C-Suite

IKEA's Global Sourcing Challenge

May 13, 2013

Emma
1 Karkar ● Olivia Heo ● Joyce Kung ● Vikram Angelo ● Dalal AlBawardi ● Panos Anadiotis
Agenda

COMPANY BACKGROUND

DETAILS OF ENVIRONMENTAL ISSUES AND

CHILD LABOR

WHAT CAUSED THIS ISSUE -ISSUES

ASSESSMENT

THE ALTERNATE RESPONSES

RECOMMENDATIONS
2
Background

• Swedish furniture retailer

• Sells affordable, good-quality furniture
to mass-market consumers
• Procurement policy: Establish long-
term relationship with suppliers
• 2,300 suppliers in 70 countries
• Marianne Barner: Business area
manager for carpets
• Rangan Exports: Indian carpet
supplier; Recently signed contract
forbidding the use of child labor
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 Mission, Vision, Values
THE VISION
To create a better life for the majority of people which is the basis of its strategic
orientation.

THE MISSION
To offer a wide range of home furnishing items of good design and function at
prices so low that the majority of people can afford to buy them.
V
A
L Humbleness Leadership Daring to be
Togetherness
and and
U by example different
willpower enthusiasm
E
S

Cost Constant Accept and

consciousnes desire for delegate
s renewal responsibility
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Situation

1980: 1992: 1994:

Formaldehyde Formaldehyde Child labor scandal
scandal in Denmark scandal in Germany in Pakistan
Rugmark contract

1995:
Child labor scandal reported
by German TV channel at
Rangan Exports
 Invitation for live
discussion
 Contract termination

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Complication – The Beginning

Global expansion
o The number of stores increased 6 times in 10 years
o Historical Store Growth
1954 1964 1974 1984 1994

Number
0 2 9 52 114
of stores

Need More Supply

o In the mid-1990s: 2,300 suppliers in 70 countries, sourcing a
range of around 11,200 products
o Commercial issues: 24 trading service offices in 19 countries
 monitored production, tested new product ideas, negotiated
prices and checked quality
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 The
Environmental
Issue

The Social
Issue

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Complication – The Environmental Issue

1980:
Formaldehyde Action
scandal in
Denmark

1st Alternative
Action action

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Complication – The Environmental Issue

1992:
Formaldehyde
scandal in
Germany

1st Action
• Immediately stopped the production and sales of Billy
bookcases worldwide
• Estimated lost: $6-7 million

Alternative Action
• Forestry: Forestry policy working with Greenpeace
and World Wide Fund for Nature
• Environmental Criteria: working with suppliers,
adapting the product range,transport and distribution,
ensuring environmentally conscious stores
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Complication – Social Issue

1st Action 1994:

• Marianne Barner, business area Child labor scandal in
manager, had to deal with the issue Pakistan
• Apology for ignorance and
acknowledge not being in full control

Alternative Action
• Take advice from International Labor Organization
• "Black-and-white Clause"
• Monitoring child labor practices with a third-party agent.
• Appointed a Scandinavian company for quality assurance program and
random audits of child labor practices at suppliers' factories
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Complication – Social Issue
• Barner's concerns
 Child labor issue not universally concerned within IKEA
 Proactive stand can bring cost disadvantage
• Working with foundations
 Rugmark
 Swedish Save the Children, UNICEF, ILO

1995:
Child labor scandal
reported by German TV
channel at Rangan Exports

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 Issue Assessment

Main causes which led to these

issues:
1) Principles the company was founded on

2) General procurement practice due to lack of in-house

infrastructure

3) Oversight from the management in monitoring suppliers

and sub-suppliers

4) Cultural differences

5) Failure to enforce correction measures

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 Issue Assessment
Formaldehyde Issue:
Main cause:
General procurement principle

• Never managed sub-suppliers

• Worried more about finding the right management

• Relied on technology and knowledge transfer

• In constant quest to lower prices, they bought unused production capacity

• Too trusting as a company

• Fear of making mistakes

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 Issue Assessment
Child Labor issue:
Main cause:
1) widespread socioeconomic phenomenon
2) poorly enforced laws and rarely severe prosecution

• Cost consciousness and a constant will to renew

• Child labor is deeply rooted in South East Asian cultures

• Never monitored their sub-suppliers

• Made loans to its suppliers

• General procurement principle, technology transfer and unused production capacity

also directly lead to the occurrence of this issue.

• Preventive measures were not strongly reinforced

• Barner’s proactive stand to better the children's’ lives was not universally held within
IKEA
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 Environmental Issue 
Child Labor Issue ?
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The Alternative Responses
Acts Ethical Dilemma Purpose
• Explain what Principle People Ikea
happen • No law obligation • Customers have • Haunt them
Accept • Take the blame • Ethical principles the right to know • Make it less
Short vs. • Prove how we do • Our right for • Shareholders bad
the Long-term
invitation not approve to child explanation and employees • Affect on
labor have the right to shareholders
be protected
• Maintain order with • Policies are clear, •
• Some of Lose a good
Terminate social and corporate if child labor is supplier
Terminante
Rangan Justice rules involved, contract • Positive public
Rangan
Exports vs. Mercy • Taking clear, quick, is cancelled. response
employees will
contract and investigative • It is within our • Lesson to other
be fired for their
actions. rights company’s suppliers
• Teach by example
mistakes.
legal vs. moral • Lose a good
• Affect India image percentage of
• Remove any negative • Within our rights;
• Pull other their
dimensioning India
Short vs. associations with the company’s suppliers
Exit India from our supply
Long-term brand name • Decrease the • Cheap child-
• Rebuild the trusted chain will make us
standard of living labor free
brand name lose our
further countries
company’s culture.
• Customers face don’t exist
higher prices

• Child labor and IKEA • Our contract was • More pressure on • Chances of
Rugmark never tie again based on a goal that Rugmark reoccurrence
Solo Truth vs. Loyalty was dismissed, give employees
Monitorship formal written • Send a negative
warning or fire them. message to
stakeholders.
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Course of Action

Immediate actions
1 2 3 4 5 6

Find new
Take full
supplier Monitoring
responsibility Work with
that aligns Work with of the rest
- Fire Rugmark
with our Take legal our CSR of our
Rangan Foundation
values and actions department suppliers
Exports
corporate
ethics

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Debate

YES NO
Accept taking part in the video Do not accept
Go public Take all the measurements
Explain the situation Do not fall in his trap
Elaborate our course of action Do not allow him to use us
Minimize impact Be proactive and prepare
Take advantage of his
mistake

Decision!
Accept the interview

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Recommendations

Rugmark Foundation
– Financial assistance
• Staffing
• Improve quality of services
– Monitoring controls
– Community based rehabilitation
– Community development programs
– Health care services
– Expansion plans
IKEA
– Monitoring
• IKEA CSR department
• Avoid same mistakes
• Become part of any community we enter

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20
 Appendix

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Background
“Disproportionately large part of all resources is used to
satisfy a small part of the population. . . . IKEA’s aim is to
change this situation. We shall offer a wide range of home
furnishing items of good design and function at prices so low
that the majority of people can afford to buy them... We have
great ambitions.”
--Ingvar Kamprad

Mid 90’s: Worked with 2300

1951: Opened suppliers in 70 countries.
first display store Sales rose to over 4.5 billion

Sold small items Idea of “A better life, Began to build long term business
out of families for many people” partnerships with manufactures
kitchen.  Searched for and distributers
furniture manufactures “We do not buy products from
our suppliers, we buy unused
production capacity.” -- IKEA
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Complication – The Timeline

1992:
Formaldehyde scandal in Germany
 Forestry
Adaptation of product range 1995:
Working with suppliers Child labor scandal
Transport and distribution reported by German TV
Environmentally concious channel at Rangan Exports
stores

1980: 1994:
Formaldehyde Child labor scandal in Pakistan
scandal in Denmark Ikea had no awareness of child labor
 Collaboration problem
with chemical  Apology
companies to  Advice from organizations
reduce  Change of supplier contracts
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formaldehyde  Random tests & situation analysis
 The Alternative Responses
Ethical
Acts Purpose Principle People Ikea
Dilemma

Accept the
invitation Rule-Based Thinking
Terminate
Rangan
Exports
contract End-Based Thinking

Exit India
Care-Based Thinking

Rugmark
Solo
Monitorship
End-Based Thinking
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Source: the heart of Leadership, PLC 2007, Ethics-Oklahoma State University-Student Union