Responsible Sourcing Policy Development in The Palm Oil Industry

Introduction and business drivers for Responsible sourcing policy development

The supply chain is one of the most strategic resources of the organization. The supply chain is a highly detailed process used by all types of organizations to obtain goods from suppliers, use them for production and then deliver the final product to the end user. An optimized supply chain creates value for the organization throughout the lifecycle by not only allowing for cost reduction and budget optimization but also helping to generate greater market and operational efficiencies (Glass, Achour, Parry and Nicholson, 2012). Recent globalization and industrialization has brought changes to the business environment, warranting organizations to redefine their approach to sourcing for more sustainability. Specific factors such as environmental degradation, growing expectations from stakeholders, cost volatility and compliance standards pose a lot of risks to organizations, motivating a shift into more sustainable sourcing.

A responsible sourcing policy refers to the “integration of social, ethical and environmental performance factors into the supply chain policy development” (Pagell and Wu 2009, p37). The purpose of responsible sourcing policy is to act as a continuous improvement ladder that acts as a benchmark for sourcing practices. Companies engage in responsible sourcing policy to guide decision making and practice in their procurement and supply chain management with the aim of building competitive advantage and better environmental outcomes (Skinner, 2013). Responsible policy making in sourcing encourages suppliers to adopt more environmentally friendly standards of raw material production, enabling organizations to push for better environmental outcomes. (Glass, Achour, Parry and Nicholson, 2012) The purpose of this report is to analyze two case studies involving responsible sourcing policy in the palm oil industry. One of the case studies will involve analysis of Unilever, as an organization with good policing strategies while the other case analysis will evaluate Mondelez, a company with bad policing strategies with regard to palm oil. Both companies deal with the production and distribution of food and beverage and are therefore suitable for the case analysis. The case analysis will lead to an analysis of the issues and challenges associated with palm oil sourcing.

Evaluation of case studies

Reasonable policing has been used as a tool for encouraging progress towards reduced deforestation and improved standards of palm oil production (Carlson and Curran, 2013, p347). Unilever is a British company with headquarters in London, UK and Rotterdam, Netherlands. The company deals with the production and distribution of “foods, beverages, cleaning material and personal care products (Unilever, 2018). According to the company’s website, the company’s ambition is to be a global leader in the development of responsible sourcing policies. The company hopes to operate business in a way that generates positive environmental outcomes, achieves economical goals and enhances social welfare. One of the areas affected by the responsible policing is the sourcing of palm oil which is used in the production of all Unilever products. Unilever is currently phasing out suppliers without evidence of ‘no deforestation policies’ thus encouraging suppliers to adopt more sustainable methods of production (Lim, Parish and Suharto, 2017). The aim of the responsible policing is to ensure that all palm oil is sourced from suppliers that are not linked to deforestation. As part of the policy, the company has to make a full disclosure of their palm oil supply. The accountability measures have led the company to be rated at an 88.5% rate of sustainability, which is significantly high (Mclean, 2017).

The responsible sourcing policy of Unilever is founded on twelve fundamental principles and is also strategically aligned to the overall strategic plan of the business. (Glass, Achour, Parry and Nicholson, 2012) For Unilever, reducing the environmental footprint is not only seen as a platform for business growth and competitive advantage but a platform for encouraging sustainable development and efficiency of the supply chain (Unilever, 2018). The policing framework is based on three major aspects of performance which include: mandatory requirements, good and best practices. The mandatory requirements of the sourcing policy require that all suppliers be responsible of their palm production practices. All suppliers must be accredited for safe sourcing of palm oil and also have a ‘no deforestation policy’. The suppliers must also be willing to adhere to the fundamental principles developed by Unilever for sustainable supply chain practices. The aspect of good practice and best practice are based on a commitment towards ensuring socially responsible behavior from the point of supply to the point of sale (Unilever, 2018).

The fundamental principles outline the mandatory requirements suppliers must fulfill to work with Unilever. The fundamental principles underpinning the Responsible sourcing policing are designed in a flexible manner to ensure continuous improvement in response to the ever changing business environment. The principles state that all business should be conducted lawfully and with integrity. All suppliers must have clear and effective guidelines outlining their expectations for business integrity. The guidelines and policies presented must be compliant to the regulatory environment and describe the criteria for dealing with situations involving conflict of interest. Both Unilever and the suppliers must have a plan for providing annual training of employees to ensure that they reflect the sustainability culture of the organization in their decision making (Unilever, 2018). Any form of non-compliance warrants sanctioning and a breach of contract. Suppliers must reveal adequate and well kept books of record and financial statements, showing adherence to standard financial standards and procedures. Employees must work freely but upon the agreed terms of employment. All members of staff must be treated equally and fairly despite their capabilities, occupation or background. All workers must be paid in full and must be respected despite their age. It is wrong to force work on any of the employees. Community welfare will be promoted at all times including the indigenous communities. All business operations must be conducted in a manner that is environmentally friendly and enhances sustainability. This means that “operations, sourcing, manufacture, distribution of products and the supply of services is to be conducted with utmost consideration for the environment” (Unilever, 2018).

The second aspect of the policy framework is the achievement of good practice. The doctrine of good practice requires that all guidelines and procedure concerning the Responsible sourcing policy be provided to all employees in a convenient manner. Unilever must engage in active monitoring, evaluation and management of supplier activities that are directly associated to supplier operations. The policy states that Unilever must establish adequate procedures with regard to screening the ethical and compliance standards of all suppliers and their workers. To ensure good practice, regular reviews must be conducted on the suppliers with the aim of continuously gauging their level of compliance and ethical conduct (Unilever, 2018). Continuous training and development must be done on all employees to ensure robust decision making skills for more sustainable outcomes. All complaints regarding sustainable practice should be forwarded to the supplier’s executive manager and the organization must also practice open communication to encourage employees to contribute and comment on sustainability efforts.

Towards achievement of best practice, additional policies must be generated in collaboration with relevant stakeholders with the aim of ensuring compliance risks are avoided and that the implementation of organizational policies is practical and viable. (Glass, Achour, Parry and Nicholson, 2012) The achievement of best practice also requires all contractors to train and develop their employees with the aim of orienting them to the organization’s sustainability culture. The identity of individuals reporting concerns over practice is kept anonymous and will not be available for victimization. The business plan must entail targets for achieving environmental sustainability to ensure that the organization remains focused towards achievement of these standards.

However, for a company like Mondelez, the official producer of ‘Oreo’ and ‘Nutter butter’, has had poor policing in sourcing palm oil, scoring a sustainability score of 30% as per the EcoWatch statistics (Mclean, 2017). According to the Greenpeace organization (2017) report, Oreo buys their palm oil from Wilmar. Wilmar is ranked the poorest and most unethical producer of palm oil in the world.

Despite Mondelez laid down commitments towards sustainability in 2007, implementation of responsible sourcing policy has not been realized at a system level since the company has regularly received complaints from consumers on their use of bad palm oil. While most responsible and committed organizations are part of an initiative to only use palm oil whose source is certified by the RSPO, Mondelez has not been part of this initiative. Both Mondelez and Wilmar have failed to respond to outcries from consumers and stakeholders to clean up their supply chain with the aim of building reforms in the palm oil industry. Wilmar International gets 80% of its palm oil from third party suppliers who are not monitored or audited since the company does not have a criterion for doing so (Bai et al 2017, p.93). The company promised to clean up their supply chain in 2007 and even developed a responsible sourcing plan aimed at guiding more sustainable practice. Mondelez has however persisted their sourcing of unethically produced palm oil by sourcing their palm oil from companies that continue to engage in the clearing of forests for palm oil production (Greenpeace organization, 2017).

Issues and challenges surrounding development of ‘responsible policing’ in the palm oil industry

Development of Responsible sourcing policing around palm oil has been a controversial issue. Modern organizations have been regularly blamed for not seeking alternative means of production while at the same time increasing consumer goods production, which has instead put pressure on palm oil suppliers to increase production. More than half of all human consumables are made from palm oil, making it a very valuable input in various organizations (Brack, Glover and Wellesley 2016). Palm oil is used in a lot of consumer products and is therefore in high demand all over the globe. However, palm oil only does well in tropical regions such as Southwest Asia where 85% of all the worlds’ palm oil comes from (Hidayat, Offermans and Glasbergen 2018, p232). The remaining 15% is grown in areas of Africa and South America, where climate is favorable. As organizations strive to expand their profitability, increasing the productive capacity plays a major role in enhancing the amount of sales leading to revenue increment. (Bai et al 2017, p.95) This means that while sustainability efforts towards production of palm oil exist, demand for palm oil has continued to increase.

Traditional farms can no longer meet demand, a factor that has motivated various producers to seek unethical means of producing more palm oil. The palm oil business is very lucrative and has encouraged more and more suppliers to destroy forests with the aim of creating more land for the rearing of palm trees. According to Bai et al (2017,p.93), production of palm oil has been projected to grow by double the current level of production by 2050, placing even more pressure on the vulnerable environmental resources. The inconsistency in government regulation against palm oil owing to the economic dependency to product has encouraged growth of poor palm oil production practices. Companies like Wilmar and Sime Darby have very poor reputations towards environmental sustainability but have since been awarded contracts to expand their operations in regions of Uganda, Liberia and South Africa. Some of the palm oil companies are run and operated by top government officials and other elite persons, which makes control very difficult. (Skinner, 2013) According to Dixon (2016), 11% of the palm oil production in Indonesia is controlled by the government.

Unfortunately, palm oil is responsible for deforestation and destruction of peat land in areas like Indonesia where it is mainly sourced. The palm oil production has also been associated to loss of indigenous communities, poor labor conditions and child labor (Department of Labor, 2013). Indonesian forests are vast and are considered a strong weapon against climatic change. The forests are also home to certain endangered species such as the “Sumatran tigers, elephants and orangutans” (Schlegel, 2016). Indonesia is the world leading producer of palm oil and so far 31 hectares of forest land has been wiped out with the aim of paving way for more palm oil plantations. Indonesia is considered the country with the highest rate of deforestation. In Malaysia, 10 million hectares of land which was formerly covered by forest has been used for the production of palm oil. (Glass, Achour, Parry and Nicholson, 2012) All over the Southeastern region of Asia, more than ten million people are estimated to depend on the palm oil industry for a source of livelihood (Brack, Glover and Wellesley 2016).

While various environmental activists call for more sustainable practices, there has been a lot of uncertainty over alternative sources of income and what people would do if not engage in production of palm oil. The conflict of interests experienced between environmental sustainability and economic sustainability has led people to focus more on their economic interests. The GDP of countries like Indonesia, Singapore and Malaysia is highly sustained by the production of palm oil. According to Brack, Glover and Wellesley (2016), palm oil accounts for almost half of the national GDP for Malaysia in terms of production and manufacturing of palm oil related products. In Indonesia alone, more than 4 million people are employed in the Palm oil industry. The production of palm oil is a pillar to economic performance since palm oil production and manufacture contributes 30% to the GDP, significantly boosting the economic performance (Ministry of Forestry, 2014). In 2014, Indonesia achieved a GDP of $878 billion, emerging #16 in the world GDP rank (Dixon 2016). Singapore is considered the financial hub for palm oil farmers and manufactures in surrounding countries since the country provides financial resources, loans and investments of various kinds.

Switching to alternative source of oil and palm oil elements is not a solution, making the sustainability efforts even more uncertain (May-Tobin et al, 2012). Palm oil is the most efficient and economical vegetable oil to produce. The use of palm oil is also intrixicably connected to the consumer goods in the global market, meaning that massive organizations would have to collapse if palm oil was to seize production. Palm oil constitutes 50% of all packaged consumer goods, meaning that 100% elimination of palm oil cannot be considered (May-Tobin et al, 2012). The debate therefore remains between the use of bad and good palm oil. Good palm oil is produced in dry land while bad palm oil is produced in forest area. The irony with palm oil sourcing is that even though some of the suppliers are believed to be operating ethically, the land used to grow palm oil in the modern world was still forest area a decade ago. Huge brands such as Nestle, PepsiCo, Colgate, General mills and others source products from suppliers found actively clearing forests in the prime years of the 21st century (Environmental Protection Agency, 2013). Despite the responsible policing, the companies have grown due to economic benefits occurring as a result of the expanding palm industry. Additionally, research by Glass, Achour, Parry and Nicholson (2012), showed that switching to other sources of oil could lead to 4 to 5 times the amount of land currently used on palm oil production, in order to meet current demand. Switching to alternatives would therefore mean more deforestation and destruction of land in more parts of the world.

Manufactures of consumer products from areas like Malaysia and Singapore have also established poor records in palm oil sustainability. This is a significant challenge given that Malaysia and Singapore are also a source of palm oil for the global market. While most of the global organizations have been motivated to redefine their supply chain to meet stakeholder expectations, organizations in Malaysia, Singapore as well as other areas have no incentive towards developing sustainable sourcing and production policies.

According to Schlegel (2016), one of the main incentives towards the adoption of open Responsible Sourcing Policing is the emergence of ethical consumerism. Ethical consumerism has emerged as a consumer trend for most countries, signifying consumer preference for ethically produced and environmentally safe products. As organizations strive to maintain competitive advantage, they have had a major incentive from the changing consumer behaviors (Bessou et al, 2017). However, statistics conducted on Malaysia and Singapore showed that consumers lack awareness on the need to promote sustainable organizational practices, making the local organizations very reluctant to promote sustainable palm oil sourcing practices (Hong 2017). A survey conducted by Hong (2017), showed that consumer interest in sourcing of sustainable palm oil was low and created low incentive for local organizations to adopt sustainable palm oil since it is considered expensive. 

Implementation and monitoring of Responsible sourcing policing

To underpin processes of due diligence and compliance assurance through Responsible sourcing policing, there is need for various types of audits to ensure organizations remain committed to achieving their sustainability targets (Thompson et al 2013). The organizations should begin by conducting a risk impact assessment with the aim of identifying suppliers associated with the highest risk. Suppliers with higher risks should undergo desktop audits, evaluating their policy and procedure frameworks as well as level of compliance to relevant laws and requirements (Schlegel 2016). An on-site audit must be conducted on all raw materials and finished goods to ensure that high quality and environmental friendly goods are sourced.

The employees are identified as the drivers to organizational objectives. An organization cannot achieve their business goals or objectives without the support and collaboration of employees. The implementation of the Responsible policing process should involve favorable change management process that are collaborative and participative as well as motivation strategies aimed at inspiring job involvement from the employees (Bessou et al, 2017). Quality change management offers training to employees concerning new philosophies, methods and procedures entailed in a policy, which eliminates resistance to change. Motivation strategies on the other hand inspire positive work behaviors and attitudes that make employees involved in their job. Involved employees care more about their productivity since it is seen to be part of their self-identity and will therefore strive to be productive. The successful implementation of a plan is highly determined by the employee perceptions and attitudes towards the policy. Since implementation cannot be done without the collaboration of employees, promoting a healthy work environment should be a priority in ensuring successful policy implementation. Additionally, leaders should promote a favorable organizational culture that emphasizes the need for ethics, professionalism and diversity (Schlegel 2016). The organizational culture provides a favorable environment for policies to work and can therefore be a favorable foundation in the implementation of Responsible Sourcing Policy.

Organizations must maintain good relationships with suppliers and contribute to supplier development. As an approach to ensure proper implementation and monitoring, procuring organizations should provide recommendations for improvement and even participate in collaborative training and development of employees to promote a culture of cooperation (Bessou et al, 2017). Procuring organizations can also share technology resources and directly fund research and development projects aimed at improving the sustainability practices o suppliers. The supplier must also be given an opportunity to reform and correct their policies before receiving any sanctions. If an audit reveals any lack of compliance to agreed terms, the supplier must be willing to develop an immediate corrective action plan aimed at correcting the situation, failure to which the supplier will be charged for breach of contract (Thompson et al, 2013).

Management should devise strategic tools aimed at measuring the actual performance of the policy objectives against expected outcomes. Continuous monitoring of performance indicators can help identify weaknesses and opportunities in the supply chain, allowing for proactive risk management and opportunity capitalization (Hidayat, Offermans and Glasbergen 2018, p232). Performance evaluation tools include sustainability scorecards designed to gauge environmental performance o f a business in various areas of operation.

Conclusion and Recommendations

Palm oil is a valuable product to the global economy since it contributes to the production of a variety of consumer goods, supports economies and provides employment. However, Palm oil production contributes significantly to the destruction of forests, loss of bio diversity, loss of indigenous communities and encouragement of poor labor practices. As organizations move to more sustainable models, adopting responsible policing to facilitate sustainable development is very important. Responsible sourcing policing will provide a rationale for organizations to follow when making supplier decisions, which will in turn help to shape the supplier production practices. To limit the negative effects of palm oil production, all brands that use palm oil are advised to take responsibility of their policy development to ensure it support sustainable supply chains. The aim should be to shun all companies that use forest areas to grow and produce palm oil and only work with those companies that don’t destroy forest land. Organizations can also build campaigns on the sustainability of palm oil as part of their policy implementation, to help encourage ethical consumerism and environmental awareness.

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