I am always surprised to see where Ikea items come from: China of course, but also Thailand, Poland, or just Sweden. In this article, I propose some ways to guide you, if you want to relocate your manufacturing production in a country with low labor costs. These outsourcing often make the headlines. However, home sourcing and efforts to keep entire industries locally, often go unnoticed.
Don’T put all your eggs in one basket
Relocating your production adds a layer of geopolitical risk to your business model. Indeed, these countries are often a little more volatile than Western economies. At the very least, they are bordering on countries in which political stability is weak and infrastructure is more fragile. By sending all your production to a country, you risk being held hostage, in the event that the latter closes its borders or creates special export taxes.
You could also experience major production shutdowns, if a major climate event (flood, typhoon, earthquake) would damage the infrastructure. In these countries, they will need more time to rebuilt. Ikea therefore distributes its production worldwide, with suppliers in more than 50 countries and only 22% of “Made in China”. They may be out of stock on one product, but their stores will continue to present the others.
What impact would the supply disruption of offshore production have on the rest of your operations? What are the risks associated with the countries or region you have chosen? What is their probability?
The impact of batch size and transportation
In general, as you produce far to reduce costs, you will choose transportation by boat. You will produce large quantities, which will be delivered to you in large lots. The first implication of the lot size is the impact on the rest of the supply chain. Indeed, by receiving at once a large volume of a single reference, how are you going to organize? Storage has a significant cost. How will you react to a delay in supply, for example to a bad weather during navigation? If you rent a warehouse to store these parts, how are you going to size it? How will you handle the transportation to bring these parts to your production site?
Ikea is of course a champion of logistics. They optimize the shape of the packaging to put more in the same container, which will be transported by boat or train. On the other hand, the variety of products is reduced, so that the offshoring model is profitable with its large lot sizes.
What is the minimum lot size you need to order for offshoring to be financially attractive? What are the impacts on the rest of your supply chain? What is the impact of lowering the cost of a part on your entire production?
The cost of an error
Ikea’s products are quite simple: some molded or machined parts, very standardized. The variation is managed with references: a sofa consists of a structure (a reference) and a cover (second reference). The complexity lies in the screw kits that come with each piece of furniture. If it happens, rarely, to have parts in excess, missing parts are extremely rare. Fortunately for Ikea. I experienced this situation, on a particular piece: not available in store, it was sent to me by mail, from Sweden. Between the cost of the in-store employee, warehouse employee, stock and shipping … This screw cost Ikea more than $ 50, which would greatly reduce the margin made on the furniture , yet very standardized.
I told you about it in a previous article on a Kickstarter project, an error on an electronic component, which can only be known after assembly, has a particularly high cost.
How will you handle a manufacturing error: detection, correction, … without being on the spot permanently? How are you going to compensate your customers, fix what needs to be? Can errors be punctual? Can a progressive disruption lead to errors on complete batches?