BUS 3260 Logistic and Supply Chain Management Group

Project
[Logistic and
Supply Chain Management
Group Project]
0505l347 JlANG Zailin
0505l339 ZHANG Chang
05003687 TSANG Lai Yin
05009944 YlP Sin Ting
050l2090 WONG Po Yan
050l4530 LAU Mei Ling
050l4549 YUE Pak Hong
050l5979 lP Pui Yee
06004369 LO Ka Hei
060l9676 CHEUNG Wai
l
BUS3620
BUS 3260 Logistic and Supply Chain Management Group
Project
Chung
Content
lntroduction P.3 P.6
Supply Chain Management
Order Fulfillment and Forecasting P.8
Purchasing P.9

Problems P.l0

Recommendation & Feedback P.ll

Packaging P.l2 P.l5

Problems P.l6

Recommendation P.l7
Transportation P.l8 P.20

Problems & Recommendation P.2l

Feedback P.22
Conclusion P.23- P.24
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BUS 3260 Logistic and Supply Chain Management Group
Project
Introduction
lKEA 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.
lKEA was founded in l943 by lngvar Kamprad in Sweden and it is owned by a
Dutch-registered foundation controlled by the Kamprad family. lKEA is an
acronym comprising the initials of the founder's name (lngvar Kamprad), the
farm where he grew up (Elmtaryd), and his home county (Agunnaryd, in
Smland, South Sweden).
lNGKA Holding B.V. is the parent company for all lKEA Group companies,
including the industrial group Swedwood, which manufactures lKEA furniture,
the sales companies that run lKEA stores, as well as purchasing and supply
functions, and lKEA of Sweden, which is responsible for the design and
development of products in the lKEA range. lNGKA Holding BV is wholly
owned by Stichting lNGKA Foundation, which is a foundation registered in
Leiden in the Netherlands.
IKEA ision!
"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:
l. Advertising and other types of communication
2. lKEA catalogue
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BUS 3260 Logistic and Supply Chain Management Group
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3. lKEA store
4. lKEA product range and genuinely low price
Respond the possibilities of the suppliers by:
l. Product Development together
2. Purchasing and distribution
3. Capacity Development
4. Capacity Commitment
5. Over Tag
IKEA Supply Chains characteristics
l. Production and market driven
2. Long term relation with supplier
3. Capacity agreement with supplier
4. Sourcing Globally.
5. Supplier lnternal competitions
"he ad#antage o$ IKEA supply chain
l. Low cost
2. Volume business
3. Unique design
4. Stable supply
5. Consist quality
"he %isad#antage o$ IKEA supply chain!
l. Less flexible
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BUS 3260 Logistic and Supply Chain Management Group
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2. Long planning cycle
3. Long lead time
4. Unstable supply
5. Discontinuous split.
IKEA Supply Chain Process
lKEA 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 lKEA manufactory. Later, the product will transport to
lKEA store and finally consume by customer.
lKEA has the integrated supply chain, which start from the design phase.
lKEA 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.
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BUS 3260 Logistic and Supply Chain Management Group
Project
&K IKEA 'etails Logistics (rgani)ation
HK lKEA is divided into four different departments to handle the logistic
issues. lnventory Department, respond for stock control and invoice.
Warehouse Department, respond for inbound and outbound logistics, Admin
and audits and Shipping, QC, AS-lS and Recovery. Distribution Department,
respond for scheduling and contractor management. Store in Store
Department, respond for store replenishment.
lKEA now has three stores in Hong Kong which is Causeway Bay, Kowloon
Bay and Shatin. ln Hong Kong, the retail logistics is divided into four different
departments to handle the logistics issue. lnventory department, respond for
stock control and invoicing. Warehouse department is responsible for inbound
and outbound logistics, administration and auditing, shipping quality control,
AS-lS and recovery. lKEA 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 lKEA supply chain pros and cons. The advantage of lKEA
supply chain is low cost, volume business, unique design of product, stable
supply and consist quality. The Disadvantage of lKEA supply chain are less
flexible, long planning cycle, long lead time, unstable supply because of
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BUS 3260 Logistic and Supply Chain Management Group
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basket effect and discontinuous split.
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BUS 3260 Logistic and Supply Chain Management Group
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(rder *ul$illment and *orecasting
ln the HK lKEA, an online integrated lT system which is managed by the
lnventory Supply Department is developed. lt 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
lKEA vendors and make forecast much more effectively by make use of this
system. The local lT 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, lkea 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 lKEA system is interconnected with the global one and both of them
can access the data and information in the other system. HK lKEA 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.
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BUS 3260 Logistic and Supply Chain Management Group
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Purchasing
Purchasing is one of the important parts of the supply chain of lKEA.
With its own woodlands, lKEA 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, lKEA needs to outsource the production of these products
to other suppliers/vendors.
ln order to sustain the quality of the products, lKEA would like to develop long-
term commitment with the selected suppliers. There is a list of criteria for lKEA
to evaluate and decide on the potential suppliers. For example, lKEA would
prefer suppliers which are financially sound, competitiveness, and have global
awareness. lKEA 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, lKEA 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 lKEA to utilize the competitive advantages of the suppliers, but
also save cost.
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BUS 3260 Logistic and Supply Chain Management Group
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Pro+lem
ln lKEA, it is common that different parts of the products are produced by
different suppliers. lt 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.
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BUS 3260 Logistic and Supply Chain Management Group
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'ecommendation
Although the purchasing method lKEA 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 lKEA 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 lKEA and its suppliers, it is possible for lKEA to
monitor the production progress and status of the parts. Knowing the latest
information and status of the parts, lKEA would be able to coordinate and take
any feasible action to alleviate the negative influence if "basket effect" occurs.
*eed+ac, $rom the manager
Refer to the recommendation suggested for solving the "basket effect", the
manager of lKEA 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 lKEA 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.
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BUS 3260 Logistic and Supply Chain Management Group
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Pac,aging
ln 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. ln lKEA, 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 lKEA 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 -./01 units
of that type of cup. lKEA 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 002 to /3011.
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The second example is the candle. ln the original design, the fuse of the
candle was projected out at the top and the candles couldn't 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 3/01 pac,s to 41511 pac,s with a percentage
increase more than .-2.
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The third example is the stic, 6hich is used to hold the curtain. ln 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 7/2 in each container and also lower the price of the product due to lower
transportation cost.
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BUS 3260 Logistic and Supply Chain Management Group
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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, lKEA
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 4581 to 77.1 in a container.
lKEA's 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.
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Pro+lem
ln order to minimize the cost in packaging, lKEA mainly uses leatheroid to
pack the items for transportation. As a large portion of the items produced by
lKEA 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:
49 :ro,en items caused loss to the company
79 E;tra la+or cost needed to in#estigate the items thoroughly
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BUS 3260 Logistic and Supply Chain Management Group
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'ecommendations
Since quite a large portion of the items offered from lKEA is breakable, we
suggested using +iodegrada+le 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. lt is also environmentally friendly which helps lKEA
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/l5/archives/2007/09/biodegradable_polystyrene_in_the_works.ht
ml (Biodegradable polystyrene in the works)
*eed+ac, $rom IKEA
Company 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.
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"ransportation
IKEA Stores/warehouses
lKEA 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. lKEA 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 l23,000 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
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BUS 3260 Logistic and Supply Chain Management Group
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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 lKEA.
Delivery Terms and Conditions
At lKEA, 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, lKEA can arrange delivery right to customer door by an
inexpensive, independent service.
%eli#ery charge $or &ong Kong and outlying islands is as +elo6!
HK lsland,
Kowloon and the New Territories
Tung Chung Town and
Park lsland
Discovery
Bay
Outlying
lslands#
Product
Price
<$l,000 >$l,000 - $4,000 >$4,000 <$l,000 >$l,000 - $4,000 >$4,000
Products
delivered
directly from
the
warehouse
$70 $l40 $200 $l50 $220 $280 $290 l0% of the
product
price
(minimum
charge:
$750)
Products
that need to
be
transferred
from the
stores to the
warehouse
before
delivery.
$70 $l40 $200 $l50 $220 $280 $290 l0% of the
product
price
(minimum
charge:
$750)
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lKEA also provide ""Next Day Delivery" once customers have chosen the
"Delivery Service" or "Delivery and Assembly Service", lKEA can deliver your
purchases the next day.
Distribution Department
Distribution Department in lKEA is responsible to the customer delivery job.
They handle average l8,000 jobs every month. ln the 2007, there were
220,000 jobs. The head count of this department is l5 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 l60 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 Service
For more comprehensive services, lKEA 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 $l00. lKEA 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.
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BUS 3260 Logistic and Supply Chain Management Group
Project
Pro+lem
The number of contractors is too large. lt is difficult to manage 9 third party
contractors.
'ecommendation
We 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 lKEA well. Then, lKEA can make sure the contractor can be familiar with
the products of lKEA.
They also can provide some training for the drivers. lt 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, lKEA 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. lt can boost the driversincentive and build some models
for other driver to follow.
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BUS 3260 Logistic and Supply Chain Management Group
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*eed+ac, $rom Management
The above suggestions are good. For the Driver Reward Scheme, lKEA really
want to motivate the staff of the contractors. lt is because the staff is on the
frontline to provide service to lKEA 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 lKEA 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.
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BUS 3260 Logistic and Supply Chain Management Group
Project
Conclusion
ln conclusion, lKEA is a successful business model based on its successful
supply chain management.
P
urest $orm 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 lKEA 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. lt also comes
in the form of a railhead, if it is viable,

for all goods leaving the factory. From a
supplier's perspective a solid relationship with lKEA 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.
(ther competiti#e ad#antages
Effective purchasing policy is another success factor affects the whole business.
Also with the customized design, well controlled product quality and customer
service, make lKEA developing a healthy way and continue success in its
industr
y
.
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Project
["his is the end o$ the report]
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