IKEA’s Challenges in Global

Markets and Child Labor

Charles James. Alicia Stevenson, Sheila Smith

Law/531

July 22, 2013

Lisa Smith

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What is IKEA?

• Started by Ingvar Kamprad while living on Elmtaryd farm in Agunnaryd Sweden when he was 17

• The name IKEA means: Ingvar Kamprad Elmtaryd Agunnaryd

• In 1953 IKEA started selling affordable, consumer assembled, furniture

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Corporate Profile

• Cost consciousness and prohibition of wasting of resources

• Sells well designed, functional home furnishings products at low prices for a larger audience of consumers

• World’s largest specialized furniture retailer

• Has stores in 17 countries

• Has relationships with 2300 suppliers in 70 countries

• Sources around 11,200 products

• Has 24 trading service offices in 19 countries tasked with monitoring production, testing product ideas, price negotiation, and quality assurance (QA)

• Won’t accept any timber, veneer, plywood or layer-glued wood from intact natural forests or high conservation forests.

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IKEA’s Mission: Creating a better life for the many people

Ingvar Kamprad’s business philosophy centered around using simple business processes, discount suppliers, and “common sense” approaches to decision making.

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Issues in a Global Market: Child Labor

• IKEA relies on suppliers for all their products.

• German TV station ran story on child labor used to make Indian rugs sold in IKEA stores.

• IKEA’s contract with their rug supplier had a clause that the contract could be cancelled if child labor was being used in the manufacture of the rugs.

• IKEA hired a third party company to provide monitoring and inspection services in the area of child labor used by the suppliers.

• IKEA was asked to sign up to a partnership that certified products as not being created by child labor (Rugmark).

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Issues in a Global Market: International Law

• IKEA selling the “Billy” line of shelves in Germany

• German law sets limits on formaldehyde emissions from consumer products

• A German TV station broadcasted a news story on IKEA bookcases emitting formaldehyde fumes

• IKEA quickly enacted strict requirements on glues that used formaldehyde as a base

• IKEA worked with chemical suppliers to limit formaldehyde in their products that IKEA used through it’s suppliers

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Issues in a Global Market: Bonded Labor

• Bonded labor: adults and children working in factories to work off debts.

• The debts were transferred from the parents to the children.

• Due to the low wages and the high interest rates on the debt some children never worked off the debt and passed it to their children.

• In 1976 the Bonded Labour System Act was passed to reinforce the original Pledging of Labour Act of 1933.

• Lack of enforcement in the source countries is preventing IKEA from stopping this from happening in their supplier’s factories

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How IKEA deals with ethical dilemmas

• Switching from Beech to recycled yogurt cups in their OLGA chair line to save natural resources.

• Maintained communications with environmental and conservation groups like World Wide Fund for Nature (WWF) and Greenpeace.

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Positives

• Competitive pricing for the masses

• Supply chain monitoring

• Keeping simplicity in their business model to make effective “common sense” business decisions.

• Quick to address adverse situations

• Keeping leadership in touch with the front line employee experience

• Purchases supplier’s off season capacity for product manufacturing

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Negatives

• Liberal use of outsourcing of process completion and product manufacturing

• Uses a 3rd party company to handle their QA for their products exclusively

• Not affiliated with organizations, like Rugmark, for supply chain monitoring

• Maintaining relationships with suppliers that violate the terms of their contracts

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Room for improvement

• Incorporate a blended in-house and outsource solution for process completion and product manufacturing

• Have internal staff to handle the QA of their products in conjunction with 3rd party companies tasked to do the same.

• Should join organizations, like Rugmark, that are dedicated to socially conscience business practices.

• Review contract compliance and take appropriate actions for remedies

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Conclusion

• IKEA should enforce the terms of their contracts with their suppliers and monitor their suppliers for any sign of breach.

• Maintain vigilant monitoring efforts over their suppliers and distributors to make sure legal and ethical issues are noticed and quickly addressed.

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REFERENCE

• Harvard Business School: IKEA’s Global Sourcing Challenge: Indian Rugs and Child Labor (#9-906-414)

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