IKEA’s Cost Efficient Supply Chain
“Assembled furniture is expensive to transport and store because you end up paying for a lot of air. By flat packing unassembled furniture and getting customers to pick their own products in store, Ikea dramatically reduced its transportation and warehousing costs and passed the savings to their customers”1 Carter McNabb, Partner, GRA2, November 2008.
On January 01, 2009, Modern Material Handling announced that IKEA Group3 (IKEA), world‟s largest furniture retailer4, had won the Modern‟s Productivity Achievement Award5 for the Warehousing/Distribution segment for the year 2008-09. Founded in 1943, in Sweden, IKEA focused on offering a wide range of good quality, stylish, well-designed, and functional furniture at a low cost so that more people could afford it. IKEA kept cost reduction at the center of any decision making. It made efforts to improve its internal supply chain processes like packaging, warehousing, and transportation which contributed to its cost cutting objective. Its most differentiating factor was its flat packaging system which had significantly improved its operational efficacy. IKEA was ranked 35th in the list of the top 100 brands by Business Week6 for the year 2008-09. The company‟s brand value was estimated to be US$ 10.9 billion in 2008. For the financial year 2008, IKEA registered sales of US$ 28.8 billion. According to industry experts, IKEA‟s supply chain management was the key factor for the success of the company. The company considered factors like carriers used for transportation and pallets used in warehouses to base its decisions like furniture design and packaging. As a result, IKEA was managing its costs better than its competitors and was able to offer products at 30% lower costs. IKEA maintained a long-term relationship with its suppliers and assisted them in improving their processes so that it would help in cutting costs further. The company did not offer free home delivery as other furniture retailers did and expected its customers carry the products with them in 1 2 3
Jasmine Smith, “Achieving Supply Chain Efficiency,” Inside Retailing, November 17, 2008. GRA is an Australia based supply chain consulting company founded in 1997. Inter IKEA Systems BV located in the Netherlands is the owner and franchisor of IKEA concept. The IKEA concept focuses on the company‟s commitment to product design, customer values and solutions. According to the company, “IKEA concept: At the IKEA store you pick up what you want, take it home and put it together yourself. You do a little work so you don‟t have to pay someone else to do it for you. And we design our products so they can be made at a low price and then constantly work to push this price even lower.” Based on the revenues. Modern Material Handling (MMH) honors companies with Modern‟s Productivity Achievement Awards every year for making outstanding strides in material handling and related information systems. For the year 2008-09, awards were presented for Manufacturing, Warehousing/ Distribution, and Modern Thinker segments. BusinessWeek is a business magazine published by New York based McGraw-Hill Publishing Company. 1
IKEA’s Cost Efficient Supply Chain
their vehicles and assemble the products themselves. This helped IKEA cut down on a part of its transportation costs and pass on the benefit to its customers in the form of low priced goods.
IKEA was founded by Ingvar Kamprad (Kamprad) in 1943 in Agunnaryd, Sweden, when he was 17 years old. Kamprad started by selling goods like pencils, wallets, jewelry, picture frames, and watches. Kamprad tried to keep costs low by purchasing goods in large quantities and passed on a part of this benefit to his customers. In 1947, Kamprad introduced furniture in his product line and found that there was a good demand for it. He sourced furniture from manufacturers in local forests so that he could...