Operational Innovations in Emerging Economies to Advance Sustainable Sourcing

Millions of poor smallholder farmers produce global commodities, often through illegal deforestation. Multinational commodity buyers have committed to halt deforestation and improve livelihoods of smallholder farmers in their supply chains. In this talk, I will first propose a profitable way for buyers to achieve these dual commitments, motivated by field research in Indonesia’s palm oil industry. Currently, farmers supplying palm fruit suffer from delay in payment, and buyers expensively attempt to avoid sourcing from illegally-deforested land by monitoring individual farmers. Instead, we propose that buyers monitor villages by satellite and offer immediate payment upon fruit delivery for all farmers in a village—if no production occurs on illegally-deforested land in the village. Using field data, dynamic programming and game theory, we show how immediate payment improves productivity and profitability for farmers, processors and buyers, and how village-level incentives best halt illegal deforestation. I will then discuss how we are testing the effectiveness of these proposals through a controlled procurement experiment, and I will close the talk by outlining new work on the design of platforms to improve smallholder supply chain operations in emerging economies.