Management Essays – Ikea Operations Management

How Does Ikea Approach Operations Management?

Abstract

The main purpose of this paper is to focus on the how IKEA Company approached its operation management. Particularly, it covers the following: how the company establish and manage customer requirements, secondly how does these customers requirements used for the company’s product and services, then, third covers the operational systems and processes it used in its operation, fourth consists of capacity planning, process layout, and product services/scheduling, inventory and projects were managed in the organization. And, lastly is on why and how monitoring and evaluation of operation were carried out by the company. This paper also provides empirical findings and application of relevant theories that will help readers to really understand how the company operates and what relevant theories it applies.

Introduction

In most companies these days whether it is local or multinational companies, they are always faced with big challenges. Challenges those are sometimes insurmountable to overcome like continuing to be innovative or problems related to cost. These are two of the most common challenges that company continuously faced, but these problems may also be overcome only if the company operates in a way that it focus mainly in its main strength and at the same time focusing on the right market, where they would know that they have the advantage. In this paper with IKEA Company as the main focus, it will give us exactly how typical multinational companies manage to operates. It will include such processes like customer requirements, operations management, monitoring projects and other theories and processes applied in actual operation. This paper also provides some important empirical findings that will help to support the theories and actual strategies applied by the company.

Historical Background of IKEA Company

It was not so long after the company founder INGVAR KAMPRAD born in 1926 and just 17 years later after that year, where at a very young age when INGVAR registered the first IKEA Company and this was in July 28, 1943. Actually, the name of the company IKEA stands for (Ingvar Kamprad Elmtaryd Agunnaryd). Couple of years later, the company had its first advertisement through a local newspaper, and then through aggressiveness in the business, Ingvar launched its first fine and modern line of furniture in 1948. Followed by launching of IKEA’s catalogue and first furniture showroom in Sweden in 1951 and 1953 respectively.

Four years later, the true concept of the company’s creation of well designed furniture at a very low price started in 1955 and three years later it was the world’s first IKEA store opened. From those early years the company started to grow and number of co-workers and that started to be seen by the company in 1958 and a year after that was the introduction of the company’s self assembly furniture. But, since the company want to make sure that they offered not only low price items, they started to find ways on how quality will be implemented. That is why by 1961, the company started to implement quality testing in all its products.

Then the company sees opportunity to expand and by 1963, the company launched their first IKEA store outside Sweden and this is in Norway. Then from their on the company started to grow and stores outside increases and it was first penetrated in the European region. And by the company reaching the 90’s, the company became design oriented which is needed in order to compete, but still the main concept and vision of the company to lower the price and at the same time quality is not out of the plan and it continuously been the advantage of the company.

Like in 1997 specifically was the year for children, where the company has developed numerous products for kids and still innovative design continuous to work for the company. And by 2003, through its donations has helped a Swedish hospital to build “The Kaprad House” which primarily facilitates for cancer patients.1

How does the organization establish customer requirements?

Establishing customer requirements maybe is one of the most important factors for success for any company in the world and whether it is local or multinational business. The main reason is that it mainly focuses on how a company develops the right product. It may very simple to say that it may only be about how the company interviews or provide questionnaires or even conducting surveys just to know the important and appropriate requirement of the customers.

1 The IKEA Concept, 2007.

But, actually it is more than that and it takes a lot of effort in performing such activity. That is also the problem with come companies, they would think that establishing customer requirement is easy as like asking them when they visit the shops, stores or even sometimes paying some formal visits does not answers all these and in fact there are customers that would only accomplish survey forms out of persistence by some crews or managers of the shops. And the problem started as when the company started to rely on these requirements and apply some strategies on it, seeing it as the real problem and from there irrelevant solutions were applied and that only adds problem or worsen the problem of the company.

In theory, it is said that establishing customer needs or requirements are mainly the job of the marketing department of the company and these group also knows that requirements of customers may come from different aspects in the business. Like one of the aspect is that requirements may come from the attitude of the customer towards the product which is shaped by the experienced by the product itself, like take for instance a product that is known for ore than 2 decades and the customers are well used to it, this means that the attitude of the customers towards that product and the years of experience of the product itself plays a big factor in understanding the requirement of its customers.

Secondly it can also be brought about by the opinions or claims of other customers, which is sometimes can also help the company in understanding the need of their customers, but this can only be applicable to products or services that were introduced positively at first, because there are some new or old products that are not well recognized and these products on the other hand are obviously hard to analyzed its customer needs.

But there are some more aggressive ways on how to deal with customer requirements and this is through direct selling, these type of business has the greater advantage against the others most of the time. The reason is that they directly work with the customers and the business units are the ones asking what they need and from there, the direct seller provides what best fit to their needs. Lastly is that company relies on advertising, this happens when the company introduce new product to the market or sometimes before they introduce to the market by just letting them aware of the product that will be soon launched.

From the result of public acceptance based from the popularity ratings of the advertisement, the company would then based it and later used it as a basis for customer requirement. But the latter is sometimes dangerous and drastic because sometimes the company maybe mislead on the popularity of the advertisement which sometimes does not reflect on the actual sales of the product. Other theory that needs to be well followed in order to accomplish better requirement gathering is that company must understand that there are three important factors that need to be considered in establishing requirement of customers and these are in the form of questions:

• Who buys the product?

• What they actually buy?

• And most importantly, how they buy?

And these three questions can also directly address the important concern of customer satisfaction. Like in terms of who buys it, this pertains to the type of customer that would possibly and those who will definitely buy the product. For customers that will definitely buy the product, there should be a separate strategy that will be applied to them like may be giving them some small perks like through discounts maybe enough since these customers are considered the loyal ones. While for those customers that are potential and have the probability of buying the product, strategy may be more aggressive like giving them discounts or even focusing on designs or even giving additional perks for buyers may also be used to strategize new and potential customers. Secondly, focusing on what the customers actually buy is one question that companies must look into in establishing requirements.

In this question, the main focus is on closely understanding what the customers really like; these can be brought about by latest trends or specific needs for specific type of customers. For most company’s the latter seems to be easily been addressed by companies as they can easily study such requirements, but what is hard for companies to anticipate are the trends that may come and for companies they only compete by who among them can be the first one to introduce that trend to the market. But sometimes these does not give any assurance on them, what makes it more lasting impact is on how the company the company provide not only just the trend but also quality and in terms of price in order for customers to really appreciate the product itself.

Lastly in terms of how they buy, this pertains to how accessible and availability of the product t the customers. This is also been a big factor in establishing requirements because there are times that products have the best quality and the price is within the budget, but due to availability of stocks and availability to the customers, it became a driving force for customer not to buy the product and instead they would settle to change their preference and that becomes the problem of some companies. This means that consistencies is always a challenge as well, companies should always remember that if they offer such quality and sure to be a hit product for their customers, it does not stop there and the company itself should be prepared and be able to be up for the challenge to produce as many products as it can in order to address the demand for the product or services that they offer. That is why it is also important to address customer requirements because it also helps in understanding its target customer.2

For IKEA, a company that in everyday they operate, understanding and establishing customer requirement is essential.

2 Establishing Customer needs, n.d.

The reason mainly is that they provide products that should always look into the needs of their different types of customers. But, even though the needs may come differently and uniquely, depending either on designs, price or even space or combination of both or all of the products. As the main vision of the company mainly focuses on how to provide better life for its customers and this is through their two main company objective and that is to provide as much as possible wide variety of products to choose from and at the same time prices that are low that surely they can afford. As based from its main vision, it obviously follows that the company’s main concept is to really provide low prices home furnishing products.

This concept started when INGVAR KAMPRAD an entrepreneur from Smaland province in southern part of Sweden had an innovative idea in mind. As an entrepreneur he found out that in order to be successful in the business, he saw that most people live simple and they live their life frugally and they really work hard. This only shows that people would only buy things that are important on them and majority of the people would consider buying not so luxurious and high price things. That is why from that observation, he made an impression that in order to satisfy these highly hard working customers to buy the products and be able to compete well in the market. That is why from that observation, he made an impression that in order to satisfy these highly hard working customers to buy the products and be able to compete well in the market.

Then, what he did was an approach to find ways on how to provide not only quality products but also providing them with a lot of choices and most specially the price is low, which customers will surely find way to fit on their budget and that is until now the trademark of the company that is why they became popular anywhere they operate in the world. That is why with this technique or strategy that was applied by the company since the time when the company actually started. These were also the effective strategy that the company applied and has been a very effective way. This is true in fact even up to now that companies must understand that the need of the customer should still be satisfied and in order to do this there should be well consideration not only on the basic functionality of the product but also taking into consideration on the price and quality of the product.3

This only shows that the company from the beginning knows what it takes to be in the business and how they can actually address the concerns and requirements of their customers. And from this concept by its founder and entire workforce that are working for the company, it was easy for the company to just innovate and be flexible on the different needs of their customers since the foundation were well established. And since the company were jointly managed by group of owners around the world, they also kept in mind that the way they operates like specifically how they establish requirements must be in line with the global concept and practice of the company which is still starts with products that are not only quality but also sold in a very low price. That is why for any additional requirements like in terms of additional functionality designs and even in terms of price are mainly comes from the actual conversation and interaction by the customers themselves through the store co-workers. Even the actual store arrangement and presentation becomes a focal point in establishing customer requirements.

How are customer requirements translated into products/services?

It is true that establishing customer requirement does not stop there and what the company needs to do is to translate these requirements into actual product or services. For most companies these has also become a major problem, maybe not just because of the problem that some companies may established the wrong requirements or it is just company’s translate the required products or services wrongfully.

3 The IKEA Concept, 2007.

Most specially customers these days are very intelligent and they easily shift their preference and what makes it difficult these days is that there are a lot of products to choose from and one wrong move can give a lot of impact for the business and that is something that company’s must look into closely. There are actually many theories that can be applied in carefully and effectively translating customer requirements into products or services, But among the many theories, there is one important theory that focuses on how products are being planned before it actually delivers to the customers and this is what is being called as product planning framework. In this model or framework it shows that for companies to be successful in converting requirements into products or services. In this approach it also tackles the over-all company strategy that should also be included in the actual development of the product and not just the requirement alone. Because there are instances that the company over-prioritize on the certain aspect in the product planning where in fact it does not only need to separately prioritize but also have to manage how the different factors relate to one another. Needs, 2004)

In it shows that it is not only the detailed requirement alone is important, instead it should be well collaborated with the other factors or aspects of product planning. And it all starts with understanding first the company strategy; these should be the starting point and then it follows by three collaborative processes which include competitive business environment, which involves a careful understanding on how the company understand the way it should perform in order to be competitive and not just develop a product or service that only performs the basic requirement of the customers instead it should be developed to address competitiveness, secondly in the group of process after understanding the main corporate strategy is the market dynamics, at this point company’s must also look into the different trends and market situations which may also become a major factor in the business.

Companies must look into the way market is moving and sensitivity towards these aspect gives a lot of leverage for the company even by the time of planning in the development of the product. Then, the third and last part of the three collaborative processes is development capabilities; this includes the identification of the company’s capabilities of developing the actual product. This situation also a big impact for some companies because there are companies that even though they already identified and studied the market dynamics and the competitive business environment, eventually they found out that they have no capability or capacity to do it, so what they need to do is to just focus on planning to develop some products that are within their capacity to developed. These three processes are also considered as market opportunity filter. Architecture and long –term roadmap come next, which focuses mainly on how the product can be developed product policy and goals which is very important in terms of establishing long-term success of the product.

There are also other factors that it really focuses like corporate or division value added, core technology applied and other aspect that mainly focuses on the long-term success of the product. Detailed user requirements or product definition comes next, where at this point, these only includes the detailed understanding of users needs and all the information that it supports which includes the things that were presented above, like information regarding what customers wants, who actually buy the product and how they buy it. This information will then be used for establishing a business case which will mainly use in providing a study that will be use to support the feasibility of the product development and lastly is the process of execution, which involves the actual generation of the product or services.

But this may be applicable and useful to some products or services that are well established in the industry or companies that already has its name and just continuous to explore for new opportunities. The reason is that there are many failures that may be encountered by companies who are introducing new product in the market. One of the most common reason is that since they don’t have establish customer awareness and their data are sometimes not reliable and just follows current market trends.

It shows that there are also some important factors that need to be carefully addressed by new companies or companies introducing new product lines in the market. These also show that there are many cases that can contribute the ineffectiveness of translating customer requirements into product or service development.4

For IKEA, in terms of translating customer requirements into products and services, it has always been the main focus of the company and this is perform by the company through what the company called as IKEA’s Main Range. As most companies would also envy how the company operates and how they still provide low price products even though there are a lot of economic problems that are happening. But, the main reason why the company continues to survived and still keep up with quality and price is though its what they called as IKEA Range.

IKEA range refers to the formula on how the business operates and it all starts with its main concept of producing low price products plus their effective production method that continuously been the priority which gives big boost for the company since it is the major cost centered activities of the company and lastly but definitely not the least is with the innovative ideas and minds of their people that up to now becomes a major concern driving force in the success of the company as well. But basically there are four basic factors how the IKEA range actually performs and translates customer requirements and these includes: profile, design, functionality and the strategy they do for lowering the price of its product. In terms of profile, the company continues to target the fundamental activities in every home such as eating, sleeping, storing items and socializing but the company always makes sure that their products based on these basic activities they always have to consider the limited budget and space of most of its customers. In other words, the company always strives to provide a product that first satisfies

4 Driving Product Development with Customer Needs, 2004

the basic needs of their customers based on the standard activities in everyone’s homes and then consider the tight budget and limited space of homes of the customers.

In terms of design, just like in the profile, designers of the company are always task to provide innovative ideas that comprises of new and innovative designs and at the same time address low cost production cost, which may result to low price for their customers. Even though this is a big challenge for designers, still they manage to produce products that are not only stylish but also at low cost to produced and sell. These are two of the main secret of the company, they always find better ways on how they can lower the production cost through better designs, because for them is they will still produce better design with low production cost, they can leverage against the competition and that gives both benefit for the company and most specially for their customers.

In terms of functionality, the companies always look into beyond the basic functionality of its products. It constantly seeks value to its products, and with that it also implements strict quality assurance, in order for their customers not to say that their products are not just low price and style but also durable. This only shows that the functionality of products through quality is an essential part of IKEA’s business and this should not compromise cost.

In terms of low price products, the company has implemented this strategy by providing a wide range of choices. With the many choices that they offered, there will definitely be a choice of the customers that is fit for their budget and not just a fit in the space they have in their homes. The company does not compete on a per item basis, they compete in terms of prices through selections and wide range of designs and functionality of products that they offered and this is an added advantage of the company.

And as how the company perform its actual way of translating customer requirements into actual product development or services and as based on the concept that were presented earlier, it clearly stated that there are clear evidence that IKEA stick with its corporate strategy to offer products that are not only affordable but also has quality. This known requirements where further enhanced by innovative design by their designers that still carefully addresses the needs of the customers.

What operational systems and processes are in place to satisfy the Product/service requirements of customers?

It is true that there are different processes or systems that need to be implemented by company in order to institutionalize the way on how the company satisfies product or services requirements. Because there are times where other company apply different ways on how they manage requirements and these results to inconsistencies in the information that the company generates. And in order for these very essential requirements not going to waste, company’s should create a well defined process on how not only keep it but more importantly satisfy these requirements through implementation of the right processes and systems. For IKEA, the main idea for the company is to really see on how the store nationwide performs the business and these are again based from the company’s IKEA range.

In the presented process by the company IKEA above, it uniquely showed that the company again mainly focuses on satisfying customer requirements through finding any possible ways on how they can offer only the best and well designed products which is mainly the start and end of its processes. The first one as being the standard designs of the products that were studied by the company and the last one as the added inspirational designs, which mainly focuses however on the innovative ideas that comes only from their senior designers, but what is important here is that these designers stills looks into the main global strategy of the company. While the one that separates the first and last activities in the process is with regards to finding the best production method that has also become the secret key for success of the company.

This is because through these well designed production method, it gives the company enough leverage in applying cost for its products. And all these three main processes is equivalent to IKEAS Unique process in satisfying customer needs. In fact there is even some strategy that the company implemented in the design of its stores globally that also added to the company’s success globally. To add on their very unique and very effective concept in operating the business, the company stores around the world operates in a way that inspire all its customer on the real life look of the rooms and homes, this is in order for them to really see the real look of the products once it’s installed. With big space stores that the company offers from its customers, and actually encourage taking their time and letting them feel comfortable within the store.

Letting the customers actually sit, lie down, open and close drawers in their products, it adds more value for their customers since they can actually feel, see and hold on the products. Added to that is the assigned workers that is always ready to assist the guest if they need additional information, most specially some technical details. With the 9,500 different designs and products to choose from, it definitely provides an excellent travel experience and that gives customers a big possibility that there is always a product that’s right for them, either in terms of budget or in terms of space.5

In fact there are also proofs that a show that these process has become an effective way on how the company continuously grows not only in terms of sales or revenues but also in terms of stores and visitors that visited every store it operates in the world. First, in terms of sales there was a consistent increase in sales from the time the company started up to 2007, which means that no matter what and how big economic issues that comes in the global economy, IKEA still manage to perform well and with its unique process in satisfying the needs of the customer, sales are always increasing.

In terms of number of visitors that visited the stores worldwide, it also shows that number also increases which means that customer awareness is improving and this also improves the company’s global sales. And with its 200 stores around the world and more than 450 million visitors annually. This only shows that the company’s stores and its products are well recognized.

And the company where very aggressive in expanding its business globally, in order to serve its clients better.

With these figures that were presented, it only proves that the company with its unique process of satisfying the needs of their customers, it shows that they continually become very effective and most of their customers are really satisfied about the process and how they are being given the right attention by the company as a whole. Particularly in terms of the increasing number of visitors and the continuous huge increase in sales of the company.

How are capacity planning, process layout, product/service scheduling, Inventory, and projects, managed in the organization?

In order for any company performs not only based from the company’s current needs but also the future and included to those are some unexpected requirements, capacity planning is definitely important. Actually in theory there are three main steps for capacity planning, and these are: (1) company needs to determine service level requirements, (2) the company must analyze current capacity, and lastly, (3) company must plan for the future. For most cases that problem usually is in the second and third. It is because of the reason that most companies usually understand what are the things that they need to do, but the problem is that either they know that they are not capable of performing their assignments but keeps on getting some just for the greediness of getting some just to increase revenues or sometimes there are companies that really doesn’t know what their capacity are, and what happen is that when they actually perform the actual projects then they found out that they are short in resources. Also, there are issues that comes in the third step, where most companies both understand their projects and effectively knows their capacity but still failed due to lack of anticipations or not being ready to instant demand in the market and this eventually resulted to failure as well.6

In terms of process layout, process scheduling, inventory and managing project in the organization, there are only two ways that can mainly classified a company and these are either centralized or decentralized process. Centralized process arises when processes from the different branch or stores of one global company follows the same global process and actually performs the process consistently. While the decentralize process involves an autonomy for each branch to perform their own process, but still follows the top main process. This can also be

6 How to do Capacity Planning, 2007.

known today as matrix type of organization. For IKEA it actually performs centralize and decentralize way of operation or the company called it as for-profit and non-profit way of operation. Even though it was originated in Sweden, the company operated in a very unique approach, since it’s main operation is subdivided into two parts: (1)non-profit, and (2) for profit operations, where the latter or the main INGKA Foundation is located in Leiden in the Netherlands. Or in other way of representing it, the company structure may be look into as two different parts and these are: mainly operations and the other one is franchising. Just to segregate the two, majority of the operations which covers management of the majority of its stores worldwide, design and production factories of furniture as well as the purchasing of supplies are done and centrally managed by the INGKA Holdings, which is among the 36 countries it operates it manages the 235 stores worldwide while around 30 remaining stores are managed by the different franchises outside the INGKA Holdings. Also, the INGKA Holdings is not also owned by a single owner or company instead it is owned by Stitching INGKA Foundation which was established by its owner, Kamprad in 1982 and that started the strategy of the company to have applied the company for non-profit organization. This non-profit organization is managed by five members where INGKVAR as Chairman and included as members is his wide and lawyers. With its tax avoidance strategy in 2004, the company profit is taxed and at the same time for the owners, Kamprad and his family cannot get profits directly instead they do collect a portion of its sales from the franchising agreement between them and their partners.

But even with these very unique and sometimes classified as complex way of operation by the company, the over-all company that still manages the overall process is again handled by the INGKA Holdings, like in terms of capacity planning, process improvements and others are still in the authority and supervision of the holdings. This only means that even though the company is owned by several owners in the different countries, still in terms of the over-all operations and processes, the mother company which is the INGKA Holdings is the one manages it.

Explain why and how monitoring and evaluation of operations are carried out

As based from the discussion that were presented above regarding how the company globally operates, it only shows that obviously the way the company monitors are also manage by the main company and that is the INGKA Holdings, but for franchisee’s they primarily have the authority to manage their own branch but they need to follow the global IKEA process which is mandated by the Holdings. Even in monitoring the way on how the company’s foundation is also doing is also managed centrally. But, even though this was a strategy that were applied by the company and even though it creates complexity to some since every stores may be under the INGKA Holdings or being managed as franchised, the company as a whole still has provided a well deserve recognition that it deserves to be commended as a company that provides importance to the environment and world change. This is through INGKA’s Foundations, with its focus on innovative interior design and architecture has been recognized as the world’s largest charitable institution with a net worth of $33 billion, beating the well known and richest couple in the world Bill and Melinda Gates.

But, even though the foundation net worth is huge, it does not reflect the real amount it actually gives or donates unlike its counterpart. This was proven as report in 2005 shows that the company not only focuses in its own home country Sweden, specifically the Lund Institute of Technology with an amount donated of $1.7 million. This is far low against the donations that Gates Family has given which reaches a huge amount of $1.5 billion in the same year. Even though the company has been in the forefront of many projects for a cause like the following: (1) A Euro for every toy sold in 2006 for UNICEF which accumulates to 1.75 million Euros. (2) In the 2005 Tsunami, KEA Australia agreed to match dollar for dollar co-workers donations and donated all sales of the IKEA Blue Bag to the cause. (3) Pakistan Earthquake in 2006, IKEA gave 120,000 blankets. (4) Lastly, it provided furniture for more than 100,000 bridge schools for both India and Liberia.7

Summary

In this paper, it shows that IKEA even though the way it operates seem to be complex and difficult to understand, still the company performs its operation effectively. This is mainly brought about by their unique way of establishing and at the same time satisfying customer needs. With the company’s main focus on developing products that are not only with quality and most of all products that are low in price and added to that the wide variety of designs to choose from has made the company a best choice for customers worldwide. This has also been an effective drive for the company success, because internally, they always focus on how they can think of developing effective production method and highly innovative designs and that gives them better leverage against their competitors worldwide that even franchisers finds complex doing business, still they were enticed with the continuous increase in growth sales of the firm.

Recommendations

As based from the study there are only two main recommendations that should be focus by the company in order to strengthen the success of the company. First, it is more on establishing a more concrete and straightforward global operations and the second is for the company to increase its support for the charity since that was the main purpose of being a foundation since there was a tremendous criticism that even though that the INGKA Foundation has a huge net worth.

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