Reference no: EM133320280

Case Study: The case discusses the ethical procurement practices of the world's largest furniture retailer, Sweden-based IKEA, a specialist in stylish but inexpensive furniture in Scandinavian designs. Initially, the company was accused of large-scale cutting of trees and using chemicals in furniture manufacturing. Thereafter, IKEA started working toward better procurement practices. In 2000, in an attempt to improve its operations and processes and minimize the negative impact of these on society and the environment, IKEA launched a set of environmental and social standards called the 'IWAY'.

Under IWAY, a set of directives was specified for IKEA's suppliers; it was mandatory for all the suppliers to abide by IWAY that outlined the requirements for procuring the raw material, maintaining environmental balance, and waste disposal, among other things. IKEA terminated its contract with some of its suppliers due to their non-compliance with the IWAY standards

Issues:

Understand IKEA's Ethical Procurement Practices
Study IKEA's IWAY code of conduct that its suppliers were expected to follow
Examine the various factors which led to establishment of IWAY
Study IKEA's relationship with its customers and suppliers
Discuss the pros and cons for customers, suppliers, the environment, and for IKEA itself of having a stringent code of conduct like IWAY
Discuss the ways by which IKEA could strengthen its relationship with suppliers and customers.

Introduction:

In February 2014, the Forest Stewardship Council (FSC) withdrew certification to Swedwood Forestry, a subsidiary of Swedish furniture retailer IKEA . FSC alleged that in Russia's Karelia forests, IKEA was harvesting old growth trees in regions that were protected. According to the FSC representative, "IKEA's departure from this part of Karelia, with its high concentration of old natural forest, clearly shows that it is not ecologically, socially, or economically sustainable to harvest old-growth forest, which are a non-renewable resource."

IKEA, the world's largest furniture retailer, specialized in stylish but inexpensive furniture in Scandinavian designs. The majority of IKEA furniture was made from wood, which the company sourced from different countries. IKEA's business had earlier involved the large-scale cutting of trees. There was also a widespread use of chemicals in the manufacture of its furniture.
In the mid-1980s, when IKEA's furniture products were tested and found to be made of particle boards from which there were excessive formaldehyde emissions, the company was the target of a lot of negative publicity. However, this proved to be a turning point for the company. IKEA started working toward better procurement practices, which led to the launch of environmental and social standards, 'IWAY', in 2000. IWAY was an attempt by the company to improve its operations and processes and minimize the negative impact of its activities on society and the environment.

Background Note:

IKEA was established in 1943 by a youngster of 17, Ingvar Kamprad (Kamprad). Kamprad came up with the name IKEA by combining the first letters of his name (Ingvar Kamprad with the first letters of the farm and village in which he grew up (Elmtaryd and Agunnaryd). IKEA began in a shed that was just two square meters in size. Kamprad started his business by buying pens, Christmas cards, matches, cigarette lighters, nylon stockings, and other items in bulk. He sold these items to the residents of Smaland at a reasonable price, but still made healthy profits. To save more money, Kamprad used the trucks that delivered milk to transport his packages. IKEA soon started making money. In 1945, Kamprad started promoting his business through mail order catalogs as conducting individual sales calls had become impossible because of the volume of business.

Furniture was introduced in IKEA's product portfolio in 1947. By 1951, the furniture sales had increased so much that Kamprad decided to discontinue all other products and concentrate solely on selling furniture that was stylish yet low priced.

In 1953, the first IKEA shop was opened in Älmhult. By 1955, IKEA had begun designing its own furniture. It also introduced flat packaging at around this time. In 1955, IKEA's sales were at SKr 6 million. In 1958, the first IKEA showroom was opened. The sales rose to SKr 40 million by 1961. In 1963, IKEA ventured overseas by opening its first store in Norway. In 1965, the first suburban store was opened on the outskirts of Stockholm. That was the time IKEA introduced several concepts like self-service and distributing catalogs. IKEA ventured into Denmark in 1969

Ikea Culture:

When IKEA was founded, Sweden was witnessing a transformation with the creation of a welfare state with generous pensions, health insurance, and child allowance. The company also inherited its culture and vision from its native land. The company's logo sported blue and yellow, colors from its country's flag. The fresh and healthy way of life was reflected in IKEA products that ranged from blond woods and natural textiles to untreated surfaces. The retailer while bringing in modernism also carried forward the Swedish home furnishing traditions.

Right at the beginning, IKEA developed its vision 'to create a better everyday life for many people'. The vision was backed by the business idea of offering a wide range of well-designed furniture at affordable prices.

Environment Friendly Products:

IKEA's major product development activities were carried out in Älmhult, Sweden. As far as possible, IKEA used renewable and recycled raw materials. However, it took care to maintain the functionality and appearance of the product. The design team of the company considered several aspects of the product like price, quality, function, material, and the technical aspects before designing the product. The team ensured that the products were free from substances that caused allergies or those that were harmful to health and the environment. The designers were encouraged to review the environmental consequences of their designs.

Building Awareness:

IKEA's products were manufactured at the facilities of 1600 suppliers spread across Europe, North America, and Asia. Almost two-thirds of its suppliers were in Europe, one-third in Asia, and about 3% in North America. The products were made by the suppliers according to IKEA's specifications. In 1998, in order to promote workers' rights, IKEA entered into an agreement with the IFBWW. It aimed to ensure better working conditions, health and safety for workers at enterprises that manufactured and supplied goods for IKEA.

Symbiosis with Suppliers:

With the introduction of IWAY in 2000, IKEA had very rigid terms and conditions for its suppliers. IWAY was applicable to all the suppliers of IKEA, and the suppliers were required to communicate the code of conduct to their co-workers and sub-suppliers. It was mandatory for the suppliers to acknowledge and accept the IWAY requirements and sign the IWAY Compliance Commitment document.

Ikea for Customers:

By 2005, IKEA had evolved into a one-stop store where customers could pick up environmentally sensitive and styled products. Icon, a British design magazine, named the founder of IKEA, Kamprad, as the most influential tastemaker in the world and wrote, "If it wasn't for IKEA, most people would have no access to affordable contemporary design." By end of 2005, IKEA had become a global middle class shop that offered affordable products like the Billy Bookcase, the Lack sidetable, and the Ivar storage system for US$120, US$13, and US$190 respectively. A manager at IKEA described the company's strategy as looking at the competition, knowing their prices, and finally slashing them to half.

Challenges:

In 2002, in order to get a general picture of IKEA, the Dutch trade union confederation FNV conducted research on the company. FNV found that IKEA lacked transparency in its IWAY standards and provided very little information to the public. The monitoring process for checking IWAY compliance among its suppliers was also very vague, according to the union confederation. As per the research study, "The case studies in India, Bulgaria, and Vietnam although showing a different situation in each country, make it clear that there are still numerous violations of IKEA's code of conduct in all three countries in all factories researched." Thus, the major challenge for IKEA was to ensure successful implementation of IWAY.

Creating a sustainable IKEA value chain with IWAY:

We believe that everything we do comes with the responsibility to create a positive impact on people, society and the planet. But we can only achieve this if our business partners share our vision and commitment to sustainability. That's why we have IWAY, the IKEA code of conduct for suppliers.

Question: 1. What factors lead to the creation of IWAY?

Question: 2.  Internet Search -Research IKEA's A look at our code of conduct, IWAY

Question: 3.  What is IWAY? iway-standard-general-section-edition-60.

Question: 4. What do you think about the IWAY code of conduct that IKEA suppliers are expected to follow?

Question: 5.  Discuss the pros and cons for customers, suppliers, the environment, and for IKEA itself of having a stringent code of conduct like IWAY.

Question: 6. Discuss the ways by which IKEA could strengthen its relationship with suppliers and customers.

Question: 7. What is your impression of IKEA as a company? Please explain.