How IKEA has incorporated sustainability principles free essay sample

Introduction Traditionally, most multinational companies see themselves as competing to survive. However, if this philosophy leads to unwillingness to co-operate, it can be self-defeating. Behind this concept is the idea of supply chain management, which is the network of organizations and individuals who are involved in producing and delivering products to the end users. Thus, a home furnishing company such as IKEA is a part of a supply chain that includes the suppliers of raw materials, component manufacturers, transporters, retail stores and end customers. In the past it was often the case that the relationship with the suppliers was competitive rather than co-operative. It is still the case today that multinational companies will try to achieve cost reductions and quality improvements at the expense of their supply chain partners, but a further dimension has been added sustainability. The aim of this essay is to examine IKEA’s sustainability report and evaluate its sustainability principles. It will explore how IKEA has incorporated its sustainability principles with its suppliers whilst maintaining and improving its strategic competitive advantage in the home furnishing industry. About IKEA IKEA is a multinational company that produces home products including disassembled furniture, accessories, bathrooms, and kitchens at retail stores around the world. The company focused on disassembled design furniture at reasonable prices in the beginning and is currently the largest furniture manufacturer in the world. From IKEA’s headquarter in Sweden, it operates more than 265 stores in twenty-five countries and employs one 123,000 (Bartlett Nanda, 1996, pp. 5-20). IKEA designs all of its products, which are mostly manufactured by independent sources, and sells them under its brand name through its own stores and a number of other distribution channels. IKEA owns almost all strategic business units that it relies on for its production, which is crucial for their profitability, since they basically rely on outsourcing their production. For example, it owns the industrial group Swedwood, the main source for the wood that to be used in the manufacturing of IKEA’s furniture, as well as the sales companies that run IKEA stores and the procurement functions. IKEA formed a separate company IKEA of Sweden that is responsible for the design and improvement of the products of the IKEA collection. Sustainable procurement policy Sustainability is a development concept defined by the United Nations (1987) as meeting the needs of the present without compromising the ability of future generations to meet their own needs. Sustainable procurement policy emerged from this concept. It refers to a set of purposes, principles and rules that guide the work of an organization and put its social, environmental and economic values at the heart of a business to achieve its competitive advantage (Monczka et al. , 2010, p. 136). IKEA’s sustainable report demonstrated that they are dedicated and striving to incorporate sustainability within their business relationships by implementing comprehensive principles in order to gain a competitive advantage as a first mover. Those principles expressed explicitly in their code of conduct, which called â€Å"IWay†, expressly cover all the three sustainability aspects social, environmental, and economic—and guide IKEA’s internal and external relationships and especially its supplier relationships. This policy is based on their vision â€Å"to create a better everyday life for many people† (IKEA Sustainability Report, 2010, p. 6). and is expanded with the 2015 Sustainability Goals that state that sustainability is a priority and should influence the whole value chain from product design to the end of a product’s life cycle. IKEA’s FY2015 Sustainability Goals are: to offer a range of products that is more sustainable, taking a leading role toward a low carbon society, turning waste into resources, reducing water footprint, and taking social responsibility. Those goals are considered and integrated into the supplier relations’ policies (IKEA Sustainability Report, 2010, p. 8). Supplier selection policy and sustainability principles Supplier selection is becoming a much more important aspect of the procurement process for IKEA. IKEA seeks to have close and long-term relationships with suppliers who share and respect its values. IKEA as a multinational company that has a concern for its reputation is forged a bond that governs their relationships with their suppliers, since they rely on outsourcing their production. IKEA deals with more than one thousand suppliers to procure the products required for its global operations. IKEA has incorporated its â€Å"IWAY† to minimize risks that could affect its sustainability policy especially social or environmental risks. IWAY contains the requirements suppliers have to meet in order to be approved by IKEA and specifies that it is the responsibility of the suppliers to communicate the code of conduct to their staff and sub-suppliers. The code of conducts mainly covers the sustainability and its social, environmental and economic aspects. While it is compulsory for suppliers to adhere to the relevant local laws as per communicated in â€Å"IWAY†, it is uncertain whether adequate standards and laws exist in developing countries. IKEA specifies that in addition to relevant law, suppliers must comply with the code of conduct. To enter a business relationship with IKEA, suppliers must first fulfill pre-requirements that mainly focus on social and environmental values. IKEA stipulates that complete compliance with the code of conduct should be reached within twelve months from first delivery date (IKEA Sustainability Report 2010, pp. 15-37). Environmental values are the first sustainability value that is communicated in the code of conduct. It is subdivided in a number of principles, the first one being energy consumption reduction. The code demands measuring and comparing the energy utilization annually by assessing measurable goals, time frames, and current measures for raw materials, water usage, and chemical spills. The second principle focuses on preventing any kind of severe pollution to air, ground and water. The suppliers have to ensure that they do not emit any excess emissions, high noise levels, or pollute the water. In fact, to suppliers have to utilize effluent treatment plants (ETPs) for water and have to properly operate them. The third principle demands that suppliers have to handle, store, and dispose chemicals and hazardous waste such as lubricant oils, paints, acids in a safe manner for workers and the environment. Suppliers are required to have and maintain Material Safety Data Sheets, competence training for the staff, and reliable labeling for chemicals and hazardous waste (IKEA Sustainability Report 2010, pp. 58-85). This indicates that IKEA tries to lead their suppliers and sub-suppliers toward achieving high environmental standards. IKEA furthermore stresses the importance of approved suppliers having plans to mitigate environmental impacts from production and operations. The second sustainability value is the social one. IKEA states that it â€Å"expects that suppliers have to respect the basic human rights and to treat their workers honestly and with respect† (IKEA Sustainability Report 2010, p. 38). Firstly, IKEA’s IWAY emphasized the importance of preventing child and forced labor. To ensure complete compliance, IKEA has assigned a supervisory duty to internal and external auditors. Secondly, suppliers have to provide healthy and safe working environments by e. g. , facilitating high air quality, a low level of noise, enough lighting, and proper drinking water and hygiene facilities. The second social principle is to provide staff with health and safety training for aspects of the daily working life before they start working. The third social principle is that suppliers have to pay their staff the minimum legal wages and compensate them for overtime. Thus, suppliers have to provide overtime information such as pay-slips. Also, suppliers should not provide their staff more than three months of advance payment to avoid that they are working under force. Suppliers have to grant weekly, yearly and emergency leave days. The fourth social principle is that staff needs to be treated fairly and without any kind of discrimination. Lastly, the code of conducts states that IKEA does not accept physical punishment and harassment or abuse (IKEA Sustainability Report 2010, p. 38). Economic values are the code of conducts’ third sustainability value. Since IKEA mostly outsources its production to developing countries, the scale of IKEA’s activities can have an effect on the host economies. According to Sturges (2000, p. 12) there is a strong relation between the activities of multinational companies and a positive economic development of host countries. One of the important factors for economic well-being is investment high levels of investment are coupled with a strong economy (Lucas, 2000, p. 24). IKEA usually does not invest directly in the developing countries it operates in, but encourages other stakeholders to invest by subcontracting the production of its products. Thus, factories will be built, people will be employed and money will be injected into the host countries’ economies. An initial income will be distributed, goods will be consumed, and new income is created with each transaction. This in turn creates new demand for goods, which creates more demand for labor and thus more employment opportunities for more people (Coates, 2000, p. 60). IKEA balances the sustainability aspects to some degree through the supplier selection policy to achieve a competitive advantage by which will increase profitability that is important for IKEA as per mentioned by the Group President and CEO Mikael Ohlsson (IKEA Group net profit) Good profitability is needed to carry out our extensive growth program on existing as well as new markets, to give more people access to the IKEA range. Sustained profitability is also enabling us, through IKEA Social Initiative, to finance a number of Social projects that e. g. soon will have benefited 100 million children†. According to Moffatt (2008, pp. 81-87), IKEA’s supplier selection policy represents the traditional view of sustainable development, which simply seeks the crossing point of the sustainability aspects economic, environmental and social. Much evidence for IKEA’s commitment to their aims toward their stakeholders has been found. For example, IKEA works together with UNISEF in joint projects to safe children around the world and prevent workplace abuse (IKEA Sustainability Report 2010, p. 27). They press their suppliers to supply only certified wood and timber and follow their forestry code of conduct. The economic aspect is showcased by IKEA’s efforts of developing their suppliers in developing countries by increasing employment levels and household incomes in the host economies. IKEA’s competitive advantage Competitive advantage is the strategic advantage a specific business has over its competitor within its industry. Attaining a competitive advantage supports a business and improves its position in its industry (Chaharbaghi Lynch 1999, p. 45). The challenge is that achieving sustainability requires additional cost, while competitiveness demands lower costs, especially in highly competitive industries (Porter Linde, 1995, p. 97). In the case of IKEA, it has been stated clearly that sustainability is not an option anymore, but a requirement that should not be traded off for lower prices. IKEA’s sustainability report shows that they have incorporated sustainability and also achieved a competitive advantage, while providing people with innovative, stylish, affordable home furnishing products. Also, it can be assessed that IKEA is keen to take a distinctive role in the industry through the use of the first mover strategy, which could add another competitive advantage (Adams, 2006, p. 143). According to Hart and Ahuja (1996, p. 31), being sustainable really pays and will reflect positively on the bottom line by utilizing a prevention strategy, which results in an efficiency improvement. A prevention strategy implies that a re-engineering has to be applied on the production process meaning that most of the excess cost and the environmental impact would be eliminated starting from the designing stage until product disposal (Horngren et al. , 2011, p. 281). For example, IKEA’s sustainability report stressed that the goal was minimizing Carbon dioxide emission, turning waste into resources, reducing the water footprint, and becoming more socially responsible. These goals have been communicated within IKEA through the sustainability score-card, which emphasizes producing more products by using less material, using renewable materials, increasing transport efficiency, using energy efficiently, and minimizing the use of energy, water, and waste in the usage stage (IKEA Sustainability Report 2010, p. 19). Suppliers’ compliance with the code of conduct †¢ In order to guarantee the suppliers’ compliance to IWAY, IKEA explicitly requires having the right of inspecting the suppliers’ floor shops without any previous announcement. IKEA can either use its internal auditors, who are supposed to do unannounced routine checks of the suppliers’ compliance, or external auditors such as KPMG and Intertek Testing Services (IKEA Sustainability Report 2010, p. 37). Recently, IKEA faced criticism for one of its code of conduct’s aspects child labors. Two of its suppliers in Bangladesh and India were employing children and not respecting human rights in their dealing with their employees (Haan Michiel, 2006, p. 20; Sjoman et al. , 2006). IKEA has admitted the existence of these incidents in its sustainability report (2010, p. 37) and stated that it is focusing on the improvement of their suppliers’ social and environmental responsibility gradually, especially in developing countries to achieve full compliance by 2015, since there are no supportive laws for such principles. This can be interpreted as a transparent and proactive approach by IKEA that adds to its good record in terms of sustainability. Conclusion In conclusion, sustainable procurement policy is vital for IKEA’s suppliers’ relations’ management. IKEA’s sustainable procurement principles contain all relevant sustainability aspects. However, there were a number of violations of the code of conduct by suppliers, which have caught the attention of IKEA and will be addressed in future improvements. Regardless of the discrepancies among some of the suppliers, IKEA seems to have incorporated sustainability principles deeply within its suppliers’ performance evaluations and is maintaining its competitive advantage in the home furnishing industry. This competitiveness has been achieved by innovation, a leadership role, and low prices they were the result of increasing production efficiency throughout the value chain and are based on the concept of preventing any unnecessary processes and material use. References