ost9-906-414REV: NOVEMBER 14 2006rPCHRISTOPHER A. BARTLETTVINCENT DESSAINANDERS SJÖMANyoIKEA’s Global Sourcing Challenge:Indian Rugs and Child Labor (A)opIn May 1995 Marianne Barner faced a tough decision. After just two years with IKEA the world’slargest furniture retailer and less than a year into her job as business area manager for carpets shewas faced with the decision of cutting off one of the company’s major suppliers of Indian rugs. Whilesuch a move would disrupt supply and affect sales she found the reasons to do so quite compelling.A German TV station had just broadcast an investigative report naming the supplier as one that usedchild labor in the production of rugs made for IKEA. What frustrated Barner was that like all otherIKEA suppliers this large well-regarded company had recently signed an addendum to its supplycontract explicitly forbidding the use of child labor on pain of termination.NotCEven more difficult than this short-term decision was the long-term action Barner knew IKEAmust take on this issue. On one hand she was being urged to sign up to an industry-wide responseto growing concerns about the use of child labor in the Indian carpet industry. A recently formedpartnership of manufacturers importers retailers and Indian nongovernmental organizations(NGOs) was proposing to issue and monitor the use of “Rugmark ” a label to be put on carpetscertifying that they were made without child labor. Simultaneously Barner had been conversingwith people at the Swedish Save the Children organization who were urging IKEA to ensure that itsresponse to the situation was “in the best interest of the child”—whatever that might imply. Finally there were some who wondered if IKEA should not just leave this hornet’s nest. Indian rugsaccounted for a tiny part of IKEA’s turnover and to these observers the time cost and reputationrisk posed by continuing this product line seemed not worth the profit potential.The Birth and Maturing of a Global Company1To understand IKEA’s operations one had to understand the philosophy and beliefs of its 70year-old founder Ingvar Kamprad. Despite stepping down as CEO in 1986 almost a decade later Kamprad retained the title of honorary chairman and was still very involved in the company’sactivities. Yet perhaps even more powerful than his ongoing presence were his strongly held valuesand beliefs which long ago had been deeply embedded in IKEA’s culture.DoKamprad was 17 years old when he started the mail-order company he called IKEA a name thatcombined his initials with those of his family farm Elmtaryd and parish Agunnaryd located in the________________________________________________________________________________________________________________Professor Christopher A. Bartlett Executive Director of the HBS Europe Research Center Vincent Dessain and Research Associate AndersSjöman prepared this case. HBS cases are developed solely as the basis for class discussion. Certain details have been disguised. Cases are notintended to serve as endorsements sources of primary data or illustrations of effective or ineffective management.Copyright © 2006 President and Fellows of Harvard College. To order copies or request permission to reproduce materials call 1-800-545-7685 write Harvard Business School Publishing Boston MA 02163 or go to http://www.hbsp.harvard.edu. No part of this publication may bereproduced stored in a retrieval system used in a spreadsheet or transmitted in any form or by any means—electronic mechanical photocopying recording or otherwise—without the permission of Harvard Business School.Copying or posting is an infringement of copyright. [email protected] or 617-783-7860. IKEA’s Global Sourcing Challenge: Indian Rugs and Child Labor (A)ost906-414forests of southern Sweden. Working out of the family kitchen he sold goods such as fountain pens cigarette lighters and binders he purchased from low-priced sources and then advertised in anewsletter to local shopkeepers. When Kamprad matched his competitors by adding furniture to hisnewsletter in 1948 the immediate success of the new line led him to give up the small items.rPIn 1951 to reduce product returns he opened a display store in nearby Älmhult village to allowcustomers to inspect products before buying. It was an immediate success with customers travelingseven hours from the capital Stockholm by train to visit. Based on the store’s success IKEA stoppedaccepting mail orders. Later Kamprad reflected “The basis of the modern IKEA concept was created[at this time] and in principle it still applies. First and foremost we use a catalog to tempt people tovisit an exhibition which today is our store. . . . Then catalog in hand customers can see simpleinteriors for themselves touch the furniture they want to buy and then write out an order.”2opyoAs Kamprad developed and refined his furniture retailing business model he became increasinglyfrustrated with the way a tightly knit cartel of furniture manufacturers controlled the Swedishindustry to keep prices high. He began to view the situation not just as a business opportunity butalso as an unacceptable social problem that he wanted to correct. Foreshadowing a vision for IKEAthat would later be articulated as “creating a better life for the many people ” he wrote: “Adisproportionately 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 gooddesign and function at prices so low that the majority of people can afford to buy them. . . . We havegreat ambitions.”3NotCThe small newsletter soon expanded into a full catalog. The 1953 issue introduced what wouldbecome another key IKEA feature: self-assembled furniture. Instead of buying complete pieces offurniture customers bought them in flat packages and put them together themselves at home. Soon the “knockdown” concept was fully systemized saving transport and storage costs. In typicalfashion Kamprad turned the savings into still lower prices for his customers gaining an even largerfollowing among young postwar householders looking for well-designed but inexpensive furniture.Between 1953 and 1955 the company’s sales doubled from SEK 3 million to SEK 6 million.4Managing Suppliers: Developing Sourcing PrinciplesAs its sales took off in the late 1950s IKEA’s radically new concepts began to encounter stiffopposition from Sweden’s large furniture retailers. So threatened were they that when IKEA beganexhibiting at trade fairs they colluded to stop the company from taking orders at the fairs andeventually even from showing its prices. The cartel also pressured manufacturers not to sell to IKEA and the few that continued to do so often made their deliveries at night in unmarked vans.DoUnable to meet demand with such constrained local supply Kamprad was forced to look abroadfor new sources. In 1961 he contracted with several furniture factories in Poland a country still in theCommunist eastern bloc. To assure quality output and reliable delivery IKEA brought its knowhow taught its processes and even provided machinery to the new suppliers revitalizing Poland’sfurniture industry as it did so. Poland soon became IKEA’s largest source and to Kamprad’s delight at much lower costs—once again allowing him to reduce his prices.Following its success in Poland IKEA adopted a general procurement principle that it should notown its means of production but should seek to develop close ties by supporting its suppliers in a2Copying or posting is an infringement of copyright. [email protected] or 617-783-7860. 906-414ostIKEA’s Global Sourcing Challenge: Indian Rugs and Child Labor (A)rPlong-term relationship.a Beyond supply contracts and technology transfer the relationship led IKEAto make loans to its suppliers at reasonable rates repayable through future shipments. “Ourobjective is to develop long-term business partners ” explained a senior purchasing manager. “Wecommit to doing all we can to keep them competitive—as long as they remain equally committed tous. We are in this for the long run.”Although the relationship between IKEA and its suppliers was often described as one of mutualdependency suppliers also knew that they had to remain competitive to keep their contract. Fromthe outset they understood that if a more cost-effective alternative appeared IKEA would try to helpthem respond but if they could not do so it would move production.opGrowing Retail: Expanding AbroadyoIn its constant quest to lower prices the company developed an unusual way of identifying newsources. As a veteran IKEA manager explained: “We do not buy products from our suppliers. Webuy unused production capacity.” It was a philosophy that often led its purchasing managers to seekout seasonal manufacturers with spare off-season capacity. There were many classic examples of howIKEA matched products to supplier capabilities: they had sail makers make seat cushions windowfactories produce table frames and ski manufacturers build chairs in their off-season. The manageradded “We’ve always worried more about finding the right management at our suppliers thanfinding high-tech facilities. We will always help good management to develop their capacity.”NotCBuilding on the success of his first store Kamprad self-financed a store in Stockholm in 1965.Recognizing a growing use of automobiles in Sweden he bucked the practice of having a downtownshowroom and opted for a suburban location with ample parking space. When customers drovehome with their furniture in flat packed boxes they assumed two of the costliest parts of traditionalfurniture retailing—home delivery and assembly.In 1963 even before the Stockholm store had opened IKEA had expanded into Oslo Norway. Adecade later Switzerland became its first non-Scandinavian market and in 1974 IKEA enteredGermany which soon became its largest market. (See Exhibit 1 for IKEA’s worldwide expansion.) Ateach new store the same simple Scandinavian-design products were backed up with a catalog andoffbeat advertising presenting the company as “those impossible Swedes with strange ideas.” Andreflecting the company’s conservative values each new entry was financed by previous successes.bDoDuring this expansion the IKEA concept evolved and became increasingly formalized. (Exhibit 2summarizes important events in IKEA’s corporate history.) It still built large suburban stores withknockdown furniture in flat packages the customers brought home to assemble themselves. But asthe concept was refined the company required that each store follow a predetermined design set upto maximize customers’ exposure to the product range. The concept mandated for instance that theliving room interiors should follow immediately after the entrance. IKEA also serviced customerswith features such as a playroom for children a low-priced restaurant and a “Sweden Shop” forgroceries that had made IKEA Sweden’s leading food exporter. At the same time the range graduallyaThis policy was modified after a number of East European suppliers broke their contracts with IKEA after the fall of the BerlinWall opened new markets for them. IKEA’s subsequent supply chain problems and loss of substantial investments ledmanagement to develop an internal production company Swedwood to ensure delivery stability. However it was decidedthat only a limited amount of IKEA’s purchases (perhaps 10%) should be sourced from Swedwood.b By 2005 company lore had it that IKEA had only taken one bank loan in its corporate history—which it had paid back assoon as the cash flow allowed.Copying or posting is an infringement of copyright. [email protected] or 617-783-7860.3 IKEA’s Global Sourcing Challenge: Indian Rugs and Child Labor (A)ost906-414expanded beyond furniture to include a full line of home furnishing products such as textiles kitchenutensils flooring rugs and carpets lamps and plants.rPThe Emerging Culture and Values5yoAs Kamprad’s evolving business philosophy was formalized into the IKEA vision statement “Tocreate a better everyday life for the many people ” it became the foundation of the company’sstrategy of selling affordable good-quality furniture to mass-market consumers around the world.The cultural norms and values that developed to support the strategy’s implementation were also inmany ways an extension of Kamprad’s personal beliefs and style. “The true IKEA spirit ” heremarked “is founded on our enthusiasm our constant will to renew on our cost-consciousness onour willingness to assume responsibility and to help on our humbleness before the task and on thesimplicity of our behavior.” As well as a summary of his aspiration for the company’s behavioralnorms it was also a good statement of Kamprad’s own personal management style.opOver the years a very distinct organizational culture and management style emerged in IKEAreflecting these values. For example the company operated very informally as evidenced by theopen-plan office landscape where even the CEO did not have a separate office and the familiar andpersonal way all employees addressed one another. But that informality often masked an intensitythat derived from the organization’s high self-imposed standards. As one senior executive explained “Because there is no security available behind status or closed doors this environment actually putspressure on people to perform.”NotCThe IKEA management process also stressed simplicity and attention to detail. “Complicatedrules paralyze!” said Kamprad. The company organized “anti-bureaucrat week” every year requiring all managers to spend time working in a store to reestablish contact with the front line andthe consumer. The workpace was such that executives joked that IKEA believed in “management byrunning around.”Cost consciousness was another strong part of the management culture. “Waste of resources ”said Kamprad “is a mortal sin at IKEA. Expensive solutions are often signs of mediocrity and anidea without a price tag is never acceptable.” Although cost consciousness extended into all aspectsof the operation travel and entertainment expenses were particularly sensitive. “We do not set anyprice on time ” remarked an executive recalling that he had once phoned Kamprad to get approval tofly first class. He explained that economy class was full and that he had an urgent appointment tokeep. “There is no first class in IKEA ” Kamprad had replied. “Perhaps you should go by car.” Theexecutive completed the 350-mile trip by taxi.The search for creative solutions was also highly prized with IKEA. Kamprad had written “Onlywhile sleeping one makes no mistakes. The fear of making mistakes is the root of bureaucracy andthe enemy of all evolution.” Though planning for the future was encouraged overanalysis was not.“Exaggerated planning can be fatal ” Kamprad advised his executives. “Let simplicity and commonsense characterize your planning.”DoIn 1976 Kamprad felt the need to commit to paper the values that had developed in IKEA duringthe previous decades. His thesis Testament of a Furniture Dealer became an important means forspreading the IKEA philosophy particularly during its period of rapid international expansion.(Extracts of the Testament are given in Exhibit 3.) Specially trained “IKEA ambassadors” wereassigned to key positions in all units to spread the company’s philosophy and values by educatingtheir subordinates and by acting as role models.4Copying or posting is an infringement of copyright. [email protected] or 617-783-7860. 906-414ostIKEA’s Global Sourcing Challenge: Indian Rugs and Child Labor (A)Waking up to Environmental and Social IssuesrPIn 1986 when Kamprad stepped down Anders Moberg a company veteran who had once beenKamprad’s personal assistant took over as president and CEO. But Kamprad remained intimatelyinvolved as chairman and his influence extended well beyond the ongoing daily operations: he wasthe self-appointed guardian of IKEA’s deeply embedded culture and values.yoBy the mid-1990s IKEA was the world’s largest specialized furniture retailer. Sales for the IKEAGroup for the financial year ending August 1994 totaled SEK 35 billion (about $4.5 billion). In theprevious year more than 116 million people had visited one of the 98 IKEA stores in 17 countries most of them drawn there by the company’s product catalog which was printed yearly in 72 millioncopies in 34 languages. The privately held company did not report profit levels but one estimate putits net margin at 8.4% in 1994 yielding a net profit of SEK 2.9 billion (about $375 million).6opAfter decades of seeking new sources in the mid-1990s IKEA worked with almost 2 300 suppliersin 70 countries sourcing a range of around 11 200 products. Its relationship with its suppliers wasdominated by commercial issues and its 24 trading service offices in 19 countries primarilymonitored production tested new product ideas negotiated prices and checked quality. (SeeExhibit 4 for selected IKEA figures in 1994.) That relationship began to change during the 1980s however when environmental problems emerged with some of its products. And it was even moreseverely challenged in the mid-1990s when accusations of IKEA suppliers using child labor surfaced.The Environmental Wake-Up: FormaldehydeNotCIn the early 1980s Danish authorities passed regulations to define limits for formaldehydeemissions permissible in building products. The chemical compound was used as binding glue inmaterials such as plywood and particleboard and often seeped out as gas. At concentrations above0.1 mg/kg in air it could cause watery eyes headaches a burning sensation in the throat anddifficulty breathing. With IKEA’s profile as a leading local furniture retailer using particleboard inmany of its products it became a prime target for regulators wanting to publicize the new standards.So when tests showed that some IKEA products emitted more formaldehyde than was allowed bylegislation the case was widely publicized and the company was fined. More significantly—and thereal lesson for IKEA—was that due to the publicity its sales dropped 20% in Denmark.In response to this situation the company quickly established stringent requirements regardingformaldehyde emissions but soon found that suppliers were failing to meet its standards. Theproblem was that most of its suppliers bought from subsuppliers who in turn bought the bindingmaterials from glue manufacturers. Eventually IKEA decided it would have to work directly withthe glue-producing chemical companies and with the collaboration of companies such as ICI andBASF soon found ways to reduce the formaldehyde off-gassing in its products.7DoA decade later however the formaldehyde problem returned. In 1992 an investigative teamfrom a large German newspaper and TV company found that IKEA’s best-selling bookcase series Billy had emissions higher than German legislation allowed. This time however the source of theproblem was not the glue but the lacquer on the bookshelves. In the wake of headlines describing“deadly poisoned bookshelves ” IKEA immediately stopped both the production and sales of Billybookcases worldwide and corrected the problem before resuming distribution. Not counting the costof lost sales and production or the damage to goodwill the Billy incident was estimated to have costIKEA $6 million to $7 million.8Copying or posting is an infringement of copyright. [email protected] or 617-783-7860.5 IKEA’s Global Sourcing Challenge: Indian Rugs and Child Labor (A)ost906-414rPThese events prompted IKEA to address broader environmental concerns more directly. Sincewood was the principal material in about half of all IKEA products forestry became a natural startingpoint. Following discussions with both Greenpeace and World Wide Fund for Nature (WWF formerly World Wildlife Fund) and using standards set by the Forest Stewardship Council IKEAestablished a forestry policy stating that IKEA would not accept any timber veneer plywood orlayer-glued wood from intact natural forests or from forests with a high conservation value. Thismeant that IKEA had to be willing to take on the task of tracing all wood used in IKEA products backto its source.9 To monitor compliance the company appointed forest managers to carry out randomchecks of wood suppliers and run projects on responsible forestry around the world.opThe Social Wake-Up: Child LaboryoIn addition to forestry IKEA identified four other areas where environmental criteria were to beapplied to its business operations: adapting the product range; working with suppliers; transport anddistribution; and ensuring environmentally conscious stores. For instance in 1992 the companybegan using chlorine-free recycled paper in its catalogs; it redesigned the best-selling OGLA chair—originally manufactured from beech—so it could be made using waste material from yogurt cupproduction; and it redefined its packaging principles to eliminate any use of PVC. The company alsomaintained its partnership with WWF resulting in numerous projects on global conservation andfunded a global forest watch program to map intact natural forests worldwide. In addition itengaged in an ongoing dialogue with Greenpeace on forestry.10NotCIn 1994 as IKEA was still working to resolve the formaldehyde problems a Swedish televisiondocumentary showed children in Pakistan working at weaving looms. Among the several Swedishcompanies mentioned in the film as importers of carpets from Pakistan IKEA was the only highprofile name on the list. Just two months into her job as business area manager for carpets MarianneBarner recalled the shockwaves that the TV program sent through the company:The use of child labor was not a high-profile public issue at the time. In fact the U.N.Convention on the Rights of the Child had only been published in December 1989. So mediaattention like this TV program had an important role to play in raising awareness on a topicnot well known and understood—including at IKEA. . . . We were caught completely unaware.It was not something we had been paying attention to. For example I had spent a couple ofmonths in India learning about trading but got no exposure to child labor. Our buyers metsuppliers in their city offices and rarely got out to where production took place. . . . Ourimmediate response to the program was to apologize for our ignorance and acknowledge thatwe were not in full control of this problem. But we also committed to do something about it.DoAs part of its response IKEA sent a legal team to Geneva to seek input and advice from theInternational Labor Organization (ILO) on how to deal with the problem. They learned thatConvention 138 adopted by the ILO in 1973 and ratified by 120 countries committed ratifyingcountries to working for the abolition of labor by children under 15 or the age of compulsoryschooling in that country. India Pakistan and Nepal were not signatories to the convention.11Following these discussions with the ILO IKEA added a clause to all supply contracts—a “black-andwhite” clause as Barner put it—stating simply that if the supplier employed children under legalworking age the contract would be cancelled.To take the load off field trading managers and to provide some independence to the monitoringprocess the company appointed a third-party agent to monitor child labor practices at its suppliers inIndia and Pakistan. Because this type of external monitoring was very unusual IKEA had somedifficulty locating a reputable and competent company to perform the task. Finally they appointed a6Copying or posting is an infringement of copyright. [email protected] or 617-783-7860. 906-414ostIKEA’s Global Sourcing Challenge: Indian Rugs and Child Labor (A)well-known Scandinavian company with extensive experience in providing external monitoring ofcompanies’ quality assurance programs and gave them the mandate not only to investigatecomplaints but also to undertake random audits of child labor practices at suppliers’ factories.rPEarly Lessons: A Deeply Embedded ProblemyoWith India being the biggest purchasing source for carpets and rugs Barner contacted SwedishSave the Children UNICEF and the ILO to expand her understanding and to get advice about theissue of child labor espe…
