ikea case study supply chain management

Sustainable supply chain management: a case study at IKEA

Date of Publication: Nov 21, 2017

Author: Francine Laurin & Kamel Fantazy

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Behind the Scenes of IKEA’s Supply Chain Strategy

As the world’s largest home furniture retailer, providing stylish and functional home furnishings, offering direct shipping of its recognizable DIY items in flat packages, and with stores all over the planet,  IKEA  has differentiated itself from the competition by offering modern products at affordable prices. IKEA furniture items are so popular that even their hard-to-pronounce names have become well-known.

Founded in Sweden in 1943, the IKEA Group now operates over  460 stores in 62 territories and countries , employing 231,000 workers worldwide, who report (on sites like Glassdoor and Indeed) that IKEA’s working conditions, both on the floor and in the warehouse, are excellent.

An IKEA store can be found in practically every major city on Earth, with 277 in Europe, 77 in Asia, and 70 in North America. In 2022, the company’s sales reached almost $48.3 billion, growing at a rate of 13% in 2021 since the year prior. As IKEA continues to adapt to a changing market and ever-shifting consumer preferences, its supply chain is evolving as well.

How Does the IKEA Supply Chain Work?

IKEA’s supply chain strategy is efficient and effective. In order to keep it this way, IKEA focuses on a few key areas.

Sustainability Initiatives

Businesses with complex supply chains often have trouble keeping track of every supplier’s sustainability efforts. To address this, IKEA introduced  IWAY  (the IKEA supplier code of conduct) in 2000, as well as an annual  sustainability report . This standard specifies the requirements the company places on suppliers and manufacturers and outlines what they can expect in return. It also lays out guidelines designed to reduce waste and help ensure products are sourced sustainably.

“The world is changing, and the IKEA business is changing with it,” reported Torbjörn Lööf, the CEO of Inter IKEA Group. To further enhance supply chain sustainability, the company developed a proprietary tool called the “e-wheel,” which helps assess the environmental impact of its products at five stages of the supply chain, each forming a key part of its strategy:

• Raw materials
• Manufacturing
• Distribution
• Consumer use
• End of life

More specifically, the furniture giant has been working toward a  circular supply chain  since 2018: Every item is designed and manufactured with  next use  in mind. Depending on the product, this could mean using only recycled materials in production or providing a spare parts warranty.

As another example of the company’s sustainability efforts, IKEA launched the ÅBÄCKEN water mist nozzle in late 2022 designed to help cut down home water usage by up to 95%, as well as raise awareness that every drop counts.

Inventory Management

To avoid waste and cost inefficiencies caused by the bulk stock ordering of items that don’t sell as expected (meaning more costs and less room in warehouses for better selling stock), IKEA employs “minimum settings”, the lowest number of products that have to be available before a new order can be placed, and “maximum settings”, the highest number of products that can be ordered at once.

Further increasing  inventory management  efficiency, IKEA’s “do-it-yourself” model has also helped set their supply chain apart. By packaging their products compactly, customers can easily take their purchases directly from the warehouse to their homes to assemble themselves. This allows IKEA to maintain a larger inventory, in turn reducing the company’s shipping costs.

Finally, by automating restocking processes for “high-flow” items — which make up 80% of a store’s sales volume — the business is able to minimize the need for shipping and manual restocking.

In-Store Logistics in IKEA Stores

To streamline the flow of goods in and out of its stores, IKEA operates with a unique and rare feature: in-store logistics managers and personnel. An IKEA logistics manager and other personnel members monitor deliveries, record all inventory coming into stores, sort goods, and ensure they’re placed in the appropriate areas.

By handling logistics in-store, every IKEA location can closely monitor and control all processes, helping to ensure high store-level inventory accuracy — a rarity for many retailers that rely on forecasting and inventory replenishment logic handled at distribution centers.

Not only does this help IKEA reduce costs, but it also helps improve customer loyalty, creating an easy-to-navigate shopping experience that allows consumers to buy the furniture and housewares they need, where and when they need it.

Lessons to Learn from IKEA’s Supply Chain Strategy

As the modern supply chain continues to shift in response to changes in the market, consumer preferences, and the economic landscape, businesses need to remain nimble if they want to succeed. Although emulating IKEA’s strategies may be challenging for smaller companies, the retailer can provide inspiration for several aspects of the supply chain — particularly for forward-thinking businesses looking to increase sustainability and optimize efficiency.

For instance, some companies may want to consider implementing or increasing automation to centrally manage complex supply chain processes. Not only can this enhance productivity, but it can also cut costs. Aspects of IKEA’s  inventory optimization  strategies, as well, can be adopted by businesses looking to be at the forefront of their industries.

With a range of inventory management systems available, businesses have many options to choose from for their specific needs. For instance, some systems are designed specifically for small- to medium-sized companies, some are geared toward certain industries, and some may offer special features for particular business needs.

IKEA Supply Chain—COVID-19 Impact

In light of the  COVID-19  crisis, businesses around the world have been rethinking and reworking their supply chain operations — IKEA included. The retailer had been forced to temporarily close some stores, but demand for office furniture remained steady as people working remotely wanted to create comfortable, practical setups.

Henrik Elm, the global supply manager at brand owner Inter IKEA Group, which heads supply, said that  supply chain disruptions  increased as the virus spread across the United States and Europe, with closed borders and suppressed movement creating hold-ups. Spreading inventories across warehouses in different locations has helped, he said.

The main challenge the company faced was finding space to store items stuck in transit to areas where most IKEA stores were closed. Elm correctly foresaw constraints in harboring these goods, and warehouses being a bottleneck. “Things that were on their way we are either re-steering or storing,” he told  Reuters at the time. To aid in relief efforts, IKEA also shifted its focus to making face masks, hand sanitizers, visors, and single-use aprons for healthcare workers.

Since then, the company announced that while retail sales benefited after re-opening post-pandemic, inflation and supply chain issues impacted 2022 sales, leading to rising costs and higher product prices. Although sales grew financially, quantities had not. In light of this, IKEA decided to redesign some of its bestselling products, such as the famous Billy bookcase , in a bid to keep manufacturing costs low while still being profitable.

IKEA Supply Chain—Moving Forward

Going by the company’s sales data history, and despite sales dipping for the first time due to COVID-19, a steady increase in revenue is anticipated in the next couple years; demand for IKEA products never seems to dwindle. In 2022, IKEA registered a total sales increase of 6.5% with 4.3 billion visits by customers to IKEA’s website accounting for 22% of its overall sales (the rest, by its 822 million in-store visitors).

The company continues to have a competitive advantage, offering many home items at a similar quality and much lower cost than other furniture retail giants. IKEA is set on prompt order fulfillment, and the use of fewer materials (and therefore, fewer costs for customers) for continued customer satisfaction and loyalty.

While the continuing impact of COVID-19 and potential future spikes are not exactly certain, IKEA has laid solid groundwork for itself by building an efficient, sustainable supply chain — one that includes long-term business relationships and long-term contracts with suppliers and manufacturers — that will help carry the business through the current crisis, as well as any disruptions that may occur in years to come.

• https://about.ikea.com/en/about-us/year-in-review
• https://www.statista.com/statistics/264433/annual-sales-of-ikea-worldwide/
• https://www.retail-insight-network.com/news/ikea-fy22-results/#:~:text=IKEA%20registers%20total%20sales%20increase%20of%206.5%25%20for%20fiscal%202022

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How IKEA Evolved Its Strategy While Keeping Its Culture Constant

If you’re leading your team through big changes, this episode is for you.

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The Swedish furniture maker IKEA found huge success producing quality furniture at affordable prices. But in 2017, the company was at a crossroads. Its beloved founder had died, and the exponential rise of online shopping posed a new challenge.

In this episode, Harvard Business School professors Juan Alcacer and Cynthia Montgomery break down how IKEA developed, selected, and embraced new strategic initiatives, while fortifying its internal culture. They studied how IKEA made big changes for the future and wrote a business case about it.

They explain how the company reworked its franchise agreements to ensure consistency among its global stores. They also discuss how IKEA balanced global growth with localization, developing all-new supply chains.

Key episode topics include: strategy, growth strategy, disruptive innovation, emerging markets, leadership transition, competitive strategy, company culture, succession.

HBR On Strategy curates the best case studies and conversations with the world’s top business and management experts, to help you unlock new ways of doing business. New episodes every week.

• Listen to the original HBR Cold Call episode: IKEA Navigates the Future While Staying True to Its Culture (2021)
• Find more episodes of Cold Call
• Discover 100 years of Harvard Business Review articles, case studies, podcasts, and more at HBR.org .

HANNAH BATES: Welcome to HBR On Strategy , case studies and conversations with the world’s top business and management experts, hand-selected to help you unlock new ways of doing business. The Swedish furniture maker IKEA found huge success producing quality furniture at affordable prices. But in 2017, they were at a crossroads. Their beloved founder had died, and the exponential rise of online shopping posed a new challenge. Today, we bring you a conversation about how to develop, select, and embrace a new strategic initiative – with Harvard Business School professors Juan Alcacer and Cynthia Montgomery. They studied how IKEA made big changes for the future while fortifying its internal culture and its external identity. In this episode, you’ll learn how the company reworked its franchise agreements to create a more managerial and modern culture, and ensure consistency among its global stores. You’ll also learn how they balanced global growth with localization – including new supply chains. This episode originally aired on Cold Call in June 2021. Here it is.

BRIAN KENNY: For some of the world’s most celebrated founders, the entrepreneurial drive kicks off at an early age. Mark Zuckerberg developed Facebook in his Harvard dorm room at the age of 18. Michael Dell made $200,000 upgrading computers in his first year of business, he was 19. Before Jack Dorsey founded Twitter, he created a dispatch routing platform for taxis in his hometown of St. Louis, while he was in middle school. But then there’s Ingvar Kamprad who began selling matches at the age of five to neighbors in his rural Swedish homestead. By the age of seven, he was buying matches in bulk in Stockholm and selling them at a profit back home. Ingvar learned early on that you can sell things at a low price and still make a good profit. A philosophy that fueled the success of his next business venture, IKEA. Today on Cold Call , we welcome professors, Juan Alcacer, and Cynthia Montgomery to discuss their case entitled, “What IKEA Do We Want?” I’m your host, Brian Kenny, and you’re listening to Cold Call on the HBR Presents network. Juan Alcacer’s research focuses on the international strategies of firms in the telecommunications industry and Cynthia Montgomery studies the unique roles leaders play in developing and implementing strategy. They are both members of the Strategy unit at Harvard Business School. And thank you both for joining me today. It’s great to have you on the show.

CYNTHIA MONTGOMERY: Thanks Brian.

JUAN ALCACER: Thank you for having us.

BRIAN KENNY: You’re both here for the first time, so we’ll try and make it painless so we can get you to come back on. I think people are going to love hearing about IKEA and getting an inside view. Most of us have had that experience of being like mice in a maze. When you go into an IKEA store, you are compelled to walk through the whole place. It’s really brilliant, so many of the touches and things that they’ve done. And this case helps to shine a light, I think, on some of those decisions and how they were made. I had no idea how old the company was. So just starting with its history, it’s going to be good to hear about that. Juan, I want you to start, if you could, by telling us what would your cold call be to start this case in the classroom?

JUAN ALCACER: I like to start the case, bringing in the emotions of the students and their relationship with IKEA. So most of our students have had some experience with IKEA. So I’d just start asking how many of you have been in IKEA, and then I’d start asking why? Why did you go to IKEA? And this time telling you all the things that you just mentioned, for instance, walking through the maze, going to eat the meatballs. So they started bringing all these small, decisions that were made through the years, that made IKEA, IKEA.

BRIAN KENNY: Who doesn’t love the meatballs? Cynthia, let me ask you, you’re both in the Strategy unit at Harvard Business School, there’s a lot of strategy underlying this whole case. I’m curious as to what made you decide to look at IKEA and sort of, how does it relate to your scholarship and the things that you think about; the questions you try to answer?

CYNTHIA MONTGOMERY: I’m really interested in the choices firms make about who they will be and why they will matter? The core questions at the identity of a company. In 1976 Kamprad laid out very, very carefully. What IKEA would do, who it would be. He identified its product range. The customers it would serve, the company’s pricing policy, all in a document called, The Testament of a Furniture Dealer. And he described it as, “the essence of our work.” And 45 years later, it was still required reading for all of the IKEA’s employees. It’s probably the most compelling statement of corporate purpose I’ve ever seen.

BRIAN KENNY: Remarkable in a company that’s based on furniture. It was a very, sort of powerful thing. There’s an exhibit in the case that shows the whole Testament. Maybe we can dig a little bit into the history here. I alluded to the fact that it’s been around for a long time. Cynthia, just tell us a little bit about how the company came to be and how it evolved over time.

CYNTHIA MONTGOMERY: IKEA started actually as a mail-order business in Sweden and in the late 1940s Kamprad noticed that despite a lot of demand for furniture, agreements between the furniture manufacturers and retailers were keeping furniture prices real high. He was interested in a different set of customers. And he decided that to attract farmers and working class customers, he needed to be able to offer quality furniture at lower prices.

BRIAN KENNY: What were some of the early challenges that they faced. I’m also curious a little bit about the Swedish culture and how that sort of factors in here. Because there was definitely undertones of that factoring into the way they set this up.

CYNTHIA MONTGOMERY: It’s a virtue to be frugal and to be very careful about how you spend your money. And that made a huge impression, particularly given his background, growing up on a farm for Kamprad, he decided he really wanted to lower the prices of furniture and began to do so. And it turned out that there was a very, very strong response from other furniture manufacturers who basically said that they were going to boycott him. They wouldn’t allow him into their furniture fairs, him personally, as well as his company. And so in turn, what happened was that they also pressured local suppliers not to sell to a IKEA anymore, basically trying to force him out of the market. And what happened was that that actually drove Kamprad to Poland as a source of supply because local firms wouldn’t supply him anymore. And in the process, he discovered that Polish manufacturers could actually make furniture at far, far lower costs than Swedish manufacturers. And that essentially gave IKEA a cost structure that was more like a difference in kind, than a difference in degree. And that proved enormously important to building almost insurmountable competitive advantage for IKEA.

BRIAN KENNY: He was also really keen with innovations early on that things like the restaurant area and the childcare space, what were some of the insights that drove him to make those kinds of decisions?

CYNTHIA MONTGOMERY: One of the things that he decided quite early on is that he wanted to have the stores located out of town. And the reason is because land there was much, much cheaper. So he built these ,as you described earlier, Brian, these gigantic stores on the outskirts of town and they had lots and lots of square footage and lots and lots of merchandise, but you know, it took time to get there. It took time to shop there and what he wanted to do was make it worth it for the customers to make the trip, worth it for them to spend a lot of time in the stores. So he decided to add restaurants and the now famous meatballs, which come in several flavors, actually around the world, and to add childcare centers that would care for young children while the parents shopped. On the low cost front, he was innovative in other ways, he actually borrowed the idea of flat pack from another innovator, but he’s the one that actually brought it to life in such a big way. Then he discovered that if you let the clients go in and pick off the furniture packs themselves, they could even save more money and lower the costs in the store.

BRIAN KENNY: So they have a pretty complicated org structure, when we start to dig into some of the nuance of the case. Juan, could you describe for us, how they’re set up from an org structure standpoint?

JUAN ALCACER: You have to realize that coming from Sweden, which is one of the countries with the highest taxation for corporations in the world. So early on, they decided to find some organization structure and legal structure that would allow them to lower taxes. And that created basically an ownership based on foundations, based in the Netherlands. And they decided, early on, to separate the company into pieces. One is the franchise store, which is basically running the brand and running the management image of the brand. And then the operational part of the company, which is a franchisee. And for many years, those two things were separated. The franchisee was also in charge of manufacturing and so forth. So it was a very strange structure, that was put in place in part by the charisma and the leadership style of Ingvar Kamprad. If I can go back to your question about the Swedish culture. One of the things that, at least for me, is very striking is that when you look at multinationals, there’s a thing called the liability of being a foreigner, which means that when you go to another country, you have some disadvantages. And you try to mitigate that liability of being a foreigner, by pretending to be of that particular country. IKEA went with a totally different approach, they’re totally Swedish. Names of their products are impossible to pronounce. The fact that they have meatballs, they have their Swedish flags all over the place. They embrace the Swedish spirit as a part of the brand. You don’t see many multinationals with that. That makes IKEA what it is today.

BRIAN KENNY: I definitely think that’s part of the appeal here in the US, for sure, is people being exposed to the Swedish culture in a way they never had before. What is the culture of the company like, what’s it like to work there?

JUAN ALCACER: We went to both the Netherlands and to Sweden and we had a great time. It’s a very egalitarian culture. All the VP’s, high-level managers, none of them have an assistant. Only the CEO has an assistant. They don’t have offices, so everybody shares an open space. The whole place is decorated with IKEA furniture, everybody talks to each other by their first name. It’s very collegial, very friendly.

CYNTHIA MONTGOMERY: I would add to that. I think IKEA was incredibly generous to us, in the sense that they shared all kinds of confidential, internal documents and were really willing to talk in a very open and forthright way, about both their strengths and their challenges, which was incredibly refreshing. And as Juan said, that it was very egalitarian, and not surprisingly IKEA was one of the first companies to embrace democratic design. And that spirit was everywhere in the company.

BRIAN KENNY: Cynthia, what would you say are some of the keys to their success over the years?

CYNTHIA MONTGOMERY: I’d say that IKEA basically picked a lane and stuck with it. They had clarified, as I said at the top of the show, very, very carefully about what they wanted to do, who they wanted to be. And what they said is, look, this is what we’re going to be about. We’re going to offer an extensive range of practical, well-designed furnishings at low prices. And we’re going to serve the many, not the few. And the many are those with limited financial resources. When you have such clarity about what you want to do, then you can set out and try to maximize how you approach that. Essentially IKEA built a system, to do exactly that, extremely well and their distinctiveness made them truly an iconic firm. And it’s great when you talk with students about, what’s the purpose of your business?, What are you doing? What’s interesting is that oftentimes they can describe much more carefully what IKEA is doing, than what their own businesses doing. The last thing I would add, is that as Juan one said, they’re really synonymous with Sweden and they put that right out there. It’s almost like the way that Coca-Cola is synonymous with the US. And that has been a big part of their advantage.

BRIAN KENNY: Okay. So we’ve painted a very rosy picture for IKEA, but it’s an HBS case. So there’s tension, inevitably. So let’s dig in a little bit to where the case brings us. I’m going to mispronounce his name. I hope I don’t, but Torbjörn Lööf is that close?

CYNTHIA MONTGOMERY: Yeah.

BRIAN KENNY: He is the protagonist in the case. And he is stepping into a leadership role here really after an iconic leader has stepped back and that’s a challenge. Any time that happens, and a leader has to step in. And as he starts to sort of peek underneath the hood a little bit, he starts to see some of the challenges that IKEA is facing in this now seventh decade, I guess, of their existence. So Juan, maybe you can set that up for us a little bit.

JUAN ALCACER: It’s not only that he is stepping in the shadow of a leader that created the company. It’s that the company is still controlled by the family. So this is not a public firm, this is a private firm. So, he had to basically walk a very, very thin line, trying to take IKEA towards the future, but still preserving the past. And he had basically two main tasks, one is short term, that organization restructure that we were talking about, that was very complicated was created products. As I said before, the franchisee, which is basically the one that was running all the operations, was also the manufacturer. But there were other franchises. So for instance, the operations in Middle East are run by another company. So they wanted to create a system of transparency, that all the franchises are run the same way. When you have a franchisee that has basically represented 80% of your sales, and the ones that are representing 2% or 3%, there is an imbalance of power. So they tried to create a structure that is more managerial, that is more modern, that will allow to create incentives for new franchisees to come into the system. So that transaction was basically transferring production and transferring the functions that were in the franchisee back to the franchisor. There were 25,000 people that have to move from one place to another.

BRIAN KENNY: Wow.

JUAN ALCACER: They didn’t move physically, but in terms of the legal status they shift around. And the second is to bring IKEA to the world. What they observed is that there were some changes in demographics, they were targeting the low-income, what they call the thin wallets of the world, but it turned out that people that would go to IKEA are not thin wallets anymore. These people have already moved towards the middle-class and they also have this whole, to increase the number of consumers to three billion, and that meant that they have to basically grow globally, at a rate that they have never done, before they had two or three markets, like China and India. They also have the issue of eCommerce, to pick up and every retailer in the world is dealing with that. So, it’s two steps. One, getting the house in order, and second one, creating a path for the future for IKEA to become an icon for the next 75 years.

BRIAN KENNY: Yeah. And I also think at some level it’s hard to sustain that original mission that they set out with, when you’re trying to expand so rapidly and bring in a much larger audience. Cynthia, I don’t know if you have other observations about these changes they were facing.

CYNTHIA MONTGOMERY: Absolutely. Because one thing is that you can look at the challenges that came from expanding into new geographies. But the other thing that they found in a large study that they did, is that there were challenges in their core business as well, that the countries they’d been in for a number of years, and what I’ll call the big blue box stores, mostly in developed countries. What they found is that increasingly many of their customers in those markets wanted new conveniences. They wanted stores that were located closer to city centers because a number of people say in their late twenties, early thirties are not driving and don’t have cars. And they found that there was an increasing demand for delivery and assembly services for shopping online. These trends are worrying to a huge number of retailers, but particularly a challenge to IKEA because low price, low, low price, so low that that people can recognize the difference. That being at the heart of their strategy. And customers’ willingness to spend time getting to the store, hauling furniture about, ultimately assembling it. Those are at the very, very heart of their low-cost strategy and their very distinctive value proposition. It was a big challenge within the developed markets as well.

BRIAN KENNY: And depending on where they went in the world, a different set of challenges pops up almost everywhere. Juan, you mentioned earlier that they pushed back against localization, but is that a sustainable strategy? When you’re trying to go into entirely new markets like China and India.

JUAN ALCACER: The beauty of IKEA is that they found a segment across different cultures that was very similar. College students the United States, that needed to have furniture for a few years only, it could be young couples that are opening a new house, in some places it’s immigrants that are moving from one country to another country that need to buy furniture, but they don’t have the money to do so. So there was this very common segment across the world that they were able to then define, that allows them to have basically 80% of their line, of their range, is common across countries. And they have around 10% to 20% that varies by country. Now, when they go to China, and they go to India, they find that the changes have to be of a higher scale for three reasons. One, the tastes are different, also the materials, when you are going to India and you are going to houses that are in a high humidity environment, the type of wood that you can use is different. Now you start, not only changing the look of the product but you also have to change how you made it. And the third big challenge is when you look at what is defined as thin wallet, in these markets, is really thin. It’s not thin wallet in Sweden, it’s not thin wallet in the United States. So, you have to go to prices that are really, really low. And that means that you are already a low cost producer but you have to go even lower. That means that you have to change your supplier, so it starts changing the fundamental parts of the business model that they created through the years.

BRIAN KENNY: And it could probably, pretty easily, get away from you. So this does call for a strategy. Cynthia, can you describe for us what the three roads forward are? This was sort of underpinned their strategy going forward and how they were going to deal with some of these challenges.

CYNTHIA MONTGOMERY: Basically, the three roads, the first was affordability, as Juan said, this isn’t affordability in the way that they, at the level at which they’ve traditionally thought about it. This is affordability for wallets that are either very thin or actually where the willingness to pay just isn’t as high, because they’re accustomed to having goods that are at very low prices. So they wanted to attack affordability for people who could not afford IKEA today. They cared a lot about accessibility. They’ve got to reach and interact with people where they are. And the last is sustainability, and they felt really, really strongly about this. And I think much in line with what you see with a number of other countries in Europe, that they cared a lot about the sustainability of the products and wanted to make a positive impact for people, society and the planet. And they’re taking on all three of these aspirations at once.

BRIAN KENNY: You have written many cases, I’m sure that parallel this, what are some other firms that have faced similar challenges and maybe figured out a way to deal with the same sets of challenges?

JUAN ALCACER: The challenge of going overseas, we didn’t write cases about multinationals for many years. They always have this tension between coordination in headquarters and adaptability in each one of the subsidiaries. So IKEA was very good at playing that game for many, many years. In a way they were going to countries that were somehow similar to Sweden. Now that they are venturing to countries that are farther away in many dimensions, not only physically, but also in terms of economic distribution, in terms of taste. They are seeing this tension to be amplified. We have seen that in many companies, Procter and Gamble has been doing that for years and years, Unilever has been doing that for years and years. IKEA has done it for 75 years. They went overseas very early on. But now the challenge is a little bit higher. The other challenge is that Cynthia also mentioned, which is basically adapting to new technologies and new demographics. Every retailer is facing that. Any supermarket, any chain that has been selling in brick and mortar is facing those challenges. So, what is interesting about IKEA is that they are facing these all at the same time and they’re facing this during the process of transition from the leader that created the company to a new set of managers that are more professional and are not part of the family.

BRIAN KENNY: You mentioned technology. I’m just curious, the role that the internet plays in this, because now everybody can see, you know, through YouTube and other things, what the experience is like from one place to the other, and how important is consistency across all those geographies, versus a little bit of localization to make it feel a little bit more like this is the China version of IKEA versus the European version of IKEA. Cynthia, do you have thoughts on that?

CYNTHIA MONTGOMERY: That’s the real challenge here in the sense that, how do you take this whole model that has been developed over so many years? And it’s very, very hard to imitate, which has given them a lot of strength over the years, but when the environment changes, instead of responding in a piecemeal way to all kinds of external stimuli, it’s how do you take this whole model and evolve it in some coherent way that stays true to the iconic sense of who IKEA is? I really see it fundamentally, as an existential question for IKEA.

BRIAN KENNY: Such a great point. Look, I want to thank both of you. This has been a really interesting discussion about a brand that we all know and have experienced many times firsthand. I have one more question for each of you before we part ways. And that would be if there’s one thing you want people to take away from this case, what would it be? Juan, let’s start with you.

JUAN ALCACER: What I would like listeners to take from this, is we have this mentality of growth, growth, growth, and expanding and doing different things, and when you look at IKEA, you have to wonder, is it better that IKEA stays doing what they do well, or do they have to keep growing and entering all these markets and adapt to overseas. We have this basic assumption that growth at any cost should be the goal. I would like the listeners, when they look at the case and think about the cases, to question that very basic assumption.

BRIAN KENNY: Cynthia?

CYNTHIA MONTGOMERY: One of the things about IKEA that I think it’s really, really important to know is that they really brought something different to the world and they did it in a very compelling way. So at the heart, to do something that’s distinctive, that adds value. It comes through really strong in the IKEA story. At the same time, when the environment changes, how do you evolve, is really challenging. And so the fact that they’re being so open in how they’re confronting this, I think there’s a lot to learn there. It’s a challenge. I think it’s really important to remember what’s at the heart of this company, is that they’re really bringing something that’s very unique and they need to continue to do that.

BRIAN KENNY: Juan Alcacer, Cynthia Montgomery, thank you so much for joining me. The case is called, “What IKEA do we want?” Thanks again.

JUAN ALCACER: Thank you.

HANNAH BATES: You just heard Harvard Business School professors Juan Alcacer and Cynthia Montgomery in conversation with Brian Kenny on Cold Call .  We’ll be back next Wednesday with another hand-picked conversation about business strategy from the Harvard Business Review. If you found this episode helpful, share it with your friends and colleagues, and follow our show on Apple Podcasts, Spotify, or wherever you get your podcasts. While you’re there, be sure to leave us a review. We’re a production of the Harvard Business Review. If you want more podcasts, articles, case studies, books, and videos like this, find it all at HBR dot org. This episode was produced by Anne Saini, and me, Hannah Bates. Ian Fox is our editor. Special thanks to Maureen Hoch, Adi Ignatius, Karen Player, Ramsey Khabbaz, Nicole Smith, Anne Bartholomew, and you – our listener. See you next week.

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IKEA-Case Study Supply Chain Management

Ikea can be stated as the world’s largest furnishing product vendor (Kotler et. al., 2009) with sales of over 20 billion Euros in 2009 (Kelly, 2010). The company is known all over the world, especially Europe, North America and more frequently in Asia and Australia and is popular for offering “ a wide range of well designed, functional home furnishing products at prices so low as many people as possible will be able to afford them” (Kelly, 2010, p.1). In order to be able to fulfil this aim and promise, IKEA had to and also did implement certain strategies with the aim to be as efficient as possible and provide their customers with the expected quality and mutually satisfy their needs for the reasonable price. In the following it is to discuss the main supply chain strategies IKEA chose in order to work effectively with their respective members and achieve their business goals. Furthermore it is to enlighten the major advantages and value adding factors IKEA gains from their strategies and good relationships and networks with their supply chain members, as well as the assumable measures for improvement IKEA could develop in the future.

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This report focuses on IKEA’s management and communication surrounding sustainability in general and chemical risks specifically. IKEA’s work is analysed in relation to theoretical concepts around responsibility, supply chain, and governance . The report focuses on IKEA’s visions and organizational structures, its policy instruments to deal with chemical risks, supplier-relations and communication and learning. The study is based on previous scholarly literature, analyses of relevant documents, a field visit at a few of IKEA’s suppliers in southern India, as well as interviews with staff working at IKEA in Sweden. The report focuses on IKEA’s systems and processes for dealing with chemical risks, and not on the implementation of such measures in quantitative terms.

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The paper is a case study for the different types of risks faced by IKEA as the company started its operations in China. How the risks were mitigated, avoided or accepted has been discussed.

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Securing responsible sourcing through IWAY

We believe that everything we do comes with taking responsibility for the impact on people, society and the planet across our value chain. But we can only do this if our business partners share our vision and commitment to sustainability. That’s why we have IWAY, the IKEA code of conduct for suppliers.

What is IWAY?

IWAY is the IKEA way of responsibly procuring products, services, materials and components. It sets clear expectations and ways of working for environmental, social and working conditions, as well as animal welfare, and is mandatory for all suppliers and service providers that work with IKEA.

Since 2000, when we first introduced IWAY, we have built a credible and robust system that we can rely on to support, challenge, and actively work with together with our suppliers.

With IWAY we create impact in 4 main areas by:

• Promoting positive impacts on the environment
• Securing decent and meaningful work for workers
• Respecting children’s rights
• Improving the welfare of animals in the IKEA value chain

IWAY is based on internationally recognised standards and principles for human rights, environmental protection and worker health and safety, as well as on our own IKEA values and legal compliance. It’s the foundation for our overall sustainability work, both together with our direct suppliers and sub-contractors in the whole value chain.

A look at IWAY requirements

IWAY is structured around 10 principles which reflect the IKEA standpoints on different environmental and social topics:

IWAY principles:

• IWAY principles are supported by effective routines and open dialogue
• Business is conducted lawfully and with integrity
• Children are protected and opportunities for work, learning and family life are promoted
• Fundamental labour rights are respected
• Workers have time off work, are paid responsibly and have opportunities to develop competence
• Workers’ health and safety are protected
• Working and living conditions are suitable
• The planet is protected
• Resources, including water and waste, are managed in a sustainable and circular way
• Animals live decent lives

Each of the 10 IWAY Principles is, in turn, supported by IWAY requirements. If you want to learn more about the IWAY requirements, please read the IWAY Standard and respective IWAY Sections .

IWAY principles are based on internationally recognised standards and principles, such as the UN Guiding Principles on Business and Human Rights (UNGPs), the 10 Principles of the UN Global Compact , the UN Sustainable Development Goals (SDGs) and the ILO Centenary Declaration for the Future of Work , among others.

At the heart of IWAY is an approach to continuously develop the framework together with suppliers, with the goal to collectively achieve responsible sourcing and a more sustainable IKEA value chain. We define minimum mandatory requirements but encourage our suppliers to develop above and beyond them. For this, we have a staircase model for the IWAY requirements that promotes suppliers to focus on continual improvement and development around IWAY topics.

Always improving – the IKEA way

We have been working with IWAY since 2000 and are continuously revising it to make sure that it stays relevant, reflects global changes and challenges and it contributes to the commitments in the IKEA Sustainability Strategy and the IKEA Supply Strategy.

Currently, we are working with IWAY 6, which was introduced to suppliers in September 2020. This latest version of IWAY is a total system upgrade, that introduced improved ways of working as well as new topics, such as biodiversity and conservation of natural resources, animal welfare and an increased focus on the competence development of workers.

One of the important changes in IWAY 6 is shifting the focus from only conducting audits at our suppliers to also focusing on providing more support to them to achieve the best possible results now and in the future. It’s about both ensuring compliance as well as supporting a continuous and sustainable development.

We want to be a force for good for people, society and the planet at every step in the IKEA value chain. This means we are taking IWAY further down the IKEA value chain, to the sub-suppliers of our direct suppliers and all the way to the source of raw materials. We are at the beginning of this journey and are working together with our suppliers, IKEA teams and other external stakeholders.

We want IKEA to be an example of how a business can operate responsibly. IWAY contributes to building a strong sustainable foundation for the IKEA value chain and continual development for ourselves and our suppliers.

In FY23, we continued the implementation of the IWAY Digital Platform Work Section 6.0. This section was implemented among suppliers who rely on digital platforms to provide services for the IKEA business. Typical services performed by these workers include customer delivery and installation services. In these segments, workers often function independently and do not maintain an employment relationship with suppliers nor digital platforms. One of the challenges is implementing requirements for systems to register working hours.

During the year, to support suppliers with the implementation of IWAY, we offered more than 1,000 implementation activities including, for example, capacity-building and training on topics such as internal auditing, health and safety and responsible recruitment.

While IWAY has a focus on supporting our suppliers with their continuous development journey, compliance with mandatory IWAY requirements is, and remains, the foundation of our partnerships with suppliers. In FY23, more than 1,000 verification activities were performed in the Inter IKEA Group supply chain. They include gap assessments for new suppliers and full or focused audits for existing suppliers. Following the pandemic, audits are back on track, with remote audits just one of the types of verification activities.

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Inside IKEA’s Supply Chain & Inventory Management

Post on Tuesday, August 21st, 2018 in Accounting

Founded back in 1943 in Sweden, IKEA is now one of the world’s most well-regarded furniture and household appliance brands.

It is also the largest furniture retailer in the world. For 75 years, the company has been living up to its key goal, which consists in making “well-designed, functional home furnishings available to everyone,” as stated on its website .

But what we’re here to talk about is IKEA’s supply chain and inventory management. 

That’s the backbone of the company, and what allowed them to grow at scale and reach these loft numbers:

• IKEA closes up the Top 40 of the World’s Most Valuable Brands , according to Forbes rating.
• The company owns over 400 stores in more than 50 countries around the globe.
• Nearly 200,000 employees work for IKEA Group worldwide.
• In 2013, IKEA printed 212 million copies of its catalog, translated into 29 different languages.
• As of 2016, the company sold $42.4 billion in goods.
• Each year the company launches nearly 2,500 new products. As of 2017, IKEA had 9,500 products in their portfolio.
• In 2017, IKEA website reached a total of 2.3 billion visitors globally whereas the physical stores reached 936 million visitors.

The furniture giant owes a lot of this success to its unique and innovative supply chain strategy. That’s the straw that stirs the drink for IKEA, the thing that gives IKEA its competitive advantage.

In this post, we are going to take a closer look at the key features of IKEA supply chain and see how they have led the company to success.

IKEA Supply Chain: How It Works

Before we dive into the gritty details, let’s give a brief overview of how the supply chain of IKEA works.

It goes roughly like this: 

• The company identifies the production requirements of each item, and determines the necessary logistics and related costs.
• IKEA representatives order the required raw materials from suppliers.
• The company distributes the resources for manufacturing and starts the production process while adhering to its quality requirements.
• The manufactured products are delivered to storage facilities and distributed to stores, and eventually, customers.
• If the customers are not satisfied with the quality, they can return products according to the warranty that they get with the purchase.

That’s the broad overview, but next we’ll get into the finer details about what makes IKEA’s supply chain so effective.

IKEA Supply Chain Features

These features allow the company to optimize its supply chain management processes.

• IKEA manufacturing and shipment costs are quite low because its furniture and home accessories are made of recycled and sustainable materials. In such a way the company uses fewer materials and requires fewer resources to produce and ship new parts.
• The most remarkable feature of IKEA furniture is that customers assemble it themselves. The furniture is sold in pieces, which are placed into convenient, flat packages. As a result, IKEA saves on transportation and fulfillment because the pieces take up less room in trucks. IKEA can ship more items at a lower cost. The DIY principle also allows the company to use the storage space more economically and thus save IKEA money on inventory management. Finally, many products are shipped directly from suppliers to the stores, a strategy that also significantly reduces warehousing and storage costs.
• More than 1,800 suppliers in 50 countries sell raw materials to IKEA. The company uses 42 trading service offices around the world to manage relationships with suppliers. It signs long-term contracts with the most trusted suppliers and thus gets materials at the lowest possible prices. Besides, IKEA encourages its wholesale partners to be environmentally conscious by giving them rules and guidelines called the IKEA Way of Purchasing Home Furnishing Products (IWAY). Such an approach helps to improve quality standards and reduce prices. This is what makes the furniture more affordable for customers.
• Unlike other stores, IKEA hires in-store logistics managers who are responsible for all inventory-related processes, such as monitoring deliveries, sorting and separating goods, and directing them to the correct locations. Each IKEA store has a showroom on the upper floor and a warehouse on the ground floor, with more than 9,500 products in stock. In the showroom, shoppers can see and feel the products. Each item has its own article number as well as an aisle and bin number. Customers can use these numbers to locate items in the warehouse. However, shoppers cannot access one-third of the warehouse because this zone is designated for bulky items, which cannot be collected without help from the staff.
• Cost per touch means that the more times somebody touches the product during the shipment, the more costs the company carries, because it needs to pay the procurement and delivery staff. However, IKEA customers collect the most of the items themselves, so fewer “touches,” and fewer costs, are involved.
• IKEA warehouses are divided into automated facilities for fast-selling items and manual facilities for slow-selling items. This allows the company to reduce handling costs for low-demand products and ensure the smooth flow of high demand products within the IKEA supply chain.
• With the IKEA inventory tracking system, the staff can set up both the minimum number of products available before reordering, and maximum number of a specific product to order at one time. These settings help the company nail down the perfect reorder point , and prevent understocking and overstocking issues. It keeps logistics managers aware of what is sold, and how much inventory enters the store through direct shipping and from distribution centers. They use this information to forecast sales for the next couple of days and order products to meet the forecast demand. If the sales data does not match the expected number of items that should have been sold that day, the logistics manager does a manual stock take.
• IKEA values its customers above all and strives to deliver the best service possible. Constant monitoring of customer satisfaction is an integral part of IKEA’s business strategy. They analyze the number of complaints, returned products, demand for certain products and customer suggestions. Company representatives even visit the homes of their customers to gain feedback and ideas on products that customers might be looking for. The collected ideas are then used as the starting point of a new design process. Finally, IKEA stores provide the visitors with additional facilities, such as play areas for kids as well as food courts and mini shops with traditional Swedish food. This encourages the customers to visit physical stores even in the era of ecommerce and online shopping.

Now you know the secrets of IKEA’s supply chain strategy

We talked about a lot of the things that helped the furniture giant become what it is, including:

• How sustainable manufacturing saves costs on raw materials.
• How the do it yourself approach, cost per touch strategy, and direct shipping to stores save storage costs.
• How long-term contracts with suppliers leave room for volume discounts.
• How warehouse zoning ensures efficient inventory management.
• How internal inventory management software controls the reorder point and optimal order quantity.

These strategies are definitely worth borrowing. If wisely used and adapted, they can lead a retailer to success. If you’re looking to streamline your supply chain, take a look at Dynamic Inventory’s inventory management system , and see how it can take your business to a new level of efficiency. 

Adam is the Assistant Director of Operations at Dynamic Inventory. He has experience working with retailers in various industries including sporting goods, automotive parts, outdoor equipment, and more. His background is in e-commerce internet marketing and he has helped design the requirements for many features in Dynamic Inventory based on his expertise managing and marketing products online.

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