UNIVERSITI PUTRA MALAYSIA

THE USE OF INFORMATION TECHNOLOGY IN MANAGING THE SUPPLY CHAIN OF MALAYSIAN

PALM OIL INDUSTRY: THE CASE OF FELDA

NITTY HIRAWATY KAMARULZAMAN

GSM 2002 4

THE USE OF INFORMATION TECHNOLOGY IN MANAGING THE SUPPLY CHAIN OF MALAYSIAN PALM OIL INDUSTRY:

THE CASE OF FELDA

By

NITTY HIRA WATY KAMARULZAMAN

Thesis Submitted in Partial Fulfillment of the Requirements for the Degree of Master of Science in the Graduate School of Management

Universiti Putra Malaysia

November 2002

Abstract of thesis presented to the Senate ofUniversiti Putra Malaysia in partial fulfillment of the requirements for the degree of Master of Science.

THE USE OF INFORMATION TECHNOLOGY IN MANAGING THE SUPPLY CHAIN OF MALAYSIAN PALM OIL INDUSTRY:

THE CASE OF FELDA

By

NITTY HIRA WATY KAMARULZAMAN

November 2002

Chairman: Professor Mad Nasir Shamsudin, Ph.D.

Faculty: Graduate School of Management

This study was carried out to investigate the use of information technology (IT) and

information systems (IS) by Malaysian palm oil industry in managing their supply

chain. This study focused on Felda's palm oil supply chain which comprised of its

subsidiary companies namely Felda Plantations Sdn. Bhd., Felda Palm Industries

Sdn. Bhd., Felda Vegetable Oil Products Sdn. Bhd., Felda Transport Services Sdn.

Bhd. and Felda Marketing Services Sdn. Bhd.. Investigation was also made to

examine the extent of these palm oil companies in managing their primary and

support activities and how IT and IS support those activities to improve the

company's supply chain. In addition, the study was also done to investigate the

utilization of IT and IS in all levels and activities ofthe company's supply chain.

Data for the study were obtained through close-ended questionnaires that were

mailed to the respondents comprised of managers from Felda's companies that were

involved along supply chain. Data collected from the s\lrvey were analyzed using

descriptive analysis, regression analysis, correlation analysis and reliability analysis.

11

Result showed that Felda has effectively managed its primary activities particularly

in estates, palm oil mills and refineries. Felda also has managed its inbound and

outbound logistics as well as its marketing activities effectively. However, the

results revealed that IT has not been fully used to effectively support certain primary

and support activities, particularly in estates operations. However, while IT has

made a lot of contribution to support palm oil mills support activities, it has made

less contribution to support their primary activities. Further, IT has contributed

significantly to support refineries' primary and support activities. At the same time,

the results revealed that IT has effectively support distribution and marketing

activities.

From the findings, several recommendations are given to assist Felda and other palm

oil based companies to enhance the management of their activities along their supply

chain and help them to be more competitive in the industry.

111

Abstrak tesis yang dikemukakan kepada Senat Universiti Putra Malaysia sebagai memenuhi sebahagian keperluan untuk ijazah Master Sains.

PENGGUNAAN TEKNOLOGI MAKLUMAT DALAM MENGURUSKAN RANTAIAN BEKALAN BAGI INDUSTRI KELAPA SA WIT MALAYSIA:

BAGI KES FELDA

Oleh

NITTY HIRA WA TY KAMARULZAMAN

November 2002

Pengerusi: Profesor Mad Nasir Shamsudin, Ph.D.

Fakulti: Sekolah Pengajian Siswazah Pengurusan

Kajian ini dijalankan bertujuan untuk menyelidik penggunaan teknologi maklumat

(IT) dan sistem maklumat (IS) oleh industri kelapa sawit Malaysia dalam

menguruskan rantaian bekalan mereka. Kajian ini difokuskan kepada rantaian

bekalan kelapa sawit Felda yang terdiri daripada anak syarikatnya iaitu Felda

Plantations Sdn. Bhd., Felda Palm Industries Sdn. Bhd., Felda Vegetable Oil

Products Sdn. Bhd., Felda Transport Services Sdn. Bhd. dan Felda Marketing

Services Sdn. Bhd. . Penyelidikan juga dijalankan untuk memeriksa sejauh mana

syarikat kelapa sawit ini menguruskan aktiviti utama dan sokongan mereka dan

bagaimana IT dan IS menyokong aktiviti tersebut untuk memperbaiki rantaian

bekalan syarikat. Tambahan lagi, kajian ini turnt dijalankan untuk menyelidik

penggunaan IT dan IS di semua peringkat dan aktiviti rantaian bekalan syarikat.

Data untuk kajian diperolehi melalui soal-selidik tertutup yang dihantarkan melalui

pos kepada responden yang terdiri daripada pengurus-pengurus syarikat Felda yang

terlibat di sepanjang rantaian bekalan. Data yang dikumpulkan daripada kajian

IV

dianalisis menggunakan analisis diskriptif, analisisi regrasi, analysis korelasi dan

analisis kebolehpercayaan.

Hasil kajian menunjukkan bahawa Felda telah menguruskan aktiviti utama mereka

dengan efektif terutamanya di ladang kelapa sawit, kilang kelapa sawit dan kilang

penyaring kelapa sawit. Felda juga telah menguruskan logistik masuk dan keluar

serta aktiviti pemasaran dengan berkesan. Walaubagaimanapun, hasil kajian

mendedahkan bahawa IT tidak digunakan sepenuhnya untuk menyokong aktiviti

utama dan sokongan secara berkesan terutamanya bagi operasi ladang. Namun

begitu, IT telah membuat banyak sumbangan untuk menyokong aktiviti sokongan

kilang kelapa sawit, serta sedikit sumbangan untuk menyokong aktiviti utama.

Seterusnya, IT tumt menyumbang secara bererti untuk menyokong aktiviti utama

dan sokongan kilang penyaring kelapa sawit. Pada masa yang sama, hasil kajian

mendedahkan bahawa IT telah menyokong secara efektif aktiviti pengagihan dan

pemasaran.

Daripada penemuan ini, beberapa cadangan telah diberikan untuk membantu Felda

dan lain-lain syarikat yang berteraskan kelapa sawit untuk meningkatkan pengurusan

aktiviti mereka di sepanjang rantaian bekalan serta membantu mereka untuk lebih

berdaya saing di dalam industri kelapa sawit.

v

ACKNOWLEDGEMENTS

All praise to Allah S.W.T. who has blessed me with patience, strong will, courage

and consistent good health during the course of my preparation of the thesis. I

would like to take this opportunity to express my gratitude to many people who have

helped me to complete this thesis. First and foremost, I would like to express my

deepest thanks and appreciation to Professor Dr. Mohd. Zain Mohamed, Chairman

of the Supervisory Committee, for his sincere guidance and advise, valuable

suggestions, encouragement and constructive comments throughout my thesis

writing which subsequently made the thesis a reality. My sincere appreciation also

goes to the other members of the committee, Prof. Dr. Mad Nasir Shamsudin and

Dr. Jamil Bojei who have helped me greatly by giving suggestions on the analytical

framework and offering proactive and insightful comments.

My appreciation is also extended to Encik Arif Simeh from MPOB, Kelana Jaya; all

officers and managers of Felda Group; all staffs of Universiti Putra Malaysia and

Pusat Maklumat MPOB, Bangi. I also would like to express my gratitude and

thanks to my close friends and course mates for their help throughout my study.

Last but not least, I would like to express my heartfelt thanks to the most important

man in my life, my dear husband, Yahya Bazlan Ismail, who shares my burden and

continuously gives full support, encouragement and love during my study. To my

beloved sons, Muhamad Naqib and Muhamad Hakimi, mother, father, sister and

brother thanks for always cheering up my life and giving me happiness.

VI

I certify that an Examination Committee met on 30th November 2002 to conduct the final examination of Nitty Hirawaty Kamarulzaman on her Master of Science thesis entitled "The Use of Information Technology in Managing The Supply Chain of Malaysian Palm Oil Industry: The Case of Felda" in accordance with Universiti Pertanian Malaysia (Higher Degree) Act 1980 and Universiti Pertanian Malaysia (Higher Degree) Regulations 198 1 . The Committee recommended that the candidate be awarded the relevant degree. Members of the Examination Committee are as follows:

Syed Abd. Kadir Syed Long Alsagoff, Ph.D. Associate Professor Faculty of Economics and Management Universiti Putra Malaysia (Chairman)

Mad Nasir Shamsudin, Ph.D. Professor Graduate School of Management Universiti Putra Malaysia (Member)

Jamil Bojei, Ph.D. Lecturer Graduate School of Management Universiti Putra Malaysia (Member)

Mohd Zain Mohamed. Ph.D. Lecturer College of Business and Economics UAE University United Arab Emirates (Member)

Vll

...... '-"�1. SALLEH, Ph.D. As ociate ProfessorlDeputy Dean G aduate School of Management Universiti Putra Malaysia

Date: �1--/1 {tl"3

This thesis submitted to the Senate ofUniversiti Putra Malaysia has been accepted as partial fulfillment of the requirements for the degree of Master of Science.

viii

ZAINAL ABIDIN KIDAM Associate ProfessorlDean Graduate School of Management Universiti Putra Malaysia

Date: �'itl , 10'3

DECLARATION

I hereby declare that the thesis is based on my original work except for quotations and citations which have been duly acknowledged. I also declare that it has not been previously or concurrently submitted for any other degree at UPM or other institutions.

NfITY 4� KAMARULZAMAN Date: \" JQ"'\A(WO ;'oc�

IX

TABLE OF CONTENTS

ABSTRACT ii ABSTRAK ACKNOWLEDGEMENTS APPROVAL DECLARATION

iv vi vii ix xiv xvii xviii

LIST OF TABLES LIST OF FIGURES LIST OF ABBREVIATIONS

CHAPTER I: INTRODUCTION 1

1 . 1 Malaysian Palm Oil Industry 1 1 . 1 . 1 Planted Area 2 1 . 1 .2 Production 2 1 . 1 .3 Exports 3 1 . 1 .4 Competitiveness of the Malaysian Palm Oil Industry 4 1 . 1 .5 Contribution of Palm Oil Industry to the Malaysian

Economy 5 1 . 1 .6 Strengths and Challenges 6

1 .2 Supply Chain Management Concepts 9

1 .3 Adoption of IT for Supply Chain Improvement 1 1

1 .4 Supply Chain in the Malaysian Palm Oil Industry 1 5

1 .5 Federal Land Development Authority (Felda) 1 7 1 .5 . 1 Establishment and Objectives of Felda 17 1 .5 .2 Felda's Palm Oil Industry Supply Chain 18

1 .6 Problem Statement 2 1

1 .7 Objectives of the Study 22

1.8 Significance ofthe Study 23

1.9 Organization ofthe Thesis 24

CHAPTER II: LITERATURE REVIEW 26

2. 1 Defining Supply Chain Management 26

2.2 Is Supply Chain Management A Relevant Strategy? 29 2.2. 1 The Concept of Value-Added in Supply Chain 31 2.2.2 Building Strategic Relationships and Coordination 32 2.2.3 Performance Measurements 34

x

2.2.3 . 1 Measuring Delivery Activities 2.2.3 .2 Infonnation Quality 2.2.3.3 Customer Service and Satisfaction

35 36 36

2.3 ITIIS Systems and Supply Chain Advantages 37 2.3 . 1 Relevant Data and Infonnation 40 2.3.2 The Internet and Web Technologies As A Tool for SCM 40 2.3.3 Various Systems Used 42

2.4 Conclusion 45

CHAPTER III: CONCEPTUAL FRAMEWORK 46

3 . 1 Value Added Strategy Along the Supply Chain 46

3.2 Porter's Value Chain Model 48

3 .3 Activities Along Palm Oil Industry's Supply Chain of Felda 50 3.3 . 1 Oil Palm Estates 52 3.3.2 Palm Oil Mills 52 3.3.3 Palm Oil Refineries 53 3.3.4 Pam Oil Transportation and Distribution 53 3.3.5 Palm Oil Marketing and Services 54

3.4 Infonnation Technology and Information Systems Deployed Along the Palm Oil Industry's Supply Chain 54

CBAPTER IV: METHODOLOGY

4. 1 Research Site

4.2 Sampling Design

4.3 Research Instrument

4.4 Data Collection

4.5 Data Analysis 4.5. 1 Descriptive Analysis 4.5.2 Regression Analysis 4.5.3 Correlation Analysis

4.6 Reliability Analysis 4.6. 1 Primary Activities 4.6.2 Support Activities

CHAPTER V: ANALYSIS AND DISCUSSION

5 . 1 Plantation 5 . 1 . 1 Plantation Profiles

Xl

57

57

57

58

60

61 61 62 63

64 64 66

67

67 67

5.1.2 Primary Activities in Estates 69 5. 1.2. 1 Sourcing of Raw Materials Activities 69 5 . 1 .2.2 Relationship with Suppliers 71 5 . 1.2.3 Production Activities 74

5 . 1 .3 IT Support on Primary Activities in Estates 75 5. 1 .4 The Influence of IT on Primary Activities in Estates 77

5.1.4. 1 Sourcing of Raw Materials Activities 77 5 .1.4.2 Production Activities 78

5. 1.5 Relationship Between IT and Primary Activities in Estates 79 5 . 1.6 IT Infrastructure and Estates' Performance 80 5. 1.7 Use ofIT in Estates' Support Activities 8 1 5 . 1 .8 Information Systems Used in Estates 82

5.1 .8. 1 Reasons for Using IS in Estates 83

5.2 Palm Oil Mill 85 5.2. 1 Palm Oil Mill Profiles 85 5 .2.2 Primary Activities in Palm Oil Mills 86

5 .2.2. 1 Procurement of Raw Materials Activities 86 5.2.2.2 Relationship with Suppliers 88 5 .2.2.3 Processing and Production Activities 90

5 .2.3 IT Support on Primary Activities in Palm Oil Mills 92 5.2.4 The Influence ofIT on Primary Activities in Palm Oil Mills93

5 .2.4. 1 Procurement of Raw Materials Activities 93 5 .2.4.2 Processing and Production Activities 94

5.2.5 Relationship Between IT and Primary Activities in Palm Oil Mills 95

5.2.6 IT Infrastructure and Palm Oil Mills' Performance 96 5 .2.7 Use ofIT in Palm Oil Mills' Support Activities 98 5.2.8 Information Systems Used in Palm Oil Mills 99

5 .2.8. 1 Reasons for Using IS in Palm Oil Mills 100

5.3 Palm Oil Refinery 102 5.3 . 1 Refinery Profiles 1 02 5.3.2 Primary Activities in Refineries 103

5.3 .2. 1 Procurement of Raw Materials Activities 103 5.3 .2.2 Relationship with Suppliers 104 5.3 .2.3 Processing and Production Activities 106

5.3.3 IT Support on Primary Activities in Refineries 108 5 .3.4 IT Infrastructure and Refineries' Performance 1 1 0 5.3.5 Use ofIT in Refineries' Support Activities III 5.3.6 Information Systems Used in Refineries 1 1 3

5.3.6. 1 Reasons for Using IS in Refineries 113

5 .4 Palm Oil Transportation and Distribution 1 15 504 . 1 Palm Oil Transport Profiles 1 15 5 .4.2 Distribution Activities 116 5.4.3 Delivery Performance 118 5.4.4 IT Support on Distribution Activities 119 5.4.5 IT Infrastructure and Transport Branches' Performance 120 5 .4.6 Use of IT in Transport Branches' Support Activities 121

xu

5.4 .7 Information Systems Used in Transport Branches 123 5.4.7 .1 Reasons for Using IS in Transport Branches 123

5 .5 Palm Oil Marketing and Services 125 5.5.1 Marketing Company Profiles 125 5.5.2 Marketing Activities 125

5.5.2.1 Marketing Strategies 126 5.5.2.2 Promotion Activities 127 5 .5 .2.3 Products Quality 128 5.5.2.4 Products Prices 129

5.5 .3 Services Activities 130 5.5.4 IT Support on Marketing Activities 132 5.5.5 IT Infrastructure and Marketing Company's Performance 133 5.5.6 Use of IT in Marketing Company's Support Activities 134 5.5.7 Information Systems Used in Marketing Company 136

5.5.7.1 Reasons for Using IS in Marketing Company 137

5.6 Discussion on the Felda's Supply Chain 138 5.6.1 Discussion on the Status of IT Along Felda's Supply Chain 139

5.7 Summary on Support of IT and IS along Felda's Palm Oil Industry Supply Chain 141

5.8 Recommendations for Felda to Manage Its Supply Chain 143

CHAPTER VI: CONCLUSION AND SUGGESTIONS

6.1 Summary and Conclusion

6.2 Limitations of the Study

6 .3 Suggestion for Future Research

REFERENCES

APPENDICES Appendix A Appendix B Appendix C Appendix D Appendix E

BIODATA OF THE AUTHOR

Xlll

146

146

150

151

153

161 162 163 170 178 186

195

LIST OF TABLES

Table Title Page

Table 1 . 1 Planted Area of Oil Palm, Production of CPO, Export and 1 Export Value of Palm Oil

Table 1 .2 World Major Producers of Palm Oil: 1995-2000 ('000 tonnes) 5

Table 1 .3 Matching Goals to Information Systems Along Supply Chain 14

Table 4. 1 Companies' Major Activities 58

Table 4.2 Breakdown of Respondents 61

Table 4.3 Reliability Analysis 65

Table 5 . 1 Plantation Profiles 69

Table 5.2 Sourcing of Raw Materials Activities in Estates 71

Table 5.3 Relationship with Suppliers in Estates 73

Table 5.4 Production Activities in Estates 75

Table 5.5 IT Support on Primary Activities in Estates 76

Table 5.6 Regression Analysis for Sourcing of Raw Materials in Estates 77

Table 5.7 Regression Analysis for Production in Estates 79

Table 5 .8 Correlation Between IT and Primary Activities in Estates 80

Table 5 .9 IT Infrastructure and Estates' Performance 8 1

Table 5 . 10 Use of lT in Estates' Support Activities 82

Table 5 . 1 1 Information Systems Used in Estates 83

Table 5 . 12 Reason for Using IS in Estates 84

Table 5 . 1 3 Palm Oil Mill Profiles 86

Table 5 . 14 Procurement of Raw Materials Activities in Palm Oil Mills 88

Table 5 . 1 5 Relationship with Suppliers in Palm Oil Mills 90

Table 5 . 1 6 Processing and Production Activities in Palm Oil Mills 92

XIV

Table 5 . 17 I T Support on Primary Activities in Palm Oil Mills 93

Table 5 . 1 8 Regression Analysis for Procurement of Raw Materials in Palm Oil Mills 94

Table 5 . 19 Regression Analysis for Processing and Production in Palm Oil Mills 95

Table 5 .20 Correlation between IT and Primary Activities in Palm Oil Mills 96

Table 5.21 IT Infrastructure and Palm Oil Mills' Performance 97

Table 5 .22 Use ofIT in Palm Oil Mills' Support Activities 99

Table 5.23 Information Systems Used in Palm Oil Mills 99

Table 5.24 Reasons for Using IS in Palm Oil Mills 101

Table 5 .25 Refinery Profiles 102

Table 5.26 Procurement of Raw Materials Activities in Refineries 104

Table 5.27 Relationship with Suppliers in Refineries 106

Table 5.28 Processing and Production Activities in Refineries 108

Table 5.29 IT Support on Primary Activities in Refineries 1 1 0

Table 5 .30 IT Infrastructure and Refineries' Performance 1 1 1

Table 5.3 1 Use ofIT in Refineries' Support Activities 1 12

Table 5 .32 Information Systems Used in Refineries 1 1 3

Table 5.33 Reasons for Using IS in Refineries 114

Table 5.34 Transport Company Profiles 1 1 6

Table 5 .35 Distribution Activities 1 1 8

Table 5.36 Delivery Performance 119

Table 5.37 IT Support on Distribution Activities 1 20

Table 5.38 IT Infrastructure and Transport Branches' Performance 121

Table 5.39 Use ofIT in Transport Branches' Support Activities 122

Table 5.40 Information Systems Used in Transport Branches 123

xv

LIST OF FIGURES

Table Title Page

Figure 1. 1 Export Volume by Countries 4

Figure 1.2 Systems Approach in Palm Oil Industry 8

Figure 1.3 Supply Chain Management: Areas of Opportunity 11

Figure 1.4 Felda's Supply Chain 19

Figure 3 . 1 Porter's Value Chain Model 49

Figure 3.2 Model of Activities Along Palm Oil Industry's Supply Chain of Felda 51

Figure 3.3 Model of Competitive Position of Felda's Palm Oil Industry Supply Chain 56

Figure 5.1 Information Systems Deployed 143

XVll

ADC

APS

CAD

CAM

CAPP

CIM

CPFR

CPO

DRP

EDI

ERP

FFB

GDP

IS

IT

JIT

MES

MH

MIS

MPR

OMS

POS

PPO

R&D

LIST OF ABBREVIATIONS

Automated Data Collection/Captured

Advanced Planning and Scheduling

Computer-Aided Design

Computer-Aided Manufacturing

Computer-Aided Process Planning

Computer-Integrated Manufacturing

Collaborative Planning, Forecasting and Replenishment

Crude Palm Oil

Distribution Resource Planning

Electronic Data Interchange

Enterprise Resource Planning

Fresh Fruit Bunch

Gross Domestic Product

Information Systems

Information Technology

Just In Time

Manufacturing Execution Systems

Automated Materials Handling Systems

Marketing Information Systems

Manufacturing Production Report

Order Management Systems

P oint-of-S ales

Processed Palm Oil

Research and Development

XVlll

RML

SCM

TMS

VMI

WMS

WWW

Rangkaian Maklumat Ladang

Supply Chain Management

Transportation Management Systems

Vendor Managed Inventory

Warehouse Management Systems

World Wide Web

XIX

CHAPTER I

INTRODUCTION

This chapter presents the background of the Malaysian palm oil industry, the

discussion on the supply chain management concepts and the supply chain in the

Malaysian palm oil industry. This chapter also presents the problem statement,

objectives of the study, significance of the study and organization of the thesis.

1 .1 Malaysian Palm Oil Industry

The Malaysian palm oil industry has witnessed tremendous growth during the last

four decades as reflected in the continuous expansion in the planted area of oil palm,

and the production and exports of palm oil (Table 1 . 1) .

Table 1 .1: Planted Area of Oil Palm, Production of CPO, Export and Export Value of Palm Oil

Year

1960

1970

1980

1990

1995

1996

1997

1998

1999

2000

Planted Area of Oil Palm (hectares)

54,638

261,199

1,023,306

2,029,464

2,540,087

2,692,286

2,819,316

3,078,116

3,313,393

3,376,664

Production of CPO

(tonnes) 91,793

431,069

2,573,173

6,094,622

7,810,546

8,385,886

9,068,728

8,319,682

10,553,913

10,842,095

Source: Malaysian Oil Palm Statistics, 2001

I

Export of Palm Oil

(tonnes) 97,568

404,198

2,749,752

6,105,300

8,459,700

9,322,900

9,607,866

9,901,039

11,847,487

12,365,849

Export Value of Palm Oil

(RM million) 61.23

273.6

3,212.3

5,983.8

12,378.2

11,678.1

12,894.3

21,348.6

19,210.5

14,928.6

2

1.1.1 Planted Area

Oil palm cultivation in Malaysia has expanded rapidly as a result of the conversion

of target tracts of private rubber holdings to oil palm estates as weB as large-scale

cultivation by federal and state governments in new land areas. This happened when

the government undertook the agricultural diversification program in the 1 960s, to

reduce the country's economic dependence on rubber and tin. In 1 960, the total

planted area under oil palm cultivation was 54,638 hectares. Two decades later, in

1 980s, the total area planted under oil palm reached 1 ,023,306 hectares (PORLA,

1 980). Since then, the total planted area increased marginally and in 2000, the total

planted area reached 3,376,664 hectares (Table 1 . 1).

1 .1 .2 Production

Production of crude palm oil (CPO) has increased dramatically over 40 years. In

1 960, Malaysia produced only about 9 1 ,793 tonnes of CPO, but by the year 1 970s,

production increased to 43 1 ,069 tonnes. Output continued to increase rapidly to

2.57 million tonnes in 1 980 and 6.09 million tonnes in 1 990 (Table 1 . 1 ) . Based on

the Table 1 . 1 , production of palm oil increased significantly from 1 990 up to 1 999.

However, production dropped from 9.07 million tonnes in 1997 to 8.32 million

tonnes in 1 998. The decrease in production was most probably due to the impact

from the worldwide economic and Asian currency crises in 1 997, resulting in

deflated demand for industrial products. Nevertheless, production started to increase

again in 1 999 at 10.55 million tonnes from 1 998. In 2000, the production of CPO

reached 1 0.84 million tonnes.

3

1.1.3 Exports

Total export of palm oil products recorded increases over the last 40 years. Palm oil

exports have increased tremendously since the 1960s. Exports of palm oil products

in 1 960 were 97,568 tonnes but the expanding output, which was increasingly

channeled to overseas markets, saw total exports rising to 6. 1 1 million tonnes in

1 990 (Table 1 . 1 ). In 2000, total exports of palm oil increased two-fold to 12.37

million tonnes. Total export value of palm oil has also increased dramatically since

the 1 960s. In 1 995, the export value was RM12.38 billion, but the value fluctuated

from 1996 to 2000 due to unstable prices of palm oil and the Asian currency. The

highest export value accounting to RM21 .35 billion was recorded in 1998 and it was

then the largest foreign exchange earner of the country (MPOB, 2000).

By the year 2000, India remained the largest export market for Malaysian palm oil at

2.03 millions tonnes (22.4% of total exports) (Figure 1 . 1) . Pakistan was the second

largest export market at 1 . 10 million tonnes (12 . 1 %). The European Union, the

People's Republic of China and Egypt followed next with exports totaling 1 .04

million tonnes ( 1 1 .4%), 1 .02 million tonnes ( 1 1 .3%) and 0.43 million tonnes (4.8%),

respectively.

Figure 1.1: Export Volume by Countries

Egypt (4.8%)

PR of China (11.3%)

European Union

(11.4%)

Pakistan (12.1%)

1.1.4 Competitiveness of the Malaysian Palm Oil Industry

The top five crude palm oil (CPO) producers, namely Malaysia, Indonesia, Nigeria,

Colombia and Thailand contributed 1 2.54 million tonnes or 82.4% of the world

production in 1995 (Table 1 .2). In 2000, these producers contributed about 21.73

million tonnes or 90% of the world production and Malaysia remained the leader by

producing 10.84 million tonnes of palm oil or about 50% of the world production.

Malaysia maintained the position as the world's largest palm oil producer and was

quite far ahead compared to other competitors such as Indonesia and Nigeria

(MPOB, 2000). Since Malaysia is the biggest palm oil producer in the world,

Malaysia is considered to be the major market player in the world palm oil trade and

is able to influence the supply and prices of CPO in the international market.

The Malaysian palm oil industry also contributes much to the world oils and fats

economy. Malaysia contributed 9.5% of the world oils and fats production.

Malaysia is also the world's leading palm oil exporter contributing to 60.7% of the

5

total world trade in palm oil. World palm oil exports constituted 42.0% of the total

oils and fats trade, out of which 72.0% is made up of Malaysian palm oil. Thus,

palm oil has relatively made a major impact on the world oils and fats market,

providing strong competition to soybean oil and other animal fats (Economic

Report, 200012001 ).

Table 1 .2 : World Major Producers of Palm Oil: 1995-2000 ('000 tonnes)

Country 1995 1996 1997 1998 1999 Malaysia 7,221 8,386 9,069 8,319 10,554 Indonesia 4,008 4,540 5,380 5,100 6,250 Nigeria 640 670 680 690 720 Colombia 353 410 441 424 501 Thailand 316 375 390 405 495 Rest of World 2,672 1,901 1,943 1,981 2,111

World 15,210 16,282 17,903 16,919 20,631 Source: i) Oil World, Statistics Update, Various Issues

ii) Malaysian Palm Oil Board, 2000

1 .1 .5 Contribution of Palm Oil Industry to the Malaysian Economy

2000 10,842

7,000

740

524

525

2,194

21,825

The latest economic indicators on Malaysia's economic performance show that

recovery measures taken by the Malaysian government have yielded positive results.

Real Gross Domestic Product (GDP) recovered to 5.4% in 1999 from -7.5% in

1 998. First quarter growth for year 2000 was -11.7%. Broad based growth rate for

certain sectors in 2000 such as manufacturing was 27.3%, services were 6.3%,

agriculture was 2.9% and construction was 1.2% (MITI, 2000). The positive

attributes of GDP from the agriculture sector which was mainly contributed by the

palm oil industry has been recognized as the major contribution to the Malaysian

GDP.

6

In 1 998, after the economic crisis, the palm oil industry contributed substantially to

the Malaysian economy, accounting for 9.2% of the country's GDP. This suggests

that palm oil industry will have to play a major role in sustaining maximum

contribution of the agriculture sector as well as Malaysia's economic performance in

the future. Palm oil industry contributes towards a very versatile industry, as it can

be easily included in many manufacturing activities and also able to contribute

directly to the expansion of the manufacturing sector. The palm oil industry indeed

has a great impact in meeting the challenges of the economic development of

Malaysia. In the year 2000, export earnings from palm oil and its related products

reached RM1 4.9 billion, thus maintaining its position as the second largest export

earner for the country after electrical and electronic products.

1 .1 .6 Strengths and Challenges

The success of the Malaysian palm oil industry is the result of the ideal climatic

conditions, efficient milling and refining technologies and facilities, research and

development (R&D), efficient and effective use of management tools and marketing

strategies. In addition, the Malaysian government is fully committed to the

expansion of the industry and encourages global expansion of palm oil production.

Being a highly competitive and profitable industry, oil palm will continue to expand

its planted area as well as marketing approach in the future. This will help the

agriculture sector to maintain a reasonable growth rate, projected at 3% per year. To

maintain the stability and competitiveness in the market place, palm oil industry

must be willing to face the future challenges. As pointed out by Yusof and Ahmad

( 1 994), major challenges faced by palm oil industry include increasing value added,