3a=Case Study - IKEA Trading Area Poland

3a=Case Study – IKEA Trading Area Poland

Introduction
Go into an IKEA store and you will notice that it is essentially self-service and, once you
get your purchase home, self-assemble. Most business commentators have held this up as
an example of a clever retailing operation – many of the usual costs have been passed to
the customer, such as finding the item in the warehouse. However, a close look at the
whole IKEA operation reveals that the layout and service in their stores is just the
outward, customer-facing evidence of a highly efficient supply chain that goes right back
to the raw material in the forest.

What is striking about IKEA’s business model is the analysis in minute detail of all costs
in the value chain from the tree ‘on the root’ through sawmilling, plank or chipboard
production, component manufacture, packing, storage and transport at every stage in the
chain through to the customer’s trolley. It is seen as irrelevant whether the materials are
in IKEA’s ownership or in the hands of their suppliers and sub-suppliers at any particular
stage. The supply chain is the entity and all the legal trading entities that participate in the
delivery of any particular product do so in a boundary-less way.

For example, accompanying an IKEA team around one of their suppliers’ factories one is
struck by the familiarity the team members have with the layout and processes on the
shop floor, the stocks of raw material and where they come from, the outbound logistics
down to the way that the lorries are packed. They greet their opposite numbers as if they
are colleagues in the same firm and there is no trace of wariness or the traditional
adversarial customer-supplier relationship.

The IKEA Structure
IKEA’s structure is designed to optimise the efficacy of the design and supply processes.
It is split into 4 distinct parts that operate as a type of internal market. IKEA of Sweden
(IOS) has the headquarters function. It is split into 12 Business Areas aligned to products
(e.g. sofas, dining furniture, beds etc.). Under IOS the Retail Division controls all the
stores, the Distribution Centres are likewise grouped under distribution and the Trading
Areas deliver the purchasing and supplier support functions.

                                    IKEA of Sweden
                                         ( IOS)
                                 Headquarters, design
                                 and marketing functions

           Retail                    Distribution              Trading Areas
                                                               (Purchasing,
                                                               logistics & supplier
                                                               support

The way that the internal market works is that the Business Area Manager commissions a
product using an integrated project team that includes a designer (either freelance or from
one of IKEA’s 2 design schools in Sweden), a technician and a product developer. The
‘Istra’ (the marketing decision maker in the Business Area) will then set up a competitive
tender to decide the country of production. The trading areas compete to win the contract
to supply that product or product range, either globally or regionally, in a tender process.
Thus Trading Area Poland will cooperate with manufacturers in Poland to supply it at the
best possible price, the criteria being the ‘landed price’ at IKEA stores taking into
account all materials, processing and logistics costs along the way.

This sourcing system manages to be highly competitive and un-adversarial at the same
time. The TA Poland team are in effect ‘on the same side’ as the suppliers in the Central
European region: they are helping them to put the tender together to win the competition
against manufacturers in the Far East or elsewhere. This will involve looking not just at
price but searching for production capacity and economies in raw material supply and
efficient logistics.

Case Study: The Alve Office Furniture Range

TA Poland and pine furniture manufacturer Formaplan have worked together to win the business of
supplying a new range of office furniture globally. The project has involved developing new staining
and lacquering skills to win the confidence of IOS that they can produce the brown pine furniture to
a high standard. They had to submit prototypes for Istra approval.

They have had to concentrate production on a short supply chain in a pine forest area south of
Warsaw to be able to deliver a landed price anywhere in the world that competes favorably with
suppliers in other regions. The whole chain is as short as 30-60km, depending on where the timber
is sourced, from the forest to the dispatch of finished goods to the distribution centers. IKEA is
assisting Formaplan to build a railhead at their finishing plant to ensure that onward distribution
costs as little as possible.

IKEA logistics Experts have also assisted with advice on the packaging and the packing of items in
the containers, focusing on a 60% filling rate.

Formaplan will start to supply the furniture on an OPDC basis (Order Point Distribution Centre)
basis with a 20 working days lead time initially. Once the test run on the product has happened and
sales of the product settle down to a more predictable rate the intention is for Formaplan to ‘climb
the supplier ladder’ to shorter delivery times, initially to 15 working days. IKEA will determine the
service level for the Alve range that equates to the required availability of the product in the retail
stores, usually 90-99%. This will in turn dictate the quantity of buffer stocks that Formaplan have to
hold. The expectation is that as the accuracy of forecasting improves the requirement to hold stock
will go down. Formaplan will have complete transparency of all IKEA’s stockholding of the product
at warehouses and stores to assist them.

This is a big step for Formaplan. IKEA accounts for 40% of their business. They do not stand to
make huge margins from Alve but the volumes that IKEA guarantee will help them to expand and
they know that all being well it will be a lasting relationship.

Case Study – CIMIR sofa manufacturer

CIMIR in Brodnica, 2 hours north of Warsaw, is an IKEA supplier on the inside track. The
company’s founder was an IKEA manager in Sweden who then left to set up a manufacturing
company in Poland, serving the European market, and Mexico, serving the North American market.

In 10 years the company’s turnover in Brodnica has grown to €20m on 16000 m2 of factory floor
with a headcount of 400. The capacity is 500 sofas today with a surge capability of 600. They have
just changed their supply contract with IKEA. Previously they were manufacturing on a JIT basis
and delivering direct to stores on a 2 week lead time. They are now working on an OPDC basis
with a 5 day lead time, this necessitates holding limited stock; no more than one week’s worth
depending on the season and the proximity to a catalogue launch. The next step is to move to a 3
day lead time using a transit method where the sofas will be routed via distribution centres without
actually being taken into store.

A critical success factor in achieving these remarkable lead times has been the decision to divorce
the sofas from the covers so that they are manufactured and delivered separately and only marry
up when they come out of their respective boxes in the customer’s living room. This allows
simplicity in the manufacturing process as they are all one colour: white. That is not to say that the
product is ‘mass produced’. There is a batch size of one – even for covers - and a product range of
over 700 different styles. “ We could make 500 different sofas in a day” says the production
manager, “it would be difficult but we could do it!” Normal batch sizes are 25-50.

The supply chain is taut with all the components coming from a maximum of 2 hours away.
Although some inputs have been imported. For example polypropylene fibre comes from Korea.
Most of their suppliers have been with them for 10 years and they try to develop long relationships
rather than shopping around. The policy is to stay with the same supplier whilst negotiating prices
on a rolling basis. They cooperate closely with their suppliers, both on the design of new products
and in coordinating inbound logistics. They also help their suppliers with the purchase of raw
materials. For example they import plywood from Russia and the Baltic states at cheaper prices
than their supplier can achieve. They then sell it to the supplier before buying the components back
and assembling them.
Labour in Poland is cheap when compared to Western Europe standards but not by global
standards. A factory worker is paid Zl 2000 per month (£330) gross or Zl 1200 net (£198). The
Polish working week is constrained by law to 40 hours and the trend is downwards. The factory
works 2 x 8 hour shifts; 0600 to 1400 and 1400 to 2200 hours.

They acknowledge that Poland can no longer compete with the Far East on price. “We feel the
yellow breath on our backs!” as they say. The deduction is that they must compete on the
efficiency of their logistics and the service they are able to give in terms of short lead times and
small minimum order quantities, as well as quality.

CIMIR has just appointed a quality manager and they have 2 quality control inspectors. They are
implementing a TQM program and hope to have ISO 9000 accreditation next year.

The business process is as designed as far as possible on JIT ‘pull not push’ lines. CIMIR has full
visibility of IKEA forecasts and inventory holdings and they have developed their own forecasting
model based on trend analysis. Components arrive in exact quantities, pre-cut in the case of
wooden components and sometimes foam as well; although fabric purchasing is not possible on a
JIT basis. It is noticeable in the in-bound storage area that the components destined for IKEA
products are efficiently packaged to take up the least space on the shelves. There is no barcoding
as yet and the scheduling is still done manually but the goal is to have a fully computerized
enterprise resource planning system (ERP). The shop floor is laid out in cells rather than on a
process flow basis. Teams of 5-6 people assemble one complete sofa frame at a time from its
parts. This is a conscious decision to give teams ownership and pride in their work. The individuals
are all multi-skilled and enjoy greater variety of tasks than in a conveyor belt process. They have
tried kanbans without much success but are keen to try again.

The frames are then moved into the upholstery shop where again it is a cellular layout. Teams fit
the foam padding and the covers and wrap, pack and barcode the products for onward dispatch.
Special fire resistant foam is used for products destined for the British market. The whole factory is
conspicuous for its lack of work in progress, scrap or buffer stocks. The complete cycle is well
under 24 hours and most sofas go out the same day.

 The warehouse at the back of the factory is set up to load straight onto either trains or lorries.
Video cameras look straight into the containers to check on the loading for damage or smuggling.
The containers are then sealed. Barcoding facilitates computerized recording of outgoing loads. In
a small office in the corner clerks work on IKEA’s ECIS system to ensure that the documentation is
correct for customs clearance.

In the design workshop CIMIR’s designers are working with a team from IKEA in Sweden, including
a freelance designer, on a prototype for an IKEA competition to supply a new range regionally.
They will be up against manufacturers in other countries but IKEA’s Warsaw office is helping them
with their bid.

CIMIR has benefited from IKEA’s advice, particularly on logistics, and this spread of best practice
has enabled them to break into a number of new markets serving customers other than IKEA on a
make-to-order basis.

Supplier Support

TA Poland will continue to act as the regional eyes and ears on the ground acting as the
interface between IOS and the supplier. The purchaser will be responsible for regular
reviews of the supply contract. The technical staff will help with continuous
improvements on the design. The business support section will give advice on IT and
logistics. And the IKEA transport manager will book all transport rather than the

supplier, unless the supplier is able to extract the same terms. That achieves maximum
purchase leverage on hauliers and the best possible price for the movement of goods by
road or rail.

Lead times

Great emphasis is put on the ordering and distribution methods. IKEA’s suppliers are
categorised according to the lead time that they work on. IKEA’s policy is to try to
shorten lead times gradually. IKEA staff refer to the supplier ladder. A supplier may start
to supply goods on either a long warning fixed time delivery basis or a call-off >4+4
basis, in other words he will be given over 4 weeks notice of a 4 week window in which
he must deliver the goods. IKEA will then help the supplier to develop his business
processes to the point where he can progress to call off 4+4. Call offs are time based
methods and once the supply chain is functioning smoothly the supplier will progress to
an order driven method: Order Point Distribution Centre (OPDC) at progressively shorter
lead times, from weeks down to days, with the manufacture and delivery of goods being
triggered by orders. Once a supplier is able to achieve this they explore the possibilities
of cutting the distribution link out of the chain so that retail stores deal directly with
factories (Vendor Managed Inventory or VMI) perhaps with goods bypassing the
distribution centres altogether and going direct to retail stores, or going via distribution
centres but only on a transit basis so that there is not time for them to be booked in and
out of the warehouse.

This is supply chain management in its purest form. All links in the chain work together
to shorten the cycle time and cut out logistical costs so that products reach the customer
at the lowest possible price. The progression up the ladder is gradual and reached by
agreement with suppliers. The speed imperative has to be balanced against the
dependability of supply and the maintenance of high percentage availability of the
product in the stores. It is an IKEA mantra that customers cannot buy products if they are
not available on the shelves.

The Supplier Benefits
The degree of support is impressive. The manufacturer acknowledges that the margins he
earns from the products he sells to IKEA are far lower than from other customers but the
support he receives and the nature of the relationship he has with IKEA far outweigh this
disadvantage. This includes:
• Contractual Trust. He knows that he will always be paid within 30 days. He knows
that in all probability IKEA will stick with him and that, if for any reason the relationship
or a product is discontinued, he will not be disadvantaged and any stock in the pipeline
will be bought from him.

• Product Life Cycles. IKEA tries to keep product life cycles as long as possible.
Typically they range from 3 years out to 20 years. This helps manufacturers to plan for
the long term.

• Investment. If he has an opportunity to generate extra capacity that will allow him to
manufacture products more cheaply for IKEA they may assist with credits to allow him
to pay for the plant now and pay IKEA back with his goods later. If he goes to a bank
IKEA may help him to gain a loan by guaranteeing a certain level of future business.

• Focus on profit rather than volumes or margins. In his sales negotiations with the
IKEA purchasers he will be dealing with people who understand his business,
particularly the cost drivers. Whilst this could be viewed as a disadvantage when it comes
to price negotiations, it means that the IKEA traders will work with him to lower his
costs so that they can buy at an acceptable price and he can sell at an acceptable profit.
This contrasts with the ‘poker playing’ ‘take it or leave it’ approach that characterises
many such negotiations in the industry. Ultimately IKEA want to keep the same suppliers
for a long time so that they can develop them and to avoid the expense of starting new
relationships with suppliers.

• Technical advice. IKEA staff are on hand to give advice on a number of aspects of the
business from the layout and flow on the factory floor to the design of packaging. This
allows the supplier to develop distinctive competences in, for example, the application of
veneers and lacquers.

• IT. The supplier will be linked to ECIS, IKEA’s own system. This will allow him to
have total transparency of the supply chain so that he can see IKEA sales forecasts and
view inventory levels in distribution centres and stores. This helps him to anticipate
orders. Upstream, the system facilitates JIT from his sub-suppliers. As the system
becomes more refined additional benefits are coming on-stream such as a worldwide
trading domain for IKEA partners to allow them to find the cheapest sources of raw
materials and components.

• Logistics. IKEA has a strong logistics competence that it spreads to its suppliers. This
comes partly in the form of advice. The IKEA logisticians will work through every
element to find the most cost effective option from the packaging, through the filling rate
of containers to the route and choice of transport system. It also comes in the form of a
railhead, if it is viable, that gives a cost reduction of around €10/m3 for all goods leaving
the factory.

From a supplier’s perspective a solid relationship with IKEA gives his operation a critical
mass and the development of expertise and ‘best practice’ that can be put to good use in
winning business from other customers.

The Purchaser Perspective

IKEA’s commitment to an HR policy that gives its managers a broad training is a
contributory factor to the effectiveness of its purchasers. The purchaser will have gained
valuable experience in other areas, such as supplier support, that gives him a powerful
insight into the cost drivers in the price equation. However, his brief is not to focus
exclusively on price but on the future potential of supply relationships and the generation
of capacity. If price is a problem he will work with the supplier to reduce the costs rather
than looking for a different supplier. This is the essential difference between IKEA’s
approach and many others in the industry.

The Design Perspective

IKEA’s commitment to design is illustrated by the fact that the company’s biography of
its founder Ingvar Kamprad is entitled Leading By Design1. It is core to the company’s
philosophy that they should design products that are functional, simple, well made and
‘cheerful’ with a distinctive IKEA image and at a price that everyone can afford. This
means a commitment to design that not only concentrates on aesthetics but also on
economy of effort in materials, assembly, storage and transport. IKEA is an exemplar of
‘lean design’. Designers have to understand the whole supply chain process and tailor
their products accordingly. The integrated project team (IPT) approach ensures that all
these aspects are covered. And the internal market ensures that prototypes from aspirant
supply chains are rigorously tested through the manufacturing and logistics phases of
production.

The Logistics Perspective

The Logistics Manager and the Transport Manager run logistics audits of their suppliers
together to identify bottlenecks and improve processes. In TA Poland there is a clear
structural distinction between transport and logistics. The essential difference is that
transport deals with the present and logistics deals with the future. Interestingly the Army
makes the same distinction. The Transport Manager deals with the physical movement of
goods and the actual booking of carriers. The Logistics Manager focuses on continuous
improvement and the progression of suppliers up the supplier ladder. He will search for
new ideas to smooth the flow of goods through hub and spoke systems using best sources
of rail or road options. He will try to put railheads into factories and warehouses where
possible to give an alternate option to road transport. A comparison of the two transport
systems in Poland is shown below:

Road                                                   Rail

€19/m3 to Sweden                                       €9/m3 to Sweden
Faster                                                 Slower
Less Reliable                                          More Reliable
Eco-unfriendly                                         Eco-friendly
80 m3 capacity per lorry                               200 m3 capacity per waggon

Smart logistics at IKEA also includes a very rigorous analysis of the way products are
packaged – in the famous flat-pack boxes – and then loaded into containers. Damage in
transit is kept to a minimum by strict guidelines and templates for loading. Photographs
of damage incidents are taken and lessons learnt and disseminated. It is not uncommon to
see video cameras at IKEA suppliers’ factories monitoring the loading of containers (and
ensuring that there is no smuggling of illegal cargoes out of Poland).

1
    Leading by Design The IKEA Story by Bertil Torekull Harper Collins 1998.

IKEA apply the SCM doctrine to picking. There is acknowledgement that the task of
picking items from shelves to make up orders has to be done somewhere in the supply
chain. They analyze the respective efficiencies in the suppliers’ warehouses and the
distribution centre warehouses before making a decision.

The development of highly organized hub-and-spoke distribution systems allows
minimum order quantities to be kept low. It is possible for a carton, rather than a pallet or
a container, to be dispatched from the factory to the distribution centre where loads are
then consolidated before being transmitted as containers to destinations around the globe.

The Quality Perspective

It is a tenet of the IKEA creed that they do not chase after quality for its own sake. Their
products are not over-engineered to give a greater finish than the customer requires.
Nevertheless quality is taken very seriously and the whole supply chain participates.
Their definition of quality is that the product must first be available in the store and
secondly it must match up to the customer’s expectations: it must be complete, free from
defects and easy to assemble. Returns to stores are analyzed and each product is carefully
monitored. TA Poland then runs Project OCTOPUS. This entails a team made up of
people from all parts of the supply chain, TA Poland staff as well as suppliers, going to
IKEA stores, possibly overseas, and carrying out rigorous inspection of the products
there. When they find defects they then track back to see where in the supply chain they
have occurred and how they can be prevented from happening again. In this way
problems with damage in transit or poor factory quality control are discovered and put
right.

Quality is also assured by the frequent interaction between TA Poland staff and their
suppliers. Purchasers often go into factories and carry out inspections of IKEA products
being made there.

Questions

1. Product flow structure is described as the network structure for sourcing,
manufacturing, and distribution across the supply chain. Since inventory is necessary in
the system, supply chain members may keep a disproportionate amount of inventory.
When decisions are made to rationalize the supply chain network, it is necessary to
determine where the inventory should be held to maximize total supply chain efficiency
and effectiveness. Inventory represents a large percentage of a manufacturing firm’s
investments in assets and a much larger percentage of the assets for wholesalers and
retailers.
What are the implications of this for managing inventories in the supply chain?

2 Do you agree with idea that in the future the nature of competition will not be company
against company, but supply chain against supply chain? What if the company share the
same supplier with competitors, or your supplier is also your competitor ( for example:
Wal-mart and Goodyear, Goodyear sells tires to Wal-Mart but also sells tiers by itself )
Do you agree that the Supply Chain Management in Poland is the best answer for Asian’s
competitors?

3 As Logistics and Product Development are only part of Supply Chain Management,
What future improvements you could suggest (see picture below) for IKEA? As a CEO
of company what information from your suppliers and customers you would like to
know? What information you would be likely to share with them?

4 Based on your knowledge describe what the terms logistics and supply chain
management mean to you. How are logistics and supply chain management similar
and/or different? What difficulties would you expect to encounter when trying to
implement supply chain management?