Wednesday, September 11, 2013
Building a flexible supply chain, did Ikea do well?
Based on my own shopping experience in Ikea, I am not satisfied with their inventory level. Just in August, I went to Ikea for four times to buy my bed, desk, chair and other stuff. However, the lamp and pen container I wanted are always out of stock. When I went to Ikea again with my friend one week ago, I tried to check if they replenished the stuff I wanted, I was still disappointed to see the tag “out of stock”. The chair my friend wanted is also out of stock. It reminds me of the same experience in Australia last year, I got the desk only when I went there for the second time. Stockout might be understandable during back-to-school season, but it was not back-to-school season when I shopped in Australia. Why does stockout often happen in Ikea?
This is not a blog full of complaints about Ikea’s stockout, however, I want to share some thoughts about flexible supply chain. Ikea has a sophisticated supply chain. Starting from price tag and design, to shipping and selling, Ikea created a legendary model. However, Ikea’s inventory management is not as perfect as its business model. From August to September, Ikea is always crowded especially on weekends. When one item is out of stock, it usually takes about one week to replenish. Since Ikea is typically located far from downtown, customers without vehicles may not be willing to return to the store in a short period. Thus, safety-stock inventory is especially important for Ikea to maintain a high service level. Ikea need to decide the inventory quantity based on inventory costs and service level. It seems that Ikea values more on cost saving.
Ikea may have the power to sacrifice service level occasionally, but the risk is too high for most firms. Although we can get the Economic Order Quantity (EOQ) by numeric calculation, uncertainties would affect the whole supply chain and invalidate all the calculated numbers. According to the article this week Building a Flexible Supply Chain for Uncertain Times, companies need to deal with changing conditions by making production process more flexible. It reminds me of Zara’s supply chain management. Unlike most clothing companies, Zara disperses its factories worldwide. You can find clothes produced in China, Cambodia, Vietnam, and Thailand just in one store. On one hand, Zara utilizes the comparative advantages of each producing area. On the other hand, the risk of lacking raw material, economic downturn and labor strike would be much lower. Thus, in this way, flexible supply chain means dispersed risk.
Inventory management needs up-to-date data and regular review of these data, so that we can use the Reorder Point System to determine the reorder point. But how do we deal with the limitation of the system? How do we determine the balance point between the service level and safety stock? Now I am clearer about the reason that supply chain management is a combination of science and art.