Unilever: Building a black soy bean supply chain in Java, Indonesia | Unilever | Supply Chain

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This case study provides an example of a company working with smallholder farmers through enterprise development to secure supplies of raw materials and to build its own brand, while benefiting farmers in terms of improved incomes and a guaranteed market for their produce.
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  1 Unilever: building a black soy bean supply chain in Java, Indonesia This case study provides an example of a company working with smallholder farmers through enterprise development to secure supplies of raw materials and to build its own brand, while benefiting farmers in terms of improved incomes and a guaranteed market for their produce. Background  Kecap Bango, a specialty sweet soy sauce made from black soy beans, has been manufactured since 1928. It was srcinally produced using Javanese soy beans and was marketed and sold exclusively in Java, where the brand has close local associations and a high level of visibility.   Recognising the potential to market the product throughout Indonesia, PT Unilever Indonesia, the local arm of multinational Unilever, acquired a majority stake in the Bango brand in 2000. In 2007 it acquired 100 per cent ownership of the brand. Looking to expand its distribution and sales, Unilever undertook an assessment of its raw material requirements. This showed that the limiting factor were the black soy beans, which up until 2003 were grown solely in West Java and for which supply from existing sources could not easily be expanded. It was possible to import beans from abroad, but Unilever decided to use only locally grown beans, given that it was part of the Bango brand identity to be ‘local’ – and that Java provides ideal conditions in which to cultivate black soy beans. The company decided to focus its development of new suppliers in central and East Java. With a product manufactured and distributed domestically, the value chain from farmers to manufacturer was relatively simple. In West Java, Unilever sourced supplies from third party suppliers, who took their produce to a company-owned factory for processing. In setting up its new programme, however, one of the major problems for Unilever was the lack of any formal structures or institutions with which it could work as a business partner. To address this issue, the company needed farmers to set up an entity which would represent them and which could help them to work collectively. Under Indonesian law, the best option for such an enterprise was a co-operative owned by the farmers themselves. The main business driver for Unilever was expanding the market for the Bango brand. A second driver was to expand the sustainable supply of black soy beans and to maintain or improve the quality and price of the product. It was essential for Unilever to solve the supply problem in order to make the most of opportunities for growth.  2 Existing agricultural production in central and East Java is a mix of cash and subsistence crops, including peanuts and maize in the dry season and rice in the wet season. Women’s involvement in agricultural production and marketing is limited by social attitudes and by a lack of education. In rural areas the primary employment for women is in the low-paid, labour-intensive harvesting and post-harvesting phases of production. To develop the new supplies it needed, Unilever set up the Black Soy Bean Farmers Development Program to encourage Javanese farmers to grow the crop. As the programme aimed to develop new sources of beans, it did not target existing suppliers. No specific analysis of poverty levels or the extent of land cultivated by the smallholders engaged in the Unilever programme has been undertaken. However, from an initial pilot project in 2001 involving a dozen farmers, the programme has grown steadily and by 2007 involved the participation of some 6,600 smallholders, with 1,100 hectares of land under cultivation. Key champions  Unilever was founded in the 1890s. Today the company has a global portfolio of 400 brands in the food and home and personal care segments. It is active in over 100 countries and generates nearly half of its sales volumes in developing and emerging economies. In 2008, it employed 174,000 people worldwide and had a turnover of   40.5bn. The company works on sustainability in the areas of agriculture, eco-efficiency, carbon, and water through a range of external initiatives and its own internal programmes. PT Unilever Indonesia was established in 1933, and today manufactures soaps, detergents, cosmetics, and dairy- and tea-based products, as well as soy sauce. Smallholders living near the Unilever processing factory were identified as potential local partners. The smallholders, with help from Unilever, set up seven legally registered co-operatives, which they owned themselves, with management teams made up of farmers and other individuals. Three of these were based on existing co-operatives, while the other four were set up from scratch.   Gadjah Mada University (Universitas Gadjah Mada, or UGM) was a key educational partner. It had the agricultural knowledge base to provide technical assistance to help soy bean farmers to grow their crops. This assistance included training, capacity building, and the provision of extension services, in close co-operation with Unilever. The Unilever Indonesia Foundation was set up in 2000 to carry forward the company’s commitment to corporate social responsibility. In the Black Soy Bean Farmers Development Program it provided business development support for the farmers’ co-operatives and also developed community initiatives such as a women’s empowerment programme, co-coordinating and managing the programme jointly with UGM. The Indonesian Government has been generally supportive of the programme, but to date  3 there has provided no concrete support or opportunities for partnership, apart from the supply of extension services. How it works   The business driver for Unilever in developing the capacity of smallholders was the need to secure supplies of raw materials to enable the growth of the Bango brand. The primary consideration for smallholders was to increase their incomes. Diversifying production into a new crop marketed through a different channel also gave them a new and regular source of income. The company describes below its holistic approach in developing the programme. Its strategy was to secure sustainable supplies from a dispersed network of smallholders by facilitating the formation of smallholder enterprises. Improving the livelihoods of farmers has had three positive outcomes for Unilever: it has allowed it to a) expand production; b) demonstrate commitment to its sustainable agriculture programme, including the economic and social development of farmers within its supply chains; and c) build loyalty to the Bango brand. Unilever pays new smallholder producers the same price for their soy beans as it does existing suppliers. To create an incentive to participate in the programme, its processing factory has committed to buying all production supplied by the co-operatives that meets Unilever’s quality standards. The co-operatives also undertake the following activities: ã  Register and formalise membership of new farmers who join the programme; ã  Arrange meetings between co-operative managements and Unilever to agree contracts and to agree technical support from UGM, before the planting season begins; ã  Purchase and distribute inputs including seeds, fertilisers, and agricultural machinery; ã  Agree production plans with smallholders; ã  Buy back crops from the farmers, managing their consolidation and transport to the Unilever processing factory. The Unilever Foundation has funded the provision of financial services and low-cost credit for farmers, delivered through the co-operatives. Via the Foundation, Unilever offers farmers ‘soft’ loans to enable them to manage the increased costs of buying high-quality seeds, fertilisers, herbicides, and pesticides recommended by the company. These inputs are purchased and distributed by the co-operatives, and farmers repay the loans after they have sold their crops. This facility gives farmers an alternative to loans from traditional moneylenders who charge high rates of interest, in some cases up to 40 per cent. This financing scheme has also allowed six women’s groups to start their own small-scale business trading in local markets, which generates additional income for their families and communities.  4 The programme has seen the establishment of four new co-operatives and has supported these and three pre-existing co-ops to become independent, professional business entities. The locations of the co-ops were selected on the basis of an agronomic assessment and their proximity to the factory, with one co-op per district. Membership of each co-op ranges from roughly 500 to 1,000 farmers. The quality of the beans produced by the co-operative farmers is generally as good or better than that of the srcinal suppliers. The Unilever Foundation supports the co-operatives by means of mentoring, and has developed an individual business plan for each one. It also conducts training on the introduction of IT systems and standard operating procedures, while key managerial staff receive training in areas such as business and financial management. Unilever plans to develop the seven existing co-ops to maturity before setting up any new ones.   Extension officers from Gadjah Mada University deliver training to farmers on good agricultural practices from the planting period through to harvest time. These include crop management, optimum use of fertilisers and pesticides, crop rotation, and post-harvest handling. Due to improved agricultural practices trained farmers reach bean yields of 1 to 2 tons per hectare, while untrained farmers typically reach 0.7 tons. Training is delivered through a ‘farmer field school’ model, via the co-operatives.   Training programmes are developed in consultation with   Unilever’s own production management staff and with the management of the Unilever Foundation, to ensure that training meets both the farmers’ needs and those of the company. They also receive support from the Government’s extension programme. In addition, the Foundation supports a social programme aimed at empowering women, to enable them to become more socially and economically active. This began in 2007, when it delivered a series of training activities on nutrition, entrepreneurship, and personal development to six groups of women. This pilot project proved successful, and in 2008 some 500 women participated in the scheme. In 2009 it is planned to extend the programme to other regions, with a planned 1,000 women participating. Unilever’s processing factory delivers additional supporting components to the overall programme. It gives farmers secure, guaranteed access to the market by committing to buy their crops at a price that is agreed annually, based on the market price, before the crop is planted. In return it is assured of a steady supply of black soy beans. Contracts agree quantity and quality terms and stipulate incentives and penalties on quantity, time of delivery, and volume expectations. In 2008, an open-price contract was created, but given the choice, in 2009, the co-operatives opted for a pre-defined price mechanism to form the basis of the contract. Together with UGM, Unilever has worked to develop new seed varieties. Black soy bean has been something of a neglected crop in Java, with production falling dramatically after the introduction of yellow soy beans from China. However, the university’s research
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