IKEA as a leader in inventory management
For large companies with what seems like an endless supply of inventory, inventory management systems are crucial to the overall success of the company. The efficacy of inventory management systems is dependent on the inventory that flows through the company’s supply chain, starting with the suppliers and ending with the customers. The main challenge with supply chain inventory management is finding the optimal balance between levels of inventory without creating shortages or overflow of inventory. IKEA, the world’s largest home furnishing retailer, has a unique and successful supply chain inventory management system that allows them to hold more than 9,500 products in each of their stores while still remaining profitable across the globe.
IKEA uses multiple strategies to reduce the pressures for large inventories, which include customer service success, ordering costs, setup costs, labor and equipment utilization, transportation costs and payments to suppliers. First, because IKEA needs to transport a substantial amount of materials to create their products, IKEA must reduce their transportation cost. To do so, IKEA uses as few materials as possible to make their products and uses sustainable or recycled materials without compromising on quality. Next, IKEA holds sustainable relationships with their suppliers. IKEA communicates with many suppliers to create competition in order to receive the lowest price possible. In doing so, IKEA creates long-term business relationships and contracts with suppliers in order to further lower prices.
Additionally, IKEA utilizes inventory management strategies that decrease setup costs and utilizes labor and equipment. IKEA combines retail and warehouse processes through including a warehouse on the premise of each IKEA store, where customers can browse for items. This eliminates the need for a separate warehouse in addition to a fully stocked retail space. IKEA also uses the cost-per-touch inventory tactic that abides by the rule stating that there are more costs associated with a product if more hands touch it. Furthermore, in order to consolidate the large level of inventory, IKEA packages their products into pieces in flat packages. These packages take up less space in trucks to maximize the number of products that can be shipped while also allowing more products to be stored in warehouse bins and racks.
Next, IKEA manages in-store inventory efficiently in order to provide good customer service and deliver customers with products of promised quality and price. First, IKEA employs in-store logistics personnel to handle inventory management, who is responsible for ordering products and for material handling logistics in IKEA stores. The logistics personnel are responsible for the efficient flow of goods, which overall increases customer satisfaction and increases profits. These personnel use an inventory management system called “minimum/maximum settings” in order to maintain the optimal level of inventory in IKEA stores. This system establishes a minimum number of products that are available before reordering and a maximum amount of a particular product to order at one time. Another responsibility of the logistics personnel is to monitor what is sold through point-of-sale data. This data enables them to forecast sales for the next few days and allows them to order the correct number of products to meet this demand.
https://logisticsmgepsupv.wordpress.com/2016/04/18/ikeas-inventory-management-strategy/
https://www.tradegecko.com/blog/ikeas-inventory-management-strategy-ikea
Fran,
I really enjoyed your post about IKEA! A few things came to mind while reading. First, IKEA’s inventory management is very spectacular, but it got me thinking about how they compare to companies that have to be worried about the shelf life of their products, such as massive grocery stores. At first glance, IKEA is in a much easier position because the ready-to-assemble coffee table is not going to go bad as it waits for a customer on the shelf. However, consumer preferences and tastes will give this coffee table a limited shelf life if style preferences change. This has made IKEA masters at forecasting in addition to the many ways they successfully store inventory in their massive retail stores.
From the very beginning, IKEA has had the ability to create consumer preferences before the market demands them. I was reading a great article that I will attach at the end that walks through the IKEA museum with one of the very first employees for IKEA. At first, the flat packaging design was for the good of the company to save on space. But now, the geniuses at IKEA have turned it into a brand that creates demand in the market. IKEA is seemingly a right of a passage for some people. I visited IKEA last summer, but before that I had friends that would be shocked when I told them I had never been. The experience of a trip to IKEA is memorable within itself.
As the interviewer moves through the museum, he notes something spectacular about IKEA products. Sorry for the long quote, but I find it very important to IKEA’s success. He writes, “We live in eclectic times, in which retro pieces and attitudes mix freely with cutting-edge design. But much of the furniture I see here, from the tartrazine oranges and white fake-leather swivel chairs of the Sixties through to the black plastic dining set of the Eighties (based on 19th-century style), could be imagined on sale in any Ikea today.” The shelf life that is the primary concern with massive retailers is avoided at IKEA due to their ability to create timeless, yet simple and cheap designs. They manage inventory incredibly well, but they also forecast consumer preferences, which allows their inventory to continue to fly off the shelves. Thanks for sharing!
Article referenced: https://www.independent.co.uk/property/house-and-home/property/shelf-life-ikea-and-the-flatpack-revolution-358147.html
Francesca, it is interesting to read a post on a company like IKEA, who is actually a bit of a mystery to me. I have not been in very many IKEA stores before, and it is cool to read about their inventory strategy. I had no idea that the company carries so many different pieces of inventory. At first glance, I would liken the inventory strategy of IKEA to that of a Mattress Firm of Ashley Home Store. On the surface, these companies hold minimal inventory due to the nature of their sales. However, the fact that IKEA remains profitable with such a large inventory base is phenomenal. I wanted to look outside of your post to find some of external ramifications of IKEA’s supply chain management. According to an article from The Guardian, IKEA seems to be a market leader in sustainable supply chain practices. IKEA traces their wood from the source, performs continuous audits of their supply chain, and also focuses on reducing costs within both their own and their suppliers’ companies. This adds a bit more depth to the reason why IKEA can hold so much inventory but remain in good standing. Because the company is able to effectively regulate their inventory and supply chain while also placing emphasis on being responsible within the supply chain, IKEA does an excellent job of managing their supply chain inventory. https://www.theguardian.com/sustainable-business/sustainable-supply-chain-competitive-advantage
Fran,
The times that I’ve shopped at IKEA have truly been memorable. The layout of the store is so well designed that once you go in you have to go through the entire store in order to get out; there is no way back. This being said, a shopping trip to IKEA usually took me at least an hour. And although as a customer I loved the experience of seeing the displays and imagining how my future house could look like, doing a quick trip to purchase one item was nearly impossible. So even though I love going to a brick and mortar store, sometimes online shopping is the best option.
The first store that comes to my mind when I think of stylish yet affordable furniture and home décor is, of course, IKEA. But after I arrived to the US I saw an advertisement for an online furniture company called Wayfair, it has a very similar value proposition as IKEA but with no physical store. I decided to do a bit of research on Wayfair’s inventory management to see how different it is from IKEA’s. Surprisingly, this $4 billion plus company holds almost no inventory themselves. Instead, they have a close supplier network of over 10,000 suppliers across five distinct brands – Wayfair.com, AllModern, Birch Lane, Joss & Main and Perigold. Wayfair role is not creating new products, but instead is curating a collection from a group of suppliers. Until a few years ago from the information I could gather, whenever a customer made a purchase 90% of the time the supplier was the one making the delivery, not Wayfair.
It is clear why Wayfair is doing so well, they have been managing they supply chain inventory extremely well. With little inventory, great variety and no brick and mortar store this company will surely be successful for a very long time.
https://rctom.hbs.org/submission/wayfair-growing-with-little-inventory/
https://www.wayfair.com/v/about/our_story
Fran,
Wow! What a thoughtful and insightful post, thanks for sharing. IKEA is an awesome example of a company that blends wholesale and retail into one customer-facing service. Though typically massive and hard to maneuver, the company has plans to open smaller, boutique-style storefronts that will offer significantly fewer products than the 9,500 number for the current stores. Though intuitively it would be easier to manage fewer products per store, the transition into this new style of store will present some new inventory management problems.
With fewer products, customers may not find what they’re looking for in-store, so IKEA will have to ensure that its infrastructure to order products from other stores is intact. Further, it will be less cost-effective to maintain an inventory management staff in each store, so a new or updated system will have to be put in place. Let’s hope they can pull it off!
https://www.ft.com/content/9cdd3292-9201-11e5-94e6-c5413829caa5
Christian,
I had no idea that IKEA is planning to open boutique-style storefronts that will offer a limited selection of products – how interesting. I wonder where they will open these stores (malls, strip centers) and if they will offer the same products and inventory as in the regular IKEA stores. Will these be positioned as higher end/luxury stores or offer the same products? I’m interested to see how they turn out!
Christian and Fran,
I appreciated both of your thoughts on IKEA’s inventory management and forecasting strategies. I agree with Christian that these new store fronts will present new challenges for IKEA’s already impressive inventory management systems. They can look at smaller store-front models to imitate proven methods of smaller scale forecasting techniques. A small business website gives tips for operating a boutique storefront which includes continuously monitoring inventory turnover and making sure that there are no undue costs associated with inventory management. It will be difficult to maintain an inventory that keeps up with constantly shifting fashion trends and ensuring a sufficient amount of choice and convenience that is commonly associated with IKEA’s brand name. I am interested to see how they tackle the challenges of scaling down their operations.
Source:
http://smallbusiness.chron.com/inventory-management-small-retail-clothing-store-26214.html
Fran,
Thanks for your post! For a company like IKEA, whose stores each hold more than 9,500 products, inventory management is a critical factor to their success. IKEA commits to a catalog of products that will be stocked in their stores for a year at a guaranteed price and they must ensure that these products are available in their stores at all times.
The idea of IKEA combining retail and warehouse processes through including a warehouse on the premise of each IKEA store where customers can browse for items was extremely interesting to me. This strategy has proven successful for other retailers as well such as Costco, Sam’s Club, and The Home Depot. Customers enjoy having a variety of options when shopping whether that be color, style, price, etc. IKEA’s model allows them to consistently maintain a deep inventory of product that satisfies the customers’ wants and desires, further strengthening their relationship with them.
As you mentioned in your post, IKEA employs in-store logistics personnel to handle inventory management in its stores. In each store, there is a logistics manager responsible for the ordering process of new inventory. This model has proven very successful for IKEA and I believe that it has the power to be very successful in other industries and companies as well.
For example, in the fashion industry some items are extremely popular and sell out almost instantaneously while others are less popular and very few are sold. Additionally, trends differ by geographical location (west coast vs. east coast, temperature, etc.). A company such as Nordstrom could utilize IKEA’s model of in-store logistics personnel who would order the clothes, shoes, makeup, etc. based on the buying patterns and trends of the customers in their one store, in turn tailoring the inventory to a specific store instead of Nordstrom headquarters ordering the same inventory for all of their stores.
https://www.ikea.com/ms/en_US/jobs/business_types/stores_retail/logistics.html
https://logisticsviewpoints.com/2009/11/05/in-store-logistics-at-ikea/