IKEA Business Area - Case Study Example

?Introduction IKEA is the world’s largest furniture retailer. The company was founded by Ingvar Kamprad in 1943. The vision of the company is to create a better everyday life for many people. The company started out as a mail order business. Due to the business savvy of its founder the firm grew rapidly and eventually expanded into a retail establishment. Twelve years after its inception the firm started to sell furniture. Early on the company faced heavy competition from the Sweden cartel that controlled the industry in Europe. The firm did not backed down and eventually it created its own supply chain by establishing long term relationships with suppliers in Poland. The company always used outside the box thinking in its business strategies such as buying idle production time from manufacturers in other industries. One of the reasons for the success of the firm in the furniture business was its introduction of self-assembled furniture. This concept help the firm reduce its prices because it eliminated two of the highest cost drivers in the industry which are assembly and delivery. The company’s managerial philosophy is to have an open system in which nobody is superior to others. Input from the employees is always welcomed at IKEA. The management process stressed simplicity and attention to detail. Being cost conscious was also a part of the business culture of the firm. IKEA penetrated the United States marketplace in 1985. In the 1990’s the company was exposed to bad media when a revelation was made to the public that IKEA was dealing with suppliers in Asia that used child labor. Stakeholders Ingvar Kamprad – Founder of the firm. His values and beliefs are embedded in IKEA’s culture. Using child labor goes against everything he stands for. He does not want to hurt the reputation of the company through a child labor scandal. Marianne Barner – IKEA business area manager for carpets division. She is responsible for finding a solution to the problem. Shareholders – The shareholders of the firm are worried about the problem of child labor because its occurrence will hurt the image and reputation of the company which will negatively impact the price of the common stocks of the company. Asian children – The children population in Asia are at risk due to employment exploitation by IKEA suppliers. The children are the biggest victims in this scandal. Issues By the mid 1990’s the company had grown tremendously. IKEA had 98 stores across 17 countries worldwide. Its supply chain had become extremely complex since the firm had almost 2,300 suppliers. It had become extremely difficult to monitor the actions of its suppliers. To make things worse those 2,300 suppliers were scattered across 70 countries. The firm was sourcing around 11,200 products. During the 1980’s environmental problems occurred with some of the products IKEA sold. In the 1990’s a new and extremely serious issue occurred as the company was accused of doing business with suppliers that used child labor. Child labor is a growing problem in our society with over 250 million children working in the labor market (Humanium, 2010). IKEA in the 1980’s faced new regulations from the Denmark government that redefine the limits of formaldehyde emissions permissible in product building. At concentration above 0.1 mg/kg in air this material caused watery eyes, headaches, burning sensation in throat, and difficult breathing. The company was fined by the government of Denmark and it was heavily criticized by the media. IKEA sales in the aftermath of this scandal drop by 20% in Denmark. The company reacted quickly to the problem by establishing stringent requirement regarding formaldehyde levels. At first the problem was not simply to attend since suppliers bought from sub-suppliers that were exposed to formaldehyde. The firm resolved the problem by dealing directly with glue producing chemical companies. A decade later the firm was once again facing issues with formaldehyde in Germany. Its best selling bookcase series had high levels of the toxic material. The source of the problem was the lacquer of the bookshelves. The firm stopped production and sales of the bookshelves to remedy the problem. The company lost $6 million to $7 million to correct the issue. The long term solution to the problem was to raise the quality of the wood used by the company by adopting standards set by the forest stewardship council. In 1994 a Swedish television documentary showed children in Pakistan working at weaving looms. IKEA was mentioned as one of the importers of carpets that did business in this sweatshop. The company claimed it was caught completely unaware of the problem. Ignorance is not a valid excuse for a business. In an attempt to deal with the problem IKEA put a clause in its contracts with suppliers that if they used child labor their contract would be cancelled. They also hired a Scandinavian company to do stop audits of its suppliers in India and Pakistan. A year after the initial revelation of child labor among its suppliers a German journalist filmed children working at IKEA’s largest supplier of rugs, Rangan Exports. It has become quite clear that IKEA needs to find a solution to solve the problem. Alternative solutions The company must take immediate action to deal with the problem of child labor in the rug industry. The government of India and Pakistan is turning a blind eye to the problem. An alternative solution to the problem is to exit the rug industry altogether. The sale of rugs represents only a tiny portion of the firm’s business. Continued bad press associated with doing business with suppliers that hire child labor can hurt the image, reputation, and goodwill of the firm. A second potential solution to the problem is to sign up with the Rugmark Foundation. The Rugmark Foundation is an organization that works with other non-profit organizations to monitor the Indian rug industry in order to stop the use of child labor in the industry. A tag is placed in all rugs that are manufacture in companies that are audited by Rugmark. This is a viable solution, but its reach is limited to Indian companies. IKEA has suppliers across 70 countries worldwide. A third solution is to assign an auditor to every single supplier in the supply chain of IKEA. This measure would ensure that the company directly monitors all its suppliers. The solution sounds great, but it might be cost prohibitive to hire so many auditors worldwide. A fourth solution is for IKEA to create its own manufacturing facility in India to manufacture the rugs the company sells at its retail establishments. A con associated with this solution is that IKEA does not have experience manufacturing rugs. Optimal solution The optimal solution to the problem is to take control of the supply of rugs by manufacturing its own rugs in India. The firm has so many suppliers that it would be difficult to monitor all suppliers. If IKEA operates its own manufacturing plants the firm can offer a 100% guarantee that child labor is not used in the manufacturing process of rugs. Another advantage of producing its own rugs is the elimination of the middle man that takes a cut of the profit by distributing the product to IKEA. Conclusion Child labor is a serious problem worldwide that companies in the retail industry must recognize and attend. IKEA had more to lose by continuing to do business with shady suppliers. The brand name of the company and its reputation was going to deteriorate if the firm was involved in another child labor scandal. The firm decided that the optimal solution to the problem was to build its own rugs in India. This solution will ensure that the image, goodwill, and reputation of the firm are protected in the long term. References Humanium.org (2010). Child Labour. Retrieved December 5, 2013 from http://www.humanium.org/en/child-labour/ Read More