IKEA Centralized Supply Chain and its Dilemma in Malaysia………

Rahmat, a Sales person at IKEA had a discussion with his Superior, Fadilah regarding the sales at his department.

“We have a very good product, offered at an extremely good price, but people are still reluctant to purchase it from us. I can see that the sales performance is starting to drop, and that is definitely not good for us. What is happening?” says Fadilah to Rahmat.

Rahmat looks at Fadilah and said “It’s not about the product or even the price. But, it’s about what we are offering to our customers. Malaysian are not like the Westerners who does everything by themselves.”

The sales at the Wardrobe’s Department keep decreasing with inventories piling up. Sweden’s HQ has apparently stopped delivering materials as there is no point to supply something when it can’t be sold at Malaysia store.

Rahmat’s colleague, Azmi confronted Fadilah, ”There was a rich guy coming to the section and requested for me to design the wardrobe for his bungalow at Shah Alam. Everything was according to his taste and he has agreed to pay for it until he knew that he needs to install it all by himself, and then he cancelled the order. I’ve just missed my luckiest day ever!”

Ever since IKEA starts its operation in Malaysia, they have the opportunity to manage their own sales, inventories, purchasing activities and other administrative matters. As long as all of the activities is reported to the Headquarter and the sales is good, that is enough.

But, the situation has turned the other way around when the Supply Chain Management Department at IKEA’s Headquarter decided to centralize all the Supply Chain activities. Its Head of Department, Dr. Hasbullah decided that after considering a lot of factors including the security of supply, volume consolidation and the push and pull factor.

Since its establishment, IKEA has been known for its Do-It-Yourself furniture products. The simple yet economic packaging has enabled the product to be carried easily to any part of the world. Instructions which were provided in each packaging made the installation of the furniture much easier.

But that is only applicable for the westerners. In Malaysia, the people can still adapt in installing the small furniture such as coffee tables or even drawers. But, installing a wardrobe or even a kitchen cabinet might be a problem for the Malaysian.

That is the problem which Rahmat, Azmi and Fadilah is facing at the moment. Due to the centralization of the supply chain, IKEA Malaysia is not allowed to provide any installation services of the furniture which they are selling. That has certainly affects the selling performance of bigger furniture such as the wardrobe and kitchen cabinet. As a result, many of the affected departments disagreed on the decision which has been made. Taking the responsibility, Fadilah discussed with Dr. Hasbullah on the way to tackle the issue. “We should not be working like this. Each of IKEA’s branch need to have freedom to choose on how the supply chain structure. It does not make any sense for this to be controlled by someone!”argued Fadilah.

“Calm down, Fadilah. What we would like to have is a centralized system. We have been seeing disruption of supply by vendors, inventories overstocking and the cost overshoots against the budget. Is that what we want?. But, I do understand your situation. And as a result of that, I’ve already discussed this with your CEO, Mikael Ohlsson and he has agreed to start introducing the installation services for big-sized furniture. “answered Dr. Hasbullah.

“Once we have this inline, we will then have a better coordination & integration, standardization of processes, specialization of skills and learning effects. This will be a good stepping stone not just for IKEA Malaysia but also for other stores.” He added.

That has relieved the stress which Fadilah is facing right now. But, does that solves everything?

IKEA At Glance

The following history shows how over six decades IKEA went from the woods of southern Sweden to being a major retail experience in 40 countries/territories around the world.  The IKEA story begins in 1926 when founder Ingvar Kamprad is born in Småland in southern Sweden. He is raised on 'Elmtaryd', a farm near the small village of Agunnaryd. Even as a young boy Ingvar knows he wants to develop a business1920s

At the age of five Ingvar Kamprad starts selling matches to his nearby neighbors and by the time he is seven, he starts selling further afield, using his bicycle. He finds that he can buy matches in bulk cheaply in Stockholm and re-sell them individually at a very low price but still make a good profit. From matches he expands to selling flower seeds, greeting cards, Christmas tree decorations, and later pencils and ball-point pens.1940s-1950s

The roots of a furniture dealer. Ingvar Kamprad is entrepreneurial in developing IKEA into a furniture retailer. This period sees the exploration of furniture design, self assembly, advertising, the use of a catalogue and a showroom to reach the many people.1960s-1970s

The IKEA concept starts to take shape. New IKEA stores open and hero products are developed such as POÄNG and BILLY bookcase. It is a time where concept takes shape and is documented in Ingvar Kamprad's The Testament of a Furniture Dealer.1980s

IKEA expands dramatically into new markets such as USA, Italy, France and the UK. More IKEA classics arrive such as KLIPPAN, LACK and MOMENT. IKEA begins to take the form of today's modern IKEA.1990s

IKEA grows even more. Children's IKEA is introduced and the focus is on home furnishing solutions to meet the needs of families with children. The IKEA Group is formed and responsibility for people and the environment is seen as a prerequisite for doing good business.

2000s

IKEA expands into even more markets such as Japan and Russia. Everything for the bedroom and kitchen is explored and presented in co-ordinated furnishing solutions. This period also sees the successes of several partnerships regarding social and environmental projects.IKEA, a worldwide leader in furniture retailing has gone from decentralized to centralized planning of its network of suppliers, distribution centers (DC), stores and forwarders. This has taken them from a fragmented management to a coordinated, centralized, supply chain planning. The challenges for IKEA’s, which has about 30,000 sales items, 1,400 suppliers, 30 central DC’s and 280 stores globally is although the right prerequisites for centralized supply chain planning exist, its implementation may result in problems or there may exist obstacles for its full implementation. Implementing centralized supply chain planning in an appropriate planning context led to several operational performance improvement and the obstacles were mainly related to human and organizational, as well as to software and data issues. A number of perquisites for centralized supply chain planning were identified: functional products, vertical integration, a dominating organization possessing the power and competence to enforce the implementation, and the use of one planning domain possessing all critical planning information.

IKEA Concept and history

IKEA offers a wide range of well-designed, functional home furnishing products at prices so low that as many people as possible will be able to afford them. This is the idea at the heart of everything IKEA does, from product development and purchases to how we sell our products in IKEA stores globally.  Anybody can make a good-quality product for a high price, or a poor-quality product for a low price. But to make good products at low prices, you need to develop methods that are both cost-effective and innovative. This has been the focus of IKEA since its beginnings in Småland, Sweden. Maximising the use of raw materials and production adaptation to meet people's needs and preferences has meant that our costs are low. The IKEA way of doing things is to pass these cost savings on to you, our customers.

IKEA Vision and business ideaAt IKEA our vision is to create a better everyday life for the many people. Our business idea supports this vision by offering a wide range of well-designed, functional home furnishing products at prices so low that as many people as possible will be able to afford them.

IKEA product range

The IKEA product range focuses on good design and function at a low price. It offers home furnishing solutions for every room in the home. It has something for the romantic at heart, the minimalist and everyone in between. It is co-ordinated so that no matter which style you prefer our designers and product developers work hard to ensure that our products meet your day-to-day needs and eliminates the unnecessary.Our low prices

Low prices are the cornerstone of the IKEA vision and our business idea. The basic thinking behind all IKEA products is that low prices make well-designed, functional home furnishings available to everyone. We are constantly trying to do everything a little better, a little simpler, more efficiently and always cost-effectively.Everyday a better life

We have taken the straightforward approach to the furniture business, by starting with developing furniture with the price tag in mind. This is the IKEA way, to maximise the use of raw materials in order to fulfil people's needs and preferences by offering quality products at an affordable price.

Overview of IKEA Centralised Supply Chain

Old Planning ConceptIn the old planning concept, the regions and the stores had a great deal of power and a high degree of local freedom in terms of planning and placing replenishment orders. Due to frequent shortages, some regions purposely overestimated demand to ensure delivery, which led to imbalance in demand coverage. Some markets suffered from stock-outs for long periods, whereas other markets ended up with obsolete inventories. Forecasting was done on a regional level with approximately 120 people using different methods to reach different goals. In terms of capacity planning, the different parts of the supply chain (stores, warehouses, regions, etc.) tried to optimize their own function, leading to imbalanced supply plans with a low and unstable total throughput and long replenishment times for the supply chain as a whole. Several in-house-developed legacy systems were used to support the planning, and data was transferred as flat files using an in-house-designed data routing system. At the time, IKEA had an old patchwork of software systems and applications, further contributing to the fragmented and modified planning procedures and lack of proper data management.

The supply chain had a functional orientation with limited transparency between functions and sub-processes, leading to reactive and unsynchronized planning behavior. Several different planning systems (software) were being used in parallel. Planners did extensive manual work because of the lack of standardized software support and standardized working methods. This made it difficult to secure high planning information quality and stock balances, and lead times were considered reliable. Hence, there was a lack of trust and communication between different parts of the supply chain. Other supply chain performance problems were difficulties having personnel pay attention to data

maintenance, a lack of proper follow-up tools to monitor forecast deviations, hard to change mindsets among users, and no synchronization of order and stock data.

New Planning ConceptIKEA initiated a programmed aiming at implementing a new planning concept to take better control of its supply chain and to enhance delivery service and costs. This concept is an integrated, global planning process, and is formally located in a central planning function called IKEA of Sweden. IKEA of Sweden supervises the IKEA universe and develops long-term marketing, logistics and purchasing strategies. IKEA of Sweden greatly influences the decisions concerning the number of items being carried, purchasing, suppliers, distribution, store coordination and so forth.

The global planning process starts with the sales and demand planning which sets the frames and generates future demand data for IKEA’s. The demand data is thereafter input to the global materials planning process, which in turn drives the supplier capacity and load planning processes and the planning of the distribution supply chain i.e. transport, warehouse and store planning. IKEA developed its centralized planning concept in several stages.

It first focused on demand planning, with new demand planning software being fully implemented in 2003. It next focused on improving materials planning, working first on the supplier-to-Distribution Centre (DC) flow, with new fulfillment software being fully implemented in 2006. IKEA then expanded the fulfillment functionality to cover the entire flow from supplier, via DC, to store (including direct deliveries); it fully implemented this in 2011. IKEA also conducted the specialization and centralization of the planning organization in stages. In 2007, IKEA split the former supply planners group, which in the old planning concept had responsibility for both demand and materials planning, into two: demand planners, which has demand planning responsibilities and need planners, which has materials planning responsibilities. In 2009, IKEA finalized the centralization of the demand and need planners within IKEA of Sweden