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A conversion from sales in money into volume in cubic meter

- A prerequisite to Mid Term Capacity Planning within the sub process

Plan & Secure Capacity at IKEA

Hampus Flink Elmfors

Sofie Josefsson November 2010

Department of production management Lund University, Faculty of Engineering

Lund, Sweden

This article summarises a master thesis project done for IKEA, which concerns a prerequisite step to their Capacity Planning. When planning capacity such as transports, storage at local warehouses and flows through goods receptions at stores IKEA uses the unit cubic meter of articles. The purpose of this project was to

investigate how total forecasted sales outflow in money can be converted into cubic meter, as a prerequisite to the capacity planning.

Background

For all companies, planning of different activities is necessary in order to stay competitive in a global market. One important part of planning is capacity planning. Capacity planning concerns how to allocate resources, since having resources available for refining is a cost whether they are in use or not. In the same way it is also a cost in terms of lost sales to not have capacity to produce what the market demands. This means that it is a cost to have capacity but also a cost to not have capacity. For this reason it is of great interest for all companies to have a balance between capacity need and capacity assets.1

Different levels of capacity planning are used at IKEA depending on the time frame of the planning. Mid Term Capacity Planning, which this project concerns, has a planning horizon of the nearest 1-2 years. When planning capacity such as transports, storage at local warehouses and flows through goods receptions within this planning horizon IKEA uses the unit cubic meter of articles. The capacity need is therefore estimated in cubic meter and would be most straight forward to calculate through aggregating forecasted volume for each article into a total capacity need, which can be called a “bottom-up” approach. But this is not possible today due to low quality, incomplete sales forecast for many of the articles.

Therefore, the potential of using a “top-down” approach was investigated, which means that a total forecasted sales plan is converted into an estimation of the future outflow of products in cubic meter. This should be done by using a conversion factor which has the unit average value per cubic meter for IKEA products. The future outflow in cubic meter can then be further broken down into desirable units, for example for each country or each selling unit. This will then be an input to plan capacity such as transports, storage at central warehouses and spaces at goods receptions.

Introduction

The starting point of the “top-down” approach is the Group Management´s total Sales Plan in money, which is translated into volume in cubic meter by using a conversion factor. This conversion factor would be the forecasted, average value per cubic meter of an IKEA product. The future outflow in cubic meter can easily be estimated by dividing the total Sales Plan by the conversion factor. The problem is how to calculate the conversion, which this project will investigate.

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Purpose

With the “top-down” approach, the conversion factor should convert the Group Management´s Sales Plan in money into volume in cubic meter. How this can be done is shown in Formula 1.

Formula 1

One part of ensuring a high quality estimation of the forecasted sales outflow in cubic meter, is to ensure high accuracy of the conversion factor. How the conversion factor should be calculated and what factors that affect the future, average value per cubic meter, have been investigated. In order to deliver a model of how to

calculate the conversion factor, the deliverable was divided into three major parts as presented

below.

 Present a hierarchy of factors that affect the conversion factor.  Evaluate how to consider the effect from the factors.

 Present a model of how to calculate the conversion factor.

Methodology

Different scientific approaches have been used for the three parts of the study. The first part of the study was carried out in order to identify factors that affect the conversion factor. This part has an explanatory approach, since the starting point was to examine reality and interview people working for IKEA, in order to find factors that were relevant to further investigated in the second part of the study. The second part of the study is descriptive, since the purpose is to describe how the factors affect the conversion factor. In the last part of the study, the relationships between the factors that should be considered have been more thoroughly described and how these can be considered in one common model has been presented. Since the last part focuses on presenting causes and relationships of the factors presented in a model, this part of the study has an explanatory approach.

Limitations

Due to time restrictions some limitations were set. The value and volume considered in the study was restricted to the outflow from selling units, which are stores or home-shopping trough internet or telephone sales. Therefore the price of the products relevant to consider is the selling price (catalogue price which might include realisation or changes in price due to campaigns etc.). The volumes are volume of the customer package. Since the limitation for this study was set to only outflow of selling units, neither factors that might affect the average value per cubic meter before and after this point of the supply chain was considered. This study does not take data sources into consideration, which is an important step to complete the conversion procedure.

Materials

The study is inductive, meaning that the starting point was investigating reality in order to detect relationships and patterns in order to form a theoretical model. To collect this information several interviews were held with persons within IKEA, but also literature studies were carried out. All interviews where held by both authors to minimise the risk of misunderstandings. The interviews were also semi structure and summery was written directly afterwards. This was in cases of uncertainties sent to the interviewee for confirmation. The literature used for the study is only literature recommended from the university and literature of famous authors. The literature is therefore interpreted as a reliable data source.

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Procedure

The overall purpose of this study was to create a model of how to calculate the conversion factor. A

prerequisite for this is to investigate which factors that will affect the average value per cubic meter of an IKEA product. To create a model of the conversion factor means in practice that the average value per cubic meter of an IKEA product should be converted from one year to the next. This is illustrated by Formula 2.

Formula 2

The conversion means that factors that will affect the average value per cubic meter of an IKEA product, for the next year, will be considered. How this can be done in practice is shown in Formula 3.

Formula 3

Since the unit of the conversion factor is value per cubic meter, all identified factors must affect either the

value, the volume or both the value and volume of a product. The factors can therefore be sorted into these

three different groups.

Within these three groups a secondary level was introduced, showing the groups of factors that were identified within IKEA. Factors that were identified to affect the volume of customer packages are found within the group

Density improvements. Factors that are expected to affect the value of the products are divided into the groups Macro and Micro economic factors. The group Product range factors are factors that are expected to affect

both the value and volume.

Result

Several factors were investigated within the group of factors, but only an overall discussion of the factors is provided below. A hierarchical structure of the actual factors that will be considered in the model of how to calculate the conversion factor will also be shown. Depending on how the factors affect the conversion factor they have been divided into three main groups: factors that affect the value, the volume or both the value and

volume.

Value and Volume

Factors that affect both the value and the volume are changes of the IKEA product range, and are called product range factors. An example of a product range factor is when new products are introduced and some old ones are phased out. It could also be when the revenue of some products or product groups increases or decreases.

All products have a unique value per cubic meter. A change of the product range will therefore obviously contribute to a change of the average value per cubic meter of a product. So, if changes are introduced within the IKEA product range from one period of time to another, the average value per cubic meter of all products will be affected. This can be illustrated by an example: If IKEA decides to include a large amount of silver cutlery in the range, which normally has a high value per cubic meter, this will increase the average value per cubic meter.

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The best case would be to consider product range changes on article level. This is, as mentioned, not possible due to low quality, incomplete sales forecasts at an article level. However, product range changes are

advantageously considered on an as detailed level as possible, which is the reason why product range changes will be considered on a product group level instead.

Two divisions were found relevant to use when considering product range factors. These were a division between the two distribution channels, called Cash and Carry (CC) and Customer Direct (CD), as well as a division between the 20 different product groups within IKEA, called Home Furnishing Businesses (HFB), which groups the products together according to use.

Value

The factors that affect the value of the customer package are divided into the two groups: macro and micro economic factors. The distinction between macro and micro economic factors makes it easier to distinguish the factors that IKEA might be able to affect. The macro economic factors are not possible to affect on a corporate level, while the micro economic factors to a larger extent are controlled by IKEA.

To types of price changes are used within IKEA: price investments and price adjustments. Price investments are changes in the catalogue price for a product from one year to another. The price adjustments are on the other hand a way to consider

Volume

Within IKEA the measurement density improvements is used to consider improvements that concern the volume of the customer package. An improvement means that the customer package is decreased in volume. Density improvements concern all products and are measured in the unit value per cubic meter.

Density improvements are expressed in the unit value per cubic meter, but are actually just an estimated goal of improvements received by decreases in volume of the customer packages, which can be misleading. “What gets measured gets done”2 is a well known expression, which implies that the improvements received though volume decreases should be measured in the unit volume. This will be possible when a follow-up system of volume changes, which is under development, is in use within the organization.

Hierarchy of factors

The factors that were identified and that should be considered when calculating the conversion factor are presented in figure.

*The effect from inflation is considered in price investments.

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Ljungberg, A. & Larsson, E (2001) p.215 Value/m3 Value and volume Product Range factors HFB Distribution channels Volume Density improve-ments Value Macro economic factors Inflation* Micro economic factors Price investment Price ajustment

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The factors price investments and price adjustments are recommended to consider as they are calculated within IKEA today. The factors product range factors and density improvements will be discussed in the following section.

The model

The factors can then be consolidated in a model as in.

Discussion

This study is mainly based on interviews with persons working at IKEA, and since it is qualitative, the model has not been verified with any statistical evaluation. To ensure that the model achieves the desired accuracy and that the model is reliable, is would be preferable to complement this study with a quantitative study.

References

Johnsson, P. & Mattsson, S-A. (2003) Produktionslogistik. Studentlitteratur, Lund.

References

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