IKEA's timeless formula for selling "cheap quality goods": Save, save more, save forever

Background: Founded in Sweden in 1943, IKEA started out as a mail-order company but quickly pivoted to furniture because it felt there was a huge demand for “cheap furniture.”

The plan: Keeping its “quality furniture at affordable prices” ethos, IKEA not only surprised customers but also shocked competitors with a super-efficient supply chain and extremely frugal inventory management techniques.

The result: Ranked 40th on Forbes’ World’s Most Valuable Brands with $39.3 billion in revenue in 2017, IKEA is living proof that low prices can absolutely go hand in hand with high quality.

IKEA – The perfect combination of vision and execution

Founded in Sweden in 1943, IKEA started out as a mail-order company but quickly branched out into furniture because it saw a huge demand for “cheap furniture.”

Each IKEA store is typically 27,000 square meters (about the size of 5 football fields) with at least 9,500 different products. How does IKEA manage such a huge inventory while keeping prices low?

Starting with the vision, IKEA has always operated on the principle of providing beautifully designed, highly practical furniture at low prices so that as many customers as possible can afford it.

That vision is shared with every department, from supply chain, warehouse to marketing and sales. All work together to maintain this “survival” competitive advantage of IKEA.

This allows IKEA to offer catalogues with thousands of products available at prices that remain stable throughout the year.

Cutting costs in design

IKEA's designs are highly appreciated by experts for their low maintenance costs, high applicability but still maintain efficiency in transportation, product quality and environmental impact.

According to a study by The Times in London, more than 50% of IKEA products are produced from recycled materials but still maintain high quality and durability.

By designing products with as few materials as possible, IKEA not only cuts down on purchasing costs, but also transportation, storage costs...

Excellent ability to coordinate with partners

Another secret behind IKEA's success comes from its ability to work and maintain good relationships with raw material suppliers and factories. These partners will significantly support IKEA in cutting costs.

IKEA currently purchases raw materials from more than 1,800 suppliers across 50 countries. To manage this huge system, 42 representative offices are spread around the world to negotiate prices, check quality, monitor working conditions and environmental impacts.

Not only does it stimulate competition between suppliers to bring quality orders, IKEA also proactively signs long-term contracts with large quantities to push prices to a minimum.

But not all low prices are good, IKEA promises consumers that their products are "cheap but not cheap regardless". Customers can enjoy low prices without compromising on inhumane working conditions or negative impacts on the environment.

"Lego style" goods

Most IKEA products are finished at the customer's home. All of these "lego models" are packaged in flat cardboard boxes to reduce empty space during transportation.

This special packaging method also saves space during storage, especially on shelves. All the savings in fuel and inventory costs go directly to the customer's pocket.

Store and Warehouse, 2 in 1

Each IKEA store also acts as a warehouse. When shopping at IKEA, customers can easily reach products on high shelves within the reach of adults. But above that are inventory products that are stored up to 5-6 floors high!

IKEA inventory products on high shelves will be brought down and arranged in the shopping area every night (forklifts and trolleys are not used during opening hours to avoid risks for customers).

In addition, IKEA also uses about 1/3 of the floor area to store products that need to be transported by IKEA staff. But to save on labor costs, IKEA always tries to keep the number of products in this area to a minimum.

"Touching" costs

There is an interesting cost principle in the Supply Chain: The more parties touch a product, the higher its operating costs.

For example, after a customer decides to buy a certain product, it will be ordered, transported from the manufacturer to the retailer, from the warehouse to the display, and from the display to the customer's car or even to the customer's home.

Each "touch", from transportation, loading, moving location ... costs the business a certain amount of money. The less "touched" the goods are, the less money it costs to maintain. That is why IKEA always encourages customers to pick up neatly packaged products and take them home themselves.

Optimizing in real time

IKEA also relies on a "rare" factor: In-store inventory managers. Responsible for monitoring and updating sales and inventory, these employees constantly ensure that no item is "out of stock" or overstocked, contributing to boosting revenue and cutting costs for IKEA.

To make those "perfect" decisions, IKEA employees are trained to use the "maximum/minimum" method:

- Minimum: The amount of goods that need to be restocked.

- Maximum: The amount of goods that are restocked at one time.

Since in-store inventory is only restocked in the evening, the above method is based on the average sales of each product in one to two days. Continuous inventory replenishment with tightly controlled quantities not only minimizes inventory costs but also reduces the risk of losing revenue due to customers not finding the products they want.

In addition, inventory managers also receive "up-to-the-second" support from the information management system. From the number of products sold to the number of products being produced, on the way, preparing to be imported... All of this data will help employees make quick and accurate decisions.

Results

The above "synchronized savings" strategy has made IKEA the most successful furniture retailer in the world with minimal operating costs and high customer satisfaction.

IKEA has grown despite increasing global competition. In 2017, IKEA ranked 40th on Forbes' list of the World's Most Valuable Brands with revenue of up to 39.3 billion USD.

Vision combined with execution. IKEA is not only different from its competitors but also has no fear of being "copied" by anyone with its supply chain strength.