The case IKEA s Global Sourcing Challenge: Indian Rugs and Child Labor (A) is about IKEA s development

from a backyard company to one of the world s largest furniture retailers, which has to deal with the issues of child labor and how they should behave considering economical issues and the company s policy! Conclusions made in this study are only based on the facts given in the case, considering pros and cons of an action.

How should Marianne Barner respond to the invitation for IKEA to have a representative appear on the upcoming broadcast of the German video program?

A live discussion would give IKEA the possibility to explain themselves and their intention concerning their engagement in India. Especially Marianne Barner could make her intentions clear as she is feeling that IKEA s responsibility is much broader than just trying to abolish child labor by stopping business relationships with partners who employ children in their companies. This would provide IKEA a positive image and might strengthen their engagement. As the Filmmaker just provided IKEA with several still shots taken from the movie, though the whole film was requested to be viewed, leaves too many unpredictable options that the cutting of the movie would provide an image which wouldn t leave any space for explanations concerning IKEA's engagement in India but defending itself against accusation which might be made through the movie. Movies have the power to suggest a certain image especially if negative scenes are shown. There for it is indispensable to IKEA to review the movie before attending the discussion. The refusal to show the movie to IKEA implicit shows that their intention is not to hear about IKEA s engagement but having someone to blame. The discussion might have an aggressive and confrontational attitude towards IKEA for using a supplier, which employs children and suggesting IKEA a reckless company just caring about profit. For these reasons I would suggest Marianne Barner not to attend the discussion but to release an official note which explains the refuse in participating in the discussion and includes a short agenda in IKEA s engagement in India which might be linked to a webpage with further information concerning their plans and engagement in India.

What actions should she take regarding the IKEA supply contract with Rangan? What long-term strategy would you suggest she take regarding IKEA s continued operation in India? Should the company stay or should they exit?

IKEA aims for long-term relationships with its suppliers and also supports them in order to get a reliable but competitive supplier. The same attempt could be done in India as they did in Poland several years before. Of course at first sight it seems as if IKEA would risk to lose some of its reputation and sales power for continuing relationship with the Indian supplier but it would have an even more positive effect on its reputation if IKEA will maintain its connections and help them developing new systems, involving the public. Involving the public by marketing actions helps them to understand IKEA s intentions so it won t be misunderstood and will also have a marketing effect itself. To continue their engagement would also match the company s policy and Kamprad s view create a better everyday life for many people . This was originally meant to insure affordable sales to customers but they also haven t had the problem of child labor at that time. So by the time values change and should be extended to broader meanings. As it is a question of moral IKEA can also use this as a marketing strategy to bolster its image. Regarding the philosophy in the best interest of the child it is necessary to continue and even improve IKEA s engagement in India. It is obvious that child labor is deeply implemented in India s culture as many people are poor and a child s loan is inevitable to ensure the life of the whole family. This shows that pulling out would not abolish child labor but threaten Indian people even more as a resource of earning money would disappear. In return a negative image could be established towards IKEA for not taking further actions in the Indian market.

Braking up relations with its supplier could cause tremendous public disagreement as a lot of people think that companies such as IKEA, the world s largest furniture retailer, is just interested in earning profit. Many people share a common view, that these types of company also owe responsibility not only to the shareholders but also to the society. By refusing help an image could be created which would cause not just the loss of sales but also of IKEA's value. Not just sales create the value of a company also its reputation is a valuable good which can cause a huge loss if it is damaged!

In an economical/capitalistic view it would be better to pull out of Indian rugs as it just has a tiny part in IKEA s turnovers and the risk seems to overbalance the profit. But to fulfill Kamprad s view to create a better everyday life for many people and also the philosophy in the best interest of the child it would be better to continue the engagement in India. To ensure that child labor is not exploited and that its labor is in the best interest of the child so that one day child labor can be abolished, which won t happen in a couple of years, IKEA should implement a system which allows monitoring the whole process. IKEA could urge its supplier to provide the children with education, so that the children are also able to learn something. This aim could be reached by cutting working hours and the implement of classes. As its supplier won t have the financial means to establish this kind of system IKEA needs to give financial aid to its supplier which he pays off by future deliveries. Because IKEA has not enough experience in the field of child labor and would need to hire new staff it should cooperate with Rugman, which already has experiences in the field of child labor and

there for is able to monitor the processes suggested and implemented by IKEA. IKEA should still do random monitoring to ensure that regulations adhered. Another option is to establish a own manufacturing company combined with a school which finances itself by the production of rugs so that children can earn money to support their families and finance their own education. In a long-term view this would lead to the abolishment of new child labor. This kind of institution should be run by IKEA itself and to proof that it is in the best interest of the child monitored by an institute like Rugman.

IKEA doesn t have to be concerned about competitors, which will sell the rugs cheaper than IKEA. Other competitors don t have such a huge production volume to offer prices that low. If they will use child labor, they will experience the same issues as IKEA already did. Besides the part of turnover for the rugs is so small that it won t have an effect on IKEA that much, even if the rugs would be a bit more expensive as its competitor ones. It is the reputation issue, which would have a bigger impact. Values of customers are changing. People are willing to pay a bit more for products if it proofs them a pure conscience.

IKEA s Global Sourcing Challenge: Indian Rugs and Child Labor

Jordan de Jong

Case Study

The case I will analyze and discuss in this case study is IKEA s Global Sourcing Challenge: Indian Rugs and Child Labor . I will begin with the vision, values, and strategy of IKEA and an internal analysis of the issues that they have faced as of the time of the case. Next, I will detail the issues IKEA faced in the years prior to the Indian rugs and child labor challenge. Then I will describe the Indian rug and child labor problem that IKEA faced and the management issues surrounding it. Following a description of the issues I will describe the strategies that I believe IKEA management can use to overcome the challenges. Finally, I will conclude with what IKEA did choose to do and the results.

The IKEA story begins with the founder Ingvar Kamprad and a dream to provide people with necessary goods. He began selling various items via mail order as IKEA in 1943. In 1948 IKEA started to sell furniture and the company as we know it today started to take shape. In 1951 IKEA published their first catalogue to draw a picture for customers as to how the products would look in their homes. This was followed by IKEA beginning to design their own furniture in 1995 and opening the first store in 1958. The store was Stockholm but not in the traditional down town area but instead in the suburbs where ample customer parking and more floor space allowed IKEA to display their products in a new style. By 1956 IKEA had started using the flat pack technique, selling furniture in flat boxes with assembly required by the customer, and began sourcing furniture outside of Sweden. IKEA s success via non-traditional techniques was not popular with other furniture dealers in Sweden. Competitors were trying to arrange for a boycott of IKEA by suppliers. The pressure was enormous and IKEA had to have trucks deliver supplies to stores in the middle of the night. It was at this point that IKEA decided to look outside of Sweden for their furniture. The first batch of foreign produced furniture was a batch of plastic chairs from Poland . With lower cost of labor and factor cost from Poland IKEA lowered its prices. This is significant because it shows that IKEA believes in their vision and business idea and live it every day. The IKEA vision is, To create a better everyday life for the many people. and the business idea is, To offer a wide range of well designed, functional home furnishing products at prices so low that as many people as possible will be able to afford them. When IKEA cut labor and other factor costs by sourcing from Poland as opposed to Sweden they had an opportunity to increase margin and profits. The fact that they instead lowered the price of their products and passed the savings onto the customer demonstrates that IKEA lives their vision and business idea. In 1963 IKEA began internationalizing by opening a store in Norway. The pace of expansion was vastly increased in the 1970 s with additional expansion into Switzerland and many other European countries. The expansion continued in the 1980 s and 1990 s. IKEA went from just 2 stores in 1964 to 114 stores in 1994. With this expansion they had many challenges to overcome to maintain their competitive advantage and dedication to low prices. To ensure that high quality, low price, and a customer focus was maintained in all IKEA products and practices IKEA began looking for innovative ways to produce furniture and distribute it to the customer. In 1980 IKEA introduced the LACK coffee table. The table was made from wood that came from an interior door manufacturer and this kick started IKEA s drive for low cost manufacturing via alternative sources. IKEA was not just looking for the best furniture supplier and material manufacturer but instead they were scouring the planet for the best quality and lowest price materials and manufacturing regardless of industry or country. Another example came in 1985 when IKEA introduced the MOMENT sofa. The MOMENT sofa had a metal frame that was manufactured by a supermarket cart factory. As the company grew through the 1960 s and 1970 s the culture of the company was starting to solidify. Kamprad had a very strong idea of how he wanted the company to operate and be managed. He was eager to share his ideas on management with his staff and thus authored the document, A Furniture Dealer s Testament in 1976. The document described the nine cornerstones of IKEA culture and his

vision statement, To create a better everyday life for the many people. cornerstones were as follows: 1. 2. 3. 4. 5. 6. 7. 8. 9. The product range our identify The IKEA spirit A strong and living reality Profit gives us resources Reaching good results with small means Simplicity is virtue Doing it in a different way Concentration Important to our success Taking responsibility A privilege Most things still remain to be done. A glorious future

The testament nine

While the company, CEO, and staff were all dedicated to the nine cornerstones of the business there were still some issues that IKEA would have to deal with, suppliers and sub-suppliers. IKEA ran into trouble in 1981 in Denmark when government regulation was changed with regards to formaldehyde emissions for building products. When wood or other building products burn the permissible formaldehyde emission was set at 0.1 mg/kg. One of the main components in IKEA products was particle board and therefore subject to the new regulation. Many products did not meet the new regulatory standards and IKEA was fined by the Danish government for non-compliance. The case was widely publicized and IKEA was blasted in the press for their environmental ignorance and sales in Denmark dropped by 20%. Considering IKEA s commitment to their customers and quality products they could not let this continue. They worked with their suppliers to ensure that their products were up to Danish government standards but they were not able to ensure that all of the particle board met the formaldehyde emission standards. The suppliers contended that the glue in the particle board was causing the high emissions and that the suppliers could not fix it themselves. IKEA then worked with ICI and BASF to reduce the emissions in their glue that goes into particle board. From the way that IKEA not only worked with suppliers to resolve the issue but with sub-suppliers as well we can see that this company takes a great deal of responsibility for their actions. Several years later in Germany IKEA was once again lambasted in the press for using large amounts of polyvinylchloride (PVC) in packing after it was found that dioxins were dispersed when PVC is burned. The environmental concerns were becoming more and more relevant to IKEA with the formaldehyde issue from 1981 reappeared in 1992, this time in Germany. The new case of the formaldehyde

emissions was with the IKEA BILLY bookcase, a best seller. Learning a lesson from the Denmark incident IKEA this time stopped distribution and sales of the BILLY bookcase until the cause and a solution could be found. It turned out that the lacquer on the bookcase was the cause of the problem. The investigation and logistics around a world wide stoppage of distribution and sales cost IKEA $6 - $7 million. In true IKEA style in reaction to the Germany incident IKEA established a forestry policy. Working with the World Wildlife Fun (WWF) the forestry policy IKEA established started with identifying the source of every piece of wood that went into furniture, veneer, and plywood. They know that all of the wood that goes into IKEA products is from commercial forests that practice responsible forestry. In addition, they run projects to facilitate responsible forestry world wide. They also began using chlorine free recycled paper in the catalogue to emphasize their commitment to the environment and responsible forestry. With these examples of issues that IKEA has faced with environmental issues and the socially responsible way in which they handled them it is clear that IKEA is a company that believes in the vision statement and has a long range plan and relationship with customers and suppliers. In 1994, while IKEA was still working on a solution to the BILLY bookcase formaldehyde issue, there was a report that some of IKEA s Pakistani suppliers were using child labor to weave rugs. They were surprised to hear this as they thought child labor was not common place in these countries. Given the way that IKEA reacted to the environmental issues it faced in the past on thing is certain, IKEA would act responsibly and work towards a last resolution to the issue. Their first reaction was to meet with Swedish Save the Children, United Nations International Children s Emergency Fund (UNICEF), and the International Labor Organization (ILO) to find an appropriate response. Swedish Save the Children advised them to think about not only the IKEA reputation but also of the children. IKEA added a black and white clause into their contracts in India and Pakistan that stated that if children were used in the manufacturing of goods for IKEA the contracted would be cancelled effective immediately. IKEA decided to visit their suppliers in India without giving prior notice of their visit to see if they were in fact using child labor. They were surprised to find that some of the factories they visited were in fact using child labor and other factories threw them out of the building presumably to hide the fact that they were using child labor. India had outlawed child labor but had not signed Convention 138 drafted by the ILO in 1973. Given the fact that India had outlawed child labor but it seemed to occurring on a regular basis not only in India but with IKEA s suppliers, IKEA had a tough decision to make. How to effectively enforce their anti-child labor policies while keeping the best interest of the child in mind? Additionally, Indian rugs are inexpensive to produce and high quality, two very important qualities for IKEA, but the social cost to Indian children and the reputation cost to IKEA make it a difficult value proposition to calculate. IKEA has to wonder, is it worth it to continue to produce rugs in India with all of the child labor issues that they may face for year and years to come? Along with these management issues is the deeper issue of whether or not corporations are responsible for enforcing effective social programs that facilitate development and sustainability or if the

government is responsible for this task. When weighing the options available to IKEA they seems to fall into two categories with 2 approaches, Corporate Social Responsibility and Government Social Responsibility. The table below, table 1.1, shows the actions that IKEA can take staying in line with the two categories. Table 1.1 Corporate Social Responsibility Government Social Responsibility Fund social infrastructure Participate in NGO Social Exit Market Lobby for Tighter Labor Regulation

Intervention in Foreign Social Affairs

With these actions and approaches in mind there are 3 strategies that should be analyzed. IKEA can fight Indian child labor head on, resolve the root cause of Indian child labor, or exit the Indian rug market to stop child labor in their company.

Fighting the Indian labor market head on would mean that IKEA continues their black and white child labor clause with Indian contract manufacturers, exhibit zero tolerance when suppliers are found to be non-compliant, and implement a strict audit and compliance monitoring program. Suppliers and retails that wanted to take this approach created a foundation called Rugmark to assist with the auditing and monitoring of child labor ILO policy and compliance. Any rugs produced by a company that is certified as not using child labor will have a Rugmark. This type of approach was not recommended by the Swedish Save the Children foundation because it did not have the best interest of the child in mind. Instead there is a possibility that many children would move to more dangerous jobs or prostitution if they were summarily dismissed from rug manufacturing jobs. This is in fact what happened in 1993 when Bangladeshi garment factories were forced by the US to crack down on child labor or face import restrictions. An estimated 50,000 child laborers were fired and it was suspected that most went into more dangerous jobs or were exploited in human trafficking. Another difficulty with this strategy is the shear size of the manufacturing area that would need to be monitored and audited. There are an estimated 175,000 in one of India s carpet producing clusters that would make auditing, monitoring, and compliance a costly proposition. IKEA has such a strong commitment to low costs being passed on to the consumer that this would be a difficult strategy for them to peruse long term. Next let s look at resolving the root cause of Indian child labor. To achieve this goal IKEA would have to promote child welfare and education, engage their suppliers as partners, provide incentives for compliance, and maintain a policy of continuous engagement with both suppliers and any programs they put in place. This is not a short term solution or one that could be performed by IKEA alone but it is in fact the strategy that they decided to pursue. IKEA s approach was

multifaceted. They partnered with UNICEF to ensure that all children in the carpet producing cluster in India had a chance to receive an education. They did this in some cases by building schools for those that were not allowed to attend public schools; they were called alternative learning centers. The program also inoculated infants and promoted welfare in the community. In addition to this partnership with UNICEF IKEA also worked to create a tight relationship with their suppliers and engage them to create solutions to eradicate child labor practices. They implemented a program with suppliers that would audit them on a regular basis. If child labor was discovered during the audit the supplier would have to write a corrective action plan. The corrective action plan would not just fire the child laborer but the supplier would be responsible for ensuring the education of the child and welfare were taken care of to ensure a repeat of Bangladesh did not occur. IKEA would then follow up with the supplier and the school of the child to ensure that they corrective action plan was actually being followed. If the supplier did not follow through on the corrective action plan then the contract was broken and IKEA would no longer transact any business with them. The third strategy is to exit the India rug market. This would be the simplest of the three strategies but would also have a good deal of effort required by IKEA to find a new cluster to manufacture rugs without child labor at an affordable cost and high quality. The threat of exit alone would put pressure on the Indian government to take a more active role in compliance of the labor laws and the laws dealing with child labor in particular. Knowing the commitment that IKEA has to it s suppliers, customers, low prices, and high quality I feel confident that their decision to actively engage suppliers and work together for a positive future with no child labor will be successful. I do not feel that this is the best use of resources by a company from a shareholders point of view. In the future if IKEA had to chose between returns to shareholders or continued involvement with UNICEF and Indian social responsibility programs they would have a very tough choice to make. Either choice would have a negative impact; furthermore the choice to side with shareholders would in my mind effectively undo all of the positive work that IKEA has performed to date. Pursuing the strategy of exiting the Indian rug market would translate into a higher cost for consumers but it would also remove any conflict of interest for management and society. A customer purchasing a rug from IKEA today may not feel comfortable knowing that a child may have woven the rug but is now being educated by an IKEA supplier. On the other hand, a customer paying a slightly higher price with the knowledge that no children were used in the weaving of the rug may be appealing for socially conscious consumers, myself included. _____________________________________________________________IKEA s Global Sourcing Challenge In regards to accepting the invitation to take part in the live discussion during the airing of the Germanproduced program, you accept, because to decline is equivalent to admitting guilt. In terms of your business relationship with Rangan Exports, you terminate the remainder of the contract due to their blatant violation and lack of integrity. Additionally, IKEA s approach to the issue of child labor needs to

be a hybrid between using Rugmark and its own sources of monitoring, while simultaneously staying aware of other potential sources for rugs. Rangan Exports Ikea s objective to develop long-term business partners is only possible if certain standards are met. These standards include a particular expectation for quality, as well as staying competitive in terms of cost. Furthermore, in order for long-term relationships to succeed, the buyer and supplier expect a certain degree of trust and commitment. By using child labor not only is Rangan Exports violating the contract, but they are also violating the sanctity of their relationship with IKEA. To some extent one can understand their drive to stay competitive, considering the fact that not being competitive may directly result in the loss of their contract with IKEA. Rangan Exports explicitly signed an addendum contract knowing that they would be unable to uphold it and were aware of the risks associated with violating it. IKEA attempted to fulfill their commitment to do what is the socially responsible, but they can only do so much with controlling what their supplier does. Therefore, it is unnecessary to partner with suppliers who are concerned more with profits rather than the buyer-supplier relationship. Additionally, IKEA cannot be expected to monitor or babysit every single supplier because it could be very costly to carry out such investigations. It is beneficial for IKEA to terminate the contract and look for a more trustworthy supplier, since it is unclear as to what other parts of the contract Rangan Exports is willing to violate or if the contract even means anything to them. Approaching the Issue of Child Labor The primary concern of dealing with the issue of child labor is maintaining a high level of social responsibility. From IKEA s beginning, founder Ingvar Kamprad set out to correct social problems, forever engraining the value of social responsibility in its culture. In regards to the use of child labor in India, there are conflicting views as to what is considered to be socially responsible. In India, it is common practice for children to work and the government is more tolerate of the matter when it is unbounded child labor and even more so when it took place under the supervision of their parents (87). Laws also permit children to work in craft industries in order to not lose the skills from previous generations (87). Additionally, the Swedish Save the Children organization encouraged IKEA to act in the best interest of the child (81). Is not working, in the best interest of the children of India? Without employment, many Indian families may lose an important source of income which could have a direct correlation on the well-being of the child. Moreover, with the laws being poorly enforced and prosecution rarely severe, one must consider whether or not this is the preferred environment to conduct business in. Nonetheless, the most logical decision in this case would be to do what is considered to be socially responsible in the eyes of your consumers rather than by letting the culture of your supplier determine your decision. Failing to meet the standards of what your consumer considers to be socially responsible poses far greater consequences. This was the case in the early 1980 s when IKEA s sales dropped 20% in Denmark after they received bad publicity for failing to meet the standards on formaldehyde in many of their products. They incurred further losses of an estimated $6 to $7 million in 1992 when they discontinued a popular bookcase series due to its lacquer emitting high levels of formaldehyde (85).

The Airing of the German-Produced Program Whether or not to attend the airing of the program is not an option. If IKEA declines the invitation they will be presumed to be guilty and aware of the situation. It is in IKEA s best interest to send a representative to not only defend IKEA s image, but to also inform the public that IKEA is taking all necessary actions to ensure that there will be no reoccurrences of this unpleasant incidence. Prior to the airing of the German program, it is wise for IKEA to hold a PR conference. This is an opportunity to inform the public of the addendum to your suppliers contract, your interaction with Rugmark, and your involvement with Swedish Save the Children and International Labor Organization (86). Course of Action The first step in the recommended course of action for IKEA would be to find a suitable supplier within the Rugmark organization and terminate their contract with Rangan Exports. It is advisable that IKEA does not completely relinquish control by completely trusting the Rugmark organization, and should have either their field trading managers or the third-party Scandinavian company continue to occasionally monitor the carpet production (86). Due to the additional costs associated with using Rugmark and monitoring production, IKEA should reevaluate whether or not India is the best source for meeting their cost requirements on rugs.

____________________________________________________________IKEA s Global Sourcing Challenge: Indian Rugs and Child Labor (A) Case Synopsis IKEA is a privately held, international home products company that designs and sells ready-to-assemble furniture such as beds and desks, appliances and home accessories (www.worldisyouroyster.com). The company was established in 1943 by Ingvar Kamprad in Sweden when he was just 17 years old. Kamprad himself, who still owns the private company, is rumored to be the world s richest man. IKEA is currently the world's largest furniture retailer and arguably the most successful global retailer. Being one of the biggest global retailers, IKEA benefited a lot by the globalization of its business; IKEA s target market is the global middle class who is looking for low-priced but attractively designed furniture and household items. The company started as a home-furniture retailer in Sweden over 50 years ago. Throughout the years with the use of effective globalization, IKEA managed to increase its business revenue and profit by selling and making home-furniture in different countries all over the world, and it has over 300 retail stores in more than 30 countries (www.ikea.com). Other than that, they sell roughly 10,000 different products, which attract customers from different places all over the world. The basic assumption behind IKEA's global strategy was one-design-suits-all, which meant that the company did not adapt to the local markets (www.salon.com).

The case IKEA s Global Sourcing Challenge: Indian Rugs and Child Labor is about IKEA s development from a backyard company to one of the world s largest furniture retailers, which has to deal with the issues of child labor and how they should behave considering economical issues and the company s policy (Bartlett et al 8).

Case Questions 1. How should Marriana Barner respond to the question of IKEA to have a representative appear on the upcoming broadcast of the German video program? Being an organization with such principles and values, IKEA should address the concerns during the broadcast by sending a representative to clarify any issues and stand by the organization s interest. IKEA s philosophy and vision statement to create a better everyday life for the many people was an indicator that this organization is committed to sell affordable, good quality furniture products around the world (Bartlett et al 4). Their rapid international expansion and the need to supply the demand may have caused IKEA to run into these different outsourcing issues. The leadership at IKEA got involved with different ONGs to discuss what areas needed improvement, and requested the input from the International Labor Organization (ILO) in order to guarantee all its vendors were abiding the labor laws accordingly (Bartlett et al 6). IKEA was committed to track down its product sources and hired an independent agent to monitor and assist with such complicated task. They seem to have all bases covered; however it is necessary to do something similar to what they did for the Swedish television documentary, where IKEA was again the focus of accusations involving the use of child labor to get products made in Pakistan and India. With the assistance of their legal team, Marriana Barner, should prepare a statement to the public and IKEA s customers, reassuring their commitment to get to the bottom of the case and promote their initiative to fight child labor and exploitation. By not sending a representative to the broadcast, the organization would openly take the risk of being the target of the public opinion. Leaving an audience with unanswered questions and putting in jeopardy the reputation and creditability earned over the years by its funder and honorary CEO Inguar Kamprad. 2. What actions should she take regarding the IKEA supply contract with Ragan exports? During the spring of 1995, a well-known German documentary maker notified IKEA about a film he made was about to be broadcasted on German television showing children working at looms at Rangan Exports, one of IKEA s major suppliers. He refused to let the IKEA preview the video; however he invited them to send someone to take part in a live discussion during the airing of the program. According to Barner, it was immediately clear that this German-produced program planned to take a confrontational and aggressive approach aimed directly at IKEA and one of its suppliers (Bartlett et al 8). The refusal to show the movie to IKEA implicit shows that their intention is not to hear about IKEA s engagement but

having someone to blame. The discussion might have an aggressive and confrontational attitude towards IKEA for using a supplier, which employs children and suggesting IKEA a reckless company just caring about profit. Barner should first of all understand the situation thoroughly before taking any steps against Rangan Exports. The Global sourcing always brings with it the social, cultural and regulatory differences which should be dealt with effectively to ensure success in global supply chain. She should help Rangan Exports to avoid using child labor in production of rugs by bringing awareness about such social issues and how it impacts the life of child in physical, mental, spiritual, moral, and social terms. She should even pressurize the supplier for avoiding child labor in production. A live discussion would give IKEA the possibility to explain themselves and their intention concerning their engagement in India. Barner could make her intentions clear as she is feeling that IKEA s responsibility is much broader than just trying to abolish child labor by stopping business relationships with partners who employ children in their companies. This would provide IKEA a positive image and might strengthen their engagement. 3. What long term strategy would you suggest she take regarding IKEA S continued operation in India? Should the company stay or exit? IKEA needs to think in a long term strategy regarding its continued operations. They need to seriously consider the damaging and tarnishing effects a child labor could have on their company. I believe that IKEA can continue to outsource with India, however, they need to be stricter and more effective checks and balances. They also need to be put into place and make sure that the contracts will not be violated in any way. IKEA is a huge company that has grown over the years. And to maintain in that way they need to be strict with the child labor laws. For example, there should be routine checkups at all the suppliers to ensure that they are within the bounds of their contract. Even though it might seem like an expensive operation, IKEA needs to maintain a good image worldwide. In addition, IKEA would hurt their image in the long term if a major publicity slam like a child labor law would take place. There could not only be a huge loss in trust in IKEA from such a circumstance, but also a major drop in sales, which as previously mentioned would be costlier than putting in a strategic system of checks and balances. Overall, I believe that IKEA can achieve goals of being cost effective in its outsourcing endeavors to India, nevertheless, new levels of caution need to be taken to make sure the suppliers are behaving in the ethical manner as predetermined and agreed upon by the contract signed between both parties. Many companies have been affected by child labor laws and if IKEA wants to keep the proper image, then they would need to create a system where suppliers are going to follow these contracts. 4. Do you think IKEA should continue to source carpets in India, would you suggest that she: a) Continue IKEAS s own monitoring and control processes or sign-up to Rug-mark? b) Continue to focus only on eliminating the use of child labor in IKEA s supply chain or engage in broader action to address the root causes of child labor as Save the Children is urging?

With India being the biggest purchasing source of carpets and rugs IKEA should continue to source carpets from them (Bartlett et al 7). The company s experience and hard work will enable IKEA to come up with a solution that applies to their beliefs and values. IKEA s own monitoring and control processes would be the best option when it comes to avoiding the child labor issue in manufacturing. When IKEA began its globalization in India, Barner spent a couple of months in India learning about trading but got no exposure to child labor (Bartlett et al 6). This incident comes to show the dysfunctional culture and management practiced in India. IKEA should act upon its own interest because nobody but IKEA is as interested for its own reputation. With the self-monitoring technique the company will have complete assurance of the procedures taking place and will not be able to be unfairly accused. Save the Children, taught IKEA a lot regarding the child labor and shared their concern of children s rights. After the experience of being accused for child labor on the media, IKEA should sign up to an industry-wide response to growing concerns about the use of child labor in the Indian carpet industry (Bartlett et al 1). After all, IKEA is very concerned of its name and has strong beliefs. A big part of IKEA s profits come from India. Therefore, if they protect and they stand by their beliefs by not allowing child labor they will be able to continue to profit from India and at the same time prove the media wrong of all mislead accusations. By just focusing on eliminating the use of child labor in IKEA s supply chain would not be successful, for they have already been accused directly as a company of such an issue. In order to prove their unawareness they must take drastic measures and try to make a difference for the company s sake as well as to protect the children s rights. 5. How appropriate were the various actions as IKEA s management took in response to the crisis of 1995? IKEA had been publicized in a German documentary featuring child labor in many factories including one of their major suppliers from Pakistan. When the broadcasting become global and was shown throughout the world alongside the IKEA headquarters it was apparent that the corporation was in dire need of assistant. According to Christopher A Bartlett, IKEA immediately sought legal advice to inquire about counsel and contribution from the International Labor Organization located in Geneva (Bartlett et al 6). Furthermore, Marianne Barner, the business area manager of carpet, began with creating a new clause for all co-existing contracts that they were prohibited from practicing child labor and if they were to be found to be guilt of this activity their contract was annulled without further discussion. Due to the fact that India and Pakistan have laws concerning child labor, the governments were not enforcing them as they should be. Barner then took an even greater step and appointed a Scandinavian company in order to monitor child labor within their contracted suppliers. The company would be providing external monitoring of companies quality assurance programs and gave them the mandate not only to investigate complaints but also to undertake random audits of child labor practices at supplier s factories (Bartlett et al 6). Barner continued on her active role as the area manager and traveled to India and Pakistan to see the problem up close and personally and was given more information than was first collected. Within India

and Pakistan though child labor is looked down upon it is the norm within their society, for many of these children are indentured servants for debts that their parents or grandparents had obtained. With all the information received, Barner still stood by her stance and refused child labor to be active within the company s suppliers. With the situation being monitored the issue was thought to be controlled however that was found to be inaccurate when a German film maker had approached IKEA headquarters and showed evidence that one of its major suppliers, Rugmark, continued to use the practice of child labor. The German filmmaker was planning on airing it and had allowed the company to have a representative in order to defend themselves since the film was only targeting the IKEA Corporation and Rugmark. With this coming to light Marianne Barner began to question her decision of whether to send a representative or not, especially since the negative publicity would affect the profit of the company as it once had before. Barner s questions were along the lines of should the company continue to try to deal with the issue through its relationships with its suppliers? Or should it recognize that the problem was too deeply embedded in the culture of these countries for it to have any real impact and simply withdraw? (Bartlett et al 8). It was later found that she terminated the Rugmark contract and with this decision it became known that IKEA was in complete conflict of the practice and would continue to carry on its business values no matter the effects it would have to face. 6. What is your evaluation of the IWAY policies and practices that have refine IKEA s relationships with the suppliers? What benefits do you see? What concerns do you have? IKEA focused on developing a long-term relationship with its supplier, by supporting them. This relationship allowed IKEA to make loans to their suppliers at reasonable rates, and suppliers would pay these loans through future shipments. IKEA saw the big picture, when committing to their suppliers, because they would commit to them as well. Even though suppliers were aware of this commitment, they did not want to take that for granted, therefore they had to always stay competitive to bring the best and affordable designs to IKEA (Bartlett et al 2). IKEA was driven by a desire to improve the quality of life of the different agents involved in these networks, and not only by profit maximization. The benefits we see is that IKEA will always have a great supply team that will provide them with innovative and unique furniture at a lower cost. On the negative side, this can create barriers of entry to other suppliers that are interested in gaining business with IKEA, limiting IKEA s opportunity for development of new markets.

Works Cited Bartle , Christopher A., Vincent Dessain, and Anders Sjman. IKEA's Global Sourcing Challenge: Indian Rugs and Child Labor (A). Boston, MA: Harvard Business School, 2006. Culture, Pop. Ikea's Third World Outsourcing Adventure -- in the U.S. - The Labor Movement Salon.com. Salon.com - Salon.com. Web. 25 Apr. 2011.

<http://www.salon.com/news/the_labor_movement/?story=/tech/htww/2011/04/11/ikea_s _third_world_outsourcing_adventure_in_the_united_states>. "FAQ." Welcome to IKEA.com. Web. 25 Apr. 2011. <http://www.ikea.com/us/en/customerservices/faq>. Samy, L.A. ,and Vijayabascar, M. Codes of Conduct and Supplier Response in the IKEA Value Chain. October 3, 2006. http://www.inmotionmagazine.com/global/lasamy_ikea.html#Anchor-Key11481 "The World Is Your Oyster! Topic 1: Overview and Introduction to International Business." The World Is Your Oyster! Web. 25 Apr. 2011. <http://worldisyouroyster.host56.com/?cat=3>.

IKEA s Global Sourcing Challenge The foundation of IKEA s vision statement was to create a better everyday life for many people by selling affordable, good-quality furniture to the majority of consumers. IKEA has grown into a successful multi-billion dollar global company and a leader in their industry, but IKEA didn t start out that way. IKEA was founded by Inguar Kamprad when he was 17 years old selling fountain pens, cigarette lighters and binders out of his kitchen. To keep up with competitors, Kamprad added furniture to his newsletters. With the success of furniture, he decided to focus on furniture and drop all the other small products. As IKEA grew, Kamprad continue to evolve his business. In 1951 he opened a display store to reduce his product return. Kamprad wanted to keep his product costs low so the majority of people can afford to buy them. He decided to take the most costly portions of furniture purchasing delivery and assembly and eliminate them from his business strategy. This allowed Kamprad to lower his prices even more giving the ability for customers to self-assemble their furniture to save money. Kamprad s constant quest to lower prices was his business focus. As the company evolved, so did their focus. They became more concerned with environmental and social issues with forestry, environmentally friendly stores, transport and distribution and child labor. They have molded their company and their suppliers to not only maintain a cost effective products, but also to be environmentally and socially conscious. IKEA faces a large issue with child labor in the Indian carpet industry. While IKEA made good attempts to stop their suppliers from using child labor, the issue is still present. Child labor is a prevalent issue with a lot of global companies because they can create the products needed at a fraction of the cost. Child labor has been a serious issue because the children start working at the age of 5 in very dangerous conditions and risking their life and having serious injuries is a daily reality. It is prevalent in poverty stricken countries where families use their children to help pay off their own debts or to make money so the family can survive. There are many things for IKEA to consider when dealing stopping child labor. Most importantly the profit-and-loss of IKEA; making a stand on this issue could seriously put them at a disadvantage to their competitors because the product cost would increase due to the wage increase

and in return, IKEA would be forced to raise their prices on their products making it so their competitors can easily swoop in and take the industry lead. IKEA has a few options on solving the issues they face with child labor. None of the options are an easy decision and all options have pros and cons. The alternate solutions include: station an employee at every production location that has previously had an issue with child labor, force all suppliers to stop all child labor in their manufacturing or the contracts will be cancelled and banned from future business, pull production and suppliers out of India and finding suppliers in other areas, or continue business as usual, being forced to just deal with the press and social issues that will arise. Since none of these issues are fail proof, it is important to analyze each option and figure out what would be the best strategic move for the company. Although the child labor is a very important and serious social issue that needs to be stopped, IKEA needs to be able to continue to make a profit and it is and should be their main focus when making a decision. Doing what is socially right and taking a stand can cost significant money, time and energy for little to no return for the company. To make a good strategic decision IKEA needs to outweigh all the options. Having an employee at all production facilities would be an extremely expensive venture. Also, this would not stop child labor in locations where there is no staff. But having an employee in place would eliminate child labor at these locations. Forcing all suppliers to stop child labor is a great option because the cost on IKEA is slim to none. The suppliers are desperate for IKEA s business so they should be easily swayed to correct the issue on their end. Unfortunately, IKEA has already attempted this strategy and suppliers have yet to follow through. It is also extremely hard to make sure suppliers follow through on these. Pulling production and suppliers completely out of India will cause a significant and detrimental cost to IKEA. With the use of child labor, suppliers are able to keep cost low and in return IKEA can keep their prices low. Taking suppliers from a new area will cost money to find and research suppliers IKEA will be forced to raise prices and this may alter/affect their Mission Statement. Continuing business as usual would potentially be detrimental to IKEA in the long run. The press can easily cause bad-blood between a company and its customers. IKEA would most likely lose a significant amount of business and be forced to do something or close down. After analyzing the options above, the best solution would be a combination of forcing suppliers to stop child labor and to pull out of Indian carpet industry. By forcing suppliers to stop child labor in their manufacturing plants puts the pressure, cost and issue on to the supplier and away from IKEA. This is the easiest and most cost effective solution. It forces the suppliers to be responsible for their part on allowing child labor to continue. They would need to establish their own way of stopping the issue if they want to keep IKEA. IKEA is one of the largest companies in the industry, so if they do not follow what IKEA is outlining for them, they will lose a significant portion of their business and possibly not be able to continue their business. It would be a smart strategic move on their part to follow what IKEA is asking them to do. IKEA will need to make sure they are following proper protocol on child labor by enforcing some type of policies and procedures as well as a control system in place to check in and ensure they are doing their part as a supplier. If they do not and IKEA finds that they are still participating in child labor, then IKEA will automatically cancel the contract between them and issue a significant fine for a breach in contract. Associating a large fine to the suppliers will deter them from being part of child labor and keep them on tract. IKEA should also try to work with governmental laws to

ban the supplier from being able to supply their products to other business forcing their business to close if they do not fix their ways. Seeing how serious and strict IKEA s policies are will set a president within all suppliers who want to keep their business running. Since there were issues in suppliers following through with this in the past, I feel it is important to pull out of those areas with the most serious child labor issues. Sometimes, no matter what a company does to take a stand on social issues, it still will not change the way of life in a poverty stricken country. These families are desperate and willing to take the risks in order to survive or pay off debt. Sadly, some families that live under these conditions don t have a choice. The suppliers will still save money and keep overhead cost down by having children manufacture the products, and companies will still use them who may not necessarily care about any social issues. Unfortunately, for those locations just one company cannot change the situation. But hopefully by pulling out other companies can follow in IKEA s footsteps. It is essential to show that IKEA is taking this issue very seriously and also keeping their mission statement intact and being able to conduct their business the way Kamprad intended. IKEA can use their large size as bargaining power to their suppliers to get them to do what they want. I feel that this is the best strategic move for IKEA to solve the issue of child labor.

IKEA: Global Sourcing Challenge

[Name of Student] [Name of University]

IKEA: Global Sourcing Challenge

IKEA is a world beloved Swedish furniture company that started in 1943 as a mail-order business that offered goods purchased from low-priced suppliers. Its founder, Ingvar Kamprad helped grew IKEA into a multi-billion manufacturer and producer of self-assembled furniture as it is known today (IKEA, 2011). Key to why IKEA products are embraced by people beside quality that can be bought at an unmatched prices are that they are produced in a socially responsible and environmentally friendly way. IKEA s sourcing strategy is usually credited for maintaining these standards, especially on how well it keeps its relationship with its suppliers from developing countries. It is also said that IKEA has put some manufacturing Code of Conduct for its suppliers called "The IKEA Way on Purchasing Home Furnishing Products" (IWAY).

Through the years, IKEA has been constantly evolving its approach to business and its compliance to government regulations. Realizing that adherence to quality standards and being socially committed are vital to its business, IKEA requires manufacturers and suppliers to ensure compliance in terms legal issues, working conditions, prevention of child labor, external environment and forestry management.

Labor and environmental responsibility issues The success that IKEA was enjoying encountered a setback in 1994 when a German television aired a documentary that directly aimed at tarnishing the brand s reputation. In the report, it investigation the use of children in the production of carpets by IKEA s suppliers. For IKEA, reputation is important. The negative publicity generated by the television report immediately impacted IKEA s financial health as it deals with public and regulatory pressures not only from its home country but also from other nations (Bartlett, Dessain, & Djoman, 2006). The use of child labor in some developing countries like India remains a societal dilemma despite efforts to abolish bonded labor. Even with laws in place to stop the practice, laws were poorly enforced and prosecution rarely severe. For its part, IKEA is faced with the the enormous challenge of keeping true with its social responsibility commitment and ensure that anything that it sells uses labor fairly. Even compelling suppliers to commit to contracts that would forbid the use of child labor is not enough. Even the company is not a public entity and carpets not taking huge chunks of its investments and profit chart, IKEA must address reputation management (Bartlett, Dessain, & Djoman, 2006). On the environmental front, the setback came in the form IKEA s emission of environmentallydamaging materials in its production of its products first in 1982 and then 1992. The latter was brought up by a large German newspaper and television network who assailed IKEA for surpassing the limit permissible to use for its bookshelves product. The company also uses woods which can create huge forest denudation when unregulated, and advocacy groups and government regulators are already taking advantage of the publicity to promote their advocacies and causes (Bartlett, Dessain, & Djoman, 2006).

Recommendations It is not only IKEA that is accused of contracting suppliers that use children as labor. Other big brand names like Apple Inc has been receiving negative publicity out of these problems. Given that big brands can be dragged for public scrutiny even for very small issues, majority of the people who patronize company are more understanding so long as they will continue to enjoy unique and quality products or services from such companies who have the unique position of providing the market with unique and unmatched product. As such, managing the press would be light. The bigger challenge though would come from some social activists, disgruntled consumers or haters who can threaten the company by mounting viral campaigns through social networking websites like

Facebook, Twitter and Youtube. To deal with these publics, it would be best to launch a campaign that would give assurance that all products by IKEA passed through numerous regulatory standards. These are best provided through the press who can be invited and given access to major suppliers factories to give them free reign to inspect the working conditions and documents. IKEA can also release disclaimer statements on its corporate website assuring the public about its strict compliance to all terms of labor regulations. Non-government organizations and advocacy groups would be approached by IKEA to initiate talks, getting their inputs and contributions in developing best practice policies about their cause that would benefit both parties. Meanwhile, fears that IKEA is causing more harm than good in the environmental can be allayed by mounting strategic campaigns that will feature its commitment to the environment and sustainability efforts by the government and advocacy groups. Internally, the company can invest on research and development to discover materials with less environmental hazards and other alternatives that will be useful for its production not only in the short-term but can last. IKEA must also readily submit to requests for transparency that it is ensuring sustainability as a corporate social responsibility. In these areas, IKEA can very freely undertake since competition is less of an issue to the company, besides its not being a publicly-listed company.

References Bartlett, C.A., Dessain, V., and Djoman, A. (2006, May 3)."IKEA's Global Sourcing Challenge: Indian Rugs and Child Labor (A). Harvard Business Review. Massachusetts: Harvard Press.

IKEA. (2011). Corporate Information. Ikea.com. Retrieved from http://www.ikea.com/ms/en_US/about_ikea/index.html IKEA s Global Sourcing Challenge: Indian Rugs and Child Labor (A) 1. Marianne Barner s response to the invitation for IKEA to have a representative appear on the upcoming broadcast of the German video program should be a resounding yes. The case clearly represents that IKEA had already begun to take steps towards making sure child labor was not only not used to produce products they sold in their stores but that the company was also already working with other organizations such as Swedish Save the Children to ensure that the child labor laws were upheld in general. Not appearing on the German broadcast would force the public in to the assumption that IKEA had something to hide. 2. Based upon the way IKEA dealt with other hot button issues in the past, it would be in keeping with what the company stands for to terminate the supply contract with Rangan Exports. The case states that Indian rugs account for a tiny part of the company s sales and as stated, the potential for profit is not

worth the controversy. The case represents for instance, through the measures taken to insure that formaldehyde emissions met government standards that it was willing to take a loss and go above and beyond the necessary requirements for the good of the environment. Production and sales of their bestselling bookcase series, Billy, was halted immediately when found have emissions in the lacquer higher than German law would allow. In this example, the decision was made without counting the cost of lost sales and production and was estimated to have cost the company $6 to $7 million. This proves that doing the right thing would be in the best interest for the company for this small profit product as well. Rangan Exports clearly did not uphold their contract agreement.