IKEA's Global Sourcing Challenge

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Case Study Analysis | CSR | Crisis Management | Global Marketing

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  • Main cause: General procurement principle, which led to its suppliers buying from sub-suppliers, who collected materials from glue manufacturers. IKEA never managed sub-suppliers. They concentrated on hiring suppliers but didn’t have control over their sub-suppliers (like the glue manufacturers)They were worried more about finding the right management at their suppliers than finding high-tech facilities. Thus, low-tech equipment & lack of know-how could have been a causeRelied on technology and knowledge transferIn constant quest to lower prices, they bought unused production capacity – which means, a lot of their suppliers working off-season might not have been in the furniture business and therefore lacked the know-howThey were too trusting. IKEA was founded on principles like humility and simplicity and therefore assumed their suppliers to share the same ethics“Fear of making mistakes is the root of bureaucracy and the enemy of all evolution” – this pushed the suppliers to take more risks and willingness to make mistakes while experiment with lowering product costs
  • Main cause: 1) widespread socioeconomic phenomenon arising out of poverty and lack of development and education 2) poorly enforced laws and rarely severe prosecutionIKEA was founded on the principle of cost consciousness and a constant will to renew. These ideologies were communicated to their suppliers who in turn, turned to child labor as a way to cut costs. “Waste of resources, is a mortal sin at IKEA” – Kampard.The concept of children working from a young age is deeply rooted in South East Asian cultures (even though it has been outlawed since 1933). Many times, children working would have been a consensual arrangement between the suppliers and the artisan families. It is difficult to keep track of children working in homes where whole families worked on looms from the sub-suppliers level. They never monitored their sub-suppliers & thus were caught unaware.IKEA made loans to its suppliers at reasonable rates. This put pressure on their suppliers to repay the loans and cut costs wherever possible. Employing children was one way to do this. General procurement principle, technology transfer and unused production capacity also directly lead to the occurrence of this issue. In-house production could have avoided this.After the Pakistan incident, even though they added a ‘black and white’ clause and hired a Scandinavian investigation company, they failed to enforce these measures successfully, which led to a bigger reoccurrence in India. Barner wanted to take a proactive stand to better the children's’ lives, however this view was not universally held within IKEA and this stance indirectly lead to the rise of this issue.
  • Exit India:Affect on IKEA: The complexity of the child labor issue requires input and influence from many parties.31% of manufactured material coming from AsiaContract:Principle:Diminish those who do not follow my rules
  • Exit India:Affect on IKEA: The complexity of the child labor issue requires input and influence from many parties.31% of manufactured material coming from AsiaContract:Principle:Diminish those who do not follow my rules
  • IKEA's Global Sourcing Challenge

    1. 1. C-Suite IKEA's Global Sourcing Challenge May 13, 2013 1 Emma Karkar ● Olivia Heo ● Joyce Kung ● Vikram Angelo ● Dalal AlBawardi ● Panos Anadiotis
    2. 2. Agenda COMPANY BACKGROUND DETAILS OF ENVIRONMENTAL ISSUES AND CHILD LABOR WHAT CAUSED THIS ISSUE -ISSUES ASSESSMENT THE ALTERNATE RESPONSES RECOMMENDATIONS 2
    3. 3. Background • • Swedish furniture retailer Sells affordable, good-quality furniture to mass-market consumers Procurement policy: Establish longterm 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 • • • • 3
    4. 4. 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 and U willpower E S Leadership by example Cost consciousnes s 4 Daring to be different Constant desire for renewal Togetherness and enthusiasm Accept and delegate responsibility
    5. 5. Situation 1980: Formaldehyde scandal in Denmark 1992: Formaldehyde scandal in Germany 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 5
    6. 6. Complication – The Beginning Global expansion o The number of stores increased 6 times in 10 years o Historical Store Growth 1954 Number of stores 1964 1974 1984 1994 0 2 9 52 114 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 6
    7. 7. The Environmental Issue The Social Issue 7
    8. 8. Complication – The Environmental Issue 1980: Formaldehyde scandal in Denmark Action 1st Action 8 Alternative action
    9. 9. 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 • 9 and World Wide Fund for Nature Environmental Criteria: working with suppliers, adapting the product range,transport and distribution, ensuring environmentally conscious stores
    10. 10. Complication – Social Issue 1st Action • Marianne Barner, business area manager, had to deal with the issue • Apology for ignorance and acknowledge not being in full control 1994: Child labor scandal in Pakistan 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 10
    11. 11. 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 11
    12. 12. Issue Assessment Main causes which led to these issues: the company was founded on 1) Principles 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 12
    13. 13. 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 13
    14. 14. 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 • • • 14 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
    15. 15. Environmental Issue Child Labor Issue 15 ? 
    16. 16. The Alternative Responses Acts Accept the invitation Terminate Rangan Exports contract Exit India Rugmark Solo Monitorship 16 Ethical Dilemma Short vs. Long-term Purpose • Explain what happen • Take the blame • Prove how we do not approve to child labor Principle • No law obligation • Ethical principles • Our right for explanation People • Customers have the right to know • Shareholders and employees have the right to be protected Ikea • • • Haunt them Make it less bad Affect on shareholders Short vs. Long-term Truth vs. Loyalty • Policies are clear, if child labor is involved, contract is cancelled. • It is within our rights • 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. • Child labor and IKEA never tie again Justice vs. Mercy • Maintain order with social and corporate rules • Taking clear, quick, and investigative actions. • Teach by example legal vs. moral • More pressure on • Chances of • Our contract was Rugmark reoccurrence based on a goal that employees was dismissed, give • Send a negative formal written message to warning or fire them. stakeholders. • Some of Terminante Rangan employees will be fired for their company’s mistakes. • • • • • Affect India image • Pull other company’s • Decrease the • standard of living further • Customers face higher prices Lose a good supplier Positive public response Lesson to other suppliers Lose a good percentage of their suppliers Cheap childlabor free countries don’t exist
    17. 17. Course of Action Immediate actions 1 Take full responsibility - Fire Rangan Exports 17 2 Find new supplier that aligns with our values and corporate ethics 3 Take legal actions 4 5 6 Work with our CSR department Monitoring of the rest of our suppliers Work with Rugmark Foundation
    18. 18. Debate NO YES Accept taking part in the video Go public Explain the situation Elaborate our course of action Minimize impact 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 Decision! Accept the interview 18
    19. 19. 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 19
    20. 20. 20
    21. 21. Appendix 21
    22. 22. 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 1951: Opened first display store Sold small items out of families kitchen. 22 Idea of “A better life, for many people”  Searched for furniture manufactures Mid 90’s: Worked with 2300 suppliers in 70 countries. Sales rose to over 4.5 billion Began to build long term business partnerships with manufactures and distributers “We do not buy products from our suppliers, we buy unused production capacity.” -- IKEA
    23. 23. Complication – The Timeline 1992: Formaldehyde scandal in Germany  Forestry Adaptation of product range Working with suppliers Transport and distribution Environmentally concious stores 1980: Formaldehyde scandal in Denmark  Collaboration with chemical companies to reduce 23 formaldehyde 1995: Child labor scandal reported by German TV channel at Rangan Exports 1994: Child labor scandal in Pakistan Ikea had no awareness of child labor problem  Apology  Advice from organizations  Change of supplier contracts  Random tests & situation analysis
    24. 24. The Alternative Responses Acts Ethical Dilemma Purpose Principle People Accept the invitation Rule-Based Thinking Terminate Rangan Exports contract End-Based Thinking Exit India Rugmark Solo Monitorship Care-Based Thinking End-Based Thinking 24 Source: the heart of Leadership, PLC 2007, Ethics-Oklahoma State University-Student Union Ikea

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