IKEA challenges rugmark for India operations

Ikea

1. IKEA Global Sourcing Challenge: Indian Rugs and Child Labour By: Manoj (23PGBA-17) Karun (23PGBA-35)] Aryadeep (23PGBA-04) Onkar (23PGBA-22) Harjot (23PGBA-10)

2. Introduction In May 1995, Marianne Barner , Business Area Manager for Carpets at IKEA, faced a significant challenge regarding one of IKEA’s key Indian rug suppliers. A German TV investigation exposed the supplier’s involvement in child labor , despite the contract explicitly forbidding it. IKEA faced a long-term challenge, including: Joining industry-wide initiatives like Rugmark , a child labor free certification. Ensuring that IKEA’s response was in the best interest of children . Debating whether to exit the Indian rug market , considering the risk to reputation versus profits. Barner had to choose between cutting ties with the supplier , which would disrupt supply and affect sales, or addressing the issue sustainably.

3. 1995 1953 1951 1961 1986 IKEA Journey Faced a major CSR challenge related to child labor . IKEA founded by Ingvar Kamprad at the age of 17 as a mail-order business. Introduced self-assembled furniture in flat packages, revolutionizing the furniture industry First showroom opened in Almhult, Sweden, allowing customers to inspect products before purchase . IKEA introduced furniture in its product line, quickly becoming successful. Sourcing from Polish factories , becoming its largest supplier and helping reduce costs. 1948 1943 Kamprad stepped down as CEO but retained strong influence as honorary chairman .

4. Managing Suppliers: Developing Sourcing Principles IKEA’s Long-Term Supplier Relationships Challenges in Sweden’s Furniture Industry (Late 1950s) Strategic Move to Polish Suppliers (1961) Ensuring Competitiveness

5. EXPANDING ABROAD IKEA began expanding by opening its first store outside Sweden in 1965 in Norway. By the mid-1990s, IKEA operated 98 stores in 17 countries with a global catalog printed in 34 languages. The company's conservative approach to new markets with attention to local needs. Focus on standardization, cost-efficiency, and the extension of the product range. Product range expanded beyond furniture to include textiles, kitchen utensils, flooring, rugs and carpets, lamps, plants, etc. Initial Expansion (1950 s -1970 s ) Expansion beyond Europe (1970 s -1990 s ) Expansion to Emerging Market (1990 s -Present) This phase focused on nearby markets with similar cultures and consumer behaviors. Learned to adapt the preferences of local consumers (key to its success in diverse markets). Used a standard store format and product design but adapted its product offering to local tastes and behaviors

6. CULTURE AND VALUES 1 2 3 4 IKEA’s Philosophy Informal Work Environment Simplicity and Attention to details Focus on cost consciousness IKEA’s Leadership and Culture development To create a better everyday life for the many people 1.Open plan office layout with no private space. 2.The work environment (collaboration and contribution over position). 1.Anti-bureaucrat week- managers to spend time with front desk and customers. 2.Management by running around (management style) 1.No wastage of resources. 2.Employees are trained to consider costs in their decision-making. 3.Rewards for employees with creative solution 1.Formalization of IKEA values “Testament of a Furniture Dealer”. 2.IKEA ambassadors were appointed to promote company’s philosophy. 3.Leadership transition in 1986

7. ENVIRONMENTAL ISSUES - FORMALDEHYDE

8. 1980: Formaldehyde scandal in Denmark Complication – The Environmental Issue 1 st Environmental Issue Danish authorities passed regulations in the early 1980, defining limits for formaldehyde emissions. Formaldehyde was binding agent for plywood & plyboard. IKEA products emitted more than 0.1mg/kg formaldehyde. IKEA was fined heavily & image was tarnished coz of scandal. As a result, sales dropped 20% in Denmark 1 st Action Alternative action Action:-

9. 1992 : Formaldehyde scandal in Germany 2nd Envrionmental Issue German media investigated the high formaldehyde emission in Billy ( IKEA’s best selling bookcase) S o urce of problem was not glue but the lacquer on bookshelves. 1 st Action Immediately stopped the production and sales of Billy bookcases worldwide Estimated loss: $6-7 million Alternative Action Forestry Policy: Designed on working with Greenpeace and World Wide Fund for Nature – IKEA didn’t acept any timber, veneer or plywood sourced from natural forest or from forest with high conservation value. Imbed Environmental Policy into business values : working with suppliers, adapting the product range,transport and distribution, ensuring environmentally conscious stores Eg – Redesigned OGLA chair to be produced from waste material of yogurt cups. Complication – The Environmental Issue

10. Social Issue – Child Labor

11. 1 st Child Labor Issue Swedish documentary showed child labor used at weaving carpets by a supplier in Pakistan IKEA: the most blamed due to its high profile IKEA had no awareness of child labor problem Social Issue – Child Labor 1994: Child labor scandal in Pakistan Immediate Response:- Marianne Barner, business area manager of IKEA, had to deal with the issue. Apologized for ignorance and acknowledge not being in full control. Commited to take action against the issue. Alternative Action Consulted International Labor Organization (ILO). Introducted "Black-and-white Clause" in supplier contracts – contract to be void if supplier employed children under legal working age. Monitoring child labor practices in India & Pakistan with help of a third-party agent. Appointed a Scandinavian company for quality assurance program and random audits of child labor practices at suppliers' factories

12. 2 nd Children Bonded Labor Issue A well-known German documentary maker threatened to broadcast children working at looms at Rangan Exports on German TV. IKEA was the direct target in this case. Social Issue – Bonded Labor 1995 : Child labor scandal reported by German TV channel at Rangan Exports Barner's concerns Child labor issue not universally concerned within IKEA globally but she wanted to help. Proactive stand can bring cost disadvantage Barner’s Options :- Working with foundations Rugmark Swedish Save the Children, UNICEF, ILO

13. Vision : “To create a better everyday life for the many people .” Stakeholder Theory : Children are key stakeholders of our business – as members of the communities where we operate, as users of our products and services, as family members of our co-workers, as young workers and as future co-workers and IKEA leaders. All children have rights, everywhere and always. As a global business, we have a big responsibility to demonstrate leadership and be aware of our impact throughout the IKEA value chain and take action to address it.

14. The corporation denies any responsibility for social issues. The corporation seeks to go beyond industry norms. The corporation accepts responsibility and does what is demanded of it by relevant groups. The corporation admits responsibility but fights it, doing the very least that seems to be required. Reaction 4 Defense 3 Accommodation 2 Pro - Action 1 Social Responsiveness Framework (Carroll)

15. Challenges to IKEA 1) Appear on TV : German documentary? 2) Rangan Export Violation : Terminate ? Build credibility to external stakeholders [media] B uild trust by apologizing and sharing action plan. Chance of being biased and prejudiced. Unknown aspects. 3) Continue Engaging on own or allow Rugmark to monitor ? 4) Stay in India? Market share and supply chain. Loss of Brand and business. Consistent problem of Child Labor Public Backlash : admission of wrongdoing No need to look for the issues directly. Trusted operations. Message to other suppliers about IKEA values. Public trust for being serious to its CSR. Established supplier base lost. What about others? Root cause of Child Labor not addressed Not as per the Vision of IKEA

16. Suggestions Set examples this time but plan long term for engagement with Tier 2/3 directly. Understand the root cause and work for Short Term / Mid Term and Long Term Continue Indian market with direct engagement with suppliers / Audit and work with NGO / Local bodies at root level. Give Press release and share action plan. Do not appear on TV Terminate Monitor by self Continue India 1 2 3 4

17. Real Action Plan “bridge schools” Root Cause addressal : Facilitate education and support livelihood for families including women employment [Small Financial Units] Long term Tier 2/3 action plan by direct engagement Supplier Code of conduct : iWAY Work close with NGO / Govt. / Agencies C ontinues sustainability efforts as a leader.