Element 2B: Understand the supply chain: traceability and risk analysis
Companies need to know their palm oil origin to assess compliance with their policies, and to ensure an appropriate plan for full compliance is in place if a supplier fails to meet the policy criteria. Furthermore, risk analysis is a useful approach to support the prioritisation of resources, identify appropriate actions and plan for interventions, especially for downstream companies.
This briefing note provides guidance to allow companies to understand, manage and assess the main risks associated with their palm oil supply chain by implementing traceability systems and conducting risk assessments through some key steps, tools and approaches. It outlines key themes as follow:
Process to map the supply chain and implement traceability systems for companies at different positions in the supply chain;
Guidance on assessing the environmental and social risks in the palm oil supply chain, especially those associated with cultivation in producing countries.
1. Understanding the supply chain
This section introduces the stages and actors involved in the main stages of production, processing, trade and consumption of a typical palm oil supply chain. There are different types of fresh fruit bunch (FFB) producers: mill-owned and managed concessions, independent concessions, scheme smallholders and independent smallholders who can be direct FFB suppliers to the palm oil mills or indirect FFB suppliers through aggregators such as dealers, collection centres or transporters.
2. Map the supply chain and implement traceability systems
In order to achieve transparency, supply chain mapping is carried out whereby the companies identify each actor from their direct supplier onwards and understand the relationship between each actor including trust building between the buyers and suppliers.
Traceability is fundamental to implementing responsible sourcing commitments, as it allows companies to comprehend their potential sustainability risks and entry points for interventions across the supply chain, ultimately contributing to meeting the commitments. It is divided into Traceable to mill (TTM), Traceable to plantation (TTP) – traceability to direct FFB suppliers AND Traceable to production region – traceability to indirect FFB suppliers.
To operationalise traceability, companies should start with defining traceability and set commitments including targets to achieve both TTM and TTP. From there, the process flow can be broken down into several steps:
Step 1: COLLECT - information gathering from direct suppliers and other sources, such as: online platforms and public reporting by companies (e.g. mill lists and traceability progress).
Step 2: REVIEW - review and verification of data to guarantee the quality, integrity and accuracy of the data collected.
Step 3: ANALYSE - analyse data to calculate traceability scores.
Step 4: REPORT - reporting of traceability (transparency) on the progress made towards meeting their policy commitments and their traceability targets, in the form of: traceability scores in achieving TTM and TTP, publication of mill lists and direct supplier lists.
Step 5: STORE - to deal with frequent changes in the supply base and volumes sourced, companies can set up a system to update and review the ‘known’ volumes reported at regular intervals.
3. Assessing the environmental and social risks
Buying companies can use risk analysis or assessments to evaluate potential risk in their current or future operations, supply chains, and investments. This section describes several risk assessment tools that are relevant for downstream and midstream companies to assess environmental and social risk, respectively. These including land use change assessment through satellite monitoring and Environmental Impact Assessment, while human and social rights can be done via Human Rights Risk Assessment (HRRA) or Social Impact Assessment (SIA) depends on the position of the company in the supply chain.
Traceability and transparency in supply chains, together with environmental and social risk assessments, can help companies to prevent, identify and mitigate potential risks as well as remediate negative impacts from the production of oil palm in the supply base. Mitigating and remediating activities include developing action plans and prioritising actions such as supplier engagement, sectoral and collaborative engagement through landscape approaches and industry initiatives, amongst others.
More information is available in the briefing note below – BN02B Understand the supply chain: traceability and risk analysis
