Supply Chain Management

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Introduction

An efficient supply chain management system aims to minimize supply chain costs

and increase the efficiency of flows and processes (Blanchard, 2010). To achieve

goals and sustain growth, basic supply chain flows are necessary to be properly

developed and managed. Thus, the make process and demand forecasting become

the significant aspect in supply chain for companies to emphasize on. The purpose

of this essay is to focus on IKEA’s supply chain management through examining the

effectiveness of three primary aspects, which are supply chain key flows, production

scheduling & material requirement planning, and supply chain forecasting.

IKEA, a Sweden home furnishing brand established in 1941 by Ingvar Kamprad, is

the largest furniture manufacturer and retailer in the world (IKEA, 2017). Focused on

making a better lifestyle for all people influenced by their business, it has composed

of several factors in manufacturing of their products such as low-cost, well-design,

and function. As of today, more than 400 retail stores across 30 countries is owned

and operated by IKEA Group, making about €35 billion of total revenue in fiscal 2016

(IKEA, 2017). It has over 9000 items in the product range such as office series, bed

room series, kitchen series, lightning series, textiles, dinning series, bathroom series,

and children’s items series. Ready–to-assemble furniture is the most popular and

biggest selling flat pack invented by IKEA, since all furniture components are

packaged in flat pack and required only simple assembly, consumers can save the

cost of furniture purchases and delivery (Kara, 2015). Moreover, IKEA home

furnishing products are designed in Sweden headquarter, manufacturing has been

subcontracted to OEMs in China and other countries of Asia (Loeb, 2012). To

facilitate the sustainable process and reduce the environmental impact, the company

has a sustainability plan for all the raw materials sourced (IKEA, 2017). Needless to

say, improvements in its supply chain management are required to further guarantee

its success.

The Key Flows in Supply Chain

(Threadpunter.com, 2017)

The diagram above illustrates the basic key flows of IKEA’s supply chain with

respective entities, which are raw material supplier, final product manufacturer,

distributor, retailer, and customer (Scm-institute.org, n.d.). The four key flows to

connect the supply chain entities together are as follows:

Information flow

The centralized supply chain of IKEA transfers all types of information and operating

instruction from the headquarters in Sweden to over their hundreds of retail units, for

example, stores layout, product catalogs styling, shopping bags color, and staff

uniforms (Grant & Jordan, 2015). The company also completes sharing of integrated

information for team building and planning across corporate boundaries, including

supplier and suppliers’ suppliers, and customers and customers’ customers.

Internally, each department carries out their functions with great collaboration

between various divisions. Externally, there is also the partnership formed with

customers and suppliers for decisions making.

Primary cash flow

Financial flow of IKEA between parties of raw material suppliers (creditors) and

customers (debtors), performing the functions of customer payment, transaction

accounting, and supplier settlement (Ikea.com, 2017). Primary cash flow comprises

of cash inflows and cash outflows. Cash inflows include normal cash sales, credit

sales, and interest from investments. Cash outflows include payments for supplies,

payment for operating & non-operating expenses (e.g., labor wages and insurances).

Primary product flow

IKEA designs and sells a variety of home furnishing product at a low costs. The

suppliers provide IKEA with the primary resources for all kinds of furniture, such as

wood board, metal product, finished leather, oil and minerals. The company sources

raw materials worldwide from over thousand suppliers; as for instance, Baosteel Co.

Ltd – stainless steel, Steel Stone Co. Ltd – nuts, bolts and screws, Royal Leather Ind.

Ltd – finished leathers, Parallel Ltd – polyurethane foam, and Solrac Coatings –

liquid coatings. Moreover, IKEA’s subsidiary Swedwood supplies timber and timber

products for its own furniture production (Woodworkingnetwork.com, 2008). IKEA is

the final product manufacturer who turns the primary resources into a variety of

furniture. It has over forty distribution centers in 18 countries, and all are attached to

retail stores for directly selling the furniture products to the end customer

(Natgeotv.com, n.d.).

Return product flow

IKEA creates a product returns management system to recall back the faulty

products from end customers and perform repair or replacement services. The retail

stores typically collect the dissatisfied products from customers and the returned

products is further sent to their Sweden headquarters which can recycle the product

and redistribute it again through the supply chain (Ikea.com, 2017). A recall is often

held for safety reasons over a manufacturing defect or design defect in a product

that can possibly result in death and injuries to user. In 2016, IKEA was actually

demanded a global recall for over millions of MALM dressers (Dailymail.co.uk, 2016).

This is due to the unstable furniture problem that caused the fatal accidents in

children.

Recommendation

Information flow can be improved by running CPFR model to coordinate all aspects

of supply chain information to the relevant entities. Collaborative Planning,

Forecasting and Replenishment (CPFR) make extensive use of internet to transmit

the real time information from downstream to the upstream, including inventory

status, sales forecasting, order planning, and information on retail sales (Seifert,

2003). CPFR is also a solution to the bullwhip effect which happened as a result of

information distortion. For instance, the retailer can share an access host database

with their distributor and manufacturer in other countries on a 24/7 basis. Therefore

all decisions for planning and forecasting can be able to come from the upstream

side, and to perform replenishment based on the agreement between supply chain

entities.

Primary cash flow can be improved through effective management of working capital,

which is the money a business uses within their daily trading operation (JPMorgan,

2014). The key to managing working capital is the timing of cash movements, for

instance, to delay cash outflows for as long as possible and or to receive cash

inflows as quickly as possible (Macpas.com, n.d.). This can be done through supplier

negotiation to request for longer trading credit period. Another way is to reduce the

credit offered to customers and or to shorten the length of credit period offered to

customers.

Primary product flow can be improved by developing the appropriate supply chain

strategies. The Effective Reactive supply chain strategy is most suitable for IKEA as

he delivers the low cost flat pack all the way of their centralized business chain

(Threadpunter.com, 2015). Another benefit of this strategy is the effectual

management of total delivered cost (TDC), which include all cost related to handing

over a final product to the end customers (Joc.com, 2009). Efficient Reactive supply

chain strategy also requires integrated connectivity technology to enhance the

overall flow efficiency. For instance, all supply chain entities include supplier,

manufacturer, distributor, and logistics service provider can work together to perform

replenishment with new stocks for retail outlets within a day.

Return product flow can be improved with the application of reverse logistics

software solution, such as Optoro and Genco (Softwareplatform.net, 2016). Reverse

logistics software help retailers to manage returns and recover their value with

technology tools in a streamlined process (Forbes.com, 2017). For example, the

reverse logistics provider carefully test and screen the returned product according to

manufacturing specifications. Non-faulty returns are considered as reusable

inventory because they are still perfectly good, and as a result, the defective ones

will be properly recycled by following all security data and environmental regulations

(Industryweek.com, 2013).

The Make Process

(Wisner, Tan, Leong, 2014)

The diagram above illustrates the production overview of IKEA with detailed process

mapping: aggregate production plan (APP), master production schedule (MPS), and

material requirement plan (MRP).