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Ikea

Why Ikea’s $1 Billion Supply Chain Investment Will Boost Its Profits and Its Brand

IkeaIkea says it will invest €1 billion ($1.1 billion) in forestry and companies developing recycling technologies, renewable energy and biomaterials as part of the retail giant’s plan to secure a long-term supply of sustainable materials for its products.

“We are going all in to transform our business, to ensure that it is fit for the future and we can have a positive impact,” said Peter Agnefjäll, Ikea Group president and CEO, in a statement.

It’s also a smart business move that will have a positive impact on Ikea’s bottom line.

Ikea has invested €1.5 billion ($1.6 billion) in renewable energy since 2009 including wind turbines and solar panels. The company also, as of fiscal year 2016, diverts from landfills 88.7 of its overall operational waste, through recycling or energy recovery. These efforts are also helping Ikea grow its business; the company says its total revenues during fiscal year 2016 reached €35.1 billion ($37 billion), up 7.4 percent from last year.

Pierre Francois Thaler, co-CEO of EcoVadis, which provides supplier sustainability ratings for global supply chains, said in an interview there are three main drivers for sustainable procurement.

“The first is around risk management,” Thaler said. Companies need a long-term supply of materials to produce their products. Disruptions in the supply chain directly affect profits — if a company can’t produce a product because it doesn’t have the necessary materials it will lose revenue — and can cause long-term harm to a brand’s reputation.

The second driver, Thaler said, is cost prediction. Ensuring sustainable materials helps prevent massive cost spikes, often due to demand outpacing supplies.

“The last driver, and that’s what Ikea is after, is differentiation — improving the value of the brand for end consumers by being positioned as the leader in this space,” Thaler said. Another example, he added, is Unilever. About half of Unilever’s growth last year came from its sustainable living brands, which grew 30 percent faster than the rest of the company’s business.

Risk Mitigation

Ikea says that the materials it uses most in its products are wood and cotton. According to the company’s latest sustainability report, all of the cotton Ikea uses in its products comes from sustainable sources, using farming practices that improve farmers’ livelihoods and protect the environment.

In fiscal year 2016, Ikea sourced 61 percent of wood from more sustainable sources. “To reach 100 percent by 2020, we need to work with others to increase the global supply of sustainable sources of wood,” the report says.

This also helps Ikea mitigate a major business risk: deforestation puts global companies at risk to the tune of $906 billion in revenue annually, according to CDP. This is because about a quarter (24 percent) of major companies’ revenues depend upon four deforestation-linked commodities: cattle products, palm oil, soy and timber products.

To this end, part of Ikea’s billion-euro investment will focus on sustainable forestry. One of the ways Ikea and other companies including Apple do this is by investing in forests. This allows the companies to ensure the forests are managed responsibly, while also ensuring a reliable source of wood for products and packaging materials.

“Sourcing wood from sustainable forests is not only good for the brand but for the business,” Thaler said. “Ikea, being such a large consumer of wood, needs to ensure the sustainability of their own operations if they want to keep supplying wood-based products.”

Investing in companies that focus on recycling will also help Ikea’s business — using recycled materials cost less than virgin materials — especially if it focuses on circular economy approaches, Thaler says.

Reliable, Cheaper Materials

Ikea’s sustainability report highlights products coming in early 2017 that advance the circular economy. These include a spray bottle that partially uses waste plastic from Ikea stores instead of virgin plastic and kitchen fronts made from recycled wood and plastic foil from recycled plastic bottles collected by Japanese municipalities.

“This uses less raw materials, it costs less, and it uses less energy and produces less emissions and climate impacts,” Thaler said. “With circular economy products, you can rally align those three metrics, which, most of the time are going in opposite directions.”

Ikea is a huge multi-national and not every company has $1 billion to invest in its supply chain. But there are a few simple steps that any corporation can take to improve the sustainability and reliability of the materials it needs to produce its products.

Steps to Sustainable Procurement

The first step, Thaler says, it to identify hotspots, that either present risk now or are likely to in the future. “So for Ikea, it will be wood. For our other companies, it may be packaging or chemicals.”

“Second, it’s not reinventing the wheel in terms of metrics and measurement tools,” he said. “Embed those metrics in your existing procurement strategies instead of completing new methodologies.”

And finally, take an integrated approach to managing risks and promoting best practices.

“Many companies, especially in the US, are very focused on risk management, compliance and environmental regulations,” Thaler said. “Risk management needs to be done, but you can also identify opportunities for innovative, environmental practices or vendors with advanced technologies or new materials. Unilever, a few years ago, changed their responsible sourcing policy to also measure best practices. They’re not only identifying poor practices that put vendors at risk but also rewarding those innovations that exist in the supplier base.”

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