Making sustainable production mutually profitable for small and large companies
In January 2016 team members of the SWITCH-Asia project Prospect Indonesia: Promoting Eco-Friendly Rattan Products travelled to Germany to take part to an international furniture exhibition and to hold a business dialogue event.
Silvia Sartori and Uwe Weber from the SWITCH-Asia Network Facility met Ms Lili Saragih and Mr Harm van Oudenhoven who are Agribusiness Advisor and Agriculture Sector Leader with the Netherlands Development Organisation SNV, one of the partners of the SWITCH-Asia project, to learn more about the project's "inclusive business unit".
SWITCH-Asia Network Facility (SANF): Can you tell us how you understand inclusive business and in what way it has been part of the "Prospect Indonesia" project?
Harm: Inclusive business is a term that was developed by SNV around 2005-2006 to encourage business to go beyond corporate social responsibility (CSR). In SNV we thought that CSR is a bit part-time, too small: Can we not incorporate pro-poor thinking into the business model of companies? So instead of rattan processing companies investing in, say, a school or a medical centre, can they not invest in the training of farmers themselves or in their providers and producers so that the production model becomes more sustainable part?
When we started the rattan project, the idea was that larger companies producing rattan furniture would invest in the areas where the rattan is produced and at the farmers level.
We realised quite soon that only the very large companies were able to do this. It is very expensive actually to go to Kalimantan and Sulawesi, to invest and to liberate resources for this. For smaller companies it became almost impossible. After initial visits, which we encouraged, they said: "We cannot do this".
So we started looking more at the home-based production. Can we help smaller scale producers work more safely, more environmentally friendly, using less energy? After the first phase of seeing that it was very difficult to get rattan furniture companies involved with farmers, we moved most of our activities into the rattan production areas.
One of the first issues was increasing work safety: how to produce rattan furniture in a cleaner way but also how to set up the production site in a safe way, so that there are proper fire exits, fire extinguishers, first aid kits and the likes.
SNV organized workshops showing how knowledge from large companies could be used to train small-scale producers. So large manufacturers and small scale producers, also called subcontractors, got involved in training on safety regulations, production regulations, first aid and other issues that are necessary for eco-labelling, like good housekeeping, decent working environment, proper access to sanitation facilities, etc. The Prospect Indonesia project only facilitated such cooperation: the large companies themselves would get involved by getting organised and providing budget to improve production facilities and processes at their subcontractors. Companies are more enthusiastic about working via this direct interaction, it is more in their sphere of influence. Many companies see a value for themselves then.
This is what we are trying to do: change the mind-set of the companies so that they invest in their supplier base. This is not only beneficial for small-scale suppliers but also for themselves and it becomes part of their day-to-day business.
SANF: Can you tell us more about these supporting companies? What is their role within the project?
Harm: The companies that got on board the fastest were those with a more international background or management. Later, seeing that investment was not too high and that small-scale producers appreciated cooperating with bigger buyers, more local companies joined. Currently many different companies join the trainings and became aware of the positive impact of working closely with suppliers.
Lily: One of the main purposes of inclusive business is to strengthen the relationship between companies and sub-contractors. Usually these large companies work with rather informal sub-contractors. Before the project's intervention, their relationship was strictly business-only: large companies place the order, sub-contractors provide them some products and large companies pay. That was it.
Within the Prospect project we try to improve this relation, with both foreign and locally owned companies. We try to introduce standards and criteria to comply with large buyers' requirements in Europe, US and other developed countries. There is no exact standard for sustainable furniture production available yet. So we combined different standards from IKEA, WALLMART, TJX, and other standards from large buyers, and came up with 6 minimum criteria that are common to all standards.
We introduced these criteria to the rattan processors in Java as one minimum generic standard.
The SWITCH-Asia project only provides budget for the trainings itself. Implementation of the standards and related changes in their subcontractor's operations are funded by the anchor company.
So far, the project trained 38 companies on the concept of investing in small scale or homeworker suppliers. Of these, 25 companies have gone further into a second discussion on how to implement inclusive business practices. 11 of these companies introduced us to their subcontractors that have been trained on the sustainability criteria. 7 subcontractors have received funds from the companies to make the improvements in their workshop, such as installing new toilets, improving the layout, roofing, flooring, making a well ventilated workshop, placing safety and health equipment. We now hope that they will also invest in energy saving.
SANF: The project contract will be completed in about one year. How do you plan to carry on the inclusive business concept afterwards?
Lily: We already have a strategic plan within our project. In the future, for the next year, we will be concentrating on energy saving because one of the criteria that we developed for cleaner production is energy use.
In the production process, the rattan furniture makers use a lot of firewood to steam the rattan so that it can be bent. Gas flames are also used for special treatments needed to finalize the products. But there are many things that we can do to reduce the energy costs and to make production more efficient. We already made a trial run with a new burner and saw from the project data that we already collected that we can reduce the energy use by up to 60%. This is good for the environment and good for production costs. Also, we developed a switch on/off pedal for liquid petroleum gas (LPG), so they can reduce the use of LPG up to 35 %.
Harm: We introduced energy saving to large companies and they see the economic value of introducing for example the energy efficient stove and pedal for LPG to their sub contractors. The new gas burner is much more efficient as it shuts off when not in use and the improved steam boiler is now insulated and the heat source is concentrated. So it becomes economically advantageous to do something that actually improves the production. That is the idea of inclusive business: it becomes part of the large buyers' business thinking that if they improve the production of the sub-contractors, it is also advantageous for them. This is the sustainability argument that we promote. It becomes profitable for the companies to invest in their sub-contractors.
SANF: Do you already have any figures about the savings or profits generated in this way?
Harm: The energy saving is considerable. Our energy saving work only started 2-3 months ago but we are talking of 30 to 40 % energy saved in the first shop trials and we think 50-60% can be reached with proper training. The LPG pedal reduces energy consumption by 35%, the energy efficient stove reduces energy consumption up to 40%. That alone should be enough of an argument for companies to say: ok, let's invest in this. And the other one is the safety regulations: if companies want to move towards eco-labels, they need to invest in the small producers. If they can get a better market via eco-labels, the investment makes economic sense. So the whole idea of inclusive business is not just a charity thing that you do once, but something that can improve the production system and generates benefits for companies, too.
Lily: In social terms, now the reality in rattan production in Java for instance is that more and more SMEs are shifting their industry to other products due to decreasing demand for rattan products. The rattan industry is shrinking and more and more sub contractors are disappearing. It is becoming difficult for large companies to subcontract their production.
With this project we realised that one particular subcontractor will prioritise the companies that invest in them. So inclusive business is a comprehensive solution. The main idea of inclusive business is a win-win solution: when the company invests in their subcontractor, the production will be ensured, meanwhile, it also benefits the subcontractor as safety and working place are improved and orders are being placed regularly. The relationship between buyer and sub contractor is strengthened and their mutual trust increases.
SANF: SMEs are known to have limited funds for investment, which they normally allocate there where they generate the highest returns. So they may rather want to buy new machinery or buy stock than invest in energy saving, especially in a country like Indonesia where energy is subsidised and investors don't get high returns on energy saving. What is your financing concept on this?
Harm: Investments required for energy saving are in fact very low, compared to new machinery. We are talking of 60 to 200 euro investments, so they require much less money than what is needed to buy a new machine. And if you look at the energy use, it is still so basic: it's simple techniques that can already make big difference. Steam boilers in most production places are hung above an open fire. Making it a proper oven system with bricks and mortar makes a substantial difference.
Lily: At the factory level, it will still be more profitable for them to invest in a new machine. But in Cirebon, Solo and Surabaya we are working at the grassroots level, really at the household level: they are not formal, sometimes they don't have any legal permit to do their work because it is at the household level, so investing in the machine is not feasible unless they have huge orders from companies. In the real situations that we observe, the order is not more than 5 to 6 containers per month and also it is a very traditional energy use. The energy we want to reduce is the firewood and the LPG gas. LPG gas is subsidised for poorer households but not for industrial purposes. This is another aspect we want to teach: that there are other ways to reduce their energy costs, such as buying unsubsidised and legal LPG, and using the pedal with on and off switch to reduce the use of energy.