Company Background
IKEA, the world’s largest home furnishing retail chain, was founded in Sweden in 1943 by Ingvar Kamprad when he was 17 years old. The company’s name is the acronym of the founder’s initials and the village which he grew up, Elmtaryd, Agunnaryd. The company sought to sell affordable, quality furniture to mass market consumers around the world. By combining function, quality, design and value – always with sustainability in mind, its vision is ‘to create a better everyday life for the many people’.
IKEA (HK) is under Dairy Farm. Dairy Farm operates IKEA in Hong Kong, Taiwan and Indonesia markets on a franchise basis. It is also the leading home furnishing retailer in these markets.
IKEA's Supply Chain
IKEA supply chain management is impressive in terms of the use of high-flow and low-flow warehouse facilities to support its store operations. In its high-flow warehouses, IKEA employs automatic storage and retrieval systems to drive down its costs-per-touch. Products stocked in a low-flow facility are not in high demand, and operations rely on manual processes since workers will not be shifting and moving inventory around too much. These strategies allow IKEA become the world’s most successful furniture retailer with low operating costs and high product demand. This enable IKEA to stay competitive in the industry as it continually seeks more advanced methods to streamline supply chain management.
Apart from this, IKEA is willing to invest more to improve customer experience. They set up a pick-up point for customers living in Hong Kong Island. Although picking up home furniture in Hong Kong Island only accounts for a small percentage of sales, IKEA still provide this alternative choice, in addition to home delivery, because they believe it can bring convenience to customers and enhance their satisfaction.
Guided Tour and Interesting Findings
We have visited the warehouse of IKEA, in which everything is placed orderly and systematically. The main difference of the warehouse between IKEA and others are the area used by IKEA would be larger and storey would be higher (Photo 1), since there are numerous assemblies of every single item. The handling of a product would be more complicated as well. For example, a cupboard of IKEA could consist of 20 assemblies, meaning that IKEA has to do 20 times handling, which is much more complicated than other companies by simply once handling.
Photo 1
In order to save space, IKEA has invented an innovative way to store mattress – using vacuum packing (Photo 2). Although it looks small, it is a double mattress surprisingly. Therefore, it can also bring certain convenience to those customers taking the mattress by themselves. However, this kind of mattress has disadvantages too. One of the major disadvantages is the expiration. The mattress can only be kept by 180 weeks and it cannot be shaped to the normal mattress after that period. In response to it, IKEA has to use FIFO to make sure the earlier stocks can be sold earlier. If the mattress or other products cannot be sold before expiring, IKEA would finally donate them to the need. It is, indeed, a good practice that can reduce waste.
Photo 2
Q&A
Q1: Being a subsidiary of Jardines, how does IKEA meet the quality management standard of both the parent company and IKEA international?
A: IKEA Hong Kong operates based on a franchise contract. As a franchisee, IKEA reports to Dairy Farm as well as IKEA Group in terms of business growth and sustainability policies. For other standard and policies like quality, they leave flexibility to IKEA Hong Kong as long as they do not violate the franchisee regulations.
Q2: How will IKEA respond in the coming 10 years with regard to the trend towards sustainability?
A: IKEA establishes a strategic
sustainability planning for the future development. For the energy part, IKEA ensures access to affordable, reliable
sustainable and modern energy for all factors. This policy let IKEA improve
energy efficiency across their value chain.
Apart from energy, IKEA also insists in
improving sustainability in narrowing the inequalities. They intend to improve
the work environment in different countries and enables the personnel to
improve their lives. Especially the gender inequality, IKEA aims to achieve
gender equality and empower female workers.
Q3: What is the biggest challenge for IKEA to operate in Hong Kong?
A: The biggest challenge lies in the discrepancy between local and global operations. The set of rules and regulations for global IKEA stores is not applicable to Hong Kong due to land and space constraints. For instance, IKEA stores in the world are usually stand-alone stores, meaning that shops are incorporated in warehouses, but IKEA Hong Kong can only operate ‘mandatory stores’ that provide limited equipments and facilities. The small retail area limits the variety of goods to be displayed and obtained in-store, causing products to be delivered next day instead of same-day delivery. This greatly contradicts with global IKEA mission and standard.
Q4: Given that Hong Kong’s expensive rent for inventory storage, but also with large size of furniture. How do you manage your inventory and forecast demand to meet the customer demand with enough stocks and avoid the problem of overstock that
incurs high storage fee?
A: There are several key factors affecting our stock inventory. They include safety stock required, delivery lead time and stock availability. For instance, IKEA need to check whether stock available percentage meets standard. Also, they need to check whether their suppliers are able to achieve on-time delivery. These factors affects IKEA’s decision on stock level.
Q5: In retail level, how does IKEA practice sustainability strategies and minimize waste in operations?
A: IKEA continuously upholds sustainability in retail and distribution level. In Hong Kong, goods are in flat packages. This helps IKEA to reduce handling and utilize transporting volume so that carbon footprints can be minimized. As for global stores, paper pallets are widely used instead of wooden pallets. By eliminating non-productive supportive goods, efficiency can be increased and waste can be reduced. In addition to these two measures, IKEA also places recycling bins to collect used lightbulb and batteries from customers.
Q6: Has your company ever experienced culture clash with your franchisor (IKEA Group)? If yes, how did you resolve it?
A: There is not a big difference between
IKEA Hong Kong and the IKEA Group. Due to the culture difference in different
countries, adjustments of operations policy are inevitable. For instance,
delivery service cannot be provided on the date of purchase. However, for most
of the parts, IKEA Hong Kong follows the culture built up by the IKEA Group.
For example, sustainability, IKEA Hong Kong replaced the compact fluorescent
lamps by LED lamps in recent years.
Q7: How does the logistic center of IKEA deal with the outdated inventories?
A:IKEA adopts a first-in-first-out
mechanism to deal with the outdated inventories. They system will alert the
co-workers that how long the inventories have already stayed in the storage. If
the length of duration is close to 120 days, those inventories will have a
higher priority to be delivered to the stores or customers directly. What if
the life cycle has passed, donation of goods will also be considered.
Q8: Why does IKEA not use automation such as the robots or machines to move the
inventory?
A: Using robots or machines instead of a
labor intensive method, this would bring a large number of cost to the company.
Although it is convenient for IKEA to adopt innovation to improve the effectiveness,
having a lost cost concept, IKEA targets to provide affordable products to the
general public. Therefore, IKEA does not want to shift the price burden to
customers for the sake of retaining the customers.
Q9: How does IKEA minimize the waste produced when transmitting inventories?
A: Carbon footprint can be reduced during
the process of transmitting inventories. IKEA calculates the shortest lead time
for enhancing the efficiency, unnecessary waste on fuels consumption can be
avoided.
Q10: How does IKEA integrate advanced technology in inventory management?
A: IKEA did not deploy huge capital into the
enhancement of innovation. However, they still use the forecast to control the
inventory management. By
of goods, system can allocate the time of shipment of products. Therefore, situations of excessive inventories can be reduced.
of goods, system can allocate the time of shipment of products. Therefore, situations of excessive inventories can be reduced.
Q11: How do you manage the division of storage for different product types, especially for products with short life cycle (like Vacuum Packed Mattress)?
A: IKEA manages its storage by a centralized computer system. When the storage duration has reached 150 days, the system will generate an alert for staff that these items need to be handled in first priority. If the product ceases to be in the best condition for sale, IKEA may donate it or send it to a section called ‘As Is’ where display items or products with minor defect are sold at a discounted price.
Learning Reflection
How a company manages its own supply chain is closely related to the company’s success. An efficient supply chain can help reduce cost substantially while match customers' demand with sufficient inventory. IKEA has done a great job in this aspect. It makes use of a lot of innovative approaches like flat-package and vacuum-packed mattresses to solve the problem of space constraint. The costs saved can also be used to offer a low price to customers.
During the warehouse tour, we discovered some efficient practices. The warehouse is divided into different zones like sofa zone and living room furniture zone. Each shelf in these zones contains five levels. The bottom two levels are picking bins where fast-moving products are placed. Staff can easily pick products from them. And the upper three levels are called buffer zones. In addition, each shelf will have its own color label for workers to distinguish new and old products.
The incorporation of sustainability into the company’s strategies is a successful factor for IKEA. It introduced People & Planet Positive Strategy to reduce the energy used by the company and bring a better life for its customers. For example, it insists to use FSC-certified wood to make the furniture. In essence, IKEA's efficient back-end operations and insistence in maintaining sustainability shape IKEA into the world’s largest home furnishing retail chain.