Discussion paper 2 Key findings from feasibility study of ... Chain Discussion Papar 2...The bulk commodity approach was the most preferred option; over two-thirds of respondents including

Developing a mechanism for palm oil traceabilityfrom plantation to end use

Discussion paper 2

Key findings from feasibility study osupply chain traceability options

November 2005

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Table of Contents

1. Introduction........................................................................................................................ 3

2. Methodology..................................................................................................................... 4

3. Key Findings ....................................................................................................................... 4

3.1. Preferred supply chain options .............................................................................. 4

3.2. What supply chain control must deliver ............................................................... 5

3.3. Importance of credibility ........................................................................................ 6

3.4. Credibility of different options................................................................................ 7

3.5. Verification ................................................................................................................ 7

4. Conclusion and Recommendations.............................................................................. 8

Annex 1 List of consultees......................................................................................................... 9

Annex 2: List of team members ............................................................................................. 10

Annex 3. Questionnaires ......................................................................................................... 11

Annex 3a. Questions for companies producing, trading or using palm oil ................ 11

General background information......................................................................................... 11

Supply chain information........................................................................................................ 11

Your own supply chain management.................................................................................. 13

Implementation........................................................................................................................ 14

Annex 3b. Questions for interested parties ...................................................................... 15

General information ................................................................................................................ 15

Supply chain information........................................................................................................ 16

Implementation........................................................................................................................ 17

Supply chain traceability options for RSPO oil: Discussion paper 2, November 05 2

1. Introduction At the second RSPO meeting in Jakarta in October 2004, it was agreed that it was necessary to have a mechanism for linking the palm oil being used by RSPO members and other responsible users (including industrial users of palm oil based substances) with the oil palm plantations being managed in accordance with the RSPO criteria. This was seen as critical to the success of the criteria as they were more likely to be implemented in plantations if there was a clear market demand for the oil produced. Consequently a decision was made by RSPO to support a study aiming to develop a fuller understanding of possible supply chain traceability options for RSPO oil.

The study, funded by the Doen Foundation, and undertaken by a team of RSPO members (see Annex 1 for a list of those involved), has two main phases:

• Firstly, identifying possible options for managing the supply chain and establishing which were the most appropriate for RSPO.

• Secondly, elaborating and field testing the selected options.

The study involved:

• A review of other sectors to assess the way in which different approaches have been used in practice1.

• A questionnaire-based feasibility study to collect the views of a range of interested parties on the potential approaches identified (see Annex 2 for a list of organisations consulted).

• Development of outline methodologies for the implementation of feasible options.

This paper presents a summary of the key findings of the feasibility study. The findings address the following main questions:

• Which supply chain options could be useful to and/ or are preferred by RSPO members

• What RSPO members want the control of their supply chain to deliver

• How important it is that the supply chain approaches used are credible to each of the actors in the supply chain

• How RSPO members rate the relative credibility of the supply chain options

• What verification approaches could be effective in ensuring credibility of the supply chain options used

• What are the main issues involved in the implementation of the supply options

1 Background review of supply chain traceability options for RSPO, Discussion Paper 1, ProForest, 2005. Available from www.proforest.net/publications


http://www.proforest.net/publications

2. Methodology A project team made of individuals and organisations, which have expressed interest through RSPO, in being involved in the study was convened to oversee the project (see Annex 1 for a full list of the members). Questionnaires (see Annex 3) were then developed in consultation with the team members and sent to 32 organisations including the team members and other interested parties. This was followed up by telephone interviews with 21 respondents to the questionnaire including 15 producers, processors or end-user of palm oil and 6 interested parties (i.e. social and environmental NGOs, investors, donors etc); see Annex 2 for the list of consultees. The results of the interviews were analysed and the key findings presented below.

3. Key Findings

3.1. Preferred supply chain options The study identified three broad categories of supply chain options for RSPO oil (see Discussion Paper 32 for more):

• Segregation. There are two approaches using this mechanism:

o Bulk commodity (‘RSPO Grade Oil’)

o Identity preserved (IP)

• Controlled Mixing Approach. There are two types of supply chain approaches applying the control mixing mechanism:

o Percentage-in percentage-out (mass balance)

o Percentage (%) based claims

• Book and Claim Approach

Generally, the results indicate that, by far the preferred approach for respondents is segregation because it is considered credible and offers a high degree of assurance that oil is from plantations that conform to RSPO standards.

The bulk commodity approach was the most preferred option; over two-thirds of respondents including both industry and NGOs indicated that it was an acceptable approach. The IP approach was the second most preferred approach (see figure 3.1 below). The reasons given by respondents for preferring the bulk commodity approach included:

• It is likely to be much cheaper than conventional IP;

• Once established, the operational mechanisms can adapt to both small and large volumes of trade.

2 Discussion Paper 3 is available at www.proforest.net/publications



0%

10%

20%

30%

40%

50%

60%

70%

IP Bulk Comm

odity%

Claims

Mass balance

Book & Claim

Figure 3.1 Preferred supply chain option for RSPO

NGO etcIndustry

The controlled mixing approaches (i.e. mass balance (20%) and percentage-based claims (20%)) were not preferred options for respondents (and had no support from NGOs interviewed) because there was a perception that it lacks credibility in providing reasonable assurance that materials conform to RSPO standards.

Similarly, the Book and Claim approach was not preferred because it was perceived that:

• It lacks credibility with regards to RSPO procurement;

• There is inadequate guarantee of RSPO materials in the supply chain;

• The mechanism may not be transparent;

• It may encourage corruption.

3.2. What supply chain control must deliver The study indicated that RSPO members want their supply chain to deliver four main outcomes:

• Sustainable production;

• Risk management;

• Internal policy implementation;

• Marketing claims.


0%10%20%30%40%50%60%70%80%

Sus. Prod.

Risk Mgt

Internal Policy

Claims

Others

Figure 3.2 What suppliers want RSPO supply chain to deliver

NGO etcIndustry

Some additional issues were also identified such as fair pricing and equity. Respondents’ views on the level of importance of the four outcomes are shown in figure 3.2.

Most respondents (about 76%) indicated that the most important outcome to be achieved through the supply chain mechanism was the ability to guarantee that products are conforming to sustainable production standards. Many respondents also considered providing a mechanism for substantiating claims very important.

3.3. Importance of credibility The main actors in the palm oil supply chain are producers, processors and end-users. Other interested parties include governments, NGOs, investors, landowners

Table 3.3. Summary analysis of respondents view on credibility of RSPO supply chain

Importance of credibility with:

Actor Producers Processors End-users

NGOs Govt Others e.g. communities

Producers V V V V M V

Processors V V V V S

End-users V V V V S V

NGOs V V V V M V

Other interested parties V V V V M V

V = very credible M = moderately credible s = slightly credible


The results indicated that most respondents considered that it is very important for RSPO supply chain approaches to be credible with all the major actors in the chain, and local communities whose livelihoods directly or indirectly derive from oil palm plantations.

However, the study indicated some differences in detail between different groups. For example, both producers and end-user identified a need to be credible with external stakeholders while this was seen as less important by processors. Also, all groups perceived credibility with government as less important than credibility with industry and NGOs (see table 3.3).

3.4. Credibility of different options Most respondents consider the bulk commodity and the IP approaches highly credible. The percentage-in percentage-out approach is considered moderately credible whilst the percentage based claim and the book and claim approaches are considered least credible. These results are consistent with the findings in 3.1. A general summary of the respondents’ view on the relative credibility of the supply chain approaches are presented in table 3.4.

3.5. Verification In order to ensure that the preferred supply chain for RSPO functions effectively, there needs to be a credible mechanism to verify that it is being implemented. To achieve this will require:

• A verification procedure that is transparent and credible;

• A competent and recognised verification organisation.

The study identified three potentially applicable verification options for RSPO. These are

• Self declaration by suppliers;

• Verification by RSPO-approved verifiers;

• Independent certification.

Figure 3.5 Preferred verification approach for RSPO

8%

50%

42%

Self declaration

RSPO verifiers

Independentcertifiers


Of the three verification options identified above the study indicated that the preferred option is a verification process undertaken by RSPO-approved verifiers (see figure 3.5 above). Certification was also seen as a very credible option, but more respondents preferred the RSPO-approved verifier approach because it was felt that:

• RSPO is not ready for independent certification in the short term;

• Independent certification is expensive.

It is interesting to note that the RSPO technical working group supports the option of RSPO-approved verifiers for verification of implementation of the RSPO criteria in plantations.

Table 3.4 General summary of the respondents view on the relative credibility of the supply chain approaches

Degree of credibility

Approach

Ver

y

Mod

erat

e

Slig

ht

Comments

Bulk commodity Considered very credible because it offers a high degree of assurance that oil is from plantations that conform to RSPO standards

Identity preserved Considered credible because it offers a high degree of assurance that oil is from plantations that conform to RSPO standards

Percentage in-percentage-out

Lacks credibility in providing reasonable assurance that raw materials conform to RSPO standards

Mass balance (percentage based claims)

Lacks credibility in providing reasonable assurance that raw materials conform to RSPO standards

Book and claim Lacks credibility in providing reasonable assurance that raw materials conform to RSPO standards. The process may not be transparent. It may encourage corruption.

4. Conclusion and Recommendations The main conclusions and recommendations from the study are presented in Developing a mechanism for palm oil traceability from plantation to end user: Discussion Paper for RT3: A summary of options. November 2005 (see www.proforest.net/publications).



Annex 1 List of consultees Producers, processors and users

Organisation Activity Country

Aarhus Refiner Europe

Agropalma Producer Brasil

Body Shop Retailer UK

Cargill BV Refiner Europe

Cognis End user Europe

Daabon Producer Colombia

Fuji Oil Europe Refiner Europe

Golden Hope Producer Malaysia

GOPDC Producer Ghana

Henkel End user Europe

Karlshamns Refiner Europe

MIGROS Retailer Switzerland

Palm Oil Refiners Assoc of Malaysia Refiners Malaysia

Unilever End user Europe

Waitrose Retailer UK

Interested parties

Organisation Activity Country

AidEnvironment Doen Advisor Netherlands

Forest People’s Movement SNGO UK

Friends of the Earth-Netherlands ENGO Netherlands

Greenpeace Netherlands ENGO Netherlands

HSBC Investor UK

WWF Forest Conversion Initiative ENGO International


Annex 2: List of team members

Name Company Activity Location

Sabri Golden Hope Plantation and primary processing

Malaysia

Manuel Davila Daabon Plantation and primary processing

Colombia

Ian McIntosh Aarhus Refining UK

Jan-Olof Lidefelt Kalshamns Refining Sweden

Jan Sintobin Fuji Oil Europe Refining Belgium

Hans-Jurgen Klueppel

Henkel End user Germany

Jan Kees Vis and Jeffrey Glanz

Unilever End user Netherlands

Dr Simon Lord New Britain Palm Oil Ltd

Plantation and primary processing

Papua New Guinea

Intan Shafinaz Mohd Suhaimi

Consolidated Plantations Berhad

Plantation and primary processing

Malaysia

Eric Swartberg Cargill BV Refiner Netherlands

Jenny Kau Palm Oil Refiners Association of Malaysia

Refiners Malaysia

Fausta Borsani Migros Retailer Switzerland


Annex 3. Questionnaires

Annex 3a. Questions for companies producing, trading or using palm oil

Name of Company

Contact details for any follow up

Type of user (eg producer, refiner, manufacturer)

Date

General background information

1.1 What type of oil palm product does your company produce, buy or sell?

1.2 What is the scale of your company’s activity. Please provide an estimate of acreage or tonnes of oil.

Supply chain information 2.1 Which of the following supply chain options could be useful to your company?

Identity preserved (segregation)

Bulk RSPO (commodity grade)

Mass balance/%-based claims

Mass balance/% in-% out

Book and claim

None

Comments

2.2 What would your company want the control of your supply chain to deliver?

Guarantee of sustainable production

Minimising internal risk

Implementing internal company policy

Marketing/ making claims

Others, please state

Comments


2.3 How important it is to your company that the supply chain approaches used are credible to each of the following actors?

Actors Very Moderately Slightly

Producers

Processors

End users

NGOs

Governments

Others

Comments

2.4 How effective does your company consider each of the following verification approaches to be in ensuring the credibility of the supply chain approaches used?

Verification process Very Moderately Slightly

Self-declaration by suppliers

Verification by independent RSPO-approved verifiers

Independent certification

Comment

2.5 How does your company rate the relative credibility of the potential supply chain approaches and why?

Approach Very Moderately Slightly Reason(s)

Identity Preserved (segregation)

Bulk RSPO (grade commodity)

Mass balance/ .%-based claims

Mass balance/. % in-% out

Book and claim


Your own supply chain management The purpose of this section is to collect detailed information on the supply chain including the way material arrives at your company, what you do with it and how it is then dispatched. This will be used to inform the discussion about which of the five supply chain options might be feasible from a practical point of view.

Stage 1: Incoming material

What raw material do you use and how does it get to you?

For example, is it crude oil arriving in bulk containers, refined oil arriving in barrels or fruit bunches arriving on the back of trucks?

What information arrives with it such as labels or documents?

Stage 2: Internal processing

What do you do with the material once it arrives and how do you control this?

What information do you record and keep which might allow product to be traced through the process?


Stage 3: Dispatch

What products do you dispatch and how?

Eg do you sell crude oil sent off in large tankers, refined products sent out in barrels or do you sell margarine already in tubs and ready for the end user.

What information do you keep and what goes with the product?

Implementation 4.1 Does your company think it is possible to implement the different approaches

being considered in the oil palm sector?

Supply chain Yes No Comment





Book and claim

4.2 What are likely to be the problems or issues associated with each approach?

Supply chain Issues/ Problems





Book and claim


4.3 For each of the supply chain mechanisms what are likely to be the additional costs (or additional resource requirements) of implementation? How acceptable is this and who will cover the costs?

Supply chain Comments





Book and claim

Annex 3b. Questions for interested parties

Name of Company

Contact details for any follow up

Type of user (eg producer, refiner, manufacturer)

Date

General information

1.3 What is your organisation’s interest in sustainable palm oil production?

1.4 Do you think it will be useful to have a supply chain mechanism for linking RSPO oil with plantations managed according to the set of RSPO criteria?


Supply chain information 2.1 Which of the following supply chain approaches do you think would be useful for

RSPO oil and why?


Bulk RSPO (commodity grade)



Book and claim

None

Comments

2.2 What would you want/ need the control RSPO oil supply chain to deliver?

Guarantee of sustainable production

Minimising internal risk

Implementing internal company policy

Marketing/ making claims

Others, please state

Comments

2.3 How important it is to your organisation that the supply chain approach used is credible to the following actors?

Actors Very Moderately Slightly

Producers

Processors

End users

NGOs

Governments

Others (Communities)

Comments


2.4 How effective does your organisation consider each of the following verification approaches to be in ensuring the credibility of the supply chain approaches used?

Verification process Very Moderately Slightly

Self-declaration by suppliers

Verification by independent RSPO-approved verifiers

Independent certification

Comment

2.5 How does your organisation rate the relative credibility of the five potential supply approaches and why?

Approach Very Moderately Slightly Reason(s)

Identity Preserved (segregation)


Mass balance/ .%-based claims

Mass balance/. % in-% out

Book and claim

Implementation 3.1 Does your organisation think it will be possible to implement the following in the

palm oil sector?

Supply chain Yes No Comment





Book and claim


3.2 What would be the likely problems or issues associated with each approach?

Supply chain Issues/ Problems





Book and claim

3.3 For each of the supply chain mechanisms what are likely to be the additional costs (or additional resource requirements) of implementation? How acceptable is this and who should cover the costs?

Supply chain Costs





Book and claim


Documents

Discussion paper 2 Key findings from feasibility study of ... Chain Discussion Papar 2...The bulk commodity approach was the most preferred option; over two-thirds of respondents including