Vendor-Managed Inventory in Ikea

Vendor-Managed inventory in Ikea

Ikea believes that the supplier is more able and in a better position to manage and administrate the purchase. The company has such a wide range of products that it is not reasonable to think that the employees can keep all of Ikea’s suppliers in focus. The suppliers, on the other hand, is in a much better position to focus on his own products. He is well aware of both the demand and production of the articles. This is the reason to why Ikea decided to implement its first VMI relationship in 1996. (Erica, Therese, 2005)

Ikea adopts the Vendor-Managed Inventory combined with Consignment Stock (Baraldi, 2008). Vendor-Managed Inventory places the inventory decisions to suppliers (Baraldi, 2008), while the Consignment Stock requires buyer to decide the order quantity and shipment frequency (Ben-Daya, Hariga, &Al-Durgam, 2013). In the combination of VMI and CS, both ordering and holding costs are shared between suppliers and buyers, making the combination of two more cost-effective and better coordinated (Ben-Daya, 2013).

From Ikea’s annual summary in 2013, 2014 and 2015, we can get the inventory turnover rates in 2012, 2013, 2014 and 2015 equal to 5.92, 6.70, 5.95 and 5.94, respectively. In other words, Ikea is able to sell its inventories within a week by applying the VMI strategy, and this means its inventory carrying cost would be quite low. On the other hand, although some benchmark studies show on a lower risk of stock outs due to VMI, there has been no news or information about Ikea’s failure in holding enough stocks. Briefly, the low inventory turnover rates indicate the success of applying VMI in Ikea.

VMI benefits not only Ikea but also its suppliers. In a VMI relationship, one of the major benefit is that the transparent information will damp down the bullwhip effect, which help the supplier make efficient production plans. As is showed in a case study by Erica and Therese, Brantorp AB, a manufacturer of kitchen...