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

PURCHASING MANAGEMENT
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PURCHASING MANAGEMENT
EOH HOOI YAN

PURCHASING MANAGEMENT
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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