CENTRALIZED SUPPLY CHAIN PLANNING AT IKEA

Presented by: M. Hayat Khan Nayab Maqsood

INTRODUCTION
Background:
Basic focus on situations when centralized supply chain planning is effective.
The outcomes expected from applying centralized supply chain planning. How to achieve the outcomes through effective application. This paper identifies Ikeas shift from decentralized to centralized supply chain planning which includes;
Supplier networks Distribution centres Stores

WHAT IS CENTRALIZED SUPPLY CHAIN PLANNING?

Having common and standardized working methods, centralized organization and integrated IT infrastructure. Effective centralized SCP causes;
improved transparency visibility synchronized processes

There are strong problems and obstacles in implementing centralized supply chain planning;
incongruent objectives and strategies result in incoherent supply chain processes.

IKEA has:
30,000 sales items 1,400 suppliers 30 central distribution centres 280 global stores

LITERATURE REVIEW
PREREQUISITES FOR CENTRALISED SUPPLY CHAIN PLANNING
Two types of products;
Innovative Functional

Prerequisites for centralized planning Functional Products

Two supply chain categories

Physical Efficiency Market Response

Vertical Integration

Functional products require vertical integration to facilitate low-cost production through centralized planning. Centralized planning requires management by single organization. Limited ownership of manufacturing and full ownership of warehouses and retailers to have strong control. One planning domain required to possess all information for easy coordination of supply chain information.

Dominating Organization

Power and Competence

One Planning Domain

 Centralized Planning Concept

This paper applies three centralized planning concepts: Planning Process
Centralized planning process should have strong connection with functional and organizational planning processes. Planning processes can be classified based on length of the planning horizon and supply chain process that have to be supported.

E.g. Forecasting process might integrate individual forecasts from different markets and products. Information from sales and operations department could be needed.

Centralized Planning Concept Planning Process

Planning Organization
Decision making should be divided into two categories
1. Decisions about regular activities facilitating output and control of hierarchy. 2. Decisions about allocation of resources.

In centralized organizations authority is with corporate headquarters. Centralized organization helps implementing coherent software support to facilitate decision making in global supply chain arenas.

Planning System Planning Organization

Planning Systems
Use of ARP systems which;
Support coordination of global supply chain Deals with coordinating supply chain decisions such as stock replenishment, distribution and sourcing. ARP is effective in standardized planning process which have high automation.

 Effects from Centralized Supply Chain Planning

Integration
Decision making on a high level with tight integration.

Strong control and coordination are important benefits as decentralized can cause incoherency in system targets due to conflicting incentives or lack of information.

Effects From Centralized Planning Integration Standardization Specialization Learning

Standardization
Application of centralized processes throughout the organization.

Specialization
Centralized supply chain planning causes horizontally effective hierarchy with more planning specialists in the span of control and so increasing skills and effectiveness of the chain of command.

Learning
Large companies with centralized planning get more technological and supply knowhow by being directly involved in the supply chain.

 Obstacles to Centralized Supply Chain Planning

Resistance to Change
Fail to respond to local conditions or in developing management capabilities can cause problems in centralized supply chain planning.
Supply chain members seldom accept centralized approach. Impossible to get a large supply chain to agree and implement centralized planning and control.

Centralized Planning Obstacles Change Resistance Top Management Involvement Training and Knowledge Data Quality IS Integration

Lack of Top Management Involvement

Transferring planning tasks from planner to system can lead to disagreement and resistance.

Training and Knowledge

It is important to have training and knowledge as without it planning processes cant be changed and also employees might not be open to centralized planning.

Data Quality and IS Integration

APS cannot work if the quality of data collected from research is not effective.

RESEARCH MODEL AND QUESTIONS

RQ1: What effects can be expected when centralized supply chain planning?
Conceptual Framework

RQ1 RQ1

Organizational Performance

RQ2: What are the obstacles for implementing centralizes supply chain planning?

RQ2

METHODOLOGY
Single longitudinal case study at IKEA. Comparison of IKEAs supply chain planning before and after the implementation of centralized planning. Change occurred between 2000-2011. Old Approach: Situation before 2003. New approach: Situation after 2010. IKEA met the prerequisites of supply chain planning implementation. Study nature: Unique: IKEA has unusual supply chain characteristics. Data Collection:
In depth interviews observations company documents. Three researchers collected data and did the analysis;
Two were external to IKEA and one worked at IKEA.

 Data Analysis
Conceptual framework and research questions used as an input. Theory generation procedure. Data analysis divided into five steps;
1. Writing up case descriptions of the old and new planning concepts using the process, organization and planning systems structure outlined in the literature review. 2. Describing IKEAs supply chain context and relating it to the centralized supply chain planning prerequisites defined in the literature review. 3. Identifying, grouping and relating centralized planning effects.

4. Identifying obstacles for implementing the new centralized planning concept.

5. Validating the final case description and conclusions.

CASE STUDY
IKEAS Supply Chain Characteristics
Vision Create a better everyday life for the many people Annual sales of 23.1 billion. 1,27,000 employees. 620 million + visitors. 280 Stores run by franchisees. Sells through online website. Catalogue 197 million copies with more than 9500 items. Supply chain is global with sales and purchasing in all major regions of the world. Stores are divided into 3 geographical areas and supply through 30 DCs by 1400 suppliers in 55 countries. More than half of the sales volume is distributed directly from suppliers to stores.

Major sales made in Europe then North America and then Asia/Austraia.

IKEA was effective for centralized planning because;

High growth: 10-20 new stores every year; global goal to double sales every 5 th year. Functional products. Supply chain is vertically integrated; made to stock with limited customer orders.

Owns part of supply capacity; Distribution Groups.

OVERVIEW
Old Planning Concept
1. Regions and their stores had great deal of freedom and power in terms of planning. 2. Shortages caused inefficient supply chain by overestimating demand to cause imbalance in demand coverage. 3. Some markets suffered from stock-outs whereas others had surpluses. 4. Several different planning systems being used. 5. Planners did manual work due to lack of software and standardized working methods. 6. Unreliable data collection. 7. Lack of trust and communication between parts of supply chain.

New Planning Concept

1. Application of integrating global planning process developed by IKEA of Sweden that supervises all of IKEAs operations and develops marketing, logistics and purchasing strategies. 2. Influences decisions about items in IKEA stores, purchasing, suppliers, distribution, stores etc. 3. Global planning process shown in Figure 2;

Figure 2: IKEAs global supply chain planning processes

Figure 3: Implementation steps of IKEAs global supply planning concept

CASE ANALYSIS
Planning Process
1st step to design standardized planning processes coherent with supply chain objectives. By doing this IKEA was able to achieve supply chain and hierarchal integration to all supply chain processes from distribution to stores. This caused better forecasting, accuracy and reduced safety stock.

Planning Organization
Centralized authority and control gave a global view of the supply chain. Led to common learning and continuous improvement in supply chain. IKEA added planners for effective forecasting to reduce demand imbalances.

Planning System
Forecasting softwares implementation such as APS helped in carrying out frequent quantitative forecasts. APS; user-friendly and effective led to increased forecasting accuracy.

DISCUSSION
Prerequisites for Centralized Planning
IKEA has functional products therefore could adopt vertical integration. Some argue that IKEA is not fully vertically integrated but there is strong backward and forward integration; many manufacturers have IKEA as sole consumer and some are even owned partly or fully by IKEA. IKEA is a dominating organization with full ownership of stores and warehouses and even partial control of suppliers. New SCP caused one planning domain.

Centralized Planning Concept

Study shows redesigned planning process caused better supply chain integration. Moreover effective visibility in supply chain causes better demand matches.
New planning process also created better standardization with effective methods and planning techniques which can lead to better specialization in the future. Better standardization of processes enhanced idea of integration. Better planning process creates effective learning in the organization by increasing individual and organizational learning as new methods were being applied and their advantages and disadvantages were being measured.

Centralized Planning Concept and Obstacles

Human and Organizational Software and Data

CONCLUSION
IKEA realized the need for change. Based on goal of having low cost products and efficient supply chain led to centralized supply chain planning. Managerial Implications:
Centralized planning is important for large and growing global supply chain that is looking for low cost and supply chain effectiveness.

Managers can use this study to analyze if they have the prerequisites needed for applying centralized supply chain planning.
Research can aid in obstacles of centralization.

Research Implications:
Provided theoretical framework to analyze dynamics of centralization of supply chain planning. Tested and identified framework and developed 14 relationships explaining effects and obstacles in SCP.