Lean replenishment at IKEA-Lean bevoorrading bij IKEA

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Mekelweg 2 2628 CD Delft the Netherlands Phone +31 (0)15-2782889 Fax +31 (0)15-2781397 www.mtt.tudelft.nl

This report consists of 81 pages and 20 appendices. It may only be reproduced literally and as a whole. For commercial purposes only with written authorization of Delft University of Technology. Requests for consult are only taken into consideration under the condition that the applicant denies all legal rights on liabilities concerning the contents of the advice.

Specialization: Production Engineering and Logistics

Report number: 2014.TEL.7841

Title:

Lean replenishment at IKEA

Author:

C. Sla

Title (in Dutch) Lean bevoorrading bij IKEA

Assignment: Master’s Thesis

Confidential: yes (until March 26, 2019) Initiator (university): C. Sla

Initiator (company): Wim Blaauw (IKEA Nederland B.V.), Peter Áč (Swedwood International AB) Supervisor: dr. ir. H.P.M. Veeke

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Preface

This report is the result of my research at IKEA, and the final project of my studies at the Delft University of Technology, to obtain a Master’s degree in Mechanical Engineering2_.

During the greatest part of my studies, I worked as a part-time co-worker at the self-serve area of IKEA Barendrecht. I knew little about the processes before the store, but the longer I worked there, the more I grew fond of IKEA’s values, and the more I became interested in IKEA’s supply chain. Together with Wim Blaauw3_{and Peter Áč}4_{, I formulated the assignment, based on a mutual interest}

to look across functional borders, and to analyze our processes from a holistic point of view.

For me personally the output has been more than I could wish for. I would like to thank Wim and Peter for their ongoing interest and support, and the opportunities they created to visit various companies within IKEA. Interviews on location at Retail, Swedwood, Transport, Trading, DS and Supply AG really helped me to develop an overall understanding of today’s challenges, and the challenges to come. And wherever I went, I immediately felt at home. IKEA is special in this regard. Furthermore, Iwould like to thank KristianKaspersen5_{for our discussions, his}_{interest, and his great}

taste in music. And I would like to thank Hans Veeke, for his feedback, and putting me backontrack where needed. Within IKEA there is much to do; Hans reminded me that I first need to graduate. I hope my results will contribute to a better everyday life for the many. I also hope that my findings will be shared within the company, and further developed to truly establish a leaner organization. To end with Ingvar’s famous words: “Most things still remain to be done. A glorious future!”

Cruger Sla,

Amsterdam, March 11 2014

2_{With a specialization in Production Engineering and Logistics.}

3_{Then Retail Logistics Manager at IKEA NL, now Deputy Retail Manager at IKEA UK & IE.}

4_{Then Supply Chain Development Manager at Swedwood International, now Logistics Manager at IKEA TANEE.}

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Summary

IKEA is a home furnishing company with a fully integrated supply chain (product development, production, distribution, retail, etc.). Cost-consciousness is rooted in everything IKEA does.

The purpose of IKEA’s ‘Replenishment System’ is to make produced goods available to fulfill IKEA customer demands. IKEA’s growth and developments in the supply chain enable cost-efficient Direct Delivery (DD) distribution methods; i.e. deliveries directly from supplier to store, without a distribution center in between. But growth also creates new challenges: limited store capacities have become bottlenecks for a cost-efficient supply chain. With this in mind, and the fact that DD is IKEA’s main and preferreddistribution method, this thesis focused on waste elimination in DD replenishment. The DD Replenishment System was analyzed using the Delft Systems Approach, with a focus on the relation between Swedwood West (manufacturer of board on frame furniture) and IKEA NL

From the analysis it followed that the main potential for waste elimination is in prevention of unnecessary too early and too late deliveries. These cause waste in terms of:

- unnecessary inventory (safety stocks; capital, interest)

- unnecessary use of valuable storage space (opportunity costs) - unnecessary in-store handling(motion andconveyance).

The main causes of unnecessary too early and too late deliveries are unnecessary batch ordering, non-agility (i.e. the inability to respond to need changes), and a lack of process flexibility.

Based on the analysis, a redesign was proposed with measures that prevent unnecessary batch and queue, improve agility and improve the process flexibility. Better order and process control reduce the need for safety stocks, which is essential to achieve the desired improved efficiencies.

In addition, changes to the internal order logic were proposed to reduce handling and make more efficient use of the total storage space in the store (sales space and SGF storage space).

To quantify the effects of the proposed changes, a quantitative case study was performed by means of a computer simulation. The goal was set to maintain the same level of effectiveness (product availability) at maximum efficiencies (minimum costs).

The results demonstrate a clear potential: efficiency of inventory could be increased to 140,3%, efficiency SGF storage use to 243,5% and efficiency of in-store handling to 111,8%.

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Summary (in Dutch)

IKEAis eenhomefurnishingbedrijfmeteenvollediggeintegreerdesupply chain (product ontwikkeling, productie, distributie, verkoop, etc.). Kostenbewustzijn zit diep geworteld in alles wat IKEA doet. Het doel van IKEA’s ‘bevoorradingssysteem’ is de geproduceerde goederen beschikbaar te maken voor de klant. IKEA’s groei en ontwikkelingen in de supply chain hebben kostenefficiënte Direct Delivery (DD) distributiemethoden mogelijk gemaakt; dat zijn leveringen direct van de supplier aan de winkel, zonder een distributiecentrum ertussenin. Diezelfde groei creëert ook nieuwe uitdagingen: beperkte opslagcapaciteiten in de winkels zijn bottlenecks geworden for een kostenefficiente supply chain. Met dit in gedachte en het feit dat DD IKEA’s hoofd- en voorkeursdistributiemethode is, richt dit onderzoek zicht op het minimaliseren van verspilling in DD bevoorrading.

Het DD bevoorradingssysteem is geanalyseerd middels de Delftse Systeemkunde, met een focus op de relatie tussen Swedwood West (producent van board on frame furniture) en IKEA Nederland. Uit de analyze volgt dat de grootste potentie voor het elimimineren van verspilling zit in het voorkomen van onnodig te vroege en te late leveringen. Deze resulteren in verspilling in de vorm van

- onnodige voorraad (veiligheidsvoorraad; kapitaal, rente)

- onnodig gebruik van waardevolle opslagruimte (opportunity costs) - onnodige in-store handling (beweging en transport)

De hoofdoorzaken van onnodig te vroege en te late leveringen zijn het onnodig orderen in batches, hetnietkunnenreagerenopbehoefteveranderingen,en het gebrek aan procesflexibiliteit.

Op basis van de analyse is een herontwerp voorgesteld met maatregelen om onnodige batch and queue te voorkomen, de wendbaarheid te verhogen en de procesflexibiliteit te verhogen. Betere order en procesbeheersing verlagen de behoefte aan veiligheidsvoorraad, wat essentieel is om de gewenste verbeterde efficienties te bereiken.

Om de effecten van de voorgestelde veranderingen te testen is een kwantitatieve case study uitgevoerd middels een computer simulatie. Het doel was dezelfde effectiveit te bewaren (product beschikbaarheid) bij maximale efficientie (minimale kosten).

De resultaten tonen een duidelijke potentie: de efficientie van voorraad kan worden verhoogd tot 140,3%, de efficientie van SGF opslaggebruik tot 243,5% en de efficientie van in-store handling tot 111,8%.

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List of words and abbreviations

Abbreviation Term Description

ASSQ Assigned Sales

Space Quantity

The maximum number of goods of an article that fit in the sales space.

BPDF Biggest Peak Day

Forecast

The share of a weekly sales forecast that is assumed as biggest daily forecast.

Central shortage No stock at the source (supplier or DC).

Cognos A business intelligence tool developed by IBM.

Commercial Quantity

The minimum amount of stock that is needed in the sales space for commercial purposes (i.e. to give a perception of plenty, where needed).

DC Distribution Center

DD Direct Delivery A distribution method between suppliers and stores, without a Distribution Center

in between.

Direct flow Used to describe the in-store flow of delivered unit loads that can directly and fully be used for sales space replenishment.

DMG Distribution Mix

Group

The distribution mix (Direct Delivery, DC delivery).

DSP Demand and Supply

Planning

A platform that runs supply chain software developed by JDA. IKEA uses the software module Fulfillment for need calculation and ordering.

DTFP Door To Floor Point The minimum sales space size of an article to be in direct flow.

EWS Expected Weekly

Sales

The store operational sales forecast on article level for a specific week. Calculated and adjusted in the MHS-SRS system.

Extra Need A manual input to DSP to support the automatic need calculation and secure

availability in anticipation of a big customer (e.g. a business customer that would otherwise take all the stock).

FL Full load A full unit load quantity, not yet used for replenishment.

IKEA Ingvar Kamprad

Elmtaryd Agunnaryd

The acronym IKEA is made up of the initials of the founder (Ingvar Kamprad) plus those of Elmtaryd, the family farm where he was born, and the nearby

village Agunnaryd.

IRL Individual

Replenishment Level

A calculation made in the SGF module of MHS used to determine when an article should be replenished from internal storage locations (SGF) in the store.

Local shortage No stock at the store.

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LT Lead Time The time between initiation and completion of a process.

MAXOH MAXimum stock On

Hand

The amount of goods of an article that steers the external order quantity.

MHS Möbel Hus System An IKEA operating system used to support the replenishment and sales of IKEA

stores, and in-store replenishment.

PL Part Load A unit load (e.g. a pallet) that is previously partly used for replenishment.

RP Replenishment Point Stock level that steers when to replenish. The sum of the applied Safety Stock

standard and the Commercial Quantity standard.

SGF Store Goods Flow SGF is used to refer to the internal storage buffer in a store. It is also a module in MHS that steers when articles should be replenished from storage locations.

SL Service Level Product availability KPI.

SLM Sales Location

Management

This describes both a store process and a tool to support the process; to dimension ASSQ’s, given a store’s space capacity constraints, in order to secure the goods availability at the sales space, control in-store handling and storage costs, and control the use of the display.

SRS Store Requirement

System

A module in MHS that calculates Expected Weekly Sales and Safety Stock standards.

SM Sales Method SM0: code for the articles with sales locations in the Market Hall area of a store

SM1: code for the articles with sales locations in the Self-Serve area of a store SM2: code for the articles with sales locations in the Full-Serve area of a store

SS Safety Stock Inventory carried to prevent stock-outs.

STO Store STO 415: IKEA Amersfoort

SUP Supplier SUP 14729: Swedwood West

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1 Introduction

The IKEA vision

IKEA was founded by Ingvar Kamprad in Älmhult, Sweden. It started with the following vision:

To create a better everyday life for the many people.

In this vision two external goals are expressed:  IKEA wants to improve people’s lives  IKEA wants to do this for the many people

Without limitations IKEA would maximize [a better everyday life] and [for the many people].

The IKEA business idea

In order to realize the IKEA vision Ingvar formulated the following business idea:

We shall offer a wide range of well-designed, functional home furnishing products at prices so low that as many people as possible will be able to afford them.

IKEA’s business thus focuses on ‘home furnishing’. Many people call it a social mission:

70% of the world’s population can hardly afford their daily bread – even less a functional and cozy home. Wherever people live, there is and will always be a need for a strong and efficient IKEA

Concept, siding with the many people. - Ingvar Kamprad, ‘The Origins of the IKEA Concept, 2009’

The business idea describes some requirements to the offer:

 A wide range; IKEA wants to create a ‘complete home furnishing offer’, to provide in the ‘complete home furnishing need’

 Well-designed; think of quality, ergonomics, etc.

 Functional; products must not only be well-designed, they must also be adjusted to the customers’ needs in order to create value, i.e. to improve their lives

 Low price; so that the many people can benefit, especially those with little to spend Over the years the idea has developed into much more than can be described in one sentence. It started on a very small scale, with a recruiting base of just Ingvar’s friends and family. The more the company grew, the more important it became to make all the new co-workers part of the emerging IKEA culture. In 1976 Ingvar therefore described the IKEA business model in more detail in what became later known as ‘The Testament of a Furniture Dealer’. In addition he defined a set of words that became an important part of the IKEA heritage in ‘A Little IKEA Dictionary’.

These documents are interesting and inspiring to read, but for the purpose of this research the notion of them suffices. Also interesting in this regard are the manuals ‘The IKEA Concept Description’ (2012) and ‘IKEA Values, An Essence of the IKEA Concept’ (2012) by Inter IKEA Systems.

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Context of this research

To realize the IKEA vision, it is IKEA’s duty to grow.

First of all, to create economies of scale, which enable lower costs per product that can be passed along to the many people in the form of lower sales prices (i.e. to create a better offer). And second, to enable people in new geographic areas to improve their lives (i.e. to reach the many people). But growth requires resources - especially in the area of finance, which creates a wonderful dilemma:

In order to grow IKEA needs to build up profit, but if it charges too much it is unable to offer the lowestpricesat goodquality, and ifit charges too little, it is unable to build up financial resources. It resembles the core idea of lean, i.e. maximizing customer value while minimizing waste. It forces IKEA to be constantly stubborn in cost savings of all kinds, to achieve higher efficiencies in all areas. Within logistics, IKEA’s growth created opportunities to develop cost-efficient Direct Delivery (DD) replenishment setups between suppliers and stores (DD is currently the main distribution method within IKEA). But IKEA’s growth also creates new challenges: storage space capacities inthe stores have become new bottlenecks, which limit IKEA’s overall replenishment efficiency.

With this in mind, and IKEA’s logistics strategy to further develop the DD offer, this thesis focuses on waste elimination in DD replenishment. What is needed to achieve leaner replenishment results?

Structure of this report

This report is structured into eight main chapters. Chapter 2 provides a general introduction to IKEA’s supply chain and the Direct Delivery replenishment process. In chapter 3 the system boundary and goal of this research are explained, the ‘Replenishment System’ is introduced, the current system is analyzed using the Delft Systems Approach, and the targets for waste elimination are pointed out. The chapter ends with an analysis summary. Basedon this analysis, aproblemdefinition is formulated in chapter 4, together with the main research questions. Chapter 5 provides solutions to the identified problems with a proposed redesign. In chapter 6 the waste elimination potential of this redesign is quantified through simulation. In chapter 7 the results are put into perspective, implementation is discussed, and recommendations are done for further research. Chapter 8 ends with conclusions.

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2 IKEA’s supply chain

To provide some guidance to this thesis, this paragraph briefly explains some IKEA essentials.

The IKEA Group

The IKEA Group (INKGA Holding B.V. and its controlled entities) is a home furnishing company with a fully integrated supply chain (including product development, production, distribution, retail, etc.). The company is owned by Stichting INGKA Foundation, in the Netherlands.

The IKEA Group franchises the IKEA retail system from Inter IKEA Systems B.V. in the Netherlands. Inter IKEA Systems B.V. is the owner of the IKEA Concept and the world wide IKEA franchisor.6

Retail

The IKEA Group sells home furniture primarily through IKEA retail stores.

In FY2013 the IKEA Group owned a total of 303 stores in 26 countries.7_{Total sales were € 27,9}

billion8_{, of which 69% in Europe, 16% in North America, 8% in Asia and Australia, and 7% in Russia.}

IKEA B.V. is a retail unit in the Netherlands, part of the IKEA Group, consisting of 11 retail stores and 1 service office (in Amsterdam, with country management, sales leaders, marketing, etc.).

IKEA Retail Services AB in Sweden governs the matrix of such retail units, driving the global retail development in all sales channels and contributing to the development of the commercial direction.

The product range

Besides the IKEA store, the product range is probably what most people associate with IKEA.

What IKEA stores sell is designed and controlled by IKEA of Sweden AB, part of the IKEA Group.9_The

IKEA product range consists of about 9.500 products, of which about 2.000 are yearly renewed. The range is structured into 20 Home Furnishing Businesses, based on customer needs.

Suppliers

The IKEA product range is manufactured by suppliers. In FY13 the IKEA Group had 1.046 home furnishing suppliers in 52 countries. 60% was purchased in Europe (mostly in Poland 18%, Italy 8% and Sweden 6%), 33% in Asia and Australia (of which in China 23%), 3% in North America, 3% in

6_{Inter IKEA Systems B.V. is owner of the IKEA Concept, and expands the IKEA business by franchising. It}

monitors, protects, improves and develops the IKEA Concept.

7_{Growth / compare former years: FY03: 165 stores; FY12: 298 stores; FY13: 303 stores. In addition currently 42}

stores are operated by franchisees outside the IKEA Group.

8_{Growth / compare former years: FY03: 11,4 billion; FY12: 27,0 billion; FY13: 27,9 billion.}

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Russia and 1% in South America. One group of suppliers is special in the sense that they are part of the IKEA Group: the IKEA Industry Group. IKEA Industry manufactures wood-based furniture. IKEA Industry currently has 44 production units at 36 sites in 11 countries.

Of these, Swedwood West in Zbąszynek, Poland is the focus of this research. Swedwood West manufactures board-on-frame furniture like ‘Lack’ and ‘Expedit’, and supplies all IKEA stores in the world; in FY2013 a total of 1.605.003 m3, of which 79% to Europe (of which to Germany 24%, to Italy 8% and to the United Kingdom 8%), 7% to North America, 6% to Asia and Australia and 8% to Russia. Swedwood West’s volume share of total world sales is about 6%. It is IKEA’s biggest supplier.

The supply matrix, replenishment setups

What is produced where and for whom (i.e. the supply matrix) is controlled by IKEA of Sweden, in collaboration with IKEA Supply, through commitments with suppliers (IKEA Industry and external). IKEA Supply is the group of companies that form the IKEA Group supply organization.

IKEA Supply AG is the main wholesale company within the IKEA Group, owning the goods in the 32 IKEA Distribution Centers (DC’s) and 11 Customer Distribution Centers (CDC’s) in 16 countries.10_IKEA

Supply AG is also the purchasing and selling company for products from suppliers to franchisees. Given the supply matrix, goods need to be distributed from suppliers to stores. The Supply Team, part of IKEA Supply AG, controls the replenishment setups, i.e. the distribution and ordering methods. Replenishment setups vary per supplier – store relation. They are a function of the supply matrix, storage space capacities, sales volume rates, location and supplier stability (a.o.).

With 1.046 suppliers and 303 retail stores in many countries, the distribution network is complex. Examples of distribution methods are Direct Delivery (DD), e.g. full DD (direct delivery between supplier and store), Transit delivery (DD with a transit hub in between) or cluster DD / Transit (with a consolidation point in between); DC delivery, i.e. separate deliveries from supplier to Distribution Center and from Distribution Center to store; and Combined Supply, i.e. a combination of DD and DC, primarily Transit with a supporting DC function for relations with long lead times or unstable relations. IKEA’s replenishment process is primarily order driven. Some vendor-managed setups exist as well.

Trading Service Offices

IKEA Supply has 28 Trading Service Offices in 24 countries, organized according to sending area. Trading offices are the link between suppliers and IKEA. They maintain relationships with suppliers, are concerned with the daily operations, and measure and control supplier performance (a.o.). Trading Area Central Europe operates in Croatia, Czech Republic, Hungary, Poland, Slovakia and Slovenia, with a total share of 24%. The office in Janki, Poland is responsible for Swedwood West.

10_{IKEA B.V. uses 3 Distribution Centers for store replenishment: low-flow Distribution Center Dortmund,}

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Transportation

Given a replenishment setup, the goods need to be moved between suppliers, DC’s and stores. IKEA Transport is part of IKEA Supply’s DS Operations, and is responsible for the purchasing, scheduling and control of all transportation. The Transport office in Warsaw, Poland is responsible for all shipments from Poland. The actual transportation function is outsourced to external freight carriers.

The Direct Delivery (DD) replenishment process

The focus of this research is on the replenishment process of the Direct Delivery product range between Swedwood West / suppliers and IKEA retail stores. Below the process is summarized.

IKEA customers buy their products in IKEA’s stores. They expect the products to be available when they want it. In order to secure the required product availability, retail stores order from suppliers. The ordering process is automated, and based on forecasted sales over lead time standards. Orders for unit loads are exported daily, for Swedwood West about 8 days in advance of the planned delivery date. DD suppliers receive the orders directly, the same night as they are exported. Orders include ‘requested dispatch dates’, and the lead time standards for order export should be defined in such a way that the suppliers receive enough orders to dispatch at satisfactory filling rates, without delays. Suppliers plan shipments based on received order volumes and IKEA’s filling rate goals for dispatch (KPI’s). They export ‘shipment orders’ to IKEA Transport in the form of preliminary consignments, normally 2 days in advance of their planned dispatch date. A consignment is a ‘bundle of orders’. Based on slot availability (resource capacity) for loading and unloading at supplier and store, and commitments with external freight carriers, IKEA Transport schedules the deliveries and books the transportation service. Bookings are one-way, the carrier is responsible to arrange its own ride back. Without delays, the carrier arrives on the scheduled dispatch date with a transport unit, which is then loaded and dispatched. Transportation from Poland to the Netherlands generally takes two days. Without delays, the transport unit arrives in the morning before store opening. The store’s Goodsflow department then unloads the goods and replenishes the sales spaces11_{, before the customers arrive.}

Products that do not fit in their sales space upon delivery need to be stored in the stores internal storage buffer, referred to as SGF. Stock from SGF is used later for sales space replenishment.

11_{A sales space is where the customer collects his goods for immediate take away. Sales spaces for Swedwood’s}

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3 Analysis of the Replenishment System

3.1 Research system boundary

3.1.1 The IKEA System

IKEA’s vision and business idea can be reformulated into a root definition of the IKEA System:

A system that creates a better everyday life for the many people, by transforming home furnishing needs into satisfied home furnishing needs, through a wide offer of well-designed, functional home furnishing products at low prices, such that as many people as possible are able and willing to afford them.

The system’s primary function is to ‘transform’ people with home furnishing needs into customers with satisfied home furnishing needs, by transforming raw materials into sold home furnishing goods.

Figure 3-1 illustrates this with a ‘black box’ of the IKEA System.

Figure 3-1: Black box of the IKEA System

3.1.2 Steady-state model of the IKEA System, control theory

The Delft Systems Approach (Veeke, et al., 2008) distinguishes four conditions that enable a process in a system to be controlled properly:

1. There must be an objective; it must be known which output or state is desired to achieve with the system

2. The system must be capable of realizing this objective

3. It must be possible to influence the system’s behavior in one way or another

4. The relationship between the interference and the resulting behavior must be known

In order to satisfy these conditions, the rather abstract requirements from ‘The Testament of a Furniture Dealer’ must be translated into realistic measurable objectives, policy and standards. This is illustrated with a steady state model in Figure 3-2.

Requirements; as described in ‘The Testament of a Furniture Dealer’

People with

home furnishing needs Customers with satisfiedhome furnishing needs

Performance

Raw materials Sold home furnishing goods

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Figure 3-2: Steady-state model of the IKEA System; the primary process (yellow) and function control (blue)

3.1.3 Research system boundary, goal of this research

A system boundary distinguishes a system to be studied from its environment. The choice of the system boundary is dependent on the goals of the research.

 The primary goal of this research is to ‘make the replenishment process between IKEA Industry production units (and suppliers in general) and IKEA’s customers lean(er)12_.

It was decided to limit the study to the biggest IKEA Industry production unit: SUP 14729 SWEDWOOD POLAND Sp. z o.o. Oddz. Fabryki WEST - from now on Swedwood - and IKEA NL. It was also decided to focus on the Direct Delivery (DD) product range - i.e. the direct flow between suppliers and IKEA retail stores, without a distribution center in between - since this is the main replenishment setup between Swedwood and IKEA. Direct Delivery has proven to support cost reductions and IKEA is building an infrastructure and working methods to continue this journey13_.

DD suppliers produce to stock. This means that home furnishing products are produced against a sales forecast and sold to IKEA distribution centers and stores from finished goods stock.

 Swedwood’s customer order decoupling point is thus at Swedwood’s warehouse, where finished goods are stocked in a buffer to be dispatched to IKEA companies.

IKEA’s customers primarily buy the products from sales stocks at IKEA retail stores.

 IKEA’s final customer order decoupling point is thus at the sales stocks at IKEA retail stores, where IKEA customers collect their goods for immediate take away (or home delivery).

12_{Lean is an ongoing transformation. One could never make a dynamic organization lean, only}_leaner_{. In}

paragraph 3.2.2 the fundamentals of the lean philosophy are summarized.

13_{Source: Logistics Strategy For IKEA 2012 - 2016}

Requirements; as described in ‘The Testament of a Furniture Dealer’

People with

Performance

Objectives, policy, standards Results

TRANSFORMATION PROCESS Evaluate Standards

Deviations Initiate

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The system of interest is everything in between these buffers that is necessary to make the products available for IKEA customer demand. This is illustrated with Figure 3-3.

Figure 3-3: Research system ‘left and right’ system boundaries

The decision for these boundaries implies that production and sales and the overall control of these functions (balancing production and sales to prevent overstocks and central shortages) are beyond the scope of this research. Swedwood’s customer order decoupling point will not be challenged.14

Besides the goals of the research, the system boundary is also dependent on the ability to measure those goals and the means to achieve them.

IKEA’s supply chain is too big to challenge all policy and standards coming from initiating functions performed by various organizations within IKEA, within the timeframe of a graduation assignment. Therefore a decision was made about which standards would be taken for granted and which were open to be challenged.

 It was decided that standards regarding the IKEA product range and replenishment setups will not be challenged. In other words, it is assumed that the standards that define who supplies what to whom through which replenishment setup are ‘right’.

In paragraph 3.2.1 and 3.4.2 these standards are further explained.

14_{To get a feeling for how ‘decoupled’ IKEA’s orders are from production: Swedwood’s buffer stock is about}

162.500 m3, which is about 4 weeks of its total world sales. From a lean perspective this seems huge and

therefore an interesting topic for research. However, potential overstocks at the supplier would be a production and sales issue, not an ordering and delivery issue, and thus out of the scope of this research.

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3.1.4 The Replenishment System

Figure 3-4 indicates the position of this research’s (sub) system in the steady-state model of the IKEA

System. From now on this system will be referred to as the Replenishment System.

Figure 3-4: The Replenishment System; a subsystem of the IKEA System Requirements; as described in

‘The Testament of a Furniture Dealer’

People with

Performance

Initiate Evaluate

Standards Deviations

TRANSFORM

Development of the IKEA product range

Pr od uc tio n Replenishment System _Sale s

Standards (who, what, whom)

Control of replenishment setups (which setup)

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3.2 Black box

The purpose of the Replenishment System is to make produced goods from Swedwood’s / the supplier’s warehouse stock available to fulfill IKEA’s customer demands.

Figure 3-5 illustrates this with a ‘black box’ model of the primary function.

Figure 3-5: Black box model of the Replenishment System

The primary function transforms ‘produced goods’ into ‘available goods’ for IKEA sales units to sell. It is one in a series of transformations that together form the supplying process.

3.2.1 Standards; the IKEA product range, the supply matrix, objectives

Apart from the material flow input, other inputs for the Replenishment System are standards, such as the IKEA product range and the supply matrix. The product range defines what needs to be made available (incl. unit load dimensions,etc.). Thesupplymatrix defineswhichproduction unitproduces

what for whom. Global supply chain objectives are defined in terms of costs, availability and sustainability. Availability is being measured in terms of service levels (see paragraph 3.3.2).

These standards are decided upon by initiating functions in the IKEA System (IKEA of Sweden a.o.).

3.2.2 Requirements; the concept of lean

In addition to measurable standards like costs and product availability, IKEA also sets ‘requirements’. One of themainrequirementsforthisresearchis that thesystemmustbelean.

There are many books written about lean, but in a nutshell it comes down to the following: 1. Figure out what value needs to be created or provided

2. Create or provide that value with the least amount of waste

The lean philosophy is derived from the ‘Toyota Production System’ and is centered on ‘preserving value with less work’. Taiichi Ohno defined seven main targets for waste elimination (the 7 ‘mudas’):

Standards

- IKEA product range, supply matrix - objectives Results, performance Initiate Evaluate Standards Results Standards Deviations Available goods Produced goods Requirements - lean TRANSFORM Pr od uc tio n Replenishment system _Sales MAKE PRODUCED GOODS AVAILABLE TO

FULFILL IKEA’S CUSTOMER DEMANDS

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1. Overproduction

2. Waiting (time on hand)

3. Unnecessary transport or conveyance 4. Overprocessing or incorrect processing 5. Excess inventory

6. Unnecessary motion 7. Defects / repair

(Ohno, 1988) considered the fundamental waste to be overproduction, i.e. producing more than is needed. In view of the Replenishment System this translates into making more products available than is needed. Overproduction is fundamental because it causes most of the other wastes.

3.2.3 Performance; the concepts of effectiveness and efficiency

To control the replenishment process properly the performance of the function must be measurable. Performance can only be determined by comparing the actual results after a period of time with the initially determined standards (objectives) for the determined time period.

The Delft Systems Approach (Veeke, et al., 2008) provides clear definitions for effectiveness and

efficiency, which make it possible to test the processes that are designed for achieving a system’s

objectives. The concepts of effectiveness and efficiency are summarized below.

In order toachievethe desired output or state, a system must carry out the required transactions. For these transactions means are required (machines, tools, people, energy, etc.). To acquire those means and to get them to carry out the transactions the system must make sacrifices.

Standards define the Results (yields) that a system intends to achieve with its means and activities, and the maximum permissible Sacrifices the system is prepared to make to achieve those Results. Effectiveness is defined as the relationship between the actual Result and the set standard:

(3.1)

Efficiency is defined as the relationship between two Sacrifices:

(3.2)

Effectiveness indicates value creation: if the actual Results are greater than intended to achieve with the system, then the effectiveness is higher than 100%. Efficiency indicates waste elimination: if the actual Sacrifices are lower than intended, then the efficiency is higher than 100%.

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To control a process, Results and Sacrifices should be compared continuously with the standards that have been set. In case a process is controlled over a longer period of time, the average effectiveness and average efficiency need to be compared with the standards.

If there are deviations that could not be brought under control in spite of all interventions made, then this could be a reason to loosen the standards. Similarly, the standards could be sharpened.

Figure 3-6 illustrates the above with a conceptual model. Results are seen as outputs of the black box,

which require Sacrifices to be fed in. The model differs slightly from the one in (Veeke, et al., 2008), to illustrate the analogy with a standards control loop with initiating and evaluating functions (like shown in Figure 3-2). Note the different type of arrows: this is not a steady state model.

Figure 3-6: Conceptual model illustrating the concepts of effectiveness and efficiency

(Bikker, n.d.) defines four additional main criteria for performance analysis / (re-)design of a process:  Flexibility (the ability to react to (sudden) changes, e.g. product flexibility, process flexibility)  Controllability (satisfaction of the conditions described in paragraph 3.1.2).

 Quality of the work  Ability to innovate

In addition to Ohno’s seven mudas, (some of) these process criteria will be used in the coming paragraphs to indicate current problems / waste elimination potential in the Replenishment System. In paragraph - effectiveness and efficiency will be used to evaluate the proposed changes.

3.2.4 Results and Sacrifices

The critical starting point for lean thinking should be a conscious attempt to define value (Results): It is the purpose of the IKEA System to satisfy people’s home furnishing needs. And it is the purpose of the Replenishment System to make the goods available (to enable the sales).

Results Sacrifices

Initiate standards (objectives) for expected Results (yields) and Sacrifices

m m

MAKE PRODUCED GOODS AVAILABLE TO FULFILL IKEA’S CUSTOMER DEMANDS

Effectiveness = Ractual / Rstandard Sstandard Rstandard Sactual Ractual Efficiency = Sstandard / Sactual

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So value is created in the form of customer need satisfaction, through sales of available products. The degree of a customer’s need satisfaction is a function of the quality of the product (the offer in the broadest sense) and the specific customer (his needs, personality, etc.).

A second main value component to be created is revenue, because revenue is needed to build up profit, which is needed to grow, which is essential to realize the IKEA vision.

Growth creates economies of scale, resulting in lower costs per product that can be passed along to ‘the many people’ in the form of lower sales prices (resulting in a better offer). It also enables people in new geographic areas to improve their lives (reach the many).

A third desired Result is customer loyalty, because customer loyalty enables additional sales.

Customer loyalty is a function of product availability directly, the quality of the product offer (in the broadest sense), the existence and quality of competitors, and the overall IKEA experience. It is also a function of the customer (his needs, spending limit, personality, etc.). The actual impact of the non-availability of a product on sales and these aspects is unpredictable:

The non-availability of a product could result in a missed sale of that product; it could result in missed sales of other products; it could even result in (extra) sales of products that the customer would not have bought if the product had been available for instant gratification. The resulting customer need satisfaction sum, revenue sum and customer loyalty are a function of the customer’s willingness and ability to return for the product, the availability of alternatives and competition, and the variables described above.

To achieve the desired Results, the Replenishment System must make ‘Sacrifices’. The foremost sacrifices the system makes are financial costs (e.g. transport costs, storage costs, handling costs). Otherrecognizedsacrificesareecological sacrifices (i.e. the damages done to Earth’s ecosystems). It must be noted that the selection of ways and means also results in additional value, e.g. employment opportunities for people to earn an income, develop themselves.

One could certainly think of more,but for this research the primary ones described above are enough.

Figure 3-7 summarizes the above with a conceptual model.

Figure 3-7: Results and Sacrifices; f(product availability, …) and f(ways and means)

Results (value):

-Revenues

-Customer need satisfaction

-Customer loyalty

-(Employment)

- Etc. MAKE PRODUCED GOODS AVAILABLE TO

FULFILL IKEA’S CUSTOMER DEMANDS Sacrifices:

-Financial costs (transport, storage, handling, etc.)

-Ecological sacrifices

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3.3 Effectiveness

3.3.1 Introduction

In the previous paragraph value was determined. Below will be described how IKEA measures the effectiveness of value creation and what is used for prioritization to achieve the desired Results. The main limitations of the current system will be discussed.

3.3.2 Current effectiveness measurements: service levels

In paragraph 3.1.2 it was described that

- one of the four essential conditions for proper control of a process in a system is that the relationship between an interference and the resulting behavior must be known (condition 4). From paragraph 3.2.4 it followedthat

- the availability of a demanded product has unpredictableeffects on the system’s Results. It is uncertain if and how much a shortage will affect the sales of (other) products and what the resulting customer need satisfaction, customer loyalty and revenue will be.

This means that condition 4 for controllability cannot be met.

In orderto solve this issueIKEA uses a system called ‘service level classification’.

Service level classification divides the IKEA product range into service classes (S1- S5) and measures availability results per service class (for S1 - S4)15_{in terms of ‘service levels’.}

Instead of measuring the consequences of product availability in terms of the individual aspects (i.e.

sales revenue, customer need satisfaction and customer loyalty), to control the supplying process

IKEA sets (high) product availability standards and measures product availability results, assuming that achieving these standards results in acceptable Results and Sacrifices in terms of these aspects.

Figure 3-8 illustrates how service level classification substitutes revenues, customer need satisfaction

and customer loyalty with service levels in the model of Figure 3-7. This satisfies condition 4.

Figure 3-8: Results and Sacrifices, the IKEA way

15_{S5 not measured, because it concerns outgoing range for which production is / will be stopped.}

Results (value):

-Revenues

-Customer need satisfaction

-Customer loyalty

-Service levels

-(Employment)

MAKE PRODUCED GOODS AVAILABLE TO FULFILL IKEA’S CUSTOMER DEMANDS Sacrifices:

-Financial costs (transport, storage, handling, etc.)

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It is important to realize that the service level standards for product availability (90% S4 - 99% S1) are not necessary for survival of the company, or ‘optimal’, but desirable; a political decision.

This implies that it is not the Replenishment System’s goal to maximize productivity, which is defined by (Veeke, et al., 2008) as the ratio between Results and Sacrifices (R/S).

The goal is to achieve a desired minimum availability standard (effectiveness) at maximum efficiency.

3.3.3 Limitations of service level classification

The purpose of the service level classification system is

1. to achieve a desired product availability for the customers

2. to be able to evaluate supplying effectiveness16

3. to be able to give priority to the ‘right’ articles in the supply chain

In view of these three points the main limitations of IKEA’s service level classification are described below. A detailed study can be found in Appendix Bfor further explanation.

From a performance evaluation perspective:

1. Service levels are measured as an ‘available range percentage of the product range’, where a product is ‘available’ if at the end of the day the stock > 0 and ‘unavailable’ if the stock = 0. From a value standpoint it is fundamentally wrong that these measurements are not done with respect to actual IKEA customer demand. Measuring zero stock of a top demanded product is rather different than measuring zero stock of something with little demand. Measuring zero stock of a product without demand is not even a shortage.

To illustrate, consider the following situation.

On a random morning right before opening, store A and B both have zero stock of the same product with the same classification. Due to a capacity problem at the supplier there is only one pallet available for replenishment. The capacity problem will last for a full week and one pallet holds 50 products. At store A the demand for this week is 40 products, at store B it is 15 products. Assume that the total replenishment lead time is 1 second. This morning the Replenishment System must decide for which store this one pallet will be made available. Regardless of the rules for prioritization, the results of this decision must be measurable. Using the current measurements, making the pallet available for either one of these stores results in ‘an available product’ at one store and zero availability at the other, the whole week. In reality, making the pallet available at store A results in 15 shortage problems (at store B), and making it available at B results in 40 shortage problems (at store A). The actual impact on the result would thus be considerably different than measured with IKEA’s service levels. It can be concluded that not including demand results in measurement errors.

16_{A result of the combined efforts of the Production System (securing warehouse stock), the Replenishment}

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16 2. Because there are four different service level standards (i.e. one for each service class), when the results of more than one sales units deviate from the standards, it is generally not possible to conclude which supplying (sub) system has better product availability results. This means that although IKEA’s service level classification system satisfies condition 4 for proper product availability control of each service class, the system lacks an overall goal that would make it possible to evaluate overall product availability results.

To back up these limitations a quantitative case study was performed (see Appendix C for details). The results are presented in Table 3-1 and Table 3-2.

STO Effectiveness S1 S2 S3 S4 87 94,1 98,6 97,0 97,3 95,4 88 96,1 99,2 97,3 97,5 94,7 89 96,5 99,3 97,5 97,2 94,5 151 94,4 99,2 96,8 96,1 95,7 270 93,8 99,3 98,3 97,8 97,6 272 94,2 99,0 97,3 97,1 94,3 274 94,2 99,1 97,7 97,0 96,5 312 96,2 98,8 97,9 98,2 97,4 378 95,4 99,3 98,0 97,9 96,4 403 95,6 98,9 96,9 97,2 95,5 404 94,9 99,3 97,3 97,6 96,1 415 94,6 99,3 98,6 98,3 97,4

Table 3-1: Comparison effectiveness measurements with service level results of the total product range of NL stores week 12 2013: percentages

Ranking Effectiveness S1 S2 S3 S4 1 89 *₄₁₅ ₄₁₅ ₄₁₅ ₂₇₀ 2 312 *₂₇₀ ₂₇₀ ₃₁₂ ₄₁₅ 3 88 *₈₉ ₃₇₈ ₃₇₈ ₃₁₂ 4 403 *₃₇₈ ₃₁₂ ₂₇₀ ₂₇₄ 5 378 *₄₀₄ ₂₇₄ ₄₀₄ ₃₇₈ 6 404 88 89 88 404 7 415 151 404 87 151 8 151 274 88 89 403 9 274 272 272 403 87 10 272 403 87 272 88 11 87 312 403 274 89 12 270 87 151 151 272

Table 3-2: Comparison effectiveness measurements with service level results of the total product range of NL stores week 12 2013: store ranking. * = shared position

In these tables official service level results (columns: S1 - S4) of NL stores (rows: 87, 88, …, 415) are compared with the results of a different measurement method (columns: effectiveness); one that includesestimateddemand and weighs availability according to the products’ salesprices, given that this is how IKEA’s service classification system is primarily driven: according to expected revenues.

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Regarding 1:

From the tables it can be derived that stores that seem to do very well in achieving thegoals,actually could be performing worse than thought. See for example STO270; according to the service level results 270 ranks clearly top 3, according to the effectiveness results 270 ranks the least. This suggests that in the current measurements the non-availability of products with demand was given not enough weight and / or the availability of products without demand was given too much weight. Regarding 2:

The tables also demonstrate that based on the current measurements it cannot be concluded how stores overall perform / rank in terms of product availability. See for example STO 89; from the service level results it is unclear how 89 performs overall, since 89 scores top in S1, somewhere in the middle in S2 and S3 and second to least in S4. When demand is included, however, it follows that with 96,5% ‘available demand value' 89 clearly ranks first of all NL stores in the measured week. The above was reasoned from a performance evaluation stand point, which is reactive (i.e. too late). Finally, from a pro-active perspective (for feed-forward control):

3. Because the classification is done at large intervals17_{, based on long-term forecasts of}

average sales18_{of aggregations of sales units}19₍₁_{) and because the system lacks an overall}

goal that could be used for value maximization / damage minimization (2), service level classification cannot be used properly for feed-forward control, in case of capacity problems. To illustrate 1:

When prioritization is needed among an S1 product and an S4 product, and the S4 product is out of stock with high demand while there is more than enough stock of the S1 product, then the S4 product should be given priority for replenishment, based on actual needs. When service level classification would be used for prioritization, however, this would not happen. Furthermore, it is impossible to prioritize among products with the same classification. To illustrate 2:

Assume two deliveries must be scheduled, but there is only one unloading slot available at the store. Then one of the shipments must be delayed. How should a decision be made between the following product mixes [50% S1, 20% S2, 10% S3, 20% S4] and [20% S1, 60% S2, 20% S3, 0% S4]? Service level classification lacks an overall goal for value maximization / damage minimization. Decisions among product mixes cannot be made. It is interesting to conclude that although the service level classification system is designed to give priorities to the right articles in the replenishment process, the use for this purpose is limited.

17_{There are only 5 classes, the total IKEA product range consists of about 13.000 products.}

18_{Long-term forecasted averages say nothing about actual needs.}

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3.4 Efficiency

3.4.1 Introduction

In the previous paragraphs value and effectiveness were defined, and the limitations of IKEA’s service level classification system were pointed out. Effectiveness is a function of product availability.

To a certain extent, safety stocks secure product availability.

The purpose of safety stocks is to protect product availability against: 1. Unexpected inventory decrease

2. Delivery delays from needed delivery dates

What is interesting is what can be done to control these ‘disturbances’.

- Better control could reduce the need for safety stocks, resulting in a higher efficiency. - It could also result in higher product availability, meaning higher effectiveness.

This means that the potential of improved control could be approached from two perspectives. Because lean is centered on ‘preserving value with less waste’20_{, from now on the potential will}

primarily be approached from the efficiency perspective.

In the coming paragraphs the targets for waste elimination will be described.

Figure 3-9: Steady-state model of the Replenishment System

20_{Setting a goal for effectiveness and achieving this goal with the least amount of waste.}

Performance, results

Evaluate Replenishment setups, ordering rules, etc.

Results

- service level results - cost results Standards Deviations Available goods Produced goods Requirements - lean Initiate TRANSFORM Pr od uc tio n Replenishment system _Sales REPLENISHMENT PROCESS Standards

- service level objectives - cost objectives

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3.4.2 Standards; replenishment setups

Figure 3-9 shows a steady state model of the Replenishment System. The model illustrates that on a

function control level, initiating functions (performed by various organizations in the IKEA supply chain21_{) define the ‘replenishment setups’ (= standards) that steer the replenishment process.}

For this research the chosen standards are assumed to be correct.

For the sake of explanation, below some additional words on replenishment setups.

A replenishment setup is a combination of the applied distribution method (i.e. the path a product follows from supplier to IKEA retailer) and order method (e.g. order driven or vendor managed), defined on the article – store level with appropriate lead time standards, for store replenishment. Choosing the optimal replenishment setup for each IKEA product is a complex process that involves cost simulations, and is crucial to achieve the desired product availability and to keep the costs low. A main constraint in these calculations are stores’ storage space capacities.

To control the inventory in the stores, stores set constraints in terms of minimum expected volume throughput times and a maximum delivery frequency. Thefirstconstraintensuresthat ‘slow sellers’ do not take up excessive amounts of storage space. The second protects for excessively high safety stocks, which would be needed to secure the product availability over long lead times (which are a function of order volumes for potential relations and transportation costs, but also simply location). Direct Delivery is the preferred distribution method. That is, if the constraints allow it. When full DD is not possible, DD cluster, DD Transit and Combined Supply (mainly DD, with a supporting DC function) are alternatives to keep costs at a minimum. A final option is to use Distribution Centers. DC setups enable product picking and shorten lead times (which require less safety stock) but are inefficient. In FY2013 Swedwood West supplied 1.605.000 m3 of furniture to IKEA stores. Of these volumes, 78,44% had a full DD setup, 3,37% a DD Transit setup and 18,19% was supplied through DC setups. From a receiving perspective, all 303 IKEA Group stores together received 26.549.000 m3, of which 34,52% through full DD setups, 21,33% through DD Transit setups, and 44,15% through DC setups. Once again, the focus of this thesis is on DD replenishment, without a Distribution Center in between.

21_{IKEA Trading - Supply Developer Sender, IKEA Supply AG - Supply Developer Receiver, IKEA Retail - Capacity}

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3.4.3 PROPER model

In the Replenishment System a clear distinction can be made between an order flow, product flow

and resource flow. For this reason it was decided to use the PROPER model (Veeke, et al., 2008)

for further analysis. Figure 3-10 presents a PROPER model of the current replenishment process.

Figure 3-10: DD replenishment aspect-system: PROPER-model of the current replenishment process

In this model it is indicated with colors who is currently responsible for the respective functions. Blue = IKEA Group organizations, Orange = supplier (could be external, not IKEA Industry), Green = external freight carrier. The headings of the following paragraphs correspond with the functions.

Performance, results

Evaluate Replenishment setups, ordering rules, etc.

Results

- service level results - cost results Standards Deviations Available goods Produced goods Requirements - lean Initiate TRANSFORM Pr od uc tio n Replenishment system _Sales REPLENISHMENT PROCESS Standards

- service level objectives - cost objectives

- IKEA product range, supply matrix

Status updates Status updates Damaged goods (back to production) Used resources Supplier warehouse stock Historic orders Deliver consignments Damaged goods Plan and create

orders for unit loads

Plan shipments and create consignments

Schedule deliveries

Dispatch goods Transport goods _{sales spaces}Replenish

Source transport units Finished order buﬀer Resources Shipment order Shipment booking

Tasks, picklists Status updates

Release transport unit Receive goods

Replenishment setups (DD) Lead time standards Supplier and receiver calendars Product dimensions, weight and packaging information Rules for order planning

REPLENISHMENT PROCESSCONTROL

IKEA

sales stock Sell

Assignment

Use transport units Stock information Sales forecasts Replenishment parameters - RP - MAXOH Orders‘in pipeline’ Results

(to evaluating functions) Standards

(from initiating functions)

Disturbances

- not enough loading / unloading slots - not enough transport capacity - traﬃc bans, bank holidays, etc.

Interventions Available goods Free Produced goods Cancelled orders IKEA SGF stock Replenishment parameters - RP - MAXOH

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3.4.3.1 Plan and create orders for unit loads

Orders for IKEA’s product range are planned, created and exported by IKEA’s ordering system DSP. This is automatically done on the article level, every night, based on

- current stock information

- sales forecasts (Expected Weekly Sales, day indices, Extra Need quantities) - replenishment parameters (RP, MAXOH)

- arrival information of orders ‘in the pipeline’ and

- the replenishment setup (DD), with lead time standards for ordering and delivery (in days) - sender and receiver calendars (closed days for dispatch and receipt)

- product dimensions, weight and packaging information (number of pieces per unit load, etc.) - rules for order planning

the total lead time (LT) standard in advance of the planned arrival date,where

.22 (3.3) DSP’s planning for arrivals is driven by expected needs. The system identifies a need when

(3.4) where the Replenishment Point is defined as

(3.5) but for Swedwood’s DD product range mainly equal to the applied Safety Stock standard.23

Expected stocks end of day are computed from current stock levels the days onward (minus forecasted daily sales and possible Extra Need quantities24_{, plus the planned arrival quantities of}

earlier exported orders25_{). Forecasted daily sales are computed from Expected Weekly Sales.}26

When orders are exported they are created with a requested dispatch date. This is the primary information about needs that suppliers use for the planning of shipments and prioritization of orders.

22_{The main value-added step in store replenishment is the physical transportation of goods from supplier to}

store (2 days). The primary reason why orders are exported the total LT standard in advance (about 8 days) is to centralize / minimize the safety stocks that are required to protect for delays from needed delivery dates.

23_{Commercial Quantities are optional to secure a minimum amount of stock in the store that is needed to give}

customers a perception of ‘plenty’. This is particularly relevant for small products such as napkins, etc.

24_{IKEA personnel with sales responsibility can plan Extra Need quantities in anticipation of a big customer.}

25_{Planned arrival information is updated in the process, e.g. upon consignment creation and delivery scheduling.}

26_{Based on historic sales data (i.e. averages, trends, forecast reliability, out-of-stock situations) and a set of}

sales parameters (i.e. promotions, sales jumps, seasonal effects), Expected Weekly Sales (EWS) are computed automatically by SRS for all articles sold. IKEA personnel with sales responsibility can improve the quality of the computed values by feeding the system with information about planned sales and marketing activities. EWS are thus outputs from the Sales System. The forecasted daily sales are computed by splitting EWS using day indices.

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In essence the RP steers when to replenish. However, according to DSP’s current rules:

 The sender lead time standard sets a minimum between order export and the requested

dispatch date. This limits the supplier’s ability to respond to sudden needs (= agility).

This is not a problem when the need is identified at least the total lead time in advance. However, in case of a sudden need – inside the export window - it results in a planned arrival date later than the need date, for which a store needs to protect with safety stock.

To elaborate, for the sender lead time standard is defined as the sum of the (persupplier)27_{and the}₍_per_{replenishment setup)}28_{. Both}

saynothingaboutthesupplier’s actualability / responsiveness to dispatch.

The first component only makes sense for suppliers that purchase and / or make to order; not for DD-suppliers who, per definition, produce to stock. In addition, it is no necessity to receive orders and plan shipments in sequential order.

The second component is only needed to extend the lead time standard between order creation and dispatch, such that, using DSP’s current rules, suppliers on average receive enough order volume to dispatch at satisfactory filling rates without delays.

It is one of the main responsibilities of suppliers in the Replenishment System to dispatch goods according to what is needed. If requested dispatch dates do not correspond with the

needs / are incorrect from the start, then suppliers are unable to make the right decisions.

The sender lead time standard thus acts as an unnecessary constraint in the ordering rules, which results in too late deliveries, for which a store needs to protect with safety stock. In addition:

 Currently, orders are created and exported according to the export window, i.e. when the planned arrival date = today’s date + the total lead time standard, regardless of whether or not this date corresponds with the need date. This could also result in unnecessary delays. The planned arrival date is a function of today’s date, the sender lead time standard, the transport lead time standard, but also sender and receiver calendars (closed days).

Sender and receiver calendars can delay planned arrival dates to dates outside the export window, when the actual need date is inside the export window.

When orders for these arrivals are exported according to the total lead time, then the

requested dispatch date does not only not correspond with the need, it is also exported (too)

late, such that the supplier might not be able to add the order to the right consignment. This way the total lead time standard / export window acts as an unnecessary constraint , which results in delays from needed delivery dates, for which a store needs safety stock.

27_{3 days for SUP 14729 Swedwood West}

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The minimum order quantity for products with a DD setup is one full pallet (= 1 unit load). The actual order quantity for a planned arrival is influenced by a store’s Sales Location Management (SLM):

SLM is the process of dimensioning sales spaces, given a store’s space capacity constraints, in order to secure the goods availability at the sales space, control in-store handling- and storage costs, and control the use of the display.29_{With SLM shopkeepers are given the freedom to make}

their own decisions regarding space size and placement on the article level.

Outputsfrom SLM are maximum stock on hand (MAXOH) values.MAXOH steers theorder quantities30_.

So the RP primarily steers when to replenish, MAXOH primarily steers how much to replenish.

 MAXOH takes into account a product’s Biggest Peak Day Forecast31_{and its Assigned Sales}

Space Quantity (i.e. the maximum number of products that fit in the sales space). The maximum of those normally determines how many unit loads will be ordered. This is fundamentally wrong:

The Replenishment Point steers when to replenish. In the RP a Safety Stock standard is included to protect for unexpected inventory decrease and delays from needed delivery

dates. It also includes an optional Commercial Quantity standard, which defines the

minimumamountofstockthatisrequiredtoservecommercialpurposes (display). If the RP is meant to serve all purposes, then there should be no need for bigger orders. The consequence of the current logic is unnecessary ordering and delivery in batches, which results in waste:

Batch ordering results in too early deliveries: inventory of non-needed products that require storage space and risk additional in-store handling and damages.32

Batch ordering also results in too late deliveries, because batch orders form unnecessary queue situations at the supplier, which impede flow;

29_{A sales space is where the IKEA customer can pick up his goods for immediate take away.}

30_{For the calculation of MAXOH see Appendix D and the calculation of order quantities see Appendix E.}

31_{by default 50% of the Expected Weekly Sales}

32_{This is especially a risk in case of high variability of Expected Weekly Sales, e.g. due to a sales promotion: If}

the ordering system identifies a need at the end of such a week (think of a temporary price reduction), then the

order quantity will be based on 50% of the EWS of the ending sales promotion. When next week the promotion is over (back to the original price), then the ordered quantity is probably too high, and will not be needed. In addition, regarding the risk of additional in-store handling and damages. Even when the ASSQ is leading in the calculation of MAXOH (which would suggest the goods to be in direct flow from door to floor), it based on the assumption that the product will be delivered on the need date, and sales behave as expected; However, if the sales are overestimated or the unit loads are delivered too early (which could be necessary from the filling rate / transportation costs perspective) then it is likely that the unit loads will not fit upon delivery. So making the ASSQ determine the order quantity, unnecessarily increases the risk of the goods not to be in direct flow.

Lean replenishment at IKEA-Lean bevoorrading bij IKEA

Specialization: Production Engineering and Logistics

Report number: 2014.TEL.7841

Title:

Lean replenishment at IKEA

Author:

C. Sla

Preface

Summary

Summary (in Dutch)

List of words and abbreviations

Contents

1 Introduction

2 IKEA’s supply chain

3 Analysis of the Replenishment System

3.1 Research system boundary

3.1.1 The IKEA System

3.1.2 Steady-state model of the IKEA System, control theory

3.1.3 Research system boundary, goal of this research

3.1.4 The Replenishment System

3.2 Black box

3.2.1 Standards; the IKEA product range, the supply matrix, objectives

3.2.2 Requirements; the concept of lean

3.2.3 Performance; the concepts of effectiveness and efficiency

3.2.4 Results and Sacrifices

3.3 Effectiveness

3.3.1 Introduction

3.3.2 Current effectiveness measurements: service levels

3.3.3 Limitations of service level classification

3.4 Efficiency

3.4.1 Introduction

3.4.2 Standards; replenishment setups

3.4.3 PROPER model