OPERATIONS MANAGEMENT
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OPERATIONS MANAGEMENT OPERATIONS MANAGEMENT Document Transcript

  • MASTERS OF BUSINESS ADMINISTRATION 2012 Assignment Record FormStudent Name: ESHANK GARGUniversity of Derby Index Number: 100272311Learning Centre: OLYMPIA COLLEGE, KUALALUMPUR MALAYSIACourse: MBATerm: 4 (SEMESTER 3)Module Title: OPERATIONS MANAGEMENTModule Leader: DR. JOANNE HEEAssignment Submission Due Date: 23 SEPT 2012Status: ActiveI confirm that I have read and understood the University regulations with regard to referencingand plagiarism. YES NONote: Please read the “Instruction to Upload the Assignment on OCTAL Study Portal” before uploading your assignment.Module Leader’s Comments:Module Leader’s Comments on Citing & ReferencingESHANK GARG_J8806167_100272311_KUKL00370_OM Page 1
  • MASTERS OF BUSINESS ADMINISTRATION 2012ESHANK GARG_J8806167_100272311_KUKL00370_OM Page 2
  • MASTERS OF BUSINESS ADMINISTRATION 2012 EXECUTIVE SUMMARYCompanies spend lots of revenue in order to meet customer value and demand but due to lackof effective operational management companies face challenges and lack of product demand.Operational management is line management of organisations that highly affect thecompany‟s performance. It is a business function that organises, coordinate and control theresources needed to produce a good, operational management is a business process to createhighest level of efficiency and value add.IKEA success is the best example of operational management. IKEA is Swedish, flat packbased furniture company. Company‟s effective management leads IKEA success all over theworld with 285 stores in 36 countries.IKEA mass production leads higher rate of production with reduce per unit cost as wellhigher capacity utilization. IKEA believes that more people should always able to afford theirproduct that‟s why the fundamental principal of success is to develop price tag first thendesign product within that range. IKEA is very much concern about their product andcustomer vale, low cost and high quality products are the brand image of company, thatcomes from the effective organisation development system, Lean management as wellCapacity planning.IKEA believes that they don‟t want their product back; company knows the concept of GoodQuality is fundamental aspect, that‟s why company have their own test lab in order to meetQuality standards. IKEA believes that supplier selection highly affects the business, that‟swhy company maintains long term relationship with their supplies in the exchange offulfilment of IKEA‟s codes and conducts of procurement policies.IKEA depending on the time frame of the planning, IKEA, today using „Plan and SecureCapacity‟ and the capacity need is to be estimated in cubic meter as well IKEA uses an ITsystem to control on their capacity planning, that link up and coordinate with all the aspectsof the operational management.ESHANK GARG_J8806167_100272311_KUKL00370_OM Page 3
  • MASTERS OF BUSINESS ADMINISTRATION 2012 T AB LE OF CONT E NT S1.0 INTRODUCTION........................................................................................................... 062.0 COMPANY OVERVIEW .............................................................................................. 07 2.1 BACKGROUND……………………………………………………………………....07 2.2 COMPANY VISION…………………………………………………………………..07 2.3 IKEA STATISTICS…………………………………………………………………...073.0 PROCESS TECHNOLOGY ........................................................................................... 08 3.1 PRODUCTION MANAGEMENT……………………………………………………08 3.2 IKEA PROCESS DESIGN……………………………………………………………094.0 ORGANISATIONAL DEVELOPMENT ...................................................................... 11 4.1 E-COMMERCE AT IKEA ............................................................................................ 12 4.2 ENTERPRISE RESOURCE PLANNING…………………………………………….135.0 LEAN OPERATION ....................................................................................................... 14 5.1 RADIO FREQUENCY IDENTIFICATION ................................................................ 156.0 QUALITY CONTROL.................................................................................................... 16 6.1 IKEA QUALITY STAIRCASE MODEL................................................................... 17 6.2 ISO STANDARDISATION ........................................................................................ 187.0 SUPPLIER DEVELOPMENT ....................................................................................... 18 7.1 SUPPLIER LONG TERM RELATIONSHIP……………………………………….198.0 CAPACITY PLANNING ................................................................................................ 209.0 FACTORS THAT ENCOURAGE CHANGES ............................................................ 22 CONCLUSION ............................................................................................................ 23 LIST OF FIGURES ..................................................................................................... 24 FIGURE 1 ........................................................................................................... 09 FIGURE 2 ........................................................................................................... 10 FIGURE 3……………………………………………………………………....14ESHANK GARG_J8806167_100272311_KUKL00370_OM Page 4
  • MASTERS OF BUSINESS ADMINISTRATION 2012 FIGURE 4………………………………………………………..........................16 FIGURE 5……………………………………………………………………….17 LIST OF REFERENCES ............................................................................................ 25 LIST OF APPENDIX .................................................................................................. 29 APPENDIX 1 ..................................................................................................... 29 APPENDIX 2 ..................................................................................................... 30 APPENDIX 3………………………………………………………………….31ESHANK GARG_J8806167_100272311_KUKL00370_OM Page 5
  • MASTERS OF BUSINESS ADMINISTRATION 20121.0 INTRODUCTIONEvery business is managed through two types of managers one are line managers and othersare 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 otherfunctions like accounting, purchasing, human resource and engineering, support these threeline management functions. Financial is responsible for managing cash-flow, Marketing isresponsible for sales and meeting customers‟ demands, but what does OperationalManagement 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 andservices. 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 consumerproducts, products for other business, or consumer or commercial services. Without resourcesmanagement, 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 highestlevel of efficiency possible within an organisation. Operations Management has beendescribed as a business function, analogous to accounting, marketing and finance foroperations 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 theproduct 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. Animportant role of operations is to analyze all activities, increase competitiveness byimproving 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 operationalmanagement and to find out the factors that affects the company business process. IKEA isvery much concern about their operational policies in order to retain their products last long.ESHANK GARG_J8806167_100272311_KUKL00370_OM Page 6
  • MASTERS OF BUSINESS ADMINISTRATION 20122.0 COMPANY PROFILE2.1 BackgroundThe concept of IKEA comes in 1943, from the initials of founder Ingvar Kamprad, plus theinitials Elmtaryd and Agunnaryd, farm and village where he grew up. In 1951, Ingvar focuseson 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 transportationexpenses, lowered storage space requirements, decreased transportation damage andreductions in labour costs. (IKEA Fans 2009).The first full IKEA store opened in Almhult in 1958, it was the largest furniture display in allof Scandinavia. In 1973, the first store outside Scandinavia was opened near Zurich,Switzerland, followed by rapid growth in Germany starting with IKEA Munich in1974. 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 andis the worlds 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 agreat home furnishing offer. It is also about taking social and environmental responsibilitytowards IKEA customers, co-workers and the people who produce our products (IKEA2011).2.3 IKEA StatisticsNumber of IKEA stores worldwide- 301Numbers of countries that have an IKEA- 41Revenue made by IKEA worldwide annually (2011) - $4 billionAnnual sale increment from 2000-2010- €9.5 billion- €23.1 billion (IKEA Annual Report 2010).ESHANK GARG_J8806167_100272311_KUKL00370_OM Page 7
  • MASTERS OF BUSINESS ADMINISTRATION 20123.0 PROCESS TECHNOLOGY (Process Design)Process design is concerned with conceiving the overall shape of processes and their detailedworkings. The first of these tasks can be approached by positioning the process in terms of itsvolume and variety characteristics. The second task is more concerned with the detailedanalysis 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 andservices. The choice of process design is most dependent on the volume and variety of theproduct or service that an organisation offers (Greasley 2008).3.1 Production ManagementThe traditional view of manufacturing management (production management) began in 8thcentury when Adam Smith recognized the economic benefits of specialization of labour. Herecommended breaking jobs down into subtasks and reassigning workers to specialized tasksin which they become highly skilled and efficient.Production is an organized activity of transforming raw materials into finished products. It isan international act of producing something useful. Production function shows therelationship between the input and the output of an organisation. by the study of productionfunction the maximum output which can be achieved with given inputs, or say resources witha 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 inputsX1 = unit of labour, andX2 = unit of machinery, and so on.Some quantities of production are assumed as fixed, that is not varying with change ofoutput, such quantities never enter in the equation (Roy N.R, 2005).ESHANK GARG_J8806167_100272311_KUKL00370_OM Page 8
  • MASTERS OF BUSINESS ADMINISTRATION 2012 Figure 1: Schematic Production System Source: (Roy N.R, 2005).3.2 IKEA Process DesignIKEA strives to have everyday life at home as company‟s starting point in all designingprocess. IKEA believes that people‟s need and dreams should always be the main source ofinspiration in the design process. They believe that the many people should always be able toafford their design, that‟s why the fundamental principal for all product development at IKEAis to design the price tag first. IKEA product developer June Deboehmler and public relationrepresentative Mark Marston said, “When we decide about a product, we always start withthe price, then the customer needs” (Terdiman D, 2008).Product planning scheme is one of the main tasks of IKEA‟s Operations Manager. Thisincludes choosing the production product strategy, the production structure and the inventorystrategy for finished goods, IKEA‟s product plan is generally of two types:Modified product strategyTypical product intentionOperations Managers modified product policy when the level of customisation is high andmanufacturing rate is low as per customer requirement. IKEA is producing 10,000 variants ofESHANK GARG_J8806167_100272311_KUKL00370_OM Page 9
  • MASTERS OF BUSINESS ADMINISTRATION 2012 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 BATCHVOLUME 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. ESHANK GARG_J8806167_100272311_KUKL00370_OM Page 10
  • MASTERS OF BUSINESS ADMINISTRATION 2012AdvantagesFollowing are the advantages of mass production; higher rate of production with reducedcycle time, higher capacity utilisation due to line balancing, less skilled operators arerequired, low process inventory, manufacturing cost per unit is low, achieving economic ofsale.LimitationsFollowing are the limitations of mass production; breakdown of one machine will stop anentire 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 productiongive more and large amount of output which tend to warehouses, inventory which increaseshigh 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 notresponsible for the actual cutting down of trees, but rely on other companies to provide thewood for their products. According to Ellen Ruppel Shell, IKEA is the third-largest consumerof wood in the world and most of the wood comes from Eastern Europe and Russia, wherewages are low and a large amount of logging is done illegally, which leads to socio economicfactor of mass production (Wiki 2010).4.0 ORGANISATIONAL DEVELOPMENTOrganization development is the process through which an organization develops the internalcapacity to most efficiently and effectively provide its mission work and to sustain itself overthe long term.ESHANK GARG_J8806167_100272311_KUKL00370_OM Page 11
  • MASTERS OF BUSINESS ADMINISTRATION 20124.1 E-Commerce at IKEAElectronic commerce or e-commerce is a term for any type of business, or commercialtransaction, which involves the transfer of information across the Internet. It allowscustomers to electronically exchange goods and services with no barriers of time or distance.According to editor-in-chief of International Journal of Electronic Commerce, “Electroniccommerce is sharing business information, maintaining business relationship and conductingbusiness transactions by means of telecommunication networks”, (Zwass V, 2011).IKEA business revolves around the philosophy of, „we do our bit, you do your bit andtogether we save money‟, the company‟s success is based on its ability to adapt to change, In2006, 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 countriesworldwide. The new website features an increased focus on the sharing of IKEA furnishingknowledge with customers, where other retailers are delivering basic data on products priceand promotions. IKEA is dedicated to granting the customers full access to its celebratedhome furnishing knowledge (Huge, 2007). Only some customers knows that the three words(cheap, innovation and stylish) of IKEA‟s product designing and development philosophy arecommunicated through IKEA‟s digital offering, for instance, IKEA launched the FacebookShowroom 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, registerfirst and then get a small profile on the space, visitors can browse the images by room forideas and inspiration, rate them, save them and share the image. IKEA keyed right into theircustomer‟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 onlypart of their digital strategy, the Shared Space Site had more than 36,000 unique users in thefirst 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 stillmissing (Crepeau N, 2012).ESHANK GARG_J8806167_100272311_KUKL00370_OM Page 12
  • MASTERS OF BUSINESS ADMINISTRATION 20124.2 Enterprise Resource Planning (ERP)ERP is a complete enterprise wide business solution. The ERP consists of software supportmodules 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 andaccounting and information service (Slack et al 2010).The concept of technology has been a vital factor in the success and sustainability of businessin contemporary society, so it‟s essential for every business organisation to ensure that itadopts the most current technology in order to ensure its competitiveness. ERP has been oneof the most important technological developments in the business world. ERP integrates theexternal and internal management of information across entire organisations and ensuresmooth coordination with the various aspects of business. ERP offers significant benefits tobusiness organisations in term of enhancing the attainment of business objective and boostingprofitability.IKEA Group, the leading retailer in the world, deals with home accessories, appliances andready to assemble furniture. The company deals with more than 12,000 products and itswebsites records more than 470 million visitors per year. IKEA had made remarkable effortin the adaptation of modern technology for its operations, as it evident in its prioritization of asuccessful implementation of ERP through Lawson Software (Article base, 2011).Lawson Opportunity Analyser (NASDAQ: LWSN), is a business modelling tool designed tohelp companies analyze the financial and operative effects of various business scenarios.Lawson Software helped IKEA prioritize and set targets for successful ERP implementationand related business process involvement (Lawson, 2008).After a comprehensive review of its global IT requirements, IKEA has decided to adopt an ITplatform, 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 shoppingexperiences for their customers (Retail review, 2010).Better Online Solution (BOS) announced the successful implementation and delivery of alogistics management system for IKEA. BOS provides data collection process for inventorystock talking, receiving goods, transferring inventory and worldwide Navision ERP System.ESHANK GARG_J8806167_100272311_KUKL00370_OM Page 13
  • MASTERS OF BUSINESS ADMINISTRATION 2012IKEA uses Egnyte Hybrid Cloud Platform and Zoho Creator Cloud Platform, which givesbusiness users an easy way to use, access share and monitors their files. (Letzion R, 2010).5.0 LEAN OPERATIONLean 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 (nottoo 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 workas possible to create a dependable product or service. It helps business save money. Leanoperation / Lean manufacturing is the process , techniques, strategies, and initiatives beingimplemented by companies around the world that aim to reduce unnecessary andunproductive tasks, activities and behaviour in the work environment (Grooms D, 2007).Lean manufacturing is now the name used for a collection of business performanceimprovement tools and concepts that focus on enhancing Quality, Cost, Delivery andPeople‟s contributions through the application of world class manufacturing principles, theelimination 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).ESHANK GARG_J8806167_100272311_KUKL00370_OM Page 14
  • MASTERS OF BUSINESS ADMINISTRATION 2012IKEA had developed its own global distribution network. By utilizing control points in thedistribution cycle and control waste, the firm is able to insure timely delivery of products toretail stores all over the world.5.1 Radio Frequency Identification (RFID)/ GS1 (SSCC)Radio frequency identification (RFID) is an automated data collection technology. It usesradio frequency waves to transfer between a Reader and an RFID Tag.RFID is a technology that incorporates the use of electromagnetic or electrostatic coupling inthe 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; itcan 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 36countries worldwide. In April 2004, IKEA began a study of the types of systems and methodsthat were being used for traceability in the group and how these could be improved. IKEAbegan a pilot project using GS1 standards on its pallets. The GS1 Serial Shipping ContainerCode (SSCC). A GS1 key used to identify logistics units was implemented at IKEA‟swarehouses 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 unloadedallowing it to be picked up and stored immediately by a truck driver. The time to unload atruck 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 andtheir 400 largest suppliers would start adopting the GS1 System and the GS1 SSCC inSeptember 2007 (Swedberg C, 2010)."Using RFID we can have multiple read points to ensure that we load and unload the rightgoods. In principle it is easy to put tags on the pallets, but implementation of an RFIDsolution also requires installation of antennae and that the equipment for sending andreceiving information," says Jan Spjuth, project manager at Supply Chain DevelopmentIKEA of Sweden. When it will actually be possible to start using RFID at IKEA depends on anumber of market factors. The cost of RFID tags and readers is expected to go down.In, 2010 SC Freda, one of Lithuanias largest furniture manufacturers, produces woodfurniture, has sold its products exclusively to IKEA, to be sold in the retailers storesESHANK GARG_J8806167_100272311_KUKL00370_OM Page 15
  • MASTERS OF BUSINESS ADMINISTRATION 2012worldwide. The company ships an average of 10,000 pallets loaded with furniture everymonth, with 800 items loaded onto a total of 15 to 20 trucks on any given day. In August2010, SC Freda began employing radio frequency identification to track furniture destined forIKEA, with the goal of reducing shipping errors and labour costs as workers moved theproducts into a warehouse and then onto trucks. But beyond warehouse accuracy and labourreduction, 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 ourown RFID system, but will follow the standards that exist.” (Raattamaa B, 2007).6.0 Quality ControlQuality is the totality of features and characteristics of a product or service that bears on itsability 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. Aquality products is concern with trying to meet customer expectations, that‟s why it is notalways true that a product with high quality will also be costly, for instance, a cup of tea orcoffee 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 perceivesthe product or service to be. Quality can be defined as the degree of between customer‟sperception of the product or service.ESHANK GARG_J8806167_100272311_KUKL00370_OM Page 16
  • MASTERS OF BUSINESS ADMINISTRATION 2012Figure 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 soimportant that ambition to offer products for sale at lower price never compromises withcommitment to provide the right quality. To make sure that all products meet the expectationsand requirements of customers, as well as mandatory standards, the products are tested atIKEA Test Laboratory with ISO Standardisation.6.1 IKEA Quality Staircase ModelIKEA Quality Staircase Model defines a 4-step approach, aimed at improving the Suppliersoverall performance in Quality, with focus on securing CEPQ (Customer ExperiencedProduct 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 QMUSTBefore 1st delivery, The IKEA Supplier must implement and comply with the entry-levelrequirements – Final Inspection, Test-status Summary and Process Control.LEVEL 2 - QWAY stIKEA supplier shall, from 1 delivery date and within an agreed time frame, implement andcomply with the minimum requirements – Start-up Process, Receiving Inspection, FinalInspection and Document and Sample Control.ESHANK GARG_J8806167_100272311_KUKL00370_OM Page 17
  • MASTERS OF BUSINESS ADMINISTRATION 2012LEVEL 3 – 4SIPFor supplier with the ambition to further develop its quality system. Related requirements arestated in this standard and are marked with SIP (Supplier Inspection Program).6.2 ISO StandardisationIKEA products must be functional and safe to use. Product quality is based on customerneeds. 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 carriedout in accordance with standards and quality each year. The IKEA test lab has beenaccredited for its quality system and test methods in accordance with ISO 17 025. The IKEAQuality 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 onquality customer, a certification of compliance for the food safety management system of itsrestaurants in Greece according to ISO 22000.The unique retail experience that IKEA has been renowned for since its foundation, IKEA‟svalue to give quality and help people live a better life at home, the purpose of certification ofgood safety management system is to prove in the most evident manner that IKEA cares forits customers.The certification was carried out by the internationally well known Certification Body TÜVAUSTRIA HELLAS, according to the provisions of ISO 22000:2005 (Hellas A, n.d.).7.0 SUPPLIER DEVELOPMENTSupplier development can be loosely defined as the process of working collaboratively withsuppliers to improve or expand their capabilities. An example may be teaching a supplierhow to manufacture a type of item that they never manufactured before for the purposes ofgiving you the option to buy, rather than make, that item.ESHANK GARG_J8806167_100272311_KUKL00370_OM Page 18
  • MASTERS OF BUSINESS ADMINISTRATION 20127.1 Supplier Long term RelationshipIKEA, the international retailer of furniture and household goods, has a reputation of lowprice and fresh, innovative design. However, it is also keen develop a reputation forenvironmental stewardship and sensitivity to social issues, purchases its raw materials frommore 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 andworking conditions. An external body verifies information submitted by suppliers. Ifsuppliers do not meet the code, they are requested to remedy the situation and if supplierscontinually breach the code, they can be removed from IKEAs suppliers list (Srinivas H2012).This document „Code of Conduct‟, in relation with suppliers is IKEA‟s minimal SocialWorking and Environmental requirement. It has been established in order to make the IKEAposition clear to suppliers and their co-workers, as well as any other parties. IKEA recognisesthe Fundamental Principles of Human Rights, laid down by the “Universal Declaration ofHuman Rights”, and believe that daily business has an impact on Environmental and HumanRight issues, in particular, in relation to peoples working and living conditions. IKEA is aproduction-oriented retailing company. We strive to build long-term relationships with suppliersthat share our commitment to promote good practices, and who want to grow and developtogether with IKEA.Legal RequirementsIKEA expects that suppliers must comply with national laws and regulations withinternational conventions concerning social and working conditions, fundamental humanrights.Suppliers must provide a safe and healthy working environments, pay proper wages andcompensation for overtime. Suppliers must not use of force or bounded labour, use of childlabour etc.Environmental/ ForestryIKEA always strives to minimise any possible damaging effect to the Environment. One ofIKEAs most weighty environmental issues is forestry, and in particular the impact of timberESHANK GARG_J8806167_100272311_KUKL00370_OM Page 19
  • MASTERS OF BUSINESS ADMINISTRATION 2012extraction on ancient forests. At the end of the 1990s, pressure from Greenpeace and otherenvironmental groups led IKEA to introduce a policy prohibiting the use of wood from intactnatural forests, except those certified by the Forest Stewardship Council. This was formallylaunched in November 1999.IKEA is joining the movement of responsible corporate consumers concerned about ancientforests, commented Green peace‟s forest campaigner (IISD, 2012). Therefore, IKEA statedthe 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, handlechemicals in an environmentally safe way, handle, store and dispose of hazardous waste in anenvironmentally 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 preferablyindependently certified as such.Suppliers must not: use or exceed the use of substances forbidden or restricted in the IKEAlist of “Chemical Products and Substances”, use wood originating from national parks, naturereserves, intact natural forests or any areas with officially declared high conservation values,unless certified (Bergmark T, 2005).8.0 CAPACITY PLANNINGCapacity 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 stabledemand. But in practice the demand will be seldom stable. The fluctuation of demand createsproblems regarding the procurement of resources to meet the customer demand (Kumar S A2008).Capacity planning is strategic in nature. Capacity is the rate of productive capability of afacility. Production managers are more concerned about capacity planning because, sufficientcapacity is required to meet the customer demand in time, capacity affects the cost ofefficiency of operations, capacity affects the scheduling system, capacity creation requires aninvestment. According to Matsson and Johnsson (2003), the extent of how capable acompany is to use its resources to add value is called Capacity.ESHANK GARG_J8806167_100272311_KUKL00370_OM Page 20
  • MASTERS OF BUSINESS ADMINISTRATION 2012It is the process plan and secures capacity that is responsible for providing a capacity plan forIKEA. Different levels of capacity planning are used at IKEA depending on the time frame ofthe planning. Central Mid Term Capacity planning which has a planning horizon of thenearest 1-2 years. Mid Term Capacity Planning to, for example, plan its capacity oftransports, central warehouses and goods receptions at stores for the nearest 84 weeks. TheCapacity need is therefore estimated in cubic meter, and would be most straight forward tocalculate 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 thecapacity need, the outflow of products has to be estimated. When the outflow has beenestimated, the capacity need can be calculated, which makes it possible to start with thecapacity planning. That method could be seen as a “bottom-up” approach of calculating thecapacity need. IKEA is today also using a bottom-up approach to calculate the future salesoutflow in cubic meter which means that the forecasted sales for each and every product isaggregated to a total sales plan. Therefore, within IKEA in the process Plan & SecureCapacity, a “top-down” approach is used when calculating the sales outflow in volume. Thismeans that a total forecasted sales plan from Group Management for all products is convertedinto the corresponding volume. To do this conversion a conversion factor is needed which isan 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 bythe conversion factor (Josefsson S 2010). (APPENDIX 1)Factor 1Factor 2Factor 3ESHANK GARG_J8806167_100272311_KUKL00370_OM Page 21
  • MASTERS OF BUSINESS ADMINISTRATION 20129.0 FACTORS THAT ENCOURAGE CHANGESThe scope of Operations Management (MO) has changed significantly in the last severaldecades. Starting from Re-order point (ROP) to Enterprise Resource Planning (ERP) andSupple Chain Management (SCM), OM has gone through a long way in term of scope andtechniques being used. JIT philosophy, Lean production and agile manufacturing havesignificantly changed the way how design and analyze the operations. Recently, OM andlogistic fields get closer, since there is no way to separate those functions any longer from theoperational process perspectives (Bayraktar E). Operation Management is a set of activitiesthat 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 anenterprise wide process and even crossing the border of the enterprise to the all supply chainof the sector. Today, Product design, marketing, HRM are important part of operationmanagement. 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 MarketGlobalization is another facet of the future business environment. Companies with a wellstructured global supply chain have a clear distinction from their competitors. Technologicaladvancements 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 ofthe economies of scale. Designing, producing, and manufacturing in different countries anddistributing, 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 MarketGreen market is a natural consequence of environmental conciseness. Operations managershould not only deal with their supply chain out of their own organization but also managethe 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. Thosetypes of concerns should be considered in the design of products. In case of globally locatedESHANK GARG_J8806167_100272311_KUKL00370_OM Page 22
  • MASTERS OF BUSINESS ADMINISTRATION 2012products, environmentally friendly policies need to be implemented along the all supplychain. More strict restrictions on environmental side as well as new standards like ISO14000 are quite likely. Corporations of all sizes, processes, and industries face increasingdemands for responsible environmental activity from legislators, regulators, customers, end-consumers, advocacy groups, local communities, and the realities of environmentaldegradation and dwindling raw material supplies. These increased pressures paralleled thegrowth of environmental management departments within firms (Angell C L 1999).CONCLUSIONThe success of IKEA‟s operational management is the result of effective analysis and controlon 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 verymuch aware about the market, company knows that today, the market need and trend ischanged, customers not only wants to buy products they wants value of their money, thatmakes 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 asgeographical factors affects the performance of company. Company has effectivedevelopment system and also uses e-commerce in order to approach maximum customers allover the world, but still company IKEA‟s e-commerce system uses only single aspect ofmarket so far company don‟t have online shopping system. The key factor for the success ofIKEA‟s pricing policy is they set price tag before production then the production teammanufacture products within that range this leads low cost of product as well as wastecontrol. IKEA believes that, “we do our work, you do your work, and together we will makeprofit”.ESHANK GARG_J8806167_100272311_KUKL00370_OM Page 23
  • MASTERS OF BUSINESS ADMINISTRATION 2012LIST OF FIGURESFIGURE 1 Schematic Production System……………………………………………………..09FIGURE 2 Manufacturing process Matrix……………………………………………………10FIGURE 3 (a) Traditional and (b) lean synchronized flow stages……………………………14FIGURE4 Magnitude Gap between customer perception and expectation…………………16FIGURE 5 IKEA Quality Staircase Model……………………………………………………17ESHANK GARG_J8806167_100272311_KUKL00370_OM Page 24
  • MASTERS OF BUSINESS ADMINISTRATION 2012LIST OF REFERENCESBookBerger, A 2011, Process Design Operations Management: IKEA, 1st edn, Grin Publication,Germany, pp. 13-14Finch, JB 2008, Operations Now, 3rd edn, McGraw-Hill Irwin, New YorkGreasley, A 2008), Operations Process Types , Operations Management, 1st edn, BritishLibrary Cataloguing in Publication Data, London, pp.pp. 22-27Heizer, J & Render, B 1999, Principles of Operations Management, 3rd edn, Prentice Hall,EnglandKumar, SA & Suresh, N 2008, Productions and Operations Management, 2nd edn, New AgeInternational Publisher, New DelhiLambert ML, Stock, JR, & Ellraw, LM 1993, Fundamentals of Logistics Management, IrwinMcGraw-Hill, New YorkReid, DR & Sanders, RN 2010, Operations Management an Integrated Approach, 14th edn.John Wiley & Sons, Inc, AsiaRoy, NR 2005, A Modern Approach to Operations Management, edn (n.d.), New AgeInternational Publisher, New DelhiSlack, N, Chamber, S, Johnston, R & Betts, A 2006, Operations and Process Management,1st edn, Pearson Education Limited, EnglandShell & Ruppel, E 2009, Cheap: The High Cost of Discount Culture‟, edn, (n.d.), PenguinPress, New YorkSlack, N, Chamber, S, Johnston, R & Betts, A 2010, Enterprise Resource Planning, inPerson Education Limited (ed.), Operations Management, 6th edn, British LibraryCataloguing in Publication Data, England, pp.409.Slack, N, Chamber, S, Johnston, R & Betts, A 2010, Lean synchronization, in PersonEducation Limited (ed.), Operations Management, 6th edn, British Library Cataloguing inPublication Data, England, pp.431ESHANK GARG_J8806167_100272311_KUKL00370_OM Page 25
  • MASTERS OF BUSINESS ADMINISTRATION 2012ElectronicArticle base 2011, The Implications of ERP Implementation at IKEA, Dubai, [ONLINE]Available at: http://www.articlesbase.com/business-opportunities-articles/the-implications-of-erp-implementation-at-ikea-dubai-4861472.html. [Last Accessed July 24 2012].Bergmark, T 2005, The IKEA Way on Purchasing Marketing Products & Services,[ONLINE] Available at:http://www.ikea.com/ms/en_CA/about_ikea/pdf/IWAY_marketing_products.pdf. [LastAccessed July 30 2012].Bayraktar, E, 2007, New challenges & opportunities for operations practioners in the newmillennium, [ONLINE] Available at:http://www.opf.slu.cz/vvr/akce/turecko/pdf/Bayraktar.pdf. [Last Accessed August 30 2012].Crepeau, A 2012, Case study: IKEA launches social offer to drive sales, [ONLINE]Available at: http://www.businessesgrow.com/2012/06/13/case-study-ikea-launches-social-offer-to-drive-sales/. [Last Accessed July 23 2012].Elmfors, HF 2010, A conversion from sales in money into volume in cubic meter, [ONLINE]Available at:http://www.pm.lth.se/fileadmin/pm/Exjobb/Exjobb_2011/Flink_Elmfors_o_Josefsson/Article.pdf. [Last Accessed August 30 2012].Grooms, D 2007, The Advantages of Lean Manufacturing, [ONLINE] Available at:http://ezinearticles.com/?The-Advantages-of-Lean-Manufacturing&id=784987. [LastAccessed July 25 2012].Huge, 2007, New IKEA E-commerce Website Launches In Over 20 Countries Worldwide,[ONLINE] Available at: http://www.hugeinc.com/pressroom/press-releases/new-ikea-website-launches-in-twenty-countries-worldwide/. [Last Accessed July 23 2012].Hutchins, D (n.d.), What is Lean Manufacturing, [ONLINE] Available at:http://www.hutchins.co.uk/Ar_Lean.aspx. [Last Accessed July 25 2012].Hellas A (n.d.), IKEA Receives Certificate of Compliance for food safety, [ONLINE]Available at:http://www.tuev.at/start/browse/Webseiten/TUV%20Austria%20Holding/News/ikea-certification-of-compliance-for-food-management-system-tuv-austria-hellas-en.xdoc. [LastAccessed July 28 2012].IKEA Fans 2009, IKEA History, [ONLINE] Available at: http://www.ikeafans.com/ikea/ikea-history/ikea-history.html. [Last Accessed July 20 2012].IKEA 2011, Annual Report, [ONLINE] Available at: http://populationaction.org/wp-content/uploads/2012/06/PAI%202011%20Annual%20Report.pdf. [Last Accessed July 212012].ESHANK GARG_J8806167_100272311_KUKL00370_OM Page 26
  • MASTERS OF BUSINESS ADMINISTRATION 2012IKEA 2010, Yearly Summary FY10 IKEA Group, [ONLINE] Available at:http://www.ikea.com/ms/zh_CN/pdf/yearly_summary/Welcome_inside_2010_update.pdf.[Last Accessed July 21 2012].IKEA 2006, IKEA Supplier Quality Assurance Program, [ONLINE] Available at:http://www.tyfountex.com/pdf/Routine%201(1)%20ISQAP%20standard%20Ed%201.pdf.[Last Accessed July 28 2012].IKEA 2003, The right quality for IKEA products, [ONLINE] Available at:http://www.ikea.com/ms/en_GB/about_ikea/press_room/rightquality.pdf. [Last AccessedJuly 28 2012].IISD 2012, The IKEA code of conduct for suppliers, [ONLINE] Available at:http://www.iisd.org/business/viewcasestudy.asp?id=119. [Last Accessed July 30 2012].Josefsson, S 2010, A conversion from sales in money into volume in cubic meter, [ONLINE]Available at:http://lup.lub.lu.se/luur/download?func=downloadFile&recordOId=1970776&fileOId=1970777. [Last Accessed August 30 2012].Letzion, R 2011, B.O.S. Better Online Solutions Delivers Logistics Management Solution forIKEA Israel, [ONLINE] Available at:http://www.boscom.com/?CategoryID=216&ArticleID=411. [Last Accessed July 24 2012].Lawson, 2008, Lawson Software Helps IKEA Components Achieve Company-Wide Goals,[ONLINE] Available at: http://www.lawson.com/about-lawson/news-room/news-releases/english/2008/lawson+software+helps+ikea+components+achieve+company-wide+goals. [Last Accessed July 24 2012].Oxbridge (n.d.), Product design, [ONLINE] Available at:http://www.oxbridgegraduates.com/essays/management/ikeas-assignment.php.[LastAccessed July 21 2012].Retail Review, 2010, K3 Retail strengthens relationship with IKEA, [ONLINE] Available at:http://www.retailtechnologyreview.com/absolutenm/templates/retail_supply_chain.aspx?articleid=1190&zoneid=1. [Last Accessed July 24 2012].Raattamaa, B 2007, IKEA adopts GS1 standards, [ONLINE] Available at:http://www.google.com.my/url?sa=t&rct=j&q=RFID+TECHNOLOGY+AT+IKEA&source=web&cd=9&ved=0CGcQFjAI&url=http%3A%2F%2Fbarcodes.gs1us.org%2Fdnn_bcec%2FDocuments%2Ftabid%2F136%2FDMXModule%2F731%2FCommand%2FCore_Download%2FDefault.aspx%3FEntryId%3D165&ei=yJEaUIW4INCwiQeCrYGwBw&usg=AFQjCNHP9Uwa3JWlpuKmAyt4VndXc8HWDg. [Last Accessed July 26 2012].Rouse, M 2007, RFID (radio frequency identification), [ONLINE] Available at:ESHANK GARG_J8806167_100272311_KUKL00370_OM Page 27
  • MASTERS OF BUSINESS ADMINISTRATION 2012http://searchmanufacturingerp.techtarget.com/definition/RFID. [Last Accessed July 26 2012].Sim, J 2010, IKEA: E-Commerce will be game changing, [ONLINE] Available at:http://bloggr.jymsym.com/2010/digital-strategy/ikea-ecommerce-game-changing. [LastAccessed July 23 2012].Swedberg, C 2010, Lithuanian Manufacturer Tracks IKEA-bound Furniture, [ONLINE]Available at: http://www.rfidnews.org/2010/11/10/freda-ikea-shipments-tracked-with-rfid. [Last AccessedJuly 26 2012].Srinivas, H 2012, Green Procurement, [ONLINE] Available at:http://www.gdrc.org/sustdev/concepts/14-gproc.html. [Last Accessed July 30 2012].Terdiman, D 2008, Anatomy of IKEA Product, [ONLINE] Available at:http://news.cnet.com/8301-13772_3-9923315-52.html. [Last Accessed July 22 2012].Wiki, 2010, Ikea Case Study: Some Effects of Mass Production and Consumption, [ONLINE]Available at:http://globalcitizens.pbworks.com/w/page/25662206/Ikea%20Case%20Study%3A%20Some%20Effects%20of%20Mass%20Production%20and%20Consumption. [Last Accessed July22 2012].WaTeresa, SL 2011, E-Commerce@IKEA, [ONLINE] Available at:http://www.scribd.com/doc/72678255/E-Commerce. [Last Accessed July 23 2012].JournelBayraktar, E, Jothishankar, MC, Tatoglu, E & Wu, T 2007, „Evolution of operationsmanagement: past, present and future‟, Management Research News, vol. 30, no. 11, pp.843-871Kippenberger, T 1997, „The story of IKEA‟, Antidote, Vol. 2, no. 5, pp.33 – 34Zwass, V 2011, „Electronic Business, e-commerce businesses‟, International Journal ofElectronic Commerce Studies, vol.2, no. 7ESHANK GARG_J8806167_100272311_KUKL00370_OM Page 28
  • MASTERS OF BUSINESS ADMINISTRATION 2012LIST OF APPENDIX APPENDIX 1 The Model for calculating Capacity Planning in cubic meterThe factors can then be consolidated in a model as in:ESHANK GARG_J8806167_100272311_KUKL00370_OM Page 29
  • MASTERS OF BUSINESS ADMINISTRATION 2012 APPENDIX 2 (OEE MODEL OF CAPACITY PLANNING)The overall equipment effectiveness (OEE) measure is an increasingly popular method ofjudging the effectiveness of operations equipment. It is based on three aspects ofperformance: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 rateESHANK GARG_J8806167_100272311_KUKL00370_OM Page 30
  • MASTERS OF BUSINESS ADMINISTRATION 2012 APPENDIX 3 IKEA SUSTAINABILITYESHANK GARG_J8806167_100272311_KUKL00370_OM Page 31