Operations and Supply Chain Management of IKEA Malaysia

This study focuses on the operations and supply chain management of IKEA Malaysia, highlighting the gaps in manufacturing operations, purchasing, warehousing, and inventory management. It proposes solutions such as organizing the supply chain, using high flow and low flow warehouse facilities, and implementing demand-driven schemes and company operating models. Key performance indicators such as continuous review system, periodic review, and order fill rate are also discussed.

IKEA Malaysia
IKEA Malaysia
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IKEA Malaysia
Contents
Introduction......................................................................................................................................3
Gap analysis.....................................................................................................................................4
Proposed operations and supply chain decisions to resolve critical gaps........................................6
A set of key performance indicators for the organization to control the performance of
operations...................................................................................................................................10
Conclusion.....................................................................................................................................11
References......................................................................................................................................12
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Introduction
IKEA Malaysia designs and sells household appliances, furniture, and household accessories.
According to a survey conducted in the year 2008, IKEA is the world's largest furniture retailers.
The innovative architectural design adopted by the company is a major competitive advantage
for the company over other firms in the domestic moreover in local markets. The company also
focuses more on the interior designs work and is always striving to stay green. IKEA operates in
Malaysia at a low price so that most people can afford it. In order to meet the company's vision
of providing better quality and cheaper services for everyone in the world, the company works
very hard to achieve quality for its customers at a reasonable price. This is done by orderly
following many business functions. The organization not only provides consumers with high-
quality furniture at an affordable price but also impresses its competitors around the world
especially with its strong inventory management technology and supply chain. KUALA
LUMPUR - IKEA, a Dutch-based furniture retailer, will invest 890 million ringgit ($211.2
million) to establish one of its largest regional distributions and in supply chain centers in
Malaysia. The Supply Chain Centre will manage inventory of RM6.6 billion yearly to meet
IKEA's growth in Asian regions. The 100,000 square meters long warehouse will supply 12
existing retailing stores in the area. IKEA also plans to increase its number of retailing stores in
Malaysia by 2026. But despite all this, there are several gaps in IKEA Malaysia operations and
supply chain management. The company is facing issues in manufacturing operations,
purchasing, warehousing, inventory management. This study includes a case study on the
optimization of IKEA Malaysia operations and supply chain in Malaysia, as well as also
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illustrates how the senior management in IKEA Malaysia can implement the improvements
proposed.
Gap analysis
Malaysia has been encouraging large local business groups and multinational companies to use
the country as a gateway to the region through various initiatives, including a major hub program
that allows companies to focus on global activities such as procurement and distribution. The
company network that makes up IKEA has recently focused on the retail business of the IKEA
Group, including shopping centres and food retail. In IKEA Malaysia, there is a huge gap in
benchmarking knowledge that can easily lead to the wrong approach, which leads to errors that
not only limit manufacturing, operations, procurement, warehousing, inventory management,
retail, and restaurant improvements, but can actually be harmful and also leading to higher than
necessary supply chain costs and erroneous improvement efforts.
Logistics issues, such as customer satisfaction, forecasting systems and the like are some of the
issues IKEA Malaysia face. Also IKEA‟s distribution centre has to serve more markets in
coming 5 years which means that they need their own big warehouses in Malaysia and a very
effective warehouse management system which is missing in IKEA. Second issue IKEA faces
are low inventory management because IKEA has a very large volume of goods and products.
There is a need of extremely high inventory level in order to provide the products and items with
high demand. Otherwise IKEA is probably out of stock (Rohsto Hou and Liu, 2011).
IKEA Malaysia lacks sufficient benchmark knowledge in its manufacturing operations,
warehousing, inventory management, and retail stores; benchmarking can really do more harm
than good. Errors include:
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i. IKEA draw wrong supply chain performance and cost conclusions
ii. IKEA compare itself with the wrong peer organization
iii. Compare the wrong performance areas
iv. IKEA set unrelated or unnecessary goals
v. IKEA choosing inappropriate performance metrics
All of these mistakes may point to the improvement work to the wrong direction, spend money
instead of saving. IKEA has documented that their supply chain strategy has not been integrated
for many years and is aligned with a broader business strategy. This is a huge mistake that can
only be caused by insufficient knowledge unless IKEA considers the possibility of vandalism
(very unlikely). When companies are involved in helping clients to improve their performance,
the misalignment of the supply chain strategy is a common problem for logistics bureau
consultants (Rohsto Hou and Liu, 2011). The problem is not the lack of understanding of
strategic needs, but the need to link it to the corporate vision and mission. IKEA often sees that
the core of the supply chain strategy is to stick to some best practices or track trends. Instead, the
focus should be on developing a plan to support the business, or more importantly, the needs of
the business customer (Acharyulu, 2014).
The gap in IKEA Malaysia Warehouse and inventory management
Warehouse managers at IKEA Malaysia face big challenges of maximize performances while
balancing the trade-offs below some uncertain condition. It is difficult for IKEA to maximize the
performance of the organization and to attain more customers in the Malaysian market.
Redundant processes: Traditionally, warehouse employees may process products multiple
times because of the nature of the inventory stores or warehousing processes. This trend still
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exists in the current practice. Notable redundancy procedure in the warehouse is that the
warehouse worker passes the same tickets through several hands. Although in some cases, this
redundant procedure is time-consuming and increases labor costs (Ketchen, Wowak &
Craighead, 2014).
Poor layout of facilities: Ineffective use of the space is a major issue IKEA warehouses face.
Insufficient storage space as well as ineffective use of accessible storage is some common issues
in the warehouse and inventory management, and facilities are poorly laid out. Poorly configured
inventory management is also a major concern for managers of IKEA because they can have a
negative impact on profits. This optimal layout affects the footprint and the space available
(Botha, Grobler & Yadavalli, 2017).
Seasonal in demand: Inversion in demand Warehouse managers have to face serious
challenges. Due to the recent global financial crisis due to the increase in the level of payload
due to the plunging in the sale of warehouses, big cost problems occurred (Vilko & Ritala,
2014). Although it does not affect the whole company equally the problem places the light on the
challenge of volatility in demand because of forces outside IKEA’s warehouse control. Seasonal
management of demand needs accurate and timely information about manufacturing, retailing
and industry which is missing in IKEA warehouse and inventory management. The ability of the
information interval distributor between the IKEA’s warehouse moreover other relevant
institutions or industry effectively limits the ability to monitor as well as to respond towards
changes in customers demand. It is essential to use the precise and timely information to provide
supply chain visibility along with demand for planning and forecast for warehouses (Aqlan, Lam
& Ramakrishnan, 2016).
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IKEA Malaysia
Proposed operations and supply chain decisions to resolve critical gaps
Organizing the IKEA Supply Chain
There should be a warehouse in the premises in every IKEA store. On the main showroom floor,
the customer will easily browse for items. Then they get the product from the place of the floor
pallet, as normal person can reach, where the furniture may be taken or bought. Additional goods
or products will be placed in reserved rack above the places. IKEA stock has been left on the
lower slot (Smith, 2011). Approximately one-third of the lower level includes the range of
warehouses for customers. Items in this location are very heavy for customers to load with no
assistance from employees. The use of barcode technology simplifies the warehousing
procedure, removes redundant processes, and maximizes resource utilization. The use of
automated systems are rapidly evolving, a supply chain management trend that has forced
warehouse managers or supervisors to maintain the latest systems to attain the desired outcomes.
In addition to maximizing space, good layouts maximize the uses of labor and equipment, the
accessibility of every item moreover items security. Maximize horizontal and vertical space
configuration with a forklift that reaches the top of the warehouse (Akalin, Huang & Willems,
2016). The complementary solution is to ensure easy access by placing the best-selling inventory
in the most accessible location.
Max/minimum settings as a proprietary system
In-store Logistic Manager uses the list redistribution management process developed by Ikea to
answer store-level inventory reader points and resale products. Since all IKEA stocks are stocked
only after business hours at night, the logic of their maximum/minimum setting is depend on
number of product that will be sold in warehouse stock in a day or two. This process caters to the
needs of the customers, while very few or too many orders are ordered to reduce the number of
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products. The strategies ensure that the list of IKEA is prepared to meet customer requirements,
reducing the costs of the lost sale. Using the IKEA's inventory system proprietary, Logistics
manager understand products that are sold throughout point-of-sale data or the amount of
inventory that directly enters a store through transport and the distribution center from the
warehouse system management enters the data (Bhakoo, Singh & Sohal, 2012). Using this data,
they may predict sales in the next some days as well as can order the products in the right
quantity to meet the demands. If sales data does not match required amount of the goods sold on
that day, then logistics managers goes straightforwardly to the pallets and the bins for the manual
list.
Use high flow as well as low flow warehouse facilities
IKEA's store functions and operation is supported by very traffic services (focusing on 20% of
SKUs, accounting for eighty percent of transactions) and fewer traffic warehouses, all of which
are manuals. IKEA uses the automatic storage and recovery system in its high traffic warehouse
to reduce per-touch costs. The demand for products stored in low flow facilities is small, and
operations rely on manual procedures because employees are not transferred and move the list
(Botha, Grobler & Yadavalli, 2017). These strategies surely made IKEA the successful furniture
retailers in Malaysia with very short operating cost moreover high product order. With this, the
business continues to seek more advanced strategies or methods to streamline SCM to maintain
competitiveness. IKEA must have a clear vision for supplemental cross-function logic support. It
not only separates IKEA from the company's peers, however it provides very competitive
advantages or profit that it is complex to repeat in other organizations.
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Strategy 1: Demand-driven schemes and company operating models are based on the real-time
demands insights or shaping of demand (Reimann & Ketchen, 2017). Proper contingency and
forecasting plans will ensure a complete visual and effective reaction to risks for example
stoppage of the supplier, political upheaval and natural disaster that are also affecting
manufacturing equipment. Companies may adjust promotion and pricing strategy to shape
demands, to move other products rapidly, to increase revenue development as well as to expand
profitability of high demand products with limited market supply (Golicic & Smith, 2013).
Strategy 2: IKEA must build a very adaptive and tight supply chain through rapid planning
moreover integration. Once the managers are able to completely understand as well as shape the
requirements and threats, they require to adjusting their supply chain to suit market opportunity
in addition to events to change. To ensure responsible agility for meeting the changing needs of
the companies, deployment of dynamic planning capabilities and continuous steering should be
done. In order to give a rapid response to the market model, the new model requires a more
consistent, dynamic supply chain adjustment (Raki, 2014). It can also reduce or eliminate shocks
in the supply network. The results surely include better visibility to increase collaboration in the
IKEA’s value chain, including trustworthy and estimated purchases and supplies, manufacturing,
transport, distribution, and warehousing and make quick decisions through better support and
analysis. At present, it is easy to achieve market response compared to cloud technology
moreover right people, technical and processes capabilities (Golicic & Smith, 2013).
There are two more KPIs that can be evaluated to check the health of the supply chain.
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Continuous review system: With a continuous review system, IKEA usually orders the same
order of each ordered item. IKEA has to calculate the inventory level, as well as whenever
quantity of item falls below a certain level, IKEA will then compensate the stock.
Periodic Review: While using the periodic review systems, IKEA order product at same time
for every phase. At the ending of every period, IKEA decides how much order based on the level
of order at the ending of every period. There is no set reader level for this kind of system
(Christopher, 2016).
It is recommended to keep the stock level low to reduce the cost of the operation. On the
contrary, cash flows increase as IKEA does not have a high level of stock maintenance for a long
time. The Inventory Management System will help IKEA get information about how much
IKEA's unique business flow is. IKEA can track important information, severity, sales patterns,
and with the previous turnover and take more educated business decisions with the company's
growth (Marodin, Tortorella, Frank & Godinho Filho, 2017).
Order Fill Rate: The order rate is described as a percentage of orders based on a list. Evaluating
the order filling rate helps IKEA to determine the balance of the list and helps predict sales. In
general, high fill rates indicate a superior ability to meet sales requirements and maintain high
customer satisfaction (Rexhausen, Pibernik & Kaiser, 2012).
On time delivery or shipment: Depending on the company's specific business, shipments may
be more important than the other when delivered or delivered on time. But the reason for
measuring them is the same. The goods were once classified as shipments at the time of
shipment and were in transit as scheduled. On-time delivery is the timetable for reaching the
payee. The requirements for this KPI’s may be most obvious: customers need timely delivery
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and delivery (Pulles, 2017). Therefore, it is the best interest to make sure that accurate and on-
time delivery is as much as possible to ensure smooth operation of the supply chain and high
levels of satisfaction.
A set of key performance indicators for the organization to control the performance
of operations
Cost-effective key performance indicator
Cost-effectiveness is another set of important KPIs that help to measure the IKEA’s supply chain
performance. Cost metrics enable organizations to better measure and manage their cost-
effective performance both externally and internally. This is not a comprehensive list of
indicators through process efficiency metrics. In order to properly manage the supply chain, a
strong series of KPI’s are needed to adjust its related deficiencies. Many key performance
indicators also reduce IKEA’s ability to address important issues and improve their importance
(Pasupuleti, 2015). A good or strong KPI should serve as a compass that can help IKEA and
team to understand that IKEA is taking the correct path for the strategic goals and objectives. To
be effective, key performance indicators should:
1. Defined clearly and quantitatively.
2. Communicate in your organization and department.
3. It is important to achieve the goal.
4. Apply to your business unit (LOB) or department (Marr, 2012).
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Conclusion
The end-to-end visibility of the distribution network provides continuous tracking of product
distribution. A solid distribution strategy ensures optimal utilization of available assets and also
checks on production facilities, inventory, suppliers, places, and warehouses. It is sure to
improve customer service through fast delivery time and a waste of existing stock. It is important
that your distribution chain will be aligned with IKEA’s business goals to help IKEA to stay on
top of every process for delivery and efficient supplier management from time to time. The
company has its own strength of hybrid strategy which is successful in simulating competitive
people and both are difficult. The company has stood ahead of the competitors because they
target people of the middle class and provide them with different products at an affordable price.
This is especially true in any business where customers are bound in contract or contract. In
particular, service level agreements will be monitored, through KPI; there may be a consensus
between a business and its client when fines can be imposed on the performance level.
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