BUS 3260 Logistic and Supply Chain Management

BUS 3260 Logistic and Supply Chain Management Group Project

BUS3620

[Logistic and Supply Chain Management Group Project]05051347 JIANG Zailin

05051339ZHANG Chang

05003687TSANG Lai Yin

05009944YIP Sin Ting

05012090WONG Po Yan

05014530LAU Mei Ling

05014549YUE Pak Hong

05015979IP Pui Yee

06004369LO Ka Hei

06019676CHEUNG Wai Chung

Content

IntroductionP.3 P.6

Supply Chain Management

Order Fulfillment and ForecastingP.8

PurchasingP.9

ProblemsP.10

Recommendation & FeedbackP.11

PackagingP.12 P.15

ProblemsP.16

RecommendationP.17

TransportationP.18 P.20

Problems & Recommendation P.21

FeedbackP.22

ConclusionP.23- P.24

IntroductionIKEA is a privately-held, international home products retailer that sells flat pack furniture, accessories, bathrooms and kitchens at retail stores around the world. The company, which pioneered flat-pack design furniture at affordable prices, is now the world's largest furniture manufacturer.IKEA was founded in 1943 by Ingvar Kamprad in Sweden and it is owned by a Dutch-registered foundation controlled by the Kamprad family. IKEA is an acronym comprising the initials of the founder's name (Ingvar Kamprad), the farm where he grew up (Elmtaryd), and his home county (Agunnaryd, in Smland, South Sweden).INGKA Holding B.V. is the parent company for all IKEA Group companies, including the industrial group Swedwood, which manufactures IKEA furniture, the sales companies that run IKEA stores, as well as purchasing and supply functions, and IKEA of Sweden, which is responsible for the design and development of products in the IKEA range. INGKA Holding BV is wholly owned by Stichting INGKA Foundation, which is a foundation registered in Leiden in the Netherlands.IKEA Vision:

To create a better everyday life for the many people by good form, good function and a low price.

IKEA Supply Chain Concept

Respond needs of the customer by:

1. Advertising and other types of communication

2. IKEA catalogue

3. IKEA store

4. IKEA product range and genuinely low price

Respond the possibilities of the suppliers by:

1. Product Development together

2. Purchasing and distribution

3. Capacity Development

4. Capacity Commitment

5. Over Tag

IKEA Supply Chains characteristics

1. Production and market driven

2. Long term relation with supplier

3. Capacity agreement with supplier

4. Sourcing Globally. 5. Supplier Internal competitions

The advantage of IKEA supply chain

1. Low cost

2. Volume business

3. Unique design

4. Stable supply

5. Consist qualityThe Disadvantage of IKEA supply chain:

1. Less flexible

2. Long planning cycle

3. Long lead time

4. Unstable supply

5. Discontinuous split.IKEA Supply Chain Process

IKEA supply chain is start from the design phase. Afterwards, a purchasing and manufacturing is beginning. Then, the finishing product will transport to local warehouse from IKEA manufactory. Later, the product will transport to IKEA store and finally consume by customer.

IKEA has the integrated supply chain, which start from the design phase. IKEA has its own design center and designers to design new products. Afterwards, their own factories will purchase raw materials and manufacture products. Through transportation, all products are stored in their retail warehouse first, and then transport to different stores in different area, in which customer will choose to buy the finished products.HK IKEA Retails Logistics Organization

HK IKEA is divided into four different departments to handle the logistic issues. Inventory Department, respond for stock control and invoice. Warehouse Department, respond for inbound and outbound logistics, Admin and audits and Shipping, QC, AS-IS and Recovery. Distribution Department, respond for scheduling and contractor management. Store in Store Department, respond for store replenishment.

IKEA now has three stores in Hong Kong which is Causeway Bay, Kowloon Bay and Shatin. In Hong Kong, the retail logistics is divided into four different departments to handle the logistics issue. Inventory department, respond for stock control and invoicing. Warehouse department is responsible for inbound and outbound logistics, administration and auditing, shipping quality control, AS-IS and recovery. IKEA distribution department handles 220,000 jobs in year 2007, which consists of 9 third party contractors and 55-60 delivery trucks. Store in store logistics mainly respond for stock replenishment. We considered IKEA supply chain pros and cons. The advantage of IKEA supply chain is low cost, volume business, unique design of product, stable supply and consist quality. The Disadvantage of IKEA supply chain are less flexible, long planning cycle, long lead time, unstable supply because of basket effect and discontinuous split.Order Fulfillment and Forecasting

In the HK IKEA, an online integrated IT system which is managed by the Inventory Supply Department is developed. It consists of 4 parts, inventory management system, order entry system, routing system and order fulfillment system. The people in charge in the department can reorder the stock with the IKEA vendors and make forecast much more effectively by make use of this system. The local IT system keeps track of the sales volume of the retail store and the volume of inventories stored in the warehouses and retail store in real time operation, it facilitates the control and the stock control can be efficient. Once the volume of stock reaches the reorder point, the staff can be easily noticed and done the replenishment. Due to logistics complications and long lead times, Ikea is forced to maintain high control levels over its vendors. Therefore, the system is essential and important, it would lead to severe store shortages, leading to losses in sales if the system is out of work. Moreover, the HK IKEA system is interconnected with the global one and both of them can access the data and information in the other system. HK IKEA staff may use the data and information in the system to develop the forecasts about the order and sale, and form particular marketing strategies. This is good practice of coordination and a more impressive forecast can be done using these collaborative data and information comparing with the traditional forecasting.PurchasingPurchasing is one of the important parts of the supply chain of IKEA.

With its own woodlands, IKEA is self-sufficient in the production of the wooden products. However, for products which are made up of other materials such as plastics and metal, IKEA needs to outsource the production of these products to other suppliers/vendors.In order to sustain the quality of the products, IKEA would like to develop long-term commitment with the selected suppliers. There is a list of criteria for IKEA to evaluate and decide on the potential suppliers. For example, IKEA would prefer suppliers which are financially sound, competitiveness, and have global awareness. IKEA believes that these criteria would ensure the high quality and low costs of the products. Besides, the supply of the products would be kept constant.

Moreover, IKEA would also request non-home-furnishing industries to manufacturer parts of the products. For instance, a manufacturer which is specific for making trolley would be request to make the frame of a sofa. This not only allow IKEA to utilize the competitive advantages of the suppliers, but also save cost.

ProblemIn IKEA, it is common that different parts of the products are produced by different suppliers. It is possible that basket effect would occur when one of the parts of certain product is not produced or delivered on time.

For example, a bed is divided into 2 components (bed frame and drawer) which are produced by 2 different suppliers respectively. Assume that the bed frame is not able to be produced or delivered on time while the other part is ready on time. Without the bed frame, the schedule for activities such as assembly of finished products and transportation would be interrupted. Then, basket effect occurs. The basket effect would cause the supply of the finished products become unstable and thus increase the uncertainty of the lead time. Also, it would intrude the arrangement of transportation of products and the warehousing foe the work-in-progress inventories and finished products.RecommendationAlthough the purchasing method IKEA used for may cause basket effect, it is believed that the advantages of using different manufacturers to produce different parts would outweigh the effect of basket effect. Therefore, changing the purchasing way of IKEA is not a possible to get improvement for the problem. Since the basket effect is inevitable, supplier relationships management (SRM) may be implemented in order to reduce the negative outcome of the basket effect.

By applying SRM between IKEA and its suppliers, it is possible for IKEA to monitor the production progress and status of the parts. Knowing the latest information and status of the parts, IKEA would be able to coordinate and take any feasible action to alleviate the negative influence if basket effect occurs. Feedback from the managerRefer to the recommendation suggested for solving the basket effect, the manager of IKEA thinks that implementing the SRM is feasible to reduce the negative effect of basket effect. However, he stated that the procedures to establish a network between IKEA and all suppliers would be a bit complex. Also, it is quite time consuming and is not cost effective. The benefits of the SRM would not be able to cover the costs. Therefore, the recommendation is feasible only in theory, but not in practice.

Packaging

In every company which involves manufacturing from other countries should consider the distribution cost since it is an important element in determining the total product cost. In IKEA, it also emphasizes greatly on packaging. The company uses new space-saving solutions to decrease distribution cost.

For example, the ear of the original design of a cup selling in IKEA is at the middle, so that it cannot be stacked up and a lot of space is wasted in packing them in the container. At that time, a container can accommodate 34560 units of that type of cup. IKEA saw the problem of the design and discussed with the designer to modify the appearance of it by moving the ear to an upper position and thus the cup can be stacked up to utilize the space in a better in transportation. The total capacity for the same item in a container is increased by 66% to 57600.

The second example is the candle. In the original design, the fuse of the candle was projected out at the top and the candles couldnt be stacked up. After modification, the wax part that near the fuse was removed slightly so that the fuse could be bent into that area. With this modification, the total capacity was increased from 7560 packs to 10800 packs with a percentage increase more than 43%.

The third example is the stick which is used to hold the curtain. In the original design, there are several sticks with different thickness in a set of package. After modification, the narrower stick can be hidden in the broader stick in the package. This can save space and increase the capacity of item for 25% in each container and also lower the price of the product due to lower transportation cost.

The last example is the package of document tray. At the beginning, the whole set of the item is split into several parts and stored in a rectangular box. However, there is some unused space within the packaging box. Thus, IKEA has modified the package into a shape with one part thinner as shown below. The modified version can then stacked up one by one in the head to toe format so that extra space can be saved. The capacity for the same item has been increased from 1890 to 2240 in a container.

IKEAs packaging strategy is to utilize the greatest space in packing the finished products in order to minimize the transportation cost. This can in turn reduce the product cost and lower the selling price. This is both beneficial to the company as well as the customers.Problem

In order to minimize the cost in packaging, IKEA mainly uses leatheroid to pack the items for transportation. As a large portion of the items produced by IKEA is breakable such as glass products, certain amount of items would be found to be broken during the logistic processes such as loading to the container and unloading to the retailing stores. This has caused loss to the company and extra effort is needed to check the integrity of the inventories.Thus, the 2 problems are:

1. Broken items caused loss to the company

2. Extra labor cost needed to investigate the items thoroughly

RecommendationsSince quite a large portion of the items offered from IKEA is breakable, we suggested using biodegradable polystyrene as the packing of those highly brittle items. This can produce a great protection to the items during loading and unloading processes in the supply chain as it can provide a cushion effect compared with leatheroid. It is also environmentally friendly which helps IKEA to build a positive image in supporting the concept of environmentally friendly. Although it would slightly increase the cost, it can save the cost of broken items and the human effort to check every item intensively. Reference:

http://www.ubergizmo.com/15/archives/2007/09/biodegradable_polystyrene_in_the_works.html (Biodegradable polystyrene in the works)Feedback from IKEACompany also concerns the loss suffered from the broken items during the logistics processes. They would also like to lower the rate of defective products. They would consider finding some other materials for the packaging of those brittle items if the cost changes are acceptable.

TransportationIKEA Stores/warehouses

IKEA owns 3 Stores and 2 warehouses over Hong Kong. The 3 Stores are located in Shatin, Telford and Causeway Bay in which Causeway Bay accounted for 40% of sales in Hong Kong. Each stores catchment different areas. The main warehouse is located in Sheung Shui and the overflow warehouse is located in Tuen Mun. IKEA believed that they are attracting customer to come to their shop rather than providing a strategic location for shopper.

Inventory Supply Department

The inventory supply department has a 123,000 CBM annual purchase volume (40 feet=50 CBM, around 2000 containers)The supply setup (by volume) is divided into DC and DD+CP. For DC, there is a distribution center in Shanghai which accounted for 35% of supply in Hong Kong, inventory will be stored in DC and wait for the order from different stores in China. The goods that is predict to have a great volume of demand will be direct delivery to Hong Kong in which accounted for 65% of supply in Hong Kong IKEA.

Delivery Terms and Conditions

At IKEA, they don't build the cost of delivery into our prices, so customer save money by taking their purchases home themselves. But if customers need assistance, IKEA can arrange delivery right to customer door by an inexpensive, independent service.Delivery charge for Hong Kong and outlying islands is as below:HK Island, Kowloon and the New TerritoriesTung Chung Town and Park IslandDiscovery BayOutlying Islands#

Product Price $1,000 >$1,000-$4,000>$4,000 $1,000 >$1,000-$4,000>$4,000

Products delivered directly from the warehouse$70$140$200$150$220$280$29010% of the product price (minimum charge: $750)

Products that need to be transferred from the stores to the warehouse before delivery.$70$140$200$150$220$280$29010% of the product price (minimum charge: $750)

IKEA also provide Next Day Delivery once customers have chosen the Delivery Service or Delivery and Assembly Service, IKEA can deliver your purchases the next day.Distribution Department

Distribution Department in IKEA is responsible to the customer delivery job. They handle average 18,000 jobs every month. In the 2007, there were 220,000 jobs. The head count of this department is 15 full time staff. For the fleet of the distribution department, it is outsourced to 9 third party contractors. There are 55-60 delivery trucks and about 160 staff. And the requirement of the staff is not only have the skill to deliver the product, but also need to know how the install the furniture.

Disposal of Furniture ServiceFor more comprehensive services, IKEA provide the service to help the customers to dispose the obsolescent furniture, such as sofa / sofa-bed/ bookcase system/ TV bench/ bed frame and just charge for $100. IKEA may carry some of them to the charity organization or landfill site. This service increases the level of complication for the transportation as they need to travel for some more destinations. ProblemThe number of contractors is too large. It is difficult to manage 9 third party contractors.RecommendationWe suggest that it is better to limit the number of the contractor and train one or two of the contractors companies that can show competence to cooperate with IKEA well. Then, IKEA can make sure the contractor can be familiar with the products of IKEA.

They also can provide some training for the drivers. It can ensure they know the ways to provide service with quality.

They can also do some evaluation regularly to ensure the performance of the contractors. For example, they can record the number of product replacement (due to the delivery process) and customer complaint. Based on these kinds of data, IKEA can assess the service quality provided by the contractors and ask them for improvement.

They can also hold a Driver Reward Scheme to praise several drivers with the best performance. It can boost the driversincentive and build some models for other driver to follow.

Feedback from ManagementThe above suggestions are good. For the Driver Reward Scheme, IKEA really want to motivate the staff of the contractors. It is because the staff is on the frontline to provide service to IKEA customers. However, it is difficult to limit the number of the contractors because there is none can show the ability and competence to provide service to IKEA stably. Also, the contractor may bargain a higher price if the number of the contractors have to limit into one or two. And it may be very risky when the number of contractors is too few.

ConclusionIn conclusion, IKEA is a successful business model based on its successful supply chain management. Purest form supply chain management 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.

Strong logistics competence That it spreads to its suppliers makes the IKEA logisticians work through every element to find the most cost effective option from the packaging, through the filling rate of containers to the route and choice of transport system. It also comes in the form of a railhead, if it is viable, for all goods leaving the factory. From a suppliers perspective a solid relationship with IKEA gives his operation a critical mass and the development of expertise and best practice that can be put to good use in winning business from other customers. Other competitive advantagesEffective purchasing policy is another success factor affects the whole business.

Also with the customized design, well controlled product quality and customer service, make IKEA developing a healthy way and continue success in its industry.

[This is the end of the report]

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