Global/local Sourcing and Challenges in the Context of IKEA

This study discusses IKEA's approach to developing sustainable practices across its local and global supply chain networks, including challenges and barriers that need to be addressed. It identifies a circular economy and forward contracts as the solution to overcome the identified barriers.

Running head: IKEA
Global/local Sourcing and Challenges in the Context of IKEA
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Abstract
Sustainability is increasingly becoming integral to modern business. Multinational corporations
(MNCs) in particular are under influence from the situation. Some of these spend hugely in
several projects to emerge a socially responsible body. For example, the study provides a brief
report on Dell and Walmart. Dell has been pretty successful with its green approach. It was also
named the greenest organization in the United States once in 2010. Although Walmart could not
perform well in terms of its sustainable approach at least it gives an example of such practices.
The main purpose of this study was to discuss IKEA's approach to developing sustainable
practices across its local and global supply chain networks. The study could reach some
interesting findings of IKEA's approach to sustainability. IKEA seeking to become a sustainable
employer reduced the number of its global suppliers to operate with a concentrated base of
suppliers. The purpose was to work with suppliers only those that can collaborate strategically
with IKEA on its vision to sustainability. It effectively shared its business model with its
suppliers. IKEA is trying to work collaboratively with its suppliers to reduce the barriers to its
sustainability projects. However, there are few challenges and barriers need to be addressed. The
study identifies that it is very challenging to balance cost with sustainable production of goods.
Some of the barriers to IKEA’s sustainable projects as found in this study are controlling and
reducing its waste contribution, and finding solutions to volatility in the currency exchange. The
study identifies a circular economy and forward contracts as the solution to overcome the
identified barriers.

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Table of Contents
1. Introduction..................................................................................................................................3
2. Methodology................................................................................................................................4
3. The main body of report..............................................................................................................5
3.1 Organization procurement strategy........................................................................................5
3.2 Comparison with best practices using relevant literature review..........................................8
3.3 Areas of further improvements............................................................................................10
3.3.1 The barriers...................................................................................................................11
3.3.2 Enablers........................................................................................................................11
3.3.3 Critical success factors.................................................................................................12
3.3.4 Possible impacts on performance.................................................................................12
4. Conclusion.................................................................................................................................12

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1. Introduction
IKEA is a globally renowned retail company in the world. It is headquartered in the
Netherlands. IKEA designs and sells read-to-assemble furniture, home accessories and kitchen
appliances. IKEA became the world’s largest furniture retailer in 2003 when its figures for sales
revenue reached €11 billion and 1.1 billion euros for the net profit. Founded in Sweden in 1943
IKEA is globally known for its modernist designs for products such as furniture and home
appliances. It takes care of its interior design work to reduce the operations’ cost. Corporate
attributes such as these allowed IKEA to develop hugely over the decades to 2010. It is during
this period IKEA could effectively lower the cost by an average 2-3%. The business strategy for
IKEA can be summarized as a global retailer that offers wide-range of well-designed home
furnishing products at low-price. The prices were kept low to an extent the products are
affordable to a huge consumer basei. This means the niche market has never been the target
market for IKEA. IKEA companies in Sweden are responsible for the design and development of
the IKEA's product range. It has its logistics centre in Europe based in Dortmund, Germany.
Singapore is the logistics centre for IKEA in Asian regionii. IKEA has more than 400 stores in
approximately 50 countries.
IKEA has long been following a tradition to embed sustainability in its operations. It has
expressed its keenness in practicing sustainability across its local and global supply chains.
IKEA has the vision to create a better everyday life for its customers. For this to happen IKEA
ensures a positive commitment to People & Planet of the triple bottom line (TBL) approach. The
real focus is on three pillars of IKEA sustainability approach. These areiii:
 Helping millions of people those who its consumers to live a more sustainable and secure
life at home;

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 Striving to avail resources and become energy independent;
 Playing a lead role in improving the lives of its customers and the communities it
influences with its business.
IKEA sets minimum requirements on social, environment and working conditions throughout
its local and global supply chains. IKEA uses a special term for this such as “IWAY”. IWAY
means IKEA way of purchasing materials, designing products and selling it to its target
customers. IWAY is a supplier code of conduct. This means IKEA is into a mutual agreement
with its suppliers across the globe to ensure sustainability across its globally spread supply chain
network. It is regularly into adopting sustainable practices to improve its impact on the
environment. In nowadays, multinational companies having a significant presence across
different countries in the world face demand pressures from consumers and Non-Governmental
Organizations (NGOs). This is for addressing the social and environmental impact of the
business. However, IKEA prides to be in those few, which adopt strategies to correct the social
and environmental impact of its business. It is with this view IKEA is investing in plans and
considering a restructuring of its organizational structure to support sustainable initiatives for the
leather supply chainiv. However, this can be a tricky move considering the barriers to implement
a sustainable global supply chain for the supply of leather. The barriers include but not limited to
like long transportation distances, resources investment, overseas suppliers and cultural
differences are few of these.
The main purpose of this study is to identify the areas where IKEA faces a challenge in
the pursuit of implementing a globally sustainable supply chain operations. The study also
recommends a few points of solutions to IKEA to control or overcome these barriers.

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2. Methodology
Secondary resources will be referred to a study about the challenges IKEA face
throughout its local and global supply chain network. Relevant literature will be used as well.
Relevant literature will help to understand the problems more descriptively and analytically. The
area of focus for this study is a broad subject. Hence, referring to secondary resources and
relevant literature will shed important lights on the purpose of this study. The roadmap for
methodology will comprise of the organization procurement strategy. The relevant literature
review will help identify the process and practices of IKEA. Moreover, this will also help to
compare IKEA with some of the best practices. Based on these pieces of discussion, the area of
further improvements for IKEA could be identified. The findings could be of significant
importance for IKEA considering its utter commitment to attain sustainability across its local and
global supply chain networks.
3. The main body of the report
3.1 Organization procurement strategy
IKEA has always been known for fulfilling its vision statement by identifying and
implementing an extensive range of business ideas. It uses these ideas to improve its supply
chain operations and to make it more sustainable as compared to existing. IKEA drives internal
competition at the organizational level. IKEA always strives to bring uniformity across its supply
chain operations at the global level. It mainly targets countries with low manufacturing cost.
Indeed, this is one step towards controlling the cost of the operations. However, the move is
rarely helpful for IKEA in terms of attaining sustainability across its local and global supply

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chain networksv. Sensing this urgency IKEA brought IWAY into practice to provide a code of
conduct to its suppliers and encourage a sustainable practice across its supply chain networkvi. In
spite of the move, it was never going to be easier for IKEA to manage its suppliers and ensure
they follow sustainable strategies. IKEA has an utter attachment for the sustainable development
of its local and global supply networks. However, it willingly does business with countries
offering low manufacturing cost to be able to reduce its entire operations’ cost. These two
objectives of IKEA are contradicting in nature. A growing concern for sustainability is less
feasible with existing intent to source from cheaper suppliersvii. This way of working has created
rooms for improvement. It is related to increased transparency and better cooperation within
IKEA.
IKEA enjoys huge economies of scale. However, with these contradicting terms, it
became a challenge for the Company to take the full advantage of its huge economies of scale.
This lead to a change in strategy. IKEA decided to restructure its sourcing strategy. The new
strategy was more oriented with its different product line. Hence, IKEA started following a
product-based strategy to separately monitor the suppliers dedicated to each product line. With
this into the process, IKEA derived a clear way of working with its local and global suppliers.
The supplier development process then became a part of the Company. As a result of this, IKEA
now has more concentrated supplier base. It effectively slashed the number of suppliers. Not less
than 1000 of suppliers now have no partnership with IKEAviii. IKEA claims to be into developing
common agenda and goals for working together with its local and global suppliers. As IKEA
claims the Company is now able to optimize its entire value chain as well as keep the cost of
operations low. As long as sustainable practices are concerned IKEA remains focused on
developing the understanding of its suppliers on the IKEA's business needs. It ensures that its

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suppliers are aware of what customers expect from IKEA. The sustainable development of
IKEA’s global supply chain network has three distinct pillars. These areix:
 Reducing the cost for entire processes of IKEA’s distribution network
IKEA can keep the operations' cost low. IKEA claims that it can work collaboratively with its
suppliers at local and global regions. The Company claims to make informed decisions and drive
its suppliers as well to make informed decisions. The suppliers of IKEA understand the growing
business needs of IKEA. Hence, they try and accommodate these changes, and offer materials,
which are good and cheaper as well. Such things will become a reality only if there is adequate
integration between the internal functions and external stakeholders of IKEA. It includes but not
limited to such as the design of the product, the selection process for sustainable materials,
designing for efficient manufacturing in terms of both cost and quality, logistics, the customer
use, and the buying processx. With the help of standard solutions for all its suppliers, IKEA can
meet consumer demand with much efficiency. The deliverables have become faster and the rate
of deliverables have also decreased. IKEA shares its business model with its suppliers. IKEA
does order materials in huge volumes. This helps IKEA to attain a high supplier bargaining
power. Due to higher bargaining capacity and bulk purchase of materials, IKEA should be able
to drive new industries.
 Collaboration with suppliers for growth
To be able to offer quality products at low-cost, it is important to have an effective and trusted
relationship with suppliers and strategic partners. This is important as well to have a wider but
concentrated base of suppliers, so that, IKEA does not have to compromise with the product
quality. IKEA rightly delivers on this account as it has a concentrated base of suppliers those

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who can offer quality products at a faster rate and low cost. IKEA enjoys an integrated way of
working with its local and global suppliers. The integration between IKEA and its suppliers help
either of the party to practice standard solutions and involve in the development of products. One
of IKEA’s strategies is to position its brand in such a way that it appears strategic and beneficial
for both its existing and potential suppliersxi. The partnership between IKEA and its suppliers can
be characterized to have mutual respect, transparency and trust for each other. IKEA believes in
creating competitive conditions to its suppliers, so that, there is enough motivation for its
suppliers to look at the new and growing business opportunities.
 IKEA follows a simple and professional style of purchasing
IKEA is constantly into Supplier Development and Purchasing Development processes. It is this
way of working that makes it a leadership Company. IKEA is constantly into developing a
platform of business intelligence where it has a common framework for identifying,
communicating and mitigating risks. It leads to one and shared views on trade barriers, political,
market and sustainability risks. This also leads to volatility in the supply of materials and
currency. To take advantage of the growing awareness of people on business sustainability,
IKEA identifies and operates a range of projects to increase its alienation with business
sustainability. Some of the examples include but not limited to such as leather and cotton
projectsxii. To behave professionally IKEA effectively reduces the layer between it and its
customers. In between, there is a concentrated range of suppliers who support IKEA offer quality
products at low cost to its target customers. This also makes IKEA an agile organization who
takes the leadership position in dictating terms and encouraging suppliers to respond to its
business needs. There is adequate clarity to its suppliers on what to and how to do different

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things. The principle is that IKEA is a sole body that encourages its suppliers and other people to
support IKEA on its sustainable needs.
3.2 Comparison with best practices using relevant literature review
IKEA is very concerned with the sustainable development of its supply chain network as
evidenced in this study and from instances they have been vocal to it. IKEA, as claimed by the
Company, shares its business model with its suppliers. It is to let its suppliers aware of IKEA's
concerns on sustainable development of its local and global supply chain networks. IKEA claims
to have been into a good relationship with its suppliers. IKEA has evidence on this fact.
According to IKEA, its suppliers know exactly what the Company expects from them in terms of
quality of the materials and its pricing as wellxiii. However, a thorough and critical assessment of
the supplier business relationship will best indicate whether the stated facts as above are true.
IKEA has implemented various programs as part of its corporate social responsibility (CSR)
activity. This includes but not limited to such as implementing programs to improve the lives of
affected children global wide. With these programs, IKEA intends to promote children's rights,
fight against child labor and support communities those who depend on IKEA's supply chain
network in India and Pakistan. IKEA is doing similar things across its supply chain network in
Brazilxiv. This indeed is a good move considering child labor has been a major social issue at a
worldwide level. However, there are other areas as well where IKEA can make its presence felt.
IKEA can boost its business by working into these areas. This includes but not limited to
addressing its environmental impact. For example, Dell was once recognized as the greenest
company in America in a public opinion survey. Dell in its vision to emerge as a green company
collaborated with strategic industry partners. It launched carbon-neutral programs, especially for

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its corporate customers and consumers. It also joined hands with the Carbon Disclosure Project
Supply Chain Leadership. Dell was an outright winner in implementing green practices and
reducing its greenhouse impactxv.
The sustainable visions of IKEA that is balancing cost and sustainability practices are
possible; however, very difficult to be implemented. Walmart is a major competitor of IKEA in
the United States as well as in other parts of the world. Walmart also struggled with its vision to
offer low-cost sustainable products to increase its customer base and emerge a responsible
business. Offering sustainable products means despite facing all the trade barriers keep the
pricing low. It is very unrealistic. In case there is volatility in currency behavior the importing
cost will also vary accordingly. No company will ever want to reduce the profit margin. In case
the currency behavior has affected the total purchasing cost the selling cost will also go up
considerably. It is to maintain a profitable venture. Similarly, in case of volatility in the supply of
materials the firm will have to look for other option to fulfill the demand. The other option might
not be as cost-effective as those existingxvi. All these suggest the probable challenges IKEA will
be facing in its pursuit to practice sustainability across its worldwide supply chain networks.
3.3 Areas of further improvements
Based on the discussion in this study and the findings of the (Section 3.2), there are few
areas where IKEA needs to find standard solutions for sustainable development of its worldwide
supply chain network. These areas are:
 Reducing the wastes

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IKEA can reduce the wastes by facilitating a “circular economy” across its local and global
supply chain networks. Circular economy helps to reduce the amount of waste by utilizing the
wastes in various possible ways to make it useful again.
 Volatility in the currency
Volatility in currency can be fought in several ways. One of the ways is getting “Forward
Contract” into practice. A forward contract eliminates the risk of currency volatility by allowing
to locking in a price today for a transaction to take place in the future.
3.3.1 The barriers
Circular Economy:
IKEA will find barriers at two separate levels such as “Within the Company” and
“Within the Value Chain”. Within the Company, IKEA will face barriers in the form of coupling
of taxation systems with the business model, resistance to change and a certain lack of consumer
demand. Within its Value Chain, IKEA will face barriers from lack of infrastructure and lack of a
secondary market to support the supply of raw materialxvii.
Forward Contract:
The list of barriers includes difficulty in estimating the size of the market and non-
standard nature of the contractsxviii.
3.3.2 Enablers

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Circular Economy:
Within the Company, the list of enablers will include long-term business perspectives,
employee attitude and competitiveness. Within the Value Chain, innovative ecosystems,
collaborations with strategic partners and the spillover effects of international corporations on the
local supplyxix.
Forward Contract:
Uncertainties surrounding the currency behavior is the enabler for forwarding contractxx.
3.3.3 Critical success factors
Circular Economy:
The critical success factors (CSFs) will comprise of using better terminology, engaging
the entire value chain and attaining a better understanding of materialsxxi.
Forward Contract:
CSFs will include significant participation from banks and financial corporations in
avoiding cascading series of defaults, and set the settlement date for future transactionsxxii.
3.3.4 Possible impacts on performance
As stated above, the circular economy will help IKEA in reducing the amount of waste it
produces. The operations’ cost will be under control and hence, the IKEA’s sustainability
approach will get a boost.

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A forward contract will help fight the uncertainties that surround to currency exchange
behavior.
4. Conclusion
Therefore, this can be concluded that IKEA is one of the few retail brands in the world to
have good vision to chase. It is because there is a growing awareness of how corporate
companies contribute with their wealth and exercises into a sustainable way of doing business.
Sustainable practices are the growing needs of the business, society and environment.
Sustainable practices help businesses to become socially responsible bodies. It boosts their
earnings and betters their market and corporate image. When global companies are heading to
business sustainability and with different purposes for it they are somehow benefitting the
communities they influence and the surrounding environment. When these things happen it
reduces the burden from both the local and international governments. Any country having its
multinational firms aggressively into sustainable practices the government of the country will
have a higher success rate in implementing policies about improvements into the society and the
environment. In spite of all these good points about sustainable business practices, these
practices are never easier for worldwide multinational firms. Like many multinational global
firms IKEA also faces barriers in its way to attaining business sustainability across its global
supply chain network. On a broader aspect, the study finds two possible barriers to IKEA’s
sustainable approach. These are its increasing contribution in generating the waste and possible
volatility in the currency. The amount of waste as found in this study can be fought with
practicing a circular economy. On the other hand, the possible volatility in currency exchange at
the international level can be fought with setting the forward contracts.

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xxi Aras, G. and Crowther, D., 2016. The durable corporation: Strategies for sustainable development. Routledge.
xxii Evans, S., Vladimirova, D., Holgado, M., Van Fossen, K., Yang, M., Silva, E.A. and Barlow, C.Y., 2017. Business
model innovation for sustainability: Towards a unified perspective for the creation of sustainable business models. Business
Strategy and the Environment, 26(5), pp.597-608.