IKEA's Global Sourcing Challenge

Case Study Analysis | CSR | Crisis Management | Global Marketing

1. Emma Karkar ● Olivia Heo ● Joyce Kung ● Vikram Angelo ● Dalal AlBawardi ● Panos  Anadiotis C- Suite IKEA's Global Sourcing Challenge May 13, 2013

2. Agenda Company Background Details of environmental issues and child labor What caused this issue - I ssues Assessment The Alternate Responses Recommendations

3. 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 Background

4. Mission, Vision, Values Humbleness and willpower Leadership by example Daring to be different Togetherness and enthusiasm Cost consciousness Constant desire for renewal Accept and delegate responsibility 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 U E S

5. Situation 1994: Child labor scandal in Pakistan Rugmark contract 1995 : Child labor scandal reported by German TV channel at Rangan Exports Invitation for live discussion  Contract termination 1980: Formaldehyde scandal in Denmark 1992 : Formaldehyde scandal in Germany

6. Global expansion The number of stores increased 6 times in 10 years Historical Store Growth 1954 1964 1974 1984 1994 Number of stores 2 9 52 114 Need More Supply In the mid-1990s: 2,300 suppliers in 70 countries, sourcing a range of around 11,200 products Commercial issues: 24 trading service offices in 19 countries monitored production, tested new product ideas, negotiated prices and checked quality Complication – The Beginning

7. The Environmental Issue The Social Issue

8. 1980: Formaldehyde scandal in Denmark Complication – The Environmental Issue 1 st Environmental Issue Danish regulations in the early 1980 Formaldehyde emissions from the chemical compound IKEA sales dropped 20% in Denmark 1 st Action Alternative action Action

9. 1992 : Formaldehyde scandal in Germany 2nd Envrionmental Issue German media investigated the formaldehyde problem The lacquer on the bookshelves 1 st 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 Complication – The Environmental Issue

10. 1 st Child Labor Issue Swedish documentary showed child labor used at weaving carpets in Pakistan IKEA : the most blamed due to its high profile IEKA had no awareness of child labor problem Complication – Social Issue 1994: Child labor scandal in Pakistan 1 st Action Marianne Barner, business area manager, had to deal with the issue 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

11. 2 nd Child Labor Issue A well-known German documentary maker will broadcast children working at looms on German TV Barner and her manager tried to learn about the situation . Complication – Social Issue 1995 : Child labor scandal reported by German TV channel at Rangan Exports 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

12. 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 Issue Assessment

13. 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 Issue Assessment

14. 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 Child Labor issue : Issue Assessment

15. Environmental Issue Child Labor Issue ?

16. Acts Ethical Dilemma Purpose Principle People Ikea Accept the invitation Short vs. Long -term Explain what happen Take the blame Prove how we do not approve to child labor No law obligation Ethical principles Our right for explanation Haunt them Make it less bad Affect on shareholders Terminate Rangan Exports contract Justice vs. Mercy Short vs. Long-term Truth vs. Loyalty Rugmark Solo Monitorship Exit India Customers have the right to know Shareholders and employees have the right to be protected Maintain order with social and corporate rules Taking clear, quick, and investigative actions. Teach by example legal vs. moral Policies are clear, if child labor is involved, contract is cancelled. It is within our rights Some of Terminante Rangan employees will be fired for their company’s mistakes . Lose a good supplier Positive public response Lesson to other suppliers Remove any negative associations with the brand name Rebuild the trusted brand name Within our rights; dimensioning India from our supply chain will make us lose our company’s culture. Affect India image Pull other company’s Decrease the standard of living further Customers face higher prices Lose a good percentage of their suppliers Cheap child-labor free countries don’t exist Child labor and IKEA never tie again Our contract was based on a goal that was dismissed, give formal written warning or fire them. More pressure on Rugmark employees Send a negative message to stakeholders. Chances of reoccurrence The Alternative Responses

17. Course of Action I mmediate actions Work with Rugmark Foundation 1 2 3 4 5 6 Take full responsibility - Fire Rangan Exports Find new supplier that aligns with our values and corporate ethics Take legal actions Work with our CSR department Monitoring of the rest of our suppliers

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

19. 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 Recommendations

20. Appendix

21. Background --Ingvar   Kamprad “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.” Idea of “ A better life, for many people ”  Searched for furniture manufactures B egan to build long term business partnerships with manufactures and distributers “We do not buy products from our suppliers, we buy unused production capacity .” -- IKEA 1951: Opened first display store M id 90’s: Worked with 2300 suppliers in 70 countries. Sales rose to over 4.5 billion Sold small items out of families kitchen .

22. 1994: Child labor scandal in Pakistan 1995 : Child labor scandal reported by German TV channel at Rangan Exports 1980: Formaldehyde scandal in Denmark 1992 : Formaldehyde scandal in Germany  Collaboration with chemical companies to reduce formaldehyde concentration Forestry Adaptation of product range Working with suppliers Transport and distribution Environmentally concious stores Ikea had no awareness of child labor problem Apology Advice from organizations Change of supplier contracts Random tests & situation analysis Complication – The Timeline

23. Acts Ethical Dilemma Purpose Principle People Ikea Accept the invitation Terminate Rangan Exports contract Rugmark Solo Monitorship The Alternative Responses End-Based Thinking Exit India Rule-Based Thinking End-Based Thinking Care-Based Thinking Source: the heart of Leadership, PLC 2007, Ethics-Oklahoma State University-Student Union