IKEA

IKEAs Global Sourcing Challenge : Indian Rugs and Child Labour (A)

Presented by : Ernima Sukmasari Email : ernimasukmasari@gmail.com Blog : nimprot2012.wordpress.com

Business Formats History

The IKEA story begins with the founder Ingvar Kamprad Elmtaryd Agunnaryd and a dream to provide people with necessary goods. He began selling various items via mail order as IKEA in 1943.

In 1948 IKEA started to sell furniture and the company as we know it today started to take shape. In 1951 IKEA published their first catalogue to draw a picture for customers as to how the products would look in their homes. This was followed by IKEA beginning to design their own furniture in 1995 and opening the first store in 1958. The store was in Stockholm but not in the traditional down town area but instead in the suburbs where ample customer parking and more floor space allowed IKEA to display their products in a new style.

By 1956 IKEA had started using the flat pack technique, selling furniture in flat boxes with assembly required by the customer, and began sourcing furniture outside of Sweden.

External Condition
Post war Cartel industry policy in Swedish - high price

Vision Creating a better life for the many people

Cost Advantage
Knock down
Saving transport Minimize storage cost

Lower price

Sales Performance 1953 SEK 3 million 1953 - 1955 SEK 6 million

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Rivalry and looking abroad

Cartels in Sweden pressured manufactures not to sell to IKEA.

IKEA unable to meet demand by local supply

1961, Look abroad Polland - for new sources. IKEA brought its know how, taught its process, provide machinery to the new suppliers

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International Expansion
Furniture dealer IKEAs ambassador in all units as role models.

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Porters Diamond

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By the mid-1990s, IKEA was the world's largest specialized furniture retailer. Sales for the IKEA Group for the financial year ending August 1994 to taled SEK 35 billion (about $4.5 billion). In the previous year, more than 116 million people had visited one of the 98 IKEA stores in 17 countries, most of them drawn there by the companys product catalog, which was printed yearly in 72 million copies in 34 languages. The privately held company did not report profit levels, but one estimate put its net margin at 8.4% in 1994, yielding a net profit of SEK 2.9 billion (about $375 million). After decades of seeking new sources, in the mid-1990s IKEA worked with almost 2,300 suppliers in 70 countries, sourcing a range of around 11,200 products. Its relationship with its suppliers was dominated by commercial issues, and its 24 trading service offices in 19 countries primarily monitored production, tested new product ideas, negotiated prices, and checked quality.

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Source Contracts
Our objective is to develop long term business partners, said a senior purchasing manager --page 745 We commit to doing all we can to keep them competitive as long as they remain equally committed to us. Loans to its suppliers at reasonable rate

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Porters Value Chain

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Unusual way to get lower cost

We do not buy products from our supplier, but we buy unused production capacity.

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Store Growth
1954 Number of stores 0 1964 2 1974 9 1984 52 1994 114

Franchise strategy

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1986, Kamprad stepped down, Anders Moberg (Kamprads personal assistant)- took over as President and CEO of IKEA

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Environmental problem issue

1980s, some IKEA products emitted more formaldehyde than was allowed by legislation. Watery eyes, headaches, a burning sensation in the throat and difficulty breathing The case was widely publicized -- IKEAs sale dropped 20% in Denmark Suppliers bought from sub suppliers, who in turn bought the binding materials from glue manufacturers.

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Environmental issues
German, deadly poisoned bookshelves publicized.

IKEA stopped the production and sales of Billy bookcase worlwide and corrected the problem

IKEAs lost of sale $ 6 to $ 7 million

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Issue encountered
IKEA established a forestry policy based on Green peace and WWF, Forest Stewardship Council Not accept any timber, veneer, plywood or layer glued wood from intact natural forests or from forests with a high conservation value. IKEA appointed forest manager to carry out random check of wood suppliers around the world. Free recycled paper in its catalogs Projects on global censervation with WWF Funded a global forest watch program

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Social Issues
Swedish television documentary showed children in Pakistan working at weaving looms, include IKEAs carpet and rugs. IKEA sent a legal team to Geneva - ILO convention 138, adopted by the ILO in 1973 and ratified by 120 countries for the abolition of labor by children under 15 or the age of sompulsory schooling in that country. India, Pakistan, Nepal were not signatories of convention IKEA appointed third party agent to monitor child labor practices - Scandinavian company IKEA educated themselves in India, Pakistan meet unions, politicians,activists, NGO, UN organization and carpet export organization Used Rugmark label --->free of children labor

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Key success factor IKEA

Clear vision Business core value committed Economic scale

Core competence : designing and marketing - innovation product

Compliance with government policies Strategic alliances with related supporting industries ( WWF, ILO, etc) Balance score card - manage econoomic and non economic factors

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