World Development Vol. 38, No. 11, pp. 1575–1587, 2010
Ó 2010 Elsevier Ltd. All rights reserved
0305-750X/$ - see front matter
www.elsevier.com/locate/worlddev
doi:10.1016/j.worlddev.2010.04.007
Supplier Upgrading in the Home-furnishing Value Chain: An
Empirical Study of IKEA’s Sourcing in China and South East Asia
INGE IVARSSON and CLAES GÖRAN ALVSTAM *
University of Gothenburg, Gothenburg, Sweden
Summary. — We use detailed firm-level data from 2008 to show how the world’s largest home-furnishing retailer, IKEA from Sweden,
provides its suppliers in China and SE Asia with significant technological support to improve their products and processes. This demonstrates that even buyer-driven global value chains, coordinated by large retailers, have the potential to contribute to technological
upgrading among many small, inexperienced producers of labor-intensive products. Theoretically, this suggests that the current value-chain theory needs to take into account the existence of a “developmental” governance structure.
Ó 2010 Elsevier Ltd. All rights reserved.
Key words — global value chains, IKEA, technology support, supplier upgrading, Asia, China
1. INTRODUCTION AND AIM OF THE PAPER
and finished products. These products will ultimately be displayed in one of their own 253 stores in 24 countries or in
one of a further 32 stores in another 16 countries, which are
operated by external franchisees (2008 figures). With a turnover amounting to 21.2 billion Euros in 2008 and 127,000 people employed in 39 countries, IKEA is today the world’s
largest home-furnishing retailer. Its growth over the past decade has been exceptional, with sales having tripled to 6.3 billion Euros since 1998. Around 80% of IKEA’s sales are in
Europe, 15% in North America, and 3% in Asia and Australia.
The single largest market is Germany, with 15% of IKEA’s total sales, followed by the USA and France (10% each), the UK
(7%), and Sweden (6%). Over three quarters of IKEA’s staff
are occupied in the retail sector, while the remainders work
in purchasing, distribution, and other activities (IKEA, 2008).
The aim of the present study is twofold. The primary aim is
to complement the existing empirical literature on buyer–supplier relations in global value chains with a detailed case study
of IKEA’s supplier relations in China and SE Asia, wherein
we focus on how suppliers are provided technological support
in upgrading their capabilities to produce a variety of homefurnishing products. Most empirical studies within the global
value chain perspective focus on buyer-driven industries and
are largely dominated by case studies of textile/apparel and
agricultural products. In these studies, the theoretical contributions also largely draw on empirical analyses of these
buyer-driven industries (see the literature compiled by The
Global Value Chains Initiative, GVC, 2010). IKEA is often cited as having developed long-term relationships with suppliers
(see, e.g., Bartlet, Dessain, & Sjöman, 2006; Hamel & Nanda,
1996; Torekull, 2008) and key product and process technologies together with trusted and well-established suppliers in
Europe (see, e.g., Baraldi, 2008; Baraldi & Waluszewski,
2007). Very few studies, if any, exist demonstrating how IKEA
contributes to technology upgrading by providing extensive
technical and financial support to less capable suppliers in
developing, low-cost countries. Because IKEA is one of the
The transfer of knowledge in general and technology in particular from transnational corporations (TNCs) to domestic
partners in host countries is a crucial issue in the eternal debate on globalization and its possible benefits and discontents.
The question of how TNCs can contribute to the transfer of
product and process technology to suppliers in developing
countries has generated increasing research interest in economics and international business, see, for example, Dunning
(1993) and Scott-Kennel (2007) on technology linkage; Blomström and Kokko (1998) and Saggi (2002) on technology spillovers; UNCTAD (2001, 2002), and UNCTC (1981) on
structural and firm-level determinants of technology linkages
and efforts, and Mathews (2002a, 2002b) on supplier upgrading among latecomer firms in Asia.
During the last decades, a rapidly growing number of studies also within the global value chain perspective focus on how
buyers, suppliers, and other principal actors are linked together when manufacturing and distributing goods and services, and how various types of global value chains can
contribute to industrial upgrading for exporters in developing
countries (for a recent overview, see Gibbon, Bair, & Ponte,
2008). Within this perspective, as well as in the other strands
of literature, there is, however, a general lack of empirical
studies that have aimed at investigating these linkages in detail
and depth. This lack is largely due to the complexity and scope
of such linkages, and, accordingly, the effort that such studies
require. The existing empirical literature generally tends to be
dominated by case studies of manufacturing companies or, as
in the global value chain literature, a few selected industries
within the retail sector (e.g., apparel). The present study contributes to the analysis of buyer–supplier linkages within the
retail branch, which is increasingly dominated by companies
who, rather than buying from wholesale suppliers, have their
own internalized global supply chain oriented toward producing their own brand goods. In many cases, these supply networks involve many different sectors and may include
arrangements for raw material sourcing as well.
The Swedish home-furnishing retailer IKEA is such an
example, being a service and distribution company for their
end-users while also running a worldwide, tightly controlled
purchasing organization for raw materials and semi-finished
* We would like to thank the Swedish Research Council for financially
supporting the study and the World Development editor and referees for
helpful comments on manuscripts. Final revision accepted: April 8, 2010.
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WORLD DEVELOPMENT
world’s largest and well-known retailers, a detailed account of
their global sourcing strategy can be of a general interest.
The second objective of the study is to use our empirical
findings to contribute to the theoretical discussion on governance structures in value chains by demonstrating that
IKEA’s deliberate support of its suppliers in low-cost countries constitutes a developmental governance structure that
falls between market and hierarchy, and between the modular,
relational, and captive classifications of recent value chain theory. The present study can be seen as an extension of our previous studies on TNCs and supplier upgrading, in which the
empirical examples were taken from the engineering sector
in general and the production of commercial vehicles in particular (Ivarsson & Alvstam, 2005a, 2005b, 2009a, 2009b).
2. CONCEPTUAL FRAMEWORK
Below, we will briefly review the rapidly growing and wellestablished global value chain literature by focusing on some
key concepts related to our present study (for extensive overviews, see, e.g., Altenburg, 2006; Bair, 2005, 2008; Gibbon
et al., 2008, and the discussion in Ivarsson & Alvstam,
2009b). Here, global value chains are seen as governed and
coordinated by large and powerful lead firms that act as chain
drivers (Gereffi, 1996). Producer-driven value chains are dominated by manufacturers of capital-intensive products (e.g.,
automotives) who source customized intermediate products
from a selected number of suppliers, usually based on close
and long-term relationships. Buyer-driven value chains, by
contrast, are governed by retailers and other brand name owners who control the distribution, marketing, and sales activities, while the production of finished, less capital-intensive
manufacturing (e.g., apparel) has been outsourced to a wide
and loose global network of suppliers (Gereffi, 2001). Another
key notion in this perspective is that domestic suppliers to foreign lead firms in the value chains can seize the opportunity to
improve their operations and market positions through functional, product, process, and inter-chain upgrading, eventually
gaining control over their own design and brand names (Gereffi, Humphrey, Kaplinsky, & Sturgeon, 2001; Gereffi, Humphrey, & Sturgeon, 2005; Humphrey & Schmitz, 2001;
Schmitz, 2006; Schmitz & Knorringa, 1999). However, this
upgrading is not automatic. Suppliers who attempt to move
upwards, especially in buyer-driven value chains, often face
high barriers to entry, due to their lack of control of design,
distribution, marketing, and sales activities (Bair, 2005; Humphrey, 2004; Humphrey & Schmitz, 2001). As noted by UNCTAD (2002), the relocation by TNCs of labor-intensive
assembly activities to developing countries may not raise the
overall skill requirements for local suppliers. Instead, their
roles and capabilities are often limited to a few types of operations in which the global competition is particularly strong.
Rather than supplier upgrading, this situation can result in
fierce competition that is based on low costs and thin margins.
In an attempt to present a more formal theory of governance patterns in global value chains, Gereffi et al. (2005) suggest that business relations in different value chains are
affected by (a) the complexity of information and the knowledge transfer required to sustain a particular transaction, especially with respect to product and process specifications; (b)
the extent to which such information and knowledge can be
codified and therefore transmitted efficiently, without transaction-specific investment between the parties involved; and (c)
the capabilities of actual and potential suppliers in relation
to the requirements of the transaction. Depending on varia-
tions in these factors, three types of intermediate governance
structures in value chains are identified, aside from the market
and hierarchical solutions. First, value chain modularity can
arise when it is possible to codify specifications for complex
products. This can occur when the product architecture is
modular and technical standards simplify interactions by
reducing the variations of components. It can also occur when
the suppliers possess the competence to deliver complete packages and modules that internalize hard-to-copy information.
This reduces asset specificity and, accordingly, the need for
buyers to conduct direct monitoring. Second, relational value
chains arise when product specifications cannot be codified,
transactions are complex, and the capabilities of the suppliers
are high. Here, tacit knowledge must be exchanged between
buyers and sellers, and highly capable suppliers provide a
strong motivation for lead firms to outsource in order to gain
access to complementary competencies. The third governance
structure is the development of captive value chains, which occur when the complexity and the ability to codify specifications are high, but the capabilities of the suppliers are low.
Such a situation requires intervention and control on the part
of the lead firms and encourages transactional dependencies,
as lead firms seek to lock in their suppliers to prevent others
from reaping the benefits of their efforts.
Below, we will demonstrate how IKEA’s supplier relations
in Asia can be seen to represent an additional “developmental” governance structure, wherein supplier upgrading is a
deliberate part of their global sourcing strategy.
3. DATA COLLECTION
General information on IKEA’s global sourcing structure
was collected in October 2008 from IKEA of Sweden (IOS)
at their centralized unit for global sourcing located in Älmhult, Sweden. Interviews were conducted with key senior managers operating as IKEA Strategic Purchasers (ISTRAs).
Additional information on the global sourcing structure and
the detailed information on IKEA’s local supplier relations
were collected through personal interviews at IKEA’s Trading
Sales Offices (TSOs) in Vietnam (February 2008), Indonesia,
and Thailand (June 2008), and at the TSOs in Shanghai and
Qingdao in China (December 2008), representing around
70% of IKEA’s total sourcing in China. In total, we collected
data on 278 currently active IKEA suppliers, of which 195 are
in China and 83 in Southeast Asia. The majority of these suppliers produce wood, metal, and textile products. In China,
many suppliers also produce mixed materials, raw materials
and components, and lighting products, while many suppliers
in SE Asia also produce natural fibers and ceramics. Generally, the Chinese suppliers make the widest range of products.
In 2008, these countries were responsible for around one quarter of IKEA’s total sourcing worldwide.
IKEA’s sourcing structure is separated into rather independent Business and Material Areas. Therefore, in order to collect reliable data, many interviews (approximately 70) were
needed with relevant IKEA personnel at the TSOs, including
Site Managers, Material Experts, Production Specialists, Buyers, Business Developers, Technicians, and other key personnel that regularly interact with suppliers (see below). The
respondents were locally hired staff with the exception of a
few site managers and experts who were Swedish and nonSwedish expatriates. All interviews at the TSOs were conducted on site by ourselves in English, and they centered on
a structured questionnaire in which the respondents were
asked to identify all suppliers that IKEA had supported to up-
SUPPLIER UPGRADING IN THE HOME-FURNISHING VALUE CHAIN
grade their technological competence in a range of specified
key areas. The same questionnaire, developed and adapted
from an analysis by UNCTAD 2001, has been used in earlier
surveys (see, e.g., Ivarsson & Alvstam, 2005a, 2005b, 2009a,
2009b). To complement and confirm IKEA’s information,
interviews were also conducted with local suppliers. To arrange this, we asked IKEA managers at the TSOs to identify
suppliers where, according to their respective opinions, at least
some measurable technological upgrading had taken place as a
result of business relations with IKEA. Thereafter, visits were
made to 23 of these suppliers. Ten visits were in Vietnam, five
in China, four in Thailand, and four in Indonesia. We personally conducted interviews in English with approximately 40
owners, managers, and responsible technicians at the suppliers. This sample does not include all suppliers where upgrading has taken place, nor necessarily does it include those
with the highest level of upgrading.
We spent approximately five hours at each supplier, and we
used semi-structured interviews in which local managers were
explicitly asked to identify the key areas of support their company had received from IKEA, as well as the extent to which
this had contributed to upgrading of their technological competence. IKEA staff was present during most of the site visits,
which potentially affected the information provided by respondents. However, such a bias should be neither precluded nor
overrated, and according to our judgments, the suppliers did
not hesitate to express their opinions. It was generally stated
by the respondents that they take pride in being able to respond to IKEA’s requirements independently, and while most
of the interviewed suppliers valued IKEA as a business partner, some also made critical remarks. Critique included the
concern that suppliers’ traditional competences were neglected
and undervalued, that IKEA sometimes exercised its bargaining power to appropriate a disproportionate share of price
IKEA of SWEDEN (IOS)
10 Business Areas / 30 Material Areas
-Product Developers
- D e s ig n e r s
-Strategic Purchasers (ISTRAs)
-Product Technicians
-Category Leaders
reductions, and that IKEA’s sourcing model was too bureaucratic. Therefore, some of the interviewed suppliers openly stated that they prioritized other customers.
In total, over 100 managers and other personnel at IKEA
and its suppliers in China and SE Asia provided empirical data
to the study.
4. IKEA’S GLOBAL SOURCING ORGANIZATION
Decisions about IKEA’s product range and global sourcing
strategy for raw materials and finished products are centralized at IKEA of Sweden AB (IOS), with a staff of 800 at
Älmhult in southern Sweden (see Figure 1). IOS is organized
into ten key Business Areas, according to the functionality
of related products (e.g., Seating & Lighting and Sleeping &
Storing). Each area is led by a Business Area Manager, who
is responsible for the short- to long-term (2–6 years) planning
of forthcoming products, the product range, purchasing and
commercial strategies, and product development. The business
areas are also supported by different functions, for example,
Law and Standards, and Social and Environment, to ensure
that products and processes comply with national and international regulations and IKEA’s own corporate standards.
Within the business areas, approximately 100 Product
Developers are responsible for identifying and broadly defining new product categories. Approximately 50 Designers design the specific products within these product categories.
The product range consists of approximately 9500 items, with
some 3000 new products introduced every year (2008 figures).
Within each business area, the key decisions for global
sourcing of finished products are made by approximately
100 ISTRAs (IKEA Strategic Purchasers), who are divided
into groups to cover the different product categories. ISTRAs
IKEA COMPONENTS
IKEA Development Centre
-Material Experts
-Pr odu cti on S pec ial ist s
External expertise
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5 Business Areas
-Product Developers
-Designers
-Product Technicians
-Material Experts
-Production Specialists
IKEA SWEDWOOD
8 Business Areas
-Product Developers
-Designers
-Product Technicians
-Material Experts
-Production Specialist
External expertise
External expertise
1350 SUPPLIERS OF FINISHED PRODUCTS
120 SUPPLIERS OF RAW MATERIALS AND COMPONENTS
4 IKEA TRADING AREAS
with 45 Trading Sales Offices
6 IKEA COMPONENTS local representations
49 IKEA SWEDWOOD local plants and representations
Regular, ongoing support to suppliers:
-Technicians
-Business Developers
-Buyers/Business Planners
-IWAY/QWAY-Specialist
Long-term, strategic support to suppliers:
-Material Experts
-Production Specialists
-Capacity Developers
-TQE-managers (Technology, Quality and Environment)
External expertise
Regular, ongoing support from IKEA:
-Provision on product designs and technical specifications
-Regular feedback on product performance to improve existing product-technology
-Technical support to improve existing production-technology
-Assistance with quality assurance systems (IWAY/QWAY)
-Training programs for suppliers' personnel
Long-term, strategic support from IKEA:
-Technical consultations to master new product-technology
-Provision, advice or financial assistance to obtain raw materials and components
-Provision, advice or financial assistance to obtain machinery and equipment
-Technical consultations to mast er new production-technology
-Advise on production layout and organization
Directions of IKEA technological support:
Figure 1. Organizational units and personnel at IKEA’s global, regional, and local levels involved in technological support to suppliers, 2008. Source: Survey
data.
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WORLD DEVELOPMENT
are responsible for the short- to long-term (2–6 years) sourcing
strategy for securing IKEA’s raw material supplies and for
selecting sourcing countries for finished products. The total
landed cost, that is, the total production, transportation,
financial, and inventory costs in each retail shop, is a key
defining variable for selecting suppliers. ISTRAs are also
responsible for identifying, selecting, and developing the
capacity and competence of existing suppliers and, when necessary, finding and developing new suppliers. ISTRAs are also
responsible for direct sourcing, that is, defining product volumes, negotiating prices, and placing orders. Each ISTRA
works together with Product Technicians, who ensure that
products meet IKEA’s technical requirements and that the designs allow for cost-efficient production. The Product Technicians are also responsible for communicating the technical
requirements to suppliers and for monitoring compliance with
these requirements. In 2008, IKEA’s global sourcing strategy
was operationalized through 45 TSOs, located in 31 countries
and grouped into four major Trading Areas: North America,
Asia-Pacific, Southern Europe, and Northern Europe.
IKEA Component (ICOMP) is another centralized sourcing
unit, which is responsible for developing and trading some
specific raw materials, components, and fittings for the IKEA
product range. While IKEA’s suppliers are free to source most
of their raw materials and components on the open market,
they are offered opportunities to buy some material inputs
from ICOMP. In 2008, ICOMP was organized into five business areas (Assembly, Technique, Comfort, Packaging, and
Raw Materials). ICOMP had approximately 750 employees,
with regional offices in Sweden, Slovakia, and China, and they
were also represented in Italy, France, and Turkey through
cooperation with IKEA TSOs. ICOMP has some 120 raw
materials and component suppliers worldwide, where favorable conditions regarding price, quality, functionality, availability, and traceability are negotiated. In 2008, ICOMP’s
sourcing reached approximately 450 million Euros, dominated
by glass, lighting components, comfort fillings, and metals, but
also plastics, fittings, packaging materials, and machinery. In
addition, the largest category is their internally developed
Open/Close fittings, which suppliers are required to use in relevant products, representing approximately half of ICOMP’s
total sales. The raw materials and components are made available to individual suppliers of finished products through the
IKEA Material and Components’ Catalogue.
A third important part of IKEA’s global sourcing is their inhouse manufacturing company, Swedwood, established in 1991
through the acquisition of Altra Wood from Munksjö, a Swedish wood product supplier, including their operations in Canada, Denmark, and Eastern Germany. Since then, Swedwood
has expanded, especially in Eastern Europe, through both
greenfield investments and acquisition and modernization of
former state-owned sawmills and wood-processing companies.
In 2008, Swedwood had 49 factories and sawmills in 11 countries, with some 17,000 employees providing approximately
10% of IKEA’s total products. IKEA’s backward integration
contributed to securing the raw material base for certified
wood, especially in Russia, and also for production capacity
for wood components and finished products in many countries, including Slovakia, Hungary, Ukraine, and Romania
(Björk, 1998). Since the early 1960s, IKEA has taken particular advantage of the wood processing competence among Polish suppliers. In the 1980s, these suppliers contributed
significantly to developing IKEA’s key board-on-frame technology, which is still used in a range of applications (Baraldi,
2008). Swedwood and their suppliers have also contributed to
developing the print-on-board technology, another product
innovation by IKEA in which printed patterns are produced
directly on fiberboard.
Aside from Swedwood, IKEA also has some other in-house
manufacturing companies, including, for example, a company
in China that makes laminated solid wood furniture using another key IKEA product technology.
5. MAJOR SOURCING REGIONS
IKEA prefers to locate complete value chains in selected
countries, including raw materials, components, and finished
products, although in some product areas, for example, solid
wood furniture, this is not always possible because of the uneven global distribution of raw materials and the preferred
locations of finished goods’ production. In 2008, almost
two-thirds of IKEA’s global purchasing was in Europe, onethird in Asia, and 3% in America. The top countries included
China (21%), Poland (17%), Italy (8%), Sweden (6%), and
Germany (6%) (IKEA, 2008). As in many other industries,
low production costs have contributed to increased purchasing
from China, expanding from 14% of IKEA’s global sourcing
in 2003. However, China’s increasing importance has recently
stagnated due to rising production costs and longer lead times
for finished products. Instead, IKEA has increased the share
of products obtained from Europe, where Polish suppliers
are in a strong position due to their high skill levels, low costs,
and vicinity to the major markets. Italian, Swedish, and German suppliers are also important, especially for the development and production of technically advanced products,
despite their generally higher costs.
Approximately 90% of products are sourced globally, such
that almost all suppliers manufacture articles that are sold in
IKEA stores worldwide. Exceptions include large, transportsensitive products (e.g., white goods and beds) and a few products adapted for local markets (e.g., larger sizes for the US
market). In addition, a few products are bought in countries
without TSOs, basically from large European suppliers with
a high level of expertize.
Recently, IKEA’s global sourcing has become more regionally concentrated, with suppliers in Northern Europe, Southern Europe, Eastern Europe, Asia, and North America
increasingly distributing products within their own geographical areas. The driving forces are an ambition to reduce logistical costs, environmental concerns, and the establishment of
new IKEA stores in emerging markets where many suppliers
traditionally are located.
6. CONCENTRATION TO FEWER AND LARGER
SUPPLIERS
The trend in IKEA’s sourcing strategy is to use suppliers
delivering larger shares of their turnover to IKEA, reducing
the number of suppliers over the last 10 years from approximately 2500 to approximately 1350 located in 50 countries.
Recently, however, the number of suppliers has increased
again due to a general growth in IKEA’s sales. IKEA typically
wants suppliers to sell a large share (60–70%) of their total
production to IKEA, contributing to cost reductions through
scale and learning economies. In addition, it incentivizes suppliers to be dedicated and willing to implement IKEA’s corporate standards on products and processes. Reducing the
number of suppliers is also a way to reduce implementation
and monitoring costs for these standards because suppliers
are required to apply them to the whole company, even if
SUPPLIER UPGRADING IN THE HOME-FURNISHING VALUE CHAIN
IKEA only buys a small share of their total sales. At the same
time, IKEA seldom wants a supplier to be fully dependent, but
prefers them to have other customers in order to spread their
risks, generate further scale economies and complementary
learning.
There is also a trend toward single sourcing, in which individual suppliers are responsible for all or most of a specific
product. This is facilitated by the fact that many of IKEA’s
products can be manufactured with fairly standardized process technology and short start-up times. New suppliers can
often be introduced into the supply chain within a year. This
introduction could be quicker were it not for IKEA’s stringent
auditing processes. At the same time, IKEA uses multiple
sourcing for products that require considerable time and effort
to find or develop new sources. Here, two or more suppliers
share the production responsibility for advanced and complicated products and products using capital-intensive production technology. Multiple sourcing is also used to reduce
transportation costs for large, heavy products.
The concentration to fewer suppliers is part of a recent shift
in IKEA’s global sourcing strategy. Until lately, each of
IKEA’s 10 business areas independently built supplier relations in different countries, generating multiple contacts and
substantial transaction costs for all parties. Different suppliers
were also used for products with similar raw material and process requirements, resulting in missed opportunities for cost
reduction based on scale and learning economies. Therefore,
in a recent shift in IKEA’s global sourcing strategy (starting
circa 2005) a horizontal dimension was added to the business
area division, forming a matrix structure, with sourcing
increasingly coordinated by approximately 30 Category Leaders (mainly selected among key ISTRAs) responsible for different Material Areas (e.g., wood or ceramics). Orders of
products with similar raw material and process requirements
from different business areas are now pooled and offered to
fewer, but larger, suppliers, resulting in cost reductions
through economies of scale and lower transaction costs. In this
new organization, a number of “prioritized” suppliers are
identified and selected to be part of IKEA’s long-term sourcing strategy and expected to supply increasing product volumes.
7. CRITERIA FOR SUPPLIER SELECTION
Potential IKEA suppliers need to fulfill some basic criteria
related to management, production, finance, and corporate
citizenship (see Table 1).
A further key criterion is the attitudes of the suppliers’ owners and top managers. Suppliers are frequently selected if they
are committed and willing to grow together with IKEA, which
often expects suppliers to expand by over 10% per annum.
This requires continuous adaptation and rationalization of
production to meet IKEA’s expectations. An open attitude toward sharing essential information, for example, on cost cal-
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culations and the utilization of raw materials and machinery,
can be more important for IKEA than technological skills
and other more visible strengths. IKEA often tries to match
its products to suppliers’ capabilities and thus, rather than
buying products, IKEA sources production capacities.
8. IKEA’S TECHNOLOGICAL SUPPORT TO ITS
SUPPLIERS
(a) Global support: the role of IOS, ICOMP, and Swedwood
IKEA provides a significant amount of technological assistance to its suppliers in a wide range of areas. Suppliers in
low-cost countries are often provided with a “roadmap for
development,” including technological support to expand
and improve their manufacturing operations. IKEA has no
well-defined centralized unit for assisting suppliers to upgrade
their operations, but we can identify some key functions that
directly, or in collaboration with external expertize, provide
technological support to suppliers (see Figure 1, above).
First, within the business and material areas at IOS, the ISTRAs, Designers, and especially the Product Developers and
Product Technicians can spend considerable time, up to 200
travel days per year, helping suppliers worldwide to solve
problems related to products and their process requirements.
Second, also at IOS, a unit called the IKEA Development
Center (ICD) leads and organizes the development of materials and techniques and is responsible for product compliance
and IKEA patents. New materials, products, and process technologies are often made to be a global IKEA standard and are
included in the specification to all relevant suppliers. ICD’s
staff, consisting of a number of specialized Material and Production Experts, often collaborates with external R&D institutions and companies, but they can also be sent worldwide to
assist suppliers to understand new product and process technologies.
Moreover, although not a part of the formal functions discussed above, many individuals at IKEA have developed technical expertize within narrowly defined product and process
technologies. These people operate as “free movers,” which
means that their expertize can be used at different levels within
IKEA and also by suppliers. This concept exemplifies IKEA’s
relatively flexible and non-hierarchical management structure,
which is deliberately shaped by circulating people between different functions (often in three-year periods). As a result, competencies are diffused between different positions and places,
such that many people hold multiple roles and are part of multiple levels of decision making.
In addition, ICOMP’s different business areas are staffed
with Business Developers, Designers, Buyers, and Product
Technicians, who actively can support their suppliers. Centralized technological support to suppliers is also provided
through Swedwood, and their expertize is often used to upgrade the capability of wood product suppliers worldwide,
Table 1. Critical areas for IKEA’s supplier selection. Source: Survey data
Area
Management
Production
Controlling systems
Raw materials
Finance
Corporate citizenship
Key variables
Experience and skills, visions and will, continuous improvements
Plant/machinery status, layout and production flow, plant utilization, quality assurance
Raw materials’ utilization, machinery utilization, productivity
Knowledge and constant evaluation of the market, focus on material utilization
Reasonable profit, sound solvency
Compliance with law, working standards, environmental awareness, business ethics
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either by inviting them to Swedwood’s facilities or by putting
them in contact with other wood product suppliers from
whom they can learn key technologies. IKEA evolved a range
of strategies to support supplier development through Swedwood over the past two decades. One of the reasons to build
up Swedwood’s production plants in Western Europe in the
early 1990s was to provide centralized technological support
to wood product suppliers in Eastern Europe that had capacity problems and old machinery. During the 1990s, however,
this was replaced by a strategy to supply more local support
( Björk, 1998). Today, Swedwood helps suppliers to expand
their production capacity by financing, designing, and building new plants. Through this arrangement, IKEA improves
its cost control by adapting suppliers’ production according
to its own requirements.
(b) Local support: the role of Trading Areas and TSOs
In countries where IKEA sources large volumes of finished
products, TSOs are established to monitor the sourcing process and provide technological support to suppliers, either directly or in collaboration with external experts. TSOs have a
fairly flat organizational structure, which includes a site manager, finance, accounting, and human resource personnel, and
quality and corporate social responsibility specialists. The regular, ongoing interaction with suppliers is typically organized
through teams of three persons, with one Business Developer,
one Buyer/Business Planner, and one Technician. These team
members can also be seen as the local representatives of the
Business Developers, ISTRAs, and Product Technicians at
IOS, as discussed above. Depending on the traded volumes,
the number of products, and the complexity of operations,
each local team is responsible for some 3–20 suppliers within
specific product areas. The Business Developer is the key team
member, responsible for overall business with the suppliers.
The Business Developers coordinate the team’s work in order
to optimize the price, quality, capacity, and delivery service.
They are also responsible for developing suitable products
for specific suppliers and finding suitable suppliers for specific
products. The role of the Buyer is to make sure suppliers’ manufacture and deliver according to the plans developed with
IOS, while the objective of the Technicians is to ensure that
suppliers meet IKEA’s expectations on product and process
quality, and to provide technological support to suppliers.
To monitor and support IKEA’s running production, the
team members make regular, frequent onsite visits to their
suppliers, typically on a weekly or bi-weekly basis. When critical problems arise, or when new products are introduced, the
technicians often provide more substantial and frequent technological support to their suppliers.
In cases where deeper, specialized technological competence
is needed, the local TSOs make use of Support functions,
which are located either at their own TSO or at the Trading
Area level, offering services to multiple TSOs. Material Experts, working in collaboration with the Category leaders at
IOS, are often located where different raw materials and/or
their processing are concentrated. Their role is to secure
IKEA’s local competence through educating and hiring personnel at the TSOs. They are also links among IOS, the TSOs,
and the suppliers for product development, and they provide
consultancy to suppliers, especially when new products are
developed and introduced. Other important channels for local
technology transfer to suppliers are Technology, Quality, and
Environment (TQE) managers, who are generally located at
each TSO. The larger TSOs also have Production Specialists
with long and extensive experience in different process technol-
ogies. Both TQE managers and Production Specialists provide
support to the TSOs and their suppliers, especially in areas of
production expansion and cost-cutting rationalization. The
TQE managers are also an important link between the TSO
and the Material Experts operating at the Trading Area level
when the local expertize is insufficient. The support offered by
Material Experts, TQE managers, and Production Specialists
is often project based, and depending on the scale, their
involvement can be intense and long-term, including daily or
weekly collaboration with suppliers over a one-year period.
When needed, External expertize (e.g., consultancy firms and
international manufacturers) can also be engaged to support
the TSOs and suppliers.
9. IKEA’S TECHNOLOGICAL SUPPORT TO SUPPLIERS
IN CHINA AND SE ASIA
(a) Regular, ongoing support
The data on IKEA’s technological support to their suppliers
were mainly collected through a structured questionnaire, in
which the key IKEA interviewees at the TSOs in China and
SE Asia were asked to identify all suppliers that IKEA had
provided with 10 specified types of technological support. In
the bottom right-hand corner of Figure 1, we show how IKEA
provides regular, ongoing support to their suppliers as well as
providing more strategically important long-term support to
expand and upgrade their operations. Looking first at the
ongoing technological support, suppliers are provided with
drawings and technical specifications of IKEA’s finished products. Almost all IKEA products are designed and developed at
IOS, but a few are originally designed by the suppliers and
thereafter adapted to become IKEA products. One of the fundamental principles behind IKEA’s low retail prices is that
products are designed to maximize material utilization and
production efficiency while at the same time minimizing logistical and distribution costs. This strategy helps suppliers to
control their material costs and reduces the complexity of
the production process, both key challenges for less experienced suppliers. Through IKEA’s technical specifications,
many suppliers become familiar with fundamentally new,
more stringent product standards in durability, functionality,
and safety, as well as in materials and processes.
A second support is regular feedback on product performance
to improve existing product technology. Suppliers are constantly provided with IKEA’s measurements of rejected products and customer complaints, communicated electronically
and through personal communications during regular visits
to suppliers by TQE managers, Technicians, and other responsible team members at the TSOs. In cases where significant
quality problems occur, specialized IKEA personnel (e.g.,
TQE managers) provide in-depth, technological advice. In
addition, responsible Product Developers and Product Technicians at ISO regularly travel from Sweden to make product
audits at their suppliers, where they calibrate IKEA’s and suppliers’ documentation on product design and quality and
make systematic tests to see that the products meet these specifications. If specifications are not met, the production can be
blocked until necessary measures have been taken, usually in
collaboration with IKEA Production Specialists.
A third type of regular support is technical support to improve existing production technology among the suppliers.
The regular operation of equipment and machinery is essentially the responsibility of the suppliers. At the same time, basic support to improve operations is provided by the
SUPPLIER UPGRADING IN THE HOME-FURNISHING VALUE CHAIN
Technicians in IKEA’s TSO teams. In production areas where
IKEA has extensive production expertize, for example, in solid
wood and flatline (board) products, more fundamental support is also provided by Production Specialists. In addition,
IKEA has also built up production competence in some specific areas of ceramics, plastics, steel processing, and natural
fibers. Moreover, when needed, TSOs and Trading Areas hire
key individuals with backgrounds at manufacturing companies to contribute with production experience in areas where
IKEA is less experienced (e.g., textiles). Therefore, despite
being a retailing company, IKEA selectively assists suppliers
to operate and improve their existing equipment and machinery. For example, because most suppliers specialize in large
volume production, it is critical for them to operate long-term,
stable production processes. Through suggestions by Production Specialists regarding appropriate tools, machinery setup,
machinery failure analysis, maintenance programs and spare
part stock-keeping, machinery downtime is often significantly
reduced, saving both the supplier and IKEA from financial
losses due to production standstill.
A fourth means of regular support is assistance with quality
assurance systems. IKEA audits its potential and existing suppliers in two areas. The first is IKEA’s Code of Conduct, originally implemented in 2000 and was specified as The IKEA
Way on Purchasing Home-Furnishing Products (The IWAY).
Through this code, suppliers are required to comply with
IKEA’s standards, with national laws and regulations, and
with international conventions concerning social and working
conditions, child labor, and the protection of the environment.
Suppliers are required to communicate the IWAY to co-workers and sub-contractors and ensure that necessary measures are
implemented as stipulated. The TSOs have direct responsibility
for supporting and monitoring the suppliers to ensure compliance with these standards and regulations. Every supplier is audited every second year, and audits occur more frequently in
some industries and countries where IKEA has the exclusive
right to make unannounced visits at any time to all places of
production. During the early 2000s, these policies were rapidly
implemented in IKEA’s global sourcing strategies. In real
terms, however, the changes were less comprehensive, especially in China and SE Asia where the implementation of the
ambitious IWAY policies often revealed new problems. In
2007, approximately 50% of IKEA’s suppliers worldwide were
fully IWAY approved, with the highest shares in Europe (78%)
and the Americas (67%) and lower shares were found in SE
Asia (52%) and South Asia (32%). In China, where only 4%
of suppliers were fully approved, IKEA, like other international companies, faces significant challenges regarding social
and environmental issues. While almost all of IKEA’s suppliers
in China have made progress and now comply with approximately 90% of the requirements, significant problems remain
with wages, overtime, workers’ health and safety, fire prevention, hazardous waste, and chemicals (IKEA, 2007). The second area where IKEA makes supplier audits is the quality
aspect of products and processes, organized through The
IKEA Supplier Quality Assurance Program. This aims at evaluating suppliers and through a four-step Quality Staircase
Model improves their overall performance to ensure that products meet IKEA’s quality requirements. To stay with IKEA,
new suppliers need at least to be QWAY approved (level 2)
within a year. Overall, some 80% of the suppliers in China
and SE Asia have attained QWAY status. Over 15% are new
suppliers and have only a QMUST status (level 1), whereas a
few have reached levels three or four.
A fifth way in which IKEA provides ongoing technological
support is through training programs for suppliers’ personnel,
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often related to the auditing processes discussed above.
IKEA’s auditing process is a learning opportunity for suppliers who are offered a documented, structured analysis of problem areas, as well as an action plan for development. Suppliers
are also provided training and support from team members
and from IWAY and QWAY specialists at the TSO. These
can also include production planning, cost calculation, packaging, logistics and electronic ordering, and invoicing systems.
(b) Long-term, strategic support
The respondents at IKEA’s TSOs also used our structured
questionnaire to identify a number of suppliers that had been
provided long-term, strategic support to expand and upgrade
their production capabilities. First, suppliers are offered technical consultations to master new product technology. The introduction of new products typically follows one of the two
routes. When IKEA introduces a completely new product in
its product range, a preliminary design idea or a drawing is
sent from IOS to one or more selected TSOs. There a relevant
business team contacts potential suppliers to discuss the possibility of producing these products, and together they develop
samples, which are returned to IOS. This process can be repeated several times, wherein suppliers, in collaboration with
IKEA’s local team members, often have suggested significant
design modifications before designs are finalized by IOS. Suppliers take an active part in the development of approximately
one quarter of the new products that IKEA introduces per
year, especially through design modifications to reduce production costs. Before the product goes into full production,
IKEA makes feasibility studies, provides training, and contributes specialized product technology expertize when
needed. The period to introduce a new product in this way,
from the initial design idea to running production, is often
one to two years, but if needed, can be less than six months.
Another way to introduce new products to a supplier is the
transfer of production from another supplier, including the
existing product design, specifications, and an established production process. This strategy is often used to reduce production costs for design-intensive products with stringent quality
requirements and when the production process is more advanced. This might include sofas, beds, and other furniture,
which are developed in close collaboration between IOS and
their established suppliers in Europe, who often are responsible for the initial production of IKEA’s latest and most
sophisticated products. After approximately two to three years
of production, or when the manufacturing process has been
stabilized and standardized, the products and their production
processes can partly or completely be transferred to lower cost
suppliers outside Europe. The cost reductions are generated
mainly through increasing production volumes and scale economies but also from lower labor costs. The European suppliers
provide the technological know-how on a voluntary basis, often coming from the prioritized suppliers with whom IKEA
has signed long-term production agreements. During the last
decade, this method has become less common as the technological capabilities generally have increased among IKEA’s
suppliers worldwide. Additionally, IKEA has improved its
ability to find suppliers that are able to take the responsibility
for production from an initial phase to large-scale production.
A second area where IKEA provides long-term strategic
support is the provision, advice, or financial assistance to obtain
raw materials and components. Suppliers are responsible for
sourcing their raw materials and other material inputs on
the open market. In some areas, however, IKEA helps suppliers to identify and acquire material inputs. One example is that
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WORLD DEVELOPMENT
suppliers can source raw materials and components through
ICOMP (discussed above), either through their warehouses,
directly from selected material suppliers or by using general
agreements to source from approximately 120 ICOMP suppliers worldwide. Previously, IKEA required suppliers to use
ICOMP for specific materials and components, but today
most of their services and materials are offered on a competitive basis. Suppliers are required, however, to use some specific
material inputs delivered by selected and approved material
suppliers, especially in product areas where IKEA has strict
quality or safety requirements, for example, electric lighting
components and surface treatments for children’s toys/furniture and products with food contact. Naturally, suppliers are
also required to use the ICOMP-designed open/close fittings.
For products offered on a competitive basis, ICOMP has a significant global market share in carbon and stainless steel, and
in comfort materials, whereas in others, it is relatively small.
Worldwide, IKEA suppliers source approximately 10% of
the relevant materials and components from ICOMP. ICOMP
also plays an important role by providing global market intelligence on the availability and price development of raw materials, as well as by monitoring the conditions to which their
suppliers agree with raw material providers.
Another support related to suppliers’ raw material sourcing
is the advice to find appropriate material inputs on the open
market, often based on IKEA’s extensive international market
experience and supplier networks. One example is the step in
the early 1990s to integrate backwards, through long-term forest leasing contracts and the acquisition and establishment of
sawmills and woodworking companies in Russia and other
Eastern European countries. This decision contributed to
building a strategic position to access certified wood raw materials in the region, and this ability is now also passed on to
IKEA’s suppliers of finished wood products. Typically, IKEA
links suppliers to approved raw material sources but are seldom involved in the deals that are negotiated, although IKEA
staff closely follows the agreed price and delivery conditions.
In addition, raw material-dependent suppliers often face
liquidity problems because most of their operating capital is
fixed in the material stocks that need to be kept in their warehouses well in advance of production and sales, and were raw
materials typically make up over 75% of their production
costs. To overcome these short-term problems, IKEA provides
financial assistance through “fast payments,” a short-term
loan that helps suppliers to finance their raw materials sourcing until IKEA pays for the finished products. This financial
support is decided by IKEA’s top management at the INGKA
foundation and its financial arm in Switzerland. Our data
show that IKEA’s suppliers in China in 2008 mainly used fast
payments to source solid wood, metals, and chemicals, as well
as layer-glued materials and textiles. Overall, it financed over
5% of IKEA’s total purchases in China and was especially
important for sourcing chemicals and solid wood products,
financing between one quarter and one third of suppliers’ production.
A third significant type of long-term strategic support is
IKEA’s provision, advice, or financial assistance to obtain
machinery and equipment. Occasional suggestions on new, simple equipment can be provided by the Technicians and other
team members at the TSO. The Production Specialists, TQE
managers, and managers operating as Capacity Developers
provide more substantial support, especially to expand suppliers’ production capacities. This is often made through partly
substituting labor for capital-intensive operations. Suppliers
in low-cost countries often face difficulties in expanding and
upgrading their production by investing in suitable equipment
and machinery. Aside from a lack of experience and capital,
the markets for production equipment are often underdeveloped. Machinery suppliers, where they exist, often do not have
the capacity for or even an interest in helping buyers to identify suitable technology. Therefore, investments are made in
inappropriate technologies, resulting in financial losses for
buyers. To overcome these problems, IKEA helps suppliers
to identify, select, and buy appropriate equipment and
machinery, including individual machines and models, and
also in building and optimizing complete production lines.
IKEA also invites suppliers to visit other suppliers or their
own production units (Swedwood) in Europe to learn new
production technologies. Moreover, IKEA directs its suppliers
to trustworthy machinery providers on the local or international markets and also accompanies them to technology fairs
and machinery suppliers. These efforts ensure that appropriate
machines are selected and that vital installation, after-sales,
and maintenance services are included when deals are made.
IKEA’s Production Specialists and other technology experts
are also involved in full-scale projects to help suppliers expand
or build new factories. They provide detailed, extensive, and
long-term strategic consultation with regard to plant construction, factory design, production layout, acquisition and installation of equipment and machinery, staffing of operations, and
management organization. On the other hand, except for tooling, IKEA does not make capital investments. It is the suppliers who have to make investment decisions and take financial
risks. Therefore, another important aspect in these larger projects is IKEA’s provision of detailed, long-term forecasts of required production capacity. This is critical information that
helps suppliers to measure their own investment plans against
IKEA’s future production needs. Basically, these long-term
forecasts are available for all suppliers and are especially used
when IKEA and suppliers negotiate longer business contracts
including the need for capital investments. Thus, one of
IKEA’s key contributions is using their experience to help suppliers to find the right mix between capital investments and
manual labor, which reduces the risk that suppliers’ production costs will increase faster than their productivity because,
as claimed by IKEA managers, “It is very easy to price yourself out of the market by making wrong capital investments.”
At the same time, when capital investments are needed IKEA
offers financial assistance. In addition to the fast payments discussed above, IKEA’s financial program includes “supplier
financing,” which are favorable loans to enable capital investments to expand or upgrade suppliers’ production capacities.
Data from China in 2008 show that, in absolute terms, these
loans were largely used by suppliers to invest in solid wood,
glass, and solid chair production, and in total, they were used
to make approximately 10% of the production in China. Together, fast payments and supplier financing were used to finance 10–15% of all suppliers’ production to IKEA in
China, with significantly higher shares (over 50%) in the production of solid chairs, glass, and solid wood products.
A fourth area where IKEA provides long-term support is
technical consultations to master new production technology.
The installation of new equipment and machinery and the necessary training to operate them are mainly the responsibility of
the suppliers. However, in specific cases, for example, in the larger expansion projects discussed above, IKEA assists suppliers
to start using the new production technology and, more generally, also instructs them to include appropriate installation
and training services in contracts with machinery providers.
A fifth type of strategic support to their suppliers can be
found in IKEA’s advice on production layout and organization.
Naturally, this is important when suppliers make capital
SUPPLIER UPGRADING IN THE HOME-FURNISHING VALUE CHAIN
investments, as discussed above. However, more often, IKEA
contributes to significant efficiency gains with no or minor
investment costs by reorganizing how, where, and when different operations are made and by eliminating bottlenecks; in
other words, by using existing labor, machinery, and management more efficiently. IKEA Technicians and other team
members at the TSO make ongoing, basic suggestions on more
efficient production organization through ideas on rational
material storage, positioning and setup of machinery, and
the staffing of operations, often by sharing good ideas from
other suppliers. However, IKEA also provides more extensive
support to selected suppliers through Production Efficiency
Programs, in which the existing production flow is systematically analyzed and rationalized. The implementation of these
programs needs a highly developed technical competence
and is mainly done by Production Specialists and IKEA’s
other technology experts. They are often implemented when
new products are introduced or when production capacity is
expanded at a supplier. These programs aim at reducing suppliers’ production costs, and when needed IKEA assists the
suppliers to make capital investments by offering supplier
financing and advice on appropriate machinery. The suppliers
are selected on the basis that business relations are long-term
and strategically important, and these suppliers are motivated
to take part in the programs by the benefits resulting from
higher production capacity and cost reduction, which IKEA
typically shares on a 50/50 basis.
10. THE EXTENT OF IKEA’S TECHNOLOGICAL
SUPPORT
As is clear from the discussion above, IKEA’s technological
support to its suppliers is not given in an ad hoc fashion. On
the contrary, it is part of a deliberate strategy to secure
IKEA’s manufacturing base in terms of production volumes
and technological capabilities, to gain control over product
quality, and to influence cost development and performance
standards among suppliers. Below, we analyze the significance
of this support by estimating the share of suppliers that IKEA
has supported in China and SE Asia. This estimation was
made by summarizing all suppliers that IKEA’s personnel at
the TSOs had identified as being provided with technological
support within the 10 areas specified in our structured questionnaire. Table 2 shows the systematic nature of IKEA’s technological support to its suppliers.
1583
IKEA provides ongoing, regular support to all of its suppliers in four areas: the provision of product designs and technical specifications, regular feedback on product performance to
improve existing product technology, assistance with quality
assurance systems (IWAY and QWAY), and training programs for suppliers’ personnel. In addition, 40% of suppliers
are offered assistance to improve their existing production
technologies.
Turning to long-term, strategic support, the significance of
IKEA’s technological support becomes even more striking.
Almost all suppliers (90%) are provided with technical consultations on product characteristics to master new product technology. Almost half of their suppliers (48%) are given advice
on production layout and organization, and almost half of
the suppliers (47%) are assisted through the provision of advice or financial assistance on obtaining raw materials and
components. Furthermore, almost one third of suppliers
(32%) are provided with technical or financial assistance to obtain machinery and equipment, which may include full-scale
plant expansion as discussed above. Finally, the least longterm support is given in the area of technical consultations
to master new production technology for which 13% of suppliers have been supported.
If we compare the figures for China and SE Asia, we notice
that while the general level and structure are rather similar, a
larger share of suppliers in China is provided support to
improve the existing product technology and to master the
new product technology. A larger share of suppliers in SE
Asia is provided support to obtain raw materials and machinery, and a larger share is also provided advice on production
layout.
While we believe that these figures are a good approximation of the extent and forms of IKEA’s technological support,
because they are an aggregate of information from a large
number of IKEA informants, they are nevertheless provided
from the perspective of IKEA, which might differ from a supplier’s perspective. In the present study, it was not possible to
confirm IKEA’s information by collecting similar data from
all suppliers. However, as discussed above in the section on
data collection, we made personal visits to 23 local suppliers
to validate the information provided by IKEA and collect
additional in-depth data on how the suppliers benefited from
this support. The results from these supplier interviews
strengthen our general findings on the extent and forms of
IKEA’s technological support to their suppliers in China
and SE Asia.
Table 2. Technological assistance by IKEA to suppliers in China and SE Asia (Vietnam, Indonesia, Thailand), 2008. Percent of suppliers. Source: Survey
data
Type of technological assistance
China
(n = 195)
SE Asia
(n = 83)
Total
(n = 278)
On-going, regular support
Provision on product designs and technical specifications
Regular feedback on product performance to improve existing product-technology
Technical support to improve existing production technology
Assistance with quality assurance systems (IWAY and QWAY)
Training programs for suppliers’ personnel
100
100
45
100
100
100
100
27
100
100
100
100
40
100
100
Long-term, strategic support
Technical consultations on product characteristics to master new product-technology
Provision, advice, or financial assistance to obtain raw materials and components
Provision, advice, or financial assistance to obtain machinery and equipment
Technical consultations on machinery-operation to master new production technology
Advice on production layout and organization
95
41
26
14
44
77
63
46
10
57
90
47
32
13
48
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11. RESULTS FROM IKEA’S SUPPORT: TECHNOLOGY
IMPROVEMENTS AMONG MANY SUPPLIERS
We have also estimated the share of suppliers that have taken advantage of IKEA’s support, resulting in a significant
upgrading of their technological competence. Naturally,
IKEA’s support will not result in an automatic upgrading of
suppliers’ technological competences. The same support might
result in varied effects on different suppliers, depending on
their existing technological capabilities and their commitments
to learn. Much also depends on IKEA’s ability to motivate
conservative and skeptical suppliers to allocate sufficient resources to absorb and make use of IKEA’s support. This is
facilitated by IKEA’s long-term perspective and is critically
dependent on personal interaction with the suppliers, based
on IKEA’s core corporate values, focusing on shared responsibility, cost consciousness, informality, and a humble, downto-earth approach. Here, key IKEA personnel include the
team members at the TSOs, the Production Specialist, and
other technology specialists, many who come from the Trading Area and IOS. To generate a well-informed estimate, we
asked these key IKEA personnel to identify all suppliers they
believed to have “substantially improved their technological
competence through assistance from IKEA.” The result shows
that IKEA’s support has contributed to upgrading the technological competence of over half of the suppliers, with a striking
similarity between China (53%) and SE Asia (52%). Also,
according to the same respondents, the implementation of
the IWAY standard has contributed to significant improvements among basically all suppliers in China and SE Asia. Visible improvements have been made in labor standards,
especially by eliminating child labor, introducing written
employment contracts with regulated working hours and
timely payments, and improving working conditions related
to safety, heat, noise, and air. The other significant effect is
in suppliers’ environmental policies, especially elimination of
non-certified wood raw materials, improved chemical storage
and handling, and wastewater and emission control.
In addition to these figures regarding the general level of
improvements, the data collected from the 23 case suppliers
have resulted in another related study (Ivarsson & Alvstam,
2010), in which we demonstrated how the inclusion in IKEA’s
global value chain contributed to upgrading among their suppliers in China and SE Asia. This was especially the case for
product upgrading, for which suppliers learned new or improved their product qualities, and in process upgrading, for
which they improved or added new production technologies.
We also identified clear evidence of inter-chain upgrading,
for which suppliers were able to use their production capacities and IKEA-related technologies to also serve other customers, including in other industries. Finally, we even identified
the existence of functional upgrading, for which some suppliers had started to design their own products and sold these on
the local and international markets.
12. MOTIVES FOR IKEA’S TECHNOLOGICAL
SUPPORT TO ITS SUPPLIERS
(a) Variations in support to different suppliers
Naturally, IKEA does not have the motivation, the need, or
the capacity to provide extensive support to all suppliers. First,
as discussed above, in its recent global sourcing strategy, IKEA
increasingly secures production capacity by concentrating on
its prioritized suppliers. These suppliers are given long-term
development opportunities, the bulk of production volume,
and the most significant technological support. Some suppliers
are also used as back-up to the prioritized suppliers, and if defined as a “potential,” they are also provided with important
technological support. In selected material areas, IKEA secures stable and long-term relationships with suppliers by signing production commitments. Depending on the complexity of
products and processes and how much IKEA has invested in
their capacity building, suppliers can be offered business contracts of up to seven years. One illustration of IKEA’s longterm supplier relations is that almost three quarters of the existing suppliers in China and SE Asia in 2008 had been with
IKEA for at least four years, and many substantially longer.
At the same time, repeated violations of IKEA’s requirements
can result in the termination of business. In 2007, IKEA canceled contracts with more than 50 suppliers worldwide, due
to non-compliance with necessary requirements: most failed
to meet expectations on price, quality, or delivery, and some
were excluded due to non-compliance with IKEA’s requirements on social and environmental responsibility.
Second, the least amount of support is given to large, established suppliers, for which IKEA does not have the capacity or
need to help expand or upgrade technological competence.
Further, less support is provided for suppliers who manufacture outgoing products and for whom, for various reasons,
business relations will be discontinued.
Third, IKEA naturally provides more support to suppliers
in the least technologically developed countries, such as Vietnam and Indonesia, compared to suppliers in countries such as
Thailand and China. Suppliers in Western Europe operate
more independently, despite the fact that they make the most
sophisticated products.
Fourth, the level of IKEA support can also vary depending
on suppliers’ willingness to cooperate. This can be a sensitive
issue, and often requires that suppliers share critical information, which potentially can be used opportunistically by IKEA
to squeeze margins from the supplier. Thus, not all suppliers
accept IKEA’s regular plant visits and scrutiny of their internal bookkeeping in order to adapt the operations to meet
IKEA’s requirements. However, there is no absolute correlation between suppliers’ openness toward sharing vital information and their willingness to adapt to IKEA’s
requirements. Some suppliers are reluctant to open their
books, but very responsive to meet IKEA’s requirements. Others are more open, but take few pro-active initiatives. Aside
from personal differences among suppliers’ managers, these
variations can partly be explained by national/cultural differences. For example, in Asia, Chinese and South Korean suppliers are often less willing to let IKEA enter deep into their
companies. Vietnamese and Thai suppliers, by contrast, have
a generally more open attitude and provide IKEA unrestricted
access to their factories and figures. These differences can also
be partly explained by industry-specific variations, such as
with suppliers in industries where IKEA has an extensive technological competence, for example, in solid wood products,
are generally more open to sharing information, compared
to suppliers operating in industries in which IKEA’s expertize
is less comprehensive.
Fifth, some suppliers prioritize other customers, with whom
the margins can be higher, and for whom the business relations
are short-term and based on a more simple calculation of price,
quality, and delivery. Some believe that IKEA’s business model
is too bureaucratic, as the audits, inspections, and suggestions
mainly generate paperwork with few results. IKEA’s decision
making is also seen as unclear, involving too many people, at
both the global and local levels, and with different functions
SUPPLIER UPGRADING IN THE HOME-FURNISHING VALUE CHAIN
and different opinions on the same issues. This can result in situations where the local TSO influences a supplier to sign a production commitment contract before IOS has finalized the
product design. For many suppliers, even a small design change
not included in the cost calculation can remove their small, but
critical, profit margin. In addition, the team members at the
TSO, that is, the main link for shaping the business relations
with suppliers, often consist of the youngest, least experienced
IKEA personnel. Frequently, they are also new to their roles,
due to fast organizational expansion and a high turnover rate
among team members. This restricts the possibility to establish
long-term, trustful business relations; instead, these relations
become inconsistent and non-dynamic.
Finally, IKEA deliberately seeks to avoid suppliers becoming either technically or financially dependent. From a technical support viewpoint, the challenge is to find the right balance
between offering support and setting standards, such that suppliers increasingly make proactive decisions and become less
dependent on IKEA’s support. From the perspective of financial independence, although IKEA wants committed suppliers
and buys substantial shares of their production, it is also
important that the suppliers have other customers in order
to spread their risk. Virtually all suppliers in China and SE
Asia in 2008 had other customers, with almost half of them
(45%) selling at least 40% of their production to other customers. As long as IKEA’s requirements are met, the suppliers can
use their plants and production technologies, including those
that IKEA has helped to introduce, to also serve other customers.
13. KEY MOTIVES FOR IKEA’S SUPPORT
Generally, IKEA’s technological support is appreciated by
its suppliers, especially when seen as free consultancy services.
But why does IKEA use so many resources to assist its suppliers? First, it is in line with a long tradition. During the early
1960s, fierce price competition had severe negative effects on
product quality within the whole Swedish furniture industry.
Increased customer complaints and widespread rumors of
low IKEA quality, further supported by the leading oligopolistic competitors within the Swedish Federation of Furniture
Retailers, resulted in decreased sales that almost ruined the
company. IKEA’s top managers learned a lesson, and made
a strategic decision to focus on products not only with a low
price, but also with lasting quality. In addition, when most
Swedish furniture suppliers boycotted IKEA in the early
1960s, it started to source products mainly from Poland and
other Eastern European countries. Located within centrally
planned economies, these suppliers had very low production
costs, but used outdated production technology. Therefore,
IKEA began to assist these suppliers to upgrade their production and product quality by providing more modern, secondhand machinery, tools, and spare parts, which were often
smuggled in through the iron curtain (Torekull, 2008). One
important result from this support was demonstrated in
1964 when a leading Swedish home-furnishing magazine published a study in which independent testing laboratories compared the quality of furniture from IKEA and other Swedish
retailers (Ek, 1964). IKEA’s products generally had the same
or higher quality as the more expensive products from up-market retailers. IKEA’s “Ögla” chair, produced in Poland by the
supplier Fameg since 1961, out-performed all similar chairs
and received the highest possible test results. The publication
of these results gave IKEA a crucial marketing advantage,
and naturally, in the early 1970s, it started to regularly publish
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the results from these standardized tests, known as
“Möbelfakta.” IKEA also became the company that most
extensively implemented these test results in their product
specifications and quality requirements when sourcing furniture from suppliers (Möbelinstitutet, 2008).
A second, related explanation for IKEA’s policy of working
closely with suppliers is found in the business culture and ethics, long instilled by the founder, Ingvar Kamprad, and other
leading managers, based on principles such as long-term commitment, shared responsibility, and a paternal view of coworkers, such that suppliers are also part of IKEA’s extended
family. The early experience in Eastern Europe also contributed to a strong belief that capitalism with a human face
and fair business relations with suppliers can contribute to
economic and social development, especially in low-cost
sourcing countries.
A third key explanation for why IKEA today puts so much
effort into monitoring product quality among its suppliers can
probably be related to problems during the 1990s. In 1992, a
leading magazine in Germany, IKEA’s largest market, published a report showing that the bookshelf “Billy,” one of the
best selling products, contained formaldehyde and generated
toxic gas in people’s homes (Stern, 1992). This resulted in lost
customer confidence worldwide and forced IKEA to further
strengthen its product quality and to develop and implement
new production technologies among suppliers. In addition,
when a Swedish television program in 1994 showed that child
labor was used by some of IKEA’s textile suppliers in South
Asia (SVT, 1994), more radical steps were taken to monitor
suppliers. By the end of the 1990s this resulted in a gradual global implementation of IKEA’s quality assurance system (the
QWAY) and its Code of Conduct (the IWAY). To gain direct
influence over suppliers’ operations and product quality, and
as always, to reduce costs, IKEA also replaced all intermediate
traders who had played an important role during the 1990s
when IKEA expanded its sourcing of “satellite” products
(non-furniture) from low-cost suppliers, mainly in Asia.
Finally, the ultimate motive for IKEA’s monitoring of suppliers is that it generates economic benefits. Although IKEA
often would prefer to have large, technologically advanced
and independent suppliers, its production costs are generally
too high. Instead, IKEA’s strategy is to secure and expand
its production capacity through close relations with smaller,
less experienced suppliers. In this situation, supplier monitoring and support is the main method to ensure and improve the
quality of products and processes, which can be especially difficult for less experienced suppliers with a rapid growth in production volumes. It is also the key tool to generate cost
reductions through continuous rationalization of production.
The cost of supplier monitoring is kept down by mainly hiring
local staff with local salaries at the Trading Areas and TSOs.
Because many of IKEA’s products are manufactured with
rather standardized production technologies, except for a
few top managers and technology experts, the local staff does
not generally need to be highly paid specialists. The local staff
also contributes positively to the regular face-to-face interactions with local suppliers, while the top managers and technology experts, who often come from Sweden, contribute to
building the IKEA business culture. Increasingly, however,
these are hired locally as well.
14. CONCLUSION AND DISCUSSION
This paper used detailed firm-level data from 2008 to show
how the world’s largest home-furnishing retailer, the Swedish
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WORLD DEVELOPMENT
based IKEA, provides its suppliers in China and SE Asia with
significant technological support to produce a variety of finished products. The support is primarily provided by key personnel located at its local Trading Sales Offices (TSOs) and
consists of ongoing regular support, in terms of detailed product designs and technical specifications, regular feedback on
product performance, support to improve existing production
technology, assistance with quality assurance systems, and
training programs for suppliers’ personnel. Of even larger significance is its long-term, strategic support. This support consists of consultations to master new product technology, the
provision of technical and financial assistance in obtaining
raw materials and machinery, consultations to master new
production technology and advice on production layout and
organization. According to the information provided through
interviews by a large number of IKEA managers, technical
specialists, and other personnel, a significant number of suppliers (over 50%) substantially improved their technological
competence through assistance from IKEA. Given that IKEA
is basically a retailing company, we believe that their technological support is quite remarkable.
In addition to the empirical contribution, we propose that
this study adds to the theoretical understanding of supplier
upgrading in global value chains. In their most elaborate attempt to present a formal theory, Gereffi et al. (2005) suggest that supplier–buyer relations in global value chains
are characterized by five different governance structures.
We believe that our empirical findings demonstrate the existence of an additional “developmental” governance structure, which clearly falls between market and hierarchy; but
at the same time, it cannot be described as either modular,
relational or captive, as suggested by their theory. In Asia,
IKEA basically sources low-cost, labor-intensive products
from suppliers with restricted technological capabilities.
These buyer–supplier relations are often complex; usually,
transactions are only partially codified due to IKEA’s flexible demands on products and production processes, for
example, they acquire production capacity from their suppliers, rather than specific products. Therefore, suppliers need
to be flexible toward constant changes in design and technical specifications. Very few of IKEA’s suppliers in Asia
have enough capabilities and resources to build symmetrical
power relations and equal partnerships. Thus, IKEA’s governance structure in these countries is not relational as it is
in Europe, where IKEA have close relations with highly
capable suppliers that manufacture the most technologically
challenging products (see, e.g., Baraldi & Waluszewski,
2007).
Furthermore, IKEA’s sourcing strategy does not result in
suppliers being locked into captive value chains. Although
IKEA wants to be a dominant buyer, they do not want to
be an exclusive customer. As we have demonstrated, this
brings substantial upgrading opportunities for less capable
suppliers to improve their product and process technologies,
and also to strengthen their market positions vis-à-vis other
customers. Finally, the hierarchical type of value chain governance, wherein production is internalized, is only used by
IKEA in a few product areas, for example, in solid wood
and board products, which are produced by their own manufacturing unit, Swedwood, primarily in Europe.
Instead, we believe that the existing typologies of governance structures need to be complemented by a “developmental” category. In such a structure, global value chains are
governed by large buyers who have a sourcing strategy that
is deliberately designed to generate technological upgrading
among less capable suppliers. As we have demonstrated in
the present study, supplier-upgrading is an inherent and
important part of IKEA’s global sourcing model and can
mainly be seen as a means to meet the goal of generating an
efficient and flexible sourcing of low-cost products. At the
same time, supplier-upgrading can partly be seen as a side effect of IKEA’s sourcing strategy, in which suppliers can take
additional advantages by adapting IKEA-related technologies
to improve their products, processes, and market positions in
relation to other customers. This additional “developmental”
governance structure seems to occur when product specifications for products can only partly be codified, when the complexity of the business transaction is higher than the capability
of the suppliers, and when the buyer wishes to closely monitor
the cost development, product quality, and production processes of the suppliers.
One possible theoretical explanation of this type of valuechain governance is that the foundation of buyer’s competitive
advantage is based on a bundle of business relations generated
by being a part of their global value chain, rather than on particular well-defined proprietary resources, for example, product or process technologies. In these situations, buyers have
few motives to lock in suppliers in order to prevent opportunistic behavior. As we have demonstrated in another related
study (Ivarsson & Alvstam, 2010), IKEA’s suppliers use their
production capacities and IKEA-related technologies to also
serve other customers. In these situations, IKEA may of
course risk losing asset-specific investments, due to opportunistic behavior by suppliers. However, this risk is most likely
outweighed by greater long-term stability, scale economies,
and learning opportunities generated by suppliers with multiple customers. In addition, if IKEA’s support is taken out of
context, it will only provide short-term competitive advantages for suppliers, reducing their opportunistic behavior.
Because this study is based on information from one casecompany, we clearly need more research to determine if our
findings are an exception rather than a rule among large transnational retailers operating in buyer-driven value chains with
technologically less complicated finished products. More
empirical studies are also needed to analyze to what extent
“developmental” governance structures can be found in other
types of global value chains. Elsewhere, we have used in-depth
data on Swedish engineering TNCs and their manufacturing
affiliates in Asia and Latin America to show that such “developmental” government structures also are an intrinsic and
necessary part of producer-driven value chains in which manufacturing buyers have to interact with their suppliers to
source non-standardized and technologically more advanced
intermediate products (Ivarsson & Alvstam, 2005a, 2005b,
2009a, 2009b). As has been shown in the literature with an
evolutionary perspective, technology development and diffusion are normally seen to be dependent on close linkages between firms and institutions, often in a local setting (Lall,
2000, 2003; Nelson & Winter, 1982; UNCTAD, 2001). In
the engineering- and other producer-driven industries, this
type of local interaction is normally made between suppliers
and local manufacturing affiliates of foreign TNCs. In the case
of the retailing company IKEA, this is carried out between
suppliers and the local TSOs.
Together, our studies on the sourcing strategies of the retailing-giant IKEA and other Swedish TNCs operating in the
engineering industries empirically show that global value
chains can be governed by “developmental” structures. We believe that this should be reflected in the theoretical understanding of how business relations with global buyers can
contribute to supplier upgrading, both in buyer-driven and
producer-driven global value chains.
SUPPLIER UPGRADING IN THE HOME-FURNISHING VALUE CHAIN
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