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ANALYTICAL REPORT: Location of the future supplier base in a dynamic

environment
INTRODUCTION
IKEA is an internationally known home furnishing retailer. It has grown rapidly since it was
founded in 1943. I chose IKEA as it is the worlds largest furniture retailer, recognized for its
Scandinavian style. The company operates in more than 40 countries and had total revenue
in 2013 of 11.5 billion dollars. IKEA is also being listed as 41 Worlds Most Valuable Brands
by Forbes. The overall goal of IKEA is to offer products with quality that are developed for
peoples life at home, at as low prices as possible, and the companys vision is to create a
better everyday life for the many people.
SUMMARY
IKEA of Sweden (IoS) is currently using offshoring method for their suppliers where they
outsource their manufacturing to low-cost country such as China and India. However,
offshoring offers challenges from a number of influences including economic, cultural and
political considerations. IoS thinking of using nearshoring to overcome the challenges that
offshoring causes like long lead times and a high supply risk. There are four basic internal
parameters that IoS considered before they decided where to locate the future supplier base
which is availability, sustainability, product quality and cost. They also mentioned the
external factors but this report will only cover the internal factors which focused on lighting
segments products only.

ANALYSIS
Availability, sustainability, product quality and cost have been identified as the internal
factors in determining the new location for future supplier base.

i. Availability
The aim with this strategy is to reach an optimal supplier base in Europe and at the same
time to get the same availability of the purchased items as globally. The distance between
supplier and the store has an impact on the product availability. By using nearshoring which
shorten the distances will decreased supply risk and short lead times. The short lead times
and decreased supply risk within nearshoring gives a better availability of the glass lighting
segment products. Availability is important for IoS lighting in the decision of where to locate
the future supplier base. Nearshoring also gives the benefit of a better supply planning since
it is easier to handle demand uncertainties. However, a challenge with nearshoring is the
availability of quality items to a low price, due to higher wages compared to offshoring. The
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glass lighting segment will face a large challenge to achieve the same availability of quality
items to a low price on the European market as globally.
ii. Sustainability
As mentioned before, nearshoring from an availability parameter will shorten the distances
which give less transportation. A benefit with the less transportation is it will gives less CO2
emissions. From the sustainability parameter, the benefit of using nearshoring for the glass
lighting segment is the decreased in carbon emissions. Nevertheless, it is important for the
supplier to be energy efficient. However, it is difficult to find suppliers that use renewable
energy in the production due to the few suppliers close to the sales markets.
iii. Product Quality
Focus of IKEA, is to offer products with a quality that are developed for peoples life at home
at as low prices as possible. But there is a challenge for the product quality parameter in
using nearshoring is to find suppliers that provide quality items to a low price. Furthermore,
glass is a sensitive material that easily breaks. Nearshoring can give a great benefit as it can
decrease risk for breakage during the transport and handling of the product as the distance
is shorten. Moreover, a benefit with nearshoring is that the buying company and the supplier
belong to similar cultures which makes it easier to communicate. Therefore, quality issues
can be avoided since IoS lighting and the suppliers perspective on product quality are likely
to be similar.

iv. Cost
As mentioned before, IKEA focused on low prices as possible. It is important to look at the
price development not only from a purchasing perspective but also form the supply chain
perspective. From this perception, nearshoring has a benefit that the total cost is lower
compared to offshoring as hidden cost can be avoided. In addition, nearshoring decreases
the logistic cost by less transportation and short lead times which makes it possible to have
low stocks levels. As the goal is to lower the price, IoS lighting is more likely to reach it by
using nearshoring compared to offshoring. Moreover, nearshoring normally has the
challenge of keeping the costs low because of higher wages in the nearshore countries. In
order to overcome the challenge, IoS need to achieve an efficient supplier base with an
automated production which is required to minimize the human interaction in the production
and keep the cost on a low level.
CONCLUSION
There are both benefits and challenges with nearshoring in term of internal factors. The aim
of IoS is to keep the price low as possible. If IoS lighting manages to handle the identified
challenges with nearshoring large benefits, as short lead times and less supply risk, the aim
of IoS could be obtained.
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REFERENCES

Hahn, E.D., Bunyaratavej, K. & Doh, J.P. (2011), Impacts of Risk and Service Type on
Nearshore and Offshore Investment Location Decisions- An Empirical Approach,
Management International Review, volume 51, pages 357380.

IKEA (2014) Business type, Available at:
http://www.ikea.com/ms/en_US/jobs/business_types/product_development/index.ht
ml (Accessed 19 September 2014)

IKEA (2014) History, Available at:
http://www.ikea.com/ms/en_US/about_ikea/the_ikea_way/history/1940_1950.html
(Accessed 19 September 2014)

Location of the future supplier base in a dynamic environment. Case Study witihin IKEA of
Sweden. Retrieved 18 September 2014 from http://lnu.diva-
portal.org/smash/get/diva2:541113/FULLTEXT01.pdf