B RANDEIS U NIVERSITY

International Business School

Case Write Up - 1
IKEAs Global Sourcing Challenge: Indian Rugs and Child Labor (A)
Operations Management BUS-272A-2

Professor: Padurean, Loredana

Abdullah Al Mahmud MBA 2012

1. Preface The Swedish furniture giant IKEA is producing home furnishing products at low prices to make them affordable to people. Ingvar Kamprad established the company in 1943. It has experienced exceptional growth over the years and expanded its operations and business relationships throughout the world. 2. Determinants of the Problems: The challenges that IKEA faced with regard to child labor have become more intense when a German television station intends to broadcast a documentary that implicates Rangan Exports of child labor. Rangan Exports is one of the main suppliers of rugs/carpets of IKEA for many years which is situated in India. These impose a big threat for Marianne Barner, Business Area Manager for Carpets, IKEA. In my opinion, Ms. Barner needs to decide about the following determinants: She must decide on whether to participate in the documentary and address these claims directly.

She must decide on whether to retain Rangan Exports as a supplier, and how to proceed. She
must assess the effectiveness of its current procedure of ensuring that no child labor is present among its suppliers.

She must decide whether to continue operation in India in the long run and how to deal with
this issue. Before addressing these issues elaborately and finding the effective way out we need to focus on the overall understanding on IKEA in brief. 3. Value proposition: The main value proposition for IKEA is to produce low price furnishing product in order to make it affordable for every one and to create a better life for many people. 4. SWOT Analysis: Strengths Weaknesses 1. Affordable price 1. Store layout reminds people regarding Wal2. Advertise thorough catalogue, radio and Mart. word of mouth. 2. Reputation hampered after certain 3. Excellent online representation environmental issues like use of formaldehyde 4. It provides a multipurpose facility while and child labor use in the production of carpet. shopping for furniture. For example existence of grocery shop, restaurant and baby care to facilitate customers need.

5. Good working environment for employees.

6. Quick challenges. response to environmental

Opportunities 1. Low cost production 2. Continuously expanding 5. Recommendations

Threats 1. Intense competition

2. Existence of companies like Crate and

Barrel, Wal-mart, Pier 1, Galiform

In order to handle the above mentioned determinants IKEA should respond in the following ways: 5.1 How to handle the documentary invitation? In response to the invitation of German documentary producer the Ms. Barner should not send any representative to participate at the documentary. Because it is apparent that the documentary producer intends to portray IKEA in a negative light as they are directly aimed at IKEA. By appearing at the interview, the IKEA representative would give more credibility to the documentary and would also give them more material to use against IKEA. It does not matter how well the IKEA representative addresses the issue, the documentary producer would be able to distort the message by editing video footage and taking the representative's responses out of context. In my opinion, IKEA should provide a written statement to the documentary producer mentioning the values of IKEA as well as the actions it has taken against the child labor practice instead of participating in the documentary. The statement should also focus that the IKEA takes all of these claims seriously and is currently conducting a full investigation into the matter. This statement will give IKEA the opportunity to control the content of its message and the documentary producer would not be able to claim that the IKEA did not respond. Besides these, IKEA should provide the same written statement in a press release or through newspaper outlets. This could enable IKEA to protect the public image even the documentary producers do not use the information provided in the written statement. This written public statement should be delivered a few days before the documentary is broadcast. Therefore, IKEA should release this public statement before the documentary airs and which will in turn diffuse the impact of the documentary. 5.2 Actions Regarding the IKEA Supply contract with Rangan Exports IKEA has maintained excellent relationships with its suppliers to provide quality products to its customers. Rangan Exports, the one of the major suppliers of IKEAs product, has been accused of violating child labor laws. The following actions IKEA should take immediately in response to this matter: 5.2.1 Communicate with Rangan Exports IKEA should thoroughly investigate Rangan Exports regarding the issue of child labor practice which was evident in the documentary. The contract signed by the IKEA and Rangan Exports clearly states that if

there is any violation of child labor laws the contract will be null and void. The IKEA should maintain a strict policy against child labor practice. IKEA should contact Rangan Exports and inform them that they have received accusations that child labor laws have been violated in their factories. IKEA should inform the supplier that they are placing their contract on probation as thorough investigations are made of their factories. 5.2.2 Rearrange the Contractual terms and conditions with Rangan Exports IKEA should make some adjustments to the contract to prevent the violation of child labor laws. Ms. Barner should take necessary action to sign a new contract which will be more focused concerning child labor. In the past, IKEA did not access to the factories and only met with Rangan Export executives in their offices. But now they send a representative each month to perform a walkthrough of Rangan Export factories to ensure that the conditions of the contract are kept intact. If the representatives report any violation of contractual terms the contract will be void immediately. Furthermore, IKEA could appoint any third party who will act as an external monitor to find the current social condition in India regarding child labor. The company will make a random audit of child labor to IKEAs supplier factories. If the supplier did not allow them to access the factories then it will be assumed they are hiding the child labor and then IKEA could end the relationship with Rangan Exports. These will be the best way to enforce a stricter contract with Rangan exports to avoid child labor. Thus, Rangan Exports would be careful enough to obey the child labor laws of India as well as allow IKEA to avoid future incidents of child labor accusations. If Rangan Exports accept the terms and conditions of the new contract then IKEA will continue to maintain the supply chain with them. Otherwise, if they dont agree then IKEA should terminate the contract with Rangan Exports based on the accusation of child labor violation. Thus, in my opinion, these new regulations to the contract are necessary to ensure that child labor is avoided. 5.3 Long-term Strategy Regarding IKEAs Operation in India IKEA could not immediately stop their operation in India and could not terminate the contract with Rangan Exports because of the following impacts:

The accusations that IKEA received through the video documentation of child labor occurring in
Rangan Exports are not yet proved. The current contract states that if any violations of child labor laws are found the contract will be terminated. However, if IKEA decided to terminate the contract with them based on that documentary and later if it is proved to be false it is possible that they could face a law suit and lose a great deal of money. For this reason I believe Rangan Exports should be dealt with as I have outlined previously. Furthermore, if IKEA decided to stop their operation in India without further investigation, it will hamper their reputation. Because hundreds of families would be out of work and which would ultimately create even more problems for IKEA. In my opinion, IKEA should maintain a good relation with Rangan Exports and imply the new contractual obligations with the company and the workers.

 IKEA cannot withdraw from India market because it will restrain itself from a big opportunity of
cheap labor and put the company at disadvantage position in compare to other competitors like Wal-Mart who are also accessing the same labor market for lower price. Therefore, IKEA should continue to its operation in India in order to keep up with the trend and get ahead of the issue and its rivals. However, IKEA can turn the threat into an opportunity in the long run by making every effort to overcome the issue of child labor. 5.3 How can IKEA continue to source Carpets in India? In the past, IKEA had faced problems for using more formaldehyde than was allowed by legislation. Then they worked directly with the glue-producing chemical companies to find ways to reduce the formaldehyde produced off of its products. Thus, based on this information, IKEA should take following actions regarding the continuation of operation India:

Own control: IKEA should be more aware regarding the issue of child labor within its company
through its suppliers. They should make a complete control over this problem. As mentioned in the case, IKEA already appointed a Scandinavian company to work directly with their suppliers to ensure that child labor is not present1. This will help IKEA to get the knowledge of child labor usage by their supplier.

RugMark: Furthermore, I would suggest IKEA to sign up with Rugmark Foundation, a recently
initiated industry response to the child labor problem in the Indian carpet industry to solve the child labor issue. Then, Rugmark will label IKEAs carpets with a unique identifying number certifying that the carpet was made without the use of child labor2. Rugmark will add more monitoring control and will help guarantee that no child participated in making the IKEAs products.

Save the Children: In the long run, IKEA should work with the Save the Children
organization, which is a Swedish organization expert on child labor. This will help IKEA to understand how they can prevent child labor more effectively in their organization.

Education: Specifically in India, families send their children to work because of poverty.
Therefore, to improve the condition IKEA need to fund a budget in the need of education for those families. Besides, IKEA should pose government to take care of this issue more rigorously. Thus, government should take necessary action to improve earnings of the families to improve standard living for Indian families which in turn help to remove poverty which is the root cause of the child labor issue. However, by working with organizations like Rugmark or Save the Children, IKEA will be able to maintain its high values and protect its brand image. This will help to improve the image of IKEA to customers and increase the sales and protect more losses from this social issue.

1 2

IKEAs Global Sourcing Challenge: Indian Rugs and Child Labor (A), page-6 IKEAs Global Sourcing Challenge: Indian Rugs and Child Labor (A), page-7

6. Conclusion I would feel that by taking above mentioned actions IKEA could advance itself to the proactive level of social responsibility. Furthermore, this will give the opportunity for Rangan Exports to avoid child labor, IKEA to take credit to fight against the child labor and India to increase the awareness against child labor practice. In summary, I could conclude that this will strengthen the relationship between customer and suppliers of IKEAs product and help to improve the product image further.