How Does IKEA’s Inventory Management Supply Chain Strategy Really Work?

Each IKEA store is huge and holds more than 9,500 products! How in the world does IKEA offer so much at such a low price while always being able to keep items in stock?

IKEA’s Best-Kept Secrets

What are IKEA’s best-kept secrets behind its smooth back-end operations and efficient supply chain processes?

The world’s largest home furnishing retailer has 298 stores in 37 countries. It ranks Number 41 on Forbes’ esteemed World’s Most Valuable Brands list and took in 35.5 billion in sales in 2013. IKEA has certainly come a long way in its 60 years of business since its 1943 founding in Sweden.

This organization impresses not just its consumers with affordable, high-quality furniture, but also competitors and companies around the world – especially with its unique supply chain and inventory management techniques.

Each IKEA store is huge and holds more than 9,500 products! How in the world does IKEA offer so much at such a low price while always being able to keep items in stock?

IKEA’s Vision

To start off, IKEA has a clear vision – to provide well-designed, functional home furnishings at prices so low that as many people as possible will be able to afford them. Its various functions (supply chain operations and inventory management included) work together to support its distinctive value proposition.

IKEA's Sustainable Relationships With Suppliers

IKEA is distinctive by committing to a catalog of products that will be stocked for a year at a guaranteed price.

Cost Savings In Furniture Design

IKEA designs unique products that incur low manufacturing costs while meeting strict requirements for function, efficient distribution, quality, and impact on the environment.

According to a case study produced by The Times of London, more than 50% of the products are made from sustainable or recycled products. IKEA seeks to use as few materials as possible to make the furniture, without compromising on quality or durability. By using fewer materials, the company cuts down on transportation costs because it uses less fuel and manpower to receive materials and ship products.

IKEA's Sustainable Relationships With Suppliers

A key part of IKEA’s success is credited to its communications and relationship management with materials suppliers and manufacturers to get good prices on what it procures.

IKEA is a very high-volume retailer – it buys products from more than 1,800 suppliers in 50 countries, and uses 42 trading service offices around the world to manage supplier relationships. They negotiate prices with suppliers, check the quality of materials, and keep an eye on social and working conditions.

Although Ikea fosters competition among suppliers to ensure they attain the best prices and materials, it believes in making long-term business relationships with them by signing long-term contracts, thus lowering the prices of products further.

For example, IKEA has a code of conduct called the IKEA Way of Purchasing Home Furnishing Products (IWAY), containing minimum rules and guidelines that help manufacturers reduce the impact of their activities on the environment. The requirements within IWAY raise standards by developing sustainable business activities and leaving positive impacts on the business environment in which the suppliers operate.

This also underlines IKEA’s commitment to the ‘low price but not at any price vision. Although IKEA wants its customers to enjoy low prices, this should not happen at the expense of its business principles.

Do-It-Yourself Assembly Lowers Packaging Costs

Most IKEA furniture is designed and sold in pieces for the customer to assemble. The pieces are placed into convenient and efficient, flat packages for low-cost transport because they take up less room in trucks, maximizing the number of products that can be shipped.

The unique packaging also takes up less space in warehouse bins and reserve racks, allowing for more room to stock additional items for order fulfillment. What the company saves in fuel and stocking costs is passed on to customers.

Combining Retail And Warehouse Processes

Every IKEA store has a warehouse on the premises. On the main showroom floor, customers can browse for items. They then obtain the products themselves from the floor pallet location with racking as high as the typical person could reach, where furniture can be purchased and taken home. Additional products are 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 from the staff. Since IKEA wants as much self-service as possible, it works to minimize the number of items in this bulk storage area.

Cost-Per-Touch Inventory Tactic

Having customers select the furniture and retrieve the packages themselves is an inventory management tactic called ‘cost-per-touch’. As a rule of thumb, companies find that the more hands touch the product, the more costs are associated with it.

For example, imagine when someone selects a piece of furniture to buy. The item is then ordered, shipped from the manufacturer, moved from the delivery truck into storage in the warehouse, moved from the warehouse to the customer’s vehicle, or delivered by the furniture retailer to the customer’s home. Every time the product is shipped moved and loaded, it costs money. The fewer times someone moves or touches the item, the fewer costs are associated with it. IKEA saves costs with this guiding principle to minimize touches because it doesn’t have to pay the customer to retrieve the furniture and take it home.

Search Google for

In-Store Logistics

IKEA also relies on something rare and unique concerning its logistical management of reordering products – it employs in-store logistics personnel to handle inventory management at its stores. According to Steve Banker, ARC Advisory Group and Logistics Viewpoints (professionals and consultants on logistical and supply chain operations), there is an in-store logistics manager responsible for the ordering process and a store goods manager responsible for material handling logistics at all IKEA stores.

“There is an in-store logistics manager responsible for the ordering process and a store goods manager responsible for material handling logistics at all IKEA stores”Steve Banker, ARC Advisory Group & Logistics Viewpoints

The duties of the logistics personnel are to monitor and record deliveries, carefully check delivery notices, sort and separate the goods, and get them off to the correct sales area or designated overstock locations. Overall, they ensure an efficient flow of goods within IKEA stores, which is essential to maintaining high sales and enhancing customer loyalty.

Maximum/Minimum Settings As Proprietary System

The in-store logistics managers use an inventory replenishment management process developed by IKEA called ‘minimum/maximum settings’ to respond to store-level inventory reorder points and reorder products.

Minimum settings: The minimum amount of products available before reordering.
Maximum settings: The maximum amount of a particular product to order at one time.

Due to the fact that all IKEA inventory is only stocked at night after opening hours, the logic of its min/max settings is based on the number of products that will be sold from the reserve stack of bin in a single day or two-day period. The process meets customer demand while minimizing ordering too few or too many products.

This strategy also ensures that IKEA has the ready inventory to meet customers’ demands, lowering the cost of lost sales.

Using IKEA’s proprietary inventory system, logistics managers know what is sold through point-of-sale (POS) data and how much inventory comes into the store through direct shipping and from distribution centers through warehouse management system data. From these data, they can forecast sales for the next couple of days and order a suitable amount of products to meet that demand.

If the sales data doesn’t match the projected number of items that should have been sold that day, the logistics manager goes directly to the pallet and bin to manually count the product stock.

IKEA believes its process and system allow for the right goods to be in the store with greater certainty, and at a lower cost, than the traditional retail forecasting and replenishment process.

Usage of High-Flow & Low-Flow Warehouse Facilities

IKEA’s store operations are supported by high-flow facilities (focused on the 20% of SKUs that account for 80% of the volume) and low-flow warehouses that are more manual. In its high-flow warehouses, IKEA employs automatic storage and retrieval systems to drive down its costs-per-touch. Products stocked in a low-flow facility are not in high demand, and operations rely on manual processes since workers will not be shifting and moving inventory around too much.

These strategies have made IKEA the world’s most successful furniture retailer with low operating costs and high product demand. This allows the company to stay competitive in the industry as it continually seeks more advanced methods to streamline supply chain management.

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 at other organizations.

While it may be hard for other organizations to copy IKEA’s successful formula with stock management and order fulfillment, IKEA’s supply chain strategies push against boundaries. This will hopefully inspire you to develop your company’s inventory strategies suited for your company’s particular operations.

For instance, the TradeGecko inventory management system may be the perfect answer for small to medium retailers or wholesalers. TradeGecko inventory management software is integrated with other software solutions such as the Shopify ecommerce platform and Xero accounting system to make back-end operations even better for your business.

To end off, IKEA sets an optimistic trend where more companies will move away from traditional and outdated supply chain management strategies used for generations to seek creative and better-suited solutions to handle inventory.

Source: TradeGecko Inventory Management

Removing Barriers to Inventory Optimization

Supply chain executives worldwide face an ongoing imperative: improve customer service levels.

They also face an ongoing risk: don’t create excess or obsolete inventory at the same time. It’s a double-edged sword for supply chain performance.

Because of variability in demand and supply, increasing customer service levels can lead to higher levels of safety stock. Improving cash flow by indiscriminately reducing working capital dollars can result in slashing the wrong inventory, resulting in lower customer service levels.

While many leading supply chain teams have conducted inventory optimization (IO) initiatives to raise service levels while lowering inventory costs, others worry that they won’t be successful in the effort.

Two common barriers that can prevent an organization from reaping inventory optimization benefits are:

  • Technology Barrier: IO success can be undermined by reliance on limited tools (such as modules built into, or bolted onto, existing ERP systems) or inadequate ones (e.g. error-prone, hard-to-maintain spreadsheets). These tools are unable to effectively analyze and model the required amount of inventory.
  • Complexity Barrier: An internal perception that understanding and implementing proven mathematical tools and business processes in order to streamline the creation of optimal inventory policies and targets is too difficult for the team to take on.

Overcoming these barriers is easier than you think.

Companies that embrace multi-echelon inventory optimization (MEIO) achieve, on average, a 28% increase in inventory turns.


Related Resources

Download Continuous Design Outsmarts Disruption: A Blueprint for Supply Chain Resiliency

Continuous Design Outsmarts Disruption: A Blueprint for Supply Chain Resiliency
In this ebook, we discuss how continuous design can reduce risk, improve resilience, and turn supply chain challenges into a competitive advantage. Download Now!

Download Risk, Resiliency, and Supply Chain Modeling

Risk, Resiliency, and Supply Chain Modeling
This paper first examines why existing supply chain management practices do not naturally develop resilient supply chains and why some of the existing supply chain processes are not suitable for addressing such risks and required responses. Download Now!

Download Digital Supply Chain’s Evolving Role in the Enterprise Agenda

Digital Supply Chain’s Evolving Role in the Enterprise Agenda
The Hackett Group 2020 Key Issues Study findings confirm that the mantra of “doing more with less” is still prevalent, but the top concern of supply chain leadership is that their organizations are in fact overcommitted, AI analytics to enable a more agile supply chain. Download Now!

Download Global Supply Chains in a Post-Pandemic World

Global Supply Chains in a Post-Pandemic World
In this webinar summary, Willy Shih, Robert, and Jane Cizik Professor of Management Practice in Business Administration at Harvard Business School, shares insights into how global supply chains came to be the way they are and how their vulnerability has been revealed through numerous crises. Download Now!

More Resources from Coupa

Related Article: Inventory Optimization Why It Matters for Your Supply Chain

Inventory Optimization Why It Matters for Your Supply Chain

Article Topics

Logility News & Resources

Logility makes entrance into supply chain-focused AI, with acquisition of Garvis
Logility Acquires Generative AI Supply Chain Planning Firm Garvis
Supply chain software platforms help to level the playing field
Logility to acquire supply chain network optimization vendor Starboard Solutions
Logility partners with Körber to expand capabilities
How Does IKEA’s Inventory Management Supply Chain Strategy Really Work?
This is Not Your Father’s Inventory Optimization
More Logility

Latest in Supply Chain

US Container Traffic Boosted by Back-to-School Rush
Bank of America Introduces Digital Supply Chain Finance Platform
Moody’s: Carbon Offsets Open Supply Chains Up to Financial, Reputational Risks
Shippers Focus on Yield Management as Rates Continue to Rise
ASCM Releasees Top 10 Supply Chain Trends for 2024
Suppliers Could Take the Biggest Hit from Auto Union Strike
5 Tips to Help Your Supply Chain Navigate Panama Canal Restrictions
More Supply Chain
Optimize Service Levels

With more than 1,300 customers worldwide, Logility is a leading provider of collaborative supply chain optimization and advanced retail planning solutions that help small, medium, large, and Fortune 500 companies realize substantial bottom-line results in record time. Logility Voyager Solutions™ is a complete supply chain management and retail optimization solution that features advanced analytics and provides supply chain visibility; demand, inventory and replenishment planning; Sales and Operations Planning (S&OP); Integrated Business Planning (IBP); supply and inventory optimization; manufacturing planning and scheduling; retail merchandise planning and allocation.

View Logility company profile


Featured Downloads

Resource Management System (RMS): How to Effectively Leverage Your Assets
Resource Management System (RMS): How to Effectively Leverage Your Assets
This guide provides an in-depth analysis of the potential of various resources available in a warehouse and how they can be utilized...
Sustainable Supply Chain Insights From PITT OHIO
Sustainable Supply Chain Insights From PITT OHIO
A whitepaper on supply chain insights gleaned at the LEED-certified gold Cleveland transportation and sustainability summit.

20 Warehouse & Distribution Center Best Practices for Your Supply Chain
20 Warehouse & Distribution Center Best Practices for Your Supply Chain
In this guide, we picked the brains of our supply chain engineers to find ways to improve warehouse and distribution center efficiency...
SOLOCHAIN WMS plus a Guide to Warehouse Management Systems
SOLOCHAIN WMS plus a Guide to Warehouse Management Systems
In these 2 'papers' Solochain WMS, we detail Manufacturing Execution System capabilities and Generix's portfolio of SCM solutions to manage all distribution logistics,...
Supply Chain Outlook: What to Expect Near-Future
Supply Chain Outlook: What to Expect Near-Future
An investigation into how supply chains have changed, where they are heading, and how you can prepare.