From Local to Global Supplier Capacity Monitoring; Buyers Now Need to Understand Manufacturing

Do you really know how much capacity your suppliers have?

Well, Swedish home furnishings retail giant Ikea did not have a good handle on the answer to that question several years ago, and decided to do something about it.

Supply Chain Digest Says... Ikea plans to extend the system's reach further to encompass its suppliers' suppliers, and says the system has had a demonstrable impact on product availability at the store. What do you say? Click here to send us your comments Click here to see reader feedback

Paul Bjornsson, a supply chain process manager at Ikea, detailed the retailer's journey to a global, centralized supplier capacity measurement system during a presentation this week at JDA Software's 2016 Focus user conference in Nashville.

Bjornsson started his presentation with some interesting questions, such as how should capacity really be defined? What should be the metrics or units of measure?

A few minutes into the presentation, Bjornsson asked four members of the audience how to define capacity - and he received back four very different answers, illustrating the challenge right from the very start.

Just a few years ago, Ikea mostly managed capacity for its roughly 1000 outside suppliers locally, out of its 12 different procurement offices across the globe for the suppliers in each region. That meant, for example, that there was no global view of supplier capacity, only a regional one.

In addition, there was no standard way to define or measure that capacity, and much of the data Ikea did have was suspect, as supplies often exaggerated their capacity, or maybe in some cases the supplier might not have really known how to measure it. The resulting overestimation of a given supplier's real capacity led to many cancellations or partial fulfillment of Ikea purchase orders, which in turn negatively impacted product availability at the store.

There were other issues. It took a lot of touches to set up suppliers and enter even the limited data relative to their capacities. Bjornsson said that there was also an issue with "asymmetrical information" - suppliers obviously knew a lot more about their true capacities and volume loads at any point in time than Ikea did.

This scenario led to a lot of fire fighting, as buyers tried to react when suppliers rejected purchase orders or short shipped, which as noted then led to shortages at the stores and thus lost sales.

Recognizing the problem, in 2011 Ikea decided it would develop new capabilities to achieve the goal of creating a single global view of supplier capacity.

One of the early steps was to agree on a definition of capacity, for which they leveraged the definition developed by the APICS organization, which in summary says "capacity" is the number of units as that can be produced over a set time period, such as a day or week.

Ikea also looked at capacity from two angles: from a product category perspective, for example "picture frames," and also from what it calls a "resource group," such as the number of cutting machines, for example. In the end, Ikea wound up with about 5800 product groups and 8000 resource groups.

Ikea spent the next several years building a centralized, global system, starting out with some Excel and homegrown tools, and then collecting the data. That data collection starts with Excel data templates completed by its suppliers, after which buyers generally follow up with actual supplier site visits, and in some cases stop watches and other tools to get the most accurate data they can for a given supplier's capacity.

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"We think it is important that local buyers understand production," Bjornsson said, noting they often needed to become knowledgeable on supplier processes such as cutting and assembly at some level of detail.

So after that effort and systems development, now Ikea can see what its global capacity is across all suppliers in a given category. As of late 2015, it had about 90% of its products supported by the system, and capacities for about 800 of its roughly 1000 suppliers, as it works to finish the remainer.

Bjornsson also said Ikea utilizes the concept of what it calls "demonstrated capacity," which means if a supplier says it has a capacity of 1000, but it always delivers 800, the system changes the capacity to that 800-unit demonstrated capacity.

He added that the cost of setting up the system and collecting the data, the payback comes from the ability to do both operational (short term) and tactical (longer term) supplier capacity analysis and planning.

Bjornsson said Ikea is also in the process of moving from use of its own tool for the system to JDA Software's Enterprise Supply Planning (ESP) applicaition.

Ikea plans to extend the system's reach further to encompass its suppliers' suppliers, and says the system has had a demonstrable impact on product availability at the store, as buyers better sync order levels with that now visible and much more accurate view of supplier capacity. The resulting increase in on-time fill rates and thus store availability is such that the payback period for its rather modest investment of some 500,000 Euros was just two days.

Bjornsonn has indications the system has reduced costs as well, likely from lower prices by better leveling production schedules at suppliers, but he needs a bit more time to prove that.

Does this approach have applicability beyond retail or even only retail without a heavy private label component? Ikea of course is almost all private label. SCDigest is not sure about that yet, but certainly the notion of formalizing how supplier capacity is defined and measured, and standardizing processes for collected and maintaining that data, is likely applicable for many companies in most industries.

What do you think of Ikea's supply capacity system? Does it have lessons outside of retail? Let us know your thoughts at the Feedback section below.

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