At many companies, the vision statement is comprised of empty words. Not at IKEA, where the company has a clear vision and its various functions work together to support its distinctive value proposition.
IKEA, the world’s largest home furnishings retailer, has a vision of providing “well designed, functional home furnishings [at] prices so low that as many people as possible will be able to afford them.” But the company also differentiates itself as a retailer. It offers distinctive product designs, and while its stores have a typical warehouse format on the bottom level, the second level provides a comfortable environment where customers can browse home furnishing concepts. From an assortment perspective, IKEA is distinctive by committing to a catalog of products that will be stocked for a year at a guaranteed price.
At a high level, IKEA designs distinctive products that are also designed for low-cost manufacturing. Most furniture is designed for the customer to assemble, and they are also designed to fit into an efficient packaging cube for low-cost transport, which benefits both the customer and IKEA. Because the company is a very high volume retailer, it gets good prices on what it procures.
IKEA’s store operations are supported by high-flow facilities (focused on the 20 percent of SKUs that account for 80 percent of the volume) and low-flow warehouses that are more manual. In its high-flow warehouses, IKEA employs automatic storage and retrieval systems (AS/RS) to drive down its costs-per-touch.
IKEA stores are also warehouses. On the first floor, the products selected by customers are picked off a floor pallet location racking as high as the typical person could reach. Additional product is stored in reserve racks above these locations. Inventory is let down to the lower slots at night (forklifts and pallet jacks are not used during store hours for safety reasons). About one third of the lower level is comprised of a warehouse off limits to customers. This space contains items too bulky for customers to load without help. Since IKEA wants as much self service as possible, it works to minimize the number of items in this bulk storage area.
IKEA employs logistics personnel at its stores. There is an in-store logistics manager responsible for the ordering process and a store goods manager responsible for material handling logistics. Having logistics personnel work in stores is rare, but there are good arguments for this (see “Should Logistics Personnel Work in Retail Stores?”).
The in-store logistics manager uses a proprietary system developed by IKEA to set and respond to store-level inventory reorder points (min and max settings), which is also fairly unique. Most retailers forecast at the distribution center (DC) level and inventory replenishment logic (e.g., minimum order quantity before reordering, maximum amount of a particular product to reorder at any one time) also resides at the DC level.
Because IKEA doesn’t replenish during the day, the logic of its min/max is based on having a bin large enough to cover all the sales for one day. Because what is sold is known (POS data) and what comes into the store is also known (WMS data), very little cycle counting is done. However, IKEA’s system is able to catch anomalies. If the system expects a certain volume of a particular product to have sold during a two day period, and much less has sold, the system will direct in-store logistics to go to the location and conduct a manual stock check. Store-level inventory accuracy at other retailers is often surprisingly low (see “The First Moment of Truth”). IKEA believes its process and system allows for the right goods to be in the store with greater certainty, and at a lower cost, than the traditional retail forecasting/replenishment process.
IKEA is moving to having in-store logistics personnel work with RF terminals. These terminals will direct workers to bins and tell them how much inventory to let down. Unlike in a DC, where WMS logic is often focused on minimizing travel distances, the guiding principle here is to minimize touches.
At many companies, advances can be easily copied by competitors. But IKEA has a clear vision supported by complementary cross-functional logic. This not only differentiates IKEA from its peers, but also provides it with a competitive advantage that is difficult to duplicate.