Supply Chain Management Practices in Wal-Mart and IKEA.pdf

UNIVERSITAS INDONESIA

SUPPLY CHAIN MANAGEMENT PRACTICES IN WAL-MART AND IKEA

KARYA AKHIR

Michelle 0906645432

FAKULTAS EKONOMI KELAS KHUSUS INTERNASIONAL MELBOURNE MARET 2014

Supply chain ..., Michelle, FIB UI, 2014

UNIVERSITAS INDONESIA

SUPPLY CHAIN MANAGEMENT PRACTICES IN WAL-MART AND IKEA

KARYA AKHIR

Diajukan sebagai salah satu syarat untuk memperoleh gelar Sarjana Ekonomi

Michelle 0906645432

FAKULTAS EKONOMI KELAS KHUSUS INTERNASIONAL MELBOURNE MARET 2014

Universitas Indonesia Supply chain ..., Michelle, FIB UI, 2014

HALAMAN PENGESAHAN

Karya ilmiah ini diajukan oleh: Nama

: Michelle

NPM

: 0906645432

Program Studi

: Management

Fakultas

: Ekonomi

Jenis Karya

: Makalah Non Skripsi

Nama Mata Kuliah

: Supply Chain Management

Judul Karya Ilmiah

: Supply Chain Management Practices in Wal-Mart and IKEA

Telah berhasil diselesaikan dan dianggap lulus dengan nilai 78 oleh dosen pembimbing Vikram Bhakoo dari universitas partner, University of Melbourne. Hak cipta atas karya ini tetap menjadi milik penulis, pembimbing dan University of Melbourne. Telah juga diterima sebagai bagian persyaratan yang diperlukan untuk memperoleh gelar Sarjana Ekonomi pada Program Studi Management Kelas Khusus Internasional Fakultas Ekonomi Universitas Indonesia (KKI FEUI).

Kepala Program KKI FEUI,

Harryadin Mahardika Ph.D NUP: 060703079

Ditetapkan di : Depok Tanggal

: 5 Maret 2014

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HALAMAN PERNYATAAN ORISINALITAS

Karya ilmiah ini adalah hasil karya saya sendiri, dan semua sumber baik yang dikutip maupun dirujuk telah saya nyatakan dengan benar.

Nama

: Michelle

NPM

: 0906645432

Tanda Tangan : Tanggal

: 5 Maret 2014

Universitas Indonesia Supply chain ..., Michelle, FIB UI, 2014

HALAMAN PERNYATAAN PERSETUJUAN PUBLIKASI TUGAS AKHIR UNTUK KEPENTINGAN AKADEMIS

Sebagai sivitas akademik Universitas Indonesia, saya yang bertanda tangan di bawah ini : Nama

: Michelle

NPM

: 0906645432

Program Studi : Kelas Khusus Internasional Departemen

: Management

Fakultas

: Ekonomi

Jenis Karya

: Makalah Non Skripsi

demi pengembangan ilmu pengetahuan, menyetujui untuk memberikan kepada Universitas Indonesia Hak Bebas Royalti Nonekslusif (Non-exclusive Royalty-Free Right) atas karya non ilmiah saya yang berjudul: Supply Chain Management Practices in Wal-Mart and IKEA beserta perangkat yang ada (jika diperlukan). Dengan Hak Bebas Royalti Nonekslusif ini Universitas Indonesia berhak menyimpan, mengalihmedia/formatkan, mengelola dalam bentuk pangkalan data (database), merawat, dan memublikasikan tugas akhir saya selama tetap mencantumkan nama saya sebagai penulis/pencipta dan sebagai pemilik Hak Cipta. Demikian pernyataan ini saya buat dengan sebenarnya.

Dibuat di : Tangerang Pada tanggal : 5 Maret 2014

Yang menyatakan,

(Michelle)

Universitas Indonesia Supply chain ..., Michelle, FIB UI, 2014

Universitas Indonesia Supply chain ..., Michelle, FIB UI, 2014

ABSTRAK

Nama

: Michelle

NPM

: 0906645432

(Universitas Indonesia)

NPM

: 550453

(University of Melbourne)

Program

: Kelas Khusus Internasional Fakultas Ekonomi, Universitas Indonesia Faculty of Economics and Business, The University of Melbourne

Judul

: Supply Chain Management Practices in Wal-Mart and IKEA

Abstrak Penelitian ini bertujuan untuk mendalami bagaimana proses supply chain management dijalankan di Wal-Mart dan IKEA, sebagaimana keduanya dikenal karena praktik supply chain yang dirancang dengan baik. Penelitian ini juga mengungkapkan tentang teknologi yang digunakan Wal-Mart dan IKEA dalam praktik supply chain-nya, strategi pengadaan logistik, serta strategi lingkungan dan Corporate Social Responsibility yang dimiliki keduanya. Wal-Mart menggunakan sistem cross-docking untuk mencapai strategi “Everyday Low Prices” mereka, di mana IKEA menggabungkan Vendor Managed Inventory dan Consignment Stock untuk mencapai efisiensi tinggi dan skema cost-sharing. Namun, kami menemukan beberapa masalah yang terjadi dalam usaha mereka untuk memperluas perusahaan masing – masing secara global, contohnya seperti masalah birokrasi dan masalah perpajakan, serta masalah dengan supplier. Wal-Mart dan IKEA telah berhasil mengatasi beberapa masalah tersebut melalui praktik - praktik supply chain dan strategi logistik yang inovatif dan fleksibel.

Kata Kunci: Cross-docking; IKEA; Supply Chain Management; VMI; Wal-Mart

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Universitas Indonesia Supply chain ..., Michelle, FIB UI, 2014

Universitas Indonesia Supply chain ..., Michelle, FIB UI, 2014

ABSTRACT

Name

: Michelle

NPM

: 0906645432

(Universitas Indonesia)

NPM

: 550453

(University of Melbourne)

Program

: Kelas Khusus Internasional Fakultas Ekonomi, Universitas Indonesia Faculty of Economics and Business, The University of Melbourne

Title

: Supply Chain Management Practices in Wal-Mart and IKEA

Abstract The purpose of this study is to identify how the supply chain management practices performed in Wal-Mart and IKEA, as both of them is known for their well-designed supply chain practices. It also reveals Wal-Mart and IKEA’s usage in technology, their procurement strategy, as well as their environmental strategy and Corporate Social Responsibility. Wal-Mart emphasizes on their crossdocking technology to achieve their “Everyday Low Prices” strategy, meanwhile IKEA combines Vendor Managed Inventory and Consignment Stock to attain higher efficiency and cost sharing scheme. However, we found several problems occurred in their attempt to expand globally, such as bureaucracy and taxation problem, as well as problems with the suppliers. It is revealed that they have managed to overcome these challenges through innovative and flexible supply chain management practices and logistic strategies.

Keyword: Cross-docking; IKEA; Supply Chain Management; VMI; Wal-Mart

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Universitas Indonesia Supply chain ..., Michelle, FIB UI, 2014

DAFTAR ISI Halaman Judul……………………………………………………………………………...i Halaman Pengesahan……………………………………………………………………..iii Halaman Pernyataan Orisinalitas…………………………………………………………iv Halaman Pernyataan Persetujuan Publikasi……………………………………………….v Abstrak…………………………………………………………………………………...vii Daftar Isi…………………………………………………………………………………..xi Daftar Gambar……………………………………………………………………………xii 1.

Executive Summary………………….…………………………………………1

2.

Introduction…………………………………………………………………......2

3.

Analysis………………………………………………………………….…..….3 3.1.

Supply Chain Management at Wal-Mart………………………….…….....3

3.1.1.

Network Configuration and Strategic Partnering…………………….........3

3.1.2.

Procurement and Outsourcing Decisions…………………..,.………..…...5

3.1.3.

Technology Application……………………………………..……….........7

3.1.3.1.

RFID…………………………..……………………………………...7

3.1.3.2.

EDIINT AS2……………………………………..……………….......7

3.1.4. 3.2.

Environmental Strategy for Sustainability…………………..………….....8 Supply Chain Management at IKEA……………………………………..10

3.2.1.

The Supply Chain Strategy……………………………………………….10

3.2.2.

Integration and Strategic Partnering……………………………………...11

3.2.3.

Sourcing, Procurement, and Inventory Decisions………………………..14

3.2.4.

Logistics………………………………………………………………….17

3.2.5.

Information Technology and Decision-Support Systems………………..18

3.2.6.

Green Strategy and Corporate Social Responsibility…………………….19

4.

Wal-Mart and IKEA Supply Chain Decisions: Critiques and Solutions………20 4.1.

Wal-Mart: Conquering the Chinese Market……………………………...20

4.2.

Criticising IKEA: from the Suppliers’ Perspectives……………………..21

5.

Conclusion……………………………………………………………………..22

6.

References……………………………………………………………………..25

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DAFTAR GAMBAR

Figure 1. IKEA and its industrial network ......................................................... .10 Figure 2. Illustration in the IKEA-Sapa sourcing process. ................................. .13 Figure 3. IKEA’s Ladder Model for Supplier Interactions and IT/Logistics……15

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1.

Executive Summary This document is made to assess the supply chain management process in

Wal-Mart and IKEA. It includes the analysis of Wal-Mart’s and IKEA’s Supply Chain Practices, Supply Network Configuration, Strategic Alliance with Trading Partners, Procurement and Outsourcing Strategies, Green and Corporate Responsibility Strategy, as well as the Technology Application in order to improve Wal-Mart’s and IKEA’s supply chain management. It will also provide the Critiques towards both companies’ supply chain decisions.

In this document, it could be found that in order to actualize Wal-Mart’s “Everyday Low Prices” policy, the company implements highly-automated distribution centres and cross-docking technology, which reduces Wal-Mart’s operating costs to further benefits the customers with low-priced products. WalMart also adopts direct sourcing in order to find the lowest price offered by suppliers, to further benefit the customers in the form of lower-priced products. Moreover, Wal-Mart applies the Continuous Replenishment Strategy in order to cut out-of-stock rate and operating costs, as well as to obtain a high level of customer satisfaction.

This document also analyses how IKEA is able to provide consumers with low-price, adequate designs, and functional home furnishings. The cost reduction is gained from IKEA’s extensive network of suppliers and the company’s outsourcing decisions. To manage inventory, IKEA combines Vendor Managed Inventory and Consignment Stock which provides IKEA with higher efficiency and cost sharing scheme. Furthermore, this document also explains IKEA’s unique logistics and technology application to ensure supply chain accuracy.

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2.

Introduction IKEA and Wal-Mart are two retail giants with their own principles and

business ideals. Both companies were established in two different, competing continents. IKEA, a Scandinavian retail heritage from Sweden, was first established in 1943 by a 17 year-old, Swedish teenager, Ingvar Kamprad. The company started to take shape in 1980s as it expanded dramatically to international market. IKEA’s vision is to offer people with wide range and well design, functional home furniture at low prices, making them affordable to many people (IKEA, n.d.). On the other hand, Wal-Mart, an American retail giant, was established 19 years later, in 1962, by a 44 year-old, middle-aged Arkansas man, Sam Walton. The Wal-Mart concept has been unchanged since its first establishment, ‘lowest price anytime, anywhere’. Wal-Mart vision, compare to IKEA, is to help people to save money and live better (Wal-Mart, n.d.).

Nowadays, the companies have expanded to regions of the world, connected to thousands of suppliers and production sites in various countries. In accordance to that, their expansions rely on the supply chain managements. Supply chain management incorporates the company’s activities from the strategic level to the operational level, through the tactical level; and initially aims to be efficient and cost-effective across systems through proper integration of suppliers, manufacturers, warehouses, and stores (Simchi-Levi, Simchi-Levi, & Kaminsky, 2008).

This paper will evaluate the design of the Supply Chain for Wal-Mart and IKEA, in regards to industry network, inventory management, and outsourcing decisions. This paper will also evaluate both companies are able to reach their current and potential customers all over the world through the supply chains given the risks and challenges. In addition, this paper will compare the sustainability strategies adapt by the two companies.

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3.

Analysis

3.1. Supply Chain Management at Wal-Mart In general, supply chain management in Wal-Mart focuses on implementing an ‘Everyday Low Prices’ (EDLP) policy, which means that the products were displayed at a steady price and not discounted on a regular basis (Johnson, 2006). In order to actualize EDLP, Wal-Mart focuses on procurement strategy of finding the lowest price offered by vendors, as well as its logistic network, aiming to cut transportation costs and lead-time; thus, results in reduced out-of-stock rate and continuous replenishment.

3.1.1.

Network Configuration and Strategic Partnering

Wal-Mart is known for its fast and responsive logistic system. Company’s highly-automated distribution centres, which operate 24-hours a day and are serviced by private company’s truck fleets, are the foundation of Wal-Mart’s supply network (Alyea, 2012). Each distribution centre supports approximately 75 to 100 retail stores within a 250-mile area. Thus, the fleet trucks do not have to travel so far to retail stores to make deliveries (shorter distance), which lead to a decrease in transportation cost, lead time, and safety stock required. If a shortage occurred, replenishment can be made quickly as retail stores receive daily deliveries from distribution centres (Alyea, 2012).

According to Supply Chain Digest (as cited in Alyea, 2012), the trucks are used to pick up goods directly from manufacturers’ warehouses, which eliminates intermediaries and increases responsiveness. However, the use of trucks increases transportation costs, but is justified in terms of reducing inventory costs. WalMart is also known as a pioneer to adopt cross-docking technology, where the products are routed from suppliers’ to Wal-Mart’s warehouses and then shipped to

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the stores without sitting for long periods of time in their inventory, which reduces Wal-Mart’s costs significantly and passed the savings on to the customers with highly competitive pricing (University of San Fransisco, n.d). Therefore, WalMart also has store-specific orders packed and shipped directly to the stores by manufacturer.

Strategic supplier alliances aim to build long-term, cooperative relationships to improve strategic and operational capabilities that provide ongoing benefits for participating companies. Strategic alliances can be formed under joint research and development, joint marketing, long-term sourcing agreement, equity investments, and non-subsidiary joint ventures (Monczka, Petersen, Handfield, & Ragatz, 1998). One form of strategic alliances applied in Wal-Mart is Retailer-Supplier Partnerships (Simchi-Levi, Simchi-Levi, & Kaminsky, 2008). Retailer-Supplier Partnerships are implemented in order to increase product flow efficiency, to further increase Wal-Mart’s profitability.

One form of Retailer-Supplier Partnerships is Continuous Replenishment Strategy, which refers to a program that triggers the manufacturing and movement of product through supply chain management when the identical product is purchased by end user (Al-Balushi, 2009). In order to achieve continuity in replenishment, Wal-Mart implements Quick Response Strategy, a partnership strategy where suppliers and retailers work together to respond more rapidly to the consumer by sharing point-of-sale scan data, enabling both to forecast replenishment needs, in order to reduce retail out-of-stocks, forced markdowns, and operating expenses (Al-Balushi, 2009). Through Retail Link, Wal-Mart shares its sales and inventory data of suppliers’ goods in retail stores with each supplier in order to improve suppliers’ forecasting (3.1.3.). In exchange for providing suppliers the access for the data from Retail Link, Wal-Mart expected suppliers to monitor and replenish the products on a continual basis (Johnson, 2006), so that the suppliers will react quickly when out-of-stock is indicated in each store. Therefore, Wal-Mart’s out-of-stock rate and operating expenses will be decreased.

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3.1.2.

Procurement and Outsourcing Decisions

In order to identify with the company’s decisions to outsource, it is crucial to determine the factors that encourage trade of intermediate goods (Bartkus & Jurevicius, 2007). It is essential to examine the interactions between the costs of transportation and the costs of services (Bartkus & Jurevicius, 2007). However, economists tend to ignore the trade barriers to make the models simpler and easier to be elaborated. This propensity would result in the elimination of important features of international trade that involves the costs of production, transportation, and services (Bartkus & Jurevicius, 2007).

By choosing the suitable procurement strategy, Wal-Mart could reduce its cost by 1% of revenue, which will affect the net profit of the company directly (Chandran & Gupta, 2003). Wal-Mart sources goods directly from manufacturers (Chandran & Gupta, 2003). The purchase decision is made based on price comparison between vendors. The vendor that can offer the lowest price will be chosen by Wal-Mart, and if Wal-Mart is satisfied with the services, the company will consider a long-term relationship with the vendor. Relationship between WalMart and suppliers play crucial in building strategic networks, as a strong relationship between suppliers and client will constitute benefits such as minimizing supplier-related risks, reducing costs, as well as maximizing customers’ satisfaction (Black, n.d.).

Although Wal-Mart’s procurement strategy is to purchase directly from manufacturers, the company still relies on intermediaries for most of its bulk of global sourcing (Supply Chain Digest, 2010). To solve this problem, Wal-Mart needs to move on to more direct procurement by implementing centralisation of its sourcing operations through the direct sourcing model. Direct sourcing is a structure where the firm directly chooses and administers the suppliers under the conventional relationship-based sourcing practices (Belavina & Girotra, 2010). As a start, Wal-Mart established four global merchandising centres for general goods and clothing, including an office in Mexico focused on emerging markets. In

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addition, Wal-Mart acquired ASDA in 1999, the grocery chain in the UK, and has been in operation ever since. ASDA’s expertise in direct sourcing helps Wal-Mart to reduce cost of purchasing goods, as well as to improve the company’s supply chain efficiency (Supply Chain Digest, 2010).

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3.1.3.

Technology Application

Wal-Mart’s investment in technology has helped the company to establish a more efficient supply chain management. Retail Link serves as the first database that provides data on every sale made at the company in two-decade period. Retail Link gives suppliers access to real-time sales data on the products they supply, down to stock-keeping in each store levels (Johnson, 2006).

3.1.3.1.

RFID

In late 2004, Wal-Mart started the RFID Mandate (Radio Frequency Identification) to enable inventory tracking in order to increase in-stock rates at store level and reduce tracking-cost. RFID tag readers are placed in parts of the stores such as on the receiving docks and on the doors, from stockroom to sales floor. RFID tags are proven to be efficient, as Wal-Mart stores with RFID have shown an improvement of 16% fewer out-of-stocks on RFID tagged products that were tested (Johnson, 2006).

3.1.3.2.

EDIINT AS2

Recently, Wal-Mart improves its technology by investing in EDI over the Internet (EDIINT), an improved working group of Internet Engineering Task Force (IETF) enabling the transport of EDI and XML data over the Internet in a secure manner. It also enables Wal-Mart and the counterparty to exchange documents in a real time environment, while the traditional EDI provides a batch driven process that creates a wait-time between submitting and receiving a submitted document (Effective Data, n.d.). Thus, by enabling an integrated supply chain, it will reduce Wal-Mart’s inventory costs (IBM Software Group, n.d.).

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3.1.4.

Environmental Strategy for Sustainability

On October 24, 2005, the president and CEO of Wal-Mart launched the sustainability program, consists of three main goals: for Wal-Mart to be supplied by 100% renewable energy, create zero waste, and sell products that sustain people and the environment (Wal-Mart, 2012). In addition, Wal-Mart has developed several strategies to actualize an improved environment, such as Sustainable 360, a strategy developed to engage suppliers, associates, and customers in their efforts to develop a better environment, and Sustainable Value Networks (SVNs), utilized to help integrate sustainable practices into all parts of the business, implemented to all levels of organization inside and outside WalMart, including leaders of the company, suppliers, academia, government, and NGOs (Wal-Mart, 2012). For instance, as an implementation of SVNs, Wal-Mart tries to reduce its greenhouse gas (GHG) emission and they are working with suppliers to do the same.

Wal-Mart generates power naturally by producing renewable energy using solar and fuel cell installations, and purchasing green energy to power the stores (Wal-Mart, 2012). Wal-Mart also uses LED freezer case lightings in stores and secondary loop refrigeration, as it reduces energy consumption by 70% and GHG emissions by 95%.

To create zero waste, Wal-Mart focuses on recycling cardboard, paper, aluminium, plastics, etc.; donating food to food banks around the country; and creating animal feed, energy, or compost from expired food and other organic products (Wal-Mart, 2012). For electronic waste, Wal-Mart encourages customers to join recycling programs with its alliances for its customers’ convenient (WalMart, 2012). Wal-Mart also uses slimmer packaging to cut unnecessary waste and saving customers money.

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Lastly, Wal-Mart maintains its sustainability by developing a standard for products, including agriculture and seafood products (Wal-Mart, 2012). In addition to the standards made, Wal-Mart supports Fair Trade program through Private Label Coffee and Sustainable Palm Oil (Wal-Mart, 2012).

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3.2. Supply Chain Management at IKEA 3.2.1.

The Supply Chain Strategy

Supply chain principles at IKEA remain the same as it was in 1960s regardless the complexity of the networks (Baraldi, 2008). IKEA aims to design and purchase products that involve low production and transportation costs through upholding long-term relationships with the designated suppliers as their peripheral sources of offerings (Baraldi, 2008). In addition, IKEA is considered as an innovative and unique firm by the industry selectors (Hultman, Johnsen, Johnsen, & Hertz, 2012); therefore, both IKEA’s focus on low-cost-butreasonable quality products and the perceived brand image have encouraged the company to put higher emphasis on the constant product and technical development that rely heavily on the internationalisation and the supply chain network (Baraldi, 2008; Hultman et al, 2012).

Figure 1. IKEA and its industrial network. Reprinted from “Strategy in Industrial Networks: Experiences from IKEA,” by E. Baraldi, 2008, California Management Review, 50(4), p. 100. Copyright 2008 by University of California Berkeley. Reprinted with permission.

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3.2.2.

Integration and Strategic Partnering

The concept of supply chain network structure involves levels of suppliers, in which they interact in order to reach their consumers – immediate and/or secondary – to deliver the products (Lusch, Vargo, & Tanniru, 2010). Planning the supply chain network is believed to help firms to find the balance between inventory, transportation, and manufacturing costs (Simchi-Levi et al, 2008). Network planning also benefits firms to maximise the utility of their resources by sourcing products from the manufacturing facility that may increases the effectiveness of the firms’ supply chain activities (Simchi-Levi et al, 2008).

IKEA adapts mostly the direct sourcing model as its supply chain structure (Belavina & Girotra, 2010). The IKEA industry network contained 550 business units specialising in different fields and spread over more than 50 countries (Baraldi, 2008). The organisation has 1,300 direct suppliers and 10,000 subsuppliers, spread over 60 countries (see figure 1). The stores are spread over 30 countries, including China and Australia. IKEA’s wholesale and logistic operations are controlled by 26 distribution centres that are located in 12 countries, linked by hundreds of logistic partners that administer the transportation facilities (Baraldi, 2008).

IKEA applies a long-term approach and aims to build sustainable relationships based on mutuality with its suppliers (Balardi, 2008; Hultman, Johnsen, Johnsen, & Hertz, 2012). In accordance to the direct sourcing model as explained by Belavina and Girota in 2010 (see section 3.1.2.), IKEA manages its interactions centralised all the way to raw material suppliers (see figure 1), by intensively collaborates with these suppliers to guarantee the quality and to fulfil IKEA’s promises on sustainability (Baraldi, 2008). IKEA relies on comprehensive task delegations to its suppliers, and this decision has brought mutual trust and commitment into more crucial roles in the interaction mechanisms (Baraldi, 2008).

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In determining its network, IKEA considers factors such as geographic point as an important aspect as it determines total cost, quality and environment requirements, production capacity, and technical competence; as well as the potential suppliers’ readiness to invest with and for IKEA (Baraldi, 2008). The mutual trust between IKEA and suppliers has created powerful yet dependent relationships (Baraldi, 2008; Hultman et al, 2012). In addition, suppliers’ control over information on technical development and/or volume of products requires IKEA to depend on them in order to plan strategic decisions (Baraldi, 2008).

One of the advantages that IKEA may gain from building long term relationships involves the reduction of biased opportunistic behaviour due to profit-relevant non-contractible actions of sourcing partners, such as capacity and inventory level (Belavina & Girotra, 2010). Many studies have shown that building long term relationships can resolve the traditional relegation losses (Belavina & Girotra, 2010). An example of the mutually beneficial relationship between IKEA and its suppliers is shown by Hultman et al (2012) in their research on the production process of PAX wardrobe system.

The sliding doors for the PAX wardrobe system are built of aluminium profiles and other accessories that are sourced by Sapa, one of IKEA suppliers. Hultman et al (2012) stated that the PAX wardrobe project was the largest single contract in Sapa’s history and the contract has opened a new business and introduced Sapa with a different way of doing business. Sapa leveraged IKEA’s knowledge to establish relationships with other suppliers (Figure 2), and according to Hultman et al (2012), Sapa stated that IKEA’s supports played as an important bridging role.

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Figure 2. Illustration in the IKEA-Sapa sourcing process. Adapted from "An Interaction Approach to Global Sourcing" by J.Hultman, T. Johnsen, R. Johnsen, & S. Hertz, 2011, Journal of Purchasing & Supply Management, 18(1), p. 18. Copyright 2011 by Elsevier Ltd. Adapted with permission

Sapa incorporated and coordinated the global supply based on IKEA’s behalf which both parties were made mutually dependent (Hultman et al, 2012). The study by Hultman et al (2012) has shown that the relationships among the players, both focal relationship – the relationships between IKEA and Sapa – and the relationships between IKEA and the supply network affect the global sourcing process. In addition, according to Hultman et al (2012), the interactions among players in a supply network may result in internationalisation. In the case of PAX wardrobe system, the relationship with IKEA had speed up Sapa’s growth in volumes significantly from the exploitation of IKEA’s knowledge on sourcing market based on IKEA’s experience and presence in China, in exchange of knowledge on products and materials (Hultman et al, 2012).

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3.2.3.

Sourcing, Procurement, and Inventory Decisions

IKEA’s internationalisation was first driven by the conflict between the company and Swedish furniture industry, where IKEA’s cost-reduction strategy was not facilitated by the industry (Hultman et al, 2012). Jonsson and Foss (2011) mentioned in their study that the internationalisation process at IKEA was initially highly explorative and based on trial and error mechanism. IKEA, through international expansions, aims to fuse standardisation with local adaptation (Jonsson & Foss, 2011). Internationalisation is theoretically based on the interaction between networks of internationalising firm and the external players, such as the suppliers that may provide sourcing for the firm (Hultman et al, 2012).

To outsource, IKEA perceives geography location as one of the crucial factors as it heavily affects costs, competences, and delivery times (Baraldi, 2008). The production of PAX wardrobe system provides an example of IKEA outsourcing decisions. The sourcing decision for PAX was done by Sapa – as the supplier, but greatly influenced by IKEA (Hultman et al, 2012). In the production process, there were three assembly units, Sweden, Slovakia, and China. The sourcing was obtained from the three countries, supported with local backup suppliers except Slovakia, as it obtained the supports from supplier in Sweden (Hultman et al, 2012). Other components of PAX were also sourced from different places such as the sliding profiles from Germany, rubber components from Sweden, bristle seals from China, and the assembly fittings from Slovakia (Hultman et al, 2012). This decision to apply the on-site assembly model in the sourcing countries aimed to optimise the production process and to eliminate ineffective time used to transport the materials from various places to a single, large assembling unit, as well as reduce the transportation cost (Li, Guo, Skibniewski, & Skitmore, 2008; Hultman et al, 2012).

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In terms of inventory management, the approach that IKEA uses to unify information is the top-down approach where the forecasting is done at the highest level across continents and eventually move down to countries’ forecasts (Scheraga, 2005). IKEA adopts the Vendor-Managed Inventory combined with Consignment Stock (CS), or known as the Ladder Model (Baraldi, 2008). VendorManaged Inventory (VMI) places the inventory decisions to suppliers (Baraldi, 2008), including placing orders on behalf of the buyer (in this case, IKEA). The Consignment Stock, on the other hand, requires buyer to decide the order quantity and shipment frequency (Ben-Daya, Hassini, Hariga, & Al-Durgam, 2013).

The Ladder Model is composed of three stages: the Call-Off stage, OrderPoint Distribution Centre, and Vendor-Managed Inventory (see figure 3).

Figure 3. IKEA’s Ladder Model for Supplier Interactions and IT/Logistics Capabilities. Reprinted from “Strategy in Industrial Networks: Experiences from IKEA,” by E. Baraldi, 2008, California Management Review, 50(4), p. 109. Copyright 2008 by University of California Berkeley. Reprinted with permission.

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The Call-Off stage basically the CS stage where IKEA releases orders every fourth week and decides that suppliers must deliver within the next 4 weeks. The next stage is the Order-Point Distribution Centre (OPDC), where IKEA orders daily and requires suppliers to deliver within the next 12 days. The OPDC often delegates a team that handles only IKEA’s orders due to the extensive product requirements. The next stage, the VMI stage is where only a handful of suppliers (1%) decide IKEA’s order quantity and when to deliver. In the combination of VMI and CS, both ordering and holding costs are shared between suppliers and buyers, making the combination of two more cost-effective and better coordinated (Ben-Daya et al, 2013).

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3.2.4.

Logistics

IKEA’s attempt to reduce logistics cost is through Design for Logistic (DFL) model (Li, Guo, Skibniewski, & Skitmore, 2008). The DFL principle considers not only the function and manufacturability, but also the convenience of packaging, transporting, and assembling the product (Mather, 1992). To further reduce costs, IKEA also implements the customer self-service through the do-ityourself assembling system. In addition, IKEA also implements the system inside the stores, allowing customers to locate and transport the purchased furniture (Li, Guo, Skibniewski, & Skitmore, 2008). However, IKEA does not leave the customers alone. To support the self-service system, IKEA provides 3D assembly instructions set, and also include the product name, price, size, composition, and possible usage and alternative decorating idea (Li, Guo, Skibniewski, & Skitmore, 2008).

To further support the supply chain efficiency, IKEA uses an innovative unit load carrier in a form of a loading ledge. The loading ledges allow various size and design, compare to traditional unit load carriers where the dimensions are fixed so that products and packaging are design and made accordingly (Hellstorm & Nilsson, 2011). Using this loading ledge, the cube utilisation of transport units may be increased as well as allowing the unit load dimensions to be adjusted to the products to eliminate empty spaces, thus increases the space utilisation (Hellstorm & Nilsson, 2011).

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3.2.5.

Information Technology and Decision-Support Systems

The information technology at IKEA is mostly revolves around to support supply chain accuracy. The attempt to improve accuracy through IT is done by IKEA in the application of track-and-trace solution (Chartered Institute of Logistic and Transport UK, 2008). The need arose when IKEA identified tracing system to increase stock visibility from the time products leave the Central Distribution Centre (CDC). IKEA installed mobile computer in the delivery trucks, connected to the IKEA Home Delivery Management System. This will enhance communication between the drivers, customers, and the Home Delivery Management.

In addition, IKEA installed the in-truck printers to print customer’s receipt as well as helping drivers to label damaged and returned goods with warehouse barcode, to help speeding up the return process when the truck returns to the warehouse. This system, according to Central Institute of Logistic and Transport UK (2008), has helped to create audit trail of every item loaded on to a truck and ensuring the correct deliveries. Moreover, the system has reduced the cost of call centres and after-sales administrations (Chartered Institute of Logistic and Transport UK, 2008).

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3.2.6.

Green

Strategy

and

Corporate

Social

Responsibility IKEA’s effort in sustainability presents in the knowledge exchange between IKEA and suppliers (Martucci, De Felice, & Schirone, 2012). Through People & Planet Positive strategy, IKEA aims to offer customers with products that help customers to save money through product designs and material decisions that enable customers to use less energy and water, as well as reducing waste (IKEA, 2012).

Because IKEA’s sustainability strategy incorporates product designs and materials, IKEA encouraged its suppliers to apply the same concept. Moreover, IKEA also continuously supports the development of a good place to work, throughout the supply chain, asking suppliers to not only focus on professional responsibilities, such as employee’s obedience, but also the presence of shared value in the working environment (IKEA, 2012).

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4.

Wal-Mart and IKEA Supply Chain Decisions: Critiques and Solutions

4.1. Wal-Mart: Conquering the Chinese Market Wal-Mart’s operation has been expanding since its first store opened in China in 1997. However, the company faced several challenges from China’s distribution sector, and by overcoming these challenges through innovative and flexible supply chain management and logistics strategies are vital to Wal-Mart’s success in China (Huffman, 2003).

Like other Multinational Corporations in China, Wal-Mart confronts the consequences of provincial autonomy and self-sufficiency, such as difficulties for road commercial and private trucking (Huffman, 2003). However, with advanced communication and infrastructure, it managed to diminish the rationale for regional self-reliance. The company believes that the use of distribution centers and back-haul trucks is efficient and allows Wal-Mart to maintain control over most of its distribution chain, yet still can provide the customers with “Everyday Low Prices” products (Huffman, 2003). Even though the trucking is contracted out, Wal-Mart still manages the rest of supply chain directly.

As the goal of logistic managers is to create a seamless flow of product going and payment made to suppliers, China’s banking, finance, insurance, and taxation; however, were bureaucratic and agitating for managers to achieve the goal (Huffman, 2003). However, Wal-Mart manages to work with the Chinese government to set up a holding company to consolidate joint venture distribution and finance, in order to overcome this challenge with China’s financial matter (Huffman, 2003).

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4.2. Criticising IKEA: from the Suppliers’ Perspectives IKEA’s requirement for global standardisation is seen as a threat for suppliers regarding the traditional value and competence of the suppliers might be undervalued and neglected (Ivarsson & Alvstram, 2011). Suppliers also see IKEA’s sourcing model as too bureaucratic, and resources have been wasted on constant and time consuming inspections for IKEA’s auditing purposes. Beside inspections, decision-making at IKEA is seen to be unclear and involves too many people, at global and local level (Ivarsson & Alvstram, 2011). This lack of clarity has resulted in information asymmetry which may eradicate small but important margins among the suppliers (Ivarsson & Alvstram, 2011).

However, the way IKEA response to the critique is rather simple. From IKEA’s point of view, it is a waste of time to deal with suppliers who do not want to cooperate well, and IKEA is ready to terminate such relationship (Baraldi, 2008). One advantage of IKEA from its readiness to terminate (and build) relationships is that the heterogeneous network resulted from the dynamics is one of the key sources of development (Baraldi, 2008).

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5.

Conclusion In conclusion, supply-chain management is an important factor to

determine whether or not a company is effective enough in utilising its resources, as well as whether a company has incurred unnecessary costs or not. In today’s global market, it seems that retail companies choose to apply price-leadership strategy which involves reducing cost in the chain process, which Wal-Mart and IKEA apply according to their own ways.

With respect to its policy, Wal-Mart tries to cut its operating costs to further benefit the customers with lower-priced products. In order to actualize the policy, Wal-Mart implements highly-automated distribution centres, which operate 24-hours a day and are serviced by private company’s truck fleets. These distribution centres each supports 75 to 100 retail stores in 250-mile area, so that each truck fleet will not have to travel so far, which will reduce its transportation cost, lead time, and safety stock required. Wal-Mart also adopts the cross-docking method to cut inventory holding costs, which also will benefit the future customers.

Wal-Mart adopts Continuous Replenishment Strategy, as a form of Retailer-Supplier Partnership, aiming to increase product flow efficiency and satisfy customers, to further increase Wal-Mart’s profitability. As for its procurement strategy, Wal-Mart adopts direct sourcing strategy. However, for most of its global sourcing, Wal-Mart still relies on intermediaries.

Wal-Mart adopts Retail Link, RFID, and recently EDIINT for its technology application, aiming to cut operating costs and improve information sharing with suppliers, which lead to a better forecast results for the suppliers. Moreover, the company develops a green strategy, consists of three main goals: to

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be supplied by 100% renewable energy, create zero waste, and sell products that sustain people and the environment.

IKEA, on the other hand, attempt to reduce logistics cost is through Design for Logistic (DFL) model and the application of innovative unit load carrier in a form of a loading ledge. This load carrier has proven an increase in space utilisation in trucks, therefore it helps to increase efficiency. In terms of technology, IKEA installs mobile computer to increase communication efficiency. IKEA’s sourcing decisions has managed to benefit the company in terms of eradicating unnecessary cost and maximising profit through various ways of outsourcing.

In addition, IKEA’s strategy for sustainability starts at the suppliers’ level. IKEA encourages suppliers to apply certain principles and to make sure that suppliers create a work-friendly environment as well as choosing product materials that can be recycled and support the environment sustainability.

Despite the difference in the supply chain strategies, both Wal-Mart and IKEA have achieved their desired goals in reducing cost, as well as keeping their principle of providing low-cost products for consumers, while still committed to their promises to maintain environment sustainability.

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6.

References

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Hellstorm, D., & Nilsson, F. (2011). Logistic-Driven Packaging Innovation: A Case Study at IKEA. International Journal of Retail & Distribution Management, 39(9), 638-657. Huffman, T. P. (2003, September - October). Wal-Mart in China: Challenges Facing a Foreign Retailer's Supply Chain. The China Business Review. Hultman, J., Johnsen, T., Johnsen, R., & Hertz, S. (2012). An Interaction Approach to Global Sourcing: A Case Study of IKEA. Journal of Purchasing & Supply Management, 18(1), 9-21. IBM Software Group. (n.d.). Meeting Wal-Mart Supplier Challenges: Business-toBusiness Solutions from IBM and IBM Business Partners. IKEA. (2012, October 23). IKEA Group Unveils New Sustainability Strategy: People & Planet Positive. Business Wire (English). IKEA. (n.d.). About IKEA. Retrieved February 12, 2013, from IKEA: http://www.ikea.com/ms/en_GB/about_ikea/index.html Ivarsson, I., Alvstam, C.G. (2011). Upgrading in Global Value-Chains: A Case Study of Technology- Learning among IKEA Suppliers in China and Southeast Asia. Journal of Economic Geography, 11, 731-752. Johnson, P. F. (2006). Supply Chain Management at Wal-Mart. Richard Ivey School of Business The University of Western Ontario. Jonsson, A., & Foss, N. J. (2011). International Expansion through Flexible Replication: Learning from the Internationalisation Experience of IKEA. Journal of International Business Studies, 42, 1079-1102. Li, H., Guo, H., Skibniewski, M. J., & Skitmore, M. (2008). Using the IKEA Model and Virtual Prototyping. Construction Management and Economics, 26, 991-1000. Lusch, R. F., Vargo, S. L., & Tanniru, M. (2010). Service, Value Networks, and Learning. Journal of The Academy of Marketing Science, 38(1), 19-31.

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Martucci, I., De Felice, A., & Schirone, D. (2012). Knowledge Exchange Between IKEA and Suppliers Through Social and Environmental Strategy. Proceedings of The European Conference on Knowledge Management. 1, pp. 699-707. Academic Conferences, Ltd. Mather, H. (1992). Design For Logistics (DFL): The Next Challenge for Designers. Production and Inventory Management Journal, 33(1), 7-10. Monczka, R. M., Petersen, K. J., Handfield, R. B., & Ragatz, G. L. (1998). Success Factors in Strategic Supplier Alliances: The Buying Company Perspective. American Institute for Decision Sciences. Scheraga, D. (2005, June). Balancing Act at IKEA. Chain Store Age, pp. 45-46. Simchi-Levi, D., Simchi-Levi, E., & Kaminsky, P. (2008). Designing and Managing the Supply Chain: Concepts, Strategies, and Case Studies (3rd ed.). New York, NY: McGraw-Hill. Supply Chain Digest. (2010, January). Global Supply Chain Focus. Supply Chain Digest. University of San Fransisco. (n.d.). Retrieved from University of San Fransisco. Wal-Mart. (2012). 2012 Global Responsibility Report. Retreived February 12, 2013, from Wal-Mart: http://www.walmart.com Wal-Mart. (n.d.). Our Story. Retrieved February 12, 2013, from Wal-Mart: http://corporate.walmart.com/our-story/ Wong, C. Y., Lai, K.-H., & Cheng, T. (2011). Value of Information Integration to Supply Chain Management: Roles of Internal and External Contingencies. Journal of Management Information System, 28(3), 161-200.

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