IKEA’s Global Sourcing Challenge

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Summary: IKEA is a Swedish company producing home furnishing products at low prices to make them affordable to people. The company was founded in 1943 by Ingvar Kamprad and kept growing tremendously from 2 stores in 1964 to 114 stores in 1994. IKEA‘s success story is the result of its founders opening store in 1951 to allow customers to inspect products before buying them, using a catalog to tempt people to visit an exhibition. Its key feature of providing self-assembled furniture starting from 1953 significantly cut transport and storage costs. The vision of the company is Creating a better life for many people. Initially their main motive was to change the situation of a disproportionately large part of all resources being used to satisfy a small part of the population.They did start working on it by reducing their costs by systemization, saving transport and storage costs. They felt stiff competition and also opposition from the Sweden’s large furniture retailers as they were threatened of losing on their business. This was the reason that they had to move abroad for new resources. They started with Poland. They placed utmost importance on developing close ties with their suppliers and develop long-term business partners. They followed a unique philosophy of using out seasonal manufacturers with spare off-season capacity. They later expanded to countries like Sweden , Stockholm ,Germany etc. They added many features to their business as the IKEA concept evolved and became increasingly formalized.They also expanded beyond furniture to textiles, kitchen utensils, flooring,rugs,lamps, etc. The cultural norms and values that developed to support the strategy was one of the key differentiating factorof IKEA.Personal beliefs and values include enthusiasm , constant will to renew, cost-consciousness, willingness to assume responsibility ,humbleness before task and most importantly simplicity and attention to detail .They also followed an antibureaucratic methodology. Besides its success stories, the company has faced environmental and social issues. The environmental issue in the early 1980s was raised as IKEA products were proved to emit more Formaldehyde than was allowed by legislation. The reason is that most of its suppliers bought from subsuppliers, who collected materials from glue manufacturers. Afterward, the company worked directly with glue companies and reduced the formaldehyde off-gassing in its products. The problem was solved but sales dropped by 20% in Denmark. In 1992, the company hit the same issue, which cost IKEA $6 million to $7 million. IKEA learned a lesson; publicity can bring a great loss in sales, not counting the damage to the brand image. In regard to social issues, the company confronted the child labor problem, which this paper mainly discusses about. In 1994, a Swedish television showed a documentary film about children working in Pakistan, targeting IKEA. In India, IKEA faced criticism about child labor from various international organizations. In the spring of 1995, another film is threaten to be shown on German television about children working at looms at Rangan Exports, a Page | 2

company used by IKEA and the producer then invited IKEA to send someone to take part in a live discussion during the airing of the program. These events urged the company to consider environmental and social issues more seriously. 1. What actions should Barner take regarding IKEA `s supply contract with Rangar Exports? Marianne Barner knew that IKEA must take on this issue and sign up to an industry-wide response to growing concerns about child labor in the Indian Carpet industry. It would be in IKEA’s best interest to force Rangar Exports to comply with the compliances which explicitly forbade the use of child labor in the factories. Rangan Exports is one of IKEA’s major suppliers, so cutting them off would cost them millions of dollars and reduce their sales. Because IKEA began addressing this issue in 1994, there should be policies set in place for termination of suppliers that decide they don’t want to comply with said agreement. Marianne’s ideal solution would entail IKEA figuring out a way to keep its contract with Rangar Exports while making sure children were no longer working at the looms.

1. If they continue with their operation in India should they sign up to an industry wide Rugmark labeling & monitoring? Marianne Barner knew that the long-term strategies for IKEA would need to make differences in the lives of the children. Getting involved with Rugmark or Save the Children would be a good long-term strategy for IKEA. Also, continuing to stay active and semimicro-managing its manufacturing plants in India would provide IKEA with results and knowledge. Visiting the plants often, unannounced, might scare away some manufacturers, but that is the cost that must be paid if IKEA wants to avoid child labor issues. The company should stay and source from India because the people need jobs and money. Additionally, since India is the biggest purchasing source for carpets and rugs, exiting from the country would result in major losses. Although maintaining a monitoring and control process is imperative for IKEA, the sign-up to Rugmark would result in more sales. Rugmark, a recently initiated industry response to the child labor problem in the Indian carpet industry, certifies whether a carpet was made with or without the use of child labor. IKEA was invited to sign up with Rugmark as a way of dealing with its ongoing potential problem for child labor problems on products from India. This would be an ideal solution because this creates a level of transparency for the consumers and IKEA. Seeing the Rugmark label on a carpet or rug would communicate that IKEA was not dealing with child labor anymore and that these products wouldn’t conflict with their consumers’ morals and beliefs. Thus, the consumers would become aware and make more purchases based upon this new visible label.

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1. Analyze IKEA’s decisions and strategies opted for development of sustained competitive advantage. First let us understand what Sustainable competitive advantage is? Sustainable competitive advantages are harder and harder to find and harder and harder to maintain. There are really only two ways that you can define this. 1. Being able to deliver more value than your competitors can, or being able to deliver the same value cheaper. 2. Do you have some systemic business advantage that allows you to deliver more value for a cheaper cost? IKEA has adopted certain strategies and has also taken certain decisions which have helped it in attaining a sustainable competitive advantage. Underlying philosophy: We feel that the major motive and also the deep lying philosophy of offering a wide range of products at prices so low that majority of people can afford them and as also to remove the disproportion of large part of the resources being used for a small part of the population leads to a competitive advantage. Culture : The cultural norms and values that developed to support the strategy was one of the key differentiating factorof IKEA. Personal beliefs and values include enthusiasm , constant will to renew,cost-consciousness, willingness to assume responsibility ,humbleness before task and most importantly simplicity and attention to detail .They also followed an anti-bureaucratic methodology. Business principles : Unique competencies which were attractively presented im a value adding environment and all at a copetitively lower prices is a business advantage. Their concept of knockdown where instead of buying complete pieces of furniture customers bought them in flat packages and put them together by themselves. This saved transport and storage cost and company used this saved cost to further reduce the prices. Managing their sales through a systematic way of initially using a catalogue to tempt people to visit store where they can then touch the furniture they wish to buy and then write an order Managing Suppliers and Developing sourcing principles: The way IKEA has maintained their relations with their suppliers and their unique way of identifying new sources is also a competitive advantage.They believe in long term relationships with the suppliers and also look in to their development . They provide them loans at reasonable rates .They also used seasonal manufacturers with spare off-season capacity to manage and develop their capacity. Page | 4

Growing Retail and expansion They very well captured the international markets and took significant advantage of what specially each country had to offer. They also serviced customers with features like playroom for children, low priced restaurant, Sweden shop for groceries etc. This was something which set them apart from their competitors. They added many features to their business as the IKEA concept evolved and became increasingly formalized. They also expanded beyond furniture to textiles, kitchen utensils, flooring, rugs, lamps, etc. They also took certain very important decisions like in response to the formaldehyde issue the company quickly established stringent requirements regarding the emissions .Even when they found that suppliers were failing to meet the standards they decided to work directly with glue-producing chemical companies and got rid of the problem. Though it did come on surface again in Germany this time it did stop it’s production and sales of the product till things were sorted. Though the problems of social issues did keep re-emerging but still their prompt reaction to it and willingness to work on all the issues is actually helping in their brand building activity. A brand who sticks to their values. The current problem of Child labour issue is also handled with a lot of concern till now. They have made strict clauses in their contracts with suppliers, they have also involved a third party for inspection and also frequently visiting the suppliers , taking judgement and a deeper perspective of the issue of Child Labour, much above the company or profit level also is also commendable. The decisions which they take further on it will surely affect their competitive advantage strategies as well. 2. Question: Should IKEA become more involved in dealing with the child labour issue as its contacts in `` Save The Children `` were urging or should simply exit the country as pragmatist`s inside the company were suggesting? Based on strategic understanding of various stakeholders of the organization to gain value for an organization, analyze IKEA `s decision? Answer: IKEA, being a world renowned brand, had opportunities and demand for its products all over the world and in the past, all the more, it had generated huge profits and had truly become a global company. On the advent of the child labour issue, in our opinion, IKEA should become more involved in dealing with the child labour issue. Though it had an option, as suggested by the pragmatists, to leave the country all together. Also it was stated that Indian rugs accounted for a tiny part of IKEA’s turnover but IKEA had stood up for various social and environmental issues in the past. Though it meant that it had to sever its ties with its major suppliers but at least in doing that it was not going against its main vision i.e. Create a better everyday life for the many people. India was not a part of the convention 138 according to which it was not committed to ratify abolition of labour by children under 15 and also IKEA was not aware that child labourers Page | 5

were involved in the rug making by its suppliers. So it can be seen that many countries, as much as 120, were already committed to ILO and many other countries might join it (India did join the Convention in 2005), hence moving base from country to country in order to avoid the issue would have been detrimental to IKEA. Also it can be seen few environment negligence issues had cost IKEA in a big way i.e. its sales dropped by 20% in Denmark on one occasion and the bookcase Billy issue had cost about $6 Million to 7 Million of loss to IKEA. After such cases IKEA resorted in restructuring and redesigning its processes in order to become more aware of its dealings and took on many environmental initiatives as well. Hence now this issue of child labour came full force in the picture, though IKEA had no clue about what was going on, it would have taken a serious hit on the profits (like environment issues earlier) as well as would have put a black spot on IKEA’s brand Image. Therefore we believe that committing itself to the protection of children, IKEA should sign up with the Rug mark commission which will not only let the organization stick to its principles but will create a goodwill for the organization, this might lead to opening up of various avenues for business in the country as well as a word spread can also open up many avenues of business in other countries as well. And since, even constant vigils and visits might not ensure that there is no involvement of the child labour, a proper commitment to the issue (like Rug-mark) will ensure that IKEA will be maintaining its standards and reputation and shall be more aware. This will provoke strategists at IKEA to work on the Quality enhancement strategies. On the hind side since the rug industry, as mentioned before , contributed as a very small portion of profits to IKEA there will not be a significant loss to the organization if they sign the anti child labour treaty and forgo of its current supplier. This can be seen as an opportunity to make new ties with new suppliers in a strategic way. This might give IKEA a competitive advantage as well. In conclusion, this decision of supporting the “save the child cause”, if taken by IKEA, will involve stakeholders such as IKEA as an organization, Marianne Barner (business area manger), suppliers as well as the child labourers. IKEA has a brand reputation to keep. It is a global brand and looked for global opportunities therefore it does not want anything to tarnish its image plus by condoning the cause it would have deviated from its values. Marianne Barner, who was faced with cutting ties with one of its major supplier, will be seen as a change agent by supporting a social cause and that might help her in bringing more business to the organization and hence her power in IKEA could increase as a strategic implementer. She is new and she would not want to be caught within the midst of an issue which was now being recognized around the world as something close to a stigma. The suppliers would be motivated to change their stance as well because many countries have committed to ILO over the child labour issue and those who did not would eventually in future, so major companies would have to result in doing business with those suppliers who supported this issue, hence the power that suppliers had was slipping and they needed to make amends in their strategies as well to retain it again. This might also make them a favourable choice of many other business houses (apart from IKEA) as well. As for child labourers it will help in their proper development and this issue basically provided voice to

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the voiceless and on a humanitarian ground IKEA would emerge out to be an origination pioneering in support of the issue paving path for other companies too. 3. Explore the case to find the balance between the economic benefits of outsourcing and strategic risks it may bring to a company`s brand image. Rugmark Foundation: Complying with the Rugmark label will get IKEA acceptance in many developed countries where ‘child labor’ is a raging issue. That will paint a positive picture of the organization and will be of a greater benefit to the business. Compliance with the rugmark label might also mean that they will have to draw back the business from countries which still practice child labor. Assuming, most of those are developing countries and have cheap labor and majority of work is being done there, IKEA will incur great amount of loss. But to overcome that they can consider China as the next best option. Reduce labor costs: Hiring and training staff for short-term or peripheral or manufacturing product projects can be very expensive, and temporary employees don't always live up to your expectations. Outsourcing will reduce the per head cost which will in turn reduce the labor cost as a whole. Reducing the labor cost will let IKEA stick to its mission of offering range of varieties of furnishing products that majority of population can afford. But it can work otherwise as well if they end up making ‘reducing cost’ as a priority because that will lead to compromising with the quality which might hamper the brand image as a whole. Start new projects quickly: A good outsourcing firm has the resources to start a project right away. Handling the same project in-house might involve taking weeks or months to hire the right people, train them, and provide the support they need. And if a project requires major capital investments (such as building a series of distribution centers), the startup process can be even more difficult. And this also means they will stick to their values of being innovative and being different. If the new products are introduced in the market really soon than the previous products might suffer a heavy loss. As, why would an individual purchase an old product instead of a new one. But if proper time frame is taken into consideration this issue could be resolved as well. Focus on your core business: Every business has limited resources, and every manager has limited time and attention. Outsourcing can help the business to shift its focus from peripheral activities toward work that serves the customer, and it can help managers set their priorities more clearly. It will help the organization maintain the focus on the matter which are more serious and which could be

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directly resolved by them considering the expertise they have. Auditing and supervising could be outsourced, to make sure quality is under check and there is no child labor involved. This could work in complete favour of business and help re-create a better and positive image. If this is not done properly and if it involves the cases of bribery and fraud it could turn around the entire picture. 3. Consider various options for re-organization for IKEA to sustain profitably. The use of child labour is an issue deeply rooted in the culture of some countries and the fact of poverty and lack of social awareness has made the problem complicated. Hence IKEA should work closely with the international organization to tackle the problem, as well as the local government, trade unions and NGOs. For future prevention of the child labour, IKEA and its monitoring team should work closely with the international suppliers and sub suppliers to understand their situation, pay unexpected visit to them to prevent the possibilities of using a child labour (IKEA). More communication to the suppliers and giving them the education of prohibition of using child labour is also important. The immediate actions should include, taking full responsibility of all the issues that were created and take all the necessary measures. They should find new suppliers that align with the values and corporate ethics of IKEA. They should also work with the CSR departments and promote education for children and abolition of child labor. They should monitor the rest of the suppliers around the world and should comply with Rugmark Foundation. In addition to all of that they should also accept taking part in the video and go public about it by explaining the situation, elaborating the course of action and thus minimizing the impact.

By Bhoomi Bhatt Monika Nehe Pooja Junnarkar Shaurya Deep

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