Managing a big large multinational conglomerate like IKEA comes with several challenges and issues, especially in the supply chain. Some of IKEA’s supply chain problems are related to quality control, product availability, and disruptions caused by global events such as the Suez Canal blockage.
Let’s see some of the case studies of IKEA’s supply chain issues and how this Swedish company has managed to resolve these challenges over the years.
What is a supply chain?
A supply chain is a combination of all the processes involved in the sourcing of raw materials, production, distribution, and delivery of products or services to customers.
IKEA Supply Chain Problems
- IKEA supply chain problems relating to inventory management
- Distribution and Logistics Problems
- Supplier Relationships and Sourcing Challenges
- IKEA supply chain problems relating to quality control
- Sustainability and Ethical Supply Chain Practices
IKEA supply chain problems relating to inventory management
One of the common and frequent IKEA supply chain problems is the issue of shortage of raw materials needed for the manufacture of products to meet the demand of customers.
In 2021 during the COVID-19 that started in China, many countries placed restrictions on flights and shipments coming from China. The Chinese government as well put curfews that restricts movements within the country. All these halted many businesses and as a result, the global supply chain was disrupted, since many companies produce in China because of its cheap labor.
IKEA was impacted as well because a quarter of its products are manufactured in China. The biggest issue of this IKEA supply chain problem was to get goods out of China and ship them to customers. The impact of this issue was a delay in fulfilling orders and the unavailability of some products.
Distribution and Logistics Problems
Transportation of large products to customers is an issue with the IKEA supply chain. For instance, it was faced with the challenge of delivering large items such as washing machines, technical machinery, and freezers. To address this issue, the company explored innovative delivery solutions by delivering component parts separately and assembling them locally at the point of consumption.
By utilizing local assembly, shipping containers can be loaded to their maximum capacity, leading to a more efficient, cost-effective, and sustainable supply chain. This strategy helped it to save money on the transportation of large items.
Supplier Relationships and Sourcing Challenges
Supplier management can cause issues in IKEA’s supply chain because the company sources products from many suppliers globally. The problem with this is ensuring consistent quality across different suppliers.
The differences in production processes, materials, and quality standards among suppliers can lead to variations in product quality. Therefore, IKEA must have robust supplier management practices in place to maintain the desired level of quality for its products. Some of the quality checks include the use of cameras, lasers, and software in the factories to monitor the production process in real time.
IKEA supply chain problems relating to quality control
IKEA has faced various supply chain problems related to quality control and product availability over the years.
One major instance was the 2016 recall of 29 million MALM and other models of chests and dressers due to serious tip-over hazards. These product recalls not only cause disruptions in the supply chain but can also impact consumer trust in the brand and also result in financial losses.
Sustainability and Ethical Supply Chain Practices
To solve IKEA’s supply chain problems arising from sustainability and ethical supply chain practices, the company took several significant steps to ensure its products are produced and sourced in a socially and environmentally responsible manner.
One of the key challenges IKEA has encountered in its sustainability efforts is ensuring that all its suppliers comply with the company’s strict environmental standards.
With numerous suppliers and subcontractors spread across the globe, it can be challenging to monitor and enforce sustainable practices consistently. Some suppliers may prioritize cost-cutting measures over sustainability, leading to potential environmental and ethical issues such as excessive resource consumption, pollution, or labor violations.
To address these IKEA’s supply chain problems, the company has implemented supplier auditing and monitoring. It conducts regular audits to assess suppliers’ compliance with environmental, social, and labor standards. These audits help identify areas for improvement and provide an opportunity for corrective actions to be taken when violations are found.
Moreover, IKEA collaborates with suppliers to provide support and guidance on adopting sustainable practices, making it a more cooperative and constructive process.
Another IKEA supply chain problem is the challenge of ensuring the traceability of raw materials throughout its supply chain.
For a company that produces a vast array of products, ranging from furniture to textiles, obtaining full transparency on the origin of raw materials can be complex.
Supply chains often involve multiple tiers of suppliers, making it challenging to track the entire chain back to the source. This lack of transparency can lead to issues such as deforestation, illegal logging, and unsustainable sourcing practices.
To address this, the company actively engages with suppliers to map the sources of materials used in its products, particularly those that are considered high-risk for environmental and ethical concerns. This mapping process helps identify potential risks and enables IKEA to take appropriate actions to promote responsible sourcing.
Balancing sustainability goals with cost and operational efficiency can be challenging because adopting sustainable practices and ethical supply chain measures can sometimes lead to increased production costs, which, if not managed carefully, might impact a company’s competitiveness in the market.
However, IKEA has been steadfast in its commitment to sustainability and has recognized that long-term benefits, both in terms of brand reputation and customer loyalty, outweigh the short-term challenges.
Other ways through which IKEA’s supply chain problems relating to sustainability are solved
In the fiscal year 2022, IKEA took significant steps toward its sustainability goals by initiating a phased-out approach to eliminate plastic from its consumer packaging solutions. This strategic move was driven by the company’s commitment to reduce plastic waste and pollution and to promote the adoption of packaging solutions that prioritize renewable and recycled materials.
The process of phasing out plastic packaging will occur in two stages: the first step involves implementing this change for all new product ranges by the year 2025, and the second step entails transitioning the existing product range by 2028.
By adopting this approach, IKEA seeks to play a leading role in the industry, encouraging other companies to follow suit in developing sustainable packaging alternatives. The ultimate aim is to create a positive impact on the environment and make a meaningful contribution to combatting the global plastic waste crisis.
To further show the commitment to solve IKEA’s supply chain problems relating to sustainability; the company moved beyond consumer packaging; the branch of the company responsible for furniture manufacturing has already made significant strides in reducing its carbon footprint.
One noteworthy accomplishment occurred in May 2022, when the IKEA Industry Zbąszynek in Poland officially commenced the construction process for one of Europe’s largest solar farms dedicated to its own use. This solar farm has a total capacity of 19 megawatts, signifying a major step towards IKEA’s goal of relying on renewable energy sources.
Transitioning to renewable electricity has been a crucial aspect of IKEA’s broader sustainability strategy. Presently, all IKEA Industry operations consume only 100% renewable electricity, a noteworthy achievement that showcases the company’s commitment to sustainable practices.
The benefits of generating its own clean energy help the company to reduce reliance on traditional and carbon-intensive energy sources. This mitigates the environmental impact associated with furniture manufacturing.
See also: McDonald’s Competitive Advantage
Other IKEA’s Supply Chain Issues
- Political and Economic issues
- Natural disasters and hazards
- Unforeseen circumstances
Political and Economic Issues
Government policies and macroeconomic issues affect businesses to a large extent. For example, BREXIT contributed to IKEA’s supply chain problems through tariffs, labor shortages, more paper works and delays at the border.
The exit of the UK from the European Union (EU) caused several issues in IKEA’s supply chain. One such problem is the increase in Tariffs; the UK government imposed tariffs on some goods imported from the EU, which has also increased the cost of goods for IKEA.
There is also the issue of increased paperwork resulting in border delays. Since the UK left the EU’s single market and customs union, there has been an increase in the paperwork needed for goods moving between the UK and the EU. The effect of this on IKEA’s supply chain is longer lead times and higher costs because the company is forced to stockpile goods in order to avoid stockouts.
This has also made it more difficult for IKEA to collaborate with its suppliers in the EU.
Another major contributor to IKEA’s supply chain problems in 2021 to 2022 following the exit of the UK from the EU is the labor shortage. This problem was a result of EU citizens being unable to come to work in the UK without visas as before and it was worsened by the emigration of many EU workers back to their home countries during the Covid-19 pandemic.
The labor shortage caused a shortage of lorry drivers which presented significant challenges to IKEA’s supply chain operations in the UK, leading to disruptions in supplying approximately 1,000 product lines to UK customers across all IKEA stores in the UK.
The global price of crude oil is another economic issue that added to IKEA’s supply chain problems. The global price of crude oil affects the price of fuel that is used for transportation or delivery of products – whether it is by air, land, or sea. Over the past 3 years, the increase in the price of fuel has affected the supply chain of IKEA as well as that of other companies.
What economic factors affect IKEA?
IKEA is affected by exchange rate fluctuations, inflation, recession, interest rates, and the political stability of countries where its factories are located.
An increase in the price of goods and services does not translate to profits for a company because its supply chain also becomes impacted by higher costs for raw materials, labor, and transportation. This can put pressure on profit margins and make it more difficult for the company to compete with its rivals.
High-interest rates can also pose issues in IKEA’s supply chain, as the cost of borrowing money becomes higher. This means the company may have to pay more to borrow money to finance its operations which put pressure on its cash flow.
Natural disasters and hazards
Natural events like COVID-19 have contributed to IKEA’s supply chain problems. During the pandemic, there were restrictions on movements, which means low or absent manufacturing of products. As a result, there were supply chain disruptions leading to a significant drop in the availability of products.
Another hazard that added to IKEA’s supply chain problems was the incident of some dishware made by IKEA that caused injuries to at least four people as reported by Foxbusiness. Two individuals required medical attention.
The company was compelled to initiate a massive product recall as a precautionary measure. Nearly 160,000 units of dishware, including bowls, plates, and mugs, were affected. This is because of a potential burn risk as declared by the United States Consumer Product Safety Commission (CPSC) warning notice.
The concern lies in the susceptibility of these items to become brittle and break, leading to possible leakage of hot food or liquids, thereby posing a significant burn hazard.
Other incidents such as fire hazards in Warehouses can cause a shortage of products and delays in fulfilling deliveries.
Unforeseen phenomena are some of IKEA’s supply chain issues. There are some circumstances that may occur beyond the control of a business that can impact the supply chain, no matter how it tries to prevent them.
One such was the Suez Canal obstruction of 2021. This happened when a ship, The Ever Given, was stuck, blocking the Suez Canal for 6 days, and preventing more than 369 ships from passing. IKEA said it had about 110 containers on the ship.
With about 12% of global trade passing through the canal every day, the global supply chain was impacted severely. Some ships that were rented incurred more charges, and others were rerouted around the horn of Africa which added extra 8 days to some, and the delivery time was prolonged.
Also read: Starbucks Supply Chain Issues and Management
What makes IKEA’s supply chain successful?
IKEA’s competitive advantage lies in its ability to offer products of high quality at a much lower cost than other furniture retail giants. Another reason why the IKEA supply chain is successful is because of its prompt order fulfillment and the use of fewer materials (and therefore, fewer costs for customers) for continued customer satisfaction and loyalty.
Managing IKEA’s supply chain problems
As of 2023, IKEA is 80 years since it started and has developed some strategies to help the company succeed by solving some of its supply chain problems.
How IKEA’s supply chain problems are managed
- The proximity of factories to the continent with the highest turnover.
- Outsourcing to countries with cheap labor
- Prompt action to mitigate any potential danger
The proximity of factories to the continent with the highest turnover.
A significant portion of IKEA’s product range is procured from suppliers in close proximity to its sales markets. Specifically, in Europe, where IKEA garners the majority of its turnover, approximately 70% of the products available for purchase are manufactured right on the continent.
This strategic approach to regional sourcing not only ensures shorter supply chains but also facilitates faster and more efficient deliveries, enabling IKEA to meet customer demands with greater agility and reduce transportation-related environmental impacts.
Outsourcing to countries with cheap labor
In order to reduce the cost of manufacturing while increasing its profit margin, IKEA outsources to countries with cheap labor such as China, Vietnam, Myanmar, etc.
Another added benefit of outsourcing manufacturing to countries like China is to reduce the lead time. These countries have a high population which means more available labor to work in the manufacturing of the products quickly.
Prompt action to mitigate any potential danger
The prompt recall of over 160,000 pieces of dishware due to their significant burn hazard risk shows how seriously IKEA takes the management of its supply chain. Apart from addressing potential safety concerns and lawsuits, it demonstrates the company’s commitment to prioritizing customer safety and its readiness to comply with regulations.
IKEA went further to give a full refund to all the customers that returned the recalled products.
Let’s see some case studies of how IKEA’s supply chain problems were managed below.
How IKEA managed the problem of inventory shortage
When IKEA was hit by a shortage of raw materials in 2021 during COVID-19, it began reducing the number of versions of some of its products. The reason is to make sure the products with the highest demand are made a priority.
In response to this IKEA’s supply chain problem, the company took taking proactive measures to prevent shopper dissatisfaction by temporarily eliminating unavailable products from both their online stores and physical store showrooms.
In order to cater to customer needs effectively, IKEA also tactfully offered alternative suggestions for similar items in place of unavailable ones.
Another way the company addressed the issue of shortage during the pandemic of 2019 is by using alternative routes of transportation. Instead of transporting its products from China to Europe by sea, it opted to use trains. The reason for this is to free up container capacity and use these containers to ship more products by sea to the United States since there are no train routes from China to the USA.
Video: Why Global Supply Chains May Never Be the Same
Even though IKEA has faced many supply chain problems, the company has been consistently growing by taking proactive measures to solve these issues and it has been very good at it. This has contributed to its success. There are more issues that may arise in the future and to maintain its market share, innovation and adoption of technology is key.
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