Supplier Diversity: IKEA in India

- December 3, 2012 7:12 AM
Categories: Supplier Collaboration |

Supplier diversity comes in many shapes and forms, and one of the functions is to identify and develop small, and local businesses that can be brought into the company’s supply chain to drive sales and meet government requirements (city, state, national) and/or appease certain constituents. Done correctly, this does not become a window dressing or cronyism exercise but drives profitable growth through increased innovation and stronger ties to the customer base.

Supplier diversity teams have an important role in the areas of engaging with local governments, to highlight procurement successes, identify areas of opportunity, and understand the typically multi-tiered nature of supplier relations. Especially the last one is important – direct opportunities with Fortune 500 firms are typically limited for smaller and even mid-sized firms, and it can be far more effective to encourage Tier 1 suppliers to engage with smaller firms instead.

So how is this related to India and IKEA? Earlier this year, as India finally allowed 100% foreign-owned subsidiaries to operate in the country, the Swedish retailer announced plans to open 25 stores in India – investing around USD $2B (Euro 1.5B) in the process over a 15-20 year period. Welcome news for India, one would think? Smooth sailing for IKEA was also expected since the retailer has long carried numerous products made in India – from fabrics to cast iron and aluminum kitchen products – and should have acquired substantial local knowledge and connections over the years.

But no – India’s bureaucracy has struck down much of IKEA’s plans. They’re imposing strict rules around what can be sold, and where it should be sourced. The Orwellian named Foreign Investment Promotion Board seems more preoccupied with preventing average Indians from gaining access to any foreign sores, and it has nixed slightly over half of IKEA’s standard product lineup. IKEA can sell no presents, no fabrics (ironic, since much would be made in India), no books, no leather products, nothing travel related, no toys, no electronics, no lifestyle items (whatever that is), and no food! 15 out of 29 categories are disallowed. Forget about getting your meatballs & lingonberry fix if you visit IKEA in India. Luckily the bureaucrats have at least permitted IKEA to sell furniture…

Additionally, Indian mercantilism is imposed – a 30% local sourcing requirement. This is an ironic, or perhaps insightful, policy coming from a country predominantly known (in procurement circles anyway) as an outsourcing country for various transactional back office and IT-related activities.

That IKEA has so widely missed the mark in its relations with the Indian government – despite decades of procuring large quantities of Indian products for sale in its stores worldwide – suggests an internal disconnect. As with most European firms, they really don’t “get” the supplier diversity concept as it is applied here in the USA – and now, IKEA is paying dearly for these lessons.
For all those firms watching how the IKEA activity plays out, start to engage with your supplier diversity team, develop a multitier capacity-building strategy, analyze your spend and tie it to your sales efforts to see where there are opportunities as well as to showcase what you are already doing.

- Thomas Kase

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