IKEA SUPPLY CHAIN

While at university I studied Ikea’s supply chain. This series may be a denser read but very interesting.

IKEA’s network is composed of more than 1,800 suppliers located in 50 countries (Lu, 2017). The IKEA’s code of conduct, between the company and its manufacturers, prevents unethical practices as child labour, or discrimination (IKEA, Planet and communities, 2018). Indeed, IKEA stands by its principles and apply them to its supply network. As shown in figure 1, the SC starts with the sourcing of raw materials for both the product and its packaging. In the meantime, products are designed in Sweden. Raw materials is transported to the factory to start manufacturing. IKEA’s lean SC uses make-to-stock (MTS) practices to control its production. Through this technique, IKEA eliminates all types of waste, manufacturing before products are ordered by customers (Slack et al, 2010). The product is packaged and transported to regional distribution centres, then to local stores where customers purchase their goods (Jonsson and Mathiasen, 2004).. The flow of service goes downstream and the flow of information upstream (Slack et al, 2010). Thanks to precise forecasts and efficient communication with suppliers, IKEA keeps its inventory level low, avoiding waste and unnecessary spending for storage (Lee et al, 2007). Since customers have access to the stockroom, stocks are only replenished at night (Schofield, 2018).

Figure 1: IKEA supply chain

The SC exposed above is out of the ordinary for several reasons, ie products are ready to be build when sold and customers help themselves in the stock. The environment in which IKEA is evolving becomes more competitive with the emergence of cheaper foreign and online retailers. The Swedish retailer prides itself with an innovative SC that allowed to sustain its competitive advantage and maintain its profit envisioning change. 

From design to manufacturing and selling the product, IKEA developed a SC aligned with the corporate strategy: reducing costs. To lower manufacturing costs, innovation to the SC and other changes can be implemented (Slack et al, 2010-p.39). For instance, the manufacturing has been made in low-cost countries and a packaging revolution, leading to optimising transports and handling. Those flat-packs will be the focus of our essay on SC capability of innovation. Overall, IKEA puts in place innovative operations, such as the layout of their stores or self building furniture. 

The company manufactured its products to fit into flat packaging. This has been disruptive for both product-design and packaging innovations. The SC is driven by cost but not only, as it prioritises ethical practices and quality (IKEA, 2018). This innovation has indeed enabled lower costs without compromising its standards.

Three interrelated capabilities form an organisation’s SC capability and sustains value creation: innovation, efficiency and flexibility (Zhang et al, 2016 p.82).

Innovation as a capability is defined as “focal firms’ continuous ability to utilise collective expertise, knowledge, skills and resources […] in relation to new processes, product, services, administrative, or organisational systems in order to create and capture value for the entire supply chain” (Iddris et al., 2016). Scholars split improvements into innovation-based improvements and continuous improvement (kaisen) (Slack et al, 2010 and Reid & Sanders, 2002). Kaisen is usually related to Top Quality Management (TQM), therefore, will not be the focus of this research. A firm’s ability to innovate is linked to suppliers’ innovativeness (Bellamy et al, 2014). Moreover, innovation in the SC is very related to profitability (Twede, 1992 and Jenssen, 2003). Because innovations disrupt an organisation, it is essential that it creates monetary value in the long-run.  The impact of developing innovations is stronger when the corporation knows its “market potential” (Verganti, 2009). 

The next article will argue that IKEA’s supply network was able to exploit the market potential of the innovative capability of its SC through flat-packaging, cutting costs and waste.