Environmental Sustainability in Supply Chains: A Focus on IKEA

Executive Summary

Operations management forms the base of every organisation. Incorporating sustainability at the core of businesses has become essential as there is a lot of deliberation around climate change and other environmental concerns increasing worldwide. This is also related to increased competitions among companies and is an important element of success in the marketplace. Companies which have been involved with investing in eco-efficient methods have often seen substantial paybacks through reduced costs. Also consumers, mainly in the developed societies, are becoming more aware of the ecological consequences of their actions of buying and consuming products thereby leading to companies to tie sustainability to the core of their operations. This essay will broadly focus on environmental sustainability in supply chains and provide an in-depth case study example of IKEA.

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Introduction

The United Nations World Commission on Environment and Development defines sustainability as development focusing on meeting the needs of present generations without compromising the ability of future generations to meet their needs (Egmond & Vries, 2011). With the growing scarcity of non-renewable resources and other raw materials, increasing importance is given to creating and operating a ‘green supply chain’. Klassen and Johnson (2004) define ‘green supply chain’ management as the “alignment and integration of environmental management within supply chain management” (Abbasi & Nilsson, 2012). The idea of environmental supply chain management is to create synergy and support efficiency throughout the steps in the supply chain, to enhance environmental performance, minimise waste and save costs. Together with increased globalisation of supply chains, consumers are increasingly able to retrieve supply chain-related information about products. Hence organisations must create a supply chain which begins with an end-to-end assessment, analyse the gaps present in the supply chain, and then decide how effectively they can address challenges and increase functionality.

Organisations are part of a more extensive system. Sustainability in its operations is crucial as it helps consumers to evaluate whether it can maintain its day to day practices without compromising its future resources. This overarching concept is commonly known as Corporate Social Responsibility (CSR), which is continuously changing and evolving. Sustainability can be associated with social, economic and ecological resources and an organisation’s corporate social behaviour is closely monitored by investors, employees, regulators, customers and communities (Rassart, 2019). Knowing the level of environmental impact and viability of different vendors and customers is becoming common as most industries move towards a more sustainable future. Supply Chain Management (SCM) needs to consider issues of sustainability because a lot of challenges that companies face originate from how contractors, suppliers, and labour practices are operating along with their impact on communities and habitats. Companies are striving to operate sustainably and are initiating environment-friendly methods for obtaining raw materials, manufacturing and delivering throughout the process inside the plant. Similarly, the involvement of the trading partners, suppliers, and other required departments in this process is challenging, due to the complexity of incorporating existing management methods and mindsets along with ‘environment’  (Y.K.Fung, Morton, & Chong, 2000)

Sustainable supply chains and problems around it

Many companies have already altered their orientation towards the sustainability agenda through strategic approaches. IBM, for instance, is trying to tackle the carbon footprint of its operations and supply chain by engaging with IBMers from different domains. It includes people in research divisions (who invent technologies to detect and analyse data), those in charge of finance and accounts as well as discusses with suppliers to establish their environmental management system and goals. They have also partnered with organisations to resolve issues on environmental subjects. The Responsible Business Alliance (created by IBM), is a group of 140 members who collaborate to promote ethical practices across supply chains. IBM’s research division also came up with VolCat, also called volatile catalyst, which catalyses chemicals at high temperature and pressure to clean waste from PET (a plastic used to pack food and beverages). Making this is a more economically sustainable method (Murray, 2019). Nike turned 54 million pounds of factory scrap into premium material, M&S has launched Plan A 2025 initiative aiming to transform it into a zero-waste business. Fashion labels like H&M and Adidas have also launched recycled collections, and smaller brands and retailers are trying to catch up (Adidas, 2019). Clothing and shoe brand Timberland attempts to ensure all their produces are made in an environmentally friendly manner. For them, sustainable leather is of concern, and they have been successful in their efforts, by collaborating with their partners. By implementing various initiatives and focusing on a sustainable supply chain program, companies are likely to see cost reductions, improved risk management and boost the value of their brand (Ovenden, 2019).

Global supply chains are fragile and prone to emerging risks. At times there are supply chain errors which can lead to disasters. For instance, during Christmas 2004, the Panamax cargo ship carrying Sony PlayStation 2 was blocked by an oil tanker in the Suez Canal, obstructing and delaying ships from China which were carrying the consignment of consoles. Even though Sony resorted to using Russian cargo planes to transport the consoles, the sales fell 90% during the season. This proves that bottlenecks exist and can disrupt the chain through no one’s fault. Similarly, the Japanese earthquake and tsunami-affected the extended business of global electronics production. Hence, companies design their operating models to have an optimum balance between financial efficiency and stable supply chain. Incorporating sustainability into a company’s supply chain is complex but can help to reduce risks using several initial steps (Culp, 2012). However, some companies/ entities have found it hard to identify the technologies and resources necessary to meet those current and future needs. Consumers expect more from their favourite brands, companies and retailers, therefore one of the motivators for moving towards sustainability is consumer demand. The increasingly stringent environmental legislation passed by ruling public bodies as well as social pressure on organisations is also positively inducing them to become aware, responsible, and push forth improvements in the environment (Mueller, 2018).

Sustainability problems for retailers

Sustainability has become a key element for retailers. They are the intermediaries between customers and producers, ensuring cooperation with industries leading to greater profitability and lower carbon emissions (Koberg & Longoni, 2019). The retail sector is extremely complex, given its myriad sources and the respective diversified supply chains. Retailers can influence local and world supply chains by shaping and determining activities like new product development, acquisition terms, production and distribution aspects, and packing patterns decisions. Large retailers generally have the privilege of controlling and implementing sustainability in their supply chains (Graciola, et al., 2018). Retail becomes one of the most vulnerable sectors to the impact of sustainability. In India, too, sustainability in retail becomes more critical as it is a major (fastest) growing economy. With rapidly changing business ecosystems, changing customer needs, evolving business processes, the challenges are dynamic. At every stage in the retail value chain, there are specific conventional approaches regarding sustainability that can be adopted and customised by any firm in the retail sector. These mainly include building internal stakeholder support, establishing objectives, expectations and code of conduct, supply chain mapping and prioritisation, supplier engagement, industry collaboration and monitoring and evaluation. However, the biggest barriers that retailers in India face (mainly small and medium-sized enterprises) include lack of sincerity, awareness, resources and means to adopt such practices (KPMG, 2017). Supply chain sustainability is a cross-cutting issue, and IKEA has been an exemplar in this situation with a focus on end-to-end supply chain visibility

How IKEA effectively manages its retail operations and supply chain

IKEA, the world’s largest Swedish founded home furnishing retailer with over 400 stores in 50 countries, has been successful in integrating sustainability practices into the management of the supply chain. To create a sustainable supply chain, factors like collaboration, integration of key members of the supply chain, operations, distribution activities, redesigning, purchasing and the ability to instill sustainability initiative across the supply chain are essential (Laurin & Fantazy, 2017).IKEA is a pioneer firm that has a complex and vast supply chain. The organisation has introduced a systematic way of working with sustainability across manufacturing and distribution centres/ operations. They believe in working hard to achieve quality at affordable prices. These are two of the main product attributes. They would do this for their customers by modifying their value chain, building long-lasting supplier relations, investing in highly automated production and producing in volumes. IKEA is a prime example of a company which aligns its business and operating models and relies on its value chain to optimise its production and overhead costs.

IKEA believes in using as few materials as possible to make its furniture, without compromising on durability and quality. This, in turn, contributes to Cost Savings as it cuts down on transportation costs, using less fuel and workforce to receive materials and ship products. This is another critical driving factor for firms in their pursuit of sustainability. Another key component associated with its success is its sustainable communications and relationship with material suppliers and manufacturers. IKEA purchases products from more than 1800 suppliers, using 42 trading service offices world over, making it a very high-volume retailer. It can negotiate prices with suppliers to attain the best prices and materials. IKEA’s commitment to ‘low price but not any price’ vision is reflected through having long-term business relations with these suppliers and signing contracts with them, thus lowering prices of products further (Lu, 2014).

Predictive analytics techniques forecast where and when goods will arrive, allowing shipment from various suppliers to be combined to be sent to multiple final destinations. This is how containers and trailers can be fully and efficiently utilised, reducing the greenhouse gas emission per unit of cargo. Supply chain managers need to ensure ethical sourcing of how suppliers obtain or produce raw materials to see if they are following sustainability standards.

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As most IKEA furniture is designed and sold in pieces, the ‘Do-It-Yourself’ concept lowers packaging costs. The pieces are placed into flat packages, which are convenient and take up less room in trucks, thereby increasing the number of products which can be shipped in the limited area. It also minimises order fulfilment costs. The unique packaging takes up less space in warehouses as well as shelves, leaving more room to stock additional items for order fulfilment. IKEA follows an inventory management tactic called ‘cost- per-touch’, i.e. each hand that touches a product is a step in the supply chain process. For instance, if a customer orders a sofa, the manufacturer needs to ship it to a warehouse for distribution, followed by loading and finally getting delivered to the customer. These steps increase costs for both the manufacturer and retailer hence, IKEA allows customers to assemble and integrate the furniture themselves. Accordingly, the stores tend to function as warehouses too, where customers can access inventory as required (Johar, 2019). The inventory reorder points and products are supervised by the in-store logistics manager who uses the inventory replenishment process developed by IKEA and known as ‘minimum/maximum settings’ to replenish stocks. The minimum setting is the smallest number of products that must be available before a new order has to be put in, whereas a maximum setting is the highest amount of each product which can be ordered at once. This reduces overstocking inventory or and increasing costs when it is not necessary (Mulholland, 2019).

The two-tier system of warehousing used by IKEA is based on flow and is an effective and efficient manner to ensure products remain stocked. Low flow warehouses stock items that get a little turnover and are run on manual operations since workers do not need to move as much inventory around. High flow warehouses stock products which are in heavy demand at stores in a given territory and require a higher level of automation through resource planning software. This 20 % of high flow products constitute 80% of a store’s sale volume. This is where IKEA uses the ABC inventory management technique, i.e. an approach for classifying inventory items depending on the item’s consumption values, and the 80/20 Pareto principle to categorise items based on value (Tradegecko, 2018). These techniques and processes grant a competitive advantage to IKEA as it seeks more advanced methods to organise its supply chain well. These strategies ensure that the firm can keep the cost of lost sales as low as possible by maintaining inventory ready to meet customer demands.

IKEA’s operations and environment sustainability

Besides fulfilling its vision of creating a better everyday life for as many as possible through well designed, functional, low priced, affordable products and sustainable supply chain- IKEA is doing its best to reduce its impact on the environment. Becoming People & Planet Positive it plans to use only recycled and renewable materials in its products by 2030 (Ringstrom, 2018). IKEA mostly uses raw materials like wool, cotton and glass out of which wood and cotton are renewable and recyclable materials. It also focuses on increased availability of certified wood from responsibly managed forests but is trying to find alternative materials to avoid depletion of valuable resources. IKEA’s aim is to reduce consumption and carbon dioxide emissions, while also saving costs and increasing competitiveness. The organisation chooses rail transport where possible and tries to minimise goods going into intermediate storage in distribution centres- by using direct deliveries from suppliers to stores. IKEA stores often operate free shuttle buses to and from the city centre and aim at promoting sustainable transport for customers and co-workers.

Other interesting activities which IKEA is involved in includes reducing its water consumption, designing products to minimise water use in manufacturing by using a printing technique called Soft Pigment Printing. It is working on developing new products like ‘MISTELN mist nozzle’ with a start-up called Altered, which can reduce water use by more than 90% and ‘GUNRID air purifying curtains’ which are being developed with universities in Asia, Europe, IKEA suppliers and innovators. But IKEA has faced criticism. Ecologists have voiced against its ‘sustainable’ logging by stating that it is not living up to its standards by cutting down primeval forests and using 1% of the world’s commercially logged wood. Customers have also complained about defective products and have criticized its commitment to sustainability, lack of transparency of wood supply chain, issues like forced labour use, tax avoidance, greenwashing and unsustainable goals were under the limelight  (The Sustainable Guy, 2017).

Conclusion

Sustainable supply chains are the main themes of businesses today. Leading companies have strong procurement methods and standards, along with supplier codes of conduct and a strong drive to improve their core operations. This of course needs real time scrutiny of the supply chains. The onus lies on companies and their purchasing departments, to tackle the situation by working with the suppliers to ensure certain social and environmental standards are maintained all along the supply chain. Starting from selecting the suppliers, auditing, and keeping a look out on any major changes or problems. Even though technology is bringing about a lot of innovation and enhancing supply chain performance- achieving sustainable supply chain is hard due to the complexity and interrelations of the supply chain environment and management practices associated with it.

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