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Q1a) Evaluate the extent to which effective Supply Chain Management has impacted on the
profitability and performance of IKEA (15 marks) Commented [WU1]: Case study examples given in exam
included;
Re-building of the distribution process,
Effective Supply Chain Management (SCM) is the integration and management of supply chain Centralisation of control,
organisations and activities through cooperative organisation relationships, effective business Strategically managing the movement of stock,
Re-modelling the supply chain,
processes, and high levels of information sharing to create high performing value systems that Achieving economies of scale through improved logistics,
provide member organisations a sustainable competitive advantage” (Robert B Hanfield and Ernest L Upgrading and enhancing materials handling equipment,
Developing on-line capability – web tool
Nichols, Introduction to Supply Chain Management). It is a strategic approach to supply network Improved forecasting,
Utilising technology solutions – web tool, automation
relations and management which recognises the interdependent nature of supply issues and
recognition of the value effective supply chains can have by recognising that it is supply chains that
compete, not companies.

Effective SCM can impact profitability and performance in a number of ways, such as through
systems integration and improved communication and increased information sharing for faster and
more accurate information flows. Improved communications and information sharing is a key
element of SCM which enables a multitude of subsequent benefits to be realised and in turn lends
itself to better planning and coordination within the supply chain. IKEA demonstrated this through
the centralisation of control over planning, forecasting and replenishment and the re-modelling of
the supply chain. The changes IKEA made to its supply chain and planning processes were to
overcome a plethora of issues, such as fluctuating goods availability and a lack of a common and
structured tactical planning of demand and replenishment, which were heavily based on improved
communication through IKEA itself, and its supply chain. One of the key factors as to why IKEA found
itself in that situation was the lack of communication where SBU’s, be it retail stores or distribution
centres, didn’t communicate clearly, accurately, or in IKEA’s case, honestly as some regions
knowingly manipulated need and demand calculations.
- cross supply chain working group which developed the web based application and data
warehouse to better visualise and communicate leadtimes throughout the supply chain (p.9)
- JDA Software group and implementation of Advanced Planning and Scheduling software to
support new planning process and forecasting to communicate accurate info through the supply
chain (P.9)

A second way SCM can also impact profitability and performance by reducing waste activities and
non-value adding activities throughout the supply chain. Waste activities could be any of Okinawa’s
Seven Wastes (e.g. Overproduction, Inventory, Waiting, Excess Motion etc.) which all add to the
costs of each member of the supply chain. Jointly identifying and eradicating these activities, as well
as developing co-operative goals and guidelines for the future enables supply chain members to
focus resources on real continuous improvements which will positively impact profitability,
performance and sustainability. For IKEA, this included the provision of accurate data to its supply
chain and the strategic management and movement of stock through its global supply network. It is
also seen in IKEA’s standardisation of its transport and logistics and storage to the Euro Pallets which
also enabled the automation of some of its distributions systems. The Warehouse management
system also enabled IKEA to further reduce waste activities and non-value adding activities by load
and task levelling.

A third SCM can also impact profitability and performance by Reducing Total Costs throughout the
supply chain through better coordination and planning, reduction of inventory and better capacity
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utilisation and avoiding sub-optimal decisions where costs, often inventory, are reduced by one
party at the expense of another. Reducing total costs would have been a key factor in IKEA’s decision
to centralise control over supply chain planning and demand forecasting, as well as to better manage
inventory and planning for stock availability of the flow of goods and materials. IKEA also reduced
total costs of transport through the location of distribution centres and the design of their logistics
systems which reduced overall distances travelled for replenishment by locating fast moving lines
closer to the retail outlets and having slower moving lines at distribution centres in strategic
locations further away. By doing this, IKEA reduced its cost which will ultimately impact profitability
and performance.

A fourth SCM can also impact profitability and performance by Reducing Cycle Times through
supporting innovation and faster and more precise delivery times, shorter order cycles, lower
inventory and supply chain agility. Again, IKEA’s centralisation of planning and forecasting was a key
part in their ability to reduce cycle times by being able to provide the supply chain with accurate
data in a timely fashion for better planning and utilisation. IKEA’s Port Wentworth distribution
centre is a key example of IKEA reducing cycle times which was also supported by the design and
operation of the new logistics and distribution system. As part of this development, IKEA also
employed a web based application to visualise lead times to further integrate upstream planning,
supply and distribution and assisting the reduction of cycle times. By reducing cycle times and lead
times, IKEA will be able to move more products through their logistics systems and to the customer,
increasing performance which should positively impact profitability.

A Fifth SCM can also impact profitability and performance by improving responsiveness to customer
requirements. Improving responsiveness requires flexibility but can impact profitability and
performance by creating customer and brand loyalty and increasing revenue, as shown in the
Marketline Company Profile (2013). IKEA improved responsiveness to customer requirements
through its concentration on the customer journey and customer experience. IKEA focused on
shopping experience and the “improved range, price, ambience, layout and facilities could be one of
the differentiating factors for specialists, which could give them a competitive edge” (P.4, Case
Study). IKEA also improved their responsiveness to customer requirements in terms of stock range
and availability through the centralisation of planning and forecasting and supply integration which
enabled IKEA to overcome issues with stock outs which should increase their performance and
positively impact profitability.

In my opinion, there are a number of benefits which can impact on profitability and performance.
Effective SCM can be a source of competitive advantage for organisations and add value and enable
them to differentiate themselves from competitors allowing them to continually improve
performance of the supply chain as a whole which will subsequently provide positive impacts to the
organisations profitability.
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Q1b Assess two key risks in IKEA’s supply chain, including how they may impact on corporate
performance (10 marks)
Corporate performance at its simplest can be defined as how an organisation is progressing towards
achieving one or more pre-selected goals. Although there are numerous benefits to SCM, the recent
growth in globalisation has created more complex and wide reaching supply chains, which also
brings greater risk. Supply Chains are no longer a chain of businesses with one-to-one relationship
but should be viewed as networks of supply chains which can contain hundreds or thousands of
companies around the world which can all be subject to numerous risks. There are also more local
risks associated with SCM around building long term, collaborative relationships with a rationalised
supply base which can have a significant impact on Corporate Performance.
One risk which can be associated with SCM which may impact on Corporate Performance is Supply
Risk. Supply Risk is attributed to strategies such as Supply Base Rationalisation, Partnering and the
development of lean and agile supply chains due to the increased dependency of the buying
organisation on a narrower supply base which is more prone to risks around supplier failure, supply
disruption or variability of supply. For IKEA, this could be risks around low cost country sourcing and
issues around vulnerability to quality failure, supply delays and stock outs. The issues IKEA had with
planning and replenishment shows the difficulties it had and the effects it caused with some regions
having stock outs and other carrying excess inventory. The impact of supply risk on corporate
performance would ultimately be that IKEA may risk not meeting customer expectations or
customer service levels and it could affect their positive reputation and brand image which is built
around the shopping experience (including stock available to take away), sustainability and social
responsibility. IKEA could reduce risks associated with Supply Risk by looking at options such as multi
or dual sourcing for some inputs, which IKEA already does, or having pre-qualified suppliers on
stand-by. They could also look at internal measures to mitigate Supply Risk, for example more
precise supplier evaluation around capability, capacity and utilisation which may help IKEA refine
their load levelling.
A second risk associated with SCM could be Financial Risk, such as a lack of, or inadequate, price or
cost analysis in setting negotiated prices during negotiation. There could also be risks around the
investment appraisal with high capital investments through a lack of whole life cycle costing or a lack
of budgetary or cost control management which could lead to over payments, continued payments
or even fraudulent activity. Financial risk could also be due to external factors from IKEA’s macro
environment such as interest rates, commodity prices or exchange rates, or a lack of understanding
of the business boom and bust cycles, the current economic climate and risk of recession. The
financial risk could come from the supply chain members themselves in terms of their own financial
viability and performance impacting on the corporate performance of IKEA. The largest financial risk
to IKEA could be their investment and development in foreign markets as, according to Porters Value
Chain, there is a risk the investment and development may not be fully realised by IKEA, especially
with IKEAs ownership of product rights and ability (and history) of being able to switch suppliers
quickly.
In my opinion, IKEA could reduce these risks through enhanced due diligence around supplier
appraisal and their financial stability and performance, monitoring financial ratios and indices,
improving internal processes and processes throughout the supply chain, and more detailed
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environmental analysis and planning. They could also reduce financial risk through environmental
scanning and STEEPLE Analysis.. Commented [WU2]: Exam case study examples -
Supply risks,
Compliance risks,
Reputational risks,
Economic or financial risks,
Demand risks,
Macro environmental risks,
Operational risks,
Tech and info risks