Wednesday, September 4, 2013
Is Ikea's SCM miracle a vulnerable one?
Among readings for the class this week there was an article which caught my particular attention: "How Ikea Designs Its Sexy Price Tags". It describes in an easy way the Ikea's business model almost fully based on "Sexy Prices" and supporting impressive Supply Chain Management (SCM) practices. The core of the model is that the products (especially furniture) are first priced, and only after that the fitting to the price manufacturing pattern and design are determined. The SCM here plays the important role as only broad supply chain capabilities with consequent flexibility afford Ikea to put the price to the initial step of product creation process.
Such a business model is obviously a great one which is proved by overwhelming success of Ikea all over the word: $37 billion in annual sales with 340 stores internationally (as of June, 2013). However, as every complicated system, it has its vulnerabilities, one of which I would like to discuss in this post.
As one of the main product divisions of Ikea is furniture, the company consumes huge amount of wood. At the same time the international society is becoming more and more sensitive to environmental problems, such as deforestation and consequent climate change. Of course, Ikea's cheap and quality wooden products cause logical environmental questions to arise, especially the question: "Where this wood comes from?". To satisfy the environmental needs, US government, for example, introduced in 2008 a set of measures requiring retailers "to disclose the source of wood in their products". However, these measures passed only partially due huge opposition and lobbying activities from the side of Ikea and other major retailers.  This is why that happened.
Everyone who have ever had a cheap Ikea furniture knows that it is much lighter than it seems to be. This comes from the fact that it is made not from the solid wood (which is a comparatively expensive material), but from processed wooden materials (as, for example, particleboard) which are much cheaper - so-called "composite materials". In the situation of Ikea, with its huge supply chain network, the wooden components for one particular piece of composite material can come from a number of different suppliers, which got them from other suppliers and so on. Moreover, the ready piece of furniture has more than one piece of such material. This makes it almost impossible to determine the source of wood used in most Ikea products. If the US measures passed in full, Ikea would have to fully change its SCM which in turn would definitely have changed the business model of the company and would have resulted in price rocketing (which is equal to end of leadership?!). Is this a vulnerability of Ikea business model and SCM in particular? Definitely yes.
Till now, the lobby of major retailers works really well, and the environmental laws similar to US one are keeping being rejected. However, there are no guarantees that in some time, when the deforestation will become even more serious, these measures will not pass again. Here we can also add several scandals where Ikea was accused of using wood obtained from illegal logging in Russia and China. If the company wants to secure its leading position in the future, it shold start now thinking more carefully how to solve such problems caused by infinite number of suppliers.
Should they put more money in SCM control? Or maybe they should remodel the whole system? All i all, I am pretty sure that in the following years we will see some major changes in Ikea's business model.
P.S. This problem concerns not only wood supply. If we recall the resent European scandal with horse meat found in Ikea's meatballs (http://www.nytimes.com/2013/02/26/world/europe/ikea-recalls-its-meatballs-horse-meat-is-detected.html), we will find a lot of parallels with the composite material situation described above. The meatballs were made from processed meat (as the furniture is made from processed wood) supplied by different suppliers within Ikea's supply chain. The fact that in some meatballs in Ireland besides declared beef and pork there was found horse meat has led to full recall of meatballs in all European locations and big reputation loss for the company. But these were just meatballs - a small complimentary good in Ikea stores (served in restaurants and sold for home use). If we imagine similar situation with furniture that, say, is proved to be made from big amount of illegal wood, we can tell how much more serious this would be.
1. Higgins A, Castle S. (2013, February 25). "Ikea Recalls Meatballs After Detection of Horse Meat". NY Times.
2. Laskow S. (2012, June 21). "Ikea won’t tell where it gets its wood — and Congress is about to give it a pass". Gist.org.
3. Margonelli L. (2002, October). "How Ikea Designs Its Sexy Price Tags". Business 2.0.
4. Upbin B. (2013, Jone 12). "How To Stop Three Billion New Ikea Customers From Wrecking The Planet". Forbes.