Due to the recent uproar in German media, IKEA’s brand and image are being-«rimshed, and I believe IKEA needs to respond to this situation immediately. IKEA’s supplier, Rangan Exports, haJviolated its supply contracts by using child labor for the production oflndian rugs, and such media exposure could lead to sizeable long-term problems such as disruptions in supply and sourcing, lost sales and profits, and reputation risk.
I have applied 4 key decision-making criteria to the alternatives IKEA could employ to rectify this situation (Exhibit 1). Above all, since IKEA has been linked to various environmental/social issyes in the past, it should take a proactive stance on the issue of child labor by participating in the media. Without such action, IKEA runs the risk of hurting its image, potentially leading to a cut in its bottom line and slog growth opportunities (Exhibit 2).
When looking at the first two alternatives, IKEA could deal with the issue of child labor through its own relationships with suppliers by forming a New Initiatives Steering Committee to manage the issue of child labor. On the other hand, IKEA shares a very important relationship with its suppliers and has many issues to manage on a day-to-day basis, like development and innovation (Exhibit 3). It is very likely that other issues, like child labor, could be overlooked from time to time. For instance, despite IKEA’s past initiative of adding an addendum to its supply contract, Rangan committed a breach of contract by utilizing child labor. For the third and fourth alternatives, IKEA could also step back and allow Rugmark to monitor the use of child labor on its behalf.
By joining hands with Rugmark, IKEA would be able to re-emphasize its spirit of responsibility and increase consumer confidence. In addition, Rugmark is an Indo-German organization and such an association could help boost their image and sales in Germany, which account for 30% of total sales. In all the alternatives stated previously, IKEA needs to determine if it should terminate its contract with Rangan or not. If IKEA keeps Rangan on board, it will eliminate supply disruptions and prevent a drop in sales.
However, sourcing a new supplier will send a stronger message to other suppliers about the consequences of breach of contract and the division will avoid future costly media outbreaks. For the last alternative, IKEA could withdraw from the Indian rug industry, because it accounts for a tiny part ofiKEA’s turnover. However, Indian rugs are complementary products to other IKEA product lines and discontinuing them would take away from the full line of products. Also, by retracting from the Indian carpet industry and not dealing with the issue of child labor, IKEA’s image as a socially responsible company could be tainted.