International operation management
IKEA was founded by Ingvar Kamprad in the year 1943. It started as a small town Swedish furniture company that was founded on the principles low prices and good quality. This simple idea was able to transform the organization along with strategic management and excellent decision making. It now has over 250 stores and a presence in 30 countries. IKEA has become an international giant with whom local furniture companies have to struggle against. The fundamentals of the organization did not change drastically with expansion however the organization did adapt to the culture and practices in the host countries. The strategy was simple, give the people lower price compared to the peers, allow them to check the quality, do no compromise on the quality, save on costs from every possible angle and make them feel happy about the purchases they made (10 Keys to IKEA’s Low Prices, 2009).
This made their brand strong and helped in vertical and horizontal integration and expansion. IKEA maintained strong ties to its home country. Its colors are a representation of the Swedish flag and its name is the initials of its founders name along with the initials of the town he was born in. The organization has used policies that have baffled researchers and lead to various analyst studying its reasons for success.
APPLICATION OF THEORIES AND STRATEGIES
When IKEA was first created, its owner had the vision of making it an international giant. He had started international meetings and proceeded for a quick expansion strategy of the organization. No other furniture company has had such an exponential growth in only a few years. First, it expanded from a small town to chains all over Sweden. This was not an easy task. The organization had no means of managing so many stores however through the excellent entrepreneurship of its founder, his strategy and global vision, the organization grew strong. The stores’ main concern would be to find ways in which they could decrease costs. They started with lowering electricity costs during day time by opening windows; they used energy saving lights and did not have a large profit margin in the start. They then expanded to Germany, France and other European nations. Once they expanded to other countries, they maintained the same policies and store strategies in every store. This was done through impeccable management practices, which further helped the organization open stores in other continents. IKEA’s business model became famous and the store called for publicity. Their process analysis and operational strategies are unique. All of their decisions have been successful and their management of inventory, staff and stores is one of the best in the world. IKEA used to purchase raw materials from manufacturers but after it expanded internationally, it started its own production company. This resulted in saving costs as well as making new designs reach the stores faster with the least amount of compromise on quality (Ikea: How the Swedish retailer became a global cult brand, 2005).
They started economies of scale by starting a production company near its stores. These companies were generally located in areas where labor was cheap and it would be cheaper to ship the goods. They also used a very different style of marketing technique which concentrated on making people happy and reaching out on their base emotions.
Most of the stores which sold products at lower prices were considered to have cheap quality like Wal-Mart; therefore IKEA had to use a lot of advertising to put the simple message across that the quality was not compromised in the deal.
They did so by hosting customer parties, sending free samples, giving huge discounts and maintaining a happy customer care service. This increased their goodwill. They also took active participation in local events and helped the community, increasing their goodwill and sales. IKEA believed in constant innovation which is one of the reasons for its strong presence. It comes up with furniture pieces that are classic and as well as new. This adds to its brand presence along with rotation of furniture so that the customers are never viewing the same thing each time they visit. Another strategy that IKEA came out with was to keep huge inventories in its stores. This would mean more space and more wastage as well as high inventory management costs however compared to the costs of maintaining the stores, the predicted sales were higher. This made them even more famous because they were the only store which was capable of holding huge inventories allowing customers to buy any product by just entering the store. They managed to do so by holding flat line products. These products would them have to be assembled by the customer hence they were made in an easy to assemble manner. By holding flat ling products, the organization could store millions of product. These strategies enabled them to increase their market share (Ikea Components is Setting practical Business Targets, 2011).
COST ANALYSIS OF CURRENT OPERATIONS
IKEA is a privately held organization. It has seen an increase in costs over the last couple of years and is struggling to survive given the recent global recession and low sales turnover. Although its new and innovative strategies have increased sales and helped them earn profits, the margin of profits and the sales turnover has decreased along with increase in the cost of raw materials and operations. An increase in sales from
Euro 21534 million in 2008 to a Euro 21846 million in 2009 is considered slow however considering the marking conditions, it is above its peers. IKEA needs to find more ways to cut costs in order to generate healthier results. It has started doing so by creating solar powered lamps etc and using solar power and saving on electricity. Its costs increased from Euro 7078 million in 2008 to Euro 7198 million in 2009. Reducing its costs will also be another challenging for the organization (Process Analysis Model, n.d.)
OPERATION MANAGEMENT ISSUES IN PRODUCT DESIGN OPERATIONS
IKEA is strongly linked to its product and organization design. The process from which production starts until it reaches the stores and makes sales is very commendable for an international giant like IKEA. Although the operation process has been commendable there are still a few loopholes in the process. The main problem concerning IKEA is its inventory storage. Warehousing costs are on the high. The organization cannot afford to store thousands of products for each different store. This would not only mean high cost of storage but also wastages in products. Once the product gets old, it needs to be replaced by other more innovative products. This makes the lifecycle of the furniture short and increases the wastages that the organization will have to incur.
Currently IKEA ships the unwanted goods to other stores where it might have a high demand however this not only adds to the risks of no sale but also increases the cost of shipping. Since it produces flat line furniture, the place taken up is not a lot but the store has expanded into all departments of housing and office furniture hence has to bear a high cost of storage. A good option available to the organization is to display goods in the store and ship the goods later to the customers through mail. This would help in preventing storage costs, cost to keep inventory management and save on any kind of wastages. The organization can also concentrate on re using the unsold furniture into other products. Since the organization owns its own production company, it can re use the unsold pieces of furniture and make other innovative products. Currently it does not pay too much attention into re using and re cycling however if it wants to keep costs low it needs to consider this alternative (SWOT Analysis and Sustainable Business Planning, 2011).
Another Operation management issue with IKEA is that the organization is extremely large. It not only needs to concentrate on maintaining the current stores but also on expansion into other countries. IKEA’s expansion into India and other developing countries is on the hold. It has been extremely conservative in its approach to expansion and trying to be overly cautious. A good example is its indecision over opening stores in China. Once the company decided that China would be a good market, its management was scared to take the risk of entering a market where consumers were traditional and other furniture retails offered cheaper products.
However, the expansion went very well and China has been a very good turnover for the organization. The government too was pleased with IKEA. Hence IKEA’s management needs to take more risks and consider global expansion while maintaining the quality of products and service given and lowering costs.
By using process model analysis on the organization’s approach to its day to day operations, the following flow chart was developed. A process flow chart is required in order to recreate the design of the organization and understand the process in a simplified manner.
The flow chart contains these symbols and meaning:
The above flowchart shows that there is a lot of time that is wasted in the transportation of the goods as well as in inspection of the products. Waste recovery has not been given a lot of attention as required and time spent on planning needs to be increased in order to develop products that lead the furniture market. Analysis models using classifier analysis, location analysis, cost and duration analysis and resource analysis have shown that the organization has been using all possible forms of increasing business however there is more scope and a lot it can do to improve its current standards. It does not utilize its resources like space for storage, marketing for customers and training employees for better customer satisfaction and higher sales. It is very conservative in its approach to location and store openings and production company locations. It needs to get more aggressive in order to build a stronger more stable and more profitable brand.
The overall design of the organization is excellent with importance given on lowering costs; the only problems are inventory management and cautious expansion.
IKEA’s simple business strategy of low prices has created a lot of trouble for the organization. By lowering prices, the quality of products offered lowered and although the organization has been thriving to maintain its quality it has sometimes been unable to meet international standards. The products are also a little below quality but their quest for lowering prices has also affected their quality of service offered. Customer care does not get proper attention and the workers do not have the time or resources for proper international training (Levine, 2010).
The organization is barely scrapping through with the quality required which has adversely affected the business. The sales have gone down and prospective sales from elite consumers have seen a sharp decline. Another noticing factor on quality management is the advertising campaigns that the organization holds. They are unable to research well on the market because of being very cost conscious and have therefore missed out on their target customers in their marketing plan. Because IKEA is an international brand, it not only has to consider international policies but in order to do well in the host country, the organization also needs to pay special attention to the customs and traditions of the host country. It has been failing to do so correctly resulting in profits dwindling below expectations in certain regions and countries like the United States (Levine, 2010).
IKEA is a privately held organization, hence information on IKEA is difficult to attain. IKEA follows a very difficult return service with delays and sometimes refusal to take back the goods purchased by consumers. This reflects back on their credibility and goodwill. For any organization that works directly with customers, service needs to be impeccable especially for an international organization like IKEA however IKEA has not been very good with its quality management approach. The organization has however taken a lot of steps to maintain its Corporate Social Responsibility (CSR) and taken many steps to make a difference in the host country.
IKEA can take many steps to improve quality. The organization can adopt TQM (Total Quality Management) in its operations in order to ensure quality. It needs to spend money on its processes however the returns it could possibly earn are potentially higher than the costs. The organization needs to adopt a six sigma approach to management and strategically increase the quality of products and service provided. This should increase collectively in all the stores. It has been seen that most of the sales come from EU nations which makes up of about 50% of its sales with only 5% coming from North America. This is a potentially untapped market and IKEA needs to improve quality and assure the consumers of its products and quality so as to increase its potential in not only the markets it already has a presence in but also the markets in which it plans to open stores.
IKEA can use the theories for quality improvement in order to manage the quality. Management stresses on the following important principles and theories for quality improvement that IKEA can use to its advantage.
1. Develop customer focus in each step of the process and train employees to provide the best customer satisfaction. IKEA depends on its consumers and it needs to prove to the consumers that they can depend on IKEA as well.
Customer focus is very important internally as well as externally in the workings of the organization.
2. Leadership. The international size of the organization makes it difficult for them to manage and lead the process. Leadership is required for each different store and all the leaders need to have a similar set of rules, aims and objectives. This can be done by training each leader of the store together. With the values that needs to be used in the organization.
3. Process based quality management. One theory of quality management states that if each process in the organization deals with the optimum use of resources and time, the overall outlook of the organization will be much different.
4. Decision making approach of the organization needs to change. The management needs to realize that they can no longer be over cautious in their approach if they want to gather all the market share and potential sales if they continue being conservative.
They need information that is correct and they need to work slowly because of their mere size but they also need to take an aggressive role in this slow recession filled economy in order to survive and compete.
5. Continual improvement in quality. Quality management is not a onetime approach, the organization has to imbibe it into its day to day workings, control the quality and give feedback on the improvements done. The constant feedbacks would be supplied along with the advantages that the organization achieved due to the process of quality management.
IKEA can also use the Crosby theory of quality management which stresses on zero errors, prevention of errors, quality being an adherence to requirement and quality as being a price paid for non conformity. It sets goals for lower period of days so that the results would show, it requires total commitment from the upper management, encouragement to the employees, training given accordingly, creating incentives for high sales, determining the costs for quality etc.
IKEA being the world’s leading furniture retailer does not utilize its capacity or use capacity management to its advantage. It uses Data Core Virtual Storage Solutions globally considering its size. The new version uses auto provisioning which is allocation of products to its demand, auto failover which is mirroring and using high availability in its products and snapshot functions which means creating backup for all the information that is feed from all its stores worldwide. The software is the latest and expected to improve the management of inventory. Before the implantation of the software, IKEA struggled with its supply chain management. It sometimes had over supplied products and sometimes there was a lag in products which diminished demand. Since it is not an internet based supplier, it needs to keep a good amount of product as reserves. It needs to create a balance between oversupply and under supply so as to reduce wastages. IKEA has tried to take advantage of the technological improvements to sort out its supply chain management. The organization had earlier used JDA system in 2006 to solve its problems in supply chain management (IKEA Services, 2011).
For an organization like IKEA the primary concern in capacity management are as follows:
1. It needs a technology that can forecast with a great level of accuracy based on past results and future market environment the market demand and supply movements. This forecasting accuracy will help the organization improve its functions and save millions of dollars in shipping, storage and recycling.
2. It needs an approach that improves the sales forecasts and predicts consumer behavior. The predictions need to be translated into sales figures so that the organization can plan on expansion and innovation. All the departments in the organization are interrelated and using capacity management to its highest level could help create more potential from the other departments as well.
3. Another area where IKEA needs to focus on is the anticipation of problems before they occur. A large organization is prone to have problems in its supply chain management and capacity management however if it is in a position to predict the changes and challenges well ahead of time, it can be better prepared for the threat or even to a certain extent help prevent it. This is an integral part of management function through which
the organization can gain further market share and capital.
4. Transportation and logistics methods need to be simplified with each consignment being traceable so that the management can better predict the product whereabouts and avoid loss in transportation. With the rise in fuel costs the management needs to carefully lay out its supply chain management as well as logistics problems. With over 12000 products and 250 stores in 30 countries the organization needs better capacity management solutions (Supply Chain Management, 2006).
IKEA store layout is in the form of a maze. The consumers need to walk through different custom rooms build to give them an idea of the product they might like. The stores are therefore multi layered with additional space given for storage.
This has proven to be a good thing because this marketing strategy makes the customers view all the products and increases sales. It does however have the following disadvantages:
It wastes a lot of its store space
It confuses the customers who find it difficult to return to the product they liked before
It irritates consumers who are looking for a particular product and have to go through the entire store for it and it wastes a lot of time which consumers do not prefer.
However, this marketing strategy is important but it can be improved upon to avoid the above hindrance. There are many other store formats that the organization can select from instead of its free flow layout. An image of the store layouts is mentioned below.
Therefore IKEA can select a grid layout or a spine layout to avoid confusion. Having different layout on each store can also be helpful and avoid any wastage of space. Since the organization has 20000 products they need to be displayed in an arranged format with utmost importance given to layout so that they appear attractive for the customers to buy. The lighting also should be set up in a way that enhances the qualities of the products. The benefits of having a store layout are that it helps the customers organize their wants. It has been proven in countless studies that a good display of the products makes the customers more inclined to buy the products. This means that a layout can make or break a sale hence needs attention from the upper management (Waters, 2011).
IKEA has a great future ahead. It needs to take an aggressive role in this market because its sales are now stagnant and costs are on a rise. It has used the best method for inventory management along with supply chain management it can further expand its dominance over the other furniture retailers by becoming a public company instead of staying private and add additional funds to its disposal. The has been orthodox and conservative in its approach to management so far but it needs to change its policies into being more innovative not only in the products it makes but also in the strategies it follows. The company has great potential and a business plan that matches no other organization in the world. It size and its success by far have been commendable. It company also needs to change into being more web based which would reduce the cost of transportation and logistics.
It has a lot of potential and a goodwill that precedes every country it decides to open a store in, however marketing is also an important feature IKEA needs to look into. Its current marketing strategies were effective in an expanding economy where people where ready to spend however in this current recession the only way IKEA can make more sales is through advertising its fundamental business objective; low cost. It needs to cash into the recession and increase sales by lowering prices and making its products quality checked. IKEA also has a lot of improvement to do in the customer care area where it is lacking behind due to its policy to lower costs. The organization needs to train its employee so that they are more efficient and better equipped to make a sale.
To conclude I would like to add that IKEA has great potential not only in its existing countries but other countries where it does not have any stores. It needs to tap into the sales before some other organization does.
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