Governing the teak furniture business: A global value chain system dynamic modelling approach

Environmental Modelling & Software 24 (2009) 1391–1401

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Environmental Modelling & Software journal homepage: www.elsevier.com/locate/envsoft

Governing the teak furniture business: A global value chain system dynamic modelling approach Herry Purnomo a, b, *, Philippe Guizol c, Dwi R. Muhtaman a a

Center for International Forestry Research (CIFOR) Jalan CIFOR, Situ Gede, Sindangbarang, Bogor, West Java 16680, Indonesia Faculty of Forestry, Bogor Agricultural University, Kampus IPB Darmaga, Bogor, Indonesia c Centre de Coope´ration Internationale en Recherche Agronomique pour le De´veloppement (CIRAD) Bogor, PO Box 6596 JKPWB, Jakarta 10065, Indonesia b

a r t i c l e i n f o

a b s t r a c t

Article history: Received 30 April 2007 Received in revised form 3 January 2008 Accepted 17 April 2008 Available online 24 June 2008

Javanese teak forest constitutes more than 35% of world teak forests. It provides employment and livelihood to millions of people. This paper describes the use of systems dynamics to mimic the value chain of teak from forest to final furniture market using phases of conceptual design, model specification, model evaluation and model uses. The model comprises Perhutani plantation teak, community agroforest, teak log trading, furniture manufacturing and market. From the model we observe baseline trends of teak forest and incomes to various actors participating in teak business including forest state enterprise Perhutani, local communities, brokers, manufacturers and retailers. We use the model to produce governance scenarios of fair trade and vertical integration, their impacts on actors’ income and the sustainability of teak plantations. Ó 2008 Elsevier Ltd. All rights reserved.

Keywords: Furniture Value chain Systems dynamics Governance Sustainability

1. Introduction Teak (Tectona grandis Linn) is one of the world’s leading hardwood timbers. Teak is the most demanded tropical hardwood due to its strength and aesthetic qualities. More than 90% of the world’s teak grows in South and Southeast Asia in natural and plantation forests. Teak occurs naturally only in India, the Lao People’s Democratic Republic, Myanmar and Thailand (Fig. 1). Teak is naturalised in Java, Indonesia, where it was probably introduced some 400–600 years ago (Pandey and Brown, 2000). Javanese teak plantations provide wood for many teak furniture manufacturers and retailers in Indonesia and other parts of the world. The livelihoods of millions of people along the teak value chain depend on the sustainability of wood supply from these plantations (Ewasechko, 2005). In 2005, the global furniture trade accounted for US$82 billion, or about 1% of the world trade in manufactures. About 54% of furniture exports came from developed countries. This share has decreased 22 percentage points, however, since the mid-1990s to the advantage of some emerging countries. China’s share increased from 3% in 1995 to 16% in 2005. Other major exporting emerging countries were Indonesia, Malaysia, Mexico and Poland. The most

* Corresponding author. Jalan CIFOR, Situ Gede, Bogor, West Java 16680, Indonesia. Tel.: þ62 251 622 622; fax: þ62 251 622 100. E-mail addresses: [email protected] (H. Purnomo), [email protected] (P. Guizol), [email protected] (D.R. Muhtaman). 1364-8152/$ – see front matter Ó 2008 Elsevier Ltd. All rights reserved. doi:10.1016/j.envsoft.2008.04.012

important structural phenomenon of the past decade has been the increasing openness of the furniture market. The overall importconsumption ratio rose from 20% in 1996 to 31% in 2005 (ITTO, 2006). Indonesia’s exports grew 5% annually, while China’s rose 30% and Vietnam’s more than 50% in markets of USA, EU and Japan. These figures mean that the future market share of Indonesian furniture is threatened. This paper demonstrates the use of Arena-Actor-Institution (A2I) concept to mimic global teak furniture value chain dynamics from teak plantations to international markets. The concept was then implemented using value chain analysis and systems dynamics methods. The model shows stakeholders along the chains, their value added distribution and governance scenarios to improve teak plantation sustainability and fairer value added distribution.

2. Value chain analysis and modelling 2.1. A2I, value chain analysis and governance A2I is a concept to understand that in every system there are arena, actor and institution, which interact dynamically. Sato (2005) argued the usefulness of the Structure-Institution-Actors (SIA) approach in analysing economic change and its impacts. S is defined as a playing field, i.e., a field or arena in which actors play; I as formal and informal rules and their enforcement; and A as an entity of action. If we applied the SIA approach to a sumo wrestling

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Fig. 1. Countries with teak plantation (shaded) and Java (Behagel, 1999).

match, then the sumo ring is S, the rules of the sumo game are I, and the two sumo players and the referee are A. We adopted the SIA approach but replaced ‘structure’ with ‘arena’ to better illustrate the playing field in the so-called A2I approach. Ostrom et al. (1994) used the term ‘action arena’ in their framework for institutional analysis to illustrate the playing field where actors meet and negotiate. Costanza et al. (2001) proposed an ecosystem–human interaction characteristics framework similar to the A2I approach for analysing human and ecosystem interaction. Value chain analysis (VCA) describes activities that are required to bring a product or service from conception or design, through different phases of production, to delivery to final consumers and disposal after use. The value chain provides the big picture and system view of a particular product (Kaplinsky and Morris, 2000). The competitiveness of an individual firm depends upon the competitiveness of its value chain (Schmitz, 2005). VCA helps explain the distribution of value added, particularly income, to those participating in it. Good value chain governance ensures that interactions between firms along the value chain are efficient and effective. Power asymmetry among various actors is central to value chain governance (Kaplinsky and Morris, 2000; Schmitz, 2005). The emergence of voluntary regulatory institutions such as fair trade and ecolabelling is a key element of globalisation. These institutions are generally meant to establish quality, social or environmental standards, and typically involve a larger degree of coordination, traceability and monitoring along different agents of the chain (Muradian and Pelupessy, 2005). 2.2. System dynamic modelling While VCA describes the static distribution of value added at a particular time (t), modelling offers a dynamic concept. System dynamics modelling provides process-based orientation. System dynamics modelling is a method developed particularly for the study of dynamic behaviour of complex systems (Forrester, 1961). System dynamics has been used extensively to examine the dynamics of population, ecological, social and economic systems. Influence diagrams are commonly used to conceptually indicate the relationships among system elements of the model. Relationships

are sometimes referred to as feedback loops or causality loops, which can be either positive or negative (Grant et al., 1997; Sterman, 2000). The relationships then are converted to stocks and flows, which represent material and information transfers. Systems dynamics modelling has also been used in supply chains. Vlachos et al. (2007) analysed the behaviour of product recovery reverse supply chains through a simulation model based on the principles of system dynamics methodology. The simulation model was able to provide an experimental tool, which can be used to evaluate alternative long-term capacity planning policies (‘what if’ analysis). Rabeloa et al. (2006) modelled service and manufacturing activities of the global supply chain using the hybrid model of analytic hierarchy process technique, system dynamics and discrete-event simulation. This hybrid model enabled managers to utilise their own experiences, preferences and qualitative assessments, which increases their level of confidence in decisions resulting in the maximisation of stakeholder value. Value chain, however, is different from supply chain, which is one of the traditional examples in systems dynamics. Supply chain focuses on how a particular company gets raw material from different suppliers, while value chain focuses on the distribution of value to participating actors under a certain institution. Albinoa et al. (2005) used another modelling tool, i.e., multiagent system (MAS), to explore the benefits of industrial district supply chains. Industrial district constitutes a specific production model where complex supply chain networks can be identified under various competitive scenarios. Monticino et al. (2005) used MAS to present complex interactions between development decisions and ecosystems, how the environmental consequences of these decisions influence human values and how subsequent decisions will lead to a better understanding of the environmental consequences of private choices and public policies. Purnomo et al. (2005) and Purnomo and Guizol (2006) implemented MAS in fields of natural forest management and forest plantation. MAS is more actor oriented than systems dynamics, but we considered the ‘stock and flow’ concept to be at the core of the problem, which is the flow of wood material and value to different actors. In addition, system dynamics is more easily understood by policy makers than MAS when dealing with value chain trends and scenarios at the national level. It is in line with Costanza et al.

H. Purnomo et al. / Environmental Modelling & Software 24 (2009) 1391–1401

(2001), who implemented their ecosystem–human interaction characteristics framework by using STELLA. Scenarios are descriptive narratives of plausible alternative projections of a specific part of the future. They are a combination of estimations of what might happen and assumptions about what could happen, but they are not forecasts of what will happen. A projection should be interpreted as one view of the future that is based upon specific information and a set of logical assumptions (Fahey and Randall, 1998). Systems dynamics provide the advantage of using the ‘future forward’ method for the construction of future scenarios. Modelling is an open-ended discussion. The participation of stakeholders is important. A model should take into account stakeholder knowledge to increase the usefulness of the model, as suggested by Ostrom et al. (1993) and Jakeman et al. (2006). 3. Method This research used the A2I concept to describe the overall system. The arena of the A2I concept was then constructed with the value chain concept (Kaplinsky and Morris, 2000) and modelled with the systems dynamics method (Forrester, 1961; Grant et al., 1997; Sterman, 2000). A2I helps to clearly differentiate arena, actor and institution. The VCA concept was used to construct the arena, which is the flow of timber from forest to furniture manufacture and market and its value added distribution among different actors. The VCA was then implemented by using systems dynamics modelling (Fig. 2). The method comprises: (a) conceptual model development using A2I and VCA; (b) specification and execution of the model with STELLA; (c) evaluation of the model; and (d) use of the model (Grant et al., 1997). The method was enriched by the proposal of Jakeman et al. (2006) on 10 iterative steps in model development and evaluation. The developed model was used to understand the trend of the current value chain and to develop scenarios to deal with value added distributional issues and plantation sustainability. The model’s realism takes a form of explicit reality, in which the model represents real situations and resources. The model was implemented with Stella 8.0, a system dynamics tool. Like other system dynamics tools such as VENSIM, POWERSIM and SIMILE, STELLA uses stocks, flows and influences to mimic real systems. It is difficult to say whether STELLA is superior to the other programs, but it is better known in Indonesia, so that it was easier to discuss and exchange a model with other modellers. To improve the STELLA diagrams’ quality, we converted STELLA outputs to an Excel spreadsheet. 4. Results 4.1. Model development 4.1.1. Define model purpose The model aimed at gaining a better qualitative and quantitative understanding of the sustainability of teak plantations in Indonesia Institution

Actor

Arena

Value chain analysis

Systems dynamics modeling

Fig. 2. Arena in the A2I was constructed by value chain method and modelled by use of systems dynamics.

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and the teak furniture value added distribution. It was to inform policy makers and actors related to the teak plantation and furniture industry sector in Indonesia about trends of teak wood availability, sustainability of teak furniture industry and distribution of income along the chain. It involved ‘what if’ scenarios of the future. At the national level, the model was communicated to the stateowned plantation operator in Java, i.e., Perhutani, the Ministry of Forestry, ASMINDO (Association of Indonesian Furniture Producers) and non-government organisations. Some of them provided suggestions and improvement of the model and its results. The model was also designed to provide policy scenarios background to the participatory action research of the European Union-funded project ‘levelling the playing field (LPF)’ in Jepara. Located in Central Java, Jepara is the centre of the teak-based furniture industry in Indonesia. At the local level the model was designed to contribute to the development of a common vision and strategic intervention to sustain Jepara furniture industries through a series of focus group discussions and workshops attended by local government officers, furniture industry owners, furniture exporters, furniture producer association, small scale plantation owners and state-owned teak plantation operators. 4.1.2. Specification of the modelling context Indonesian exports based on renewable natural products rely on the ‘big four’, i.e., rubber, palm oil, footwear and furniture. Indonesian furniture contributed 2% to global trade, but its share is shrinking due to decreasing availability of wood raw material caused by forest degradation and diminished incentives for replanting. The model, at the national policy level, illuminated these issues and provided alternative scenarios to increase, or at least maintain, Indonesia’s share at the global level. The model did not aim at making predictions of future occurrences. Rather the model aimed at making trend projections and drawing up plausible future scenarios, say in 100 years’ time. The model focused on teak plantation and furniture in Indonesia categorised as: (a) from Java, where most teak plantation is located; and (b) from outside Java. The model did not consider the current dynamic competition with China and Vietnam. The model’s aim was to give policy makers and key actors in Ministry of Forestry and Ministry of Industry and key actors in the state-owned forest plantations of Perhutani, local governments, local communities, international companies, international consumers and civil associations a better understanding of the future of the teak furniture industry. The model showed that market arrangement could be a very important driver for sustainability of teak furniture. Although the model describes the national furniture situation, action at district level was well targeted. The model was to help decision makers associated with the Jepara Furniture Industry Forum to draw up action agenda. At the same time inputs from stakeholders were to be taken into account into the model. 4.1.3. Conceptualisation of systems The model concept is shown in Fig. 3. The ‘teak forests’ arena, where teak growers are located, comprises four kinds of teak wood sources, i.e., logging from forest management units (FMUs), illegal logging from FMUs, logging of community teak agroforests and logging of teak plantations outside Java. Teak growers play the primary role here and get value from selling logs to traders. For each kind of wood source, two kinds of loops are working, i.e., ‘reinforcement loop of tree growth’ and ‘balancing loop of logging’. ‘Teak planting’ improves the growth of teak. Achieving ‘normal FMU’ and ‘desired community teak plantation’ are the primary objectives of managing teak forests. ‘Normal FMU’ is a condition by which the area of harvesting is the same as area of planting, while ‘desired community teak plantation’ means a multistakeholder agreement regarding the extent of community teak plantation.

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INSTITUTIONS Scenarios: fair trade, vertical integration etc. ACTORS

KPH teak logging rate

KPH teak replanting

+ + R gr owth

KPH teak growth

Finishing companies, exporters, importers, wholesalers and retailers

Sawmill owners, kiln drying owners and furniture producers

Log traders

Teak growers and illegal loggers

+

B log + ging

-

-

-

KPH teak -

+

+

Direct supply

China and Vietnam export

PP sawmil & industry processing

Contract partnership

+

+

+Export market+

PP teak logs

+ +

Contract direct sales + Normal KPH

KPH teak illegal logging

Java teak growth -

+

+ +

- B log Java teak ging community forests

R gr owth

+

PP illegal logs Java community teak logging +

Log traders & sawmills in Java +

SME woodworking and housing components

+

+

+ Outside Java teak forest

+

-

LE finishing and servicing exporters

+

Brokers

+ Outside Java teak logs

+ +

R-loop

R gr + owth

+

Indonesia market share

Visiting foreign buyers

+

Outside Java teak logging

B log ging

Outside Java teak planting

Legality requirement

+

Java community teak logs

+ Desired Java community teak plantation

LE manufacture of furniture & wood working +

+

Auctions

Java community teak planting

Certification requirement

Log traders & sawmills outside Java

market

Outside Java teak growth

driven + Domestic market

+ Markets

TEAK FOREST

LOG TRADING

FURNITURE MANUFACTURING

FURNITURE MARKET

ARENA Fig. 3. A2I conceptual model of teak value chain.1

Illegal loggers, which could be community members or Perhutani staff, enjoy substantial margins. We assumed that the teak stand plantation dynamic existed at FMU level in Java and at province level for smallholder teak plantations. Smaller scale can be better but, given the existing data and purpose for the model, this resolution is good enough. We also assumed that the national level of production is an aggregation of district level for state-owned teak plantation (in Java) and of province level for smallholder plantation (all over Indonesia). The second arena is ‘log trading’, where log traders are important actors. Log traders obtain Perhutani’s illegal logs from illegal loggers, outside-Java logs from brokers and Perhutani’s legal logs through the ‘auction’ mechanism, while brokers get logs from community agroforests and forests outside Java. Wood is traded in forms of logs of sawn-timber. Perhutani also acts as a log trader to sell its logs legally through ‘contract partnership’, ‘contract sales’

1 PP stands for Perum Perhutani, R for reinforcement or positive loop, B for balancing or negative loop, SME for small medium enterprises, LE for large enterprises.

and ‘auctions’ to big enterprises of furniture and woodworking. These big enterprises also obtain wood from brokers and log traders outside Java, while small and medium-sized enterprises (SMEs) obtain wood from log traders in Java. These big and small enterprises manufacture wood into furniture. It is important to dry the wood in order to get furniture of better quality. Sawmill owners, drying kiln owners and furniture producers play in this ‘furniture manufacturing’ arena. The fourth arena is ‘market’, which comprises actors of furniture finishing companies, exporters, importers, wholesales and retailers. Furniture from SMEs is going to ‘domestic market’ directly and to ‘export market’ through ‘visiting foreign buyers’ and finishing companies, while wood processed by big enterprises and Perhutani can enter the ‘export market’ directly. Currently the structure of the value chain is buyer-driven. This governance structure influences the distribution of value added among actors in the chains. Buyers define standards and rules for the producers. 4.1.4. Model feature We selected a process-based model, system dynamics, to mimic the value chain of the teak furniture industry. The process-based

H. Purnomo et al. / Environmental Modelling & Software 24 (2009) 1391–1401

model was selected because it directly merges the value chain concept with the stock and flow of system dynamics (Fig. 4). The value follows the log and furniture material transfer. Each actor provides or buys material inputs, processes them and sells material outputs. Actors receive margins based on the difference between revenue and cost. 4.1.5. Structure and parameters values to be found The model followed the general structure of value chain of furniture provided by Kaplinsky and Morris (2000). This structure was consistent with the common value chain models. We took lessons from the works of IFC-PENSA (2005) on the sawn-timber supply chain and the Ministry of Industry (MOI, 2006), which worked in collaboration with Bogor Agricultural University to study the development of SME furniture through district clusters in Jepara. We found that the work of IFC-PENSA provided the general sawn-timber supply chain diagram including teak from Java. The work of MOI provided the detail of value associated with each actor participating in the chains. The Ministry of Forestry, in collaboration with Indonesian Central Agency of Statistics, provided data on teak community plantation all over Indonesia (MOF, 2004). Perhutani provided data on state teak plantation and its dynamics in FMUs. 4.1.6. Algorithm, parameters and uncertainty quantification 4.1.6.1. Teak plantation and its dynamics. Teak forest plantation of Perhutani was modelled through stand dynamics. The stand projection estimation was not as detailed as a tree-based estimation, but using tree-based estimation for the whole of Indonesia was impossible due to unavailability of data as well as it did not meet model resolution. The basic concept of stand dynamics estimation is that the forest is represented in a stand table containing trees organised by age classes. Change in the stand table is calculated every year, using periodic measures of plots growth. This concept uses a number of trees per age class as a basis of projection. In reality the number of trees per age class is unavailable. Perhutani, however, provided data on the extent of each age class per FMU. We modified the stand age class projection, which usually uses number of trees, into an area extent age class projection, which uses area extent for each age class as a basis of projection. Outgrowth area (i.e., area extent adding up to higher diameter class area extent), mortality area (i.e., area extent subtracted from the higher diameter class area extent) and recruitment area (i.e., area extent added into the smallest diameter class area extent) were calculated on the basis of available information. Finally, forest growth can be projected. The projection method involves estimates of recruitment area (R), outgrowth area (O), mortality area (M) as well as logging area (L) and illegal activities (IA). The projected area

Overseas importers

Furniture exporters

International wholesalers

International retailers

extent at any age class ‘j’ and after a growth period ‘tþ1’ (Aj,tþ1) is defined as

Aj;tþ1 ¼ Aj;t þ Rj þ Oj  Mj  Lj  IAj where Aj,t is the initial area extent in age class j at time t. Since we used 10 cm class diameter, each year 10% of Aj,t as Oj will add up to Aj,tþ1, while Mj and Lj are taken from Perhutani data. M comprises loss to fire and natural disaster. IA comprises illegal cutting, land encroachment, illegal tree slashing and illegal grazing. The unit of projection, Aj,tþ1, was made at FMU level. Teak plantations in all the FMUs were parameterised with R, O, M, L and IA. Fig. 5 shows the summation of age class structure of Perhutani’s teak plantation. Detailed data for Aj,t at FMU level can be obtained through Perhutani’s publications (Perhutani, 2004, 2005, 2006a,b). The age class pattern is starkly different from that of normal plantation forest, which has an equal extent for each age class. Indeed, it looks like a natural forest stand structure with a reversed ‘J’ curve. There was also uncertainty in assessing the real situation in all FMUs. We roughly assumed the current state-owned and community teak plantation to fulfil only 70% of this figure, which was produced in 1957. This assumption, which was made based on the fact that the current plantation is not well managed as exemplified by the level of illegal logging, means that a smaller timber volume is produced from either main crop or thinning than was projected in the past. We also considered a harvesting factor of 90%. This factor was used to transform standing trees to harvested logs so that for every 1 m3 of standing tree, we would get 0.9 m3 of logs. Logs produced by Perhutani are categorised into three grades based on their diameters, A3 (diameter 30 cm or more), A2 (diameter 20–29 cm) and A1 (diameter 10–19 cm). Grade A1, the smallest diameter, is sold through direct sales contract from the log yards at listed price and according to the annual partnership agreements contract with bigger consumers, and it is directly supplied to Perhutani’s own factories. Grade A2, medium diameter, is sold through direct sales contract, partnership contract and at auction. Grade A3, the largest diameter, is sold through auction. The MOF (2004), in collaboration with the Central Agency of Statistics, reported smallholder teak forests to contain 79.7 million trees. Based on the teak community forestry survey by Sofiyuddin (2006), we roughly estimated 300 teak trees per hectare of smallholder teak plantation. So that, there are 265,708 ha of smallholder teak plantation, of which 167,066 ha are located in Java and 98,642 outside Java. 4.1.6.2. Value added distribution. Table 1 shows the value added along the value chain. Each actor participating in the chain creates value added. The gross value added will contribute to the final price of the product. The difference between gross output value and input cost is the net output value of the furniture.

Finishing companies Community teak growers

Perhutani teak growers

Furniture producers Drying kiln owners

Sawmill owners

Fig. 4. Model meets nature of system.

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Log traders

Fig. 5. Perhutani teak stand age structure.

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Table 1 Value added by different actors participating in furniture value chain (US$). Actors

Margin taken by actors

Cost provided by actors

Gross output values ($/m3)

Input costs ($/m3)

Net output values ($/m3)

Teak growers Log traders Sawmill owners Drying kiln owners Furniture producers Furniture finishers Furniture exporters Overseas importers Overseas wholesalers Overseas retailers

$88/m3 $27/m3 $16/m3 $13/m3 $220/m3 20% 60% 20% 60% 80%

$132/m3 $14/m3 $8/m3 $10/m3 $163/m3 10% 30% 10% 30% 40%

220 27 16 13 220 99 358 191 687 1,465

132 14 8 10 163 50 179 95 343 732

88 14 9 3 57 50 179 95 343 732

Table 2 shows the value added obtained by actors for each cubic metre of raw material. Overseas teak actors obtain 61.1% of the value added, while local teak growers, log traders, furniture producers and exporters together receive only 38.9% of value added. This smaller value added supports mostly furniture producers and community teak growers, while the poor actors get the smallest part of value added. 4.2. Baseline simulation This section observes the distribution of value added and teak plantation under the baseline situation. A baseline is a set of reference data sets or analyses used for comparative purposes (Alcamo et al., 2003). We observed the distribution of incomes and teak resources if we maintain the current situation. The baseline simulation was run under the assumption that illegal logging destroys 5% of teak plantation at all age classes. 4.2.1. Teak plantation area Perhutani, agroforests and teak from outside Java are sources of teak. We assumed that Perhutani cuts 50% of its timber at the age of 40 years in every FMU. Illegal cutting, land encroachment, illegal tree slashing, illegal grazing, fire and natural disasters take place in every FMU. Under these circumstances, after 100 years of simulation time the productive teak plantation area decreased from 732,000 ha to about 330,000 ha. Perhutani’s area decreased from 465,000 ha to 10 ha due to illegal logging, which ranged from 14,000 ha annually in the beginning to 300 ha at the end of simulation. The agroforest in Java increased from 167,000 ha to 200,000 ha, while outer island teak increased from 99,000 ha to 120,000 ha (Fig. 6). Under the current practices, teak under 20 years of age will dominate teak plantation in the future. This scenario is different from ideal plantation forest, which allocates the same area size for

each age class. The young teak domination is characteristic for unsustainable forest plantation management. 4.2.2. Teak logs Teak logs flow from Perhutani, illegal logging, agroforests and outer island teak plantations. At the model’s beginning Perhutani’s 450,000 m3 of logs dominate the log market, followed by 400,000 m3 of agroforest logs, 190,000 m3 of outer islands logs and 140,000 m3 of illegal logs. Due to illegal logging, however, Perhutani’s logs will contribute only 20,000 m3 in the future, while logs from agroforest will dominate the market (Fig. 7). Under the current circumstance community agroforest will replace Perhutani in domination of teak log supply. 4.2.3. Distribution of value added Under the current situation, international furniture retailers obtain the biggest share of net value added (NVA). Nevertheless, the retailers NVA will decrease from US$165 million to US$100 million. It is followed by wholesalers’ portion of value added, which will decrease from US$80 million to US$43 million in that period, while Perhutani’s plantation NVA will decrease from US$65 million to US$3 million. Furniture exporters, importers, SMEs, large enterprises and Perhutani furniture will obtain consecutively smaller portions of NVA. The projected NVA sum of all participating actors will decrease from US$450 million to US$250 million in the next 81 years (Fig. 8). 4.3. Model evaluation Researchers (Grant et al., 1997; Vanclay and Skovsgaard, 1997) have advocated the terminology ‘model evaluation’ instead of ‘model validation’. The term emphasises relative utility of a model. A model that is useful for one purpose may be misleading for other purposes. Jakeman et al. (2006) proposed fitness with its modelling

Table 2 Value added per cubic metre of raw material. Net value added per m3 of raw material

Net value added per m3 of product

US$

US$

Actors

Conversion factor (%)

Remaining product (m3)

Gross output values (US$)

Input costs (US$)

Teak growers Log traders Sawmill owners Drying kiln owners Furniture producers Furniture finishers Furniture exporters Overseas importers International wholesalers International retailers

100 100 70 90 40 95 100 100 100 100

1 1 0.7 0.63 0.25 0.24 0.24 0.24 0.24 0.24

220 27 12 8 55 24 86 46 164 351

132 14 5 6 41 12 43 23 82 175

88 14 6 2 14 12 43 23 82 175

993

534

459

Total

% 19.1 3.0 1.3 0.5 3.1 2.6 9.3 5.0 17.9 38.2 100

88 14 9 3 57 50 179 95 343 732 1570

% 5.6 0.9 0.6 0.2 3.6 3.2 11.4 6.1 21.9 46.7 100

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800,000

Area extent (ha)

700,000 600,000 500,000 400,000 300,000 200,000 100,000 0 1

6

11 16 21 26 31 36 41 46 51 56 61 66 71 76 81 86 91 96

Simulation year PP teak area

AF teak area

Out Java teak area

Total area

Fig. 6. Productive teak plantation areas of Perhutani (PP), agroforests (AF) and outside of Java (out Java).

purpose and transparency of the modelling process as criteria for the evaluation. Assessment of the ‘reasonableness’ of the model was based on systematic check of all the relationships within the model, from the simplest submodel (e.g., forest stand increment) to more complex submodels (e.g., the interrelationship between stand increment and value chain). The model result conformed to the expected pattern results and realities. This model complied with the basic principles of forest plantation management and was consistent with value chain theory and research results. There is not enough space here to explain the equation details of the model. Those interested may contact the corresponding author to obtain the model. To get the feedback, the model was presented at the International Society for Ecological Economics 9th Biennial Conference on Ecological Sustainability and Human Well-Being, 16–18 December 2006 in New Delhi and at the Second Asian Simulation and Modelling conference held 9–11 January 2007 in Chiang Mai, Thailand. The model was able to provide qualitative and quantitative understanding of the future shortage of teak plantation and imbalance in value distributions to different stakeholders including Perhutani, furniture industries and local communities. A virtual community of ‘Indonesian forestry’ also communicated and discussed this issue. Postgraduate students of forestry modelling of Bogor Agricultural University discussed this model and outputs. They thought that the model represented their perceptions of reality and could be a good communication tool to advocate actions towards better teak management and good furniture governance.

The model was also presented during a multistakeholder workshop on analysis of supply and demand for Indonesian forest products conducted in April 2007 in Jakarta by MOF in collaboration with Asia Forest Partnership. ASMINDO, Central Agency of Statistics, Indonesian Investment Board, Ministry of Finance, Ministry of Industry, Ministry of Trade and Perhutani participated in the workshop. Participants thought that the model was reasonable and helped discuss future scenarios. They were concerned with current trends, which are miserable. They valued the model for showing the possible solutions to current trends. Finally the model was also presented to furniture stakeholders located in Jepara to provide background on the development of the common vision of Jepara Teak Furniture Forum. They appreciated the model results and future scenarios of the furniture trade.

4.4. Future scenarios of teak business governance A scenario suggests what could happen in the future, not what will happen (Fahey and Randall, 1998). Poor actors in the furniture value chain are located mostly in furniture manufacturing and agroforestry. The sustainability of furniture manufacturing has to be secured through adequate provision of teak raw material. If the industry collapses, its employees and thousands of SME owners will suffer. The goal of good teak value chain governance is to benefit the poor, which means: (a) sustaining the supply of teak raw material in the future; and (b) improving the NVA for furniture SMEs.

1,400,000

Logs volume (m3)

1,200,000 1,000,000 800,000 600,000 400,000 200,000 0 1

6

11 16 21 26 31 36 41 46 51 56 61 66 71 76 81 86 91 96

Simulation year PP logs

AF logs

Out Java logs

Illegal logs

Teak logs total

Fig. 7. Teak logs projection Perhutani (PP), agroforest (AF), outside of Java (out Java) and illegal logging.

Total net value added (US$ million)

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H. Purnomo et al. / Environmental Modelling & Software 24 (2009) 1391–1401

500 450 400 350 300 250 200 150 100 50 0 1 5 9 13 17 21 25 29 33 37 41 45 49 53 57 61 65 69 73 77 81

Simulation year Fig. 8. Total net value added by all participating actors.

Two scenarios were implemented for this paper, i.e., fair trade and vertical integration and retailers direct investment. The scenarios are associated with market and hierarchy types of value chain governance. 4.4.1. Fair trade Good governance can create price premium through implementation of fair trade and vertical integration (Muradian and Pelupessy, 2005). The price premium for teak growers and SMEs can come from increasing the price of final products, deducting the margin of brokers, certification and collective efficiency. This price premium gives more value added returns to SMEs and teak growers, which may improve their incomes and create an incentive to grow teak. After a certain time lag it would increase the teak raw material standing stock. Raw material availability will ensure that furniture manufacturers continue to produce. The overall objectives are to improve the incomes of teak growers and SMEs and to make the furniture business sustainable (Fig. 9). We assumed 5% of price premium is feasible. Veisten (2007) showed that for English IKEA customers who responded to conjoint analysis (CA) questions, the median willingness to pay (WTP) extra for ecolabelled furniture was 16% of the price of the unlabelled alternative. In the sample that responded to contingent valuation (CV) questions, the median estimate of the price premium was 7.5%. In the samples of Norwegian Ikea customers, the CA median was 2%, while the CV median was 6%. So it is reasonable to assume a net

price premium for fair trade Indonesian furniture of 5% on the international market. Costs of certification, monitoring and other transaction costs are covered outside this 5%. The price premium is allocated to teak growers and SMEs at equal percentages. Teak growers are forced to use 50% of the incentive they receive to establish new plantations, while the other 50% is used for cost and security of land and other transaction costs. We assume that teak plantation establishment and maintenance costs US$2,000 per hectare and that the probability of success is 70%, which represents human resource and institutional capacities to grow teak. This capacity will increase over time. In case of Perhutani the possible maximum teak area is 1.1 million ha. This number is equal to the total area of teak forest, of which now only about 40% is planted. The new area of teak planted depends on the availability of funding, cost of teak plantation establishment, capacity, land availability and conflict. If the percentage of conflicts increases, then costs will increase. SMEs allocate 40% of the price premium to invest in agroforests in Java (80%) and outside Java (20%). Seventy percent of investment is allocated to obtaining land and 30% to teak agroforest in Java. Outside Java the costs for obtaining land and for teak establishment are 50% each. The human and institutional capacity to make teak establishment a success is 60% at the beginning, then improves over time. If the fair trade price premium is 5% (US$78) of the current price (US$1570), and if the level of conflict is low (30%) and the premium of US$78 is distributed and invested according to the above scenario, then the total teak area in year 100 would be 7 million ha, total logs would measure more than 10 million m3 (Fig. 10) and NVA would increase. 4.4.2. Vertical integration Vertical integration is a way of upgrading furniture SMEs through strong coordination with leading firms. While fair trade takes place in ‘market’ type of governance, vertical integration best occurs in ‘hierarchy’ and ‘captive’ types of governance. Vertical integration assumes that capability in the supply base is low and complexity of transactions is high. In these cases leading firms will enforce their standards on SMEs and teak growers. Muradian and Pelupessy (2005) described this situation in coffee trade as ‘First Party Starbucks Code’. Starbucks enforces its standards on coffee farmers. In

Vertical integration [scenario]

Fair trade [scenario]

+

+

Premium price

Teak grower incomes [goal]

SME incomes [goal] +

+ + Teak growers NVA

+

SME NVA

+

+

+ Perhutani incentive

Furniture manufacturing + +

+ +

+ Teak planting investment -

+

+ Raw material stock

Land use conflict Fig. 9. Scenario of good governance through market mechanism.

Furniture business sustainability [goal]

H. Purnomo et al. / Environmental Modelling & Software 24 (2009) 1391–1401

1399

8

Area extent (million ha)

7 6 5 4 3 2 1 0 0

5

10 15 20 25 30 35 40 45 50 55 60 65 70 75 80 85 90 95 100

Simulation year Perhutani

Agroforest

Outside of Java

All areas

Fig. 10. Teak log harvest under scenario of premium price.

vertical integration, however, the leading firms will likely seek out those that already are close to their standards. This situation creates an entry barrier for SMEs that are not selected. Leading firms take control of upgrading tree growers and SMEs (Table 3). The expected impact of price in vertical integration is lower than in fair trade (Fig. 11). Under fair trade, the market determines the price. WTP is a useful tool to investigate the willingness of consumers to pay more than for the usual products. In vertical integration the leading firms control the price. In the simulation we assumed that the price premium obtained from vertical integration is 60% of the fair trade price premium. Consequently teak growers and SMEs would receive a 3% price premium over the usual price from vertical integration. 5. Discussion The A2I concept is able to conceptually construct the teak furniture business. Clear boundaries among arenas, actors and institutions clarify the teak furniture business governance concept. The VCA is able to represent the flow of timber and its derivatives, different actors participating in the chain and their value contributions to the overall product value. As noted by Dahlstro¨m and Ekins (2006), VCA is a robust methodology for exploring various aspects of the socio-economy–environment interface. While main researchers of value chain analysis (e.g. Kaplinsky and Morris, 2000; Schmitz, 2005) use the static approach, this research integrates VCA and systems dynamics approach (Forrester, 1961). As a result, this research provides the innovative idea of integrating VCA and systems dynamics, which shows distribution of value among participating actors and its dynamics. The use of ‘explicit reality’ model realism provides furniture stakeholders an understanding of the real situation of the teak furniture sector. Table 3 Key determinants of global value chain governance (Gereffi, 2003). Governance type

Complexity of transactions

Ability to codify transactions

Capability of supply base

Degree of explicit coordination and power asymmetry

Market Modular Relational Captive

Low High High High

High High Low High

High High High Low

Low

Hierarchy

High

Low

Low

High

The price-premium-through-fair-trade scenario is promising. Ecolabelled furniture can fetch a price premium of about 10%. Fair trade has captured 13.6% of the global coffee trade (Muradian and Pelupessy, 2005). The main goal of fair trade is to guarantee a minimum price to growers and SMEs by charging consumers a premium. Fair trade needs high capability of suppliers as defined by Gereffi (2003). The furniture fair trade scenario increases the overall NVA and sustainability of teak plantations. That the fair trade system amplifies the total income of local actors was proven by the developed model results. Conditions to be achieved to implement fair trade in the furniture sector include a new standard of furniture business practices, third party monitoring and strong stakeholder coordination (Muradian and Pelupessy, 2005). Strong coordination among teak growers and SMEs is highly needed to agree to, implement and advocate the standard. This approach forms collective action among teak growers and SMEs. Communication and coordination are the most critical market aspects for participation by small producers (Scherr et al., 2004). Effective communication as well as the effort to arrive at a coordinated strategy may slow the decision-making process seeking premium price. Impatience, however, may undermine longterm social and ecological sustainability (Ribot, 2006), and a slower and more deliberate decision-making process is reasonable, particularly at the beginning. Coordinated strategy involves producing rules for sharing benefit and cost of any new standard. Without this rule enforcement capability, problems related to free riders and rent seekers can emerge easily. Moreover, the problem of elite captures as described by Platteau and Gaspart (2003) may also arise. The second scenario, vertical integration, provides less NVA than the first scenario but it is able to restore the teak furniture business. This scenario creates dependency of SMEs on the firms. Although the entry barrier for SMEs to participate in this scenario is high, this scenario can quickly canalise the upgrading of SMEs. Those scenarios work only when the level of land conflict is low and managed. Otherwise the entire business will not develop. Keeping land conflict low is a necessary condition for increasing NVA in any scenarios, but it is not the only conflict that may emerge. Sakai (2002) described three reasons why local communities and companies clashed, i.e., land appropriation process, environmental impacts and recruitment of employees. This modelling process offers learning opportunities for stakeholders. It is apparent during the presentation and discussion process that stakeholders become more aware of the threat of raw material shortage and the opportunities inherent in different scenarios. Future scenarios are able to provoke new perspectives in terms of how participants view the future. This outcome is

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Fig. 11. NVA of vertical integration and the other scenarios.

consistent with the aspects of modelling as a learning process reported by Morecroft and Sterman (1994). The method described here is useful for tracing the flow of any product particularly when it involves many different actors in providing raw materials, processing and marketing. The product may be moving along a buyer-driven chain, as do footwear, toys, carbon offset credit and low-tech agricultural products, or along a producer-driven chain, as is the case with computers, television sets, cars and other high-tech products.

6. Conclusions The current practice of the teak furniture business will result in decline or stagnancy, and it will not benefit the poor. Indonesian furniture exports will shrink due to the collapse of teak log supplies. Mismanagement and illegal logging threaten the future of teak plantation in Indonesia. The low value added gained by furniture SMEs makes furniture play a less significant role in poverty alleviation. Future scenarios of fair trade and vertical integration can create a price premium for tree growers and furniture SMEs that can be used partly for boosting teak planting. Business responsibility through international retailers’ investment can contribute significantly to the teak furniture business. These future scenarios will not only restore the teak furniture business but also constitute a great step towards teak plantation sustainability and the increase of teak growers’ and SMEs’ livelihoods. Advocating institutions to make the scenarios work as well as a low level of land conflict are necessary conditions for success. Acknowledgements This work was financed under the ‘levelling the playing field project’ (2003–2007), funded by a grant from the European Union, Tropical Forest Budget Line and managed by CIRAD/CIFOR with Gadjah Mada University as an Indonesian partner. References Albinoa, V., Carbonaraa, N., Giannoccaro, I., 2005. Supply chain cooperation in industrial districts: a simulation analysis. European Journal of Operational Research 177 (1), 261–280. Alcamo, J., et al., 2003. Ecosystems and Human Well-being: A Framework for Assessment. Island Press, Washington. Behagel, I., 1999. Etat des plantations de teck (Tectona grandis L.f.) dans le monde. Bois et Foreˆts des Tropiques 262 (4), 6–18. Costanza, R., Low, B.S., Ostrom, E., Wilson, J. (Eds.), 2001. Institutions, Ecosystems, and Sustainability. Ecological Economic Series. Lewis Publishers, Boca.

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