Procurement System at IKEA: Purchasing Style and Tools

Introduction

IKEA was founded in 1943 by Ingvar Kamprad in Sweden, and it has grown to be one of the leading international companies with over 420 stores in 52 countries around the world. For such a big company, sourcing materials globally is normally a challenge, which requires an elaborate strategy to address. The company seeks to offer affordable home furnishings at low prices so that its products can reach as many people as possible. As such, affordability through low prices is at the core of IKEAs business idea. According to the companys website, IKEAs business idea, which is to offer a wide range of well-designed, functional home furnishing products at prices so low that as many people as possible will be able to afford them supports its vision to create a better everyday life for the many people (IKEA: Our Vision and Business Idea par. 1). Therefore, in a bid to achieve this vision and business idea, the management has come up with an efficient procurement system, which is used to ensure that raw materials and other needed goods are available at the right place and time. This paper discusses IKEAs purchasing style and the tools used in the process before offering recommendations on what could be improved.

IKEAs Purchasing Style

The purchasing style at IKEA, which is part of the larger supply chain management, relies on a centralized system used in planning and coordinating the elaborate network of its suppliers. According to Johnson et al., a centralized supply chain planning strategy concerns common and standardized processes and working methods, centralized organization, and an integrated IT infrastructure with advanced planning and scheduling (APS) support and may result in benets, such as improved transparency, visibility, and synchronized processes (337). At IKEA, the procurement process is vertically integrated to some extent, and goods are mainly made-to-stock.

The Problem

Initially, the planning concept for procurement allowed regions and stores to place replenishments based on their needs. However, stores started overestimating demand to avoid shortages, and this aspect led to imbalanced demand coverage, and thus some stores would have obsolete inventories while others suffered prolonged periods of stock-outs. Regional stores were tasked with forecasting demand, which means over 120 individuals were using different methods to attain various goals. In terms of capacity planning, the different parts of the supply chain (stores, warehouses, regions, etc.) tried to optimize their own function, leading to imbalanced supply plans with a low and unstable total throughput and long replenishment times for the supply chain as a whole (Johnson et al. 342). Various in-house developed legacy systems were deployed to support this form of fragmented planning, which lacked proper data management. Therefore, the lack of standardized software to manage procurement meant that planning information, lead times, and stock balances were unreliable. Something had to be changed, and thus a new planning concept was developed and adopted.

Solution: New Planning Concept

IKEA adopted an integrated global planning process with a centralized function termed IKEA of Sweden located at its headquarters. IKEA of Sweden oversees all global purchasing strategies, among other functions. The decision on purchasing needs is made based on sales and demand forecasting to generate data on the companys future supply needs for all business areas. According to Johnson et al., The demand data is thereafter input to the global materials planning process, which in turn drives the supplier capacity and load planning processes, and the planning of the distribution supply chain (transport, warehouse, and store planning) (342). The demand planning process focuses on the aggregate sales volume within a period of five years, but it is updated thrice annually. Tactical forecasting is carried out every week based on selling volumes at every store around the world. Both tactical forecasting and demand planning are reconciled regularly to form a forecasting pyramid, and the figures obtained are used as the ultimate demand data to determine how the entire supply chain is handled.

The forecasts obtained from the demand planning process are used to determine the supply planning processes, which determine materials planning together with assessing the capacity of different suppliers. Figures from the materials planning processes are used in the replenishment of stores and warehouses. Forecasts are determined at two levels at the stores and at the distribution centers. The volumes derived from these forecasts are divided among the different suppliers using a matrix to ensure that none of the suppliers is overloaded. The supplier load process is then used to allocate volumes that suppliers have to deliver within the next 18 months. The suppliers are allowed to indicate their capacities, and in some cases, the company provides a guaranteed volume to different suppliers. IKEA can decide whether to decrease or increase supplier volumes where necessary.

The success of the Procurement System at IKEA

The new planning centralized concept at IKEA has been successful since it was implemented in the 2000s. One of the contributing factors to this success has been creating a sustainable relationship with suppliers. The company introduced a code of conduct for suppliers using the IWAY or simply IKEAs way of purchasing. Suppliers are expected to adhere to certain standards for their continued relationship with the company. IKEA has an elaborate communications and relationship management strategy that it uses to engage manufacturers and materials suppliers. With over 1,800 suppliers in over 50 countries, the company has 42 trading service offices to maintain a healthy relationship with suppliers. Additionally, the company makes a long-term commitment to suppliers through signed contracts. For instance, as mentioned earlier, some suppliers get guaranteed volumes that they should fulfill within periods of up to 18 months.

The company also employs in-store logistics to oversee the reordering of products. The in-store logistics team is tasked with managing inventory at every store around the world. For instance, every store has an in-store logistics manager whose work is to reorder goods. Additionally, a store goods manager is available to handle materials logistics in every store. The logistics teams are required to monitor and record deliveries together with sales to feed data into the system on the need to replenish stock.

Additionally, IKEA uses a proprietary system with minimum and maximum settings. This system helps in-store logistics managers to determine at what point stock should be replenished with what amount of goods. The minimum settings allow managers to know the least amount of goods that are available in the stores before placing an order for more. The maximum settings are useful in determining the maximum amount of a particular product that should be ordered at any given time. At IKEA, inventory is replenished at night after the stores close. Using this inventory system, logistics managers can establish the number of goods sold using point-of-sale (POS) data. Besides, such managers can know the amount of inventory that comes into the store, whether through distribution centers or direct shipping using advanced warehouse management system data. This information is monitored from the IKEA of Sweden center, and thus logistics managers normally get the necessary support for decision-making concerning inventory needs at every store. In case the available sales data is not in line with the forecasted number of products that should have been sold on a certain day, the logistics manager could tally the number of products available at the bins.

Therefore, the maximum/minimum principle is highly useful because the number is based on the number of products that will be taken from the reserve stack in a day or two. As such, customer demand is met, and at the same time, the ordering of too many or few products is minimized. This system streamlines operations at the stores because logistics managers do not have to worry about shortages or obsolete stock, which was a common feature in the old concept. This innovative approach to purchasing and supply chain management could be attributed to the success of IKEA despite having numerous locations around the world.

Tools Used

IKEA uses e-procurement as a competitive advantage for its purchasing needs. The use of this tool has been facilitated by a close and healthy relationship that the company has cultivated with its suppliers. The company uses e-procurement in the purchase of both direct and indirect materials. In 2005, the company partnered with IBX to use the latters on-demand application for procurement and sourcing as part of its e-procurement efforts to lower the cost of purchasing materials and services. In 2003, the company had implemented the demand planning software as it started rolling out its centralized procurement system to ensure that suppliers are updated on what they should deliver at what time. Three years later, in 2006, the fulfillment software was implemented to ensure that orders are fulfilled in time.

The e-procurement system is used for purchasing operations and inventory management purposes. The system is also useful in communicating with suppliers, especially when alerting them on the size of volumes that they should deliver and in negotiating prices. The system is also used by store logistics managers to communicate inventory needs at different stores. The e-procurement system at IKEA is integrated to ensure that need planners and business area specialists can access information from the stores, which is then used to forecast demand. To support this system, the company mainly uses the advanced planning and scheduling (APS) system software, legacy systems, and enterprise resource planning (ERP) software together with Microsoft Access and Excel at different levels of demand forecasting and inventory management. According to Johnson et al., No standard planning software is used to support the sales frame planning. Nevertheless, the tactical forecasting process is supported by standardized APS system software (344). The company continues to make the necessary improvements to better the system. The ultimate goal is to ensure that all purchasing and procurement processes are connected to the entire supply chain management to achieve the companys vision and business statement.

Recommendations/Conclusion

IKEA has managed to streamline its purchasing and procurement model by centralizing the entire supply chain, which is monitored by IKEA of Sweden. The old concept of planning and managing procurement processes was fragmented and ineffective. Regional offices would make independent decisions on what to purchase based on various forecasting methods. However, the introduction of the new centralized planning system eliminated some of the issues associated with fragmentation. The system allows for standardization of operations and demand forecasting using data collected from every store around the world.

However, despite the implementation of the new system, IKEA faces some challenges, and the following recommendations could be used to improve the system.

The supply plan accuracy is still low, especially for new products, because all the involved parties do not follow standardized working methods. Therefore, the company should come up with a criterion of ensuring that the standards ways of working are followed to address this problem.
The current system also faces challenges associated with implementing the new centralized system. The involved individuals especially need, and demand planners, have different educational backgrounds because they come from different countries. Therefore, the company should come up with a standardized way of training its employees to improve efficiency when handling the system.
The new system should be made the main application for all involved individuals. This goal could be achieved by educating the workforce on how to use the new software and achieve uniformity in the usage of the system.
The functionality of the APS and ERP software programs should be improved by offering capacity support for the involved individuals. Some employees still use in-house legacy systems and spreadsheets because they are conversant with them. However, these alternative systems are not standardized, and thus they affect the quality of data inputted in the main system. Training and monitoring to ensure compliance can be used to fix this problem.
Another problem with the current is insufficiency in managing lead time data and synchronization of the same information, which affects the quality of master data. This problem could be solved through proper training of the relevant individuals.
Finally, IKEA should not underestimate how difficult it is for employees to change mindsets. Proper change management approaches should be used to ensure that employees continually embrace the changes made in the system as it evolves to streamline the entire supply chain.