Ikea Case Study

IKEA`s global Sourcing Challenge: Indian Rugs and Child Labor
Universidad Carlos III Corporate Governance May 31, 2012 Ines Haitzinger, Karen Hintelmann, Leonie Steegers, Anny Yen

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1. Briefly present the company and the situation it is facing.
IKEA is a Swedish furniture retailer and is the largest in the world. Their strategy is to sell affordable, good-quality furniture to mass-marketconsumers around the world.

IKEA’s general procurement principle defines the goal to develop close ties by supporting its suppliers in a long-term relationship. Although the relationship between IKEA and its suppliers is based on mutual dependency, suppliers are aware of the fact that they have to stay competitive in order to continue their business with the company. That is because IKEA isalways looking for the most costeffective solution and would move production if cheaper alternatives are available. In total IKEA works with 2,300 suppliers in 70 countries and has a range of 11,200 products.

Part of IKEA’s product portfolio are carpets, which are managed by the business area manager Marianne Barner in 1995. Those carpets are mainly manufactured in India and Pakistan but accountonly for a tiny part of Ikea’s turnovers. One of the major suppliers for IKEA’s carpets is the Indian company Rangan Industries, which just recently signed an addendum together with all other suppliers of IKEA forbidding the use of child labor.

In 1980, IKEA experienced its first highly publicized scandal by selling products made of particleboard that contained more formaldehyde than Danishlegislation allowed. Formaldehyde is a chemical compound used as binding glue in materials such as particleboards. As a result, IKEA’s sales in Denmark dropped by 20%. The company reacted by establishing strict requirements regarding formaldehyde emissions but soon learned that their suppliers were unable to meet these standards because they bought the material from glue manufacturers. Since thenIKEA decided to collaborate directly with chemical companies to reduce the formaldehyde emissions in the glues used for its products. But in 1992 it was again formaldehyde that caused problems when their best-selling “Billy” bookcase series contained more formaldehyde than allowed by German legislation. In this case, the source of formaldehyde was not the glue but lacquer of the product. IKEA reactedby immediately stopping production and correcting the problem. As a consequence from both of these scandals, IKEA decided to put more emphasis on Corporate Social Responsibility.

Then in 1994, IKEA first got involved in a child labor scandal after a Swedish television channel showed children in Pakistan weaving carpets - among other companies for IKEA. The company at that point was not wellaware in general of this problem and did not completely understand the situation. Soon they apologized for their ignorance and seeked advice from organizations and introduced a

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clause prohibiting child labor in their supplier contracts. In addition, random tests were conducted and a managing team was sent to the region to learn more about this problem.

Shortly after, in spring of 1995, aGerman documentary showed children working on carpets at one of IKEA’s major suppliers: Rangan Exports. The German TV program invited IKEA to send someone to take part in a live discussion on this topic. The program implied a confrontational and aggressive approach against IKEA. Barner had to make the decision whether to recommend IKEA participate in the program or not.

2. What short-termactions should Barner take regarding the IKEA supply contract with Rangan export? What are the advantages/ disadvantages of cancelling the contract with Rangan industries?
Based on careful consideration of the following advantages and disadvantages, Barner should not instantly cancel the contract with Rangan industries. Advantages Saving IKEA’s reputation by demonstrating rigorous actions against...