IKEAs Recent Ethical and Local Sourcing Initiatives - Essay Example

IKEA’s recent ethical and local sourcing initiatives IKEA was established in n 1943 by Ingvar Kamprad when he was only 17 years old. After doing small time business, it was only in 1948, Kamprad included furniture to his selling range and it had a big impact leading to big success. However, there was a cartel of furniture manufacturers who felt the heat and they started indulging unethical activities. That is, they sold products at high prices in the market, and with IKEA offering prices at feasible and affordable prices, the cartel insisted on furniture manufacturers not sell the finished furniture to IKEA. Although, some manufacturers made deliveries to IKEA, mostly at night to avoid being seen, IKEA thought of other strategic options to counter this problem, and one among them is outsourcing. This made IKEA to go scouting abroad for manufacturers and Kamprad entered into contracts with number of factories in Poland, thus ‘seeding’ more outsourcing. It was this early decision of Kamprad to seek least expensive alternatives to domestic manufacturing of the products turned out to be a more profitable avenue for IKEA to take. As, this outsourcing strategy reduced the costs of production, it is able to offer affordable or cheap prices to the customer, thereby bringing in more customers. “IKEA currently works with 1,300 suppliers in 53 countries, but Kamprad made the pioneering decision to source furniture from communist Poland as early as 1961. Since manufacturing costs were 50% lower in Poland than in Sweden, his decision looks brilliant in hindsight.” (Barthelemy 2006). Importantly, IKEA continued as well as extended its outsourcing strategy to other countries particularly 1980’s and 90’s, particularly to Asian countries like India, China, Pakistan, Philippines, etc, where they can access cheap labour. Although, outsourcing to these countries gave IKEA a cost-effective option, it also led to the rise of ethical issues and controversies, both from the economic as well as political perspectives, thereby making or even forcing IKEA to come up with Corporate Social Responsibility (CSR) based activities. IKEA outsourced to the Asian countries many of its manufacturing processes including making of carpet, rugs, wicker baskets, etc. That is, in starting from 1970s and more prominently from 1990’s, they found many local manufacturers cum suppliers, who would manufacture the products and supply to them with IKEA label. This turned out to be a productive and profitable option, as IKEA was able to get good productivity for cheaper prices, when compared to the wages paid at its domestic manufacturing unit. However, the advantage of these profits got nullified by the barrage of criticisms faced by IKEA, when it came into the open that its manufactures/suppliers in those countries have employed children to do the work. Two Television channels, one from Sweden and other from Denmark, telecasted programs, which clearly showed how the suppliers have employed the children under the age of 14, even in contravention to the politics based Indian laws. Dutch television show "Nova" reported that the two Indian companies or suppliers, Prem Textiles and R.K. Exports, employed scores of children under age 14 to carry out physically demanding work in the manufacture of rugs and carpets. (Los Angeles Times 1997). When this news came in the late 1990’s, IKEA publicly denied it and assured that apt actions were taken. “Every producer signs a contract with IKEA that they will not employ children under 14," she said. "If they break that promise, then it is over and out for them.” (Los Angeles Times 1997). Also, IKEA shed its responsibility in the allegations by putting the blame on the suppliers. With news about IKEA ‘indirectly’ employing child labour coming from two different countries, it put them on the defensive. That is, although, they ended their contract with those suppliers, it did not prevent the media and the public from viewing IKEA as an unethical company. So, IKEA to counter these allegations and to elevate its ethical image particularly in relation to child labour related issues, came up with many CSR based activities, fulfilling both political as well as economic perspective. After admitting their ignorance about the unintentional use of child labour, they accepted to do something to solve the problem as soon as possible. The first step, IKEA took to tackle the problem of Child labour included amongst others the inclusion of a clause in the contracts with the outsourcing suppliers that if they were to utilize children in any form of employment under the legal working age, their contract would be terminated immediately. This did not cause any damages from the economic perspective to IKEA, as the fault was on the side of the suppliers. Also, importantly with so many suppliers available in those countries, IKEA has the time and advantage to select the supplier who does not at all employ any child labours, and also who provides good working conditions to the other employees. So, by selecting suppliers, who are themselves ethically correct, IKEA tried to be on the positive side of ethics. From the political perspective also, implementation of some tough child labour related rules in those countries, indirectly aided IKEA to prevent further more ethical damage, and instead focused them on implementing positive ethical and CSR actions. When viewed from another perspective, it can be said that because of the foreign companies like IKEA only the governments took constructive action. That is, after charges of child labour being practiced by foreign companies came in the Western media, governments of those outsourced countries came up with laws and legislations to minimize and eradicate child labour. For example, in India for many years, child labour has become an intricate part of employment, with high number of children employed in highly hazardous work environment as bonded labourers. “At least fifteen million children work as bonded labourers in India. Whether chained to carpet looms, sweating in silver smithies, or working in the field from dawn until dusk, these children endure miserable lives. They earn little and are beaten often.” (unhcr.org 1996). Although, India came up with the Children Act that declared bonded child labour as illegal, in 1976, the law got reinforced in 1986. “Since independence, a plethora of additional protective legislation has been put in place…A relatively recent law-the Child Labour (Prohibition and Regulation) Act of 1986-designates a child as "a person who has not completed their fourteenth year of age.” (unhcr.org 1996). However, these laws are routinely flouted by the employees without any major punishments. This type of loopholes in the laws only enabled the suppliers of IKEA or even IKEA to involve children, leading to bad image. “MNC are in a position to effectively escape local jurisdictions by playing one legal system against the other.” (Scherer and Palazzo 2010). Apart from political inaction, it is also a cultural thing, as in those countries, the children more often than not are employed in various industries to assist their parents or guardians to pay their debts. Moreover, the apprenticeship of children in the craft industries was allowed in order to pass on the specialized handicraft skills in the families. Considering the situation in those countries, IKEA came into a conclusion that it was more of a socioeconomic problem that emanated from poverty and the lack of development policies. So, apart from not picking suppliers who could employ child labours and also terminating the contracts with the wrongdoers, IKEA implemented further constructive activities. CSR activities of IKEA start immediately after any reported case of child labour. That is, IKEA has a code of conduct called The IKEA Way on Preventing Child Labour, under which unannounced surprise visits by officials from the auditing firm KPMG as well as by people from UNICEF will be made to suppliers and sub-contractors industrial units. If they find any evidence of child labour, the first step will be to suspend the suppliers from getting any new contracts for a specific period, and then importantly making or even pushing the supplier themselves to give education and other support to the children. That is, as mentioned above child labour is a socioeconomic problem and so IKEA understanding this has been implementing measures with a lot of sensitivity. “…the response must be sensitive to the economic situation of the child and to their background. To simply pluck them from their jobs and send them home could rob their family of vital income and significantly worsen the child’s situation.” (Burgess 2009). So, as part of CSR activities, IKEA makes the supplier implement a corrective and preventive action plan, including education and training, even while making unannounced visits to check the steps of the supplier. (ikea.com). Even while providing education to the child, steps will be taken to bring in an adult family member of the child (particularly women), train them and absorb them into the work, thereby compensating any financial loss that may be incurred. “Eventually, the aim is to replace the child in their role, preferably with a family member to guarantee the household’s income.” (Burgess 2009) In addition to this program, which fulfils both economic and political perspectives, IKEA is providing optimal economic aid to take care of overall wellbeing of the children in association with UNICEF. IKEA donated $48 million in 2009 to UNICEF to help improve the living conditions of children as well as provide them with education in some of the Indias economically poor areas. In addition, IKEA committed to invest further $120 million in India in UNICEF programmes over the next five years, with the figure going up to $180 million by 2015 (Marianne Barner cited in West 2009). “The donation makes the global furniture company the biggest corporate partner of the U.N. childrens foundation UNICEF (www.unicef.org), with total commitments of more than $180 million, the U.N. agency said in a statement.” (in.reuters.com 2009). With this aid, IKEA wanted to take care of the same target group of children, whom they were accused of exploiting through child labour. That is, in association with UNICEF, UNDP and also Save Children initiative, IKEA wants to provide good healthcare programs and importantly education, thereby eliminating any form of child labour. “The aim is to prevent and eliminate child labour in the carpet belt by addressing root causes such as debt, poverty, lack of access to education, disability and ill health” (ikea.com). This initiative of IKEA made it possible for 80,000 children to get an education and 140,000 children and 150,000 women were immunised. (unicef.org). These CSR activities were not restricted to India, as IKEA wants to extend these childcare initiatives to around 5,000 villages in other countries of South and South-East Asia, as well as countries in Africa and Central and Eastern Europe. Although, these CSR initiatives are providing benefits to many people, it had some shortfalls, when viewed from political and economic perspectives. Political perspective in the sense, there is view that IKEA is giving so many funds to UNICEF mainly as a public relations or marketing exercise, not with any care for the children. According to the critics, IKEA is giving the funds to divert from the bad image caused due to child labour issues. Thus, it is more of PR exercise than a philanthropic initiative. However, the strongest character reference given by UNICEF could nullify this negative charge. “Anybody doubting Ikea’s sincerity or dedication to the cause should bear in mind that the Swedish retailer receives its strongest character reference from Unicef, which insists that it does not work with companies whose commitment to development is fleeting or motivated by self-interest.” (Burgess 2009). Joanne Dunn, UNICEF’s child protection officer further added: “If a company’s policy is to chuck some money at child labour and ask us to make it go away, then we don’t work with them.” (Burgess 2009). Thus, with political and social backing in the form of UNICEF’s support, IKEA’s initiatives can be placed out of the preview of the critics. The other CSR related decision of IKEA, which is also eliciting negative remarks is its decision of not to associate with Rugmark Foundation. Rugmark Foundation was established to supervise whether the products manufactured in Third World countries or outsourcing countries are manufactured without the use of child labour. This foundation supported the manufacturing of ethically friendly carpets from 1995 and even invited IKEA to sign up with them to assist in tackling the problem of child labour in India. However, IKEA refuses to join this constructive initiative leading to criticism of its CSR initiatives. “IKEA refuses to sign up to the industry standard international Rugmark which guarantees - free trade products-style - that child labour has not been used in the manufacture of its products.” (Wadsworth 2007). IKEA is of the opinion that Rugmark will not be able to check and find all child labour violations, and thus cannot be a foolproof standard. However, when viewed from the economic perspective, one view is, adhering to Rugmark could reduce costs for IKEA. Letting Rugmark operate the control on child labour, IKEA can avoid investing money in its own watchdog program. “Many corporations are under pressure to cut costs and increase profitability as their investors demand higher returns.” (Scherer and Palazzo 2010). Also, Rugmark has a more experience and wider influence regarding child labour issues and so will be able to be more effective than IKEA in restricting child labour. From the above analysis, it is clear that IKEA got implicated in those kinds of scandals, which could have been blown out of proposition. If that has happened, it would has lost many clients, resulting in losses because customers will not want to buy from company that seems to encourages child labour. However, with quite a good of number of corrective steps and optimal CSR activities, IKEA is able to carry out many welfare measures, thus earning good ethical image. References Barthelemy, J 2006, The Experimental Roots of Revolutionary Vision, viewed on November 29, 2010 http://sloanreview.mit.edu/the-magazine/articles/2006/fall/48116/the- experimental-roots-of-revolutionary-vision/ Burgess, K 2009, Caring for children in-store means doing so in the Third World, as well, viewed on November 29, 2010 http://business.timesonline.co.uk/tol/business/industry_sectors/retailing/article6870158.ece ikea.com, Preventing child labor: What happens if a child is found? viewed on November 29, 2010 http://www.ikea.com/ms/en_US/about_ikea/our_responsibility/working_conditions/preventing_child_labour.html in.reuters.com 2009, Ikea gives UNICEF $48 mln to fight India child labor, viewed on November 29, 2010 http://in.reuters.com/article/idINIndia-38166220090223 Los Angeles Times 1997, IKEA Investigates Child Labor Allegations, viewed on November 29, 2010 http://articles.latimes.com/1997/oct/24/business/fi-46077 Scherer, AG and Palazzo, G 2010, The new Political Role of Business in a Globalized World: A Review of a New Perspective on CSR and its implications for the Firm, Governance, and Democracy, Journal of Management Studies, Blackwell Publishing Ltd. unhcr.org 1996, The Small Hands of Slavery: Bonded Child Labor in India, viewed on November 29, 2010 http://www.unhcr.org/refworld/topic,459d17822,45b61f602,3ae6a8590,0.html unicef.org, IKEA social initiative adds $48 million to UNICEFs child health programme, viewed on November 29, 2010 http://www.unicef.org/media/media_48176.html Wadsworth, M 2007, IKEA exposed over child Labour and green issues, viewed on November 29, 2010 http://www.the-latest.com/ikea-slammed-over-child-labour-and-green-issues West, N 2009, Ikea soft toy sales help fight child poverty in poorest countries, viewed on November 29, 2010 http://www.telegraph.co.uk/finance/newsbysector/retailandconsumer/6503000/Ike a-soft-toy-sales-help-fight-child-poverty-in-poorest-countries.html Read More