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Ikea Case Study

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Question 1:
IKEA´s order winners (OW) are price and convenience. IKEA is offering the same kind of products at a lower price than their rivals in the market. And they are also as the only participant of their market offering everything you need for your home at one place. IKEA´s order qualifiers (OQ) are design, function, availability and product standard. These are all attributes that IKEA must fulfill to meet the minimum requirements in order to compete in the home furnishing market.

The implied demand uncertainty (IDU) is measured by the attributes outlined in Chopra & Meindl (2007). The first and second attribute concerns the quantity of the product needed in each lot and the response time customers are willing to tolerate. Due to the fact that IKEA only have a few big stores and customers visit them rarely makes IKEA vulnerable for stock outs. IKEA make up for this by having precise forecasting of demand and by offering a broad product variety. So stock outs are rare and if they appear customers will substitute to another product. This will decrease IDU for IKEA for both attributes. The third attribute is also met by the factor mentioned above. IKEA is holding a broad product range to make sure if they don’t have one model in stock their customers will substitute to another product. IKEA does this because their customers know what they get from IKEA in terms of quality and price, and because they rarely visit the store they do not go home empty handed. The fourth attribute is about availability, and how customers always can expect to find something they need at IKEA. Due to this IDU goes down. IKEA customers value functional products over innovative products, which reduce IDU. Finally IKEA customers are more price conscious than other furniture customers, which increase IDU.

Second we measure the process uncertainty (PU) by using Lee´s (2002) framework. Because IKEA is collaborating with numerous suppliers that produce similar products they can change supplier in the case of a breakdown, which decreases the PU. A big part of IKEA's sales consists of core products with stable annual sales that will reduce the uncertainty of unpredictable and low yields. The quality of the products is maintained high through frequent quality controls of their suppliers by IKEA´s trading service offices. This will decrease PU. IKEA operates with massive supply capacity because of their many suppliers combined with their own factories. Both the large supply capacity and volume flexibility decrease PU. With reliable long-term relationships towards suppliers, minimal process changes and few quality problems IKEA operate with a stable production process that heavily decreases their PU.

By comparing the implied uncertainty demand and process uncertainty, we argue that IKEA faces moderate implied uncertainty demand and low process uncertainty. Consequently we map IKEA more towards the predictable demand and supply pole.[pic 1]

The goal of the operational strategy is to implement processes that facilitate IKEA to deliver OW criteria’s that support their corporate objectives. IKEA must facilitate for an efficient supply chain in order to deliver low price products. To implement an efficient supply chain IKEA operates with modular products, cheap materials, efficient distribution, superior filling rates and exclusive supplier deals. Consequently we claim that IKEA operates on the cost-responsiveness efficient frontier as the market frontrunner on efficient supply chain.

How IKEA enhance their efficient supply chain is based on the performance drivers outlined in Chopra & Meindl (2007). IKEA´s internal manufacturing facilities contribute to efficiency through 41 centralized factories. The production unit cost is low due to high production output as a result of similar products all around the world. Also IKEA´s retail facilities are large, relatively few, located in the sub-urban areas and operate as warehouses to enhance efficiency.  Secondly, large IKEA retailers hold inventory to lower supply chain uncertainty. By holding certain inventory at retail stores replenishment orders are more predictable and facilitates for efficient manufacturing and distribution.

Third, IKEA optimizes transportation through superior filling rates due to flat packaging, transporting high volume to big retail stores and shorter journeys by transporting directly from supplier to stores. Information is essential for IKEA to efficiently balance demand and supply. IKEA experienced some problems with supply chain information due to strong local power in terms of planning and placing replenishment requests. This resulted in a fragmented supply chain and imbalance between demand and supply.  Lastly, IKEA both manufacture internally and externally. IKEA choose to outsource some manufacturing to ensure their strategy, which is limiting investment in productive capacity.  IKEA selects their suppliers based on competition, cooperation and collaboration. IKEA have local trading service offices close to suppliers to ensure quality and efficiency. Furthermore, IKEA enhance supplier efficiency by procuring supply of raw materials for a long period of time, through long-term contracts with suppliers.

IKEA´s infrastructure is build up to support their cost efficient chain. By placing 31 different trading service offices in 26 different countries IKEA has established a production control system that evaluate each supplier. IKEA´s work structure also coordinate their suppliers centrally to efficiently achieve the common objectives.

Our conclusion illustrates IKEA´s strategic fit as a cost efficient chain. IKEA´s supply chain primarily facilitate for efficient manufacturing and distribution, while retail stores reduce uncertainty to ensure appropriate level of responsiveness. [pic 2]



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