Case Study – IKEA Trading Area Poland
Introduction
Go into an IKEA store and you will notice that it is essentially self-service and, once you get your purchase home, self-assemble. Most business commentators have held this up as an example of a clever retailing operation – many of the usual costs have been passed to the customer, such as finding the item in the warehouse. However, a close look at the whole IKEA operation reveals that the layout and service in their stores is just the outward, customer-facing evidence of a highly efficient supply chain that goes right back to the raw material in the forest.
What is striking about IKEA’s business model is the analysis in minute detail of all costs in the value chain from the tree ‘on the root’ through sawmilling, plank or chipboard production, component manufacture, packing, storage and transport at every stage in the chain through to the customer’s trolley. It is seen as irrelevant whether the materials are in IKEA’s ownership or in the hands of their suppliers and sub-suppliers at any particular stage. The supply chain is the entity and all the legal trading entities that participate in the delivery of any particular product do so in a boundary-less way.
For example, accompanying an IKEA team around one of their suppliers’ factories one is struck by the familiarity the team members have with the layout and processes on the shop floor, the stocks of raw material and where they come from, the outbound logistics down to the way that the lorries are packed. They greet their opposite numbers as if they are colleagues in the same firm and there is no trace of wariness or the traditional adversarial customer-supplier relationship.
The IKEA Structure
IKEA’s structure is designed to optimise the efficacy of the design and supply processes. It is split into 4 distinct parts that operate as a type of internal market. IKEA of Sweden (IOS) has the headquarters function. It is split into 12 Business Areas aligned to products (e.g. sofas, dining furniture, beds etc.). Under IOS the Retail Division controls all the stores, the Distribution Centres are likewise grouped under distribution and the Trading Areas deliver the purchasing and supplier support functions.
The way that the internal market works is that the Business Area Manager commissions a product using an integrated project team that includes a designer (either freelance or from one of IKEA’s 2 design schools in Sweden), a technician and a product developer. The ‘Istra’ (the marketing decision maker in the Business Area) will then set up a competitive tender to decide the country of production. The trading areas compete to win the contract to supply that product or product range, either globally or regionally, in a tender process. Thus Trading Area Poland will cooperate with manufacturers in Poland to supply it at the best possible price, the criteria being the ‘landed price’ at IKEA stores taking into account all materials, processing and logistics costs along the way.
This sourcing system manages to be highly competitive and un-adversarial at the same time. The TA Poland team are in effect ‘on the same side’ as the suppliers in the Central European region: they are helping them to put the tender together to win the competition against manufacturers in the Far East or elsewhere. This will involve looking not just at price but searching for production capacity and economies in raw material supply and efficient logistics.
Case Study: The AlveOfficeFurnitureRange
TA Poland and pine furniture manufacturer Formaplan have worked together to win the business of supplying a new range of office furniture globally. The project has involved developing new staining and lacquering skills to win the confidence of IOS that they can produce the brown pine furniture to a high standard. They had to submit prototypes for Istra approval.
They have had to concentrate production on a short supply chain in a pine forest area south of Warsaw to be able to deliver a landed price anywhere in the world that competes favorably with suppliers in other regions. The whole chain is as short as 30-60km, depending on where the timber is sourced, from the forest to the dispatch of finished goods to the distribution centers. IKEA is assisting Formaplan to build a railhead at their finishing plant to ensure that onward distribution costs as little as possible.
IKEA logistics Experts have also assisted with advice on the packaging and the packing of items in the containers, focusing on a 60% filling rate.
Formaplan will start to supply the furniture on an OPDC basis (Order Point Distribution Centre) basis with a 20 working days lead time initially. Once the test run on the product has happened and sales of the product settle down to a more predictable rate the intention is for Formaplan to ‘climb the supplier ladder’ to shorter delivery times, initially to 15 working days. IKEA will determine the service level for the Alve range that equates to the required availability of the product in the retail stores, usually 90-99%. This will in turn dictate the quantity of buffer stocks that Formaplan have to hold. The expectation is that as the accuracy of forecasting improves the requirement to hold stock will go down. Formaplan will have complete transparency of all IKEA’s stockholding of the product at warehouses and stores to assist them.
This is a big step for Formaplan. IKEA accounts for 40% of their business. They do not stand to make huge margins from Alve but the volumes that IKEA guarantee will help them to expand and they know that all being well it will be a lasting relationship.
Case Study – CIMIR sofa manufacturer
CIMIR in Brodnica, 2 hours north of Warsaw, is an IKEA supplier on the inside track. The company’s founder was an IKEA manager in Sweden who then left to set up a manufacturing company in Poland, serving the European market, and Mexico, serving the North American market.
In 10 years the company’s turnover in Brodnica has grown to €20m on 16000 m2 of factory floor with a headcount of 400. The capacity is 500 sofas today with a surge capability of 600. They have just changed their supply contract with IKEA. Previously they were manufacturing on a JIT basis and delivering direct to stores on a 2 week lead time. They are now working on an OPDC basis with a 5 day lead time, this necessitates holding limited stock; no more than one week’s worth depending on the season and the proximity to a catalogue launch. The next step is to move to a 3 day lead time using a transit method where the sofas will be routed via distribution centres without actually being taken into store.
A critical success factor in achieving these remarkable lead times has been the decision to divorce the sofas from the covers so that they are manufactured and delivered separately and only marry up when they come out of their respective boxes in the customer’s living room. This allows simplicity in the manufacturing process as they are all one colour: white. That is not to say that the product is ‘mass produced’. There is a batch size of one – even for covers - and a product range of over 700 different styles. “ We could make 500 different sofas in a day” says the production manager, “it would be difficult but we could do it!” Normal batch sizes are 25-50.
The supply chain is taut with all the components coming from a maximum of 2 hours away. Although some inputs have been imported. For example polypropylene fibre comes from Korea. Most of their suppliers have been with them for 10 years and they try to develop long relationships rather than shopping around. The policy is to stay with the same supplier whilst negotiating prices on a rolling basis. They cooperate closely with their suppliers, both on the design of new products and in coordinating inbound logistics. They also help their suppliers with the purchase of raw materials. For example they import plywood from Russia and the Baltic states at cheaper prices than their supplier can achieve. They then sell it to the supplier before buying the components back and assembling them.
Labour in Poland is cheap when compared to Western Europe standards but not by global standards. A factory worker is paid Zl 2000 per month (£330) gross or Zl 1200 net (£198). The Polish working week is constrained by law to 40 hours and the trend is downwards. The factory works 2 x 8 hour shifts; 0600 to 1400 and 1400 to 2200 hours.
They acknowledge that Poland can no longer compete with the Far East on price. “We feel the yellow breath on our backs!” as they say. The deduction is that they must compete on the efficiency of their logistics and the service they are able to give in terms of short lead times and small minimum order quantities, as well as quality.
CIMIR has just appointed a quality manager and they have 2 quality control inspectors. They are implementing a TQM program and hope to have ISO 9000 accreditation next year.
The business process is as designed as far as possible on JIT ‘pull not push’ lines. CIMIR has full visibility of IKEA forecasts and inventory holdings and they have developed their own forecasting model based on trend analysis. Components arrive in exact quantities, pre-cut in the case of wooden components and sometimes foam as well; although fabric purchasing is not possible on a JIT basis. It is noticeable in the in-bound storage area that the components destined for IKEA products are efficiently packaged to take up the least space on the shelves. There is no barcoding as yet and the scheduling is still done manually but the goal is to have a fully computerized enterprise resource planning system (ERP). The shop floor is laid out in cells rather than on a process flow basis. Teams of 5-6 people assemble one complete sofa frame at a time from its parts. This is a conscious decision to give teams ownership and pride in their work. The individuals are all multi-skilled and enjoy greater variety of tasks than in a conveyor belt process. They have tried kanbans without much success but are keen to try again.
The frames are then moved into the upholstery shop where again it is a cellular layout. Teams fit the foam padding and the covers and wrap, pack and barcode the products for onward dispatch. Special fire resistant foam is used for products destined for the British market. The whole factory is conspicuous for its lack of work in progress, scrap or buffer stocks. The complete cycle is well under 24 hours and most sofas go out the same day.
The warehouse at the back of the factory is set up to load straight onto either trains or lorries. Video cameras look straight into the containers to check on the loading for damage or smuggling. The containers are then sealed. Barcoding facilitates computerized recording of outgoing loads. In a small office in the corner clerks work on IKEA’s ECIS system to ensure that the documentation is correct for customs clearance.
In the design workshop CIMIR’s designers are working with a team from IKEA in Sweden, including a freelance designer, on a prototype for an IKEA competition to supply a new range regionally. They will be up against manufacturers in other countries but IKEA’s Warsaw office is helping them with their bid.
CIMIR has benefited from IKEA’s advice, particularly on logistics, and this spread of best practice has enabled them to break into a number of new markets serving customers other than IKEA on a make-to-order basis.
Supplier Support
TA Poland will continue to act as the regional eyes and ears on the ground acting as the interface between IOS and the supplier. The purchaser will be responsible for regular reviews of the supply contract. The technical staff will help with continuous improvements on the design. The business support section will give advice on IT and logistics. And the IKEA transport manager will book all transport rather than the supplier, unless the supplier is able to extract the same terms. That achieves maximum purchase leverage on hauliers and the best possible price for the movement of goods by road or rail.
Lead times
Great emphasis is put on the ordering and distribution methods. IKEA’s suppliers are categorised according to the lead time that they work on. IKEA’s policy is to try to shorten lead times gradually. IKEA staff refer to the supplier ladder. A supplier may start to supply goods on either a long warning fixed time delivery basis or a call-off >4+4 basis, in other words he will be given over 4 weeks notice of a 4 week window in which he must deliver the goods. IKEA will then help the supplier to develop his business processes to the point where he can progress to call off 4+4. Call offs are time based methods and once the supply chain is functioning smoothly the supplier will progress to an order driven method: Order Point Distribution Centre (OPDC) at progressively shorter lead times, from weeks down to days, with the manufacture and delivery of goods being triggered by orders. Once a supplier is able to achieve this they explore the possibilities of cutting the distribution link out of the chain so that retail stores deal directly with factories (Vendor Managed Inventory or VMI) perhaps with goods bypassing the distribution centres altogether and going direct to retail stores, or going via distribution centres but only on a transit basis so that there is not time for them to be booked in and out of the warehouse.
This is supply chain management in its purest form. All links in the chain work together to shorten the cycle time and cut out logistical costs so that products reach the customer at the lowest possible price. The progression up the ladder is gradual and reached by agreement with suppliers. The speed imperative has to be balanced against the dependability of supply and the maintenance of high percentage availability of the product in the stores. It is an IKEA mantra that customers cannot buy products if they are not available on the shelves.
The Supplier Benefits
The degree of support is impressive. The manufacturer acknowledges that the margins he earns from the products he sells to IKEA are far lower than from other customers but the support he receives and the nature of the relationship he has with IKEA far outweigh this disadvantage. This includes:
Contractual Trust. He knows that he will always be paid within 30 days. He knows that in all probability IKEA will stick with him and that, if for any reason the relationship or a product is discontinued, he will not be disadvantaged and any stock in the pipeline will be bought from him.
Product Life Cycles. IKEA tries to keep product life cycles as long as possible. Typically they range from 3 years out to 20 years. This helps manufacturers to plan for the long term.
Investment. If he has an opportunity to generate extra capacity that will allow him to manufacture products more cheaply for IKEA they may assist with credits to allow him to pay for the plant now and pay IKEA back with his goods later. If he goes to a bank IKEA may help him to gain a loan by guaranteeing a certain level of future business.
Focus on profit rather than volumes or margins. In his sales negotiations with the IKEA purchasers he will be dealing with people who understand his business, particularly the cost drivers. Whilst this could be viewed as a disadvantage when it comes to price negotiations, it means that the IKEA traders will work with him to lower his costs so that they can buy at an acceptable price and he can sell at an acceptable profit. This contrasts with the ‘poker playing’ ‘take it or leave it’ approach that characterises many such negotiations in the industry. Ultimately IKEA want to keep the same suppliers for a long time so that they can develop them and to avoid the expense of starting new relationships with suppliers.
Technical advice. IKEA staff are on hand to give advice on a number of aspects of the business from the layout and flow on the factory floor to the design of packaging. This allows the supplier to develop distinctive competences in, for example, the application of veneers and lacquers.