IKEA’s corporate mantra is “Low price with meaning.” The goal is to make things less expensive without ever making customers feel cheap

Ikea

The Swedish retailer dominates markets in 32 countries, and now it’s poised to conquer North America. Its battle plan: Keep making its offerings less expensive, without making them cheap.

Above all else, one factor accounts for IKEA’s success: good quality at a low price. IKEA sells household items that are cheap but not cheapo, at prices that typically run 30 to 50 percent below the competition’s. While the price of other companies’ products tends to rise over time, IKEA says it has reduced its retail prices by a total of about 20 percent during the past four years. At IKEA the process of driving down costs starts the moment a new item is conceived and continues relentlessly throughout its production run. The price of a basic Pöang chair, for example, has fallen from $149 in 2000 to $99 in 2001 to $79 today. IKEA expects the most recent price cut to increase Pöang sales by 30 to 50 percent.

IKEA’s corporate mantra is “Low price with meaning.” The goal is to make things less expensive without ever making customers feel cheap. Striking that balance demands a special kind of design, manufacturing, and distribution expertise. But IKEA pulls it off in its own distinctive way: tastefully, methodically, even cheerfully, and yet somehow differently than any other company anywhere. Here’s a step-by-step guide to how IKEA designs, builds, and distributes the items that the entire world wants to buy.

The Trofé mug is one of the most popular IKEA products. The story of the mug is an example of how IKEA works, from a co-worker’s bright idea through to production and sales. It is also a story about all the demands that customers place on IKEA. A low price tag is the obvious one, but other requirements include function, modern design, environmental considerations, and making sure products have been manufactured under acceptable working conditions. Both customers and co-workers must be able to rely on IKEA.

Step 1. Pick a Price

Product Development—A sketch for a new product? Yes, but it’s also a calculation of what that product will cost. The low price begins at the drawing board.

The team behind each product consists of designers, product developers, and purchasers who get together to discuss design, materials, and suitable suppliers. Everyone contributes with their specialist knowledge. Purchasers, for example, use their contacts with suppliers all over the world via IKEA Trading Service Offices. Who can make this at the best quality for the right price at the right time?

When product developer Pia Eldin Lindstén was given the task of creating a new mug over five years ago, she was also told how much it should cost in the stores. In the case of Trofé, the price had to be incredibly low—five Swedish kronor! This mug had to have a real knock-out price.

To produce the right mug at the right price, Pia and her colleagues had to take into account materials, colors, and design. For example, the mug is made in green, blue, yellow, or white as these pigments cost less than other shades, such as red.

Step 2. Choose a Manufacturer

Suppliers and Purchasing—The task of developing products never ends. Working with suppliers, the mug was shortened and the handle changed so it stacks more efficiently, saving space for transport, warehousing, and store display—and, not least, in the customers’ cupboards at home. IKEA is always keen to banish as much air as possible from its packaging. Packages should preferably be flat for efficient transport and storage.

One supplier, a factory in Romania, has worked with IKEA for 15 years. Long-term relationships help both parties to build up a huge fund of knowledge about demands and expectations. That is why products are often developed in close cooperation with suppliers. In the case of Trofé, for example, the new size has rationalized production by making better use of the space in the kiln during the firing process. That’s cost-effective and saves time.

IKEA has introduced a code of conduct governing working conditions and environmental awareness among suppliers. This deals with matters such as health and safety in the workplace and forbids the use of child labor. The practical work of implementing this code of conduct is carried out by co-workers in IKEA Trading Service Offices worldwide. Many suppliers already meet the demands; others are working together with IKEA to carry out the necessary improvements. IKEA also works closely with external quality control and audit companies that check that IKEA and its suppliers live up to the requirements of the code of conduct.

The low price tag is crucial to the vision IKEA has of creating a better everyday life for many people. That is why IKEA works nonstop to reduce costs. But it’s also a question of saving raw materials and, ultimately, the environment. The low-cost mug is one example of how environmental considerations can influence the development of products. For example, the new mug is lighter in color—a move that cuts costs and is more environmentally friendly. The less pigment that is used, the better. The mug is also lead and cadmium free.

Step 3. Design the Product

With a price point and a manufacturer in place, IKEA once again uses internal competition to find a designer and select a design for production. The designer begins the design process by writing a brief that explains the product’s price, its function, the materials to be used, and the fabricator’s capabilities. The designer then sends the brief to IKEA’s staff designers and freelancers, and refines promising designs until settling on the one to produce. The designer wants products to be like Swiss Army knives—to get maximum functionality at minimum cost.

Step 4. Ship It

Distribution and logistics are the lifeblood of IKEA and important pieces of the puzzle on the road to a low price. IKEA strives to deliver the right number of goods to the right stores at the right time. It calculates the goods requirements and makes sure that deliveries are efficient.

Each pallet holds 2,024 mugs, which are transported from Romania by rail, road, and sea to IKEA distribution centers around the world. Transportation does, of course, have an effect on the environment, but IKEA is working toward reducing environmental impact.

Many of IKEA’s products are bulky, for example, tables and chairs. IKEA pioneered the concept of flat. The company’s eureka moment occurred in 1956, when one of IKEA’s first designers watched a customer trying to fit a table into his car. There was only one way to do it: Remove the legs. From that day forward, most IKEA products have been designed to ship disassembled, flat enough to be slipped into the cargo hatch of a station wagon or safely tied down on an auto’s roof rack.

In IKEA’s innately frugal corporate culture, where waste has been declared a “deadly sin,” the flat package is also an excellent way to lower shipping costs by maximizing the use of space inside shipping containers. The company estimates transport volume would be six times greater if its items were shipped assembled. From the design studio to the warehouse floor, IKEA employees’ mantra is always the same: “We don’t want to pay to ship air.”

Making things flat is an IKEA obsession. How many times can you redesign a simple fired-clay coffee mug? IKEA’s mug was redesigned three times—simply to maximize the number of them that could be stored on a pallet. Originally, only 864 mugs would fit. A redesign added a rim such as you’d find on a flowerpot, so that each pallet could hold 1,280 mugs. Yet another redesign created a shorter mug with a new handle, allowing 2,024 to squeeze onto a pallet. While the mug’s sales price has remained at 50 cents, shipping costs have been reduced by 60 percent, which is a significant savings, given that IKEA sells about 25 million of the mugs each year. Even better, the cost of production at IKEA’s Romanian factory also has fallen because the more compact mugs require less space in the kiln.

When you ship 25 million cubic meters of goods all over the globe, flat-pack frugality adds up. IKEA now uses a 65 percent average fill-rate target for all the containers it ships, and it hopes to increase that to 75 percent. Meeting that goal will require further design changes and sometimes even sucking the air out of items (like IKEA’s shrink-wrapped pillows, which look like giant crackers on store shelves). And, of course, flat packing shifts the cost of product assembly to the customer, saving even more.

As IKEA has shifted more of its buying from Europe to the Far East, shipping time and costs have become an even more critical concern. Last year China tied Sweden atop IKEA’s list of supplier countries. The company has responded by creating a global network of distribution centers, most of which are near container ports and major truck and rail routes. There are 18 IKEA distribution centers worldwide—which handle about 70 percent of IKEA’s total product line—and 4 more are under construction. The other 30 percent of IKEA’s products travel directly from supplier to store.

Sometimes, however, product components actually come together for the first time in the store. In the case of the Pöang chair, the cushion comes from Poland and the frame from China. The two pieces are united only when the customer pulls each one off the shelf.

Step 5. Sell It

IKEA sells a lot of expensive furniture, and in a traditional store this is relatively easy: Put a piece in a lush setting, let the customer fall prey to visions of wealth and comfort, then offer plenty of easy credit. But to keep prices low, IKEA needs to sell furniture and other products such as the mug without salespeople or conspicuous price reductions. The company asks customers to assemble their furniture themselves. And IKEA doesn’t want to ship it to you either. By any conventional measure, these are formidable hurdles to overcome. Yet they also explain why IKEA has worked so hard to create a separate world inside its stores—a kind of theme park masquerading as a furniture outlet—where normal rules and expectations don’t apply.

The Trofé mugs arrive at IKEA stores packed on pallets. Any transportation packaging is collected for recycling. Price tags have already been placed on the mugs at the suppliers. In-store display is important. It’s not just a question of displaying mugs and other products. It’s also about providing inspiration for smart interior solutions. Customers contribute to the low prices at IKEA by selecting and collecting the products from the self-serve area, taking them home, and using the instructions enclosed to assemble them. Many will have already chosen the products from the IKEA catalog, of which 110 million copies are printed in 34 different language versions.

When you walk through the door of an IKEA store, you enter a meticulously constructed virtual Sweden. The first thing you encounter is a company-sponsored child-care facility. Hungry? Have some of those Swedish meatballs and lingonberries. The layout of an IKEA store guides shoppers in a predetermined path past several realistic model homes, which convey an eerily lived-in impression but are open for customers to sit in. Information kiosks provide advice on home decor. Color-coordinated cards offer plenty of suggestions on offbeat uses for products.

But the emphasis is always on price. Low-priced products that IKEA calls BTIs (“breathtaking items”) are pricier, more design-oriented—as substitutes for the BTI.

The model homes suggest cheerful young people throwing dinner parties in hallways, using mismatched office chairs and narrow side tables. These aren’t the aspirational images you’ll find at Pottery Barn or Crate & Barrel. These are people who are living well in modest circumstances—frugal folks who know the value of a comfortable place to sit.

IKEA says its biggest selling point is the price tag, but it can’t hurt that getting through one of IKEA’s huge stores takes a lot of time. The layout is blatantly manipulative—though in a friendly, knowing way, not unlike at Disneyland—but when customers finally arrive at the checkout counter, they’ve had plenty of time to fully consider their purchases.

IKEA products broadcast an ethos for living in the modern world: Don’t buy an ugly pitcher if you can get a stylish one for the same price. If you organize your plastic bags, you’ll feel more in control of your life. It’s left-brain logic applied to the right-brain art of living well. And if happiness involves dragging a cumbersome flat package off the shelf, standing in line at the checkout, hauling the box home, and spending hours assembling a kitchen cabinet, well, 260 million customers a year are willing to make that trade-off.

And, of course, next year it will be even cheaper.

FURNITURE MADE OUT OF PAPER. NO, SERIOUSLY!

WRITER: DANIEL DASEY

Close-up of an empty egg carton.

Sofas and chairs made from the same stuff as egg cartons? And bench tops and table legs made from bamboo? Anything is possible as IKEA design-teams explore a world of materials.

IKEA designers have long been intrigued by the idea of using new and more sustainable materials. Now, they have been given the chance to let their imaginations run wild and to investigate two promising – and slightly out-there – material options: Paper and bamboo.

Teams of designers have been experimenting with everything from paper sofas and bookshelves to paper tables, as well as looking for more uses for bamboo. Can these materials be durable, beautiful and age well? Can they be sustainably sourced? It’s all aimed at making better use of resources and making people’s lives better.

Michael Nikolic is creative leader for the team investigating paper furniture. “The paper industry handles a lot of waste which is turned into new packaging,” he explains. “But we thought, rather than producing packaging that will eventually be thrown away, recycled or re-produced into a new package, why not create something aesthetic? Like a sofa? This is when IKEA is at its best – when we do things differently.”

Michael’s team began by travelling the world to meet paper manufacturers and suppliers, and to learn about the qualities of different paper products. While some paper makers initially thought the idea of paper furniture was crazy, the team was able to identify nine different paper-based materials that could be of use.

A woman holding a basket made of paper pulp. A woman holding two plant pots made of paper pulp, one small and one large. And in the background there are piles with plant pots in beige, white and orange.

One of the most interesting, was paper pulp – a material used in things like egg cartons and the tray your barista gives you to carry hot coffee. Created from either wood or recycled materials, it can be molded into just about any shape and hardens to provide a hard shell. Additives can make it water resistant and it can be produced in a rainbow of colors. Other materials being looked at include paper clay, paper glue, paper cotton and even washable paper.

“With many people simply throwing their old furniture on a dump, the idea of creating affordable paper sofas, tables and chairs that could be recycled at the end of their life cycles was a big inspiration,” says IKEA designer Maja Ganszyniec. “A cradle-to-grave approach means putting a product together so that it’s easy to take apart and separate once the lifetime of the product has run out. A paper sofa follows this logic.”

I firmly believe that IKEA has helped to increase the standards throughout the bamboo industry in China, as well as securing work for many bamboo farmers.

Close-up of an plant pot made of paper pulp.

While paper furniture may not be a reality yet, bamboo is being used in increasing amounts in IKEA products. Fast-growing and requiring very little in the way of irrigation, fertilizers and pesticides, it is a wise and sustainable choice of materials when grown according to responsible forestry guidelines.

Bamboo is already used in IKEA products like RIMFORSA work bench, HILVER table tops and legs, the LILLÅSEN desk and ALDERN counter top. All bamboo used for IKEA furniture is grown in China, and as of autumn 2016 Forest Stewardship Council certified.

Larry Lin, manager of IKEA bamboo-supplier Dasso says the IKEA involvement in the industry has increased both sustainability and innovation abilities.

Two women and a man sitting around plant pots made of paper pulp. And in the background there is a board with photos and sketches.

“Together with IKEA we have raised the level of quality and also increased the efficiency for production as well as in material use,” he says. “I firmly believe that IKEA has helped to increase the standards throughout the bamboo industry in China, as well as securing work for many bamboo farmers.”

This is just two examples of new materials which has been tried out during the year by the IKEA design-teams. Today, it is too early to tell which of these products that might end up in the IKEA range. But one thing is for sure: IKEA designers will continue to push the boundaries, exploring new materials that will surprise and delight customers and help to preserve resources.

Resource

http://www.ikea.com/ms/en_US/pdf/sustainability_report/group_approach_sustainability_fy11.pdf (It might be in your best interest to find a more recent document. Have things changed? They very well may have)

Questions:

1. What are IKEA’s competitive priorities? Do these priorities align well with their supply chain and their sustainable furniture initiatives? Discuss and support your argument.

2. Describe IKEA’s process for designing and developing a new product. What manufacturing process is best suited for their sustainable furniture? Of the four types of organizations we discussed and given the state of consumers which type of organization should IKEA seek to emulate? Or does their current model work best? Explain your decision.

3. What are additional features of the IKEA concept (beyond its design process) that contribute to creating exceptional value for the customer that IKEA can leverage for their sustainable furniture? Of course, you can’t be a master of everything. To help them continue their sustainable furniture initiative should IKEA hire more LCA Certified professionals, contract out to an LCA Certified Organization or purchase a LCA Certified organization. Explain your thinking and potential costs that need to be taken into consideration regarding your decision.

4. IKEA has decided they want to open retail stores to better showcase their sustainable furniture. What would be important criteria for selecting a site

 
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