburban locations and large store reduce expenses, self-select for young families with cars, and reduce delivery costs (Miller and Miller 2005).
Typology of IKEA’s Operations (4 Vs)
1. Volume (High)
- High repeatability
- High specialization
- Capital intensive
- Low unit cost
2. Variety (Low)
- Low unit costs
3. Variation in Demand
- High utilization
- Low unit costs
- Short waiting tolerance
- Satisfaction governed by customer perception
- Customer service skills needed
- Received variety is high
- High unit costs
Because the furniture industry is highly competitive and fragmented, most (if not all) furniture retailers seek to create a sustainable competitive advantage. Differentiation is the strategy that furniture retailers employ. In the case of IKEA, sustainable competitive advantage was achieved because of the company’s added quality services. Potential purchasers try to find suppliers that offer them the greatest added value. As an added value and as a way to attract customers, IKEA offers superior customer service. IKEA meets customers with catalogs, tape measures, pens, and notepaper. The shortage of salespeople affords customers the opportunity to shop in freedom and to take notes. IKEA also offers services to parents while they shop such as the supervision of toddlers, infant-changing rooms, and attendants who warm baby bottles. Snack bars sell Swedish specialties at low prices. The strength of IKEA is its ability to shift a variety of cost burdens to the customer that might be found desirable or perceived as an added value. IKEA partners with its customers in ensuring that the customers save money by offering stylish, functional, low-cost home furnishings that customers must assemble themselves. Making the customers assemble their own furniture enables IKEA to save money on manufacturing and distribution, which they then pass on to customers in the form of lower prices at retail. To compensate for the customer having to do-it-themselves, IKEA offers other services that make this proposition attractive. These extra services include in-store child-care and play areas, restaurants, and longer hours of operations.
IKEA does not have its own manufacturing facilities. Instead, it is using subcontracted manufacturers all over the world for supplies. All research and development activities are, however, centralized in Sweden. In order to maintain low cost, IKEA lets its shoppers to assemble their own purchases. To facilitate shopping, IKEA provides catalogs, tape measure, shopping lists and pencils for writing note and measurements. IKEA’s designs and styles are very popular to its customers because it is able to blend quality, stylish designs and affordability. These characteristics make IKEA products very attractive to the customers. The IKEA design approach according to McDermott (2007) retains a strong Scandinavian identity seen in the use of natural wood, minimalist shapes, high technology, new materials and strong colors (as shown in the photos below). The company has extended the image of 20th-century Scandinavian Modernism and ensured that is has become an immensely widespread domestic living style.
IKEA’s design is made synonymous with middle-class taste and thereby becomes the vehicle by which visible signs of affluence are made accessible to people of modest means. Of special relevance is the fact that the IKEA emphasis on design gives expression to the centrality of style in the contemporary marketplace. IKEA products could be roughly described as interior European modernism done in Scandinavian style. But the company’s genius consists in joining the attractions of design to practicality and affordability along with versatility. By this means, it captures a broad demographic of consumers who can buy into a trendy middle-class lifestyle while gaining the satisfaction of purchasing highly functional and practical products at minimal cost (Dunn 2008).
Process Chart of IKEA’s Distribution Process
The supply chain of IKEA starts with product development at its headquarters in Sweden, and then the designs are passed to its suppliers in different parts of the world. Purchasing comes next, followed by distribution and then products are sent to the stores. Last in the supply chain are the customers.
IKEA operates 27 distribution centers in a total of 16 countries. From here IKEA products are delivered in 186 stores around the world. IKEA works in various ways to rationalize and simplify distribution. The secret is to calculate as exactly as possible how many products will be needed to satisfy demand. This eliminates any unnecessary costs for production and warehousing. The hallmarks of IKEA distribution are:
- Global distribution network
- Large volumes
- Flat packages
- Low costs
The fact that IKEA products are sold packed flat means that they can be transported with greater efficiency. By minimizing “wasted space” it is possible to transport and store more packages at a time. And by increasing what is known as “the filling rate” in containers etc. (in other words, reducing the amount of wasted space), the cost of transporting each item goes down.
IKEA designs its merchandise and outsourcers manufacturing to its dedicated manufacturers. IKEA then, transports finished goods from manufacturers to IKEA’s distribution centers in flat packaging. IKEA products are then subjected to inventory and then sent from the distribution center of different outlets.
Potential for E-Commerce
There is a potential for e-commerce at IKEA. IKEA can make use of e-commerce in order to integrate its suppliers and distribution networks. IKEA can create a global website. Ideally, a company builds its global web site in two stages: internationalization and localization, Internationalization is the process of preparing a web site so that it can be easily adapted to multiple locales, a locale may be a country, a language of both.
Critique of the Distribution Process
IKEA’s distribution process is very effective. The company’s network of suppliers and its strategically located distribution centers make distribution of IKEA products efficient. However, I think that the main concern for IKEA is its inventory management. In order to lessen inventory, IKEA can make use of Just-in-Time (JIT) strategy. JIT can be considered as a philosophy for waste reduction and continuous improvement, a method which to control and reduce inventory, a way of increasing throughput, and a production scheduling system (Lowson 2002).
In manufacturing, JIT is essentially a management philosophy where the primary objective is to achieve zero or minimum levels of inventory. The advantages of JIT include elimination of waste, enhanced product quality, improved employee morale and increased customer satisfaction (Reddy, 1994).
Doole, I and Lowe, R 2005, Marketing Decisions in Global Markets, Cengage Learning EMEA.
Dupuis, M and Dawson, J A 1999, European Case in Retailing, Blackwell Publishing.
Mcdermott, C 2007, Design: The Key Concepts, Routledge, New York.
Lowson, R 2002, Strategic Operations Management: The New Competitive Advantage, Routledge, New York.
Miller, D and Miller, I L 2005, Managing for the Long Run: Lessons in Competitive Advantage from Great Family Businesses, Harvard Business Press.
Reddy, A 1994, Total Quality Marketing: The Key to Regaining Market Shares, Quorum Books, Westport CT.