IKEA and Green Supply Chain Management - New corporate trends? - Teksam-IU K2-Project By Signe Waltoft Madsen (39753) Pages:39 Date: 6/1 2014 ...
←
→
Page content transcription
If your browser does not render page correctly, please read the page content below
IKEA and Green Supply Chain Management
– New corporate trends?
Teksam-IU K2-Project
By Signe Waltoft Madsen (39753)
Pages:39
Date: 6/1 2014
Supervisor: Ole Erik Hansen
1Index
Abstract ............................................................................................................................................................. 4
Introduction ....................................................................................................................................................... 4
Problem formulation ......................................................................................................................................... 5
Project design ................................................................................................................................................ 5
Methodological framework ............................................................................................................................... 6
Methodological limitations ........................................................................................................................... 7
Theoretical framework ...................................................................................................................................... 7
Theory of science: Ecological Modernization Theory (EMT) ......................................................................... 7
Global Value Chains – as an analytical tool ................................................................................................... 8
Chain governance - Buyer or producer driven? ............................................................................................ 8
Green Supply Chain Management................................................................................................................. 9
Green supply chains – a business case? ........................................................................................................ 9
Going green - Re- or pro-actively?............................................................................................................... 12
Value chains – integrating poverty and environmental concerns............................................................... 13
The vertical elements .............................................................................................................................. 13
Upgrading small producers...................................................................................................................... 14
Upgrading strategies ............................................................................................................................... 15
Horizontal elements ................................................................................................................................ 16
Horizontal actors ..................................................................................................................................... 16
Poverty – vulnerability and risk ............................................................................................................... 17
Gender and labor ..................................................................................................................................... 17
Environment ............................................................................................................................................ 17
Mapping the chain ................................................................................................................................... 18
Analysis ............................................................................................................................................................ 19
Case study – IKEA......................................................................................................................................... 19
The IKEA philosophy ................................................................................................................................ 19
IKEAs code of conduct – IWAY................................................................................................................. 20
The cotton problem ..................................................................................................................................... 20
Cotton – a thirsty crop ............................................................................................................................. 21
The Better Cotton Initiative (BCI) ............................................................................................................ 21
What makes IKEAs supply chain green? ...................................................................................................... 22
2IKEA – a re- or pro-active company? ........................................................................................................... 26
Green chains – opportunities or challenges? .............................................................................................. 26
Mapping the chain ................................................................................................................................... 27
Identifying changes in chain structure ........................................................................................................ 28
In the field – doing more with less .............................................................................................................. 29
Healthy environment – better livelihoods .................................................................................................. 31
Process upgrading – safer than organic upgrading? ................................................................................... 31
Vertical contractualization – reducing insecurity ........................................................................................ 32
Collective contractualisation ....................................................................................................................... 32
GM cotton – an unsolved dilemma ............................................................................................................. 33
Bt – a socio-economic threat? ................................................................................................................. 34
Land use efficiency ...................................................................................................................................... 35
Traceability – tracking the right cotton ....................................................................................................... 35
From field to ginners ............................................................................................................................... 35
Conclusion ....................................................................................................................................................... 36
New corporate trends?............................................................................................................................ 37
Literature overview ......................................................................................................................................... 38
3Abstract
Emerging practices within Green Supply Chain Management (GSCM) have the potential to
transform global commodity chains into responsible and profitable businesses. The global furniture
company, IKEA, is one of the front leaders in pro-active greening of their supply chain. Purchasing
more sustainably and developing suppliers and products with low carbon footprint, the buyer-
driven chain has already come a long way. Analyzing the interplay between vertical demands and
horizontal affects of the Better Cotton chain in India, uncovers that IKEA’s GSCM is associated with
both challenges and risks for small producers and the environment. Farmers respond to the new
cotton sustainability standard with mutually reinforcing strategies of process and volume upgrading
in cultivation of cotton – reducing input costs and raises yields. Though, the cultivation of a GM
crop faces challenges in terms of socio-economic dynamics and uncertainty about what the future
holds for GMO’s. Findings also indicate new trends in corporate behavior because IKEA mobilize
green action through multi-stakeholder governance and civil society actors through which it aims to
change a whole industry.
Introduction
Global sourcing of raw materials, commodities and agricultural products has reached a point where
it is no longer sustainable. Rainforests have been cut down for soy- and palm oil plantations, thirsty
crops like sugarcane, cotton and rice are causing water resource scarcity, and atmospheric
concentrations of greenhouse gases have reached record levels. Our ecological footprint has a
massive impact on the world’s ecosystems, and the global poor are the ones most vulnerable to the
changes that we are facing. As it has become overwhelmingly evident that the world’s economic
model is no longer sustainable, corporate movements are underway. Many transnational
companies have found a business case in going green through proactive organizational strategies.
As a result, today consumers can drink Coca Cola from vegetable material bottles, get
biodegradable shopping bags and lease their jeans instead of buying them. Eco-packaging,
recycling, fair-trade and organic products have become very popular and achieved high branding
value. And some of the buzzwords in the new CSR paradigm seem to be cradle to cradle, lean &
green and circular economy.1 But how do “green” companies’ activities go hand in hand with global
1
Braungart and McDonough, Cradle to Cradle (2002)
4green growth and low carbon development in the third world? Looking at many value chains from
an LCA perspective, massive GHG emissions still originate from extraction and cultivation – often
sourced in developing countries. Outsourced production and manufacturing in these parts of the
world pose big challenges for companies in terms of labor conditions, local environment and high
conservation value areas with rich biodiversity. Therefore, a strong Green Supply Chain
Management (GSCM) is more important than ever. But what social and policy implications does the
introduction of GSCM constitute upstream in the supply chain? And how does green practices and
environmental ‘standardization’ affect small producers in the developing world? Over the past
decades, many smallholders have entered a “race to the bottom” when integrating with global
supply chains – due to falling terms of trade, difficulties in complying with social and environmental
standards and harmful activities to their local environment.2 Cotton production is particularly
harmful to ecosystems and the people who grow it – as it is extremely water and pesticide
intensive. IKEA is one of the world’s biggest cotton sourcing companies that have taken action in
addressing these challenges. Working with WWF and the Better Cotton Initiative they have taken a
lead towards sustainable cotton. This project aims to identify how IKEA incorporate Green Supply
Chain Management into their cotton supply chain - reducing natural resources, raw materials,
production, enhancing efficiency and reduce their carbon footprint. At the same time it examines
how IKEAs green practices can be a catalyst for development of small cotton suppliers in India.
Problem formulation
Linking GSCM and poverty issues is an interesting, yet not over-explored field. Few would disagree
that environmental degradation and poverty are closely interlinked. This studiy explores how GSCM
and environmental poverty issues interacts. The above discussion raises interesting questions that
need closer examination. This has led me to the following problem formulation:
How does IKEA implement GSCM into their cotton supply chain? What challenges and opportunities
does IKEA’s GSCM constitute for cotton suppliers in India?
Project design
A project design overview is given below (figure 1). The first question deals mainly with studying
green practices of IKEA in a circular view. Theory about Global Value Chains (GVC) and Green Supply
2
Burnell & Randall (2008)
5Chain Management (GSCM) is introduced. The second question mainly deals with the upstream
implementation of IKEA’s GSCM at cotton farm level in India. The GSCM literature is generally
lacking management of sub-suppliers. In order to identify what opportunities and challenges IKEA’s
GSCM constitute for farmers (sup-suppliers), I need theory that goes beyond the vertical elements
of operational GSCM. Drawing on theory from the article “Integrating Poverty and Environmental
Concerns into Value-Chain Analysis: A Conceptual Framework”3, the study can incorporate
horizontal aspects into value chain analysis - in terms of social, economic and environmental
processes.
Before starting the analysis a contextual chapter is presented, framing IKEA as a case study and
explaining the environmental problem with cotton. The empirical material to be analyzed is based
on IKEAs code of conduct, the IWAY and other IKEA material. Then follows the analysis and at last,
my conclusion.
Figure 1.
Theoretical and
methodological framewotk
Case study - IKEA and "the
cotton problem"
Analysis
Conclusion
Methodological framework
GVC analysis has emerged since the early 1990s as a methodological tool and systematic approach
for understanding the dynamics of economic globalization and international trade – examining all
the processes up- and downstream in value chains. Value Chain (VC) analysis is a heuristic
3
Bolwig et al. (2010)
6framework for the generation of data. Using the VC approach along the way, new findings will
appear and new questions will rise. At the same time, the VC approach is an analytical tool which
provides important insights about green governance and chain upgrading for disadvantaged small
producers.4 When referring to “poverty”, I relate to issues concerning “environmental poverty” –
and less on the gender and social based issues.
Methodological limitations
The empirical foundation could have been strengthened through an interview with IKEA or
collected data from the field in India. Still, the IWAY and other IKEA documents can generate useful
knowledge to examine what I want to know. The literature on GSCM is mainly targeting industrial
first supplier and firms – not agricultural sub-suppliers. Still, GSCM can uncover how IKEAs green
practices affect sub-suppliers in the top-end of the supply chain. Though the article from Bolwig et
al. is targeting research in the African agro-food sector, their theoretical contributions are useful for
analyzing dynamics in the agro-commodity chain of cotton as well.
Theoretical framework
Theory of science: Ecological Modernization Theory (EMT)
This study is examined within the frame of Ecological Modernization Theory (EMT) developed in the
early 80’s. Being an optimistic school of thought rooted in the social sciences, EMT studies how to
transform structural changes in the planetary ecosystem. Fundamentally, it argues that our
economy can only be sustainable if it is based on ecological principles. Human is understood to be
in the centre of the planetary system, and has to adapt to the environmental limitations of the
planet. Already in the 70’s Herman Daly introduced the concept of “uneconomic growth” based on
the limitations on the environments carrying capacity – maybe the foundation of what later in the
80’s became EMT. Today, EMT is a pluralistic theory, or more specifically, a set of ideas. EMT has
become widespread among scholars, policy makers and in corporate leadership and is useful in
policy making and business strategies. Among other things, research has examined the potentials of
circular economy, Life Cycle Assessment (LCA), eco-innovation, industrial ecology and the interplay
of various technological and societal factors. EMT is not only limited to techno-industrial progress
4
Kaplinsky & Morris (2002)
7and related aspects of polity and economy; it also includes cultural aspects, consumer behavior and
reshaping of lifestyles. Ultimately, the only common understanding in EMT is that ecological
modernization will have to result in structural change. There have been discussions as to whether
ecological modernization should rely on government, markets or civil society - or some sort
of multi-level governance combining all three. The emergence of Global Compact and the “triple
bottom line” (People, Planet, Profit) and have led some to believe that free market principles can
pave the way for a more sustainable society. Critiques point to the fact that capitalism, free
trade and business self-regulation is the originating cause of environmental degradation – and
therefore cannot co-exist with ecology.5
Global Value Chains – as an analytical tool
In an era of rapid globalization GVC is a useful analytical tool for understanding dynamic inter-
linkages within the productive sector and how firms and countries are globally integrated through
trade and exchange of goods and services. Value chain analysis overcomes the weaknesses related
to traditional sector analysis - not looking at activities that go beyond that particular sector. GVC
can help explain why some gain from globalization while others are locked into even greater
inequality. GVC analysis provides a key entry point into identifying how upgrading of people in
disadvantaged areas can take place when entering of global market flow of information, knowhow,
ideas, innovation, goods, technology and finance.6
Chain governance - Buyer or producer driven?
In the 1990s, Gary Gereffi introduced the concept “the global commodity chain”. His contribution
has enabled important advances in the analytical and normative usage GVC’s by focusing on the
power relations7. Gereffi argued that value chains always are characterized by a dominant party
that determinates the overall activities. He distinguishes between two types of chain governance:
Buyer driven commodity chains in which a lead firm coordinates all structures and
requirements of the chain – these are often labor intensive sectors (footwear and clothing
industries and agro-industrial).
5
Mol & Spaargaren (2007)
6
Kaplinsky & Morris (2002)
7
Gereffi (1999)
8 Producer driven commodity chains in which often technology heavy producers dominate all
activities.
Green Supply Chain Management
Green Supply Chain Management (GSCM) has emerged significantly in academics in recent years.
GSCM is the environmental planning and coordination of all links in a supply chain – from material
extraction, manufacturing, transport, distribution, marketing, consumption and after-use activities.
GSCM is a systematic and circular approach and aims at reducing emissions, closing the loops,
interact with consumer behavior etc. (figure 2). 8
Figure 2.
This study will look into GSC, but put main focus on upstream actors in order to identify what
challenges and opportunities IKEAs GSCM constitute for small producers in India.
Green supply chains – a business case?
Increased pressure from public and consumers has led to rigorous environmental regulations of
international companies. Today, companies are not only being held responsible for their own
environmental performance but also for their suppliers’. Though environmental compliance can
seem time consuming and costly, it can also pave the way for competitive advantage and long-term
profitability. GSCM has emerged as a corporate strategy that helps organizations to achieve
corporate profit and market-share objectives while improving ecological efficiency. Cost savings are
8
Azevedo et al. (2011)
9often identified as lower waste disposal, reduced materials costs, lower risks associated with
environmental compliance etc. In addition to this, eco-products and green branding have become a
mainstream business case. This is also evident from the literature about Lean & Green – synergistic
because of the mutual objective of efficient use of energy and resources9. The following GSCM
practices are the most important ones (figure 3).10
•Environmental collaboration with
suppliers •Efficiency
•Green purchasing practices Economic •Cost
Upstream
•Working with designers and suppliers •Environmental cost
to reduce and eliminate
environmental impact; LCA/ECD
•Minimizing waste
•Reducing energy inputs •Costumer satisfaction
Focal •Reducing harzadous and toxic Operational
company
•Quality
materials
•ISO 14001 certification
•Environmental collaboration with
costumers •Business wastage
Downstream Environmental
•Reverse logistics •Environmental impact
•Environmental friendly pakaging
Figure 3.
Environmental collaboration with suppliers is the interaction between organizations in the SC
relating to joint environmental planning and integration of upstream environmental know-how to
suppliers. It improves the ability to coordinate operations and workflows between focal company
and supplier in order to adapt new changes in customer requirements and environmental
9
Dües et al. (2013)
10
Azevedo et al. (2011), Srivastava et al. (2007), Sarkis, (2002), Vachon et al. (2008), Rao & Holt (2008)
10regulation. Shared environmental values throughout the SC increases customer satisfaction and
reduces environmental costs.11
Green purchasing concerns the suppliers’ ability to develop environmentally friendly goods and is
becoming an important factor in supplier selection. Though often presenting an extra cost, green
purchasing is an emerging practice as consumer awareness about ecological footprint of
commodities is becoming more widespread - and as a result, a green branding value.
Product development involves working with designers and suppliers to reduce and eliminate the
ecological footprint of commodities. It is possible to design a products energy input and material
requirements related to both manufacturing, usage and after consumption. Eco-design through
tight collaboration with suppliers enhances green efforts in the upstream end and reduces waste
and environmental costs. Eco-products are niche-commodities with high value added.
Minimizing waste can be accomplished by handling and minimizing waste both before and after it
has been generated – a popular lean supply-planning process that eliminates all non-value adding
activities and materials throughout the chain. These efficiency improvements reduce business
waste and environmental costs for disposal.
Reducing energy inputs throughout every node of the chain - from extraction, transportation,
manufacturing to end of consumption – is critical in order to cut down carbon emissions. Today,
energy efficiency is a cure business strategy. As prices on fossil energy have skyrocketed, the
introduction of renewable energy in factories, transport, retail etc. is also important.
Reducing hazardous substances and toxic materials minimizes the treatment cost associated with
disposal of them and limits business waste. However, the desired environmental performance can
only be implemented throughout the chain if all actors along the chain adapt to the same
minimizing principles.
ISO 14001 certification is an internationally recognized standard defining the criteria for
environmental management systems requiring compliance with environmental legislation and
continuous low carbon development. The objective is to reduce CO2 emissions and other
environmental impacts within organizations. Though there is a cost associated with certification, it
11
Azevedo et al. (2011)
11reduces costs of resources and waste, and contributes to quality improvement. Individual adaption
of certification is not sufficient, and in the long term the all suppliers of the organization would also
have to become certified.
Reverse logistics is the collection of all processes that move in the reverse direction from the
customer to the business. This includes remanufacturing, refurbishing, sale of surplus, leasing etc.
Most activities goes at least one step back in the supply chain – from the customer to the
distributor or to the manufacturer. This practice minimizes business waste through product
recovery as well as the collection and transportation of recovered products. However, to attain the
main objectives of reverse logistics supplier collaboration is important.
Environmental collaboration with customers allows refers to making awareness about
environmental issues and in relation to consumer preferences and for instance encouraging them
to buy green products.
Green packaging reduces materials costs and business waste while improving branding value and
customer satisfaction.12
Going green - Re- or pro-actively?
A number of studies have considered institutional theory as a key driver for adopting GSCM and
found that companies were mainly influenced by pressure from external drivers and
institutionalized regulation – these are governmental regulation, international organizations private
standard setting. But other studies claim that many companies have come a long way with
developing internal practices such as eco-design, reverse logistics, green purchasing etc. and
already now are transforming markets.13
12
Azevedo et al (2011)
13
Azevedo et al (2011)
12•Green purchasing
Pro-active practices •Eco-design & green pakaging
•Reverse logistics practices
•LCA and product development
• Governmental regulation
•Institutional compliance within industry-
Re-active practices specific organizations
•Private standard bodies and certification
bodies (ISO 14001)
Value chains – integrating poverty and environmental concerns
The above uncovers important information about IKEAs GSCM practices, but is not sufficient to
uncover what challenges and opportunities it constitute for small producers. The theoretical
contributions from Bolwig et al. (2010), Integrating Poverty and Environmental Concerns into Value-
Chain Analysis: A Conceptual Framework provides useful tools for examining this. This article is a
conceptual framework that can help overcome the shortcomings in standalone GVC analysis,
looking beyond traditional vertical aspects. Integrating poverty, labor, gender and environmental
concerns into the value-chain analysis – so called ‘horizontal’ aspects, it offers some best practices
for successful integration with GVC’s. It can gain insights about the effects of IKEAs GSCM and
document some of the results in the field and on an operational level. More specifically, I will
demonstrate how environmental change related to value chains both constitute risks and prospects
of development. The GSCM strategy of IKEA is not sufficient to discover total local environmental
impact, adding a horizontal analysis can give a broader coverage. In my analysis I will incorporate
IKEA GSCM tools into the theoretical framework of vertical and horizontal aspects.
The vertical elements
The term chain suggests a focus on ‘vertical’ relationships between buyers and suppliers and the
movement of a good or service from producer to consumer. Vertical elements entail an analysis of
the flows of material resources, finance, knowledge and information between buyers and suppliers
(where ‘upstream’ signals flows towards production, and ‘downstream’ towards consumption). A
node is the point in a value chain where a product is produced, exchanged or goes through a major
13transformation or processing. Looking at the dynamics between the nodes along the chain we can
discover how power and rewards are embodied and distributed and what entry barriers that
characterize the chain.14 Vertical governance is the process by which lead firms’ organize activities
with the purpose of achieving a certain functional division of labor and standards along the chain –
resulting in specific allocations of resources and distributions of gains. It involves setting the
principles of compliance, the inclusion/exclusion of chain actors and the reallocation of value-
adding activities.15
Upgrading small producers
The concept of upgrading is used to identify the possibilities for producers to ‘move up the value
chain’, either by shifting to more rewarding functional positions, or by making products that have
more value-added invested in them. But this theory uses a broader definition of upgrading, which
allows for the consideration of ‘horizontal’ as well as ‘vertical’ aspects of value chains: a desirable
change in chain participation that increases rewards and/or reduces exposure to risk – where
rewards and risks are understood both in financial terms and with regard to outcomes related to
poverty, gender, labor and the environment. In recent years, numerous development organizations
and donor agencies have attempted to use different upgrading strategies to upgrade small
producers - usually done through corporate partnerships and competence building. However,
addressing upgrading and inclusion mainly as management and competence problems tends to
downplay the asymmetrical power relations in the agro-sector value chains, in which vertical
governance determines performance requirements, functional divisions of labor and pricing are set
by lead the firms, and transmitted upstream to traders and producers. Rising standards can provide
opportunities for selected suppliers to add value to their product, assimilate new functions, and
even spur enhanced forms of co-operation among actors in a specific industry or country.
‘Standardization’ has sometimes been the result of attempting to link vertical and horizontal
concerns – introducing new standards and certifications on social, food safety, labour and
environmental issues. Though many standards are mobilized from ethical concerns some of them
exclude farmers.16
14
Bolwig et al. (2010)
15
Bolwig et al. (2010)
16
Bolwig et al. (2010), Gibbon & Ponte, Trading Down (2005)
14Upgrading strategies
Though, Gibbon and Ponte identify seven different upgrading strategies grouped into three types17:
Improve process, product or volume (same node)
This group of strategies is about ‘doing things better or bigger’ through better technology or
management performance, within the same node. Combining process, product and volume
strategies can be mutually reinforcing; for example, when farmers increase volume to enable
investment in processing equipment needed to raise quality or when responding to lower prices
through reduction in production costs.
1.)Process: achieving more efficient production by reorganization of internal processes; this
includes smaller more frequent on time deliveries, invoicing, improving client management or
reducing wastage.
2.)Product: moving into more value-added niche-products, through complying with buyer
requirements for quality, certification, safety standards, traceability and packaging.
3.)Volume: increasing the amount of product, through increases in yield or farming land.
Inter-chain upgrading (up- or downstream in several nodes)
4.)Functional upgrading: producers adapt new skills or functions in the chain by performing
processing, bulking up, transporting or advertising – this often leads to vertical integration – closer
collaboration with lead firm governance.
5.)Functional ‘downgrading’: producers moves one node down the chain for example, from
processing to focus back on production or cultivation.
Improve value-chain co-ordination
Successful upgrading is often more likely in vertical integrated value chains where the product is
traceable to the upstream producers, as opposed to market-based ones that involves auctions,
numerous middlemen and trade flows are anonymous. Market-based transactions are
17
Bolwig et al. (2010), and Gibbon & Ponte, Trading Down (2005)
15characterized by several risks; uncertainty of price (negotiated at each exchange), small volumes,
different buyer requirements and low quality and traceability control (a precondition for rewarding
value adding efforts by farmers). Farmers can adopt two alternative forms of contractualisation
mechanisms:
6. Vertical contractualisation (between two actors in different nodes) refers to a chain coordination
where farmers and wholesalers can achieve a better deal through closer and longer term business
contracts with buyers – thereby moving away from repeated market-type transactions. The benefits
of contracts may include reduced price risks, access to price premiums, upstream access to flow of
market information and requirements, inputs and creditor reduced marketing costs. But contracts
also involve higher performance requirements, for example in respect of quality, volume, and
certification, which in turn can be difficult and costly to meet.
7. Horizontal contractualisation (between chain actors in the same node – for example, farmer
groups or associations) describes agreements among producers to cooperate over certification,
input investment, marketing and crop insurance in order to reduce costs, increase revenues or
mitigate individual risks. Such collective action is often a precondition for meeting the high
demands of buyers and can also strengthen producers’ bargaining power.
Horizontal elements
Different upgrading strategies have different implications for poverty and the environment and
involve different gender issues. Some primarily improve the economic welfare of the target group,
for example by increased cash income or greater income stability, while others have broader
societal or environmental benefits. For example, farmers may convert to organic farming, which,
under the right conditions, may preserve local biodiversity and soil and water resources, and
provide health and employment benefits to their communities. And as mentioned, upgrading
through contract farming can be a solution to declining public investment and private market
failure and providing more stable incomes, thereby reducing the asymmetry of power between
buyer and out-growers - and prevent exclusion of smallholders.
Horizontal actors
Upgrading often requires political and financial resources beyond the capacity of small producers.
This involves strengthening linkages with stronger chain actors (buyers or retailers) or building
16alliances with external actors (lawmakers, advocacy and consumer groups, international
organizations, NGOs or standard-setting bodies).
Poverty – vulnerability and risk
Upgrading has tended to focus on measurable incomes and assets associated with the relevant
chain, and less on sources of immeasurable wealth and economic risk. Useful concepts in this
context are those of vulnerability and risk – referring to farmers sensitivity towards value chain
restructuring or changes in the global market; exchange-rate fluctuations, price volatility, new
restrictions, standards etc. Farmers are resilient if they recover after a shock rapidly – for instance,
if farmers hit by exchange rate fluctuations can respond quickly by changing the nature of the
inputs on which they rely.
Gender and labor
Buyer-driven chains in the agro-sector are labor intensive – often involving women, children and
poor working conditions. A horizontal analysis of local communities should include gender issues
and definition of employment. Small farmers are often various types of unregistered sub-suppliers –
not coordinated by one buyer that controls compliance. Child labor and working conditions are
important human rights issues. Still, the main focus of this study is the horizontal impacts on the
environment.18
Environment
It is important to identify the environmental impacts that may be linked changes in the systems of
cultivation or raw material extraction in the value chain. Chain inclusion can impact the
environment in both harmful and positive ways – depending on how primary production interacts
with local ecosystems; biodiversity, water etc. Also the emissions of nutrients, toxic substances and
greenhouse gasses (GHG) from production, processing, transport have an environmental impact
along the value chain. When studying management and environmental impacts in the context of
value chains, it is useful to distinguish between local and global processes.
Local processes
18
Bolwig et al. (2010)
17This level examines the ecological balances of the local and regional ecosystem and the
management of natural resources. VC activities have historically been linked with hazardous and
toxic inputs, eutrophication and led to scarcity and contamination of water resources. Value-chain
entry has often caused land use change (LUC) - big-scale conversion of natural vegetation into
farmland. LUC is a process through which primary production and resource extraction affect
ecosystem properties and functions, such as biodiversity, carbon sequestration and soil and water
quality. But chain impact not only affects local environments in harmful ways – they can also
improve environmental management for instance through more sustainable farming practices.
Global processes
Value chains also affect environmental processes that have impacts beyond their area of origin and
therefore must be managed on a larger scale - typically GHG emissions from fertilizer in farming,
methane from livestock, chemicals in processing and CO2 and air pollution from transportation. The
‘global’ and ‘local’ processes are analytical distinctions, but horizontal view of environmental
change should encompass both dimensions. For example, the conversion of forest into farmland
may cause both local soil erosion, but at the same time release huge amounts of GHG emissions
into the atmosphere. Likewise, insecticide use may cause toxicity for both local farmers and
downstream communities, and at the same time cause large-scale impacts on biodiversity and the
ability of the biosphere to capture carbon.19
Mapping the chain
The figure below shows how vertical and horizontal elements interact and show the dynamics of
changes and actors.
19
Bolwig et al. (2010)
18The mapping includes certain actors: Chain actors (small producers, processors, exporters,
importers and retailers), External actors (NGOs, advisers, standard-setting bodies, workers’ unions
and government agencies, providing services, expertise and exert influence), Expelled actors (chain
actors who have withdrawn from the chain due to pressure.) Flows of standards, requirements,
information, inputs and finance goes upstream, and goods downstream towards consumption. The
horizontal elements (poverty, gender, labor and the environment) are represented by ‘discs’
radiating from each node, with the chain actors at the centre of the disc and the external actors,
expelled actors and nonparticipants (and their communities) in the outer parts of the discs. Within
the discs are also the different ecosystems that are managed and impacted on in each node.
Analysis
Case study – IKEA
In this section I will describe my case study and introduce what IKEA have done to drive a more
responsible business. The objective is to evaluate GSCM strategies of IKEA, putting it into a
theoretical framework. First a case study profile is presented.
The IKEA philosophy
The core business idea of IKEA is to produce smart design furniture at affordable prices – and
making sustainability something that you can expect. IKEA strives to follow principles in line with
the People, Planet, Profit idea embedded in the UN Global Compact; driving a environmental and
social responsible business while making profit (figure 4).20
People
Planet Profit
Figure 4.
20
http://www.unglobalcompact.org/system/attachments/20685/original/IKEA_Group_Sustainability_Report_FY12_FINAL.pdf?13623
92041
19IKEAs code of conduct – IWAY
Analyzing IKEAs GSCM requires a review of the Code of Conduct they require their suppliers to
comply with. The part of the IWAY that concerns environmental principles is the ones most
interestingly for me. Principles are in line with the United Nations Universal Declaration of Human
Rights (1948), the International Labor Organization Declaration on Fundamental Principles and
Rights at Work (1998) and the Rio Declaration on Environment and Development (1992).21 The
IWAY is based on four main principles:
Legal compliance: The IKEA supplier shall always comply with the most demanding
requirements whether they are relevant applicable laws or IKEA IWAY specific requirements.
Start-up requirements that need to be fulfilled before starting up a business relationship –
IKEA does not accept child labor, forced or bonded labor, severe environmental pollution or
safety hazards, unclear records of working hours and wages.
Environmental standards: Suppliers must reduce the environmental impacts from their
production and operations – this entails; work to reduce energy consumption, prevent
pollution to air, ground and water, handle and dispose chemicals and hazardous waste in a
safe way.
Social and working conditions: IKEA expects its suppliers to respect fundamental human
rights and provide health and safety training for workers; ensure their buildings are safe, pay
at least the minimum legal wage and compensate for overtime, allow time off and regular
breaks, not discriminate on any basis, not prevent workers from exercising collective
bargaining activities nor prevent from associating and not accept corporal punishment or
threats of violence.22
The cotton problem
IKEA has identified cotton as one of its heaviest global footprints. In 2012, IKEA used 160,000 tons
of cotton in its products. Cotton is the second most important raw material for the company after
wood, making it a clear strategic priority. The biggest water footprint in the IKEA value chain for
instance comes from raw material extraction, especially in cotton farming that is particularly water
21
http://www.ikea.com/ms/en_AA/about_ikea/pdf/SCGlobal_IWAYSTDVers4.pdf
22
http://www.ikea.com/ms/en_AA/about_ikea/pdf/SCGlobal_IWAYSTDVers4.pdf
20intensive if appropriate irrigation methods are not used. Cotton production has serious
sustainability issues, such as the excessive use of water and pesticides, bad labor circumstances and
associated with poverty issues.23
Cotton – a thirsty crop
According to the World Wide Fund for Nature (WWF), cotton production is the highest user of
pesticides globally, extremely water-intensive and soil eroding. Cotton is a so called “thirsty crop” -
producing 1 kg of cotton lint requires 7,000–29,000 liters of water.24 Changes in the monsoon and
weather patterns related to climate change will make cotton cultivation a risky business in the
future – sometimes drying out soil and forcing farmers to dig ever deeper for water. Poor water and
pesticide management as well as the contamination of ecosystems and groundwater harm plant
and animal life as well as the people living in the area. In India, cotton occupies 5% of the country’s
arable land but accounts for 54% of the agricultural pesticides used. Women and children are
frequently employed for this labor-intensive crop, creating social pressures such as environmental
health problems and exposure to chemicals.25 But managing the cotton supply chains responsibly is
a challenge - their raw cotton and semi-finished products are sourced from multiple global
suppliers, and are often mixed at various stages of the supply chain.26
The Better Cotton Initiative (BCI)
In 2006 IKEA became a founding partner of the global cotton platform, BCI. Today, leading
participants are international companies and NGOs, as well as an increasing number of ginners and
textile producers. IKEA, BCI, the Rabobank Foundation, the Dutch Sustainable Trade Initiative (IDH),
WWF, Solidaridad and a number of international retailers have put together a joint strategy to
speed up the implementation of Better Cotton into a mainstream commodity. BCI aims to:
Reduce the environmental impact
Improve livelihoods and economic development in cotton producing areas
Improve traceability and flow of Better Cotton throughout the supply chain
Ensure the credibility and sustainability of the Better Cotton Initiative
23
http://awsassets.panda.org/downloads/cotton_for_printing_long_report.pdf
24
http://wwf.panda.org/about_our_earth/about_freshwater/freshwater_problems/thirsty_crops/cotton/
25
Kavita Joshi Rai (2011)
26
Kavita Joshi Rai (2011)
21BCI started in 2005 when IKEA supported WWF in a pilot project to improve Better Management
Practices (BMP) in cultivation – mainly in India and Pakistan. The projects are based on hands-on
training in the field that reduces water and agrochemical use, while increasing their profit
margins. And in many places the project farmers’ average use of pesticides and water has halved,
and at the same time, farmers’ average earnings are up around 40 percent. Due to its immediate
success, the project evolved into a global multistakeholder organization – relevant to all
stakeholders in the industry, and today engaging 100.000 farmers.27 Currently, 34 % of all cotton
used in IKEA products is produced in line with BCI standards. The goal is that IKEA will source 100%
Better Cotton and fully comply with all the social and environmental criteria in BCI by 2015.28
What makes IKEAs supply chain green?
The case study profile given above will make it possible to examine, first how IKEA coordinate its
cotton supply chain. Later, it will be possible to analyze what challenges and opportunities are
generated from the chain.
IKEA manages a buyer-driven furniture value-chain, and coordinates marketing, distribution, sales
activities, and a large number of suppliers globally that manufacture many less technology-intensive
products in low-cost production countries. Though IKEA governs many activities, some practices are
out of their hands. A majority of their carbon footprint is related to material extraction, suppliers,
customer transportation, and the use and disposal of products – areas that IKEA can only indirectly
influence. IKEAs GSCM is trying to change that through a strong collaboration with suppliers in the
other part of the world. The following identifies a variety of performance measures and green
practices incorporated into IKEAs cotton supply chain – also mapped into figure 5. I will not go into
detail about economic gains of GSCM.
27
http://bettercotton.org/wp-content/uploads/2013/11/1_Overview_of_BCS_final_eng_ext.pdf
28
http://bettercotton.org/wp-content/uploads/2013/06/BCI-Expansion-Strategy-Print.pdf & http://bettercotton.org/
22•Supplier development and auditing
of cotton farmers, ginners and •Efficiency
suppliers Economic •Cost
Upstream •Green purchasing of Better Cotton •Environmental cost
•Sustainability Product Score Card;
internal LCA tool for product
development
•Minimizing waste through Lean &
Green •Costumer satisfaction
Operational
•"IKEA goes renewable" •Quality
Focal • Reducing harzadous and toxic
company materials
•Compliance with ISO 14001
certification
•The IKEA "Sustainability Direction"
initiative interacts with costumer
behaviour. •Business wastage
Downstream Environmental
•Reverse logistics at IKEA store •Environmental impact
collection points.
•Cotton commodities are sold in green
and light pakaging.
Figure 5.
Environmental collaboration with suppliers: One of the things IKEA does to create synergistic
environmental policies is through supplier development. In order to secure joint environmental
planning IKEA engages in close and long-term supplier relationship – often located in developing
countries. The IKEA Supplier Development Program (SDP) is offered for prioritized suppliers mainly
focusing on energy and water. Being present on-site with suppliers, IKEA is trying to push positive
development into the supply chain.
Auditing
IKEA staff does internal auditing in overseas production - announced and unannounced. Being on-
site and present at suppliers’ factories to support can motivate suppliers to implement the IWAY
requirements. IKEA auditors help with action plans when non-compliance is found, and they
conduct follow-up visits to review progress. Non-compliance with the IWAY start-up requirements
leads to immediate stop of deliveries, while suppliers have up to 90 days to implement corrective
actions in case of non-compliance with other requirements. Once non-compliance with start-up
requirements is resolved, suppliers are still on probation for six months with intensified monitoring.
23To ensure Better Cotton compliance, IKEA uses two internal software programs – IKEA Better
Cotton Database and myString in order to capture data at the farm and ginner levels. Third-party
auditors also verify IKEAs working methods and audit results. These third-party auditors also
conduct audits at IKEA suppliers, including unannounced checks of suppliers and their sub-
contractors.29 The IKEA supply chain is often long, and ensuring IWAY compliance at many
thousands of sub-suppliers is a major challenge. IKEA suppliers are responsible for communicating
the content of the IKEAs Code of Conduct to their workers and sub-suppliers - and to ensure that
sub-suppliers acknowledge, understand and accept the requirements. Audits also target sub-
suppliers operating in an industry or supply setup that is prone to poor working conditions.30
Green purchasing and sustainable sourcing of raw materials are some of IKEAs main sustainability
challenges. Raw material extraction is often associated with environmental and social problems.
Cooperating with WWF on sustainable purchasing and low carbon supply chain development,
important results have already been achieved – and today IKEA sources many of its most important
raw materials as wood, cotton, palm oil, leather and food sustainably. IKEA is a founding member of
The Better Cotton Initiative and works with WWF to support development of sustainable practices
for in cotton cultivation.
Product development is managed by the IKEA Sustainability Product Score Card - an internal life
cycle assessment tool to create more sustainable product development. By the end of 2015, 90 %
of the IKEA sales will come from products classified as “more sustainable”. Recognizing its
ecological footprint of cotton, IKEA has worked with product development of cotton commodities.
In order to reduce the use of cotton, IKEA has started to use Lyocell in many products. Lyocell is a
renewable cellulose-based material derived from wood fibers from tree farms – this material use
minimal amount of water and can be sourced sustainably.
Minimizing waste is a central part of the Lean & Green strategy incorporated in the company – by
2015 all IKEA main raw materials (cotton, wood and glass) are recycled. Even though suppliers are
29
http://www.ikea.com/ms/en_AA/about_ikea/pdf/SCGlobal_IWAYSTDVers4.pdf
30
http://www.ikea.com/ms/en_AA/about_ikea/pdf/SCGlobal_IWAYSTDVers4.pdf
24encouraged to closing the loops, there is surprisingly little in the literature about waste
management and efficiency improvements are coordinated in relation to IKEAs cotton suppliers.
Reducing energy inputs is taking place in every decision making throughout the company. The “IKEA
Goes Renewable” project aims to depend on 100 % renewable energy, and improve energy
efficiency by 25 % compared with 2005 (in IKEA buildings). Today, IKEA uses 47 % renewable energy
and generate another 2 % of renewable energy. In relation to suppliers, the Supplier Energy
Efficiency Project (SEEP) is facilitating suppliers in becoming more energy efficient. So far,
participating suppliers have reduced carbon emissions by about 40,000 tones. IKEA is focusing on
suppliers that consume the most energy – this includes the cotton textile industry.
Reducing hazardous substances and toxic materials is something that IKEA work with even in the
product development phase. In relation to cotton, the desired environmental performance is partly
implemented through the (sub-supplier) cotton farming project with WWF that aims at minimizing
input of pesticides and chemicals in cotton cultivation.
ISO 14001 certification is implemented throughout the IKEA focal company – and continuously
improved. But the internationally recognized standard also has to comply with environmental
legislation and reduce CO2 emissions at the upstream end of the supply chain. In a long term
perspective, IKEA is working to implement ISO 14001 certification at its suppliers. But nothing in the
literature indicates that IKEA at the present moment is working to implement ISO 14001
certification at its cotton suppliers in India.
Reverse logistics is one of IKEAs pioneering practices, still underway. In order to get materials into
reverse flows back to remanufacturing, most IKEA stores provide collection points for customers to
return waste, such as electrical and electronic equipment, discarded packaging and spent batteries.
These products are used as spare parts or sold at reduced prices in specially designated areas of the
store. Targeting full recyclability – this would then also include that cotton in the future is recycling
cotton fabrics into new products, rather than simply discarding it. Reverse logistics is a new, yet
emerging field – not developed in the top end of the IKEA cotton supply chain.
Environmental collaboration with customers has also become part of IKEAs GSCM strategy. IKEA is
trying to promote a more sustainable life at home and create customer engagement and awareness
25of how they can help reduce their climate impact. The focus is on reducing energy and water
consumption, preventing food and commodity waste. IKEA has introduced the Sustainability
Direction – a program that encourages and enables customers to recycle and reuse products. Also,
the aforementioned materials collection point at stores interacts with consumer behavior. Post-
consumption cotton can in the future be handed in and recycled at IKEA stores.
Green packaging is implemented in all packaging of IKEA furniture. Using as few resources as
possible the end product becomes lighter – and thereby minimizing the CO2 emissions related to
transportation. When sold in the store, cotton commodities also come with smart and green
packaging.
IKEA – a re- or pro-active company?
Summing up, IKEA pioneers in many new fields of GSCM; ex. in reverse logistics and innovative
product development. Interesting is their strong commitment to suppliers and internal auditing
systems I which experts and auditors support suppliers in development. From internal green
practices IKEA reduce its external need for sourcing; resource efficiency and green purchasing is
lowering the need for materials and prevents unsustainable sourcing. Being a company with
suppliers all over the world IKEA naturally has to respond re-actively to international environmental
law and regulation. But it is clear that IKEA also have a pro-active commitment to practices beyond
compliance. The impact of IKEAs green innovation will become evident in the following analysis of
its suppliers, mostly looking into the part of GSCM that concerns upstream activities as purchasing
and sourcing at supplier level. The findings about IKEAs GSCM are useful in the following when
looking at opportunities and challenges in the chain.
Green chains – opportunities or challenges?
In order to say something meaningful about what opportunities and challenges IKEAs GSCM
constitute for small producers, we need a closer look at the cotton chain below (figure 6). After the
cotton has been picked in the field it is transported to processing at ginner factories that separates
cotton from its seeds. The ginned fiber, known as lint, is compressed into bales and sold to IKEA
textile suppliers before the commodities ends up in the stores.31
31
Kavita Joshi Rai (2011)
26You can also read
