A Business Ethics Case Study
Photo credit: mastrminda/Pixabay
Yuvraj Rao '23, a 2022-23 Hackworth Fellow at the Markkula Center for Applied Ethics graduated with a marketing major and entrepreneurship minor from Santa Clara University.
Introduction
IKEA is a Swedish multinational company that was founded in 1943 by Ingvar Kamprad.[1] The company mainly provides simple, affordable home furniture and furnishings, and it pioneered DIY, or do it yourself, furniture. Kamprad originally sold binders, fountain pens, and cigarette lighters, but eventually expanded to furniture in 1948. According to the Journal of International Management, in 1953, Kamprad offered products that came as “a self assembled furniture” for the lowest price, which ultimately became a key part of IKEA’s value proposition going forward. In 1961, IKEA started to contact furniture factories in Poland to order chairs from a factory in Radomsko.[2] Outsourcing to Poland was mainly due to other Swedish furniture stores pressuring Swedish manufacturers to stop selling to IKEA. In the mid 1960’s, IKEA continued its supplier expansion into Norway, largely because IKEA didn’t want to “own their own line of production,”[3] and Germany due to its ideal location (downtown, suburban area) to place an IKEA store. Given IKEA’s suppliers were now not just in Sweden, it led to an increased importance on developing strong relationships with its suppliers.
In the following decades, IKEA continued its expansion and solidified its identity as a major retail outlet with parts being manufactured around the world. By the mid 90’s, IKEA was the “world’s largest specialized furniture retailer with their GDP reaching $4.5 billion in August of 1994.”[4] It also worked with 2,300 suppliers in 70 different countries, who supplied 11,200 products and had 24 “trading offices in nineteen countries that monitored production, tested product ideas, negotiated products, and checked quality.”[5] IKEA’s dependence on its suppliers ultimately led to problems in the mid 1990’s. At this time, IKEA was the largest furniture retailer in the world, and had nearly “100 stores in 17 countries.”[6] Also during this time, a Swedish documentary was released that highlighted the use of child labor in the rug industry in Pakistan, which impacted IKEA given it had production there. The rug industry in particular is extremely labor intensive and is one of the largest “export earners for India, Pakistan, Nepal and Morocco.” Here, children are forced to work long hours for very little pay (if there is any pay at all). In some cases, their wages are only enough to pay for food and lodging. In cases where children are not paid, the wages are used by the loom owner to pay the parents and agents who brought the children to the factories. Additionally, the work the children must do comes with a lot of risk. More specifically, children face risks of diminishing eyesight and damaged lungs from “the dust and fluff from the wool used in the carpets.”[7] As a result of these working conditions, many of these children are very sick when they grow up. Despite these terrible conditions, it isn’t that simple for families not to send children to work at these factories. A lot of the parents can’t afford food, water, education, or healthcare, so they are often left with no choice but to send their children to work for an additional source of income.[8]
IKEA and Child Labor Accusations
The accusations of child labor in the rug industry in Pakistan posed a serious challenge for IKEA and its supply chain management goals. It would need to address the serious issues of alleged injustice for the sake of its reputation and brand image. Additionally, as IKEA also had suppliers in India, it would need to be in compliance with India’s “landmark legislation act against child labor, the Child Labor (Prohibition and Regulation) Act of 1986.”[9]
As a result of these accusations, IKEA ultimately ended its contracts with Pakistani rug manufacturers, but the problem of child labor in its supply chain still persisted in other countries that were supplying IKEA. Marianne Barner, the business area manager for rugs for IKEA at the time, stated that the film was a “real eye-opener…I myself had spent a couple of months in India for some supply chain training, but child labor was never mentioned.”[10] She also added that a key issue was that IKEA’s “buyers met suppliers at offices in the cities and rarely visited the actual production sites.”[11] The lack of visits to the actual production sites made it difficult for IKEA to identify the issue of child labor in these countries.
To make matters worse, in 1995, a German film “showed pictures of children working at an Indian rug supplier... ‘There was no doubt that they were rugs for IKEA,’ says business area manager for textiles at the time, Göran Ydstrand.”[12] In response to these accusations, Barner and her team went to talk to suppliers in Nepal, Bangladesh, and India. They also conducted surprise raids on rug factories and confirmed that there was child labor in these factories. The issue of child labor, along with the accusations of having formaldehyde (a harmful chemical) in IKEA’s best selling BILLY bookcases and the discovery of unsafe working conditions for adults (such as dipping hands in petrol without gloves), led to increased costs and a significantly damaged reputation for the company.
It was later discovered that the German film released in 1995 was fake, and the renowned German journalist who was responsible for this film was involved in “several fake reports about different subjects and companies.”[13] IKEA was now left with three options. First, some members of IKEA management wanted to permanently shut down production of their rugs in South Asia. Another option was to do nothing and proceed with its existing practices now that it was announced that the film was fake. The third option was that the company could attempt to tackle the issue of child labor that was clearly evident in its supply chain, regardless of whether the film was fake or not. IKEA ultimately decided to opt for the third option, and its recent discoveries would eventually help guide the policies the company implemented to address these issues, particularly child labor in India.
Steps Taken to Address Child Labor in the Supply Chain
IKEA took multiple steps to deal with its damaged reputation and issues of child labor in its supply chain. One way in which it did this was through institutional partnerships. One such partnership was with Save the Children, which began in 1994. According to Save the Children’s website, one of the main goals of their partnership is to realize children's “rights to a healthy and secure childhood, which includes a quality education. By listening to and learning from children, we develop long-term projects that empower communities to create a better everyday life for children.”[14] Furthermore, the partnership is intended to “drive sustainable business operations across the entire value chain.”[15] Together, IKEA and Save the Children are focused on addressing the main causes of child labor in India’s cotton-growing areas.[16] Save the Children also advised IKEA to bring in an independent consultant to ensure that suppliers were in compliance with their agreements, which further improved IKEA’s practices in its supply chain. IKEA also partnered with UNICEF to combat child labor in its supply chain. According to the IKEA Foundation, in 2014, IKEA provided UNICEF with six new grants totaling €24.9 million with a focus “on reaching the most marginalized and disadvantaged children living in poor communities and in strengthening UNICEF’s response in emergency and conflict situations.” Additionally, five of the six grants were given to help programs in “Afghanistan, China, India, Pakistan, and Rwanda,” with a “focus on early childhood development, child protection, education, and helping adolescents to improve their lives and strengthen their communities.”[17]
Next, IKEA and Save the Children worked together to develop IWAY, which was launched in 2000.[18] IWAY is the IKEA code of conduct for suppliers. According to the IKEA website, “IWAY is the IKEA way of responsibly sourcing products, services, materials and components. It sets clear expectations and ways of working for environmental, social and working conditions, as well as animal welfare, and is mandatory for all suppliers and service providers that work with IKEA.”[19] In addition, IWAY is meant to have an impact in the following four areas: “promoting positive impacts on the environment,” “securing decent and meaningful work for workers,” “respecting children’s rights”, and “improving the welfare of animals in the IKEA value chain.”[20] IWAY is used as a foundation to collaborate with IKEA’s suppliers and sub-contractors to ensure supply chain transparency.
As mentioned previously, one of the main goals of IKEA’s partnership with Save the Children was to address child labor in India’s cotton-growing areas. To do this, IKEA and Save the Children developed a program that would ultimately help more than 1,800 villages between 2009 and 2014. More specifically, the program moved nearly 150,000 children out of child labor and into classrooms. Also, as a result of this program, more than 10,000 migrant children “moved back into their home communities.”[21] Last but not least, the program trained almost 2,000 teachers and 1,866 Anganwadi workers (whose duties include teaching students and educating villagers on healthcare[22]) in order to provide each village with a community leader. This was to ensure that the community had a skilled leader to assist in educating the villagers. In 2012, the IKEA Foundation and Save the Children announced that they would expand with new programs in Punjab, Haryana, and Rajasthan. This joint program illustrates IKEA’s commitment to improving communities in addition to helping children go to school.
Conclusion & Looking Ahead
IKEA has taken numerous steps to ensure that suppliers abide by the IWAY Code of Conduct. Companies around the world can learn from the policies IKEA has put in place to ensure that each company has control and complete oversight over their supply chains, which can lead to a more transparent and ethical supply chain. According to The IKEA WAY on Purchasing Products, Materials and Services, one way in which IKEA does this is by requiring all suppliers to share the content of the code to all co-workers and sub-suppliers, thus leading to more accountability among the company's suppliers. IKEA also believes in the importance of long term relationships with its suppliers. Therefore, if for some reason, a supplier is not meeting the standards set forth by the code, IKEA will continue to work with the supplier if the supplier shows a willingness to improve its practices with actionable steps to complete before a specified period of time.[23]
Additionally, during the IWAY implementation process, IKEA monitors its suppliers and service providers. To do this, IKEA has a team of auditors who conduct audits (both announced and unannounced) at supplier facilities. The auditors are also in charge of following up on action plans if suppliers are failing to meet the agreed upon standards specified by IWAY. Along with this, “IKEA…has the Compliance and Monitoring Group, an internal independent group that is responsible for independent verification of implementation and compliance activities related to IWAY and Sustainability.”[24] IKEA also has independent third party teams who conduct inspections on behalf of IKEA.[25] By conducting audits and putting together teams to ensure cooperation from suppliers throughout the supply chain, companies can be better equipped to prevent unethical practices in the production of goods and services. In Ximeng Han’s Analysis and Reflection of IKEA’s Supply Chain Management, Han highlights IWAY’s importance in maintaining links with IKEA’s suppliers.[26] Therefore, IWAY plays a crucial role in ensuring supply chain transparency and in building a more ethical and sustainable supply chain.
In addition to all of the policies IKEA has put in place to address issues in its supply chain, the company has also donated a lot of money to combat child labor in India. More specifically, according to an IKEA Foundation article written in 2013, “Since 2000, the IKEA Foundation has committed €60 million to help fight child labour in India and Pakistan, aiming to prevent children from working in the cotton, metalware and carpet industries.”[27] Furthermore, in 2009, the company announced that it would donate $48 million to UNICEF to “help poor children in India.”[28]
IKEA’s goal to completely eliminate child labor from its supply chain is an ongoing battle, and it is still committed to ensuring that this is ultimately the case. More specifically, it is extremely difficult to completely eliminate child labor from a company’s supply chain because of the various aspects involved. According to a report published in 2018 by the International Labour Organization, these aspects include a legal commitment, building and “extending” social protection systems (including helping people find jobs), “expanding access to free, quality public education,” addressing supply chain issues, and providing more protection for children in general.[29] Furthermore, Han points out the potential downsides that could arise as a result of having a global supply chain like IKEA does. Given IKEA is an international retailer, the company “has to spend a lot of time, money and manpower to enter new markets due to the different cultures, laws and competitive markets in different regions, and there is also a significant risk of zero return.”[30] Han also argues that the COVID-19 pandemic showed IKEA’s and many other companies’ inability to respond to “fluctuations in supply and demand,” primarily due to inflexible supply chains.[31] This information points out the various aspects that need to align in order to completely end the issue of child labor throughout the world, as well as the difficulties of having a global supply chain, which is why child labor is so difficult to completely eliminate.
Specific to IKEA’s actions, in 2021, IKEA announced three key focus areas for its action pledge: “Further integrating children’s rights into the existing IKEA due diligence system (by reviewing IWAY from a child rights’ perspective in order to strengthen the code),” “accelerating the work to promote decent work for young workers,” and partnering “up to increase and scale efforts.”[32] IKEA’s fight to end child labor in India highlights the importance of supply chain transparency and putting policies in place that ensures cooperation from suppliers and all parties involved. Additionally, in a Forbes article written in 2021, “According to the data from the OpenText survey…When asked whether purchasing ethically sourced and/or produced products matters, 81 percent of respondents said yes.”[33] Steve Banker, who covers logistics and supply chain management, also adds, “What is interesting is that nearly 20 percent of these survey respondents said that it has only mattered to them within the last year, which indicates that the Covid pandemic, and some of the product shortages we have faced, has made consumers re-evaluate their stance on ethical sourcing.”[34] These results confirm that customers are now considering how a product was sourced in their purchasing decisions, which makes it even more important for IKEA to be transparent about its efforts to eliminate child labor from its supply chain. Furthermore, the company’s open commitment to eliminating child labor and helping communities in India is beneficial in maintaining a positive relationship with its stakeholders.
The increase in globalization has made it even more essential for companies to monitor their supply chains and have complete oversight over business practices. IKEA is one of the companies leading the way in building a more ethical and sustainable supply chain, but more companies need to follow suit and implement policies similar to IWAY that holds all parties in the supply chain accountable for their actions. Through supply chain transparency and accountability, companies will likely be better equipped to handle issues that arise throughout their respective supply chains. Furthermore, by implementing new policies, conducting audits, and maintaining close communication with suppliers, companies can work to eliminate child labor in their supply chains and put children where they belong: in school.
Reflection Questions:
- What does this case teach you about supply chain ethics?
- What are some of the ways in which management/leaders can ensure compliance of the standards set forth by a company in terms of supplier behavior and ethical sourcing?
- Who is primarily responsible for ensuring ethical behavior throughout the supply chain? Is it the company? The suppliers? Both?
- How can companies utilize the various platforms and technologies that exist today to better understand and oversee their supply chains?
- IKEA has taken numerous steps to address child labor in its supply chain. Do you think every business working in a context that may involve child labor has a duty to act in a similar way? Why or why not?
Works Cited
“About Ikea – Our Heritage.” IKEA.
“Anganwadi Workers.” Journals Of India, 16 June 2020.
Banker, Steve. “Do Consumers Care about Ethical Sourcing?” Forbes, 9 Nov. 2022.
Bharadwaj , Prashant, et al. Perverse Consequences of Well-Intentioned Regulation ... - World Bank Group.
“Child Labor in the Carpet Industry Rugmark: Carpets: Rugs: Pakistan.” Child Labor in the Carpet Industry RugMark |Carpets | Rugs | Pakistan.
“Creating a Sustainable IKEA Value Chain with Iway.” Sustainability Is Key in Our Supplier Code of Conduct.
“Ending Child Labour by 2025 - International Labour Organization.” International Labour Organization.
“Film on Child Labour Is Eye-Opener for IKEA.” IKEA Museum, 31 Mar. 2022.
Foundation , ECLT. “Why Does Child Labour Happen? Here Are Some of the Root Causes.” ECLT Foundation, 17 May 2023.
Han, Ximeng. “Analysis and Reflection of IKEA’s Supply Chain Management.” Analysis and Reflection of IKEA’s Supply Chain Management | Atlantis Press, 27 Dec. 2022.
“Human Rights and Global Sourcing: IKEA in India.” Journal of International Management, 13 May 2011.
“IKEA and IKEA Foundation.” Save the Children International.
“IKEA Foundation Contributes €24.9 Million to UNICEF to Help Advance Children’s Rights.” IKEA Foundation, 26 May 2020.
“IKEA Foundation Helps Fight the Roots Causes of Child Labour in Pakistan.” IKEA Foundation, 18 Feb. 2013.
“Ikea Gives $48 Million to Fight India Child Labor.” NBC News , 23 Feb. 2009.
“IKEA Supports 2021 as the UN International Year for the Elimination of Child Labour.” About IKEA.
The Ikea Way on Purchasing Products, Materials and Services.
Jasińska, Joanna, et al. “Flat-Pack Success: IKEA Turns to Poland for Its Furniture.” – The First News.
Thomas , Susan. “IKEA Foundation Tackles Child Labor in India’s Cotton Communities.” Boston College Center for Corporate Citizenship , 15 July 2014.
[1] “About Ikea – Our Heritage.” IKEA.
[2] Jasińska, Joanna, et al. “Flat-Pack Success: IKEA Turns to Poland for Its Furniture.” – The First News.
[3] “Human Rights and Global Sourcing: IKEA in India.” Journal of International Management, 13 May 2011.
[4] “Human Rights and Global Sourcing: IKEA in India.” Journal of International Management, 13 May 2011.
[5] “Human Rights and Global Sourcing: IKEA in India.” Journal of International Management, 13 May 2011.
[6] “Film on Child Labour Is Eye-Opener for IKEA.” IKEA Museum, 31 Mar. 2022.
[7] “Child Labor in the Carpet Industry Rugmark: Carpets: Rugs: Pakistan.” Child Labor in the Carpet Industry RugMark |Carpets | Rugs | Pakistan.
[8] Foundation , ECLT. “Why Does Child Labour Happen? Here Are Some of the Root Causes.” ECLT Foundation, 17 May 2023.
[9] Bharadwaj , Prashant, et al. Perverse Consequences of Well-Intentioned Regulation ... - World Bank Group.
[10] “Film on Child Labour Is Eye-Opener for IKEA.” IKEA Museum, 31 Mar. 2022.
[11] “Film on Child Labour Is Eye-Opener for IKEA.” IKEA Museum, 31 Mar. 2022.
[12] “Film on Child Labour Is Eye-Opener for IKEA.” IKEA Museum, 31 Mar. 2022.
[13] “Film on Child Labour Is Eye-Opener for IKEA.” IKEA Museum, 31 Mar. 2022.
[14] “IKEA and IKEA Foundation.” Save the Children International.
[15] “IKEA and IKEA Foundation.” Save the Children International.
[16] “IKEA and IKEA Foundation.” Save the Children International.
[17] “IKEA Foundation Contributes €24.9 Million to UNICEF to Help Advance Children’s Rights.” IKEA Foundation, 26 May 2020.
[18] “IKEA and IKEA Foundation.” Save the Children International.
[19] “Creating a Sustainable IKEA Value Chain with Iway.” Sustainability Is Key in Our Supplier Code of Conduct.
[20] “Creating a Sustainable IKEA Value Chain with Iway.” Sustainability Is Key in Our Supplier Code of Conduct.
[21] Thomas, Susan. “IKEA Foundation Tackles Child Labor in India’s Cotton Communities.” Boston College Center for Corporate Citizenship , 15 July 2014.
[22] “Anganwadi Workers.” Journals Of India, 16 June 2020.
[23] The Ikea Way on Purchasing Products, Materials and Services.
[24] The Ikea Way on Purchasing Products, Materials and Services.
[25] The Ikea Way on Purchasing Products, Materials and Services.
[26] Han, Ximeng. “Analysis and Reflection of IKEA’s Supply Chain Management.” Analysis and Reflection of IKEA’s Supply Chain Management | Atlantis Press, 27 Dec. 2022.
[27] “IKEA Foundation Helps Fight the Roots Causes of Child Labour in Pakistan.” IKEA Foundation, 18 Feb. 2013.
[28] “Ikea Gives $48 Million to Fight India Child Labor.” NBC News , 23 Feb. 2009.
[29] “Ending Child Labour by 2025 - International Labour Organization.” International Labour Organization.
[30] Han, Ximeng. “Analysis and Reflection of IKEA’s Supply Chain Management.” Analysis and Reflection of IKEA’s Supply Chain Management | Atlantis Press, 27 Dec. 2022.
[31] Han, Ximeng. “Analysis and Reflection of IKEA’s Supply Chain Management.” Analysis and Reflection of IKEA’s Supply Chain Management | Atlantis Press, 27 Dec. 2022.
[32] “IKEA Supports 2021 as the UN International Year for the Elimination of Child Labour.” About IKEA.
[33] Banker, Steve. “Do Consumers Care about Ethical Sourcing?” Forbes, 9 Nov. 2022.
[34] Banker, Steve. “Do Consumers Care about Ethical Sourcing?” Forbes, 9 Nov. 2022.