Global Sourcing at IKEA Case Study

Global Sourcing

Global sourcing has remained one of the strategic complexities for supply chain managers who are involved in buying and selling products (Hultman et al. 2009, p.1).

With the heightened pressure to minimize costs to reasonable levels, firms are progressively shifting from domestic producers to country-specific, suppliers. With the recent financial hurdles faced by firms such as the 2007-2008 economic downturn, firms will continue to be pressured to source on a global scale (Hultman et al. 2009, p.1).

However, global sourcing is characterized by many challenges and complexities, which are often overlooked by many entities (Colicchia et al. 2010, 684).

Additionally, the low prices of commodities available by low-cost state producers seldom translate to lower aggregate cost of ownership. Regardless of global sources being a common element across the works manufacturing and service sectors, still there is a shortage of studies on global sourcing, and the existing studies are often sub-conceptualized relative to the literature on the supplier-buyer associations or industrial linkages.

The progressive shift to global sourcing

The progressive shift to global sourcing is expected to alter buyer-supplier associations and networks dynamically, but limited studies have been done to ascertain the significance of this trend.

Specifically, the contemporary models for developing global sourcing systems require a broad and comprehensive conceptual founding linking the supply chain approach, which is upstream focused with an established body of knowledge on internationalization, which appears to take a downstream approach.

This research report aims to give a better grasp of the global sourcing undertakings by merging the two theories and examining the global sourcing activities of IKEA.

The study of IKEA

The study of IKEA will enlighten on the existing global sourcing frameworks and processes especially the extent to which the sourcing process can be classified as incremental and linear and affirmed by the current literature on global sourcing.

This paper will have five sections, the introduction, literature review, research methodology, and the findings from the IKEA case and the implications.

Literature Review

Global Sourcing

With the increasingly corporate and scholarly attention in the recent decades, supply chain management and sourcing have been established as variables that play pivotal roles in attaining market competitiveness (Hultman et al. 2009, p.2).

Although the concept of global supply is yet to receive the attention it deserves, it is an area of increasing focus by academicians within the discipline of purchasing studies. In agreement with Jiang, Jia and Gong (2018, p.627) this paper elucidates global sourcing as a procurement technique whereby a firm identifies the most efficient location in terms of production even if the place is overseas.

It, therefore, involves a global-scale integration of procurement, engineering, productions, operations, marketing and logistics with the upstream section of an entity’s supply network.

With an emergency in the 1990s, the initial studies investigated the processes resulting in international outsourcing, occasional categorizing it into several distinct sates. The Center for Advanced Supply and Purchasing abbreviated as CAPS has been instrumental in understanding global sourcing (Hultman et al. 2009, 2) The continuous research into the area has resulted into a five-level international souring framework; local purchasing only, foreign purchase depending on the need, foreign procurement as supply chain strategy and integration of the international procurement. The initial model has four levels. According to both the models, entities progressively get an experience of the global procurement activities and sourcing dictates for the extensive coordination of strategies and requirements among global businesses (Hultman et al. 2009, p.2). Although international sourcing entails acquiring products from foreign manufacturers on a need-be basis, global sourcing is more consistent and strategic.

The second categorization of studies dwells on the driving factors for global sourcing for instance (Loppacher, Cagliano & Spian, 2011, p.160). In the investigations of the drivers for global competitive positions, firms have resorted international souring techniques, establishing a trade-off between global, centralized procurement and the need for domestic supply utilization and adjustments. The association between suppliers and firms is providing entities with the opportunity to have source efficiency and increase the international competitiveness (Loppacher, Cagliano & Spian, 2011, p.3). This study shows that supplier-buyer collaborations have evolved shifted from competitive relationships to the cooperative association by undergoing through different modes to react to different variables such as market change and purchasing of commodities and the globalization process. The research also indicates that the global sourcing behavior patterns and strategy associated with supply source internationalization and centralization of purchases is a crucial variable in supplier management practices.

Schiele (2012, p.45) investigated the boundaries of international sourcing, by focusing on the cost advantages which firm tend to get. They affirmed that cost benefits tend to diminish in the overall acquisition costs. Their study further held that international sourcing does not improve competitiveness because of the challenges of being a preferred buyer in a foreign setting. According to Leavy (2004, p.21), in developing economies, the interest of managers in outsourcing has been increasing over time. Gradually they have been viewing it as value creation and competitive process. Companies are becoming aware of the potential of outsourcing to support other strategies besides cost minimization. The study points out the four opportunities, which can be exploited using global sourcing, and they include, strategic repositioning, scaling without mass, increased market focus and disruptive innovation.

The third collection of studies concentrate focuses on the management, design of global supply, and organizational developmant, specifically the development of global sourcing approaches. The study concentrates on theorizing and defining global sourcing as well as ascertaining the relationship between purchasing (Leavy 2004, p.26). As firms examine the potential of the strategies mentioned above, it essential that they also look at the two most significant risks, the risk of adopting global sourcing at the wrong phase and the risk of losing valuable skills they could create competitive advantages in future (Mena et al. 2011, p.70).

Reuter ad others (2010, p.52)in their research theorized four aspects of global sourcing strategy, standardization of activities, purchase process integration, standardization of employee and product variables. They discovered tight connection between global purchasing and international marketing approach and affirmed that many of the decisions are identical. Pervez and Veronica (2008, p.2) examined how the international supplier networks can facilitate and create a market driving framework. Conceptually the paper gives a contribution by merging the network approach and the market driving technique. The research was exploratory, and it examined how IKEA established its supplier linkages in Poland and Russia. Eleven extensive interviews were conducted with the firm senior and middle-level managers and technicians. The findings confirmed that the market driving technique is a proactive form of market alignment. It enables firms to influence the current market variables and customers and to give unique value propositions.

Internationalization

Technology and creativity based entities especially those whose businesses are woven around technology and innovation are easily affected by globalization in regarding competitive pressures and speed of change (Onetti et al. 2012, p.346). For such entities, growth activities and strategic decisions are characterized by strong interlink between innovations, entrepreneurship, and internationalization which in practice have been studied separately. Strategic choices in practice encompass these processes and address variables like location, organizational boundaries, and the activities to concentrate on as well as selecting the strategic partners (Ericksson et al. 2015). The business model adopted by firms also been to embrace globalization and the proliferation of technology markets. According to the findings of the locational research, decisions are critical.

Internationalization this entails a firm adapting itself to the unique characteristics of its business networkers (Ericksson et al. 2015). Thus, supply networks and chains cannot be eliminated from the foreign market penetration strategies and must be integrated with the internationalization process. Therefore, internationalization originates from the interaction between the globalizing firm variables and factors for external firms. Consequently, this disrupts the nature of supply chains and changing the activities within then and the resource needs.

Research Methodology

This study has adopted a qualitative research methodology whereby it undertakes a comprehensive case study of IKEA at strategic levels and its global sourcing activities. In the growing research, quantitative research methodology has been used. Nonetheless, due to the unique characteristics of a case study research as well as its focus on a specific entity rather a general has necessitated the undertaking of a case-study research on global outsourcing. The IKEA case study gives historical and present activities in the establishment of global supply chain prices and sourcing activities at IKEA. The data used is based on archival literature and information present on the firm’s reports and website.

IKEA Global Sourcing

IKEA is a Swedish based home furnishing company that was formed by Ingvar, an entrepreneur in 1943 and it has since become the number one home furnishing globally (IKEA 2018, n.p). The firm opened its first outlet in Sweden in 1958, while its first store outside Sweden was established 1963 I Norway. Moreover, its fists store outside the Scandinavian region was in Switzerland and it was established in 1973 (IKEA 2018, n.p). Over the years the firm has grown significantly with an annual turnover growth rate of between 10% and 15%. In 2017 the firm had more than 403 retail stores in 49 countries and has more than 190,000 coworkers (IKEA 2018, n.p). The business policy that has guided the entity over the decades has been to provide relatively cheap home furnishings at prices that allow the maximum number of people to buy them and for the entity to grown duplication of the world market offering. Affordability through low-cost production has been the driving business concept for IKEA. For the firm growth is the main and explicit goal.

Although the firm is significantly different from the way it was back in 1967, its operational policies and principles have remained relatively stable. An identifiable element is the low cost approach of the firm has been to only control and own a small means of the production process. Consequently, the products that are sold within the firm’s outlet such as the PAX wardrobe and the Sultan bed are manila sourced from suppliers from around the globe through their global supply network. A properly function and tight relationships with the suppliers is a crucial success variable for IKEA except that it is often overlooked. Having the control of the products rights has resulted in enhanced control of the supply chain processes and the supplier relationships.

By the end of 2017, IKEA had products rights for nearly every products that are sold in its retail outlets. In the 90s, the firm has more than 2000 producers as part of its supply networks but in 2017, the firm decreased the number of its suppliers to below 1,400 regardless of the increased sales. The decrease in the supplier bases in the recent years is because if the increasing urgency to build and secure capacity for continuous and sustainable growth. The downstream and systematic internationalization of the firm commenced between the late 60s and early 70s. If not for the notable conflicts that the firm had with the organization, which did not understand the IKEA concept, the firm would have been bigger than it is right now. The entity forging of intimate supplier relationships in Poland and East Europe has allowed IKEA the firm to establish itself as a low-cost competitive player in the home furnishing industry.

Making Poland one of the originating markets marketed the birth of expanding IKEA of sourcing markets, and the firm has continued to increase its sourcing markets to date. By the end of 2017, the company the firm was sourcing for more than 49 countries through its more than 30 supply offices strategically located around the globe. The initial establishments of supply chains with the low-cost regions occurred in other parts of Europe and later in far regions such as China while utilizing the knowledge for similar markets for instance culture facilitated expansion. By the end of 2009, the firm had 1400 suppliers, and an equivalent of 64% of its commodities originated from European suppliers with the largest simple supply market being China at 22% followed by Poland at 16%. The firm ensured smooth communications with its suppliers through its supply office, which is, has strategically positioned around the globe. It is notable that without a collaborative relationship with its suppliers, IKEA’s balancing practice between mitigating the risk of stock-outs and incurring stock cost would be impossible.

IKEA’s global sourcing approach varies significantly. Evident across its business areas and commodity supply chains several unique characteristics, associated with its outsourcing principle enables IKEA to maintain its competitive relationship with its suppliers. One of the key pillars of this strategy is the ownership right, which IKEA has over the products and this enables the firm to change suppliers whenever it is necessary. Moreover, the firm also tries as much as possible to concentrate on a few supply markets using a few suppliers. Through this strategy, IKEA is able to balance its choices for markets and focusing sourcing activities to specific geographical settings and investing in some of the markets while foregoing opportunities existing in other markets.

IKEA’s PAX Supply Chain

This section of the research focuses on IKEA development process of one of IKEA’s global sourcing of one specific product known as the PAX wardrobe system. This product is made up of two main components, the wardrobe frame and the sliding doors, which have a variety of features. As part of the case study, the paper concentrated on one PAX doors, which have the tampered glass whose costs, forms the largest portion of the cost of the wardrobe and it is fragile and heavy. Consequently, it requires special care when being supplied. One of the suppliers of these components is Sapa Profiler, a Swedish firm which is part of Orkla Group of companies and it has supplied IKEA with the commodity since 2004. The firm also supplies IKEA with other products.

IKEA approached the supplier in 2003 proposing that firm supplier it with the PAX doors PAX wardrobe doors and this marked the beginning of successful partnerships and one of the largest single contract for Sapa profiler. For the supplier, the deal meant both new businesses and a new way of conducting business. The product sold by the provided by the supplier first made its appearance in 2004, based on IKEA’s catalog (IKEA 2017, n.p).

Notably, most of the components of the PAX wardrobe are procured globally with the main source being in Europe. Four of the PAX component types are obtained from Europe and for the Chinese production unit. IKEA has continued to source in Europe instead of China due to several variables such as restrictive covenants. Since its inception, IKEA goal has been able to regulate the production and supply of its products array. For the PAX door fittings used for the wad robe, the firm sources the components for China and Slovakia. The fittings obtained from IKEA remains, on the other hand, are procured while other components are obtained from domestic suppliers.

IKEA Global Sourcing - PAX Tampered Glass

In 2009, large percentage came from China, a situation that is different from 2003 when the initial buyer relationship was established. In 2003, IKEA sourced the tampered glass for a single domestic supplier operating in Sweden (IKEA 2017, n.p). The increasing success of IKEA soon started to put pressure on Sapa Profiler to match the growing capacity of IKEA. The initial local supplier was dropped, as the firm was reluctant to provide the suppliers at low cost. In 2005, IKEA resorted to sourcing the tampered glass form markets around the globe. IKEA soon influenced Sapa Profiler to obtain the supplies from China. Although various challenges were experienced from the onset, the supplier was eventually successful and was set up to manage IKEA’s account. The knowledge gained by IKEA played a pivotal role in the successful operations of the supplier China. In 2008, IKEA also engaged Chinese suppliers and its products were being directed towards the Slovakian production bases. Soon Sapa Profiler established operations in China. In 2007, IKEA utilized the excessive production capacity in China, the production of the doors was commenced in China.

Discussion

In the remaining part of this research, we focus on the goals of the study, which is to analyze the global outsourcing by IKEA without focus mainly being on the PAX wardrobe system. Through the research, we observe that IKEA’s case show a reactive approach to the development of sourcing strategies. This supports the findings by previous scholars that domestic sourcing eventually turns into global sourcing. In the case of IKEA’s sourcing approach, particularly is PAX supply chain the need to ensure availability of supplies and ensure low-cost production led the supplier SAPA to source internationally and being a global framework that would enable then to source component for the PAX wall robe globally. The nature of the reaction is indicated in the manner of taking pressure from the external environment and well as generating and exercising influence over the actors within the supply network. The influence that IKEA had on Sapa profiler affected the shifts in their supply chain for the tempered glass. The proliferation of Sapa Profiler’s world activities also made their suppliers restructure their network, for instance, one of the Swedish suppliers resorted to sourcing the product from China themselves.

Therefore, the development approach as seen in the case of IKEA is reactive and this forms the basis of further investigations as the role of the interactions within a supply network on the development of the intercountry outsourcing activities. In the case of Sapa profiler, the supplier of tempered glass used to make the PAX, the supplier would not be able to undertake the sourcing process without the aid and support of IKEA. Therefore, it is notable that external support is vital in the development of global outsourcing system. Additionally, the interaction and its impact on the development of the global sourcing system can be seen in the entire supplier network. Additionally, in terms of the factors that promoted the development of IKEA, global sourcing system different variables were established. Cost reduction is one of the variables that fueled the development of the firm’s sourcing system. The effort to engage in low-cost production made IKEA undertake international procurement and eventually global sourcing. Access to capacity was the second variable that was the second variable. This contrasted with the previous studies made that had affirmed that global sourcing took place in an attempt by the firm to acquire more knowledge and new products.

Conclusion

The goal of the research to analyze the development of global sourcing by undertaking cases study on IKEA and comparing it with existing sourcing models. The paper analyzed and summarized existing literature internationalization sourcing processes. Within the IKEA case, with a focus of the PAX supply system has created a better grasp of how the development of global outsourcing takes place. The research has shown that the proliferation of global outsourcing is a linear and systematic incremental process. Moreover, the process is guided by the interaction of actors in a network and those actions of various parties likely in the case of IKEA propagate up the chain prompting others to do the same

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