How to Make a Pile of Money

Continuous Improvement

When he died last year Feodor Ingvar Kamprad was worth — depending on who you listen to —  somewhere between 3 and 28 billion dollars.  According to Forbes he was one of the ten richest men in the world.  How you can misplace $25 billion and still be one of the world’s richest men is a little beyond me.

Ingvar Kamprad was the founder of IKEA.  IKEA sells more furniture than any other company in the world.  They currently operate in 52 countries with stores planned in a further 15.

Virtually everybody in Europe who is setting up home will pay a visit to one of IKEA’s huge stores.  Whilst there they stock up on cheap, simple, stylish wardrobes, tables, crockery and lighting.  Ikea is so pervasive, that it is claimed 1 in 10 European babies is conceived in an IKEA bed, though presumably not whilst it is still in the store.

How to get rich

I was once told that the formula to getting rich is very simple,

1. Find out what your customers want
2. Give it to them

I’ve never worked in marketing. I won’t pretend to understand the dark arts of finding out what customers want. In IKEA’s case though, it appears to be straight forward — simple, stylish, reasonable quality, low cost furniture.  As an ops guy though, the bit of the equation that interests me is “give it to them”.

Ikea are the masters of product design and supply.  In his book 50 things that Made the Modern Economy Tim Harford singles out IKEA for its “boringly effective systems”.  The IKEA teams continuously change and improve their products. They ensure that they are giving customers exactly what they want, without spending a penny unnecessarily.

The evolution of a mug

Somewhere along the line you may have had a drink out of a Bang Mug. 

The design path of the mug is buried deep, somewhere in IKEA’s headquarters in Älmhult, Sweden. Though, if you believe everything you read on the internet, it went a little like this:

1. First they designed a simple, straightforward mug.  IKEA’s long term supplier in Romania then produced them by the thousand.
2. Next they made the mug a little squatter and wider. Firing pottery takes a long time and kilns are expensive pieces of equipment. The kiln is invariably the bottleneck of the production process.  These changes meant more mugs would fit into each kiln.  This increased throughput and reduced manufacturing costs. It also had the knock on benefit of improving the number of mugs that could fit on a pallet, (up from 864 to 1,280), so reducing distribution costs.
3. Then they moved the handle up the side of the mug and added a flower pot style rim.  This allowed customers to stack the mug far more effectively, so saving cupboard space. It also saved distribution costs.  Now the supplier could ship 2,024 mugs on a single pallet.
4. Finally they added  a rather distinctive chip to the bottom of every cup.  This break in the rim on the underside of the mug acts as a drain when the mug is washed upside down in a dishwasher, preventing pools of scummy water from accumulating.  I guess it also saves the cost of a sliver of clay on every mug. When you consider that IKEA sold nearly twenty-five million Bang mugs a year, that sliver is not to be sniffed at.

These continuous design changes reduced processing costs, material costs and shipping costs. They also gave their customers a mug that, judging by sales volumes, they were really very happy with. IKEA has stopped making the Bang Mug now.  It sells the Färgrik Mug instead.  I can’t help but think IKEA can stuff several of them onto a pallet as well.

Boringly effective systems?

By being clear where they wanted to go and continuously chipping away at it, IKEA made a humble mug into a real money spinner.

If you applied the same clarity, focus and perseverance. Imagine what you could do to a:

1. Search engine
2. Internet store
3. Theme park
4. Mobile phone

I wish my life was so boring.

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Image by Karl Baron