Ikea

Operation management is the activity of managing the resources, such as capital, facilities, raw materials, technology, and so on, which create and deliver services and products. ( Slack et al, 2011 ) No organization could survive in long term if it cannot manage operations management effectively. The importance of operations management is that it affects an organization’s costs. There are three activities of operations management, which is directing the overall strategy of the operation, designing the operation’s services, products, and processes, delivering to customer, and developing process performance.

IKEA’s History and its was founded in 1943 in Sweden, and it is a successful international retailer with 276 stores in 36 countries. IKEA offers a large variety of well designed furnishing products with low costs, which has contributed to its success. IKEA also contributes a lot to the environment. It cares about the safety of raw materials and production. For example, IKEA stopping selling plastic bags, and it encourage customers to bring their own bags. To support “less plastic bags” action, IKEA reduced 30 cents each of its own recycle bags. Supply Network Design and Supply Chain Management

Most IKEA stores locate outside city centers in order to reduce transportation costs and capital costs. For example, there are two IKEA stores in Singapore, one is in Queenstown, the other one is in Tampines. These two places is not in the city center. Besides, Singapore is a small country that allows IKEA to save more delivery costs comparing with those big countries, such as America. In order to keep the price low, IKEA transports products by truck, rail, and ship. Flat packs and stackable products allows IKEA to handle more of them during delivering. Process Design and Layout

Firstly, IKEA’s biggest symbol is its large blue building with yellow shop sign. Secondly, its showroom design is similar to ‘one way’ layout, which makes customers wanna visit the whole store. Thirdly, IKEA provides convenience to customer from free parking, large and clear notice board. IKEA not only offers functional furnishing products, but also restaurant, grocery stores which has majority of Swedish food, and children play area. ( IKEA ‘s Official Website ) Product Design IKEA designs stylish products that can be flat-packed efficiently. ( Slack et al, 2011 ) And it makes products with low costs that are affordable to customers.

Customers have to collect the flat-packed goods from the store and assemble those products by themselves. (IKEA also provides delivery service ) In this way, IKEA could reduce labor costs ,storage costs, and shipping costs in order to support its high efficiency. In fact, both customer and IKEA benefit from this concept. IKEA’s has built good relationship with its suppliers. It has suppliers from more than 50 countries and Its purchasing teams are located all over the world and work with them. IKEA insists to work environmental friendly. ( ICMR, 2006 ) IKEA only accept woods from qualified forest which is verified as responsibly managed.

According to IKEA’s introduction, it provides collection points for customers to return waste. During manufacturing process, it tries to minimize wastes. IKEA would use the waste to produce other items if possible. In a word, IKEA makes a great effort to use and produce remanufactured and renewable goods. IKEA does a great number of tests of productions every year, and it also has third-party auditors to do the tests also. Since IKEA purchase raw materials in large volume, it enables IKEA to reduce costs. With all these effort, IKEA is able to produce sustainable goods with high quality and low costs.

In a way, IKEA does not only save direct costs, but also gain intangible costs, such as good reputation and trustworthiness. Quality Management From operation’s perspective, quality is to meet customers’ expectation. In the customers’ perspective, quality is what they think the product should be. IKEA offers delivery service, assembly service, kitchen installation, sewing service, children service, interest free, gift cards, and return policy. ( IKEA Official Website ) People love IKEA’s products, but dislike the shopping experience because there is always crowded and a long queue in the store.

IKEA provides catalogue and brochures to customers, and it creates mobile Apps so that customers could download and read it. Customers can see new products and discount products with price. IKEA creates planning tools for customers, which allow customers plan before they shopping. Customer can do their planning online, and they can also check the stock availability. There is a code with every product, customer can check its availability via its official website. It is not easy to create such visibility to customers. It did help people to understand their need, and avoid crowd.

Most important, it saved customers’ time and cost since they do not need to go to the store in person first. Nowadays, people rely on internet more than ever, IKEA should try to make itself and the system more approachable and complete. Effective operations management can bring an organization competitive advantage and profit. IKEA has presented a great example. Only each process can interact effectively, can the organization run smoothly. Reference: 1. Slack, N, Brandon-Jones, A, Johnston, R, (2011): Essentials of Operations Management, Pearson Education Limited. 2. IKEA Official Website. Online ]. Available http://www. ikea. com/sg/en/ 3. 2006. IBS Center for Management Research: IKEA’s Environmental Practices: Making Good Business Sense. [ Online ]. Available http://www. icmrindia. org/casestudies/catalogue/Business%20Ethics/IKEA%20Environmental%20Practices%20-%20Making%20Good%20Business%20Sense%20-%20Business%20Ethics. htm [pic]Confirmation Certificate Congratulations! You have successfully completed the Library Plagiarism Quiz. Student Name: Chen Zixin Student Number: 11300175 Date: 21 Mar 2013 THIS IS TO CERTIFY THAT (signature)……………………… HAS COMPLETED THE PLAGIARISM QUIZ

Remember that the confirmation certificate is a statement by you that you understand plagiarism and know how to avoid it. If you think that you do not understand plagiarism and how to avoid it after working through this tutorial, you should confer with your module coordinator, no matter what score you have obtained on the test. Please print out this page and attach a copy of the certificate to the final page in all assignments you submit on each module as part of your programme (It is your responsibility to print the certificate, complete the information, sign it, and keep a copy of it for your records) ———————– 3 3

Jones Case Study Scenario 1: Since it seems like the Jones’ are set on having a family and that family is important to them this scenario will focus more on what could be best for them to do to make sure their family life is stable. In this scenario it seems to me that Jim needs to find a job closer to home that maybe works him a little less. He has stated that he would like to spend more time with his son and that could be achieved by working closer to home. The commute itself would save him about 7 hours weekly that he could spend with his child.

Jim has also mentioned that his job isn’t particularly exciting so this might be his chance to go after something he likes more while giving him more time at home. Since his wife makes more money it might not be bad if he took a little pay cut as well in order to accomplish his goals. As far as Lisa goes if having a family is truly a main priority for them she may not want to take the job in Atlanta. She already has a job that makes quite a bit and a move to Atlanta would only mean more work and probably would mean that they wouldn’t be able to have another child for a couple of years.

Also moving to a bigger city will also mean that they will have to find new child care which may cost more, another home which will cost more and Jim will have to definitely find another job which could put a strain on the marriage if he is unsuccessful or if he is making considerably less that she is. I see the best outcome with this scenario if Jim can find a job closer to home in order to spend more time with his son and also find a change of pace with his job. Lisa would need to stick with her current position in order to make having a bigger family more attainable for the moment.

Scenario 2: If Jim and Lisa put a priority on being financially secure and more so value Lisa’s career then these are some options they might consider. First off Lisa would definitely need to take the promotion and they would move to Atlanta. This would be great because they would definitely have enough money for their home as well as childcare. They would also have more financial security and would be better able to save for things like their kids education and retirement since Lisa is now making more money than both of them were combined.

If Jim also found another job they would be very secure financially and potentially with the move it might open up more job options for Jim and he may find something that he enjoys more. Moving to a bigger city also opens up the options for better childcare and better education for their children in the future should their family grow. However as mentioned in the last scenario this may put a strain on the marriage if Jim is unsuccessful in finding another job. Also this new job for Lisa will probably mean more hours at work and less time with the family.

It will probably also mean not having another child for quite sometime and maybe never depending on what her new roles are at her job. The family might definitely have to be put on the backburner for a little while as the transition occurs. Scenario 3: This scenario would be kind of an extreme mix of the two previous scenarios. Since Jim has stated that he wants to spend more time with their son he could possibly become a stay at home dad. Lisa could take the job in Atlanta, which would definitely make more than enough money to support a family of three especially since they could cut childcare costs.

Some cons to this situation however would be that they would have to overcome the social stigma of having the wife work and the dad stay at home. That would be the biggest challenge in my opinion. Especially if Jim started to feel like his worth had been diminished. This could definitely put a strain on the marriage. Also Lisa would have to deal with turning over her motherly duties somewhat and spend less time with the family. She would also probably not be able to have kids anytime soon as well but if they decided to at least this way she wouldn’t have to take as much time off since Jim would be home tending to the new child.

Jim could also start up some type of business he could run at home. This would allow him to feel like he is contributing to the family income but also spend time with the kids. Reflection: This assignment is a good preparation for big decisions that we all make in our lives. One thing that it shows is that there are many possible solutions to any problem and that we must look at the risks and rewards with each and decides which is best for our own unique family situation. These decisions would be much easier for a family with no children vs. family that already has 3 or 4 kids. If my wife and I were presented with the same situation I would think that we would follow scenario 1 the closest since family is most important to us. Neither of us are really looking to make a lot of money and for myself I wouldn’t mind being a stay at home dad. My wife may object but I love kids and spending time with them and if my wife was offered a job that paid a lot of money, enough to support a family, and it was something that she wanted to do and was passionate about I would like to think that I would support her in doing that.

Every family is different though and needs to meet different needs so there is no wrong or right way to go about this. I personally believe that family should always come first but that doesn’t necessarily mean that you have to spend a lot of time with them. I think it is important though that you are there for your spouse or your kids when they need you and that you are there to support them in the things that they do. If they feel your love and support I don’t think it matters how many hours you work or how much money you make.

KEA’s Global Sourcing Challenge:

Indian Rugs and Child Labor (A) In May 1995, Marianne Barner faced a tough decision. After just two years with IKEA, the world’s largest furniture retailer, and less than a year into her job as business area manager for carpets, she was faced with the decision of cutting off one of the company’s major suppliers of Indian rugs. While such a move would disrupt supply and affect sales, she found the reasons to do so quite compelling.A German TV station had just broadcast an investigative report naming the supplier as one that used child labor in the production of rugs made for IKEA. What frustrated Barner was that, like all other IKEA suppliers, this large, well-regarded company had recently signed an addendum to its supply contract explicitly forbidding the use of child labor on pain of termination. Even more difficult than this short-term decision was the long-term action Barner knew IKEA must take on this issue.

On one hand, she was being urged to sign up to an industry-wide response to growing concerns about the use of child labor in the Indian carpet industry.A recently formed partnership of manufacturers, importers, retailers, and Indian nongovernmental organizations (NGOs) was proposing to issue and monitor the use of “Rugmark,” a label to be put on carpets certifying that they were made without child labor. Simultaneously, Barner had been conversing with people at the Swedish Save the Children organization who were urging IKEA to ensure that its response to the situation was “in the best interest of the child”—whatever that might imply. Finally, there were some who wondered if IKEA should not just leave this hornet’s nest.Indian rugs accounted for a tiny part of IKEA’s turnover, and to these observers, the time, cost, and reputation risk posed by continuing this product line seemed not worth the profit potential. The Birth and Maturing of a Global Company1 To understand IKEA’s operations, one had to understand the philosophy and beliefs of its 70year-old founder, Ingvar Kamprad. Despite stepping down as CEO in 1986, almost a decade later, Kamprad retained the title of honorary chairman and was still very involved in the company’s activities.

Yet perhaps even more powerful than his ongoing presence were his strongly held values and beliefs, which long ago had been deeply embedded in IKEA’s culture. Kamprad was 17 years old when he started the mail-order company he called IKEA, a name that combined his initials with those of his family farm. HBS cases are developed solely as the basis for class discussion. Certain details have been disguised. Cases are not intended to serve as endorsements, sources of primary data, or illustrations of effective or ineffective management. Copyright © 2006 President and Fellows of Harvard College.

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IKEA’s Global Sourcing Challenge:

Indian Rugs and Child Labor (A) forests of southern Sweden. Working out of the family kitchen, he sold goods such as fountain pens, cigarette lighters, and binders he purchased from low-priced sources and then advertised in a newsletter to local shopkeepers. When Kamprad matched his competitors by adding furniture to his newsletter in 1948, the immediate success of the new line led him to give up the small items. In 1951, to reduce product returns, he opened a display store in nearby Almhult village to allow customers to inspect products before buying. It was an immediate success, with customers traveling seven hours from the capital Stockholm by train to visit. Based on the store’s success, IKEA stopped accepting mail orders. Later Kamprad reflected, “The basis of the modern IKEA concept was created [at this time] and in principle it still applies.First and foremost, we use a catalog to tempt people to visit an exhibition, which today is our store. Then, catalog in hand, customers can see simple interiors for themselves, touch the furniture they want to buy and then write out an order. ”

2. As Kamprad developed and refined his furniture retailing business model he became increasingly frustrated with the way a tightly knit cartel of furniture manufacturers controlled the Swedish industry to keep prices high. He began to view the situation not just as a business opportunity but also as an unacceptable social problem that he wanted to correct.Foreshadowing a vision for IKEA that would later be articulated as “creating a better life for the many people,” he wrote: “A disproportionately large part of all resources is used to satisfy a small part of the population. IKEA’s aim is to change this situation. We shall offer a wide range of home furnishing items of good design and function at prices so low that the majority of people can afford to buy them. .We have great ambitions. ”

3. The small newsletter soon expanded into a full catalog. The 1953 issue introduced what would become another key IKEA feature: self-assembled furniture.Instead of buying complete pieces of furniture, customers bought them in flat packages and put them together themselves at home. Soon, the “knockdown” concept was fully systemized, saving transport and storage costs. In typical fashion, Kamprad turned the savings into still lower prices for his customers, gaining an even larger following among young postwar householders looking for well-designed but inexpensive furniture. Between 1953 and 1955, the company’s sales doubled from SEK 3 million to SEK 6 million.

4. Managing Suppliers: Developing Sourcing Principles As its sales took off in the late 1950s, IKEA’s radically new concepts began to encounter stiff opposition from Sweden’s large furniture retailers. So threatened were they that when IKEA began exhibiting at trade fairs, they colluded to stop the company from taking orders at the fairs and eventually even from showing its prices. The cartel also pressured manufacturers not to sell to IKEA, and the few that continued to do so often made their deliveries at night in unmarked vans.Unable to meet demand with such constrained local supply, Kamprad was forced to look abroad for new sources. In 1961, he contracted with several furniture factories in Poland, a country still in the Communist eastern bloc. To assure quality output and reliable delivery, IKEA brought its knowhow, taught its processes, and even provided machinery to the new suppliers, revitalizing Poland’s furniture industry as it did so. Poland soon became IKEA’s largest source and, to Kamprad’s delight, at much lower costs—once again allowing him to reduce his prices.

Following its success in Poland, IKEA adopted a general procurement principle that it should not own its means of production but should seek to develop close ties by supporting its suppliers in a 2 IKEA’s Global Sourcing Challenge: Indian Rugs and Child Labor (A) 906-414 long-term relationship. a Beyond supply contracts and technology transfer, the relationship led IKEA to make loans to its suppliers at reasonable rates, repayable through future shipments. “Our objective is to develop long-term business partners,” explained a senior purchasing manager. We commit to doing all we can to keep them competitive—as long as they remain equally committed to us. We are in this for the long run. ” Although the relationship between IKEA and its suppliers was often described as one of mutual dependency, suppliers also knew that they had to remain competitive to keep their contract. From the outset they understood that if a more cost-effective alternative appeared, IKEA would try to help them respond, but if they could not do so, it would move production.

In its constant quest to lower prices, the company developed an unusual way of identifying new sources.As a veteran IKEA manager explained: “We do not buy products from our suppliers. We buy unused production capacity. ” It was a philosophy that often led its purchasing managers to seek out seasonal manufacturers with spare off-season capacity. There were many classic examples of how IKEA matched products to supplier capabilities: they had sail makers make seat cushions, window factories produce table frames, and ski manufacturers build chairs in their off-season. The manager added, “We’ve always worried more about finding the right management at our suppliers than finding high-tech facilities.We will always help good management to develop their capacity.

” Growing Retail: Expanding Abroad Building on the success of his first store, Kamprad self-financed a store in Stockholm in 1965. Recognizing a growing use of automobiles in Sweden, he bucked the practice of having a downtown showroom and opted for a suburban location with ample parking space. When customers drove home with their furniture in flat packed boxes, they assumed two of the costliest parts of traditional furniture retailing—home delivery and assembly. In 1963, even before the Stockholm store had opened, IKEA had expanded into Oslo, Norway.A decade later, Switzerland became its first non-Scandinavian market, and in 1974 IKEA entered Germany, which soon became its largest market. (See Exhibit 1 for IKEA’s worldwide expansion. ) At each new store the same simple Scandinavian-design products were backed up with a catalog and offbeat advertising, presenting the company as “those impossible Swedes with strange ideas.

” And reflecting the company’s conservative values, each new entry was financed by previous successes. b During this expansion, the IKEA concept evolved and became increasingly formalized. (Exhibit 2 summarizes important events in IKEA’s corporate history. It still built large, suburban stores with knockdown furniture in flat packages the customers brought home to assemble themselves. But as the concept was refined, the company required that each store follow a predetermined design, set up to maximize customers’ exposure to the product range. The concept mandated, for instance, that the living room interiors should follow immediately after the entrance. IKEA also serviced customers with features such as a playroom for children, a low-priced restaurant, and a “Sweden Shop” for groceries that had made IKEA Sweden’s leading food exporter.

At the same time, the range gradually This policy was modified after a number of East European suppliers broke their contracts with IKEA after the fall of the Berlin Wall opened new markets for them. IKEA’s subsequent supply chain problems and loss of substantial investments led management to develop an internal production company, Swedwood, to ensure delivery stability. However, it was decided that only a limited amount of IKEA’s purchases (perhaps 10%) should be sourced from Swedwood. b By 2005, company lore had it that IKEA had only taken one bank loan in its corporate history—which it had paid back as soon as the cash flow allowed. 906-414 IKEA’s Global Sourcing Challenge: Indian Rugs and Child Labor (A) expanded beyond furniture to include a full line of home furnishing products such as textiles, kitchen utensils, flooring, rugs and carpets, lamps, and plants. The Emerging Culture and Values5 As Kamprad’s evolving business philosophy was formalized into the IKEA vision statement, “To create a better everyday life for the many people,” it became the foundation of the company’s strategy of selling affordable, good-quality furniture to mass-market consumers around the world.The cultural norms and values that developed to support the strategy’s implementation were also, in many ways, an extension of Kamprad’s personal beliefs and style.

“The true IKEA spirit,” he remarked, “is founded on our enthusiasm, our constant will to renew, on our cost-consciousness, on our willingness to assume responsibility and to help, on our humbleness before the task, and on the simplicity of our behavior. ” As well as a summary of his aspiration for the company’s behavioral norms, it was also a good statement of Kamprad’s own personal management style.Over the years a very distinct organizational culture and management style emerged in IKEA reflecting these values. For example, the company operated very informally as evidenced by the open-plan office landscape, where even the CEO did not have a separate office, and the familiar and personal way all employees addressed one another. But that informality often masked an intensity that derived from the organization’s high self-imposed standards. As one senior executive explained, “Because there is no security available behind status or closed doors, this environment actually puts pressure on people to perform. The IKEA management process also stressed simplicity and attention to detail.

“Complicated rules paralyze! ” said Kamprad. The company organized “anti-bureaucrat week” every year, requiring all managers to spend time working in a store to reestablish contact with the front line and the consumer. The workpace was such that executives joked that IKEA believed in “management by running around. ” Cost consciousness was another strong part of the management culture. “Waste of resources,” said Kamprad, “is a mortal sin at IKEA. Expensive solutions are often signs of mediocrity, and an idea without a price tag is never acceptable. Although cost consciousness extended into all aspects of the operation, travel and entertainment expenses were particularly sensitive.

“We do not set any price on time,” remarked an executive, recalling that he had once phoned Kamprad to get approval to fly first class. He explained that economy class was full and that he had an urgent appointment to keep. “There is no first class in IKEA,” Kamprad had replied. “Perhaps you should go by car. ” The executive completed the 350-mile trip by taxi. The search for creative solutions was also highly prized with IKEA. Kamprad had written, “Only while sleeping one makes no mistakes.

The fear of making mistakes is the root of bureaucracy and the enemy of all evolution. ” Though planning for the future was encouraged, overanalysis was not. “Exaggerated planning can be fatal,” Kamprad advised his executives. “Let simplicity and common sense characterize your planning. ” In 1976, Kamprad felt the need to commit to paper the values that had developed in IKEA during the previous decades. His thesis, Testament of a Furniture Dealer, became an important means for spreading the IKEA philosophy, particularly during its period of rapid international expansion. (Extracts of the Testament are given in Exhibit 3.

Specially trained “IKEA ambassadors” were assigned to key positions in all units to spread the company’s philosophy and values by educating their subordinates and by acting as role models. 4 IKEA’s Global Sourcing Challenge: Indian Rugs and Child Labor (A) 906-414 In 1986, when Kamprad stepped down, Anders Moberg, a company veteran who had once been Kamprad’s personal assistant, took over as president and CEO. But Kamprad remained intimately involved as chairman, and his influence extended well beyond the ongoing daily operations: he was the self-appointed guardian of IKEA’s deeply embedded culture and values.Waking up to Environmental and Social Issues 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 totaled 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 company’s 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. billion (about $375 million). 6 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. (See Exhibit 4 for selected IKEA figures in 1994. ) That relationship began to change during the 1980s, however, when environmental problems emerged with some of its products.

And it was even more severely challenged in the mid-1990s when accusations of IKEA suppliers using child labor surfaced. The Environmental Wake-Up: Formaldehyde In the early 1980s, Danish authorities passed regulations to define limits for formaldehyde emissions permissible in building products. The chemical compound was used as binding glue in materials such as plywood and particleboard and often seeped out as gas. At concentrations above 0. 1 mg/kg in air, it could cause watery eyes, headaches, a burning sensation in the throat, and difficulty breathing.With IKEA’s profile as a leading local furniture retailer using particleboard in many of its products, it became a prime target for regulators wanting to publicize the new standards. So when tests showed that some IKEA products emitted more formaldehyde than was allowed by legislation, the case was widely publicized and the company was fined.

More significantly—and the real lesson for IKEA—was that due to the publicity, its sales dropped 20% in Denmark. In response to this situation, the company quickly established stringent requirements regarding formaldehyde emissions but soon found that suppliers were failing to meet its standards.The problem was that most of its suppliers bought from subsuppliers, who in turn bought the binding materials from glue manufacturers. Eventually, IKEA decided it would have to work directly with the glue-producing chemical companies and, with the collaboration of companies such as ICI and BASF, soon found ways to reduce the formaldehyde off-gassing in its products. 7 A decade later, however, the formaldehyde problem returned. In 1992, an investigative team from a large German newspaper and TV company found that IKEA’s best-selling bookcase series, Billy, had emissions higher than German legislation allowed.This time, however, the source of the problem was not the glue but the lacquer on the bookshelves.

In the wake of headlines describing “deadly poisoned bookshelves,” IKEA immediately stopped both the production and sales of Billy bookcases worldwide and corrected the problem before resuming distribution. Not counting the cost of lost sales and production or the damage to goodwill, the Billy incident was estimated to have cost IKEA $6 million to $7 million. 8 5 906-414 IKEA’s Global Sourcing Challenge: Indian Rugs and Child Labor (A)These events prompted IKEA to address broader environmental concerns more directly. Since wood was the principal material in about half of all IKEA products, forestry became a natural starting point. Following discussions with both Greenpeace and World Wide Fund for Nature (WWF, formerly World Wildlife Fund) and using standards set by the Forest Stewardship Council, IKEA established a forestry policy stating that IKEA would not accept any timber, veneer, plywood, or layer-glued wood from intact natural forests or from forests with a high conservation value.This meant that IKEA had to be willing to take on the task of tracing all wood used in IKEA products back to its source. 9 To monitor compliance, the company appointed forest managers to carry out random checks of wood suppliers and run projects on responsible forestry around the world.

In addition to forestry, IKEA identified four other areas where environmental criteria were to be applied to its business operations: adapting the product range; working with suppliers; transport and distribution; and ensuring environmentally conscious stores.For instance, in 1992, the company began using chlorine-free recycled paper in its catalogs; it redesigned the best-selling OGLA chair— originally manufactured from beech—so it could be made using waste material from yogurt cup production; and it redefined its packaging principles to eliminate any use of PVC. The company also maintained its partnership with WWF, resulting in numerous projects on global conservation, and funded a global forest watch program to map intact natural forests worldwide. In addition, it engaged in an ongoing dialogue with Greenpeace on forestry. 10 The Social Wake-Up: Child LaborIn 1994, as IKEA was still working to resolve the formaldehyde problems, a Swedish television documentary showed children in Pakistan working at weaving looms. Among the several Swedish companies mentioned in the film as importers of carpets from Pakistan, IKEA was the only highprofile name on the list. Just two months into her job as business area manager for carpets, Marianne Barner recalled the shockwaves that the TV program sent through the company: The use of child labor was not a high-profile public issue at the time.

In fact, the U. N. Convention on the Rights of the Child had only been published in December 1989.So, media attention like this TV program had an important role to play in raising awareness on a topic not well known and understood—including at IKEA.

We were caught completely unaware. It was not something we had been paying attention to. For example, I had spent a couple of months in India learning about trading but got no exposure to child labor. Our buyers met suppliers in their city offices and rarely got out to where production took place.

Our immediate response to the program was to apologize for our ignorance and acknowledge that we were not in full control of this problem. But we also committed to do something about it. As part of its response, IKEA sent a legal team to Geneva to seek input and advice from the International Labor Organization (ILO) on how to deal with the problem. They learned that Convention 138, adopted by the ILO in 1973 and ratified by 120 countries, committed ratifying countries to working for the abolition of labor by children under 15 or the age of compulsory schooling in that country. India, Pakistan, and Nepal were not signatories to the convention. 1 Following these discussions with the ILO, IKEA added a clause to all supply contracts—a “black-andwhite” clause, as Barner put it—stating simply that if the supplier employed children under legal working age, the contract would be cancelled. To take the load off field trading managers and to provide some independence to the monitoring process, the company appointed a third-party agent to monitor child labor practices at its suppliers in India and Pakistan.

Because this type of external monitoring was very unusual, IKEA had some difficulty locating a reputable and competent company to perform the task. Finally, they appointed a 6IKEA’s Global Sourcing Challenge: Indian Rugs and Child Labor (A) 906-414 well-known Scandinavian company with extensive experience in providing external monitoring of companies’ quality assurance programs and gave them the mandate not only to investigate complaints but also to undertake random audits of child labor practices at suppliers’ factories. Early Lessons: A Deeply Embedded Problem With India being the biggest purchasing source for carpets and rugs, Barner contacted Swedish Save the Children, UNICEF, and the ILO to expand her understanding and to get advice about the issue of child labor, especially in South Asia.She soon found that hard data was often elusive. While estimates of child labor in India varied from the government’s 1991 census figure of 11. 3 million children under 15 working12 to Human Rights Watch’s estimate of between 60 million and 115 million child laborers,13 it was clear that a very large number of Indian children as young as five years old worked in agriculture, mining, quarrying, and manufacturing, as well as acting as household servants, street vendors, or beggars.Of this total, an estimated 200,000 were employed in the carpet industry, working on looms in large factories, for small subcontractors, and in homes where whole families worked on looms to earn extra income.

14 Children could be bonded—essentially placed in servitude—in order to pay off debts incurred by their parents, typically in the range of 1,000 to 10,000 rupees ($30 to $300). But due to the astronomical interest rates and the very low wages offered to children, it could take years to pay off such loans. Indeed, some indentured child laborers eventually passed on the debt to their own children.The Indian government stated that it was committed to the abolition of bonded labor, which had been illegal since the Children (Pledging of Labour) Act passed under British rule in 1933. The practice continued to be widespread, however, and to reinforce the earlier law, the government passed the Bonded Labour System (Abolition) Act in 1976. 15 But the government took a less absolute stand on unbonded child labor, which it characterized as “a socioeconomic phenomenon arising out of poverty and the lack of development. The Child Labour (Prohibition and Regulation) Act of 1986 prohibited the use of child labor (applying to those under 14) in certain defined “hazardous industries” and regulated children’s hours and working conditions in others.

But the government felt that the majority of child labor involved “children working alongside and under the supervision of their parents” in agriculture, cottage industries, and service roles. Indeed, the law specifically permitted children to work in craft industries “in order not to outlaw the passage of specialized handicraft skills from generation to generation. 16 Critics charged that even with these laws on the books, exploitive child labor—including bonded labor—was widespread because laws were poorly enforced and prosecution rarely severe. 17 Action Required: New Issues, New Options In the fall of 1994, after managing the initial response to the crisis, Barner and her direct manager traveled to India, Nepal, and Pakistan to learn more. Barner recalled the trip: “We felt the need to educate ourselves, so we met with our suppliers. But we also met with unions, politicians, activists, NGOs, U. N.

rganizations, and carpet export organizations. We even went out on unannounced carpet factory raids with local NGOs; we saw child labor, and we were thrown out of some places. ” On the trip, Barner also learned of the formation of the Rugmark Foundation, a recently initiated industry response to the child labor problem in the Indian carpet industry. Triggered by a consumer awareness program started by human rights organizations, consumer activists, and trade unions in Germany in the early 1990s, the Indo-German Export Promotion Council had joined up with key 906-414 IKEA’s Global Sourcing Challenge: Indian Rugs and Child Labor (A) Indian carpet manufacturers and exporters and some Indian NGOs to develop a label certifying that the hand-knotted carpets to which it was attached were made without the use of child labor. To implement this idea, the Rugmark Foundation was organized to supervise the use of the label. It expected to begin exporting rugs carrying a unique identifying number in early 1995.As a major purchaser of Indian rugs, IKEA was invited to sign up with Rugmark as a way of dealing with the ongoing potential for child labor problems on products sourced from India.

On her return to Sweden, Barner again met frequently with the Swedish Save the Children’s expert on child labor. “The people there had a very forward-looking view on the issue and taught us a lot,” said Barner. “Above all, they emphasized the need to ensure you always do what is in the best interests of the child. ” This was the principle set at the heart of the U. N.Convention on the Rights of the Child (1989), a document with which Barner was now quite familiar. (See Exhibit 5 for Article 32 from the U.

N. Convention on the Rights of the Child. ) The more Barner learned, the more complex the situation became. As a business area manager with full profit-and-loss responsibility for carpets, she knew she had to protect not only her business but also the IKEA brand and image. Yet she viewed her responsibility as broader than this: She felt the company should do something that would make a difference in the lives of the children she had seen.It was a view that was not universally held within IKEA, where many were concerned that a very proactive stand could put the business at a significant cost disadvantage to its competitors. A New Crisis Then, in the spring of 1995, a year after IKEA began to address this issue, a well-known German documentary maker notified the company that a film he had made was about to be broadcast on German television showing children working at looms at Rangan Exports, one of IKEA’s major suppliers.

While refusing to let the company preview the video, the filmmaker produced still shots taken directly from the video. The producer then invited IKEA to send someone to take part in a live discussion during the airing of the program. Said Barner, “Compared to the Swedish program, which documented the use of child labor in Pakistan as a serious report about an important issue without targeting any single company, it was immediately clear that this German-produced program planned to take a confrontational and aggressive approach aimed directly at IKEA and one of its suppliers. For Barner, the first question was whether to recommend that IKEA participate in the program or decline the invitation. Beyond the immediate public relations issue, she also had to decide how to deal with Rangan Exports’ apparent violation of the contractual commitment it had made not to use child labor. And finally, this crisis raised the issue of whether the overall approach IKEA had been taking to the issue of child labor was appropriate. Should the company continue to try to deal with the issue through its own relationships with its suppliers?Should it step back and allow Rugmark to monitor the use of child labor on its behalf? Or should it recognize that the problem was too deeply embedded in the culture of these countries for it to have any real impact and simply withdraw? 8 IKEA’s Global Sourcing Challenge: Indian Rugs and Child Labor (A) 906-414 Exhibit 1 IKEA Stores, Fiscal Year Ending August 1994 a.

Historical Store Growth 1954 Number of Stores 0 1964 2 1974 9 1984 52 1994 114 b. Country’s First StoreFirst Store (with city) Country Sweden Norway Denmark Switzerland Germany Australia Canada Austria Netherlands Singapore Spain Iceland France Saudi Arabia Belgium Kuwait United States United Kingdom Hong Kong Italy Hungary Poland Czech Republic United Arab Emirates Slovakia Taiwan Year 1958 1963 1969 1973 1974 1975 1976 1977 1978 1978 1980 1981 1981 1983 1984 1984 1985 1987 1988 1989 1990 1991 1991 1991 1992 1994 City Almhult Oslo Copenhagen Zurich Munich Artamon Vancouver Vienna Rotterdam Singapore Gran Canaria Reykjavik Paris Jeddah Brussels Kuwait City Philadelphia Manchester Hong Kong Milan Budapest Platan Prague Dubai Bratislava TaipeiSource: IKEA website, http://franchisor. ikea. com/txtfacts. html, accessed October 15, 2004. 9 906-414 IKEA’s Global Sourcing Challenge: Indian Rugs and Child Labor (A) Exhibit 2 IKEA History: Selected Events Year 1943 1945 1948 1951 1955 1956 1958 1961 1963 1965 1965 1973 1974 1978 1980 1980 1985 1985 1991 Event IKEA is founded. Ingvar Kamprad constructs the company name from his initials (Ingvar Kamprad), his home farm (Elmtaryd), and its parish (Agunnaryd).

The first IKEA ad appears in press, advertising mail-order products. Furniture is introduced into the IKEA product range.Products are still only advertised through ads. The first IKEA catalogue is distributed. IKEA starts to design its own furniture. Self-assembly furniture in flat packs is introduced. The first IKEA store opens in Almhult, Sweden.

Contract with Polish sources, IKEA’s first non-Scandinavian suppliers. First delivery is 20,000 chairs. The first IKEA store outside Sweden opens in Norway. IKEA opens in Stockholm, introducing the self-serve concept to furniture retailing. IKEA stores add a section called “The Cook Shop,” offering quality utensils at low prices.The first IKEA store outside Scandinavia opens in Spreitenbach, Switzerland. A plastic chair is developed at a supplier that usually makes buckets.

The BILLY bookcase is introduced to the range, becoming an instant top seller. One of IKEA’s best-sellers, the KLIPPAN sofa with removable, washable covers, is introduced. Introduction of LACK coffee table, made from a strong, light material by an interior door factory. The first IKEA Group store opens in the U. S. MOMENT sofa with frame built by a supermarket trolley factory is introduced. Wins a design prize.

IKEA establishes its own industrial group, Swedwood.Source: Adapted from IKEA Facts and Figures, 2003 and 2004 editions, and IKEA internal documents. 10 IKEA’s Global Sourcing Challenge: Indian Rugs and Child Labor (A) 906-414 Exhibit 3 “A Furniture Dealer’s Testament”—A Summarized Overview In 1976, Ingvar Kamprad listed nine aspects of IKEA that he believed formed the basis of the IKEA culture together with the vision statement “To create a better everyday life for the many people. ” These aspects are given to all new employees through a pamphlet titled “A Furniture Dealer’s Testament. ”

The following table summarizes the major points: Cornerstone

1. The Product Range—Our Identity
2. The IKEA Spirit—A Strong and Living Reality
3. Profit Gives Us Resources Summarize Description IKEA sells well-designed, functional home furnishing products at prices so low that as many people as possible can afford them. IKEA is about enthusiasm, renewal, thrift, responsibility, humbleness toward the task and simplicity. IKEA will achieve profit (which Kamprad describes as a “wonderful word”) through the lowest prices, good quality, economical development of products, improved purchasing processes and cost savings. “Waste is a deadly sin. ”
4. Reaching Good Results with Small Means
5. Simplicity is a Virtue Complex regulations and exaggerated planning paralyze.

IKEA people stay simple in style and habits as well as in their organizational approach. IKEA is run from a small village in the woods. IKEA asks shirt factories to make seat cushions and window factories to make table frames. IKEA discounts its umbrellas when it rains. IKEA does things differently. “We can never do everything everywhere, all at the same time. ” At IKEA, you choose the most important thing to do and finish that before starting a new project.

The fear of making mistakes is the root of bureaucracy. ” Everyone has the right to make mistakes; in fact, everyone has an obligation to make mistakes.

6. Doing it a Different Way

7. Concentration—Important to Our Success

8. Taking Responsibility—A Privilege

9. Most Things Still Remain to be IKEA is only at the beginning of what it might become.

200 stores is Done. A Glorious Future! nothing. “We are still a small company at heart. ” Source: Adapted by casewriters from IKEA’s “A Furniture Dealer’s Testament”; Bertil Torekull, “Leading by Design: The IKEA Story” (New York: Harper Business, 1998, p. 12); and interviews.IKEA’s Global Sourcing Challenge: Indian Rugs and Child Labor (A) Exhibit 4 a. Sales IKEA in Figures, 1993–1994 (fiscal year ending August 31, 1994) Country/region Germany Sweden Austria, France, Italy, Switzerland Belgium, Netherlands, United Kingdom, Norway North America (U.S. and Canada) Czech Republic, Hungary, Poland, Slovakia Australia.

To this end, and having regard to the relevant provisions of other international instruments, States Parties shall in particular: Provide for a minimum age for admission to employment Provide for appropriate regulation of hours and conditions of employment Provide for appropriate or other sanctions to ensure the effective enforcement of the present article.

Case Study IKEA: Expanding through franchising to the South American market? Introduction This report is made by four, fourth year IBMS students for a marketing course.

This report is based on a case from the book Global Marketing, by Svend Hollensen. The basis of this report is the international operating company IKEA. The main question that will be answered in this report is: Should IKEA expand further through franchising to the South American market? To answer this question the current situation of IKEA will be taken into account in this report.Next to this also other aspects like a SWOT analysis and other theoretical information will be used to come to conclusion, recommendation and possible implementation. Table of content Current Situation5 IKEA basic information5 The IKEA concept7 IKEA’s vision7 SWOT8 IKEA’s Strengths8 IKEA`s Weaknesses8 IKEA’s Opportunities8 IKEA’s Threats9 analysis9 Marketing Strategy11 Transnational Organization11 Region Centre (Regional headquarters)12 Conclusion Market Strategy13 Entry Mode14 Franchising14 Pros franchising14 Cons franchising14 Strategic Alliances15 Non-equity15Pros non-equity15 Cons non-equity15 Joint venture16 Pros16 Cons16 Conclusion entry mode16 Entering the South American Market17 Brazil17 Brazilian furniture market17 IKEA and Brazil18 Short term recommendations19 Long term recommendations21 Sourcing concept IKEA23 Economical and Political Situation Brazil23 Conclusion Sourcing Concept South America24 Overall Recommendations25 Current Situation IKEA basic information IKEA is founded in 1943 a small village called Agunnaryd in Sweden. IKEA is a Acronym, composed from the following components: * I (Ingvar) – Founder’s first name K (Kamprad) – Founder’s last name * E (Elmtaryd) – Farm where Ingvar Kamprad grew up * A (Agunnaryd) – Home village Today IKEA is present in almost 40 countries worldwide. Within these countries IKEA currently has 301 IKEA stores, the IKEA Group owns 267 of the in total 301 stores.

These 267 stores are divided over 25 countries. Next to this IKEA employs over 120,000 employees worldwide. IKEA has over 600 million visitors annually, worldwide. The following map shows the coverage of IKEA store worldwide. Legenda: Light orange: IKEA is not present in these countriesDark orange: IKEA is present with one or more store in this country The following table shows how the amount of stores has developed over the last years; Annually IKEA generates around 21,5 Billion Euros. The following graph shows the turnover development of the last years; Currently five countries are responsible for a large amount of IKEA’s turnover worldwide. These countries are: * Germany (16% of total revenues) * USA (11% of total revenues) * France (10% of total revenues) * Great Britain (7% of total revenues) * Italy (7% of total revenues) The IKEA conceptThe IKEA Concept is a concept based on offering not only a wide range of well designed, functional home furnishing products.

The concept is also based on offering the products at low prices, this so that as many people as possible will be able to afford them. IKEA wants to reach as many people as possible, by offering their home furnishing products at a low price and hereby help people to live a better life in their own home. Next to this the IKEA Concept also sets guidelines for the product design, the manufacturing, transporting and selling process as well as for the assembly of the products by the customers at home.Together these guidelines contribute to putting the IKEA concept into practice. IKEA’s vision IKEA’s vision is to create a better everyday life for as many people as possible around the world. Our business idea supports this vision by offering a wide range of well-designed, functional home furnishing products at prices so low that as many people as possible will be able to afford them. To summarize, IKEA’s mission statement is; “to create a better everyday life for the many”.

SWOT As describe in the current situation IKEA is doing well, and their concept is working worldwide.But as every company, IKEA also has weaknesses and threats also come along IKEA’s path. A good way of making an overview of not only the internal, but also external situation of IKEA, is by a SWOT analysis. In this chapter IKEA’s strengths and weaknesses, as well as the companies opportunities and threats will be shown in a SWOT analysis. IKEA’s Strengths Strengths are company resources that represent competitive assets. Next to this strengths are very important for a company’s competitiveness and ability to succeed within a market.IKEA’s strengths can be defined as following; * IKEA’s strong, and worldwide known brand * IKEA’s strong concept and vision * IKEA`s partnerships with suppliers (long-term and high quality) * Economies of scale IKEA`s Weaknesses Weaknesses are the opposites of strengths, and therefore a company’s competitive liabilities.

IKEA’s weaknesses can be defined as following; * IKEA’s rapid growth and worldwide of activities (centralized startegy) * Keep the information flow to customers and stakeholders up-to date IKEA’s OpportunitiesA market opportunity is an opportunity for the company is the company’s strengths can be used to gain from the situation. Opportunities for IKEA can be defined as following; * Continue developing (even) green(er) products to fulfill the future demand for environmental friendly products * Increase presence in North American and Asian markets, by making use of economies of scale * Explore possibility of expanding in new markets IKEA’s Threats Threats are opposed by a company’s external environment, and should be recognized by the company so that the company can take measures.Threats for IKEA can be defined as following; * Growing number of retailers are offering low cost furniture * The global economical crisis makes that the consuming behavior worldwide has dropped, because of a increase in unemployment rates and a decrease in disposable income of consumers Conclusion SWOT analysis To being able to make a good conclusion of IKEA’s SWOT analysis, the following figure will give a simple but clear overview of the above described parts of the SWOT analysis. Internal Environment Weaknesses IKEA’s rapid growth and worldwide of activities (centralized strategy) – Keep the information flow to customers and stakeholders up-to date Strengths + IKEA’s strong, and worldwide known brand + IKEA’s strong concept and vision + IKEA`s partnerships with suppliers (long- term and high quality) + Economies of scale External Environment Threats – Growing number of retailers are offering low cost furniture – The global economical crisis, drop in consuming by consumers Opportunities + Continue developing (even) greener roducts + Increase presence in North American and Asian markets + Explore possibility of expanding in new markets From the SWOT analysis there can be concluded that IKEA is currently very successful. The main reason for this are IKEA’s strong strengths, the combination of these strengths is what makes IKEA so successful. IKEA can use their strengths to become even more successful on the market worldwide. But they have to work on their weaknesses to stay keep the position on the global market that they currently have.

Therefore IKEA should especially pay attention to the speed with which they are still growing, this could become a more serious weakness in the future and managerial measures should be taken to oversee this. A way of managing this could be to thoroughly analyze future expansion opportunities, so that IKEA will stay successful in the future. The threat of the global economical crisis is not only affecting IKEA, but still IKEA should focus even more of communication with their customers. By staying true to their concept and vision, and by keep communicating this to consumers IKEA will be able to manage this threat.The treat of competition will become more severe when the current global economical crisis is over. IKEA should pay close attention to the competition, not only on a global level but also on a local level. This will need to be analyzed on a regular basis, so that IKEA will be able to come with new products and or marketing tools to keep customers satisfied and informed.

Marketing Strategy Currently IKEA centrally controls their marketing strategy from the corporate headquarter. But because of the speed of expansion, IKEA is facing local pressure.The local pressure comes from demographic and cultural differences that IKEA is now facing, due to their centrally controlled marketing strategy. Managerial measures need to be taken to deal with the local pressure, this can be done by choosing another hierarchical entry mode. Therefore the suitability of a transnational organization or a region centre as hierarchical entry mode will be discussed as alternatives for IKEA’s current centralized strategy. Transnational Organization A transnational organization as hierarchical entry mode is based on the “lead country” concept.This concept states that the “lead” country takes the role of coordinator and stimulator on themselves, in combination with a reference to a homogeneous and single product group.

In IKEA’s case this would mean that the headquarter still plays a major role in managing IKEA’s strategy, but IKEA will be able to also act upon local differences within demographic and cultural differences. When a transnational organization will be use by IKEA as hierarchical entry mode, the value chain would look as shown the following figure. Lead” country Border Foreign (target) market C Region Centre (Regional headquarters) A region centre, also called regional headquarters, as hierarchical entry mode has two variants. In both variants the headquarter stimulates and coordinates the sales in the whole region. But some within the region parts of the value chain activities will take place, and will be coordinated from here, which differs from the transnational organization as hierarchical entry mode. Under region centre, as hierarchical entry mode, there are four types of internal new venture.These four types are shown in the figure below.

Number of countries involved Few Many Multinational trader Export/Import start-up Few activities coordinated across countries Coordination of value chain activities 2 1 4 Global start-up Geographically focussed start-up Many activities coordinated across countries 3 When a region centre, or regional headquarters, will be use by IKEA as hierarchical entry mode, the two variants of the value chain would look as shown the following figure. “Lead” country Border Foreign (target) market C C Conclusion Market StrategySince IKEA is current facing local pressure from demographic and cultural differences in new regions, it would be better for IKEA to switch from a centrally controlled marketing strategy to a hierarchical entry mode. After taking the above hierarchical entry modes into account, and how the value chain for both entry modes functions, the transnational organization hierarchical entry mode would be a perfect. By using this hierarchical entry mode, IKEA would be able to go in on local demographic and cultural differences, but it will still control, oversee and stimulate from the headquarter.By using transnational organization as an hierarchical entry mode IKEA will still be partially centralized in their marketing strategy, but they will be able to “think global, and act local”. This change will make IKEA stronger and it will eliminate one of their weaknesses, when it comes to further expanding into new markets in the international market. Entry Mode IKEA is currently using franchising as their traditional entry mode, when entering new markets.

The question now arises whether or not IKEA should keep using this mode of entry or if IKEA should look into alternatives, such as setting up a joint venture and strategic alliances.To see which entry mode would be the best fit for IKEA’s future expanding, all three entry modes’ pros and cons will be evaluated will then decide which mode of entry is most suitable for IKEA. Franchising This entry mode which is based on a form of licensing; the franchisee operates in a local market and pays royalty fees on revenues to the franchisor who owns the brand. The local operator has to invest in the company and has certain rights to operate the business. A guideline laid out by the franchisor has to be followed to a certain extend.In IKEA’s case there is a selection process in which potential franchisees are evaluated on retail experience and sufficient financial backing. The franchisee has to carry a certain number of standardized items, from the product-line of over 12,000 products, but he also has some room to adapt to local market needs.

All products have to be purchased from IKEA’s product lines. All franchisees are periodically audited and compared to overall corporate performance. IKEA also offers training and operational support to its franchisees.Franchisees operate on their own, but all promotional activities and catalogues are taken care of by the headquarters. Pros franchising The current system of franchising offers certain advantages for IKEA. One of the advantages is that this entry mode is safer to use with high risk countries. Since the risk the company takes is limited; the franchisee takes on most of the financial risk.

Another advantage is that the company can make use of the local experience of the franchisee; since he already has experience with the local market needs.Next to this is franchising would be in line with the change in using transnational organization as an hierarchical entry mode, this combination would increase the control of IKEA over its franchisees as well. Cons franchising If we look at the cons of franchising we can see that one of the problems is that IKEA has limited control over the single franchisees. The company needs to audit individual franchisees to maintain a certainty quality standard. Strategic Alliances When looking for alternative modes of entry for IKEA to use, the first group that comes to mind are strategic alliances.Since the main con from using the franchising method is the lack of control. Therefore it is reasonable to look into an entry mode that offers more control to IKEA.

Strategic alliances involve a number of cooperative arrangements between different firms. These arrangements are more extensive than those of a regular supplier and customer, but are not as extensive as in an acquisition. The partners both make investments in long term relationships and next to this have a common orientation towards individual and mutual goals.When looking at strategic alliances we can see that there are different modes of entry within this category. The first thing that needs to be looked at is whether or not equity in each firm is shared between the partners. A joint venture is an option where there is an equity share between the partners. Non-equity In a non-equity strategic alliance the two firms work out a contractual relationship to share some of their unique resources and capabilities.

In IKEA’s case this could be done with a retail agent that owns several stores in the new market that IKEA wants to enter.The thing that IKEA would add to this relationship is the brand name and product range of IKEA. The other company would bring in the existing distribution network and experience in the local market and capital. Pros non-equity The main advantage of using this mode of entry is that IKEA can make use of the existing distribution network and cultural experience of the partner. Another advantage is that this option is not as expensive as a going into a joint venture. Cons non-equity It will be hard to find a suitable partner, because IKEA only wants to have its own products sold in an IKEA store.So the partner needs to be willing to set up a store dedicated to IKEA.

Next to this, this option requires IKEA to invest more than when it does by using a franchising entry mode. Another con of this option is that IKEA will have a limited financial benefit from using this option, for this entry mode to be profitable enough IKEA should have a well defined and set up contract. Control for IKEA will still be very limited, since the other company only agrees on terms in the contract. If IKEA would like to influence the partner during the period of the contract its options are very limited.Joint venture Another option for IKEA to consider is a joint venture alliance. In this mode of entry two or more companies start a joint operation together, which in many cases involves transfer of personnel and resources to operate a joint facility in a certain area. There is a certain form of equity in each company, as resources are shared and brought in by both companies.

Pros The big advantage for IKEA would be the fact that the company will have more control over the joint venture compared to franchising. Since IKEA owns part of the operations it can influence the structure more.This way the company will have an easier task evaluating and maintaining the quality that the IKEA brand stands for. All in all control will be a lot easier. Cons The big disadvantage for IKEA would be the fact that it requires more financial resources to be invested in the joint venture and a higher risk in general. In the case that the joint venture becomes too risky or is not profitable enough the two parties may decide to close down the operation, taking the losses into account. Opposed to a franchising structure where the franchisee bares almost all of the risk, with joint venture the risk is shared.

Conclusion entry mode After evaluating all alternative entry modes and IKEA’s current mode of entry being franchising, there can be concluded from the pros and cons described above that the current method suits IKEA best. Especially when looking at the change to transnational organization as hierarchical entry mode, control over the franchisees will be increased. This change in hierarchical entry mode, in combination with the other pros that franchising has to IKEA, like a low risk and no large capital investments, franchising would stay the best fit for IKEA.The past has also proven that IKEA’s strategy, of using franchising as entry mode for new markets, is working very well and that there is no need for change. Especially not when IKEA changes their centralized strategy making to transnational organization as hierarchical entry mode. Entering the South American Market Over the last 30 years IKEA has grown continuously becoming a global retailer. Over the last 10 years the company has more than doubled its turnover and the number of stores they operate worldwide.

The company is nowadays present in 37 countries and runs stores in 25 of those countries.In the remaining countries 34 stores are run by franchise holders. IKEA is present in Europe, North-America, Asia and Australia but has not yet established itself in South-America. Brazil as the largest country of the continent could offer IKEA good opportunities for IKEA to expand and set foot in the region. It is therefore interesting to see if IKEA should enter that market. Brazil The Federal Republic of Brazil has an estimated population 199 million people and is the 5th largest country in the world. From 2003 to 2006 the country had a real GDP growth of 3,4% and it is predicted to rise at a similar pace in the coming years.

As a result of that growth the income of households has risen and a middle class has emerged. From 2002 to 2006 the percentage of households with a disposable income of over 5ooo$ a year has risen from 29 to 33. 5% and should keep on increasing. This income level is similar then the one of the target group of IKEA in other developing countries like China. This would mean that IKEA has a potential target market of 64 million people in Brazil. Brazilian furniture market In 2007 the Brazilian furniture market was worth 10. 01 billion $, an increase of 44% since 2004.

During the same time period, imports increased by 300% from 92 million $ to 284 million $ but still represent only a marginal share of the total Brazilian furniture market (less than 2%). The market is split in 3 main segments: residential, office and institutional with respectively 60%, 20%, 20% of the total market share. For imports the main sectors are office and institutional furniture, the high end high quality residential furniture being the only furniture of that sector which is imported for the wealthier members of the country’s society.The main import countries for Brazil are Germany and the USA with each a 20% share of total imports. As an example of the type of imports, over two thirds of imports from the USA in 2005 were institutional and office furniture. As for retail and distribution there are no large local furniture chains, most imports are done by direct importers, the end user or in small quantities by local manufacturers as a complement to their existing product lines. As IKEA is a fairly unique concept and has no global rivals, they would be the first stores of that kind in Brazil.

One main obstacle for mporting furniture into Brazil is high tariffs and taxes which can go so far as to double the price of a product for the end consumers. The Brazilian furniture manufacturing sector is made up of a large number of small to medium sized companies, which produce thanks to the large wood reserves of the country. They are mainly situated in the south of the country where most wood plantations are situated. This sector is in the process of modernising, investing in new machinery so to be able to compete on an international market and fulfil the requirements of western industrialised markets.IKEA and Brazil Just by looking at the size of the Brazilian or South-American market one can easily come to the conclusion that those are markets with potential for IKEA. Following the international growth of IKEA it seems unlikely that they will not enter South-America at some point. The question remains if this is the right time for it and how they should enter the market.

Due to the complexity of the question the recommendations will be in two parts, one being short term the other one being long term.Short term recommendations On the short term, next 5 years, we advise against IKEA opening a store in Brazil. The current situation of IKEA combined with the specifics of the Brazilian market does not seem to offer immediate opportunities which could be taken advantage of. Regarding the specific situation of IKEA the following aspects have to be taken into account: Disregarding their entry mode, self owned stores as well as Franchisees are obliged to carry a large part of IKEA’s international catalogue.Those products are standardises for the whole world and are currently produced in countries outside of Brazil which makes them vulnerable to Brazils import tariffs, therefore IKEA would have difficulties selling the products at a price which would make them competitive on the Brazilian market.. Furthermore considering that the average IKEA store has an annual turnover of more than 80€ million and the demand for imported furniture of the type that IKEA sells in Brazil; it seems unlikely that there is currently enough potential for a store to be profitable.

The geographic location of Brazil also poses a problem if IKEA ants to continue using some of its strategies and it might be one of the reasons they are not in South-America yet. The strategies we are referring to are both for environmental protection and cost saving, meaning that by applying some principles to protect the environment IKEA has been able to reduce its costs. Two of those principles are: * Using railroads for long-distance transportation. * Maximizing the efficiency of shipments: reduce the number of transports and the number of empty transports, make maximum use of cargo vehicle space, utilize return transportation, and avoid rush-hour traffic.When looking at Brazil in the light of this, it shows that IKEA’s logistics network is not adapted to that country. When looking at IKEA store locations and sourcing countries at the same time, it is easy to see how IKEA uses its logistics to improve efficiency. Currently IKEA is sourcing 67% of its products from Europe, 30% from Asia and 3% from North-America and those are also the places they have stores in.

When we look at a world map we can see how goods flow both ways, making it possible for IKEA to use transportation efficiently (for example by using transport units both ways).By generalising we can say that IKEA stores are located in producing countries, close to producing countries or on major world trade routes. When looking at IKEA’s efficiency, it also is important to mention that they are faced with some sourcing problems, or more precisely a sourcing bottleneck and are only able to open and supply 20 new stores a year. Considering that IKEA only has 36 stores in the USA and 10 in China compared to 44 in Germany, it would be logical for them to first concentrate on expanding withing countries or regions they are already present in until those markets are fully serviced or the bottleneck issue is solved.The last issue with IKEA entering the Brazilian market in the near future are cultural differences. Those have an impact on two main points: * The first point is the bad experiences that IKEA has made in the past in other developing countries, regarding corruption which have made them loose millions of euros. In world rankings Brazil is in the middle field but that still puts it far behind IKEA’s traditional markets in western Europe.

IKEA has in the past tried to avoid risks and this could be a factor slowing down their possible ambitions in South-America. * The second point is the need to addapt IKEA to local markets.Like their experienced showed in the USA and other countries IKEA has to addapt its concept to local culture to be able to be successful. This applies to products offered as well as the way of managing the company in that country. Since Brazil is a country IKEA has no experience with, does not know the culture or preferences of, it would take major efforts on IKEA’s part to start operations there. All these factors combined lead to the conclusion that Brazil is not yet a good country for IKEA to open a store in, so our recommendation for the near future is not to open a store there.Long term recommendations On the longer term, the recommendations are different because we belive that it is in the interest of IKEA to get involved in the South-American market and specialy Brazil for their future.

The two mains reason for that are the growing wealth of the large local population and the potential of Brazil as a sourcing country for IKEA. Regarding the local population and the wealth it would not be logical for IKEA not to enter South-America if the markets there keep on developping in the current direction.So on the long term IKEA will be present on that continent when conditions make it more interesting for them, then it currently is. As for Brazil presenting opportunities for sourcing this should be seen as something worth looking into for IKEA. Currently IKEA is looking into turning Russia in one of their main supplying countries, because of the amount of timber availableinthat country. The same would apply to Brazil, which has large reserves of wood and a developed furniture manufacturing base. As IKEA develops in North-America, Brazil becomes more interesting as a supplier country.

Currently China produces a lot of products for IKEA but it does not have enough raw materials available and must import some of those. It would therefore be smart for IKEA to develop it’s relations with Brazilian producers as an alternative manufacturing base to Asia. This would probably be a relatively slow process considering that illegal logging is still a common problem in Brazil and IKEA must make sure it can trust it’s suppliers. Once that relations are established with suppliers, IKEA sould then consider opening a store in Brazil, preferably under franchise to avoid some of the risks associated with the Brazilian market.This would also give access to knowledge about the local preferences. In the mean time IKEA should collect knowledge about Latin-American consumers, in their North-American markets and in the future with their first store in the Dominican Republic..

This last store opening also shows the posibility of progressive expansion by going south of the USA. By starting in the Dominican Republic (close to Florida) and maybe following with Mexico, IKEA could expand it’s geagraphical coverage without over extanding their logistical network. Sourcing concept IKEAIKEA is making use of use of their self-owned Swedwood Group, which produces wood based furniture and also all wooden components. Swedwood Group is present in 11 countries, which are in majority European countries. Together with IKEA they strive to produce all products as cost efficient as possible, by at the same time taking social responsibility and environmental responsibility. Swedwood’s production concept is to set up and/or further develop existing production units, this in order to maximize capacity utilization and the production plants.The production is concept ‘s goal is to optimize efficiency and volumes.

Next to the fact that this concept ensures short lead times, it also makes an efficient distribution channel possible. When looking at the current situation the current situation of IKEA it becomes obvious that they are makes use of effective sourcing strategies to make their production as cost efficient as possible. IKEA outsources their raw materials to other companies and uses Shedwood Group for, for example, the production of wooden furniture. Economical and Political Situation BrazilAs previously stated the Brazilian furniture market has grown with 44% since 2004, to a market size of $ 10. 01 billion. Although imports of furniture have only increased with 2 %, the market is growing in Brazil. As shown in the table below, the economy of Brazil is growing and the position of the consumers is becoming better.

Demographic and economic indicators| | 2005| 2006| 2007| 2008| 2009| Population aged 65+: January 1st (‘000)| 11,403. 24| 11,778. 91| 12,150. 42| 12,526. 21| 12,918. 18| Population density (people per sq km)| 22. 00| 22.

24| 22. 47| 22. 9| 22. 90| GDP measured at purchasing power parity (million international $)| 1,584,678. 23| 1,696,680. 73| 1,836,914. 57| 1,958,293.

49| 2,028,681. 20| Real GDP growth (% growth)| 3. 16| 3. 97| 5. 67| 5. 08| -0. 66| Inflation (% growth)| 6.

87| 4. 18| 3. 64| 5. 66| 4. 85| Consumer expenditure (US$ million)| 531,822. 46| 656,971. 56| 813,584.

75| 958,968. 26| 973,270. 17| Annual gross income (US$ million)| 694,076. 13| 834,724. 42| 1,032,305. 74| 1,220,762. 89| 1,237,535.

93| Annual disposable income (US$ million)| 543,442. 51| 672,063. 55| 830,185. 96| 980,754. 8| 994,446. 03| From the table above, there can be concluded that the GDP ,at purchasing power parity, is steadily growing since 2005. Also the real GDP growth, in percentage, is growing.

In 2009 there was no growth in the real GDP, but a drop of -0,6, this decrease can be well connected to the global economical crises. The annual gross income has almost doubled in 2009, compared to 2005. These economical indicators shown that Brazil is an attractive market for IKEA since this market is growing for years. The Brazilian political situation has changed compared to the past.Brazil is a republic, and current has Luiz Inacio Lula da Silva of the Workers’ Party as left-wing president, with 61% of the vote. The past years both left and right politicians have shown their respect for democratic institutions. Both sides are bringing efforts to highlight this as evidence of the political, but especially democratic maturity of Brazil.

The political situation in Brazil is not comparable to democracies in Europe, but Brazil is working hard on their democracy to work fair and correct. Although corruption scandals come to light, the democracy in Brazil is on its way to develop into a stable democracy.Conclusion Sourcing Concept South America When possible IKEA will therefore make use of near-shoring as sourcing strategy for the South American market. This concept is already used worldwide by IKEA and would also fit the expansion to South America. It also fits to Shedwood’s production concept to produce all products as cost efficient as possible, by at the same time taking social responsibility and environmental responsibility. IKEA wants to expand further by entering the South American market through expand to Brazil.This would be the good country to go to in South America, since Brazil has over 4.

6 million hectare of forest, which can be used for locally sourcing. The advantage of sourcing locally is based on IKEA’s idea to “think global and act local”, which means that multinational corporations are encouraged to build their own roots. Furthermore Brazil? s economical situation is growing and will keep growing, since Brazil is one of the key emerging economies today. The political situation in Brazil has improved a lot over the years and is becoming more stable with time.These factors together make Brazil an attractive market and once IKEA has opened a first store in Brazil, the South American market is entered. This opens up the possibility for IKEA stores to expand to countries like Mexico which will be able to use sources from Brazil, or other countries on the South American continent, due to near-shoring. Overall Recommendations Taking everything into account the recommendation to IKEA is as following.

IKEA should firstly change their centrally controlled marketing strategy to a transnational organization as hierarchical entry mode.This would be a managerial fit to the problems on demographical and cultural differences, that IKEA is currently facing when entering new markets. IKEA should take some time to implement this new hierarchical entry mode, so that the currently problems and weakness concerning rapid growth will be solved, and could become a strength of IKEA. As an entry mode IKEA is currently using franchising. After analyzing other entry mode options and when taking into account that IKEA would change their centrally controlled marketing strategy to a transnational organization, franchising would still be the best fit.In combination with a transnational organization IKEA would get more control on their franchisees and would be able to adapt better to local needs. Taking everything of above into account IKEA should not enter the South American market on the short term.

Next to this the high tariffs, relatively small size of the Brazilian market and lack of experience within the South American market, are also the main reasons for not yet entering the Brazilian market. On the long term the South American market could be a could option for IKEA to expand to.The economical situation is improving every year and also the political situation is getting more stable with the years. By changing to the transnational organization developing relations with suppliers, and looking for suitable franchisees within Brazil, IKEA would be able to enter the South American market with success. When entering the South American market on the long term, IKEA could make use of near shoring to supply the stores in Brazil. This fits IKEA’s production concept, to produce their products on the hand of low cost efficiency and at the same time taking social responsibility and environmental responsibility.

An overview IKEA, founded in Sweden in 1943, is the World’s largest home furnishings retail chain. It achieved international expansion in three major phases and now operates large warehouse showrooms in Sweden, Norway, Denmark, Holland, France, Belgium, Germany, Switzerland, Austria, Canada, the United States, Saudi Arabia, and the United Kingdom. It also has smaller stores in some other countries. IKEA’s mission is to offer a wide variety, good design and good values for “young people of all ages”.The furnishings giant has remained determined to maintain a standardised product strategy — which still remains the core of the IKEA approach. By following the approach, IKEA maintains a predominantly universally accepted product range with local minor adaptations.

IKEA’s mission is to offer a wide variety, good design, good value, for “young people of all ages”. The furnishings giant has remained determined to maintain a standardised product strategy. IKEA itself does not own manufacturing facilities. The manufacturers are subcontracted.And it only owns distribution and designs furniture. This allows IKEA to follow a cost leadership strategy through high volume production and standardised items. IKEA consumers expected to supply their time for assembling work after purchase, thus becoming a part of the IKEA concept becoming “prosumers”.

2. 1Case Question: What has allowed IKEA to be successful with a relatively standardised product and product line in a business with strong cultural influence? Did adaptations to this strategy in the North American market constitute a defeat to their approach?The key reason behind IKEA’s breakout success was because if its customer focused approach. The focus on customers’ needs has been achieved because they were not selling through dealers. This allowed them obtain feedback directly from customers. Moreover, IKEA does not deem itself as just a retailer. But rather, it operates as a central hub of a number of services. According to the case, the customers in the countries IKEA entered through international expansion were not tied to traditional furniture image.

Rather, they preferred good value, simplicity and the idea of contributing by giving their time in assembling stage. IKEA’s strategy to provide a wide variety available at one place with the assurance that customers would find something suitable, nice and simple as well as practical and of good value drew huge amounts of customers. The perceived wide variety of designs and good quality were also appealing factors. The concept was easy to promote worldwide. A catalogue with layout with minor adjustments to meet regional differences was used.Combined effects from all these practices contributed to the making of IKEA’s “universally accepted” formula. IKEA in the USA While IKEA entered the US market in 1985, it was greeted with limited success.

It later planned more expansion in 1987. Some compromises – namely with the Europe’s standardised product strategy – had to be adapted for the US. Other adaptations were also made in service delivery and processes to meet the customers’ expectations. Despite the alterations, IKEA’s streamlined and contemporary “Scandinavian” style also remained mostly unchanged.Economies of scale were still being achieved. The key characteristics that defined the IKEA concept were therefore preserved. Rather, initial hiccup in the US market taught the global furniture giant to be more flexible and adapt to the local tastes when needed.

Therefore, it can be argued that minor adaptations do not amount to a defeat to IKEA’s original approach. 2. 2Case question: Which features of the “young people of all ages” are universal and can be exploited by a global/regional strategy?The characteristics of the “Young people of all ages” stand out as universal are the contemporary, modern and innovative designs targeted towards the customers who are “young” at heart; who are not tied to the traditional image of typical furniture designs, relative to their cultures. Exploiting these characteristics with a global/regional strategy is the core of IKEA Concept. Relative to their domestic markets the perceptions can be more or less easily matched with their expectations; hence, there can be some minor regional differences in how these globally shared features can be exploited.IKEA tries to find its customer base in consumers who perceive themselves as practical, modern or non-traditional or a mix of all those at the same time. Rather than being tied down to the traditional furniture image and designs relative to their culture, they are more inclined to prefer designs that are “good”, “modern” and “streamlined” — exactly what IKEA offers in its collections.

In their minds, simplicity and practicality are likely to be of much greater importance than “traditional”. Willingness to contribute time/work in order to gain in achieving a better value is another feature shared universally for this type of customer.The whole experience of IKEA shopping includes viewing, evaluating, choosing, pick-up and self-delivery, self-assembly and finishing work, which also encompasses the other, associated choice of convenient facilities (i. e. kids playing area, Swedish restaurant etc). All that combined produces the experience perceived by this type of customers as more modern, creative and interesting than the “traditional” choice. 2.

3Case question: Is IKEA destined to succeed everywhere it cares to establish itself? IKEA’s probability of success in different settings would depend on how flexible this concept is in various different countries’ conditions.Entering the US market was a big lesson for the furniture giant. It had to compromise its universal standards to draw American customers. While the IKEA concept was only slightly modified without compromising the original formula, the organisations may have to be more flexible in other regions. Considering IKEA’s experience at the US market, it would be a reasonable to argue that taking this concept further and further globally would have limitations that could not be easily met everywhere. A good example of the case would be if a certain price for a bed is considered as a good” in the USA or in the UK market, the same product would have to be sold at a lower price in some other countries in order to match the similar customer expectations. Furthermore, more furniture can be locally produced thus increasing the flexibility of this aspect but this might appear as stretching the universally standardised assortment element of the IKEA concept.

To preserve the original formula whilst maintaining the profitability as a measurement of success, it would be vital for IKEA to establish a critical mass of potential customers.It would not only be important for these customers to like the concept, but also to be able to afford it and perceive it as “good” value. Therefore, in most developed countries, the IKEA concept may succeed. However, to expect the same amount of success for countries with erratic economic situation, extreme fluctuations in currency exchange rates, hyperinflation or with rigid importing quotas and restrictions. The problem would also apply to countries where the local people holds high values for traditional furniture designs that would be different from those of IKEA’s.All the above scenarios point towards the fact that the retail chain can have more chances of success if the IKEA concept is slightly modified at a regional level when required. However, this may potentially make them depart further from their original formula that marked its initial success.

In conclusion, IKEA’s original formula can be preserved in most countries worldwide with or without minor modifications. However, it would be unreasonable to expect the same approach to be successful everywhere. Of course, crossing that line may be another way to achieve global success but may divert the organisation from the original concept.

Introduction

The rising demand for greener, more environmentally friendly products and services has paved the way for sustainable procurement. In the field of operations management, ‘sustainable procurement has emerged as a way green the purchasing and supply process’ (Walker et al 2009, p.348). Sustainable procurement means taking consideration sustainability issues in all procurement actions and processes. In its broadest sense, it encompasses the following aspects: (a) it means thinking carefully about what the organisation purchases; (b) purchasing only what the organisation needs; (c) purchasing products and services that have high environmental performance; and (d) taking into account the social and economic impacts of purchasing decisions (Sustainable Procurement Resource Centre 2012).

According to Kennard (2006, p.1), ‘sustainable procurement is the process whereby economic development, social development and environmental protection are balanced against business needs.’ In simpler terms, sustainable procurement means carefully considering the impact of every purchasing decision on the environment and on society.

The United Nations’ definition of sustainable procurement is similar to that of Kennard (2006). The UN (2010) defines procurement as sustainable if it is able to integrate requirements, specifications and criteria, which are compatible with and favourable towards the protection of the environment, promotes social progress, and supports economic development. Environmental aspect refers to the impacts of the product or service on the environment over the whole life-cycle (i.e. from cradle to grave). Social aspect deals with the effects of purchasing decisions on issues such as labour conditions, international equity in the distribution of resources, etc. Last but not least, economic considerations involve purchasing based on principles of best value for money, price, quality, availability and functionality. These can be achieved through resource efficiency, improving the quality of products and services, and by optimizing costs.

For private business organisations engaging in sustainable procurement, it cannot be denied that that they are maximising net benefits both for themselves and the world at large (i.e. society and external environment). As such, businesses integrate cost considerations and the basic procurement criteria of price and quality, with sustainability impacts (usually evaluated in terms of quality consideration). The environmental, economic, and social factors that are part of sustainable procurement are known as the ‘triple bottom line’ or TBL (Meehan & Bryde 2011).

Despite the seemingly complicated requirements and processes involved for sustainable procurement, this is not meant to burden the market with additional obligations (UN 2010). Sustainable procurement is a well-defined strategy that can be phased gradually throughout the supply chain and the organisation’s business processes. When implemented effectively, sustainable procurement promotes dialogue and open communication between the suppliers, procurers, and management operations.

Business Drivers for Sustainable Procurement

There are several incentives for businesses to engage in sustainable procurement. One of the main drivers for sustainable procurement is due to its financial benefits. Sustainable procurement helps organisations to eliminate waste, be more energy efficient, reduce the company’s carbon foot print, and save money. Moreover, it can help to enhance the company’s image since this will have a positive impact on customers, especially as there is a rising demand for products and services that are produced in a more socially responsible and environmentally friendly way (CIPS 2012).

Engaging in sustainable procurement also helps an organisation to establish a competitive advantage by improving competitiveness. Additionally, sustainable procurement will allow the company to comply with environmental legislation. Some organisations also aim to promote resource efficiency or increase their standing in sustainability rankings such as the Dow Jones Sustainability Index (Copeland 2012). This may be motivated by the company’s corporate social responsibility (CSR) initiatives.

Practicing sustainable procurement helps companies to achieve their CSR objectives. For instance, some sustainability programmes provide jobs by sourcing supplies locally, which in turn helps to develop the local economy. The company can also improve their ethical, health and safety standards by requiring suppliers to source raw materials in an ethical and responsible way (OPITO 2012).

Kennard (2006) lists down the different benefits of sustainable procurement. These are also some of the main drivers that motivate businesses to practice sustainable procurement in their supply chain management and operations.

Manage costs by implementing a more comprehensive approach to whole-life costing
Improve internal and external standards via conducting performance assessments
Compliance with environmental and social regulations or legislation
Manage business risks
Improve the company’s image and/or brands
Develop a sustainable supply chain for the future
Involve the local community

A study conducted by Price Waterhouse Coopers and EcoVadis (2010), in collaboration with the INSEAD Social Innovation Centre quantified the value drivers associated with sustainable procurement policies. Through examining several case studies, the quantitative model was developed by analysing the three main drivers for sustainable procurement (i.e. cost reduction, risk reduction, and revenue growth) and their impacts on the company’s annual procurement expenditures, market capitalization, and revenue. These were then compared to the implementation cost of a sustainable procurement programme. The findings of the study show that the cost reduction impact of sustainable procurement outweighs the implementation costs, especially on categories where cost savings and sustainability benefits are aligned. This indicates that businesses engage in sustainable procurement because the value drivers that compel them to engage in sustainability are evaluated to be beneficial to their organisations.

Table 1. Analysis of the main drivers for sustainable procurement vs. impacts on company’s performance

Source: Waterhouse Coopers and EcoVadis (2010)

Evaluation of Case Studies on Sustainable Procurement

In this section, two global multi-national companies are evaluated in terms of their sustainable procurement policies. These are AkzoNobel and IKEA.

Case Study: AkzoNobel

AkzoNobel is a one of the leading companies in the manufacture and supply of paints, coatings, and specialty chemicals. As of 2012, the company has revenue of ˆ15.7 billion and 57,200 employees in its global operations (AkzoNobel 2012). In 2008, AkzoNobel is the first company to combine its annual report and sustainability report into a single publication. This demonstrated that sustainability is a business case, instead of a novelty, which was an idea held by most companies. For its 2009 agenda, the company included as one of its priorities the achieving world class sustainability and safety. AkzoNobel won the ProcureCon award in 2008 for its leadership in sustainable procurement. AkzoNobel is also one of the top-ranked companies in the Dow Jones Sustainability Index and in 2012; it was evaluated as one of the global super-sector leaders in chemicals (Van Hoeven 2012; AkzoNobel 2012; Achilles 2008).

Table 2. Assessment 2012 – Global Supersector Leaders (1)

Source: Dow Jones Sustainability Index, Annual Review 2012

It is evident that AkzoNobel has embedded sustainability in its overall corporate strategy. The company manages sustainability by integrating it across the business and it is reviewed based on a balanced score card. In order to map out their sustainability achievements, AkzoNobel has developed a framework to assess the environmental, economical and social aspects of their operations. This framework has three levels: (Van Hoeven 2012; AkzoNobel 2012)

Invent – to identify and manage areas that will provide long-term and sustainable opportunities for the company; work with customers and suppliers in delivering eco-premium solutions; and develop their people to lead and deliver innovative solutions
Manage – to incorporate a strong sustainability component throughout the entire value chain; work in partnership with suppliers to ensure business integrity and help deliver sustainable value to the customers; optimise processes, improve yields and improve energy efficiency
Improve – to improve in meeting compliance especially in the following areas: Integrity management; heath, safety, environment and security management; Product stewardship; and Employment practices.

Figure 1. AkzoNobel’s Sustainability Framework

Case Study: IKEA

IKEA is a global retail powerhouse in the home furnishings sector with over 338 stores worldwide. As of 2012, the company has a sales turnover of ˆ27.5 billion and 154,000 workers in its global operations. IKEA’s business idea is supported by its vision of offering well-designed, functional, and low-priced home furnishing products. The company makes its products affordable so as to enable many people to afford them (IKEA 2012).

IKEA’s business units have integrated sustainability in their business plans and managers are responsible for achieving the company’s sustainability targets. To support its sustainability objectives, the company has employed social and environmental specialists with expertise in a wide range of areas. IKEA stores and distribution centres also have social and environmental coordinators to provide training and monitor working conditions, safety, waste management, and water and energy conservation (Van Hoeven 2012).

IKEA utilizes a Sustainability Product Score card to help classify its home furnishing range and help the company move towards more sustainable product development. It serves as a guide in improving products based on 11 criteria that have an impact on a product’s sustainability profile during its life-cycle. The results of the scorecard are displayed in individual product labels (IKEA 2011a).

Table 3. IKEA KPI – Customers

IKEA integrates sustainability in every stage of the value chain. The company is creating and securing sustainable processes for: (a) Product development and sourcing of raw materials of home furnishings and food products; (b) Production and distribution; (c) Stores and shopping centres; and (d) Product end-of-life (IKEA 2011b). In terms of its procurement policy, IKEA has two important focus points: (Van Hoeven 2012)

Increasing the sustainability its of supplier base
The IKEA IWAY code of conduct is required to be followed by all suppliers.
IKEA auditors regularly visit suppliers to ensure that they comply with IWAY criteria. These visits are either announced or unannounced and each supplier is visited at least twice a year.
The Compliance and Monitoring Group is responsible for ensuring that the audit criteria are implemented worldwide.
Increasing the use of sustainable raw materials.
IKEA is taking up leadership in the stewardship of sustainable wood and cotton and the company is adapting their procurement and sourcing functions as necessary.
Issues and challenges for organisations in developing a Sustainable Procurement Policy

Sustainable procurement in the business setting requires a high degree of cooperation and commitment among all members of the supply chain. Additionally, the ‘lack of understanding of sustainability within business, coupled with poor training and accountability are significant barriers to building supplier capacity’ (Kennard 2006, p.1).

Many businesses have developed tools and techniques to support this cooperation and commitment, as well as to instil sustainability accountability in the organisation. Training is very important in fostering a culture of sustainability within an organisation. All parties in the supply chain should be given adequate training regarding the importance and benefits of practicing sustainability. Moreover, the shifting of organisational and supply chain processes into a more sustainable way requires a lot of preparation and education (CIPS 2012).

Ethical core values should also be incorporated in the sustainable procurement policies and procedures for contractors and suppliers. Transparency is essential in order to support the organisation’s ability in implementing and ensuring that the policies have been followed. Sustainable procurement policies should include environmental protection, safeguarding the organisation against corruption, respect and consideration for people, and zero-accident tolerance in safety and health issues (Kennard 2006).

The transition to sustainable procurement is not an easy task. There are various product certifications, data, labels, and other documentations that make compliance to sustainability initiatives a big challenge. As such, it can be very difficult to synthesize the loads of data regarding a product’s sustainability attributes and evaluate it as sustainably compliant. Additionally, procurement professionals have another challenge – how to integrate these sustainability criteria into purchasing decisions, while also taking into account traditional considerations such as cost, quality, and delivery. More importantly, the biggest challenge is how to roll out the company’s sustainable procurement policy to the thousands of products that it purchases (Suarez 2012).

The road to sustainable procurement can be daunting but organisations can start on the right path by aligning their sustainable procurement policy/approach with the company’s overall CSR initiatives and business priorities. Suarez (2012) recommends the following strategy for companies, which are in the beginning phase of their sustainable procurement policy:

‘By understanding how they define a product’s sustainability, companies can prioritize their efforts to reduce the impacts of the products they purchase and align their process with broader corporate sustainability goals. Looking at the full life-cycle of a product, they can focus on the highest impact areas, or hotspots, that overlap with their own commitments to sustainability’ (sec.2).

It is also important for companies to consider and involve in the creation of a sustainable procurement policy other internal stakeholders who may not be directly part of the procurement process. For instance, departments such as marketing, product design, and operations/facilities may have significant influence on product specifications and these in turn can influence procurement decisions. The company should involve these individuals in considering sustainability impacts. It is recommended that a company engage in integrated sustainability procurement efforts in order to ensure that relevant people are involved in the process and sustainability is achieved (Suarez 2012).

According to Copeland (2012), companies that want to be sustainable due to a passion for being green can only take it to a certain extent. Unless the board and shareholders support their sustainability objectives, they won’t be successful. However, getting the board and shareholders to support a sustainable procurement policy may not be that easy. To address this, the company needs to understand why it makes business sense to be sustainable.

In order for the board to support the sustainable procurement policy, it is important to understand the whole life costing of the products being procured. This includes thinking about not just the purchase and usage cost, but also the cost of disposal. Sustainable procurement should also add to the value of the company’s existing products. The product should be improved in some way by the use of sustainable materials, rather than just being sustainable for the sake of being green (Copeland 2012). Procurement professionals should be championing sustainability objectives at the board level to help their organisation to thrive (Van Hoeven 2012).

Implementation and Monitoring issues for Sustainable Procurement

Implementation and monitoring a sustainable procurement policy is faced with many challenges. This is mainly due to the fact that implementing sustainable procurement means changing policies and procedures and fostering a new mindset and culture to the organisation’s management and employees. Undoubtedly, there will be resistance to such changes.

A study by Meehan & Bryde (2010) found that although some companies have sustainability objectives included in their corporate mission statements and despite external and internal pressures to embed sustainability; these have not translated into widespread practice of sustainable procurement in their organisations. This indicates that some organisations suffer from inertia in terms of their sustainability initiatives. To neutralise inertia and spur the organisation into action, the authors recommends several strategies: (a) Take experiences from other areas that emphasise the importance of inter-organisational relationships; (b) Develop a small number of sustainable development indicators for procurement and use more advanced environmental practices as examples to demonstrate how these elements have socio-economic impacts; and (c) Instead of just focusing on the pressures and drivers of sustainability, emphasise the triggers to overcome inaction and lead changes in behaviour amongst procurement staff.

One of the issues in implementing a sustainable procurement policy is the lack of leadership and commitment (Kennard 2006). The organisation needs to elect sustainability champions who will lead in transitioning the company’s policies and processes. Without these leaders, there will be no one to drive the organisation’s sustainability efforts. These leaders should be held accountable for failure to meet the required standards. Alternatively, the organisation could set up a working group or steering committee, comprised of people from different departments, to help find the most effective ways to implement the sustainable procurement policy (Sustainable Procurement Resource Centre 2012).

In monitoring the compliance to and effectiveness of a sustainable procurement policy, one critical area that may pose challenges to the organisation is the setting of measurements or KPIs (key performance indicators). The organisation should set how it is going to measure its progress and the impact of the sustainable procurement policy on its supply chain (Copeland 2012). According to Wilkinson & Kirkup (2009), ‘Process KPIs can help to demonstrate an organisation’s intent to external organisations, whilst also helping the organisation track the implementation of policies’ (p.24).

To avoid confusion and make it easier for employees to adapt, the company should not use a different measuring system than the one it normally uses. New information should be built into existing supplier scorecards and relationship management systems. There should be a seamless integration into the old measurement system so that the business runs as usual despite the changes (Copeland 2012).

Another issue in monitoring is compliance. There is the possibility that suppliers will fail to comply with the sustainable procurement policy when the company does not follow up on compliance. As such, organisations should also conduct regular audits to ensure compliance. The performance of suppliers and other members of the supply chain must be regularly monitored to check for adherence to the organisation’s sustainable procurement policies (Wilkinson & Kirkup 2009).

Conclusions and Recommendations

Implementing a sustainable procurement policy has positive final results for a business organisation. It can help to cut costs; increase product sale price, due to the perceived added value from procuring sustainably; and attract more customers through an improved brand reputation or company image (Copeland 2012). Moreover, according to the ICLEI (2012, p.1), a procurement policy that effectively incorporates sustainability can: (a) Reduce environmental impacts; (b) Drive social improvements; and (c) Achieve financial efficiency. These benefits are the main drivers which compel business organisations to engage in sustainable procurement.

In evaluating the case studies of two multi-national companies, AkzoNobel and IKEA, it was found that in order for sustainable procurement to succeed, it must be integrated into all aspects of the business from management, operations, and supply chain. Both AkzoNobel and IKEA are leaders in sustainability in their fields because they have successfully embedded a sustainable culture into their businesses. They employ frameworks, principles, and KPIs to help them implement and monitor their sustainability achievements. They have very specific sustainability goals and they regularly audit the performance of different business units, especially in the supply chain, to ensure compliance with the company’s sustainable procurement policies.

There are several issues and challenges to developing a sustainable procurement policy. These include: (a) The need for a high degree of collaboration and engagement among members of the supply chain; (b) Lack of understanding about sustainability; (b) Lack of accountability; (c) Poor training; (d) Difficulties in synthesizing loads of sustainability information; (e) Problems with integrating sustainability criteria into purchasing decisions; and (f) Lack of support from the board.

There are also challenges in the implementation and monitoring of sustainable procurement policies. These include: (a) Failure to put into action the objectives set forth in the sustainability agenda; (b) Lack of leadership in commitment; (c) Difficulties in setting the measurement tool or KPIs; and (d) Problems in monitoring compliance.

Taking into consideration the above challenges and issues, this paper recommends that developing a sustainable procurement policy should include the following: (Kennard 2006; Wilkinson & Kirkup 2009)

Make the organisation’s members aware of the importance of having a sustainable procurement strategy
Train and guide internal and external members of the organisation and supply chain
Develop links with other organisations and peer groups to learn from their experiences
Develop a standard approach to measuring strategic outcomes
Develop operational systems and procedures that are integrated with sustainability measurements and put these into practice in day-to-day procurement and monitoring activities
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