OPERATIONS MANAGEMENT

MASTERS OF BUSINESS ADMINISTRATION 2012

Assignment Record Form
Student Name: ESHANK GARG
University of Derby Index Number: 100272311
Learning Centre: OLYMPIA COLLEGE, KUALALUMPUR MALAYSIA
Course: MBA
Term: 4 (SEMESTER 3)
Module Title: OPERATIONS MANAGEMENT
Module Leader: DR. JOANNE HEE
Assignment Submission Due Date: 23 SEPT 2012
Status: Active
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ESHANK GARG_J8806167_100272311_KUKL00370_OM Page 1


EXECUTIVE SUMMARY

Companies spend lots of revenue in order to meet customer value and demand but due to lack
of effective operational management companies face challenges and lack of product demand.
Operational management is line management of organisations that highly affect the
company‟s performance. It is a business function that organises, coordinate and control the
resources needed to produce a good, operational management is a business process to create
highest level of efficiency and value add.

IKEA success is the best example of operational management. IKEA is Swedish, flat pack
based furniture company. Company‟s effective management leads IKEA success all over the
world with 285 stores in 36 countries.

IKEA mass production leads higher rate of production with reduce per unit cost as well
higher capacity utilization. IKEA believes that more people should always able to afford their
product that‟s why the fundamental principal of success is to develop price tag first then
design product within that range. IKEA is very much concern about their product and
customer vale, low cost and high quality products are the brand image of company, that
comes from the effective organisation development system, Lean management as well
Capacity planning.

IKEA believes that they don‟t want their product back; company knows the concept of Good
Quality is fundamental aspect, that‟s why company have their own test lab in order to meet
Quality standards. IKEA believes that supplier selection highly affects the business, that‟s
why company maintains long term relationship with their supplies in the exchange of
fulfilment of IKEA‟s codes and conducts of procurement policies.

IKEA depending on the time frame of the planning, IKEA, today using „Plan and Secure
Capacity‟ and the capacity need is to be estimated in cubic meter as well IKEA uses an IT
system to control on their capacity planning, that link up and coordinate with all the aspects
of the operational management.



T AB LE OF CONT E NT S

1.0 INTRODUCTION........................................................................................................... 06
2.0 COMPANY OVERVIEW .............................................................................................. 07

2.1 BACKGROUND……………………………………………………………………....07

2.2 COMPANY VISION…………………………………………………………………..07

2.3 IKEA STATISTICS…………………………………………………………………...07

3.0 PROCESS TECHNOLOGY ........................................................................................... 08

3.1 PRODUCTION MANAGEMENT……………………………………………………08

3.2 IKEA PROCESS DESIGN……………………………………………………………09

4.0 ORGANISATIONAL DEVELOPMENT ...................................................................... 11

4.1 E-COMMERCE AT IKEA ............................................................................................ 12

4.2 ENTERPRISE RESOURCE PLANNING…………………………………………….13

5.0 LEAN OPERATION ....................................................................................................... 14
5.1 RADIO FREQUENCY IDENTIFICATION ................................................................ 15
6.0 QUALITY CONTROL.................................................................................................... 16
6.1 IKEA QUALITY STAIRCASE MODEL................................................................... 17
6.2 ISO STANDARDISATION ........................................................................................ 18
7.0 SUPPLIER DEVELOPMENT ....................................................................................... 18
7.1 SUPPLIER LONG TERM RELATIONSHIP……………………………………….19

8.0 CAPACITY PLANNING ................................................................................................ 20
9.0 FACTORS THAT ENCOURAGE CHANGES ............................................................ 22
CONCLUSION ............................................................................................................ 23

LIST OF FIGURES ..................................................................................................... 24

FIGURE 1 ........................................................................................................... 09

FIGURE 2 ........................................................................................................... 10

FIGURE 3……………………………………………………………………....14



FIGURE 4………………………………………………………..........................16

FIGURE 5……………………………………………………………………….17

LIST OF REFERENCES ............................................................................................ 25

LIST OF APPENDIX .................................................................................................. 29

APPENDIX 1 ..................................................................................................... 29

APPENDIX 2 ..................................................................................................... 30

APPENDIX 3………………………………………………………………….31



1.0 INTRODUCTION

Every business is managed through two types of managers one are line managers and others
are staff managers. Line managers like Financial, Marketing and Operational managers.
These three line managers report directly to the president or CEO of the company and other
functions like accounting, purchasing, human resource and engineering, support these three
line management functions. Financial is responsible for managing cash-flow, Marketing is
responsible for sales and meeting customers‟ demands, but what does Operational
Management do.

“Operational Management can be defined as the management of the conversion processes,
which convert land, labour, capital and management inputs into desired outputs of goods and
services. It is also concerned with the design and the operation of system for manufacture,
transport, supply or service” (Roy N R 2005).

Operations Management is the management of the resources a business uses to create value.
Value creation from resources lays at the heart of all business- those that make consumer
products, products for other business, or consumer or commercial services. Without resources
management, value is never formed, products and services are never sold, there is no profit,
and the business fails (Finch J B 2008).

Operations management refers to the administration of business practices to create the highest
level of efficiency possible within an organisation. Operations Management has been
described as a business function, analogous to accounting, marketing and finance for
operations management to be successful, it must add value during the transformation process,
the term Value added, operations describes the net increase between the final value of the
product and the value of all input. In addition to value added, operations must be efficient,
efficiency means being able to perform activities well and at lowest possible cost. An
important role of operations is to analyze all activities, increase competitiveness by
improving value added and efficiency (Reid D R and Sanders R N 2010).

The aim of paper is to analyse the effectiveness and success of IKEA‟s operational
management and to find out the factors that affects the company business process. IKEA is
very much concern about their operational policies in order to retain their products last long.



2.0 COMPANY PROFILE

2.1 Background

The concept of IKEA comes in 1943, from the initials of founder Ingvar Kamprad, plus the
initials Elmtaryd and Agunnaryd, farm and village where he grew up. In 1951, Ingvar focuses
on furniture. Then IKEA began to think about designing furniture to be flat packed. In 1956,
IKEA began testing the concept of flat pack to reduce costs through reduced transportation
expenses, lowered storage space requirements, decreased transportation damage and
reductions in labour costs. (IKEA Fans 2009).

The first full IKEA store opened in Almhult in 1958, it was the largest furniture display in all
of Scandinavia. In 1973, the first store outside Scandinavia was opened near Zurich,
Switzerland, followed by rapid growth in Germany starting with IKEA Munich in
1974. IKEA US opened its first store in 1985, and IKEA UK first opened in 1987. In 2008,
IKEA boasts 285 stores in 36 countries, with an additional 26 stores to be opened in 2009 and
is the world's largest furniture manufacturer (Kippenberger 1997).

2.2 Company Vision

“To create a better everyday life for many people”, includes a lot more than just providing a
great home furnishing offer. It is also about taking social and environmental responsibility
towards IKEA customers, co-workers and the people who produce our products (IKEA
2011).

2.3 IKEA Statistics

Number of IKEA stores worldwide- 301

Numbers of countries that have an IKEA- 41

Revenue made by IKEA worldwide annually (2011) - $4 billion

Annual sale increment from 2000-2010- €9.5 billion- €23.1 billion

(IKEA Annual Report 2010).



3.0 PROCESS TECHNOLOGY (Process Design)

Process design is concerned with conceiving the overall shape of processes and their detailed
workings. The first of these tasks can be approached by positioning the process in terms of its
volume and variety characteristics. The second task is more concerned with the detailed
analysis of the objectives, capacity and variability of the process (Slack et al 2006).

In operations the design of the process is categorised into types for manufacturing and
services. The choice of process design is most dependent on the volume and variety of the
product or service that an organisation offers (Greasley 2008).

3.1 Production Management

The traditional view of manufacturing management (production management) began in 8th
century when Adam Smith recognized the economic benefits of specialization of labour. He
recommended breaking jobs down into subtasks and reassigning workers to specialized tasks
in which they become highly skilled and efficient.
Production is an organized activity of transforming raw materials into finished products. It is
an international act of producing something useful. Production function shows the
relationship between the input and the output of an organisation. by the study of production
function the maximum output which can be achieved with given inputs, or say resources with
a given state of equation which related the outputs as the function of inputs, that is

Y = f (X1, X2…… Xn)
Where Y = units of output, which is the function of the quantity of two or more inputs
X1 = unit of labour, and
X2 = unit of machinery, and so on.
Some quantities of production are assumed as fixed, that is not varying with change of
output, such quantities never enter in the equation (Roy N.R, 2005).



Figure 1: Schematic Production System Source: (Roy N.R, 2005).

3.2 IKEA Process Design

IKEA strives to have everyday life at home as company‟s starting point in all designing
process. IKEA believes that people‟s need and dreams should always be the main source of
inspiration in the design process. They believe that the many people should always be able to
afford their design, that‟s why the fundamental principal for all product development at IKEA
is to design the price tag first. IKEA product developer June Deboehmler and public relation
representative Mark Marston said, “When we decide about a product, we always start with
the price, then the customer needs” (Terdiman D, 2008).

Product planning scheme is one of the main tasks of IKEA‟s Operations Manager. This
includes choosing the production product strategy, the production structure and the inventory
strategy for finished goods, IKEA‟s product plan is generally of two types:

Modified product strategy

Typical product intention

Operations Managers modified product policy when the level of customisation is high and
manufacturing rate is low as per customer requirement. IKEA is producing 10,000 variants of



products; IKEA is using mass production to produce their products. The different variants of
its products don‟t affect the basic process of production (Slack et al, 2010). This is particular
means that the volume is high, usually with narrow effective variety,

VARIETY HIGH

JOB
SHOP

JOBBING

BATCH
VOLUME LOW VOLUME HIGH

MASS

CONTINUOUS

VARIETY LOW

Figure 2: Manufacturing process Matrix Source: (Slacks et al 2006)

Characteristics
Mass production is used under the following circumstances:
Standardisation of product and process sequence, dedicated special purpose machines having
higher production capacities and output rates, large volume of products, shorter cycle time of
production, lower in process inventory, perfectly balanced production lines, flow of
materials, components and parts is continuous and without any back tracking, production
planning and control is easy, Material handling can be completely automatic.



Advantages
Following are the advantages of mass production; higher rate of production with reduced
cycle time, higher capacity utilisation due to line balancing, less skilled operators are
required, low process inventory, manufacturing cost per unit is low, achieving economic of
sale.

Limitations
Following are the limitations of mass production; breakdown of one machine will stop an
entire production line, line layout needs major change with the changes in the product design,
high investment in production facilities, the cycle time is determined by the slowest operation
(Kumar S.A, Suresh N, 2008).

Aside from advantages mass production has some disadvantages too, large mass production
give more and large amount of output which tend to warehouses, inventory which increases
high inventory control investment of the company (Berger A, 2011).

IKEA is such a giant company; they get their wood from a variety of suppliers. They are not
responsible for the actual cutting down of trees, but rely on other companies to provide the
wood for their products. According to Ellen Ruppel Shell, IKEA is the third-largest consumer
of wood in the world and most of the wood comes from Eastern Europe and Russia, where
wages are low and a large amount of logging is done illegally, which leads to socio economic
factor of mass production (Wiki 2010).

4.0 ORGANISATIONAL DEVELOPMENT

Organization development is the process through which an organization develops the internal
capacity to most efficiently and effectively provide its mission work and to sustain itself over
the long term.



4.1 E-Commerce at IKEA

Electronic commerce or e-commerce is a term for any type of business, or commercial
transaction, which involves the transfer of information across the Internet. It allows
customers to electronically exchange goods and services with no barriers of time or distance.

According to editor-in-chief of International Journal of Electronic Commerce, “Electronic
commerce is sharing business information, maintaining business relationship and conducting
business transactions by means of telecommunication networks”, (Zwass V, 2011).

IKEA business revolves around the philosophy of, „we do our bit, you do your bit and
together we save money‟, the company‟s success is based on its ability to adapt to change, In
2006, IKEA made plan to expand their e-commerce strategy (Wa Teresa S L, 2011).

In late 2007, IKEA announces a new website design, currently rolling out in 24 countries
worldwide. The new website features an increased focus on the sharing of IKEA furnishing
knowledge with customers, where other retailers are delivering basic data on products price
and promotions. IKEA is dedicated to granting the customers full access to its celebrated
home furnishing knowledge (Huge, 2007). Only some customers knows that the three words
(cheap, innovation and stylish) of IKEA‟s product designing and development philosophy are
communicated through IKEA‟s digital offering, for instance, IKEA launched the Facebook
Showroom Campaign, this world class leveraging the cost-free social facebook platform,
specially photo tagging and comments functionality, to create mass brand buzz (Sim J, 2010).

IKEA created the Shared Space Website, where customers, primarily women with families,
can post pictures of the room they‟ve remodelled or redecorated. To upload pictures, register
first and then get a small profile on the space, visitors can browse the images by room for
ideas and inspiration, rate them, save them and share the image. IKEA keyed right into their
customer‟s desire to show off their hard work and satisfied their desire with a very public,
gorgeous site for customers to share, their shared space site and social media network is only
part of their digital strategy, the Shared Space Site had more than 36,000 unique users in the
first month, and Facebook fans tripled in month. IKEA did nice 7% lift, with a social media.
However, social media is just a one piece of digital channel; another piece online retail is still
missing (Crepeau N, 2012).



4.2 Enterprise Resource Planning (ERP)

ERP is a complete enterprise wide business solution. The ERP consists of software support
modules such as: marketing and sales, field services, product design and development,
production and inventory control, procurement, distribution, industrial facilities management,
process design and development, manufacturing quality, human resource, financial and
accounting and information service (Slack et al 2010).

The concept of technology has been a vital factor in the success and sustainability of business
in contemporary society, so it‟s essential for every business organisation to ensure that it
adopts the most current technology in order to ensure its competitiveness. ERP has been one
of the most important technological developments in the business world. ERP integrates the
external and internal management of information across entire organisations and ensure
smooth coordination with the various aspects of business. ERP offers significant benefits to
business organisations in term of enhancing the attainment of business objective and boosting
profitability.

IKEA Group, the leading retailer in the world, deals with home accessories, appliances and
ready to assemble furniture. The company deals with more than 12,000 products and its
websites records more than 470 million visitors per year. IKEA had made remarkable effort
in the adaptation of modern technology for its operations, as it evident in its prioritization of a
successful implementation of ERP through Lawson Software (Article base, 2011).

Lawson Opportunity Analyser (NASDAQ: LWSN), is a business modelling tool designed to
help companies analyze the financial and operative effects of various business scenarios.
Lawson Software helped IKEA prioritize and set targets for successful ERP implementation
and related business process involvement (Lawson, 2008).

After a comprehensive review of its global IT requirements, IKEA has decided to adopt an IT
platform, K3’s retail software operation based in Holland is already IKEA‟s software partner.
K3 retail deliver multichannel solution that enables retailers to create joined up shopping
experiences for their customers (Retail review, 2010).

Better Online Solution (BOS) announced the successful implementation and delivery of a
logistics management system for IKEA. BOS provides data collection process for inventory
stock talking, receiving goods, transferring inventory and worldwide Navision ERP System.



IKEA uses Egnyte Hybrid Cloud Platform and Zoho Creator Cloud Platform, which gives
business users an easy way to use, access share and monitors their files. (Letzion R, 2010).

5.0 LEAN OPERATION

Lean operation is a flow of products and services always deliver exactly what customers want
(perfect quality), in exact quantity (neither too much nor too little), exactly when needed (not
too early nor too late), and exactly where required (not to the wrong location). (Slack et al,
2010).

Lean operations are business practices that use a little time, inventory, and supplies and work
as possible to create a dependable product or service. It helps business save money. Lean
operation / Lean manufacturing is the process , techniques, strategies, and initiatives being
implemented by companies around the world that aim to reduce unnecessary and
unproductive tasks, activities and behaviour in the work environment (Grooms D, 2007).

Lean manufacturing is now the name used for a collection of business performance
improvement tools and concepts that focus on enhancing Quality, Cost, Delivery and
People‟s contributions through the application of world class manufacturing principles, the
elimination of waste and continual improvement in workspace safety (Hutschins D ).

Figure 3: (a) Traditional and (b) lean synchronized flow stages Source: (Slack et al 2010).



IKEA had developed its own global distribution network. By utilizing control points in the
distribution cycle and control waste, the firm is able to insure timely delivery of products to
retail stores all over the world.

5.1 Radio Frequency Identification (RFID)/ GS1 (SSCC)

Radio frequency identification (RFID) is an automated data collection technology. It uses
radio frequency waves to transfer between a Reader and an RFID Tag.

RFID is a technology that incorporates the use of electromagnetic or electrostatic coupling in
the radio frequency (RF) portion of the electromagnetic spectrum to uniquely identify object.
The advantage of RFID is that it does not require direct contact or line-of sight scanning; it
can scan objects while moving that makes it more effective. It is also called DSRC,
Dedicated Short Range Communication (Rouse M, 2007).

IKEA Group, a multinational home furnishings company, has a total of 300 stores in 36
countries worldwide. In April 2004, IKEA began a study of the types of systems and methods
that were being used for traceability in the group and how these could be improved. IKEA
began a pilot project using GS1 standards on its pallets. The GS1 Serial Shipping Container
Code (SSCC). A GS1 key used to identify logistics units was implemented at IKEA‟s
warehouses in Älmhult and Torsvik (Sweden) as well as at three of its largest suppliers‟ sites.
During the pilot project, the GS1 SSCC bar code was read as the pallet was unloaded
allowing it to be picked up and stored immediately by a truck driver. The time to unload a
truck was reduced by 44% and the turnover in the warehouse‟s dock area increased by 55%.
The success of the pilot project, it was decided that all of IKEA‟s warehouses worldwide and
their 400 largest suppliers would start adopting the GS1 System and the GS1 SSCC in
September 2007 (Swedberg C, 2010).
"Using RFID we can have multiple read points to ensure that we load and unload the right
goods. In principle it is easy to put tags on the pallets, but implementation of an RFID
solution also requires installation of antennae and that the equipment for sending and
receiving information," says Jan Spjuth, project manager at Supply Chain Development
IKEA of Sweden. When it will actually be possible to start using RFID at IKEA depends on a
number of market factors. The cost of RFID tags and readers is expected to go down.
In, 2010 SC Freda, one of Lithuania's largest furniture manufacturers, produces wood
furniture, has sold its products exclusively to IKEA, to be sold in the retailer's stores



worldwide. The company ships an average of 10,000 pallets loaded with furniture every
month, with 800 items loaded onto a total of 15 to 20 trucks on any given day. In August
2010, SC Freda began employing radio frequency identification to track furniture destined for
IKEA, with the goal of reducing shipping errors and labour costs as workers moved the
products into a warehouse and then onto trucks. But beyond warehouse accuracy and labour
reduction, the company hoped to achieve benefits in production efficiency as well.

"The RFID project has only just started," says Jan Spjuth. “We will not be developing our
own RFID system, but will follow the standards that exist.” (Raattamaa B, 2007).

6.0 Quality Control

Quality is the totality of features and characteristics of a product or service that bears on its
ability to satisfy stated or implied needs (Roy N R, 2005).
A quality product is not necessarily a good product. In fact all products have quality. A
quality products is concern with trying to meet customer expectations, that‟s why it is not
always true that a product with high quality will also be costly, for instance, a cup of tea or
coffee taken in a highway café may taste better than what one get in a five star hotel.
According to Slack et al (2010), the customer‟s view of quality is what he or she perceives
the product or service to be. Quality can be defined as the degree of between customer‟s
perception of the product or service.



Figure 4: Magnitude Gap between customer perception and expectation
Source: (Slack et al, 2010).

IKEA knows this concept and Good Quality is fundamental at IKEA, that‟s why it is so
important that ambition to offer products for sale at lower price never compromises with
commitment to provide the right quality. To make sure that all products meet the expectations
and requirements of customers, as well as mandatory standards, the products are tested at
IKEA Test Laboratory with ISO Standardisation.

6.1 IKEA Quality Staircase Model

IKEA Quality Staircase Model defines a 4-step approach, aimed at improving the Suppliers
overall performance in Quality, with focus on securing CEPQ (Customer Experienced
Product Quality)

LEVEL 4
LEVEL 3
ISO + 4SIP
LEVEL 1 LEVEL 2 4SIP

QMUST QWAY

Figure 5: IKEA Quality Staircase Model Source: (IKEA, 2006).

LEVEL 1 QMUST
Before 1st delivery, The IKEA Supplier must implement and comply with the entry-level
requirements – Final Inspection, Test-status Summary and Process Control.

LEVEL 2 - QWAY
st
IKEA supplier shall, from 1 delivery date and within an agreed time frame, implement and
comply with the minimum requirements – Start-up Process, Receiving Inspection, Final
Inspection and Document and Sample Control.



LEVEL 3 – 4SIP
For supplier with the ambition to further develop its quality system. Related requirements are
stated in this standard and are marked with SIP (Supplier Inspection Program).

6.2 ISO Standardisation
IKEA products must be functional and safe to use. Product quality is based on customer
needs. The products must meet the customer‟s demand not only in terms of design, function,
stability and durability but also in terms of quality.
The IKEA Test Lab in Almhult tests both textile and furniture. Some 50,000 tests are carried
out in accordance with standards and quality each year. The IKEA test lab has been
accredited for its quality system and test methods in accordance with ISO 17 025. The IKEA
Quality Policy states that customer must always get full value of their money (IKEA, 2003).
IKEA policy is that they want customers back not products, that‟s why company believe on
quality customer, a certification of compliance for the food safety management system of its
restaurants in Greece according to ISO 22000.

The unique retail experience that IKEA has been renowned for since its foundation, IKEA‟s
value to give quality and help people live a better life at home, the purpose of certification of
good safety management system is to prove in the most evident manner that IKEA cares for
its customers.

The certification was carried out by the internationally well known Certification Body TÜV
AUSTRIA HELLAS, according to the provisions of ISO 22000:2005 (Hellas A, n.d.).

7.0 SUPPLIER DEVELOPMENT

Supplier development can be loosely defined as the process of working collaboratively with
suppliers to improve or expand their capabilities. An example may be teaching a supplier
how to manufacture a type of item that they never manufactured before for the purposes of
giving you the option to buy, rather than make, that item.



7.1 Supplier Long term Relationship

IKEA, the international retailer of furniture and household goods, has a reputation of low
price and fresh, innovative design. However, it is also keen develop a reputation for
environmental stewardship and sensitivity to social issues, purchases its raw materials from
more than 50 countries, principally China, Sweden, Poland, Germany, Russia, Italy.
In September 2000, IKEA launched The IKEA Way on purchasing home furnishing products,
a three-page 'code of conduct' for its 2,000 suppliers, focusing on, environmental impact and
working conditions. An external body verifies information submitted by suppliers. If
suppliers do not meet the code, they are requested to remedy the situation and if suppliers
continually breach the code, they can be removed from IKEA's suppliers list (Srinivas H
2012).
This document „Code of Conduct‟, in relation with suppliers is IKEA‟s minimal Social
Working and Environmental requirement. It has been established in order to make the IKEA
position clear to suppliers and their co-workers, as well as any other parties. IKEA recognises
the Fundamental Principles of Human Rights, laid down by the “Universal Declaration of
Human Rights”, and believe that daily business has an impact on Environmental and Human
Right issues, in particular, in relation to people's working and living conditions. IKEA is a
production-oriented retailing company. We strive to build long-term relationships with suppliers
that share our commitment to promote good practices, and who want to grow and develop
together with IKEA.

Legal Requirements
IKEA expects that suppliers must comply with national laws and regulations with
international conventions concerning social and working conditions, fundamental human
rights.
Suppliers must provide a safe and healthy working environments, pay proper wages and
compensation for overtime. Suppliers must not use of force or bounded labour, use of child
labour etc.

Environmental/ Forestry

IKEA always strives to minimise any possible damaging effect to the Environment. One of
IKEA's most weighty environmental issues is forestry, and in particular the impact of timber



extraction on ancient forests. At the end of the 1990s, pressure from Greenpeace and other
environmental groups led IKEA to introduce a policy prohibiting the use of wood from intact
natural forests, except those certified by the Forest Stewardship Council. This was formally
launched in November 1999.

'IKEA is joining the movement of responsible corporate consumers concerned about ancient
forests,' commented Green peace‟s forest campaigner (IISD, 2012). Therefore, IKEA stated
the Code of Conduct for all of suppliers to reduce the effect on environment,

Suppliers must: work to reduce waste and emissions to air, ground and water, handle
chemicals in an environmentally safe way, handle, store and dispose of hazardous waste in an
environmentally safe manner, contribute to the recycling and reuse of materials and products,
use wood from known areas and from sources that are well managed and preferably
independently certified as such.

Suppliers must not: use or exceed the use of substances forbidden or restricted in the IKEA
list of “Chemical Products and Substances”, use wood originating from national parks, nature
reserves, intact natural forests or any areas with officially declared high conservation values,
unless certified (Bergmark T, 2005).

8.0 CAPACITY PLANNING

Capacity planning is to be carried out keeping in mind future growth and expansion plans,
market trends, sales forecasting etc. It is a simple task to plan the capacity in case of stable
demand. But in practice the demand will be seldom stable. The fluctuation of demand creates
problems regarding the procurement of resources to meet the customer demand (Kumar S A
2008).
Capacity planning is strategic in nature. Capacity is the rate of productive capability of a
facility. Production managers are more concerned about capacity planning because, sufficient
capacity is required to meet the customer demand in time, capacity affects the cost of
efficiency of operations, capacity affects the scheduling system, capacity creation requires an
investment. According to Matsson and Johnsson (2003), the extent of how capable a
company is to use its resources to add value is called Capacity.



It is the process plan and secures capacity that is responsible for providing a capacity plan for
IKEA. Different levels of capacity planning are used at IKEA depending on the time frame of
the planning. Central Mid Term Capacity planning which has a planning horizon of the
nearest 1-2 years. Mid Term Capacity Planning to, for example, plan its capacity of
transports, central warehouses and goods receptions at stores for the nearest 84 weeks. The
Capacity need is therefore estimated in cubic meter, and would be most straight forward to
calculate through aggregating forecasted volume for each article into a total capacity need
(Elmfors H S 2010).
A large part of capacity planning is to estimate the capacity need. In order to determine the
capacity need, the outflow of products has to be estimated. When the outflow has been
estimated, the capacity need can be calculated, which makes it possible to start with the
capacity planning. That method could be seen as a “bottom-up” approach of calculating the
capacity need. IKEA is today also using a bottom-up approach to calculate the future sales
outflow in cubic meter which means that the forecasted sales for each and every product is
aggregated to a total sales plan. Therefore, within IKEA in the process Plan & Secure
Capacity, a “top-down” approach is used when calculating the sales outflow in volume. This
means that a total forecasted sales plan from Group Management for all products is converted
into the corresponding volume. To do this conversion a conversion factor is needed which is
an average value per cubic meter of all IKEA products for a determined period of time.
The future outflow in cubic meter can easily be estimated by dividing the total Sales Plan by
the conversion factor (Josefsson S 2010). (APPENDIX 1)

Factor 1

Factor 2

Factor 3



9.0 FACTORS THAT ENCOURAGE CHANGES

The scope of Operations Management (MO) has changed significantly in the last several
decades. Starting from Re-order point (ROP) to Enterprise Resource Planning (ERP) and
Supple Chain Management (SCM), OM has gone through a long way in term of scope and
techniques being used. JIT philosophy, Lean production and agile manufacturing have
significantly changed the way how design and analyze the operations. Recently, OM and
logistic fields get closer, since there is no way to separate those functions any longer from the
operational process perspectives (Bayraktar E). Operation Management is a set of activities
that create goods and services through the transformation of inputs into outputs (Heizer et al,
1999). Operation Management has extended from a function of the organisation to an
enterprise wide process and even crossing the border of the enterprise to the all supply chain
of the sector. Today, Product design, marketing, HRM are important part of operation
management. New trends emerging in OM and challenges waiting the organisation are listed:
Global focus, Growing Service Sector, Global competitiveness, Rapid product development,
Green Market and e-business (Bayraktar E et al 2007).

Global Market
Globalization is another facet of the future business environment. Companies with a well
structured global supply chain have a clear distinction from their competitors. Technological
advancements create new opportunities about the location of the facilities in a global world.
Virtual presence instead of physical one reshapes the all supply chains to take advantage of
the economies of scale. Designing, producing, and manufacturing in different countries and
distributing, and serving world-wide create altogether a new perspective in OM. Of course,
those are only possible with an excellent logistics management (Bayraktar E 2007).

Green Market
Green market is a natural consequence of environmental conciseness. Operations manager
should not only deal with their supply chain out of their own organization but also manage
the environmental factors. This first reminds the reverse logistics flows. (Lambert et al.,
1993) In logistics plans of the future, reverse flows will have an important impact. Those
types of concerns should be considered in the design of products. In case of globally located



products, environmentally friendly policies need to be implemented along the all supply
chain. More strict restrictions on environmental side as well as new standards like ISO
14000 are quite likely. Corporations of all sizes, processes, and industries face increasing
demands for responsible environmental activity from legislators, regulators, customers, end-
consumers, advocacy groups, local communities, and the realities of environmental
degradation and dwindling raw material supplies. These increased pressures paralleled the
growth of environmental management departments within firms (Angell C L 1999).

CONCLUSION

The success of IKEA‟s operational management is the result of effective analysis and control
on each and every aspect of company. IKEA is very strict towards pricing, quality, e-
procurement policies as well lean and long term relationship with suppliers. IKEA is very
much aware about the market, company knows that today, the market need and trend is
changed, customers not only wants to buy products they wants value of their money, that
makes IKEA to believe on low cost, and higher value products.
IKEA is the third largest consumer of wood that leads socio-economical factors as well as
geographical factors affects the performance of company. Company has effective
development system and also uses e-commerce in order to approach maximum customers all
over the world, but still company IKEA‟s e-commerce system uses only single aspect of
market so far company don‟t have online shopping system. The key factor for the success of
IKEA‟s pricing policy is they set price tag before production then the production team
manufacture products within that range this leads low cost of product as well as waste
control. IKEA believes that, “we do our work, you do your work, and together we will make
profit”.



LIST OF FIGURES

FIGURE 1
Schematic Production System……………………………………………………..09

FIGURE 2
Manufacturing process Matrix……………………………………………………10

FIGURE 3
(a) Traditional and (b) lean synchronized flow stages……………………………14

FIGURE4
Magnitude Gap between customer perception and expectation…………………16

FIGURE 5
IKEA Quality Staircase Model……………………………………………………17



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LIST OF APPENDIX

APPENDIX 1

The Model for calculating Capacity Planning in cubic meter

The factors can then be consolidated in a model as in:



APPENDIX 2
(OEE MODEL OF CAPACITY PLANNING)

The overall equipment effectiveness (OEE) measure is an increasingly popular method of
judging the effectiveness of operations equipment. It is based on three aspects of
performance:
The time that equipment is available to operate,
The quality of the product or service it produces,
The speed, or throughput rate, of the equipment.

OEE = Availability rate x Performance Rate x Quality rate



APPENDIX 3

IKEA SUSTAINABILITY


OPERATIONS MANAGEMENT

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