Efficiency of Indonesian Palm Oil Mills

Abstract

Crude palm oil (CPO) is one of Indonesian agricultural products that are widely developed. It is produced by palm oil mills. This study analyzes the efficiency of Indonesian palm oil mills and the way to improve the efficiency. The difference in the efficiency score based on managerial factors of the mills are analyzes to enhance the result of the study. The managerial factors that used are ownership, export participation, and location of the mills. This study uses 2010 manufacturing industry survey conducted by the Statistics Indonesia. The efficiency analysis is done by using Data Envelopment Analysis (DEA) with production value as the output, and production expenses, labor expenses, other expenses, and fixed capital as the inputs. The result shows that the Indonesian palm oil mills are inefficient. The inefficient firms are state-owned, non-exporting, and firms that located in Sumatera islands. On average the firms can improve the efficiency by decreasing the use of fixed capital, other expenses, labor expenses, and raw material expenses. Based on managerial factors, the difference in efficiency score occur between foreign-owned and other ownership, exporting and non-exporting firms, and firms that located in Sumatera and other islands. In regard of average efficiency score and production scale, it is not suggested to increase the number of palm oil mills. Considering the efficiency, it is suggested to learn the way to achieve efficiency from foreign-owned firms. State-owned are the least efficient firms. The source of inefficiency is fixed capital owned and labor expenses. Regarding fixed capital owned, the efficiency can be improved by renewing the technology. Reducing the number of labor or improving the productivity of the labor could rise the efficiency of state-owned firms. Based on export participation, it is suggested that the government support the firms in export participation, considering exporting firms are more efficient than non-exporting firms. The development of palm oil mills in other islands are recommended following the growing of the oil palm plantation in the area.