Eastern International University

Quarter 2 (2014-2015)
SCLM 439 - Purchasing and Supply Management

Case analysis IKEAs Global Sourcing Challenge:

Indian Rugs and Child Labor (A)

Member list: Instructor:

1 Dao Thanh Tu 1132300369 Mr. Quang Le
2 Nguyen Hoang Dung 1132300178
3 Nguyen Ngoc Anh 1132300147
4 Vu Thanh Binh 1132300011
5 Ly Minh Hien 1132300210
6 Nguyen Hieu Trung 1132300366

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I. Introduction
1. Business model

IKEA is a Swedish furniture retailer which was established in 1943.They are a multinational

furniture manufacturer and the largest international retailer of household goods and furniture.

In 1953, IKEA introduced a new key feature in their products, which was self-assemble

furniture. Customers could buy pieces of furniture in flat packages, and then go home and put

them together instead of buying cumbersome completed furniture with very low prices. This new

product was very helpful and convenient when saving transport and storage costs. Between 1953

and 1955, the companys sales doubled from SEK 3 million to SEK 6million.

Since the late 1950s, IKEAs new concept had met the strenuous objections of other

Swedens furniture retailers. In 1961, Kampard had to find out some new sources for the

companys survival by contracted with many furniture factories in Poland. He also brought his

knowhow to those factories, taught them the processes and provided machinery to new suppliers

to make ensure the quality of output and reliable delivery. This not only made Poland become the

IKEAs largest source, but also allowed Kampard to reduce the prices because of its lower costs.

Their procurement policy is to establish long-term relationship with suppliers including 2,300

suppliers in 70 countries.

With the successful of the first store, IKEA had expanded many stores in Stockholm, Oslo

and Norway in 1963. In 1974, Germany became the IKEAs largest market which had many large

and suburban stores with knockdown furniture in flat packages. The company required each store

follow a predefined design to maximize customers exposure to the product range. As their

design, the entrance should be followed by the living room interiors; there was a playroom for
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 kids, a low-price restaurant, and a Sweden shop for groceries. There was also a range beyond

furniture to include a full line of home furnishing products such as textiles, kitchen utensils,

flooring, rugs and carpets, lamps and plants.

2. Purchasing strategy
IKEA searched for foreign sources of supply and develop intimate relationship with suppliers
Because of the large furniture in Sweden felt threatened so IKEA Company had to look

abroad for new sources. In 1991, IKEA contracted with some furniture factories in Poland in

order to meet the demand with the customers. By bring know-how, teaching the process of

production, providing the machinery to new supplier, the company could assure the quality of

products. With this method, IKEA could find a large source as well as save money. IKEA aims

for long-term relationships with its suppliers also supporting them in order to get a reliable but

competitive supplier. IKEA will maintain its connections and help the partners developing new

systems to make loans. Because when IKEA braking up relationship the suppliers; it will cause

many tremendous disagreement. If two sides can cooperate, it not only share responsibility but

also creates a huge profit.

IKEA has an unusual way to search new sources: buying unused products of suppliers
The company do not buy products from their suppliers because it can help the purchasing

manager can seek out seasonal manufactures with spare off-season capacity. The important

problem is that the manager wants to seek a right manager at their suppliers than finding high-

tech facilities. With the good management, they can manage employee effectively as well as

develop the companys capacity.

II. How IKEA deal with Environmental and other

social responsibilities:
1 Environment issue

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 In 1990s, IKEA was the largest furniture retailer in the world, owned 98 stores in 17

countries around the world. With their rapid growth at that time and the process of globalization,

they had been spent years of finding suppliers of new sources due to the very high demand. In

the mid-1990s, they had partnered with 2,300 suppliers in 70 countries in sourcing

approximately 11,200 products. Because of working with a huge range of suppliers globally,

IKEA was facing with environmental problems arose with its products, made their relationship

with suppliers change.

Typically, in the early 1980s, the products emitted more formaldehyde than the allowed

figures was widely publicized and the company was fined at the time. Because of the potential

danger from this problem, IKEA was quickly giving a new stringent requirements regarding

formaldehyde emissions, but they found out that their suppliers could not meet their standard

required. In addition to that, their supplier bought from sub-suppliers, and those sub-suppliers in

turn purchased the raw materials from glue manufactures. Understanding the core cause, IKEA

decided to work directly with these glue-producing companies and came up with a reduction in

formaldehyde in its products.

The problem with formaldehyde was not over at that time, in 1992, IKEAs best-selling

bookcase named Billy had missions higher than legislation allowed in Germany. IKEA

responded to this by stopping both production and sales of that bookcase series and corrected the

problems prior to resume selling. Although they reacted quickly but it had cost them around $6

million. In the case of the Formaldehyde problem, the companys sales dropped by 20% in

Denmark. As we can see, the image of IKEA was damaged a lot due to these environmental

issues. By the problem of formaldehyde, we find that IKEA still remained at the reactive step but

not the proactive step. They reacted to the issues as they arises. It is better to avoid the threats of

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environmental issues before they emerge, because we can see even IKEA reacted very quickly

but it still caused a huge loss of profit.

The company started showing its move from reactive to proactive steps by the forestry

event. This time, IKEA anticipated the forestry issue and solved the issues before it was

publicized. IKEA made discussion with both Greenpeace and World Wide Fund for Nature, used

standards from Forest Stewardship Council. So IKEA was ready to take all the task of tracing all

wood used in its products back to its source, but not to investigate at its suppliers as IKEA did in

1990s. Additionally, IKEA continued to identify four other areas regarded to environment:

adapting the product range, working with suppliers, transport and distribution and ensuring

environmentally conscious stores.

2 Child labor

While making a lot of exertion to weather the storm of the formaldehyde, in 1994, IKEA was

caught at child labor problem with its suppliers in both of two biggest purchasing sources for

carpets and rugs: India and Pakistan.

Basically, Indian Government has already applied the Children Act (under British rule in

1933), Bonded Labour System Act (in 1976), and The Child Labour Act of 1986 (providing for a

minimum age (14 or older), appropriate regulation of hours and conditions of employment) in

order to abolish the exploitation of bonded child labors that allows high interest debts (with

principal amount varying only from $30 to $300) to pass on to next generations as the ceaseless

increase in amount of interest. However, with the reasons for socioeconomic development,

alleviation of poverty and preservation of specialized handicraft skills from generation to

generation, the problem of using Indian children (unbonded child labor) under the supervision of

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their parents was still happening. Specifically, there was an estimated 200,000 totally employed

in the carpet industry.

In 1994, therefore, a Swedish television documentary reflected the situation exploiting child

labor of IKEAs Pakistani and Indian suppliers. It made Marianna - Business area manager of

IKEA come forward and explain reasons why they are unaware:

The use of child labor was not a high-profile public issue at the time
International Community has just noticed this problem since 1989 with the formation of

the U.N Convention on the Rights of the Child

IKEA itself also paid little attention to this problem when they work in India

After that, IKEA apologized for their ignorance and committed to solve this matter. To do

this, they sent a legal team to get advice from the International Labor Organization (ILO) in

Geneva. They recognized that India, Pakistan and Nepal have not ratified Convention 138 of ILO

yet, thus they added a black and white clause to all supply contracts, which states that if

supplier employed child labor under working age, the contract would be cancelled. Additionally,

they appointed a third-party agent from Scandinavia in order to externally monitor child labor

practices at its suppliers in India and Pakistan.

In the fall of 1994, they carried out unannounced carpet factory raids with local NGOs, and

child labor was still exploited. Moreover, in this time, IKEA was invited to sign up with

Rugmark which supervises the use of label attached on carpets made without the use of child

labor.

In the spring of 1995, a well-known German documentary maker discovered one of IKEAs

major suppliers using child labor Rangan Exports, and this producer invited IKEA to take part

in a live discussion about this problem.

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 From this miserably hard context, there were several questions that IKEA had to consider in

order to protect not only business but also IKEA brand and image:

Should IKEA participate in the program or not?

How to deal with this major supplier and its violation? Keep or cancel the contract?
Whether he overall approach taken was appropriate or not?
Accept the invitation of Rugmark to monitor the matter on its behalf or not?
Whether IKEA should accept the problem which was originated deeply from the culture

of these south asian countries to have any real impact and simply withdraw or not?

III. Solution
First of all, to deal with the accusation of German television relating child labor, IKEA must

cooperate with this media channel to recover the companys brand and image. IKEA had to

express its highest appreciation to the filmmaker, since he had helped this firm detect a serious

problem. In the TV show, The Sweden Furniture Company also had to commit to the public to

eliminate this child labor problem at soonest.

After neutralizing the media opposition, IKEA was urged to investigate the case thoroughly

by sending field trips agents to the factory. All children abused by this supplier must be sent

home and provided education. Their parents need to be supported by funding or job training to

assure their financial health and stop them from sending their children back to work.

In addition to the above contingent solution, other long-term solutions had to be conducted

immediately. IKEA seems to be unaware of child labor issues occurring in their supply chain.

This firm was suggested to ask their trading offices to monitor the supplying sources closely to

identify any signal of labor child or other activities of their suppliers that violating the

environmental and social safety. Consequently, IKEA suppliers must commit to new regulation

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 of sending working children back home and providing them education. The persistence of using

child labor would result in contract termination. To support the suppliers inspection of IKEA

trading offices, this firm could coordinate with Rugmark to assure the best management of their

suppliers. IKEA would have two departments to control the child labor issue: the trading office

internally and Rugmark externally in production countries.

IV. Assessment
Child labor is a knotty issue in South Asia. Poverty and low educational level or workers

are the main roots of using child labor illegally. This phenomenon has become a culture in those

countries, especially Indian and Pakistan. In India, men, women and even children are abused

and forced to work hard because of poverty. In addition, in spite of the efforts from Indian

Government, laws were poorly enforced by both enterprises and workers. Cheap labor is one of

the most attractive reasons why many foreign companies decided to build factories here or sign

contracts with local companies. Therefore, prohibiting child labor in India would need a long

time and close coordination from the Government, enterprises, NGOs and Indian people. The

first thing IKEA should do is finding a way to raise the awareness of Indian labors and assist

poor families in financial problems. Free training courses can help local labors to work more

effectively and get higher salaries. Besides, attaching Rugmark label in IKEA products should be

continued in order to keep IKEA image and brand as well as reminding their suppliers about

commissions in the contract.