It takes commitment for an individual to build a piece of furniture, even if all the necessary lumber, hardware and clearly drawn instructions are provided in a flat packed box. Yet nearly 700 million IKEA customers worldwide are willing to make that commitment yearly, spending $31 billion in fiscal year 2008 alone. IKEA customers are more than consumers, they are collaborators in a process that makes stylish home furnishings available to the masses. In a sense, the thriving IKEA customer base is the unique product of an integrated business process that not only makes goods and brings them to market, but actually shapes the market.
Now everyone who stayed awake in econ 101 is likely shaking their heads, after all, markets are not created, they are served. Which is true in a direct way, for example when a designer is selling an idea or when a supplier is selling to a manufacturer. What makes IKEA unique as an organization is that it is not just the alpha and omega of designer and retailer; through its industrial subsidiary Swedwood, it also controls the supply of materials, manufacturing and distribution in between the concept and the consumer. "We are in a fairly unique position," says Joseph Roth, director of public affairs for IKEA in North America. "As a manufacturer IKEA has a guaranteed distribution network and market share. As a retailer, IKEA has control over the production end. By having control over the entire pipeline we can consider the big picture and really focus on the economies of scale." This vertical integration allows IKEA to make stylish products of consistent quality widely available, which has changed the way that people all over the world think about RTA furniture.
All IKEA operations are guided by the official vision statement, "to create a better everyday life for the many people, by offering a wide range of well-designed, functional home furnishings at prices so low that as many people as possible can afford them." But there is more to IKEA's success then high style at low prices. Since its inception in 1943, IKEA has been dedicated to innovation and sustainability. IKEA founder Ingvar Kamprad grew his tidy little business of selling ballpoint pens to farmers in rural Sweden (he piggybacked on the local milk van for distribution) into more than 300 stores in 37 countries, and he did it by building the industrial infrastructure necessary to support the expansion. A detailed exploration of IKEA's carefully calibrated design, production and distribution system would fill volumes, but a look at Swedwood's first North American furniture manufacturing facility, that opened in Danville, VA in 2008, provides a good insight into what makes IKEA so successful.
Manufacturing IKEA Style
In recent history many companies tried to streamline their operations by closing plants and outsourcing production. IKEA has thrived because it took a different approach. As the company's territory expanded worldwide, their network of suppliers and manufacturers grew with it, with IKEA sourcing local materials whenever possible.
There are currently 1,220 suppliers in 55 countries around the world. Significant concentrations of those suppliers are located in Eastern Europe. Following the political and economic upheaval resulting from the fall of the Berlin Wall, IKEA made the strategic decision to form the industrial subsidiary Swedwood as a means of safeguarding itself against the loss of vital suppliers.
Since its establishment in 1991, Swedwood has opened one to three new facilities each year. There are currently 45 production units in 12 countries. Swedwood has evolved to become an IKEA supplier with advanced production facilities of its own, and along the way it has afforded IKEA a means of further streamlining their integrated design, production and distribution system.
Each Swedwood factory is process oriented, using modern techniques to concentrate on one production process, one base raw material and a limited product range. This type of manufacturing optimizes efficiency and production volume. The Danville facility that opened in 2008 specializes in the manufacture of IKEA's LACK, EXPEDIT and BESTA lightweight panel furniture and storage systems. All panel processing and finishing is done in house, including the construction of the product lines' signature honeycomb panel.
THE FLATTER, THE BETTER
Considering that IKEA stores carry a product line of approximately 10,000 items, which are for the most part available at all IKEA retail locations, efficient distribution is a vital part of the company's vision to bring well designed home furnishings to as many people as possible. Certainly the location of production facilities factors heavily on transportation costs. By concentrating manufacturing to large factories and specific countries, IKEA is able to efficiently distribute a lot of product with short lead times. "IKEA's presence in North America has recently reached the point of critical mass where we can have more local suppliers and production to support all these stores with a very cost effective distribution network. And that helps keep prices low for customers," explains Roth.
In the big picture, IKEA's Distribution Services division controls the movement of product, allowing IKEA to plan, manage and maintains high levels of inventory globally. Six distribution centers serve the 37 retail locations in the United States and 11 stores in Canada. Distribution Services functions as a wholesaler for IKEA, securing local storage capacity for stores and transporting inventory to retail locations. Products generally follow the typical path from suppliers to distribution centers, where they are held until they are ordered by a store. But IKEA is always looking for innovative ways to maximize the economy of scale, so sometimes the typical path is not the most efficient way to move product. For example, Swedwood's Danville facility is well positioned to provide direct delivery to IKEA stores located in the eastern seaboard, much of the Midwest and Texas. "Since our primary focus is reducing distribution cost, we have started to eliminate the middleman, even if it is us, to have direct delivery from the manufacturer to the retail locations," says Roth.
In a smaller sense, smart packaging is used to minimize distribution costs and the environmental impact of transport. According to Roth, the ubiquitous IKEA flat pack allows for seven times as many units to be transported per shipping container then if the products were assembled. The result is reduced number of freight shipments, emissions and transportations costs. Carefully choosing the materials used for the production of larger furniture pieces, such as the honeycomb panels used in the storage systems produced in Danville, also helps to minimize freight costs.
It is interesting to note that one of the risks North American companies face in outsourcing manufacturing for cheaper materials and labor is the increasing cost of shipping back to the consumer market. IKEA's approach of partnering with or building production facilities in relatively close proximity to their retail stores is the inverse, and it allows them to bring a huge volume of product to market efficiently. That economy of distribution is one of the ways IKEA keeps prices low for customers.
Designing Inside the Box
IKEA product design and development is a complicated job handled in-house by a team of between 50 and 100 individuals located in Almhult Sweden. The company's vision to bring well-designed products to as many people as possible is reflected in the developers' first consideration in the design process, the price tag. For example the team might set out to design a coffee table that will cost $39.99.
From the target price range the designers work backwards to factor in the costs of materials, manufacturing, packaging and distribution. To ensure efficiency IKEA developers borrow designs from existing products and also look for innovative materials and manufacturing techniques.
When choosing materials, product developers consider sustainability and innovation. IKEA draws from a broad palette of wood and wood composite materials, including HDF, particleboard, plywood and hardboard to precisely value engineer products based on performance and geographic manufacturing capacity. Most product families offer a variety of finishes such as paper foils, TFM and UV lacquers with ABS plastic; and sometimes the finish slightly changes the price of the end product.
The LACK, EXPEDIT and BESTA furniture and storage systems made in Danville are a good example of IKEA's product development process. Light-weight panels like the ones produced in Danville are a favorite in IKEA products because they are easy for individuals to handle and assemble in their homes. The inner honeycomb core is made from recycled materials, which is in line with IKEA's commitment to sustainability and wise materials usage. These product segments utilize a board on frame design. The frame is assembled in the consumer's home and the panel inserts into the frame, effectively eliminating the challenge of designing hardware or connectors that work with light-weight panels.
Products At a Low Price, But Not At Any Price
The entire IKEA process aims at creating products that leave minimum impact on the environment. To ensure that partners and suppliers share the same values, IKEA has developed a code of conduct for business called IWAY, which is the IKEA way of doing business. Because 50% of the raw materials used in IKEA products are wood based, the company is deeply committed to responsible forest management, and does not accept timber from intact natural forests or high conservation forests. IKEA also contributes to several forestry projects, supports FSC certification for suppliers and uses recycled content whenever possible.
Despite its gargantuan expansion, IKEA takes care to operate responsibly. "We like to say that we can be a good business while doing good business," says Roth. The same attention to detail that guides the design, manufacture and distribution of products also carries over into how IKEA operates retail locations and treats employees. The company's policies of social and environmental responsibility have earned them a lot of recognition, including a running spot on Fortune 500's list of the top 100 companies to work for, the EPA's Environmental Excellence Award and a place on Business Week's "world's 25 Most Innovative Companies" list.
IKEA customers love the stylish and functional RTA furniture and home accessories that the company offers at remarkably low prices. But it is the company's commitment to sustainable value, achieved through carefully integrated design, manufacturing and distribution, that make consumers feel good about bringing IKEA into their homes.
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