Company Visit: IKEA
Company Background
IKEA Warehouse in Hong Kong, which located in Kwai Chung Container Terminal, consist of several floor with 32,000m2.The warehouse has more than 21500 cbm in capacity throughout 17522 locations in total in which 5957 for picking and 11565 for storage. It performs internal company logistics services, as an inventory container, for delivering goods directly to customers and to three stores on Hong Kong as well as to Macao. Its warehouse consist of three loading bays for inbound and 16 loading bays for outbound in which 14 loading bays for customer and 2 for store replenishment.By 2015, the inbound volume reached 155336 cbm, increased around 5000 cbm compare with 2014.
Visit
IKEA Hong Kong operates one distribution centre in Kwan Fong. Most of us might wondering how their distribution setup works. Actually, their products are shipped from High Flow Distribution Centres and Low Flow Distribution centres by sea or trucks. When products arrive to the ALT IKEA Hong Kong Distribution centre, they will be distributed to three local IKEA stores for store replenishment or deliver to their customers. The detail fact sheet and their daily operation process of the distribution centre will be covered below:
Infrastructure
Gross Area:
Warehouse 32,000m2
Ceiling Height 7.6m
Capacity
Volume 21,500 cbm
Number of Location 17,522
- Picking 5,957
- Storage 11,565
Range 7,560
Operation
Manpower 110 (Budget)
Transportation Sea-freight & Trucks
Inbound Volume
2013 143,159 cbm
2014 150,651 cbm
2015 155,338 cbm
During the visit, the manager in IKEA Distribution Centre shared their insights and their management strategies with us.
Distribution Centre
There are three reasons why IKEA Hong Kong selected Kwai Fong as the most suitable place to locate their warehouse. Firstly, the location is close enough to the Kwai Tsing Container Terminals. Most of their products are shipped by sea-freight so the transportation and operation time can be lower due to the short distance. Secondly, the travelling time can be maintained within 45 minutes for them to do customer delivery or replenishment. Thirdly, the capacity of ATL is the largest among Hong Kong. In order to deal with the massive inbound inventories, they would like to choose the place with tall ceiling so that they can occupy as more inventories as possible.
Inventory Management
According to the fact sheet of IKEA Hong Kong, there is an increase trend of their inbound volume. Therefore, they predict the inbound volume to Hong Kong this year will raise slightly to 16 million m2. Because of the huge amount of inventories, for the slow flow inventories, will beput aside on the aisles to do the dispatching process. Although the productivity might decrease, they do not need to spend money on leasing another place.
Human Resource Management
Buddy System
Manpower is one of their most important resources. To run the operation smoothly, skilled workers are needed. Thus, they have launched a “Buddy System” which targeted to their new joiners and supported by Senior Staff and Assistant DC Supervisors. The system will assign senior staff to the new joiner for helping them to adapt the new environment. Within one month, the senior staff will teach them about the product knowledge, stacking skills, picking productivity and accuracy, Forklift truck driving skills and so on. Regular meeting will be arranged by assistant supervisors to review their learning process.
Outbound Picker Incentive Scheme
In order to cope with the high turnover rate of picker since 2011, IKEA Hong Kong has launched an incentive scheme based on the item line processed to increase the picking productivity and the picking accuracy.
Case Question
Q1 How do you do the demand forecasting and manage the supply in order to have a stable supply and prevent stock out?
In order to prevent stock out, IKEA has developed a 5-weeks moving average model to forecast demand. In other words, the demand of each product is calculated based on product sales volume data of previous 5-weeks. It enables IKEA to respond quicker for changes in product demand. In addition, IKEA used to create production plan for 4 to 8 month later. It reduces the lead time for its hot items because IKEA could plan to produce higher volume of hot items. Also, it provides a better estimation for IKEA suppliers to schedule their production and shipment processes. Those actions smooth the product supply and reduce the chance of stock out.
Q2 As most of your customer order deliveries are outsource, how would you ensure their quality of service, such as on time delivery, customer services?
Since most of the order deliveries are outsourced, Key Performance Indicator (KPI) is a important tool to monitor the performance and services quality of the drivers. For instance, timely deliver (~25% of total score), customer complaint (~25% of total score) and the degree of damage (~50% of total score) are the key dimensions used to assess the delivery performance. If the drivers satisfied with the KPI (targets) or standards, rewards will be given. Otherwise, some penalties will be occurred.
However, as mentioned form Simeon Lee, the manager of IKEA’ Distribution Centre, the reward and penalty scheme is not very effective at this moment since some of the contactor do not concern the rewards. Besides, some of the deliver processes are using double outsourcing (subcontracting of an outsourcing contract), and it makes the management of quality more difficult.
Q3 What are the reasons behind IKEA to add the catering service at each store?
IKEA aims to provide a comfortable environment for its customer once they get into the IKEA store. Generally, customer could try every product in IKEA store, which give customer an atmosphere like being at home. Walking through the showroom of furniture and accessories are always thrilling in IKEA. The catering service matches up with their strategy. After staying a long time shopping in IKEA, customer could enjoy a tasty meal in IKEA restaurant. It improves its process flow of operation which satisfying customer needs and continuing the pleasant shopping experience.
Q4 What are the competitive advantages of IKEA Hong Kong over your local competitors like Pricerite in terms of warehouse management?
To deal with the keen competition in Hong Kong, IKEA Hong Kong keeps their competitive advantages: item range, customization, in-house design team and lower price with high quality.
IKEA Hong Kong offers more than 10,000 items to customers. All of the products are customization-allowed and designed by their in-house design teams. Thus, the customers are able to select their favourite items with desirable colours and styles. Also, they allow customers to hold stock so that the lead time can remain static. The most important is that these high quality products only offered at a lower price.
The above advantages make IKEA Hong Kong becoming one of the favourable manufacturers in the world.
Q5 What are the current practices in your warehouse related to the company’s sustainability strategy?
Sustainability is one of the key strategy of IKEA. The recovery department in Distribution Center will try their best to recovery and recycle the items which returned from different parties, like the customers, IKEA stores. In the returns management programme, the recovery department do the screening process. If the condition of returned products is still good, they will repair the items and resale in stores. The items in good condition can also transfer to a good spare parts. In case that the items conditions are moderate, they will repair and donate it to the charity, like the NGOs in Africa. This practices can help the people in needed. Assume that the items conditions is not good, they will also try to make some spare parts. However, if the items in a bad conditions and cannot repair or recycle, discard the items is their final step. Those practices show that IKEA much emphasis on sustainability, and they do not want to waste any items. Here are the table summary of recovery and recycle practices
Items Condition Actions
Still Good Repair and resale in stores/Good Spare parts
Moderate Repair and donate
Not Good/ Bad Make the spare parts or discard
Q6 At your distribution centre, what are the meaning of the high flow and low flow in the supply chain?
High-flow distribution centre means the facility dealing with high demanded products, while low-flowed distribution centre means the centre dealing with only low demanded products. Normally, automatic storage and retrieving systems are used in high-flowed warehouse as picking and delivery processes are really frequent for high demanded product. Developing a sophisticate automated system fosters quicker access to the inventory and thus helps inventory replenishment. Whereas manual operation and inventory processing would be adopted in low-flowed warehouse since picking and inventory processing are not often. The separation of high flow and low flow facility successfully reduce the cost. The mixture of machine and manpower are fully utilized in IKEA’s distribution centre.
Q7 Which part of operations in the warehouse is the most costly? How do you reduce the operational cost without affecting the efficiency?
The most costly part in IKEA Hong Kong daily operation in the warehouse is unpacking. During the peak season, they need to take care of 16 cargoes per day in average. To deal with the massive number of inbound packages, they has decided to outsource the unpacking process to the third party logistics. Although the process can speed up rapidly, the cost is relatively expensive, therefore, they will do it by themselves while the non-peak season. Due to the number drop of cargo need to take care, employees’ skills can be trained. Moreover, the operational cost can be reduced which will not affect the efficiency of the process. In the retail industry, the cost consistency is extremely important because the expenditure in the operation can highly affect the profitability of the organization, thus, they would rather keep low cost in the daily operation.
Q8 As we all know that the rental price in Hong Kong is high, how do you maintain low inventory level?
IKEA's warehouse keeps different products for the stores in Hong Kong and also Macao. However, the space in Hong Kong is limited and the rental cost is high nowadays. They need to adapt appropriate measure to maintain the inventory level as low as possible, so that they can utilize the all the available area. Therefore, Ikea warehouse in Hong Kong plan to store the huge size inventory, such as, sofa, in other place, like Shenzhen. Also, the manager of the Ikea warehouse mention that they will direct distributed (DD) the huge size products to the customers rather than gather in the warehouse (Distribution centre, DC) first after the product produced These measure helps the Ikea warehouse in Hong Kong reducing the storage space for large-scale products, thus, the area can be used for other high flow and turnover rate item.
Q9 How do you trace and track the product items during the inbound logistics and the outbound logistics?
The warehouse perform an inbound logistic to gather the products from different place as well as through different ways like air or ship, and also a outbound logistic to deliver the products to store or customers. Therefore, the trace and track (T&T) system should be operated accurately.
For the inbound logistic, the shipping company will send the invoice to IKEA Warehouse upon the inventory are packed in the container to confirm that the deliver are in progress. Therefore, IKEA Warehouse Hong Kong can trace and track the delivery process, also can the information on the computer such as the arrival date, quantity, etc.
For the outbound logistic, the trace and track (T&T) system are helpful in this function. Ikea warehouse needs to ensure the products can deliver to the store as well as the customers in a timely manner. They can use that system to monitor the local deliver process and the time needed. For example, the inventory may be empty at the weekend, so they need to transfer the goods from warehouse to store to replenish the stock. The T&T system can ensure the goods will be arrived in the store for them to sell in the coming weekdays or weekend.
Q10 IKEA is producing products which can be recycled and reused, does IKEA collect back these products from the customers? If yes, how does the reverse logistics of IKEA work?
According to reverse logistics association (2016), all of the activity associated with a product/service after the point of sale can be classified as “Reverse logistics”. The transport damage (quality problem) and change of mind are the two major reasons explained why reverse logistics occurred in IKEA (Nylund 2012). The returns management programme (mentioned in Q5) employed in IKEA provide a good guidelines to handle the returned products, such as repairing for resale, selling at a lower prices or making spare parts. Those operations can reduce the waste effectively because the products can resale to the market, and some of the spear parts can also recycled in the new products.
Reference:
Reverse Logistics Association (2016). What is Reverse Logistics?. Retrieved March 23, 2016
from http://www.reverselogisticstrends.com/reverse-logistics.php
Nylund (2012). Reverse logistics and green logistics: a comparison between wärtsilä and
IKEA. Retrieved March 23, 2016 fromhttps://publications.theseus.fi/bitstream/handle
/10024/46993/Reverse%20Logistics%20and%20green%20logistics.pdf?sequence=1
Reflection
Having seen trucks and containers busy traveling in IKEA’s warehouse, we started to understand why IKEA is so successful in its supply chain management. It not difficult to realize that IKEA’s distribution center is well-organized by utilizing storage space from solid warehouse design. For instance, inventories are closely bounded in the pallets so that it would not occupy too much storage spaces in trucks. Process flow for picking inventory is improved by separating hot items and infrequently-picked products. Constantly improving its efficiency in warehouse would ultimately contribute to IKEA’s success in overall supply chain efficiency.
Weeks before the visit, we have read the case regarding IKEA’s sustainability strategy and aggressive growth targets. We are glad that we actually have a chance to visit IKEA’s distribution center, where we could learn and reinforce what we have learnt. From our observation, IKEA is trying their best to get closer to its sustainability target. In Hong Kong IKEA’s distribution center, recycling and reusing are their current practices. They desire to minimize waste by repairing product parts or donating substandard products. For company growth, they are planning to expand their business by opening a new store in New Territories or Macau. It is invaluable for us to know those information and operational practices in real life.
Walking through IKEA’s warehouse is an unforgettable experience as it enabled us to explore more about the operation management practices. While it is enlightening to hear about the recent challenge for IKEA’s outsourcing strategy and safety issues. Special thanks to Simon Lee, the manager of IKEA’s distribution center, for giving us a fruitful visit in their warehouse.
