Question

IKEA's Global Sourcing Challenge: Indian Rugs and Child Labor

Answer 1

IKEA's Global Sourcing Challenge: Indian Rugs and Child Labor

                                                              IKEA is a Swedish company producing home furnishing products at low prices to make them affordable to people. The company was founded in 1943 by Ingvar Kamprad and kept growing tremendously from 2 stores in 1964 to 114 stores in 1994 to 231 stores in 2007 in 24 countries welcoming a total of 522 million visitors. IKEA‘s success story is the result of its founders opening store in 1951 to allow customers to inspect products before buying them, using a catalog to tempt people to visit an exhibition.

Environmental and Social Issues:

IKEA needs to get the cheapest supplies and therefore go to countries that offer cheap labor. However, these developing countries such as India, Pakistan and Nepal are facing a lot of social issues about human rights. When IKEA set its foot in these countries, it could not avoid these problems. For example in India, estimates of child labor in India vary from the government’s 1991 census figure of 11.3 million children under 15 working to Human Rights Watch’s estimate of between 60 million and 115 millions child laborers and about 200,000 were employed in the carpet industry.

Public issues:

To avoid social and environmental issues right from the beginning as when these issues emerge, they immediately affect the products’ sales tremendously. The company’s sales dropped by 20% in Denmark. Moreover, those issues lead to a big damage to brand image. In the case the company confronts child labor issue and customers perceive that the low price they benefit is by child labor exploitation in India, customers will react by avoiding products from IKEA which results in a drop in sales. To avoid this threat of loss in profit, IKEA may consider withdrawing from India. However, if IKEA withdraws from India market, it will restrain itself from a big opportunity of cheap labor and put the company at disadvantage position as other competitors like Wal-Mart is accessing the same opportunities to compete for lower product prices.

The way out

According to the case document, to address the Formaldehyde problem, IKEA “quickly established stringent requirements regarding formaldehyde emissions but soon found that suppliers were failing to meet its standards as the binding material originally comes from glue manufacturers”. Therefore, IKEA worked directly with glue-producing chemical companies and, with the collaboration of companies such as ICI and BASF, soon found ways to reduce the Formaldehyde off-gassing in its products. When the problem returned a decade later, IKEA immediately “stopped both the production and sales of Billy bookcase worldwide and corrected the problem before resuming distribution”. The Formaldehyde events urged IKEA to be more aware of the environmental issue.

The company started showing its progress from reactive to proactive steps in addressing social responsibility when it approached forestry event. This time, IKEA anticipated the forestry issue and solved the problem before it was raised by public pressure. IKEA made a move in “establishing a forestry policy under discussion with Greenpeace and World Wide Fund for Nature and standards set by the Forest Stewardship Council”. Instead of investigating at its suppliers level as the company did in the Formaldehyde case, this time IKEA was ready to trace all wood used in its products back to its source.

The child labor problem raised by a Swedish television documentary which showed children in Pakistan working at weaving looms, we first look at how IKEA addressed the event according to the case document. It “sent a legal team to Geneva to seek input and advice from the International Labor Organization (ILO) on how to deal with the problem. It turned out that India, Pakistan, and Nepal were not signatories to the convention”. The fact that India, Pakistan, and Nepal were not signatories to the convention implies it is unreasonable to accuse IKEA of violating the law of child labor. Still, this fact did not help IKEA much as child labor is an ethical issue. IKEA therefore “added a clause to all supply contracts, stating simply that if the supplier employed children under legal working age, the contract would be cancelled”. The third step was to appoint a third-party agent to monitor child labor practices at its suppliers in India and Pakistan. This third step helped the company in publicity and media, and made things seem fairer from the public’s view. The business manager Barner did some more research about the child labor issue by contacting concerned organizations, such as Swedish Save the Children, UNICEF, and the ILO to get advice. After acquiring some knowledge about the issue, Barner and her direct manager traveled to India, Nepal and Pakistan to investigate the real situation On the trip, Barner learned more about Rugmark Foundation, “organized by the Indo-German Export Promotion, Indian carpet manufacturers, and exporters, and some Indian NGOs, to develop a label certifying that the carpets to which it was attached were made without the use of child labor”. Barner then returned to Sweden and met frequently with the Swedish Save the Children’s expert on child labor.

The interactive level promises a long-term advantage in brand image and profit. As child labor is considered “Indian culture”, it requires a lot of time, energy and finance to make progress. The company needs to work tightly with UNICEF, NGOs, and Save the Children Alliance to learn from each other. In India, because of economic initiatives, families send children to work. Therefore, to help improve the situation, IKEA need to fund a budget in the need of education for those families. Besides, the company should lobby to coerce the government to get involved more actively in the process.