Supply Chain Vertical Integration – Ikea Buys into Plastics Recycling Business

Ikea is a fascinating firm, and this 2015 book that we reviewed from Magnus Carlsson, “Strategic Sourcing and Category Management – Lessons Learned at Ikea” gave a real insight into how it approaches many aspects of its business, including its supply chain.

The firm is very robust in its dealings with both the supply chain and suppliers; it believes in competition and in holding a powerful position with suppliers. Yet it has also developed a very collaborative approach with key suppliers who are prepared to co-operate in what Ikea sees as the right way. Now, according to this recent report in the Guardian, it is pursuing a strategy of vertical integration.

Ikea has bought forest in Romania and the Baltics, wind farms in Poland and now it is investing in a plastic recycling plant in the Netherlands.”

But the driver for this is not purely economic or cost-based. Rather, it is a way of ensuring that the firm can act in an environmentally sustainable manner.

“The latest Ikea move saw it acquire a 15% minority stake in Dutch plastic recycling plant Morssinkhof Rymoplast, spending some of the €3bn (£2.54bn) the company has allocated to sustainability investments”.

Ikea has a goal to use 100% recyclable and / or recycled materials to make all its plastic products by 2020. So this investment is intended to help Morssinkhof develop its capabilities to produce high-quality recycled materials, some of which presumably Ikea will buy. The investment is also being seen as a learning experience for Ikea.

Jakob Rehme, professor of industrial economics at Sweden’s Linköping University, thinks this is a logical step for a company whose demand for materials is so significant – Ikea is obviously a huge buyer of many of its key procurement items.  “This [demand] means they often need to tackle the sourcing strategy that could lead to a resource scarcity – of recycled plastics for instance,” says Rehme.

This issue of scarcity, as well as the desire to guarantee that supply chains are sustainable, and that there are no nasty horsemeat-type surprises lurking there, is driving more firms to look at vertical integration. Apple, for example, has invested in forest in the US to increase the supply of sustainable pulp and paper goods, needed for packaging.

But there are some issues here. Large company involvement could squeeze smaller firms or those in developing countries out of certain supply chains, and simply increase the power of these giant firms further. Some cynics see firms engaging in “greenwash” – a few high-profile moves to disguise an overall less impressive picture on sustainability. As we write this, the Recycling Association in the UK has named the “villains” in terms of products whose packaging is the hardest to recycle – Pringles is one key culprit brand, and manufacturer Kellogg were rather defensive in their response.

The Ikea initiative though seems admirable, and the firm certainly has the market power, desire and capability to change things for the better across their supply base. And if you want to understand more about just how the Ikea supply chain works, do read Carlsson’s book.

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