MINISTRY OF EDUCATION AND TRAINING

HOA SEN UNIVERSITY

FACULTY OF ECONOMICS AND BUSINESSES

REPORT:
IKEA’S GLOBAL SOURCING STRATEGY

Instructor: Nguyễn Thuỳ Giang

Subject: Recruitment and Selection
Class: 0100
Semester: 2233
Group: 2
Phạm Ngọc Bảo An – 22011976
Phạm Nguyễn Như Quỳnh – 22011976
Trần Hà Tường Vy – 22200001

06/2023
 ABSTRACT

This report highlights the pressing global sourcing problems faced by IKEA, a
multinational furniture retailer, in relation to allegations of forced labor practices within
the supply chain in Belarus. Over the years, IKEA has built a reputation for its
commitment to sustainability and ethical sourcing. However, recent investigations have
uncovered evidence suggesting that the company's suppliers in Belarus have been
involved in the exploitation of forced laborers from detention camps, raising serious
concerns about IKEA's adherence to its ethical standards. First, the report introduces the
context by emphasizing IKEA's prominence as a global furniture retailer known for its
sustainability and ethical practices. It highlights the emergence of allegations related to
forced labor in Belarus and their potential implications on the company's reputation and
credibility. Second, it focuses on the investigations carried out to substantiate these
allegations, shedding light on the findings and their implications. Also briefly highlights
the gravity of the issue and the urgency for IKEA to address these sourcing problems,
emphasizing the importance of upholding ethical standards throughout the supply chain.
It serves as a concise summary of the challenges faced by IKEA and the need for prompt
action to address the allegations of forced labor in Belarus.

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 ACKNOWLEDGEMENT

“We would like to say thanks to Ms. Nguyen Thuy Giang, our teacher of the
“Recruitment and Selection” subject and the guideliner for our assignment. With your
help, we'd be able to finish the assignment on time with the best resources and
knowledge. Your help means a lot to us, not only for the value of the assignment but also
for our resource of knowledge. We really appreciate that.”
“We also would like to give out appreciation to all the scientists, marketer and researcher
for such valuable resources and data. On the path to the project, there would have been a
lot of issues without the references from all of you. Your work means a lot to us to fulfill
the project and finish the assignment. Wish you all the best in your future.”
“Doing the analysis as a university student, we can’t assure that every single information
and clause we stated in the report is correct. There might be some misinformation, due to
misunderstanding the method or concluding the issue in an incorrect way. Please feel free
to give us compliments, so that we can fix our disadvantages.”
“Once again, thanks to all the people with even a very little contribution, we would’ve
done this report on time.”

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 TABLE OF CONTENTS

ACKNOWLEDGEMENT................................................................................................2

TABLE OF CONTENTS...................................................................................................3

TABLE OF PICTURES....................................................................................................4

1. Introduction............................................................................................................5

1.1. Brief history of IKEA's supply chain............................................................5

1.2. Description of IKEA's current supply chain structure................................6

2. Staffing and Recruitment Issues in IKEA's Supply Chain Outsourcing..........8

2.1. Reasons for outsourcing staffing and recruitment functions......................8

2.2. Relationship to suppliers................................................................................8

2.3. Challenges faced by outsourced supplier’s workers....................................9

3. Discussion and Analysis.......................................................................................12

3.1. Reasons for outsourcing................................................................................12

3.2. Evaluation of the impact of outsourcing on IKEA's supply chain

efficiency...................................................................................................................14

3.3. Examination of potential solutions to alleviate the issues..........................15

4. Recommendation and Conclusion.......................................................................16

REFERENCE...................................................................................................................18

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 TABLE OF PICTURES

Picture 1: Ingvar Kamprad (left) together with his sister Kerstin on a Swedish
summer’s day in the early 1930s. IKEA..........................................................................5
Picture 2: IKEA’s global supply chain planning processes............................................6

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 1. Introduction
1.1. Brief history of IKEA's supply chain
As the world market continues to change, successful companies are constantly facing
new conditions and will have to cope with them. Globalization, which makes the business
environment more open with increased investment and trade between countries, is one of
the major trends that have changed the structure of the market.
One of the most important strategic challenges faced by purchasing and supply managers
is global sourcing. Businesses have been shifting their business requirements from local
suppliers to cheaper suppliers all over the world in the face of increased pressure for cost
reductions. IKEA is not an exception.
IKEA. Ingvar Kamprad Elmtary Agunnaryd, is a privately owned global manufacturer of
home products and specializes in the design and sale of preassembled furniture,
appliances as well as household accessories.”IKEA was founded in 1943, and named
after the initials of founder Ingvar Kamprad, Elmtaryd, the farm on which he grew up,
and Agunnaryd, the nearby village. Today, the company is the largest furniture store in
the world.”

Picture 1: Ingvar Kamprad (left) together with his sister Kerstin on a Swedish summer’s day in the early
1930s. IKEA

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The spirit of Swedish lifestyle has been promoted by IKEA. There are many people who
associate Sweden with the new, healthy way of life. IKEA's range of products reflect this
Swedish lifestyle. The colors and materials used, as well as the sense of space they create,
reflect the freshness of the open air: blondwood, natural textiles and untreated surfaces.
Sweden's food and products have been promoted in IKEA stores as well. IKEA is the
leading food exporter in Sweden because of its low prices restaurants and grocery stores.
To ensure that the products are produced in an efficient and cost effective manner, with
prompt delivery to customers, supply chain management plays a key role for IKEA.
IKEA's supply chain is a complex and integrated system that requires careful planning
and management to keep its operations on track while ensuring customer satisfaction
with this scale of global presence.
IKEA has been constantly searching for more efficient ways to conduct their business and
are becoming increasingly concerned about maintaining trade competitiveness. IKEA
contracts out the production of its products to third parties all over the world, in order to
maintain its competitiveness.
1.2. Description of IKEA's current supply chain structure
IKEA’s supply chain process is depicted in the figure below. It portrays that the
operations are performed through different stages. Here is a general overview of how
IKEA's supply chain works:

Picture 2: IKEA’s global supply chain planning processes

 Product design: IKEA's product designs are designed inhouse, focusing on

affordability, functionality and aesthetics.
 Selection and management of suppliers:”IKEA selects suppliers on the basis of their
ability to provide quality products at competitive prices, while also complying with
IKEA's sustainability and social responsibility standards. To ensure compliance

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 with these standards, the company has a strong relationship with its suppliers and
carries out regular audits and evaluations.”
 Procurement: In order to guarantee timely and cost effective delivery of the
products, IKEA shall acquire materials and components necessary for
manufacturing its products from suppliers in close cooperation with them.
 Manufacturing: IKEA subcontracts production of its products to third parties, in
particular from lower cost countries such as China and Vietnam. In order to
guarantee compliance, the company provides its manufacturers with complete
product specifications as well as quality standards which are carefully monitored
throughout the production process.
 Logistics and transportation: In order to reduce its transport costs, IKEA has a
highly efficient logistic system that includes centralised warehouses and distribution
centers as well as the cross docking of flat products. With a view to transporting
products across the world, it uses different transport modes such as road, sea and
air.
 Inventory Management: To optimise the level of stocks and to minimise waste,
IKEA uses a centralised inventory management system..
 Retail operations:”IKEA sells its products through its retail stores, which are
designed to show off the products and provide customers with a unique shopping
experience. The option of online sales and home delivery is also offered by the
company.”

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 2. Staffing and Recruitment Issues in IKEA's Supply Chain Outsourcing
2.1. Reasons for outsourcing staffing and recruitment functions
The most interesting thing about IKEA is that visiting the store and getting out of there
with only a single item can be almost impossible. IKEA is made that way – they make
customers want to buy things they never even planned to purchase, called the Gruen
effect. A psychological phenomenon is making consumers lose track of their original
intentions, leading them to impulse buys. The policy of low prices encourages customers
to spend more money, which is good for consumerism.
o Thesis statement
Outsourcing is a business technique in which a company contracts a third party to
complete work, manage operations, or deliver services on its behalf.
The outside organization, known as the service provider or third-party provider, arranges
for its own personnel or computer systems to conduct the activities or services, either
onsite at the employing company's own facilities or at remote locations.
2.2. Relationship to suppliers
In the last decade, IKEA has been using suppliers that are capable of delivering a
significant proportion of their turnover to it. IKEA, according to Ivarsson & Alvstam
2010, seeks a significant sales share of approximately 60 % in the overall production by
its suppliers. Suppliers always have to comply with IKEA standards in the whole
company, and this principle can be maintained more easily as long as suppliers are selling
most of their production to Ikea. IKEA has never set a target of 100% shipment to IKEA,
because it would give rise to too much vulnerability and dependence on IKEA. IKEA's
respondents point out that at present, the company does not have a policy to allocate
certain shares to its suppliers.
In addition, IKEA prefers to locate complete supply chains, including raw materials,
components and finished products, in selected countries, i.e. Iceland & Alvstam 2010.
For instance, by aiming at reducing transport costs, IKEA is endeavouring to provide
regionally concentrated sourcing. In 2008, almost two thirds of IKEA purchases were
made in Europe, one third in Asia and 4% in North America. 33% came from Asia, with a
big part, 22%, from China (IKEA 2011).
IKEA has been constantly searching for more efficient ways to conduct their business and
are becoming increasingly concerned about maintaining trade competitiveness. IKEA
contracts out the production of its products to third parties all over the world, in order to
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maintain its competitiveness. IKEA has outsourced production of its products to third
parties in the majority of countries with little or no labor costs, including China, Vietnam,
Belarus and India. The outsourcing allows IKEA to take advantage of reduced labor costs
and access to specialized expertise, while further enabling it to focus on its core
competencies in the fields of Design, Marketing and Retail. Unlike other companies,
IKEA has a direct supplier relationship with its suppliers and this implies that it is
working directly with the manufacturer instead of depending on intermediaries. This
strategy will enable IKEA to have better control over the quality and cost of products, as
well as on working conditions for workers in suppliers' factories. But it seems that it’s not
as effective as it’s supposed to be.
However, there are often many problems associated with this practice. The standards and
ethical values of Western developed countries, which represent a major client base for the
company, are often not met by legislation in these countries. This may result in problems
such as weak environmental policies, child labor or forced labor which can damage the
company's image. The effect of these is directly on the company's sales.
2.3. Challenges faced by outsourced supplier’s workers
2.3.1. Language barriers and Cultural differences
In spite of IKEA's well known and extensive Swedish culture and its efforts to spread and
enforce it throughout its franchised or directly operated branches around the world, the
company has encountered problems that are contrary to its claimed culture, values, and
beliefs. Furthermore, problems related to age discrimination, violations of the right to
organize and other important rights issues in their supply chain have been highlighted as
well as concerns concerning attitudes towards taxes, lobbying, animal rights, habitats,
resources or the environment.
IKEA was found guilty of cultural, ethical, and reputational issues like the scandals of
gathering and storing employees’ data, the use of illegally felled Ukrainian wood, and the
flawed green labels reported low incomes and bad working conditions for IKEA truck
drivers.”IKEA also faced issues related to its marketing, examples are the sexist China
advertisement against single women (Insider, 2017), offending women in the Saudi
catalog (Quinn, 2012), the catastrophic Thai translation of products that sounded like sex
acts (The Daily Mail, 2012), and publishing a homosexual advertisement in Russia,
which was rejected there (Anand, 2019).”

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 2.3.2. Lack of control and ignorance
Labor in third-world countries supplying furniture is still one of the major challenges
facing IKEA today. Since the 90s, IKEA has been deal with child labour issues. The
connection between IKEA and the carpet manufacturer in Pakistan, which employed
children, was revealed in a Swedish TV documentary in 1994. The issue of children's
labor was emerging as a matter of public concern at the time. Child labor in countries like
India and Pakistan, and even Vietnam is a common phenomenon. In these countries, the
company does not have effective control mechanisms for its suppliers. At the same time,
child labor is socially acceptable in these places as poverty pushes people to find ways to
survive. This means that a company can not rely on the local authorities for assistance.
Even though IKEA had not been aware of this, it immediately sought advice from
organizations with a vested interest in children's rights. Following that, a policy against
child labor was adopted by way of section in all supply agreements. The contract says
IKEA will terminate all contracts with any supplier who has engaged in child labour. For
monitoring progress with respect to the child labour practices of suppliers in India and
Pakistan, IKEA has been working together with an third party agency.
Recently, in 2021, IKEA suppliers were accused of using forced labor in Belarusian jails.
According to the investigation by the French non-profit investigative journalism network
Disclose. The report stated that half of IKEA's Belarusian suppliers had ties to state
prisons run by the regime of President Alexander Lukashenko, an ally of Vladimir Putin.
In fact, this is not the first time IKEA has been accused of using forced labor. In 2012, the
company finally admitted that it bought products produced by political prisoners in the
former East Germany in the 70s and 80s.
Disclose was able to identify a textile manufacturer, Mogotex, among IKEA's
longstanding partners that cooperated with the Belarusian prison system. The company's
manufacturing products for IKEA include table linen, curtains, and towels. Its premises
are in Mogilev, an industrial city in the eastern part of Russia. Disclose’s investigation
shows that Mogotex has reportedly worked with at least four Belarusian penal colonies.
Labor camp IK-15 is one of these partners, according to a camp document establishing an
amount receivable in July 2021. In 2019, IKEA supplier Mogotex procured textiles from
Ik 2 juvenile detention centre in one of the cases listed below. The head of IK-2 was
sanctioned by the EU between 2006 and 2014 because of the “inhumane treatment of
political prisoners.” Prisoners working in IK-2 received “2 to 5 rubles per month,” less
11
than €2.The average Belarusian wage in September 2022 was 1,637 rubles — about
€600.
In 1999, when Lukashenko took power, IKEA started working with companies in Belarus
on an official basis. After Poland, Belarus became IKEA's 2nd biggest supplier of wood
during the following years. Before the Russian invasion of Ukraine, IKEA’s purchases in
the authoritarian state almost tripled from €130 million in 2018 to €300 million in 2021.
o How does IKEA deal with the problem?
The issue first surfaced ten years ago. In November 2012, IKEA had to acknowledge that
it had resorted to political prisoners in the what was then called German Democratic
Republic in the 1970s and 1980s. IKEA had been using Eastern German prisoners as
laborers to produce bookshelves. The managing director of the German subsidiary said he
was “deeply sorry” about these revelations. “It is not and never was acceptable to IKEA
that it should be selling products made by political prisoners,” he said at the time.
Consequently, on June 22nd 2022, Inter IKEA and Ingka Group have decided to go into a
new phase with respect to further reducing the size of their business in Russia and
Belarus.
 IKEA retail business continues to be closed and there will be reductions of staff.
This will have an impact on numerous colleagues. The Ingka Group intends to
divest its home furnishings inventory on the territory of Russia with a view to
supporting this scale down process.
 The workforce will be reduced and the process of finding new owners for all four
factories will be initiated by Inter IKEA's industrial business in Russia.
 There will be a ban on importing and exporting IKEA products to Russia and
Belarus. In Moscow and Minsk, the two Inter IKEA owned purchasing and logistics
offices will be closed permanently.

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 3. Discussion and Analysis
3.1. Reasons for outsourcing
Outsourcing is a practice of contracting specialists or other businesses from outside the
organization to complete specific tasks or fulfill particular responsibilities. In this case, it
is the production process of IKEA. Throughout the last thirty years, outsourcing has
revolutionized the business world and became a strategy for gaining a competitive
advantage over market contenders. In today’s dynamic environment, the pressure to be
efficient is great as ever, and most businesses consider outsourcing a viable option.
3.1.1. Benefits of outsourcing
 Cost reduction: the primary benefit of outsourcing is to save money by delegating
business functions to a party that can do them cheaper. Some research indicates that
this objective is usually met because the outsourcing party can benefit from
economies of scale by increasing production and reducing costs. It is also important
to consider the ‘Total Cost of Ownership’ - all the costs involved in the Inputs’ value
chain - and the ‘Total Cost of the Supply Chain’ - sum of only 5 supply chain cost
factors (material, labor, logistics, inventory holding, and overhead costs) - in
figuring out the total savings in any outsourcing process.
 Increase focus: by outsourcing the non-core activities, companies can have more
focus on the core ones and hence achieve business excellence and eventually can
increase their effectiveness (Yang & Huang 2000). IKEA has been outsourcing the
entire manufacturing process all over the world, marketing, logistics and everything,
even accounting. (For example, in charge of salary payments, company's proceeds
and earnings counting is a lot of different companies, one of which is also native
IKEA's department, but also this work often is done by the Russian "UCMS Group
Russia".)
 Improve responsiveness: outsourcing helps companies to be better responsive to
changes in customers’ demand. Responsiveness is defined as “the ability and
willingness to understand and react to new circumstances and to harness skills and
resources to meet those needs” (Vagadia 2012). In most cases, the risk arising from
uncertainty of demand is transferred to a third party by outsourcing.
 Social benefits: outsourcing will create more jobs in the beneficiary countries and
companies, which will not only provide them with financial benefits, but also
enhance their skills and competences. (Vagadia 2012).
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 3.1.2. Risks of outsourcing
In spite of the above benefits to be achieved through outsourcing, a journey carries with it
some risks which include as follows:
 Losing control and competitiveness: when outsourcing an inappropriate business
element, a company may lose control over certain activities, knowledge or skills.
Consequently, the company will be in a weakened position to compete.
 The risks of supplier dependability: outsourcing companies might develop a unique
skill set which is very difficult to replace. As a result, the risk of depending on a
sole supplier will increase (Fawcett et al. 2007) or even suffer from business
disruption if that supplier failed to fulfill his contractual requirements (Dawei
2011).
 Risk of losing an IPR (Intellectual Property Right) when outsourcing a unique
activity. In fact, this has happened to IKEA in Indonesia, 2016 when the Swedish
corporate struggled with the impact of the International Trade Mark Protection laws,
IKEA lost the right to use its own brand name in Indonesia after a legal battle with a
local company that claimed the trademark.
 Risk of entering long term contracts with companies which are not able to respond
to changes in the business environment, such as technological change (Vagadia
2012).
3.1.3. Controversial on outsourcing
The relationship between politics and business, which is always willing to back one
another but so far cannot reach an agreement on outsourcing issues, tends to go hand in
hand. The chances of more jobs being created in the country are lowered when it is
thought to be beneficial for businesses. Let's take America as an example. Some US
politicians, Donald Trump is a typical, assume that outsourcing of production and
manufacturing work to foreign countries is a reason the U.S. economy is struggling.
That's why when Trump ran a Presidential election campaign, he often expressed his
intentions to create jobs in America as part of the Make America Great Again campaign.
Trump has also outlined plans to cut trade ties with most of the countries. This is
completely out of line with current practice in the U.S., since America for many years has
been a leader when it comes to outsourcing services, particularly from Asia.
On the other hand, corporations are fond of outsourcing their work. For example,
conventional companies have different business models depending on their needs while
14
the IT sector is growing rapidly. They've become a good example of doing things right,
just like Apple. Apple's only designing its own products and outsourcing the rest, which
is mainly the manufacture of parts. They have achieved remarkable success through a
good relationship with the Chinese company Foxconn. Apple relies entirely on the
workers in China when it comes to production. It took them 15 days to complete the task,
which could have lasted nine months.
3.2. Evaluation of the impact of outsourcing on IKEA's supply chain
efficiency
IKEA sells couches, armchairs, and tables for about half of what competitors do.
Customers can buy a couch for less than $500 at IKEA. But the sofa typically costs at
least $900 in other shops specializing in home furnishings, if not more. Therefore, this is
the primary reason why IKEA has become an enormous success and popular with its
customers. IKEA's prices are a little bit cheap, the quality is surprisingly good. The way
IKEA designs each item and their suppliers has a lot to do with it.
One important element of IKEA's success in the retail market is its supply chain strategy.
In order to optimize the operations of companies, this strategy focuses on making use of
global sourcing, manual processes, low cycle manufacturing and e-commerce. Global
sourcing allows IKEA to take advantage of a wider range of products at reduced costs
and the automation of processes contributes to reducing costs and improving efficiency.
On the one hand, lean manufacturing means that waste is lowered and production can be
improved; e-commerce makes it possible to communicate with a broader audience. All of
these strategies allowed IKEA to remain competitive in the retail market while
maintaining its leadership position.
One of the key elements of IKEA's business model is cost-effective pricing, which is
based on offering high-quality furniture and home decor products at affordable prices.
It is possible for IKEA to reduce costs and pass the savings onto customers through a
reduction in prices by optimizing its supply chain operations. Related to economies of
scale. Their extreme volumes make them very powerful towards suppliers. They can say,
for example “well, if you reduce the price by 10%, we promise to come back next time
for another order…”. Because of that, worker's salaries in IKEA’s suppliers' factories are
extremely low. For example, prisoners working in labor camp IK-2 received “2 to 5
rubles per month,” less than €2, while the average Belarusian wage in September 2022
was 1,637 rubles — about €600.
15
Besides, IKEA actually determines the price they want to sell a product at before they
determine the actual specifics of the product, such as the material it will be made of.
3.3. Examination of potential solutions to alleviate the issues
IKEA has been making sustainability a priority over the last few years. IKEA's approach
aims at creating a lasting change wherever we are in this world for the benefit of all.
IKEA stated that they take their responsibility seriously to ensure they have embedded
processes to identify and minimise risks through robust due diligence processes,
including verification by third-party auditors.
IKEA said the human rights problems in Belarus and an uncertain environment made it
impossible for them to pursue any new business development until June 2021. In parallel,
IKEA has been studying other steps for exit from the market that would not risk the
livelihood of thousands of people we directly or indirectly employ in our supply chain.
The war in Ukraine and the international sanctions accelerated these plans.”In June 2022,
IKEA decided to leave the market and terminate contracts with their suppliers.”
While present in Belarus, IKEA carried out regular audits according to the supplier code
of conduct IWAY, in combination with the mapping of IKEA's supply chain to secure
compliance with the firm's requirements. All suppliers and service providers working
with IKEA are required to participate in IWAY, which lays down specific requirements
and procedures for carrying out the environment, social and work conditions. The IWAY
audits have not revealed any significant deviations in the suppliers. And lastly, “While no
system is a guarantee against all risks, should we have received indications of
misconduct, we would have immediately investigated and acted on them. We always
strive to live up to our values and the expectations of those in our supply chain.” said
IKEA, 2022.

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 4. Recommendation and Conclusion
Final thoughts and recommendations
In conclusion, outsourcing could deliver numerous benefits such as cost effectiveness,
enhanced flexibility, scalability and efficiency but it also brings with it risks. Ikea can
mitigate associated risks to the use of outsourced personnel while building upon its
positive results by carrying out comprehensive risk assessments, implementing
transparent communication channels, ethical value chains and regular performance
reviews.
 Conduct a thorough risk assessment: Before engaging outsourced staffing, Ikea
must conduct a thorough risk analysis to identify potential issues such as labor law
compliance, wage and hour violations, workplace safety, and employee benefits like
health insurance, leave entitlements, and pension plans. This will allow the
company to assess whether potential risks are outweighing benefits or not.
 Choosing Ethical and Legitimate Outsourcing Partners: It is important that the
company selects outsourcing partners which are ethically and legally sound. Only
certified companies that meet industry standards quality management and
environmental management should be engaged by Ikea. Additionally, Ikea should
verify whether there are any procedures in place to ensure the fair and proper
treatment of employees by its supplier.
 Set realistic expectations: Companies that choose to outsource workers need to
avoid making unrealistic demands. To identify realistic deadlines, prioritize
channels of communication, standardization of requirements and training
opportunities for outside suppliers, outsourcing partners include different teams,
experience levels, qualifications and skills which may influence the expected
outcome.
 Maintaining transparency and monitoring: In addition to this, outsourcing
requirements that companies continuously manage the outsourced activity require
them to have sufficient resources devoted to oversight of its performance so as to
create an effective internal standard operating procedure. Ikea can manage its risks
more effectively through ensuring that these problems are solved and dealt with as
soon as possible. In order to guarantee full visibility and additional checks on their
values so as to improve supply chain quality, all stakeholders should be regularly
updated.
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It’s not that easy when dealing with companies that lie and a regime that aids and abets
those lies. Take IKEA for example. Tolerance for ignorance about what happens across a
supply chain is rapidly dwindling among lawmakers, regulators and consumers. And
arguably has been for many years now, although seems to be picking up momentum
lately. Corporations can and need to do more.

18
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