IKEA - from Domestic to International - Assignment Example

The IKEA Case Study report Introduction This report is based on a case study of IKEA, an international furniture retailer. It goes to point out the challenges of international purchasing, the potential risks anticipated, the possible solutions of identified international purchasing challenges and their recommendations. IKEA an international furniture retailer was started in the 1930s by Ingvar Kamprad. The word IKEA is derived from a combination of initials from family names and Swedish family farm namely; Ingvar Kamprad, Emtayd and Agunnard. Ingvar Kamprad founded IKEA at the age of 17 where it started as a mail order company. He initially used the family kitchen as an office while selling fountain pens, binders, cigarette lighters that he had bought form local shopkeepers. His turning point came when he added furniture to his newsletter in 1948. In 1951, Kamprad opened a display store for clients to view the products before purchasing them. The display store was such a success that IKEA stopped accepting mail orders. He adopted the modern IKEA concept of using a catalogue to lure people to visit an exhibition so that they can see the interior for themselves, touch the furniture and make orders. In 1953, he introduced another IKEA feature that would cut costs of transport and storage. This was the self-assembled furniture concept that saw IKEA produce packages for clients to purchase and put together by themselves at home. This enabled Kamprad to reduce his prices thus gaining a large customer following of young post war householders who wanted well designed affordable furniture. Between 1053 and 1955, IKEA sales had doubled from SEC 3 million to SEC 6 million. From Domestic to International As the sales grew locally, the need to meet demand for furniture sources grew thus IKEA had to look for other sources of material supply from abroad. Kamprad sourced for contractors from Poland, an eastern bloc communist country at that time. This move provided supplies at low costs thus enabling him to further reduce his prices. Thus IKEA concept of supporting long-term relationships with suppliers grew. This created a mutual dependency between IKEA and its supplies thus ensuring quality output and reliability. In 1963, IKEA expansion program entered Oslo, in Norway. Two years later they self-financed a store in Stockholm with a suburban showroom which had ample parking. This made savings on home delivery and assembling costs. IKEA ventured into Sweden in 1973 and in 1974 went into its largest market, Germany. In every new store IKEA used the same concept of introducing a catalogue and advertising (offbeat) thus financing each entry with previous successes. IKEA grew developing solid concepts along the way. Large suburban stores with furniture in packages that clients could carry home and re-assemble became the norm of the day. Customer exposures to product range was made easy when a design and set-up were predetermined by the company, Some of the set-up designs included the introduction of living room interior designs, children playground, low cost restaurant and Swedish grocery shop. This led to the expansion of IKEA from a retail furniture company to one that had a range of furnishing products including textiles, kitchen utensil, mugs and carpets, plants flooring material and so forth. IKEA Strategy and Management The IKEA’s vision statement was the basis for its strategy in providing quality furniture at low prices worldwide. Kamprad’s personal lifestyle and his beliefs had a lot of influence on the strategy implementation taken up at IKEA. This led to the development of cultural norms and values that would propel IKEA into a distinct company with unique organisation culture and management style. One of these cultures is the open plan office landscape adapted by Kamprad. As the CEO he was open door policy that motivated his staff to be self-driven and high standard performers. The management style stressed on simplicity and attention to detail while eliminating bureaucracy and making sure that resources were properly managed and reduction of costs and wastage maintained. The managers were expected to spend time working in the stores at least once every year in order to regain contact with the frontline staff and the clients. Creative solutions were highly valued and planning and analysing situations encouraged using simplicity and common sense. In 1976, Kamprad put down a paper known as ‘Testament of a Furniture Dealer’, that spelt out the IKEA philosophy. This was to spread out to other units within the organisation through training of ‘IKEA Ambassadors’ who were then expected to mentor their subordinates using this philosophy and values as well as be good role models. Kamprad stepped down as CEO of IKEA in 1986 but remained its honorary chairman. His Personal Assistant and long term IKEA veteran, Andes Moberg took over as President and CEO. In 1999, Andes Moberg was succeeded by Andes Dhlvig who had also at one time worked as a Personal Assistant to Ingver Kamprad and was an IKEA veteran. During his tenor, Dhlvig designed a document that aimed to redefine IKEA’s philosophies, values and broad vision known as the ‘IKEA Way’, and shortened the ‘IWAY’. The document laid out the code of conduct and outlined its supplier expectation on environmental responsibilities as well as working conditions which specifically mentioned its stand on child labour. It derived its policies from international conventions and foundations such as the International Labour Organisation (ILO) Declaration on Right to Work, the UN Declaration of Human Rights and the RIO Declaration on Sustainable Development. International Purchasing and Global Sourcing International purchasing is described by Jiang and Tian, (2009, P6) as a commercial transaction that involves purchase between a buyer and a supplier located in different countries. Global sourcing on the other hand is described as a set of managerial activities that involve practical integration, coordination, processes, design and logistics in the supply of materials and items across international purchasing, engineering and operating locations. While international purchasing involves daily activities that support manufacturing and service departments, global sourcing is usually long-term involving evaluation and selection of foreign potential supplier. An organisation moves from domestic to international purchasing when the local supply is unable to meet the growing demand as was experienced by IKEA in the early 1960s. According to Trent and Mocczke, 2003, there are five stages to global sourcing which are namely Domestic sourcing only, Foreign purchase due to need, Foreign buying as a procurement requirement, Integration of global purchasing strategies across international purchase locations and global purchasing strategy with serviceable groups such as engineering, operations and marketing. Organisations experience these stages differently depending on how first their growth and expansion program is. The use of sophisticated global sourcing strategies is evident in the case of IKEA especially at the point where their expansion program moved from domestic to international. IKEA put up stores in Norway, Germany, Sweden and eventually to over seventy countries worldwide. Its policies and procedures evolved accordingly as the company grew. Jiang and Tian, (2009, p10) point out to the fact that the search for lower costs is the major driving strategy for global sourcing followed by product differentiation. Other factors that drive global sourcing include quality output, availability of material, processes and technology. The use of these strategies by IKEA is what gave it a competitive edge over other furniture retailers. Their products were affordable, of good quality and had a touch of uniqueness in that customers could easily re-assemble then in the comfort of their homes. Challenges of International Purchasing During its success years, we see IKEA facing a lot of challenges from its competitors, these being mainly a cartel of furniture manufactures that control the industry and were determined to keep the prices high. The cartel would collude to stop IKEA from taking orders from exhibitions in trade fairs and would sometimes put pressure on manufactures not to sell to IKEA. Another major challenge as pointed out by Jiang and Tian (2009, p20) is that of different standards and regulations that exists in different countries. Governments have a major influence on global sourcing for organisation abroad in that they set tariffs and quotas for cross border processes as well as for other international trade bills. IKEA faced this challenge in the 1980s when the Danish authorities passed a regulation defining the limits for formaldehyde, a chemical compound that was used as binding glued in plywood and particle board materials. Formaldehyde would release a poisonous gas that was harmful to people and the environment. Goodale, points out that production issues is a major challenge in international purchasing especially in manufacturing. Product specifications and tolerance issues come up in the manufacturing process and where a supplier is negligent it may affect the company brand adversely. IKEA experienced this problem when it was reported that some supplier, Rugmug, was using child labour in making the rugs it supplied to IKEA. Use of child labour is against UN convention on Rights of a child and was published in December 1989. Cultural Differences sometimes bring about miscommunication due to language differences, terminologies and differences in dialects. In the case of IKEA, the culture of using children to make creative hand- made rugs and carpets is a norm and is seen as a way of providing an extra source of income for the family. This is especially so in India and Pakistan where child labour issues were raised and publized by the media. Other challenges in the global sourcing industry as pointed out by Goodale, include Currency Fluctuations occur when the value of different currencies fluctuate as a result of supply and demand for the currency. This affects the cost of goods in a certain country thus affecting global sourcing budget. Transport costs may appreciate or depreciate depending on customs activities, shipping schedules as well as weather delays. Political as well as economic conditions of the nation should be considered before venturing into a region. The philosophy of the government, its stability and security should be considered and analysed. Other hidden costs such as the need for translators, communication problems, distance involved in performing site visits, ethics and differences in time zones and business practices Risks of global sourcing pointed out by Jiang and Tian, (2009 p 13), include security risks which put into consideration the political turmoil or uncertainty within a country. The risk of incurring costs brought about by cultural and time zone differences as well as hidden costs which may include monitoring global sourcing manufacturers. The risk of compromising the quality of the products which must be put in check in order to maintain the organisation brand and reduce penalties. Another risk is the intellectual property risk which includes the product knowledge, engineering as well as its design material which if exposed to competitors may affect the performance of the organisation. Solutions to Challenges As pointed out by Jiang and Tiang, (2009 p 21) some of the solutions that can be used in the case where supplier fails to deliver on specifications laid out include imposing stringent requirements on the supplier to ensure adherence to company material specifications. Having a policy that spells the organisation standards of acceptance as well as strictly monitoring supplier activity to ensure compliance. Field officers and third parties in the supplier country may also be appointed to monitor the practices and processing of the materials. Goodale proposes the use of forward or future markets, negotiating currency fluctuations and consulting with financial specialists as solution to managing the risks that come with currency fluctuations. Recommendations In order to an organisation to succeed in global sourcing, it needs to have well-defined global sourcing initiatives and processes. These processes have to be overseen by the executive or a steering committee and reviewed and updated continuously, Jiang and Tian, 2009 p 22. This was evident in the case of IKEA where by Kamprad, Moberg and Dhlvig always came up with policies and procedures and reviewed and updated them. Decision making must be well coordinated made at a central point in order to support and integrate coordination in order to respond to global competition effectively. There is need to have site offices in order to control and decentralize operational activities thus lower hidden costs and improve inventory management due to constant monitoring supplier activities while at the same time improving performance of the suppliers. This was evident in the IKEA case when field officers were appointed to monitor the performance of the suppliers in India and Pakistan. The use of qualified personnel cannot be over emphasised as well as use of sound budgetary resource allocation for travel, data management, sourcing for information and so forth. Making use of contractors and sourcing services gives the organisation better access to data and better internal systems support. The organisation gets time to concentrate on other operational needs. Encouraging information sharing will also ensure that access to information is readily obtained. For an organisation to succeed globally, information is key. This is seen in the case of IKEA where they made use of organisations such as UNICEF to obtain information on child labour issues. As Goodale points out, international suppliers should be well researched on and their work ethics and standards determined. Supplier selection methods used should be sound as they play a vital role in the success of global sourcing. As was with the case with IKEA, before venturing into a new market, they would produce a catalogue. The catalogue needed some research work done before producing it hence it was a source of information on the new region before the actual set up of the stores. When cooperation and interaction with suppliers is openly done it increases an organisation’s ability to responds with changing requirements of end customers thus enabling the organisation to grow with ease. This is seen in the IKEA case in which a documentary was done on children being used to make rugs and carpets by suppliers in India and Pakistan. After investigations were done, research showed that this was not true, yet IKEA had immediately withdrawn from dealing with the suppliers named. The management was able to communicate with the suppliers and reinstate their contract thus resuming a conducive relationship with the suppliers. Conclusion Global sourcing involves a set of managerial activities that combines proactive integration, coordination, logistics and design of the supply function. It requires careful research as managing external resources is not easy. Firms that strategically manage their purchasing and supply management well have higher levels of cooperation with their suppliers, Jiang and Tian, (2009 p 22). Global sourcing faces varied challenges and risks which range from political security, currency fluctuations, production costs, cultural differences, transport costs, hidden costs related of distance in site visits among others. When cooperation and interaction with suppliers is openly done it increases an organisation’s ability to responds the changing requirements of end customers thus enabling the organisation to grow with ease. As Jiang and Tian, (2009 p 22) state, Global sourcing is sensitive and requires use of sophisticated strategies that combine strategies from other functional groups such as engineering, operations and marketing. References Goodale B, University of Meriland, International Purchasing viewed on 19th November 2012 from: www.polaris.umuc.edu/~bgoodale/admn626/0209/Lesson10.htm Jiang C and Tian Y, 2009, Problems and Challenges of Global Sourcing, A study of Chinese Manufacturing Enterprises viewed on 19th November 2012 from: http: //www. hj.diva-portal.org/smash/get/diva2:318924/FULLTEXT01 Trent, R. J., & Monczka, R. M. (2003, April). Understanding integrated global sourcing. International Journal of Physical Distribution & Logistics Management, pp. 607-629. Ulf, Johansson. (2007). Read More