ikeas global sourcing challen

Sravya Doppa
Vivek S
Karthik C
Mayank Man
Naveen I
Rohan Srivasta
Vignesh K

How should Marianne Barner respond to the invitation for IKEA to have a
representative appear on the upcoming broadcast of the German video program?
Marianne Barners response to the allegation raised by the German broadcaster is
dependent on the pros and cons for taking either decision. We look at both actions objectively
and then decide on the course of action based on the route that each of them is going to take in
future.
Decision 1: Reject the Proposal for debate; dont go (Assuming the video is authentic)
An accusation without substantial proof of authenticity is not something that IKEA can
afford to address in every country (they operate in 17 countries)
The pros for this decision are
1. IKEA can avoid the uncomfortable blame and by appointing a 3rd party show they are
keen to put an end to the matter
2. This might even create precedence where every broadcaster in different countries tries to
gain instant fame by engaging IKEA in one-on-one discussions.
The cons for this decision are
1. IKEA is projected as a weak company which only cares about its profits and not human
lives. They will lose control of the whole situation and other child right protection bodies
may corner IKEA with more accusations.
2. Consumer sentiment about the brand might turn negative and IKEA might lose
considerable part of market share in Germany, its largest market in the world
The costs for not attending the discussion outweigh the benefits that can be derived and
hence, we need to look at the other option.
Decision 2: Accept the Proposal for debate; Go
Being one of the global firms committed to providing the people with the better life,
IKEA assumes responsibility to confront the situation head-on.
The pros for this decision are
1. They can clear their stand on the issue along with the steps they had taken last year with
Rugmark and Black-and-White contracts.
2. Educate the consumers of the other side of the story about unbonded child labor in India
and how they are working with the government to take eradicate this, thereby sending
strong signals to other broadcasters hoping to make quick money out of the situation.
3. IKEA will be seen as a company which is responsible for its products and not only
concerned about the profits.
The cons for the decision are

1. IKEA might be involved in very uncertain discussion for which it might not be prepared.
Issues pertaining to other industries in other countries might crop up during the
interaction.
2. IKEAs involvement might act like giving fuel to fire and sensationalizing the entire
episode.
Here too, the uncertainty surrounding the discussion and the video means that IKEA should
not take such a step to confront the issue. The solution to the problem lies in the middle path,
where IKEA can have an advantage over the broadcaster without confronting the issue on live
TV.
IKEAs solution IKEA should take the middle ground by first not going to the discussion
and then doing a press release immediately.
1. The press release should mention the proactive steps IKEA has taken to address the issue,
including sending letters to all its suppliers around the world educating them about the
situation and IKEAs stand.
2. IKEA should take responsibility, saying that it has come to our notice of such activities
by our suppliers and execute a strongly worded statement against the suppliers
3. Press should be informed of the 1994 situation and how IKEA took proactive steps with
Rugmark and working with Indo-German exports council.
4. This would ensure that IKEA doesnt follow on the merci of the broadcaster and also
sends positive signal to all its stakeholders.

What actions should she take regarding IKEAs supply contract with Rangan
Exports?
Before evaluating the options which Barner has, as far as Rangan exports is concerned,
lets try and understand the Business Model of IKEA and their source of competitive advantage.

As evident in the Business Model, Knockdown furniture and Catalogue Marketing are the
choices which IKEA makes, which results in Low Cost and Higher footfalls respectively. The
low cost is also achieved through Global Suppliers, which is another choice IKEA made, since
the competitors colluded with each other in their home country. Both Low Cost and Higher
footfalls has resulted in increased profits for IKEA and the same has been pumped for further
expansion in terms of product and store. It is also evident from the model that the profits has also
driven a lower price, which in turn increased the footfalls, and at the same time is also invested
to upskill and enhance relationships with global suppliers and into catalogue marketing.
This Asset Light business model is dependent on the Global suppliers for low cost, and
the entire model is disrupted if IKEA decides to sever ties with its suppliers. Drastic action, if
taken, against Rangan exports might have a cascading effect distressing IKEAs relationship with
other suppliers and might prove detrimental to the organization.
At a micro level, IKEA would need to investigate if the child labor used by the
organization is bonded or unbonded. If the child labor is found to be bonded, then such a practice
is illegal in the sub-continent and IKEA will have to terminate the contract with the supplier.
However, if the labor is unbonded, then IKEA will have to reconsider its option. The law permits
child labor in specific businesses, including craft industries. The economic and legal
environment in the country is dismal and so is the social status of the children and their families
at work. The children are employed to earn the extra income, not only to feed themselves, but for
the entire family. In such a scenario, it becomes a necessity for IKEA to work closely with the
supplier and improve the working conditions. One such option could sign up with the Rugmark
Foundation, and leverage their resources to serve the children currently employed in Rangan
Exports. This would not only benefit the children working with suppliers, but would also be the
most profitable option for IKEA.
On a macro level, it is safe to state that IKEA has reached the final stage of Global
Sourcing (Managing BCC dynamics) and hence, the firm needs to balance and diversify the risk
of over-exposure of sourcing from a single country. While setting up international purchasing
offices in their sourcing locations to monitor supply-base development would incur costs, it
would be beneficial to the firm to safeguard itself from potential sourcing catastrophes, in the
longer run.

What long-term strategy would you suggest she take regarding IKEAs continued
operations in India? Should the company stay or exit the market? What would be
the impact of either decision they take?
IKEA is at a cross road and has to decide if it has to continue persevering in India. There
are only two choices Exit or Stay and each of these choices will have major implications on
IKEAs long term strategy with its key source of competitive advantage its suppliers.
Exit:
In the face of child labor issues it faces in India, if IKEA pulls out, it also has to pull out
from Pakistan and Nepal which have not ratified abolition of child labor. But these are the only

destinations which supply IKEA with Indian rugs. So, one of the obvious fallouts from this
strategy is that IKEA will have to drop Indian rugs from its portfolio. Since Indian rugs
contribute only marginal revenues to IKEA, it will not have a huge economic impact on IKEA.
If we assume that Indian Rugs are not the only supply that goes out of India, Pakistan and
Nepal to IKEA, then the economic implications of a pull out is much bigger. IKEA stands to lose
out on supplies of other products in its catalogue from these low cost supplying countries which
will considerably contribute to complication of its sourcing problems.
It will be difficult to find an alternate source of supplier for IKEA. IKEAs business
model is such that it thrives on unutilized capacity of its suppliers which prevents it from
aggregating at a large scale. So, the business model only works if they source small volumes
from a large set of suppliers. Pulling out from few countries will make it difficult for them to find
such a large number of suppliers, even at other low cost destinations. The problem further gets
compounded when they have to switch suppliers in a short period of time. It will significantly
impact the sales in the shorter run. Even if they manage to find new suppliers, they will incur
huge switching costs in terms of inspection, training, transfer of know how etc. It will be a
problem again when they face regulatory issues at new sourcing destinations and they cannot
afford to exit, every time they face such issues.
Stay:
IKEA can choose to stay invested in India. It will result in loss of goodwill and will be a
huge dent in its reputation if it decides to turn a blind eye towards the child labor issue. The
choice of staying has to be supported with key decisions that will help IKEA maintain its
reputation. Some of the decision include appointing International Sourcing Officer at key
sourcing locations, uplifting unbonded child labors and providing education, etc.
IKEA will have to invest in supplier development and collaboration in India significantly.
India is an emerging nation and there is a chance for IKEA to set up shop in India at a later date.
So, maintaining supplier relationship in India is critical to tap this market potential in the future.
Sub suppliers of IKEAs suppliers can be made to team up with the NGO and ensure that the
unbonded child laborers are well paid and educated. It also aligns with the companys mission of
create better everyday life for the many people.
IKEA will have to appoint International Sourcing Officers and monitor the suppliers here
instead of going for the third party monitoring system. This would reiterate IKEAs commitment
towards its suppliers that it intends to stay for the long haul and enhance its reputation and
credibility in the global stage. Even though it incurs significant costs, the company has
reasonable evidence to believe that the investment will pay off in the longer run.
In 1994, a Swedish television documentary showed child labor in Pakistan after which
IKEA added the Black and White clause in its contracts. But, they failed in executing it, which
is why they are in a soup again. So, it will have to incur significant costs in executing its supplier
terms by random inspection visits and audits. It have also faced environmental regulatory issues
in the recent past which, it managed to fix after incurring losses to the tune of $ 6-7 million. Its

suppliers are its key assets, providing them with low cost supplies, which is its competitive
advantage. So, to prevent from getting into regulatory trouble again, they have to be proactive in
safeguarding their interests, not just in India, but across their sourcing destinations. This will go a
long way in enhancing IKEAs reputation and help build credibility with its suppliers.
Given the arguments above, it is better for IKEA to not exit India and stay by taking
some key decisions that it will help enhancing its competitive advantage in the longer run.