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IKEA Supply Chain Mangament


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A small Assignment by BBM 2012, Alliance University Students to demonstrate the Complexity of Supply Chain Management of IKEA.

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IKEA Supply Chain Mangament

  1. 1. Authors: Bhuvanashree Madhavan Manish Kumar Roy Suchi Jain
  2. 2. Introduction • Founded in 1943, in Sweden, by a man named Ingvar Kamprad. • Initially offered items such as pens, wallets, picture frames, jewelry, etc. • In 1947, furniture was added to their product selection, followed by personally designed pieces in 1955.
  3. 3. • Defined as a “lifestyle” furniture store. • Known for selling disassembled furniture. As of January 20th 2014, IKEA owns and operates 349 stores, in 43 countries (with the majority being in Europe, the U.S., Asia, Canada, & Australia). 70% of IKEA’s annual marketing budget is consumed by their catalogue.
  4. 4. IKEA stores over the world…
  5. 5. Sectors of Industry and Sustainable Supply Chains • When consumers go to a retailer like IKEA, they will be looking at the different ranges of products and how they are presented. • They may also look for quality customer service. • However, consumers may not be aware that before products reach them, they must move from being raw materials through a variety of stages to become finished products suitable for sale. This is known as the supply chain.
  6. 6. The supply chain at IKEA involves a flow of production and processes through each of the three industrial sectors:
  7. 7. The Primary Sector • The primary sector involves the development of the raw materials. • IKEA designs its own products in Sweden. Low price is one of the main factors that IKEA considers while producing home furnishings. • At the design stage, IKEA checks that products meet strict requirements for function, efficient distribution, quality and impact on the environment. • Sources raw materials from over 1,300 suppliers in 50 countries and uses a number of trading service offices across the world. • They negotiate prices with suppliers, check the quality of materials, analyze the environmental impacts that occur and also keep an eye on social and working conditions of suppliers.
  8. 8. • IKEA uses a tool - the ‘e-Wheel’ - to evaluate the environmental impact of its products. • The e-Wheel helps IKEA to analyze the four stages within the life of a product. • This also helps suppliers improve their understanding of the environmental impact of the products they are supplying.
  9. 9. • IKEA creates many design solutions to minimise the use of materials. For example, – some tables are made out of recycled plastic – some rugs are made of material clippings that would otherwise be wasted – products such as water cans are designed to be stacked - this means that more can be transported in each load, reducing the number of lorry journeys and therefore lowering fuel costs. • Each of these ideas helps IKEA’s products to be more sustainable and reduce the impact on the environment. • Approximately 50% of IKEA’s 9,500 products are made from wood or wood fibers. This is a good resource as long as it comes from sustainable sources. It can be recycled and is a renewable resource.
  10. 10. • A key part of IKEA’s success is due to its communications with materials’ suppliers and manufacturers. During manufacturing IKEA specifies to its producers that waste should be avoided. • Where waste does occur IKEA encourages suppliers to try to use it in the manufacture of other products. • IKEA has a code of conduct called the IKEA Way of Purchasing Home Furnishing Products (IWAY). • This contains minimum rules and guidelines that help manufacturers to reduce the impact of their activities on the environment. • The IWAY code complies with international legislation.
  11. 11. The Secondary Sector • Manufacturers within the secondary sector create IKEA products from raw materials. As products move through the supply chain, the process of value-added takes place. • IKEA designs many of its products so that the smallest amount of resources can make the best products. • For example, IKEA saves on resources by using hollow legs in furniture (e.g. the OGLA dining chair). • Another example is by using a honeycomb-paper filling material instead of solid wood for the inside of table tops (e.g. the LACK series).
  12. 12. • As manufacturers or suppliers add value to products, the IWAY code of practice identifies IKEA’s minimum requirements. • The IWAY code of practice expects suppliers to: – follow national and international laws – not use child labour – not use woods and glues from non-sustainable forests – reduce their waste and emissions – contribute to recycling – follow health and safety requirements – care for the environment – take care of their employees.
  13. 13. The Tertiary Sector • In the tertiary sector, IKEA’s retail stores add value to manufactured goods by providing a form of shopping different to the usual high-street experience. • These meet the needs of consumers in a number of different ways: – Each IKEA store is large and holds more than 9,500 products giving lots of choice. – Within each store, there are a number of realistic room settings that enable customers to see what the products would look like in their own homes. – The IKEA store is built on a concept of ‘you do half, we do half…together we save money’. This refers to, for example, the customer assembling furniture at home. – Customers handpick products themselves using trolleys. – IKEA provides catalogues and home delivery to save customers’ time. – IKEA stores have restaurants that provide Swedish dishes alongside local food choices.
  14. 14. IKEA SCM in a Nutshell
  15. 15. METAL PARTS • Furniture buyers across the world place high demands on IKEA products. • By using high strength steel in its products, IKEA has realized that it can improve the ergonomic and safety aspects of its designs, while reducing the weight of the products decreases costs and helps the environment.
  16. 16. • Baoshan Iron & Steel Co., Ltd. (Baosteel Co., Ltd.) is a worldclass steel conglomerate, headquartered in China, and the largest production base of high quality steel products, which is the most advanced at home and one of the most competitive steel companies in the world. • Baosteel Co., Ltd specializes in producing a full range of carbon steel, stainless steel and specially alloyed steel products represented by auto sheets, steel sheets for home electrical appliances, ship plates, steel for the energy industry, electrical steel and other high-grade products. • Its main target markets are the high and middle-end markets in the east of China, as well as other domestic markets as the complement, and it also makes efforts to explore overseas markets.
  17. 17. • In 2012, Baosteel stainless steel has passed the certification of IKEA Sweden headquarters, and started to supply stainless steel for export only for IKEA's suppliers. This is also a break through Baosteel has made in European and American trade barrier by green manufacturing process. • Today, Baosteel not only supplies IKEA with stainless steel required for beds or couches in furniture, but even products ranging from basic cutlery such as knives and forks. • Moreover, IKEA’s foremost reason for choosing them as their supplier is their high concern for environment protection, and sustainable development.
  18. 18. Where does BaoSteel get its raw materials from? • On February 24th 2011, Chinese steelmaker Baosteel entered into a three-year coal purchase agreement with Rio Tinto, British-Australian multinational metals and mining corporation to supply quality coking coal to Baosteel for three years, starting in 2011. • This agreement did not specify the annual tonnage agreed upon, but according to a source at Baosteel's raw materials department, the company has been importing about 300,000- 500,000 mt/year of coal from Rio Tinto over the past few years. • Baosteel imports a total 1 million-1.5 million mt of coal annually. • Rio Tinto supplies about 13.6 million mt/year of coal, ranking fifth in the world with a global market share of 5.7%.
  19. 19. • Baosteel Australia Mining Company Pty.Ltd., a subsidiary concern of Baosteel was registered on May 2002 at Perth, Australia, and is mainly engaged in development and production of iron ore and other minerals. • It serves as a primary platform for Baosteel in investment and supply of iron ore outside China territory. • The company corporated successively with Hamslay Ironore Mine, Australia and Fortescue Metals Group Ltd. and others, through joint venture or in partnership, for developing high-grade iron ore. Baojeri Joint Venture Project which has been effected is of over 200 million tons iron ore prospected and is designed with annual production of 10 million tons of iron ore. • A representative office is formed in Jakarta, capital of Indonesia, to cover Southeast Asia for potential of resource-oriented investment and cooperation.
  20. 20. Steel Stone Co. Ltd • Steel Stone Co. Ltd was established in 1999, in Taiwan and primarily deal with the production of nuts, bolts and screws for all kinds of furniture. • IKEA’s reason for preferring Steel Stone Co. is that they are able to supply a very high quality of their products at the cheapest cost, due to their low cost of labour.
  21. 21. TIMBER & TIMBER PRODUCTS • IKEA is likely the world’s largest single consumer of wood. • The Swedish conglomerate needs about 1% of the world’s wood supply to make the furniture sold in its roughly 300 global stores. • The company needs so much wood, in fact, that Swedwood, a subsidiary company, handles production of all wood-based furniture. Outraged as many may be, critics and their eco-conscience friends might pause before deciding to chain themselves to a forest of Scandinavian trees, the company has a sustainability plan for all this wood.
  22. 22. • Swedwood has around 15,500 employees in 40 offices and factories in 10 countries with production units in Sweden, Hungary, Russia, Poland, Portugal, Slovakia, Latvia, Lithuania, USA. • It also has an office in China where it plans to open a plant in the future. In recent years it has closed down its operations in Germany and Ukraine. • More recently, the Swedspan group, which produces mainly board products for Swedwood, was spun off from the original Swedwood group. It has around 500 employees and production units in Sweden, France, Poland, Lithuania and Slovakia.
  23. 23. Forestry work in Karelia and Vietnam… • Karelia is an area with high nature values and the decision to source wood in this area brings on great responsibility. IKEA takes this responsibility very seriously. They source on a long term basis and source in a way that helps protect biodiversity. • On the other hand, IKEA was attracted to Vietnam by the combination of low cost labour and inexpensive raw materials. IKEA drives through a tough bargain with its suppliers, many of whom say that they make thinner margins on their sales to IKEA than they do to other foreign buyers. IKEA demands high quality at a low price. However, they offer suppliers the prospect of forgoing a long term, high volume business relationship. • Moreover, IKEA regularly advices its suppliers on how to seek out the best and cheapest raw materials, how to set up and expand factories, what equipment to purchase and so on.
  24. 24. • Additionally, IKEA does not accept wood that has been illegally logged and further supports an additional 13 projects run by the World Wildlife Federation, ‘so that more wood can come from certified forests.’ • Anyone who’s bought IKEA furniture knows the ‘wood’ is actually particle board. • That particle board all comes from one place, Hultsfred – a factory in southern Sweden dedicated making the hardwood alternative. Cavernous: IKEA needs giant construction equipment to navigate around and transport saw dust out of the giant piles surrounding its massive particle board factory
  25. 25. • Hultsfred (according to National Geographic) plows through 150,000 loose cubic yards of pine saw dust every single day. • This in addition to the spruce trees thrown into massive wood chippers, that combine with the saw dust and a vile glue-like mixture containing synthetic urea to make the particle board. • The factory churns out so much of the stuff that a giant dryer capable of holding 45 tons of the saw dust-wood chip mixture refills every hour before sucking all the moisture out of the former trees at a temperature of 840 degrees Fahrenheit, National Geographic reported.
  26. 26. TEXTILES & LEATHER • Currently, IKEA's sourcing from Asia, including China, accounts for 32% of its global sourcing; it sources 64% from Europe and the rest from America. Within South Asia, 70% of the total volume sourced comprises textiles, including rugs and towels.
  27. 27. • This seemingly sleepy town, almost sandwiched between Bangalore on one side and Kanyakumari on the other, breathes textile. • Karur is quite unlike Tamil Nadu's other textile bastion, Tirupur, which is more about latest fashion, designers, international buyers and now, somewhat idling factories. Karur doesn't offer much in terms of shopping and entertainment or leisure, and while textile is its mainstay business, a local points out the town is also known for supplying mosquito nets to the World Health Organisation. Asian Fabricx factory dedicated to IKEA in Karur, Tamil Nadu
  28. 28. • The town is also home to Asian Fabricx, one of the oldest and largest Indian suppliers to IKEA, the world's largest furniture and furnishing chain. • Six to seven hours away is Tuticorin, the closest port that ships out bedspreads, curtains, kitchen linen and cushions made by Asian Fabricx to European shores, to be sold across 300 IKEA stores worldwide. • Tuticorin has yet another link to the Euro 27-billion Swedish chain - Ramesh Flowers, an IKEA supplier that deals with dried flowers for potpourri, home fragrances and the works, with a 100% women workforce, is located in the city.
  29. 29. • The sprawling 12-acre complex that houses the Asian Fabricx corporate office and factory dedicated to IKEA, business with which accounts for 65% of the supplier's revenue, has a surprise element: No shoe is allowed inside the plush corporate office. Visitors are made to take these off at the entrance; top executives, including the managing director, walk around barefoot or in socks. • This dust-free initiative might have nothing to do with the efficiency of machines; it is more of a local practice. That said, all processes at this factory have to follow rigorous steps, monitored closely by the Swedish chain, before any product is put in a box with a green tag, meaning it has been cleared. • Apart from this dedicated IKEA factory, Asian runs a dyeing unit in the town, as well as another facility for other buyers such as UK's B&Q and French chain Castorama.
  30. 30. • IKEA GreenTech, an IKEA Group venture capital company, announced in 2013 that it has invested in DyeCoo Textile Systems, a Dutch company that has developed the first commercially available waterless dyeing technology. Using recycled carbon dioxide (CO2), the technology avoids the large amount of water and chemicals used in traditional dyeing processes. • Keeping in mind that textile industry is one of the largest consumers of water, the scale of the industry’s activity in the region can put pressure on the availability of clean water and contribute to environmental pollution in the discharges from manufacturing processes. • By removing the need to use water in the dyeing process and eliminating the risk of effluent discharge, IKEA believes that the DyeCoo system could bring significant benefits to the region.
  31. 31. • Established in 1986, Royal Leather Industries Limited is a vertical unit producing finished leather for shoes, garments, hand bags and furniture. It comprises of leather Tannery and Stitching factories for garments and furniture articles. The Tannery is equipped with the most modern imported machinery from Italy, France, Germany and Netherlands. • There are about 600 people working in the Tannery and 400 in Stitching factories. • IKEA approved Royal Leather Limited as its supplier of finished leather, in 2012 from Pakistan, especially for its environmental and social compliance capacity. • Today, Royal Leather is the only zero discharge company in Pakistan, Sri Lanka and India.
  32. 32. • The skins used by Royal Leather Industries Ltd are a by-product of the meat industry, regardless of whether they were sourced nationally or overseas. • Around 200 shipping containers arrive every year from Australia, each holding 6,000 goat skins, complete with hair. • In addition, there are the occasional shipments of cow skins from Argentina, and the skins of buffalo, cows, goats and sheep brought in from local markets. • The smell emanating off them is putrid and sickly sweet, and the process to convert them into top quality leathers is long and complex.
  33. 33. CHEMICAL INDUSTRY • IKEA aims to refrain from the use of chemicals and substances that can be harmful to people and the environment. • IKEA welcomes the new EU REACH legislation on chemicals and substances which is in line with the IKEA precautionary approach to chemicals. All IKEA products for all markets, globally, shall comply with the chemical restrictions in the REACH legislation. • The EU REACH requirements are in line with how IKEA works with chemicals. The precautionary principle and substitution principle are the basis for how both REACH and IKEA works with chemicals.
  34. 34. • If practicable, IKEA apply the strictest health, safety and environmental requirements on any of the sales markets to the entire product range. For chemicals used in products, IKEA imposes restrictions in an internal company specification. These specifications comprise the binding contract between IKEA and its suppliers. • REACH applies to certain hazardous substances (Substances of Very High Concern, SVHC) that may be present in products or packaging. • IKEA works proactively with chemicals to stay ahead of standards and regulations. The IKEA interpretations of the chemical restrictions in REACH legislation are relatively strict and might differ from interpretations made by others, i.e. IKEA is at times going further than REACH requirements.
  35. 35. • IKEA is continually working with chemicals and is trying to phase-out any use of questionable substances. For example; IKEA has set an early voluntary ban on PVC (decided 1991) except in cables, an early ban of all organic brominates flame retardants in furniture (effective from 2000) and a ban on formaldehyde emitting paints and lacquers on all products (effective from 1993). • To follow-up on fulfillment of requirements IKEA carries out random checks, in cooperation with independent third party test laboratories. • IKEA is fully aware that the REACH legislation requires retailers within EU to answer customer questions about certain hazardous chemicals within 45 days. • IKEA customers can continue to be secure that IKEA products are safe and healthy.
  36. 36. • PARALLEL Ltd. Sevlievo is specialized in the production of foam polyurethane (KOVAFOAM). The company is located in Central Northern Bulgaria. • Owing to its excellent equipment, Kovafoam Ltd. is able to put out a high-quality product. The production and cutting-up machines come from leading German and Italian companies in the field. • The company's own laboratory exercises preliminary control over the materials used for production, as well as current control which guarantee the permanently maintained quality of the polyurethane. • In November 2010 PARALLEL Ltd. was praised system of quality of manufactured products in the factory, covering the new IKEA Supplier Quality Standard.
  37. 37. • IKEA recently added Solrac Coatings (Jiaxing) Co. Ltd. to its stable of liquid coatings suppliers, of which there are only ten worldwide. • Based in the Zhejiang area in China, Solrac Coatings (Jiaxing) is the Chinese arm of Productos Solrac, S.A., which is headquartered in Barcelona, Spain. The company manufactures high technology waterborne coatings. • Solrac supplies its waterborne processes to furniture manufacturers in China. Founded in 1942, Solrac has been active in markets in France, Portugal and Romania before entering Asia. • Their latest deal with IKEA helps to establish Solrac Coatings (Jiaxing) Co., Ltd. as being technologically on par with the major international coatings companies that dominate the industrial coatings sector.
  38. 38. Logistics LTW Intralogistics • IKEA’s initial distribution centre for Central and Eastern Europe was commissioned in 1989, which was also the year of great political upheaval, at the rail terminal in the Austrian town of Wels. • The layout of the manually controlled high-bay warehouse, with 20 rack lanes and one switching aisle, followed the example set in Älmhut, Sweden. • For its storage and retrieval machines (SRM) IKEA relied on a new partner with innovative switching technology, namely LTW, which at first installed three SRMs and then – thanks to IKEA’s dynamic development – supplied a further seven SRMs within two years. • Since then LTW has worked with IKEA on three continents and installed more than 220 storage and retrieval machines in 11 countries.
  39. 39. Consafe Logistics • Since the partnership started in 1997, Consafe Logistics has been involved in the setting up of many of the new Distribution Centres that IKEA has opened worldwide. • Together with Consafe Logistics IKEA has implemented the Astro warehouse management system in 15 of their Distribution Centres (DC) and Customer Distribution Centres (CDC). • Consafe Logistics’ long experience and reputation as high quality system integrators with skills in combining manual and automated warehouse management cost effectively is one reason that IKEA has chosen to partner with Consafe.
  40. 40. SINO Logistics • SINO logistics provide a total solution to IKEA in the logistics industry. They perform activities including Clearing and Forwarding, Transportation, Warehousing and insurance arrangement. • Additionally, they provide free logistics advice to IKEA that helps them in smooth movement of trade and good management of the supply chain.
  41. 41. Distribution and Warehousing • IKEA works in various ways not only to rationalize and simplify distribution, but also to minimize the impact this part of the business has on the environment. • The secret is to calculate as exactly as possible how many products will be needed to satisfy demand. This eliminates any unnecessary costs for production and warehousing. • The hallmarks of IKEA distribution are: – a global distribution network – large volumes – flat packages (self assembly by customers themselves) – low costs. • The aim, of course, is to make sure that the right products are always available at the store when the customers wish to buy them.
  42. 42. Large volumes + flat packs = low costs • The fact that IKEA products are sold packed flat means that they can be transported with greater efficiency. • By minimising “wasted space” it is possible to transport and store more packages at a time, i.e., the cost of transporting each item goes down.
  43. 43. Distribution Centers • Distribution Services functions as the wholesaler for IKEA, securing local storage capacity for stores and purchasing products from suppliers all over the world. • Products are shipped from suppliers to distribution centers, where they are unloaded, stored in racking, and then re-loaded onto road transport vehicles when ordered by stores. • The fundamental goal is to handle goods as efficiently as possible. In some cases, goods are shipped directly from suppliers to stores, or held on the dock of a distribution center for just a short time before being shipped out again. • This emphasis on efficiency helps IKEA achieve affordable prices for their store customers.
  44. 44. Erfurt, Germany [BLG Retail Logistics] • The BLG Retail Logistics distribution centre in Erfurt works in three warehouse complexes, which were built successively during the period of growth. Here, the most diverse of items are consolidated and regularly shipped to furniture IKEA stores around the country. • Perfect organization is required for the enormous quantities of goods which pass through the distribution centre. All goods deliveries – whether by truck, rail or container – are electronically collected and compared with the data already saved in the IT system. • If the delivery is complete and undamaged, the IT system automatically allocates bin locations to the goods. BLG’s tasks also include quality controls.
  45. 45. Doncaster, UK [BLG Retail Logistics] • BLG Retail Logistics performs the entire warehouse logistics for IKEA at the Doncaster site in central England. The services include warehouse logistics, transport planning, picking and quality controls. • The Distribution Centre in Doncaster is one of the two central distribution centres supplying goods to British IKEA stores. • It became the largest IKEA distribution centre in the world with a total pallet capacity of 270,000.
  46. 46. Bakersfield, CA, USA [TEJON] • The Tejon Ranch Commerce Center is strategically located at the gateway to California’s Golden Empire, a region that features major distribution centers for IKEA and other major companies such as Wal-Mart, Nestle and Car Quest. • It is the Golden Empire’s newest and best location, with up to 20 million square feet of new warehouse and industrial space immediately available. • For companies looking to serve California, the western United States and Canada, and especially those that specialize in just-in-time delivery, the Tejon Ranch Commerce Center offers a number of critical advantages: low total costs of operations; a large productive and loyal labor force; logistical advantages; and a business-friendly operating environment.
  47. 47. Jonkoping, Sweden [NREP Logistics] • The site in Jonkoping has a total space of 100.000 sq.m. with total distribution space of up to 60,000 sq.m. • The NREP distribution center has a separate entrance and generous traffic and loading zones offering plenty of room for maneuvering of trucks and trailers. The warehouse has a clear height of 10.5 metres and are also fully heated and equipped with sprinkler systems.
  48. 48. Reverse Logistics • Dissatisfied customers of IKEA can return their purchases through a collection centre located at every city that has an IKEA store, which in turn checks and sends it to the distribution centre that provided this product. The product is further sent to the focal firm in Sweden which recycles the product and re-distributes it again through the supply chain. • According to a study conducted at IKEA, it is reported that about 70% of the products returned to IKEA are recycled, and the remaining 30% goes into disposal.
  49. 49. • There is another method that IKEA uses for its reverse logistics. Consumers can return the product to the IKEA store they purchased it from. The IKEA store in turn tracks the distribution centre from which the product was provided, and transports it to the centre. • This distribution centre then sends it to the focal firm, that recycles or disposes the product.
  50. 50. Conclusion • IKEA's long-term ambition is to become the leading home furnishing company. However, for IKEA, getting there is not simply about developing profitability and market share. • As a global organization IKEA has chosen to undertake a leadership role in creating a sustainable way of working. It has educated suppliers to understand how and why sustainable production is vital. This has helped IKEA differentiate itself from its competitors. • Consumers are made aware of IKEA's commitment to sustainability through its involvement with many other organizations such as the WWF and UNICEF. IKEA is now considered by both suppliers and consumers to be a responsible company that they can trust.