1Emma Karkar ● Olivia Heo ● Joyce Kung ● Vikram Angelo ● Dalal AlBawardi ●

Panos Anadiotis

C-SuiteIKEA's Global Sourcing ChallengeMay 13, 2013

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Agenda

COMPANY BACKGROUND

DETAILS OF ENVIRONMENTAL ISSUES AND CHILD LABOR

WHAT CAUSED THIS ISSUE -ISSUES ASSESSMENT

THE ALTERNATE RESPONSES

RECOMMENDATIONS

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• 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

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Mission, Vision, Values

Humbleness and

willpower

Leadership by

example

Daring to be

different

Togetherness and

enthusiasm

Costconsciousn

ess

Constant desire for renewal

Accept and delegate

responsibility

THE VISIONTo create a better life for the majority of people which is the basis of its

strategic orientation.

THE MISSIONTo 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.

VALUES

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Situation

1994:Child labor scandal in PakistanRugmark 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

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Global expansiono The number of stores increased 6 times in 10 yearso Historical Store Growth

1954 1964 1974 1984 1994

Number of

stores0 2 9 52 114

Need More Supplyo In the mid-1990s: 2,300 suppliers in 70 countries,

sourcing a range of around 11,200 productso Commercial issues: 24 trading service offices in 19

countries monitored production, tested new product ideas,

negotiated prices and checked quality

Complication – The Beginning

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The Environment

al Issue

The Social Issue

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1980:Formaldehyde scandal in Denmark

Complication – The Environmental Issue

1st Environmental Issueo Danish regulations in the early 1980o Formaldehyde emissions from the chemical

compoundo IKEA sales dropped 20% in Denmark

1st Action

Alternative action

Action

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1992:Formaldehyde scandal in Germany

2nd Envrionmental Issue• German media investigated the

formaldehyde problem• The lacquer on the bookshelves

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 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

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1st 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

1st Action • Marianne Barner, business area

manager, had to deal with the issue

• Apology for ignorance and acknowledge not being in full controlAlternative 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

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2nd 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

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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

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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

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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

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Environmental Issue

Child Labor Issue

?

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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. LoyaltyRugmark

Solo Monitorshi

p

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

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Course of Action

Immediate actions

Work with Rugmark Foundatio

n

1 2 3 4 5 6

Take full responsibili

ty - 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

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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

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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

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Appendix

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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

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

1951: Opened first display store

Mid 90’s: Worked with 2300 suppliers in 70 countries. Sales rose to over 4.5 billion

Sold small items out of families kitchen.

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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 rangeWorking with suppliersTransport and distributionEnvironmentally 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

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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