Purchase Management Strategies of IKEA: Supplier Selection, ICT and Cost Analysis

This report analyzes the purchase management strategies of IKEA, including supplier selection criteria, ICT for purchasing operations, and purchasing cost analysis. It also provides recommendations for single sourcing, linear averaging, and the use of buy-side and independent marketplace online portals.

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PURCHASING MANAGEMENT
EOH HOOI YAN

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Table of Contents
1.0 Introduction............................................................................................................................3
2.0 Supplier Selection Criteria and Issues............................................................................4
2.1 Multiple Sourcing................................................................................................................4
2.2 Cost-ratio Method Used by IKEA.....................................................................................4
2.3 Peter Kraljic Models...........................................................................................................5
2.4 Recommendations for Single Sourcing and Linear Averaging...................................6
3.0 ICT for Purchasing Operations........................................................................................7
3.1 EDI (Electronic Data Interchange) Technology of IKEA..............................................8
3.2 Recommendations for Buy-Side and Independent Marketplace Online Portal....8-9
4.0 Purchasing Cost Analysis...............................................................................................10
4.1 Total Cost of Ownership (TCO) Used by IKEA...........................................................10
4.2 Recommendations for Activity-Based Costing (ABC)................................................11
5.0 Conclusion........................................................................................................................12
References.........................................................................................................................13-16

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1.0 Introduction
Purchase management is a function which deals with procurement of raw
material and inputs to support the production process (Luzzini & Ronchi, 2010). The
organization associate with the suppliers in order to efficiently carry out the business
operations and develop effective purchase management (Van Weele, 2010).The current
report focuses on different aspects of purchase management, for this purpose the
operations of IKEA company has been evaluated. The company is successfully
operating its business in Singapore. In-depth evaluation of purchase management
strategies have been discussed while analyzing the supplier criteria, cost aspects and
ICT technologies used by the company.
IKEA is a Sweden based multinational company which deals in the ready to
assemble furniture, home accessories and kitchen appliances etc. It is a retail
organization which was founded by Ingvar Kamprad. It is successfully operating its
business on global platform from past 75 years (Inter IKEA system, 2011). The
organization has developed a strong market share within the economy. It has efficiently
established more than 411 stores around the world. IKEA provides the quality products
for Indore as well as outdoor such as readymade furniture, textiles and rugs, lighting
and interior decorations items as well. Furthermore, company is focused about the cost
control, continuous product development and prices leadership for the global expansion
(Inter IKEA system, 2011).
The purchase management of the IKEA is strong because it has developed
effective relations with its suppliers who provide the raw material at low cost with high
quality. This has enhanced the competitiveness of the organization by developing its
potential to offer the products at competitive prices compared to another global retail
companies. IKEA has several competitors such as Walmart, Lundin petroleum, Sears,
Barn furniture etc.(Spiderbook, 2015). Moreover, strong infrastructure, effective value
chain management and well defined communication strategies has helped the company
in creating a competitive edge in the market (Hultman, Hertz,Johnsen& Johnsen,

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2009).The evaluation of purchase management strategies has been carried out in the
study to identify the supplier and purchase management aspects for the study.
2.0 Supplier Selection Criteria and Issues
Suppliers play a significant role in supply management process. They are
stakeholders who make the raw material and inputs available to the companies.
Different suppliers are available in the market however selecting the right one is critical
as companies need to analyze the aspect of quality and cost closely to manage the
strategic aspects of the business (Seuring & Müller, 2008). IKEA manufactures and sell
furniture and major raw material used by the company are cotton, plastic and packaging
materials. The organization has adopted step by step process to select the suppliers
from global level to create a significant impact on business growth.
2.1 Multiple Sourcing
IKEA is using the multiple sourcing which is helpful in attaining the material and
products in wide variety and with ease (Costantino & Pellegrino, 2010). IKEA evaluates
the suppliers’ based on their capacity as well to manage the products and services for
global market thus not relying on single source of procurement. IKEA approve the
suppliers on the basis of suitability that who is able to take the orders. In this context,
global souring is helpful because supplier would be selected as per the nature of the
commodity. This approach helps IKEA in creating a significant impact on business
development and growth within the economy.
2.2 Cost-ratio Method Used by IKEA
Cost-ratio method refers to the analysis of supplier’s performance on the basis of
standard cost analysis (Corgnati, Fabrizio, Filippi & Monetti, 2013). In this regard, the
total cost of the all purchases is calculated by including the sell price along with
consumers internal cost of operating. Moreover, the operating cost is associated with
service ingredients, delivery and quality of products. IKEA is dealing with the issue of
quality due to damages during transportation, sales mistakes as well as production
mistakes at supplier’s facilities (Sahleström & Möller, 2012). This further increase the

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cost of the purchasing and accordingly business suffer from losses. Owing to this,
application of cost-ratio analysis might not always be effective with each and every
supplier associated with IKEA.
2.3 Peter Kraljic Models
The supplier’s selection criteria for IKEA has been further explained with the
application of below mentioned model in context of product; Sofa-

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Raw
materials/Ingredients
Value Easy/difficult to
approach
Cotton Very high Easy to find
Plastics Low Difficult to find
Wood Very high Easy to find
Packaging High Difficult to find
High
Risk (Non-
supply)
Low
Bottleneck items
(Cotton)
Strategic items
(Wood)
Non-critical items
(Plastic & packaging)
Leverage items
(Equipment & machinery)
Low Value High
Figure 1: Purchasing model of Peter Kraljic for IKEA
(Source: Researcher’s own diagram)
This model consists of four quadrants which consist of leverage, strategic, non-
critical and bottleneck items (Padhi, Wagner & Aggarwal, 2012). On the basis model, it

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has been found that wood is a high risk and high value item for the IKEA because wood
is the main source for the production of goods. On the other hand, multiple sourcing
refers to availability of different sources to meet the requirements of the business
(Costantino & Pellegrino, 2010). Cotton will be considered as the bottleneck time since
it consists of high risk and low value. In the same manner, plastic and packaging are
non-critical items which neither have high risk nor high value. At this juncture, risk for
the cotton and wood is higher because of availability of suppliers is less and its it is not
easy to find the alternative solution. For this purpose, bulk purchase from the global as
well as local sources is effective to reduce the overall risk (Heese, 2015). Moreover, the
leverage item for IKEA would be equipment and machinery which have high value since
it helps in making the final product. However, the risk associated with the same is low
because company can easily find the substitute through investing enough financial
resources. At this juncture, the risk of leverage item and non-critical is lower since lots
of suppliers are available.
2.4 Recommendations for Single sourcing and Linear Averaging
On the basis of supplier’s selection criteria, it has been found that the IKEA is
using the global sourcing for the availability of the raw material. However, business
should use single sourcing as it would be helpful to boost the confidence of suppliers
and enable them to offer the raw material in the cost-effective manner (Giri, 2011). Also,
the reliance on single suppliers would help in resolving the issues of customers by
communicating properly with the suppliers about the quality parameters. Although,
products lie under the category of strategic quadrant should be supplied with connection
of more adequate suppliers who have high end technology. For instance, local suppliers
dealing with the farming can be accessed through which quality products will be
procured and whereby unique design can be ensured in the wood as the prime product
of IKEA. It is imperative for continuous supply of wood; thus, both single and multi-
sourcing would be effective to reduce the risk related to suppliers. Therefore, single
sourcing facilitates to save the cost and maintain high quality of products and services.

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It is recommended that company can prefer linear averaging approach to analyze
the quantitative performance of the suppliers. On the basis of linear averaging method,
IKEA would be able to analyze the different suppliers in term of price, service delivery
and quality (Whitaker, 2013). Since the weighted point evaluation consume huge time
as well as require expert personnel who can continuously review the performance of
suppliers (Ho, Xu & Dey, 2010). Owing to this, by selecting the linear averaging method
IKEA would not have to devote extensive time and performance can be reviewed in the
quick manner.
3.0 ICT for Purchasing Operations
Technology is a significant part of purchase operation. IKEA being the global
business unit effectively integrating technology with the purchase process to ensure
significant impact on operations and purchase management aspects of the company
(García, LEZCANO-BARBERO & CASADO-MUÑOZ, 2017).
Figure 2 : Supplier development process of IKEA

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(Source: Supplier development process, 2018)
IKEA focuses on making its products available to the public at affordable price
and wide rage in order to create a significant impact on its purchase management
process. IKEA focuses on developing a well-defined relationship with its suppliers to
create a positive impact on operational aspects of the business (Jensen, 2017). By
Using the Sell-side (Online portals) to develop and promote partnership has helped the
company in creating high development measures within the market. At this juncture,
sell-side detailed information is provided about the supplies such as quantity, price, and
delivery data through which IKEA reviews the details and accordingly proceed by
placing the order. This is helpful for company to maintain the data of suppliers and
contact them with just one click. Although, before placing the order IKEA has to clarify
regarding the mode of payment and percentage of payment through and with the
confirmation of suppliers, final order is placed. This further facilitates in getting the real
time information and the just in time delivery process (Statsenko, Gorod & Ireland,
2018). This has helped the business in developing its sales as well as purchase side. It
has created a positive impact on business development and competitiveness for the
organization. Adopting advanced and effective technology thus has helped the company
in growing its business prospects.
3.1 EDI (Electronic Data Interchange) Technology of IKEA
The current business era is surrounded by the additional technologies which is
useful to beat the competitors. In this regard, EDI is one of the recognized techniques
which are used to transfer the data electronically from one organization to another
without excessive use of paper (Course Hero, 2018). At this juncture, the IKEA is
following the EDI system to maintain the data of suppliers and all shipments are based
on the online via EDI setup with transportation or carriers. Further, all the crucial
important activities are based on this system such as infrastructure for delivering
information through multiple actions, creation as well as presentation of reports and
vendor link etc. This system is helpful to generate and maintain the track after the
standard tasks (Musawa & Wahab, 2012).

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3.2 Recommendations for Buy-Side and Independent Marketplace Online Portal
It is recommended that IKEA can adopt the other two techniques such as buy-
side and independent market place. In the buy-side portal all the activities are done by
the purchasers for suppliers that to come and sell the supplies or products. IKEA
should apply this portal as it provides better control the purchase and integrate with the
procurement systems. Also, it provides more wider choice than sell-side so as to
effectively manage the purchase operation (Brown, Call, Clement & Sharp, 2016). In
this type of technique, the strong relations as well as trust would be maintained among
different suppliers and IKEA. Besides this, IKEA can also prefer the independent market
place for the suppliers to sell the products and services. This is the virtual market place
which is neither followed by purchaser nor suppliers (Chaffey, 2015). It should be used
because it is the single interface which provides widest choice than any other mode of
purchase in context of prices, products and suppliers. This contribute towards selecting
the best suppliers and track the proper control over the purchasing operation of the
business (Seuring & Müller, 2008). In this regard, there would be free flow of information
for the suppliers as well purchasers because all the activities are prescribed by the
IKEA without any intervention (Liu & Hou, 2011).

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Figure 3: Online portal of Ikea
(Source: IO Malaysia, 2018)
4.0 Purchasing Cost Analysis
Purchasing cost analysis is important to analyze the expenses, cost and other
overheads which are incurred at the time of procurement (Delivand, Barz & Gheewala,
2011). IKEA’s Cost analysis can be done on the basis of the supplier relationships
which are strong and long-term.
4.1 Total Cost of Ownership (TCO) Used by IKEA
IKEA is using the total cost of ownership (TCO) approach in which it focuses on
the value chain, delivery of finished products to people’s home, to create the
outstanding affordability. Furthermore, delivery of better products and services at lower
price (Dogan& Aydin,2011).

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The IKEA has its own forest operations by which the company has long-term
access to wood. For example, IKEA has 83000 acres own forests through which the
regular requirements of the wood can be easily met (Inter IKEA system, 2011).Further,
it is helpful for the company put the affordable price for the finished products, delivers
the quality products and earns the higher profitability. On the other hand, TCO includes
the 3 major elements such as physical hardware cost, operating cost and personal cost
(Walterbusch, Martens & Teuteberg, 2013). With the help of the TCO approach,
organization can maintain the good relations with suppliers and provide the products at
low cost and identify the new materials from the market place. Therefore, it reveals that
application of TCO approach is better for the IKEA because it is directly associated with
cost reduction and maintenance of the better supplier relations.
The TCO model is helpful to determine all the elements of cost such as cost
avoidance as well as reduction instead of merely comparing the prices (Han,
2011).Further, the TCO is beneficial for the company to evaluate the suppliers then
select the best one for the fulfillment of the requirements. IKEA can identify the actual
cost of the supply with the help of the TCO so that cost reduction opportunities can be
highlighted.
TCO analysis supports the purchase decisions for a wide range of assets. This
includes the especially those items which are significant to maintain the operating cost
across the ownership(Ting& Cho, 2008).The IKEA can easily calculate the operating
cost of the wood, plastic, cotton and packaging because these are under the ownership
of the company. This is beneficial to analyze the overall cost of the products so that
company is offering the low-cost products with quality.
4.2 Recommendations for Activity-Based Costing (ABC)
On the basis of discussion, it has been found that the IKEA is using the TCO
approach for the cost analysis which requires the additional time for the analysis of the
different types of cost. On the basis of these criteria, it has been recommended that
company can adopt the Activity-Based Costing (ABC) technique because it is helpful to
run the indirect cost into direct cost. This can be done by tracking the cost drivers which

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has a major contribution to lead the indirect cost. In the case of the IKEA, direct cost is
the cost of wood, color, material cost etc. but these are driven by the indirect cost such
as labor and designing of the furniture. In this manner, the use of ABC approach would
be effective for the IKEA to manage and control the overall cost by proper analysis
(Asking & Gustavsson, 2011).
5.0 Conclusion
The purchase management of the IKEA is strong because it has developed
effective relations with its suppliers who provide the raw material at low cost with high
quality. The business model of IKEA focuses on managing low cost products at high
quality in order to create a significant impact on business growth and development. This
has enhanced the competitiveness of the organization by developing its potential to
offer the products at competitive prices compared to another global retail companies. It
has been found that IKEA is using the cost-analysis method to evaluate the supplier’s
performance in context of quality, delivery and price instead of linear averaging. On the
other hand, EDI is also followed by the company to transfer the data of suppliers as well
as buyers from one company to another. The overall analysis of the study revealed that
IKEA has established an effective and well-defined measure for procuring and selling its
products. Strong supplier relations and effective ICT has helped the company in

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creating an edge within the economy. In addition to this the purchasing cost analysis
revealed the strategy where warehouse cost is managed by JIT process which has
helped the business in attaining cost leadership. The overall evaluation reflects that the
business growth and development prospects are high and bright for the business.

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