IKEA Gets Deeper into the Woods by: Saabira Chaudhuri Jul 31, 2015

TOPICS: Corporate Social Responsibility, Supply Chain

SUMMARY: IKEA decided to take greater control over the raw materials used to manufacture its product. Wood is a key component of many different IKEA products. The company plans to own and operate forests and implement other initiatives to reduce use of this raw material. The goal is to secure long-term access to sustainably manage to avoid at affordable prices. Timber prices will likely increase in the future as demand increases. The company is investing in a forest as part of its overall strategy to invest in renewable energy and biomaterials. The company plans to increase sales, but plans to conserve and better use wood. The company wants to double sales by 2020 and increase the wood it uses by only 50% The design and manufacturing process are also adapting to help the company meet its goal. In addition to buying control of the raw material the company also relies on recycled wood. IKEA wants all its wood to be either recycled or certified by the Forest Stewardship Council. IKEA plans to increase sales and source raw materials in a socially responsible way. Some think the company made mistakes. The Forest Stewardship Council banned IKEA from cutting trees in Russia, but later lifted the suspension. IKEA illustrates that the goal of corporate social responsibility can be part of plans to grow a successful company.

CLASSROOM APPLICATION: Corporate social responsibility represents initiatives by companies that can include energy and the environment, worker health and safety or philanthropy. IKEA is a company that tries to actively engage in socially responsible sourcing for the wood used to make its products. The company also illustrates how the goal of sustainability often is not the only benefit or objective of decisions concerning the source of raw materials. For example, IKEA wants to secure long-term access to wood at affordable prices. Gaining control of a forest or moving toward recycled wood helps the company secure access to the raw materials it needs to manufacture furniture. The company is also taking steps to help reduce the amount of wood it takes to make its products. This involves design changes so that its furniture uses less wood but maintains its design and quality. As a result of design changes, using recycled wood and other strategies the company thinks it can meet its goal to double sales by 2020 by increasing the wood it uses only by 50%. There are many reasons why companies engage in activities that include corporate social responsibility. IKEA illustrates that these initiatives are not inconsistent with growth, reduced costs and well-designed products.

QUESTIONS: 1. What are the business motives for the IKEA forest purchase? 2. Describe the term "sustainability" and why it is an important concept at IKEA. (use information from the article as well as information from a web search in your answer) 3. How is IKEA changing furniture designs in a way that maintains quality, but reduces the amount of wood needed in manufacturing? 4. Discuss additional benefits to a company that gains greater control over its raw materials and supply chain. Are there any disadvantages? (do a web search and explain what a supply chain is in your answer)

IKEA Gets Deeper Into the Woods

IKEA is working to wield more control over its most important raw material: wood.

The Swedish furniture giant earlier this month bought a forest in Romania, marking the first time that the company will manage its own forest operations.

IKEA said owning and operating forests would help it secure long-term access to sustainably managed wood at affordable prices. The retailer used the equivalent of about 530 million cubic feet of round wood last fiscal yearor about 14 Empire State Buildingsexcluding paper and packaging.

Timber prices are expected to increase globally as population, the use of biomass for energy and U.S. housing sales are on the rise, said George Krempels, a fund manager at FIM Services Ltd.

IKEA said it would use some of the wood from its 83,000 acres of Romanian forest to locally make furniture for its store in Bucharest, with plans to open a second store. The acquisition comes as IKEA has also been investing in renewable energy and biomaterials.

IKEA in 2012 set a target to double sales to 50 billion ($55 billion) by 2020. That involves more than doubling the volume of products it sells, said IKEAs head of sustainability, Steve Howard, since the retailer tries to lower overall prices slightly every year. Despite this, IKEA is aiming to increase the wood it uses by only about 50%, Mr. Howard said in an interview.

To do this, the company has been working on optimizing its product designs to make the best use of trees. IKEA's Skogsta line of furniture uses both light and dark pieces of acacia. Photo: IKEA

IKEA designs some of its Norden series tables so they use the tops of trees and irregular-looking bits that wouldnt otherwise be used, according to a spokeswoman. The companys Skogsta product linewhich will become available in Augustis made of acacia, a type of tree that is light blond in the middle and darker on the outside. IKEA now makes products that use both shades of the wood, rather than just the dark wood, which the furniture industry has historically favored.

IKEA also has been tweaking the density of the particleboard used for the backs of products like wardrobes and dressers. Rather than use one sheet of particleboard of standard thickness, the company designs its boards to be thicker around the hinges and corners, and thinner toward the middle, which needs less support.

For the tops of certain coffee tables, such as its Lacka product, and increasingly for wardrobe doors, IKEA uses a board on a frame rather than a thicker piece of solid wood. Mr. Howard said that allows producing three or four times as much with the same raw material.

Weve been progressing through our range of products and mapping where we need solid wood, Mr. Howard said. IKEAs Mockelby table is made of pieces of wood connected with joints, but a layer of veneer helps give it the appearance of a solid piece of wood. This lets us use logs that would otherwise be thrown away, Mr. Howard said.

IKEA is increasingly relying on recycled wood for its furniture. By 2020, the company wants all the wood its uses to be either recycled or certified by the Forest Stewardship Council, a nonprofit group that promotes responsible forestry. So far, about 50% of the wood it uses meets either criteria.

IKEA also has its own foresters, who strive to ensure it is buying from well-managed forests. However, the companywhich buys much of its wood in Scandinavia, Poland, Romania, China and Russia has run into problems on its sustainability practices.

Early last year, the company was briefly banned from cutting trees in Russias Karelia forest by the Forest Stewardship Council, which had found that IKEAs Swedwood subsidiary had violated its logging agreement. IKEA appealed, and the FSC lifted its suspension a month later after reclassifying some of IKEAs alleged deviations.

Viktor Sfve, chairman of the Swedish nonprofit Protect the Forest, called IKEAs practices in Russia very brutal and said the company has logged old forests that have high conservation value. Mr. Sfve also said the FSC is paid by the organizations it certifies, making for a dysfunctional system. The FSC said its policy is to cut all ties with a company in the event of major illegal activities, which didnt need to be applied to IKEAs case in Karelia.

An IKEA spokeswoman said, We are committed to responsible forestry and to the principles of the FSC. In accordance with our forestry standards, we do not harvest in high-conservation-value forestsas defined by the FSCunless they are certified as responsibly managed.

Richard Donovan, vice president of forestry at Rainforest Alliancewhich audited IKEA in Russia for the FSCsaid the organization found no evidence that IKEA logged old trees in Karelia.

IKEA has since divested its operations in Karelia. In Russia, it still operates in Veliky Novgorod and Tikhvin.

IKEA said it recently had bought forests in Estonia, Lithuania and Latvia, totaling nearly 10,000 acres, but had no plans to harvest them at this point and isnt managing those forests itself. It also said it is considering buying forests in several other markets.