Mapping Segregated Supply Chains

Introduction

Downstream pressure for greater transparency in the palm oil supply chain has caused many oil palm stakeholders to consider being part of a segregated supply chain where the certified palm oil is kept separate from uncertified palm oil all the way through the supply chain. This way stakeholders who are concerned about buying palm oil linked to social and environmental problems, such as deforestation, can be aware of where the palm oil is coming from and how it is being produced.

It can be challenging for producers to establish a profitable segregated supply chain due to various economic and logistical barriers. One company that is taking steps to segregate its operations is New Britain Palm Oil Limited (NBPOL), which operates in the Solomon Islands and is Papua New Guinea’s largest oil palm plantation and milling operator. As of September 2012, 31,334 hectares (ha) out of a total of 45,043 ha of smallholder operations associated with NBPOL were certified by the RSPO. Also, eight out of twelve of NBPOL’s palm oil mills and plantations were certified under RSPO standards as well as three out of four palm kernel mills. The company’s core activity is the cultivation and processing of oil palm into crude palm oil (CPO), palm kernel oil (PKO) and palm kernel expeller (PKE) for sale to both domestic and foreign markets, particularly in the United Kingdom, Europe, and Australia.

The following is the outcome of an interview conducted by Sophia Gnych (ZSL Biodiversity and Palm Oil Project Developer) and Philip Rothrock (ZSL Research Assistant) with Simon Lord (Global Sustainability Director for NBPOL) on October 4th 2012.

Keywords: segregated palm oil, certifying smallholders, oil palm, sustainability, transparency, single stream palm oil

1. Why did NBPOL decide to develop a segregated supply chain? Did your company consider developing an identity preserved supply chain, and if not why not?

New Britain Palm Oil (NBPOL) has always acted as a responsible producer, supplying the European market for over 40 years. Our shipping routes have been in place for just as long. We had never co-mingled our oil at the source, but the “business as usual” model for palm oil supply chains within Europe meant that our oil would just be mixed with other sources of oil in the large refineries based there. In this sense our oil was segregated but only up to the point of delivery to the refinery. With the advent of the Roundtable on Sustainable Palm Oil (RSPO) standard, the global sustainability standard which defines how sustainable palm oil should be grown and verified, NBPOL saw the opportunity to assure customers of our responsible credentials through third party independent audits.

The company had already embarked on an ambitious ISO14001 certified Environmental Management System (EMS) and saw the RSPO certification as a means to build on this and broaden our accountability in social, environmental, economic, and governance aspects of our operations. Even before obtaining certification we began to receive enquiries from end users of palm oil in Europe about how they might be able to procure our oil, as our oil has always been traceable from the source. With these two certification systems, the company had now anchored the upstream point of production to an internationally recognised set of standards; what was missing was the downstream tethering of this traceable supply chain to customers who valued it.

With little support or interest from refiners in Europe in the idea of getting traceable and certified sustainable oil to customers in a cost effective way, NBPOL decided to take a momentous step and build its own refinery. In doing so, we also had to certify the entire supply chain to create an unbroken chain of custody from Papua New Guinea (PNG) to the UK through the port of Liverpool. The company has now expanded its capabilities by building a derivatives plant on the site that is capable of boxing and forward selling bakery products directly to end users. This initiative was very much market driven to meet the needs of our consumers by establishing a further segregated supply chain involving our European refinery capability.

Key to the purity of our segregated supply chain was ensuring that all components were RSPO certified to the same level. This involved applying the standard not only to those lands we directly managed but also to all smallholders who supplied the company with oil palm fruit. NBPOL was the first company in the world to certify all of its smallholders. Unlike many companies that have yet to certify 100% of their fruit base and mix certified and uncertified fruit at the start of their supply chain, all fruit entering our NBPOL mills is certified and segregated.

However, under the rules for identity preserved (IP) supply chains, the RSPO has stated that oil production from a single mill must be kept separate until its end point. This is impossible for most companies as the volume of CSPO from a mill would not fill a shipment, so  the cost would be prohibitive. This also holds true for NBPOL oil, which must journey from PNG to Europe; therefore NBPOL chose to certify all its mills and all its fruit supply. In a true sense our oil is “company” identity preserved rather than mill specific identity preserved. In essence, however, we have found that customers are far more concerned with the company level sustainability credentials (including smallholders) and not a mill specific supply chain.

2. What goals did NBPOL set for achieving this standard and how was progress measured? Did NBPOL achieve its goals?

Firstly we needed to ensure that we were producing a sufficient volume of palm oil to maximise our operations, including the mills and refinery. In order to do this NBPOL has doubled the amount of fruit it processes since 2007. We have achieved this mainly by acquiring other oil palm operations in PNG and the Solomon Islands but also by expanding our current estates. For each additional oil palm operation to become integrated into the NBPOL segregated supply chain it needed to be certified. As the RSPO standards, particularly for smallholders, can be tough to implement, the company gave itself two years after each acquisition to comply with the standard. Our last acquisition was of three operations in 2010, two of which have already been certified. We have one more unit to certify, and so by the end of 2012 NBPOL will have certified all its operations within the set time frame.

However, in our journey towards certification we have found that the RSPO standard alone is not enough. Stakeholders need to be informed of the extent and nature of our sustainability performance. In 2008, NBPOL published its first “Sustainability Report“, detailing our performance (good and bad) in the areas of Environment, Social, and Governance. The three annual reports that have been published to date all adhere to the Global Reporting Initiative (G4) guidelines. These clearly lay out our targets and report our progress as we move to achieve them. In each case we set a timeline for our commitments. For further information see our 2010–2011 sustainability report.

3. What were some of the largest barriers to establishing the segregated supply chain?

Although it appears to have been quite simple for us on paper, there were still some significant pinch points along the supply chain that needed to be identified and overcome.

Production
The first pinch point was the oil production at the mill, which is really the mixing of fruit bunches as they come into the mill. For us the clear and most transparent solution was to identify all sources of fruit and bring them under the same level of control. Only then can the standards be applied. In order to do this, NBPOL identified, traced, and made certification possible for all its smallholder out-growers.

Storage
The second pinch point was the bulk terminal, where oil from numerous mills is collected and stored before it is dispatched on to ships. Again, if all deliveries are from certified sources then keeping batches distinct is not important, which reduces costs. NBPOL controls all its own bulk terminals and does not use third parties.

Transport
The third pinch point was the mixing of oil for transportation on ships. Contracting the vessels ourselves and controlling the stowage of oil in the different tanks eliminates the risk of, or need for, co-mingling with non-certified oil. NBPOL contracts all its shipping exclusively.

Refining
The final pinch point was the unloading of the oil to a refinery and, most importantly, for that refinery to maintain that segregation through to the end user/downstream manufacturer. Large refineries need lots of oil in a fairly continuous chain of ships to ensure that the supply to food factories is uninterrupted and reliable. All refineries in Europe traditionally source from a number of origins and shippers to guarantee the supply of oil and to reduce the risk of interrupting that supply chain. This risk management is endemic within the industry and, as a result, no refinery had ever been established as a “single-source” model, as the perceived wisdom was that to be competitive, reliable, and achieve the right economies of scale, each refinery had to have a flexible and regular pattern of incoming cargoes. As the first single-source supply chain in Europe, we had to build into our model a much greater level of stock holding than the industry standard and convince our customers that our supply chain could be relied upon.

As our supply of segregated certified supply chains continues to grow, it actually becomes easier and more robust to use over time as all our shipments, to whichever port, will be into refineries that are now part of a segregated chain. In turn, we will have overlaid a new kind of flexible multi-port supply chain within the much larger untraceable palm supply chain around Europe. So, if we need more oil at our own plant in the UK for example, we might be able to borrow cargo from the receiver in Spain, Italy, or Germany, and vice versa. Actually, the bigger we become, the easier it should be.

4. How does this form of certification impact each part of the supply chain?

The simplest way is to visualise the supply chain as an actual physical chain. By tethering each end and keeping it taut, NBPOL ensures that there are no loose ends. Certifying the point of origin under the RSPO Principles and Criteria tethers the fruit production to the oil processing aspects (from both plantations and smallholders). Auditing the entire supply chain through applying the RSPO supply chain standard keeps the chain taut, and the addition of the RSPO eTrace system ensures that the chain is visible and therefore traceable at all times. Finally, certifying the refinery as the receiver of the certified oil secures this chain and its oil at its destination.

In addition, we will have done much of the hard work within the broader context of the supply chain for the use of palm oil in food ingredients. If we have done it right and cost effectively, then it will become a much easier decision for the end user (a manufacturer, for example) to adopt supply chain certification for themselves. In turn, this should eventually facilitate the wholesale conversion of the industry to certified sustainable palm oil across their factories and all their customers.

5. Has this process influenced NBPOL’s monitoring systems and management strategies? If so, how? What environmental factors were monitored and what were the results?

The implementation of the ISO14001 EMS standard has perhaps had a greater influence than RSPO. Because the RSPO is about values (Principles), while these are interconnected, they do not have sufficient continuity and there is a need for a framework to link the numerous certification indicators into a cohesive management system. All of the ISO standards use a process approach which lends itself more easily to companies and operations developing the necessary measurements which make up any sound monitoring system. NBPOL has always used ISO14001 to give discipline to its monitoring programmes and has expanded the thinking behind this EMS (often abbreviated to Plan-Do-Check-Act) to deliver and implement its strategies.

A comprehensive assessment of which aspects impact which of the five environmental receptors (Air, Land, Water, Eco-systems services, Resources and Stakeholders) is fundamental to any EMS. NBPOL’s assessment determined that the main negative environmental impacts are emissions and effluent from the mill and resulting soil degradation and contamination in all its forms from the plantations. Key graphs showing NBPOL’s performance to reduce these impacts over a number of years are included in each sustainability report. They show a general decline in smoke density (particulate emissions), biological oxygen demand of effluent, and pesticide usage. Supplementary programmes also look at water quality in terms of nitrates, phosphates, and species composition.

Land degradation is currently reported through the use of proxies such as fertiliser usage and pesticide applied, but longer term studies are in progress to look at both soil quantity and quality, where parameters such as cation exchange capacity, organic matter levels, and nutrients are included.

NBPOL reported on its carbon footprint earlier this year. Although not yet in the RSPO or ISO standards, the company has expanded the definitions of emissions to include greenhouse gases (GHGs) and has presented a life-cycle assessment (LCA) of its operations. Within this LCA there is an assessment of the previous land usage before the plantation as well as the impact of planting oil palm in terms of carbon dioxide emissions. NBPOL already has zero burn and no planting on peat policies but has widened the scope of these policies to include strategies to select low carbon land for new plantings.

We also measure and monitor a wide range of impacts directly and indirectly, such as water and fossil fuel use, bacterial and algal contamination, waste and landfill, energy consumption, and the use of renewable energy.

6. Which parts of the supply chain were found to produce the largest environmental impacts (emissions, water pollution, fuel use, etc.)?

The refinery in Liverpool is without doubt the cleanest part of the supply chain. The building and the process conform to the highest environmental standards, not only because the UK legislates and checks compliance but because our sister company New Britain Oils built it that way. In addition, the management voluntarily conform to a number of international standards, including ISO14001. We have not done an assessment of the pollution inherent in shipping our oil except for determining the GHG emissions and have instead focused our energy on the most significant impacts which come from the other end of the supply chain, namely growing and processing palm oil. Using GHGs as an example, the largest gross emissions come from land clearance and the second from methane emission from the lagoon treatment of the mill effluent. These two areas, land use and effluent, would also have the greatest potential to negatively impact all environmental receptors, including biodiversity and natural capital.

7. What risks are posed by developing contracts with a small number of buyers? How does NBPOL ensure that there is enough supply to support segregated supply chains? Considering risks from declines in yields (from pests, droughts, political unrest, etc.) what precautions has NBPOL taken?

NBPOL has not seen a decline in yields, in fact the opposite is true. We operate a breeding station, and over the last 30 years the company has seen increases in yield of the order of 1.6% per annum as the result of improved conventional breeding. As we supply the same quality seed to our smallholders we have not seen a decline in their yields either. Some smallholders actually achieve higher per hectare yields than the estates, but in general smallholder yields are lower than those of the estates for management reasons. Under NBPOL’s “prosperity” approach to the sustainability bottom line (People, Planet, and Prosperity), we have invested in smallholder extension programmes and use RSPO certification of the supply chain as the vehicle to bring about increases in yields and income, while ensuring continuity of production.

NBPOL advises on Good Agricultural Practice and Best Management techniques. The company also operates soft loan schemes that promote equitable distribution of income with a focus on gender equality and that assist women in managing their finances. None of NBPOL’s smallholders are under contract to supply fruit but instead the company develops partnerships. NBPOL does impose binding contracts for the purchase and supply of fertiliser for those requesting it and delivers it at cost price to the smallholders. Seeing and treating smallholders as partners and supporting them has allowed a healthy relationship to be established which mitigates potential disruptions from single smallholders.

PNG is prone to the effect of the El Nino Southern Oscillation events. Fortunately most of these events are rare and lessened by the near optimum climate for oil palm growing in PNG. There are a few major pests in PNG, but NBPOL provides pest management and personnel to assist the smallholders to deal with these in the same way it does in its own estates.

With our certified and transparent segregated supply chain, along with increased production, NBPOL has seen its customer base increase dramatically compared to what it was five years ago. Instead of our oil being sold to just four or five refinery buyers, we now have almost 100 customers in the UK alone and are far more connected now, albeit indirectly, to the customers of our other refinery customers in Europe. The market demand for certified sustainable palm oil is growing, along with consumer awareness which will further this demand, demand that NBPOL will be able to meet.