Vendor managed inventory: enlightening benefits and negative
effects of VMI for Ikea and its suppliers

University essay from Luleå/Industriell ekonomi och samhällsvetenskap

Abstract: In 2000, Ikea formulated their direction for the new millennium. Their
vision is to improve the everyday lives of the many people and in 2010 they
have an objective to be the world’s leading home furnishing company. This
will be achieved by an increase in sale and reduced sales price. In order
to reach these targets Ikea must focus on the supply chain’s logistical
efficiency. The company recognizes that the best way to cut logistical
costs is to reduce stock in the supply chain. Vendor Managed Inventory
(VMI) is an outstanding strategy to achieve this. VMI is a replenishment
program where the supplier is given access to customer’s inventory level
and demand. The supplier is fully responsible of managing the customer’s
inventory levels and has the authority, and responsibility, to replenish
the customer’s stock.

Today, Ikea is involved in 19 VMI relationships. The company’s feeling is
that by implementing VMI they have been able to increase the service level
and decrease the supply chain’s inventory level. However, they have not
done any investigations to confirm this idea. Hence, the purpose of the
thesis is to investigate the benefits, and negative effects, that are to be
obtained by Ikea, and its suppliers, after an implementation of VMI.

In order to fulfil the purpose of the thesis the authors have done a broad
literature review concerning both economic evaluation methods and
parameters that may be affected in a VMI relationship. Further, they have
benchmarked against other companies that have realized economic evaluations
of their VMI relationship. The results from these studies have been
compared to the outcome of Ikea’s VMI relationships with Bräntorp AB and
Tibro Kontorsmöbler AB.

The conclusion of the thesis is that Ikea’s supply chain will profit from
VMI. One of the major benefits is an increase in service level. Another
benefit is an increase in productivity at the suppliers. The research also
indicates that there is a risk of an increase in inventory levels at Ikea’s
distribution centers. However, this can be avoided if Ikea follows its
routines and jointly with the supplier set maximum and minimum inventory