Research Paper on IKEA

Research Paper on Logistics and Operations in IKEA:

Founded in 1943, IKEA started as a small company in the South of Sweden and spent half a century to become one of the world’s top retailing enterprises with operations within 40 countries. Nowadays it is a multinational company that produces all types of furniture elements and interior decorations. The company now offers the consumers the total brand experience under one roff (Zaccai 2006). According to the corporate web-site (IKEA), the company then was identified as a furniture store, and a few peculiarities were introduced to serve the business model: design of the furniture and the channels of promotion were established. Nowadays the company is defined as the world’s biggest home products retailer. From the operational perspective, the company appears to be an exciting case study. Let us now get deeper into company’s logistics management.

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Operational structure
At first glance, the operational structure is obvious: the designer department develops of a product, the purchase department buys raw materials for the designed products, manufacturing plants produce the order, and the order then gets transported to the distribution center. The network of stores is the final link in the chain. There the final customers can purchase products on a retailing basis. It is necessary to mention two things here. Firstly, actually the customer is the last link in the supply chain. He or she buys the products which need to be assembled before they can be used. IKEA ensures the simplicity and easiness of transportation and installment for the consumers. This allows IKEA to keep prices lower and eliminate the assembly department as a unit within the organization. Taking into consideration the number of goods sold each year, keeping such a department would be too costly and not reasonable. “It allowed easier shopping for urban Europeans who depended on public transportation, and it also lowered the company’s shipping costs dramatically” (Mental Floss). One can relate it to the lean operations approach for that assembly of the furniture is a non-value added activity. Secondly, IKEA avoids warehousing in the stores keeping the inventory in the trade halls. This can be determined as an application of Just-in-Time concept: the consumers are sure that they will get what they want because it is on the shelf. One cannot buy something that is not displayed. The next lines identify the corporate concern on this issue: “It’s not enough just to make sure the goods arrive at the right stores and customers at the right time; they must also arrive in good shape, ready to be sold at the lowest possible price” (IKEA. “Business Types”).

Processes and Operations
Let us now observe the structure of the company and its main operations more precisely. The article “Retailers in the Top 20: Pathfinders for an Industry 2010” reports that IKEA, being one of the world’s leading retailer not only in the area of household products, has slightly more than 300 stores in 40 countries where 123,000 people are employed. IKEA claims to be environmentally friendly in manufacturing and bases production on global sourcing: over 1300 suppliers from 50 countries provide raw materials and components for the company (Capell et al. 2005).

The geography of the company’s operations includes four continents for retailing and three continents for manufacturing. Such broad retailing is possible due to the unique system of franchising implemented by the company. In production, the company uses plants based in Europe, Asia and Northern America.

The manufacturing capabilities include 49 plants in 11 countries. They take raw materials from the purchase centers, the amount of which is equal to 41 in 30 countries. After the goods are produced, they move to 16 countries for distribution. The total of 27 centers and 11 centers for customers are owned by IKEA. In the company, the inventory management is efficiently maintained: the ready-made products from the plants get to the distribution centers, from where the inventory is allocated between the stores in the regions. Inventory has a short waiting time till it moves out.

Taking into consideration the fact that IKEA applies global sourcing, one may notice that diverse transportation modes are used by the company. Europe accounts for 70% of production, while China is still the leading manufacturer. Being of Swedish origin, the company has the fourth largest production capacities in Sweden and takes Swedish wood as the material for the furniture (Swedwood). IKEA employs road, rail and waterway transport and rejects the air transport because of the high costs incurred.

Distribution centers are the links in the supply chain that make the movement of IKEA products to the stores possible. The flow of goods is accomplished by transport operational department ensuring connection with the carriers and the warehouse operational department which reacts on the demand. Products are classified according to two categories: low-flow range and high-flow range (IKEA. “Business Types”).

Low-flow range accounts for large regions with the idea of central storing. At the same time, specific markets are supplied from the centers with high-flow range. Among the divisions responsible for distribution, one may distinguish between store and customer distribution. The managers involved in store distribution identify the demand and the volume of goods necessary to satisfy it. Lean operations concept is applied when sending the orders to the distribution center. Later, the logistics department takes care of the orders and allocate the products for each store in each area. The customer satisfaction is the driver to optimize the system, reduce unnecessary activities, and show involvement in the process. It may not be so critical when managing the order for the store, but more than important in individual orders.

Currently IKEA aims at making more direct deliveries to the customers. Direct channels operating via Internet and telephone now allow the customers order necessary products without visiting a store. In order to meet customer expectations, the company improves its distribution performance and logistics solutions in delivering products from the warehouses directly to the customers, report IKEA’s official website (IKEA. “Business Types”). In the supply chain of the company, several managers are assigned to inspecting the way the products flow in the supply chain. Quality manager checks the correctness of the operations at the warehouse, goods flow coordinator deals with the amounts of inventory and supply chain costs, and transport business developer manages logistics scenarios.

Logistics
Logistics represents a huge part of the operations within the company. IKEA’s “Business Types” section of the corporate website informs that logistics involves one fifth of all personnel working in each store. Here are the operations which comprise logistics in the company: receiving and replenishment, managing logistics, and stock controlling. Employees dealing with receiving and replenishment are responsible for allocation of goods within correct sales areas and locations. This part of logistics incurs mostly physical movement of goods at the places of storage applying the analytical approach for product distribution. When managing logistics, IKEA employees prove to be efficient in utilizing storage space and ensuring the allocation of right quantities for the given regions and stores. Stock controlling is the process of tracking goods as they move in and out. It involves conducting inventory and logistics procedures as precisely as possible. Namely this department is responsible for capacity planning and control. After the demand and the capacity of the distribution center are identified, the order is processed. Demand is actually estimated on a long-term basis because the distribution network of the company is already known and foreseen.

Capacity management is well applied at IKEA. Different types of controls regulate the delivery of products from the distribution centers to the stores ensuring that the volume and quality of goods ordered is right and adequate. However, some countries and cultures experienced problems in utilizing the purchased goods. The parameters of products were not suitable for the United States: the measurements and their representation were not adapted so they were not applicable for the American way of life. “American customers were buying vases to drink from because the glasses were too small” (Capell et al. 2005). In this case, either the capacity should be changed or the products should be better adapted.

IKEA’s relationships with the suppliers are a vivid example of the lean operations concept. Minimum waste and maximum efficiency are the key indicators of high performance of IKEA’s co-workers (IKEA. “Business Types”). They form teams, and each team deals with a certain geographical area establishing and maintaining the relations with the partner companies. “The Never Ending List” (IKEA. ”The Never Ending List”) incorporates the improvements made by IKEA for the benefits of customers and the humanity in whole. Among the improvements, one may see a list of achievements made in the field of inventory and product supplies. One of directions is using the leftovers to produce new products increasing the turnover and replacing waste with new products. Other direction is working with permanent suppliers within the agreed conditions. “By supporting suppliers we want to motivate them to take more responsibility for people and the environment” (IKEA). Established relationships with suppliers help to plan the volume of inventory better so that the Just-In-Time concept is more efficiently applicable. If a violation occurs, the supplier has to present the plan for the improvement in the next period. It’s a standardized work procedure as well as many other according to the IKEA’s Code of conduct. Team work is an obligatory part of the corporate culture, which ensures the concordance with the maintained principles. Besides, supplied raw materials have to coincide with the requirements on quality, IKEA’s accepted standards, and environmental protection policy.

Although it is said that the elimination of unnecessary processes fits better in smaller businesses, IKEA, being a large corporation, manages its operations extremely efficient. Being concentrated on decreasing costs, the company uses every opportunity to spare. Pursuing the JIT concept, IKEA purchases plants and factories to succeed in tracing the level of supplies. In order to better understand the production conditions, employees responsible for planning and designing often visit the production sites. This helps in problem solving and increases trust among the co-workers.

One of the criteria for choosing a supplier is the environmental concern in production. Purchasing is accomplished after selecting an appropriate supplier and ensuring the quality of goods. The material area incorporates planning for the volumes of materials and supporting deliveries. Known for the intentions to keep costs as low as possible, IKEA tends to utilize raw materials of suspicious quality. Nowadays, IKEA is the world’s third-largest lumber consumer (Butler 2009).

According to the words of Ellen Shell (2009), when purchasing raw materials, “the company declines to pay a premium to ensure that all timber is legally harvested, citing costs that would be passed along to the consumer”. Besides, many other products are not made of wood that doubts their long-lasting abilities.

As seen above, in each department the quality control is established. The definition of quality in IKEA is based not only on the absence of defects in the products, which could occur on the stages of either manufacturing or transportation, but also on the sequence and precision of processes these goods go through on the way from the assembly plant to the final consumer. Before production, raw materials are also tested for quality. Such tests instantly assure that the final goods would have much lower rate of defects.

Consumer assumptions
The goods at the stores are already packed and sorted. The shelf system in each store resembles a warehouse with consumer-friendly options. Besides, each store is supplied with a huge showroom where the products are displayed in terms of a usual household environment (Mangla 2008). This allows a regular customer to observe the potential purchase, evaluate it, and even try it just at the point of sales.

The flat packaging is what makes IKEA’s furniture unique. The system of breaking down a piece of the furniture into parts allows assembling even by a non-professional in the home conditions. It allows saving 50% on shipping costs for all the products on average and frees up space in the stores and during transportation to the place where a certain piece is about to be placed (Capell et al. 2005).

Secondary Services Operations
Besides retailing, IKEA also provides secondary services and sells additional goods to the customers. These secondary areas include restaurant and bistro, food shop, babysitting area, and shuttle buses (Mangla 2008). The food in the food stores is mostly packed in long-term storage packages or frozen. All items are produced by companies of the Swedish origin and distributed to all IKEA stores worldwide. Now IKEA is one of the world’s largest distributors of Swedish food (Barkeman 2006), while food sales reach up to 5% of company’s annual profit.

The shuttle buses provide transportation for the consumers without cars for that the stores are always located far away from the city center which makes it usually difficult to reach them on feet. An average consumer spends nearly 80 km when driving to the store (Shell 2009, 65) just because the costs of building a store in the suburbs are significantly lower compared to costs for managing such a huge site somewhere closer to the city center.

Conclusion
IKEA is a demonstrative example of how a company of enormous sizes manages to add value and bring customer satisfaction through the processes and operations it implements. There is a long way from the designer idea to the final customer who comes and buys an item in a store. This way incorporates the sequence of departments and units within the company, which differ from each other in location, type of job and duties. IKEA is a public company with the environmental concern, and this claim adds responsibility to the management and the employees when developing new products and concepts.

IKEA is about declining the cost. In order to keep the price low, the manufacturing and operational costs should also be decreased as much as possible. From the logistics point of view, there are several reasons how IKEA achieves this. At first, the turnover of goods is so high that the price of each is miserable compared to more premium and unique products of possible competitors. At second, global presence allows to implement the global sourcing approach. The goods are produced in more countries than they are sold in. At third, operating the production lines in China appears to be cheaper than in many other countries decreasing the cost for a certain group of products. At fourth, shipping by relatively cheap transportation methods has a favourable effect on the price. At fifth, the stores are usually built in the city suburbs or outside the city, and this helps to decrease the cost of the land. At sixth, the trade hall (not the showroom) incorporates the function of the warehouse as well. As a result, the design of the trade hall is cheaper and there is no necessity for additional storage of the products. Finally, the customers assemble the furniture themselves – there are no costs incurred in assembling.

Taking into consideration the aforementioned, one may find IKEA to be an optimized business structure that is capable of sustaining its competitive advantage enjoying profits even in terms of the decline in the world economy.

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