IKEA and Efficient Inventory Management (AQA - 12 marks)

Here is a suggested answer to Question 2 from Question Set B of the Paper 3 Case Study on IKEA used at the 2017 Grade Booster workshops.

Another way in which IKEA's approach to inventory management has contributed to its success is the use of vertical integration in the business to ensure that inventory is sold at lowest unit costs. IKEA's competitiveness is built on offering low prices and in order for it to do this profitably it needs to operate all aspects of the supply chain - from production to in-store inventory management - efficiently. Vertical integration involves all stages in the supply chain being owned by the same business. When done effectively, vertical integration allows a business greater control over production output and quality, and also enables a business to access production economies of scale, thereby reducing unit costs and enabling it to sell at lower prices than competitors. IKEA's vertical-integration is extensive. It owns the forests that are turned into wood, that is turned into flat-pack products. It owns the most of the distribution and logistics that bring inventory from factory to store warehouses. Whilst some external suppliers are used, IKEA essentially controls all aspects of inventory management and therefore has much greater control over production and distribution costs.