UNIVERSITI PUTRA MALAYSIA THE USE OF INFORMATION TECHNOLOGY IN MANAGING THE SUPPLY CHAIN OF MALAYSIAN PALM OIL INDUSTRY: THE CASE OF FELDA

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1 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

2 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

3 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: Faculty: Professor Mad Nasir Shamsudin, Ph.D. 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

4 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

5 Abstrak tesis yang dikemukakan kepada Senat Universiti Putra Malaysia sebagai memenuhi sebahagian keperluan untuk ij azah 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: Fakulti: Profesor Mad Nasir Shamsudin, Ph.D. 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

6 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

7 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

8 I certify that an Examination Committee met on 30 th 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 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).. '-" 1. SALLEH, Ph.D. As ociate ProfessorlDeputy Dean G aduate School of Management Universiti Putra Malaysia Date: 1--/1 {tl"3 Vll

9 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. ZAINAL ABIDIN KIDAM Associate ProfessorlDean Graduate School of Management Universiti Putra Malaysia Date: 'itl, 10'3 viii

10 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. 4 NfITY KAMARULZAMAN Date: \" JQ"'\A(WO ;'oc IX

11 TABLE OF CONTENTS ABSTRACT ABSTRAK ACKNOWLEDGEMENTS APPROVAL DECLARATION LIST OF TABLES LIST OF FIGURES LIST OF ABBREVIATIONS ii iv vi vii ix xiv xvii xviii CHAPTER I: INTRODUCTION Malaysian Palm Oil Industry Planted Area Production Exports Competitiveness of the Malaysian Palm Oil Industry Contribution of Palm Oil Industry to the Malaysian Economy Strengths and Challenges Supply Chain Management Concepts Adoption of IT for Supply Chain Improvement Supply Chain in the Malaysian Palm Oil Industry Federal Land Development Authority (Felda) Establishment and Objectives of Felda Felda's Palm Oil Industry Supply Chain Problem Statement Objectives of the Study Significance ofthe Study Organization ofthe Thesis 24 CHAPTER II: LITERATURE REVIEW Defining Supply Chain Management Is Supply Chain Management A Relevant Strategy? The Concept of Value-Added in Supply Chain Building Strategic Relationships and Coordination Performance Measurements 34 x

12 Measuring Delivery Activities Infonnation Quality Customer Service and Satisfaction ITIIS Systems and Supply Chain Advantages Relevant Data and Infonnation The Internet and Web Technologies As A Tool for SCM Various Systems Used Conclusion 45 CHAPTER III: CONCEPTUAL FRAMEWORK Value Added Strategy Along the Supply Chain Porter's Value Chain Model Activities Along Palm Oil Industry's Supply Chain of Felda Oil Palm Estates Palm Oil Mills Palm Oil Refineries Pam Oil Transportation and Distribution Palm Oil Marketing and Services 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 Descriptive Analysis Regression Analysis Correlation Analysis 4.6 Reliability Analysis Primary Activities Support Activities CHAPTER V: ANALYSIS AND DISCUSSION 5.1 Plantation Plantation Profiles Xl

13 5.1.2 Primary Activities in Estates Sourcing of Raw Materials Activities Relationship with Suppliers Production Activities IT Support on Primary Activities in Estates The Influence of IT on Primary Activities in Estates Sourcing of Raw Materials Activities Production Activities Relationship Between IT and Primary Activities in Estates IT Infrastructure and Estates' Performance Use ofit in Estates' Support Activities Information Systems Used in Estates Reasons for Using IS in Estates Palm Oil Mill Palm Oil Mill Profiles Primary Activities in Palm Oil Mills Procurement of Raw Materials Activities Relationship with Suppliers Processing and Production Activities IT Support on Primary Activities in Palm Oil Mills The Influence ofit on Primary Activities in Palm Oil Mills Procurement of Raw Materials Activities Processing and Production Activities Relationship Between IT and Primary Activities in Palm Oil Mills IT Infrastructure and Palm Oil Mills' Performance Use ofit in Palm Oil Mills' Support Activities Information Systems Used in Palm Oil Mills Reasons for Using IS in Palm Oil Mills Palm Oil Refinery Refinery Profiles Primary Activities in Refineries Procurement of Raw Materials Activities Relationship with Suppliers Processing and Production Activities IT Support on Primary Activities in Refineries IT Infrastructure and Refineries' Performance Use ofit in Refineries' Support Activities III Information Systems Used in Refineries Reasons for Using IS in Refineries Palm Oil Transportation and Distribution Palm Oil Transport Profiles Distribution Activities Delivery Performance IT Support on Distribution Activities IT Infrastructure and Transport Branches' Performance Use of IT in Transport Branches' Support Activities xu

14 5.4.7 Information Systems Used in Transport Branches Reasons for Using IS in Transport Branches Palm Oil Marketing and Services Marketing Company Profiles Marketing Activities Marketing Strategies Promotion Activities Products Quality Products Prices Services Activities IT Support on Marketing Activities IT Infrastructure and Marketing Company's Performance Use of IT in Marketing Company's Support Activities Information Systems Used in Marketing Company Reasons for Using IS in Marketing Company Discussion on the Felda's Supply Chain Discussion on the Status of IT Along Felda's Supply Chain Summary on Support of IT and IS along Felda's Palm Oil Industry Supply Chain 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

15 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: ('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 81 Table 5.10 Use oflt in Estates' Support Activities 82 Table 5.11 Information Systems Used in Estates 83 Table 5.12 Reason for Using IS in Estates 84 Table 5.13 Palm Oil Mill Profiles 86 Table 5.14 Procurement of Raw Materials Activities in Palm Oil Mills 88 Table 5.15 Relationship with Suppliers in Palm Oil Mills 90 Table 5.16 Processing and Production Activities in Palm Oil Mills 92 XIV

16 Table 5.17 IT Support on Primary Activities in Palm Oil Mills 93 Table 5.18 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 110 Table 5.30 IT Infrastructure and Refineries' Performance 111 Table 5.31 Use ofit in Refineries' Support Activities 112 Table 5.32 Information Systems Used in Refineries 113 Table 5.33 Reasons for Using IS in Refineries 114 Table 5.34 Transport Company Profiles 116 Table 5.35 Distribution Activities 118 Table 5.36 Delivery Performance 119 Table 5.37 IT Support on Distribution Activities 120 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

17 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

18 LIST OF ABBREVIATIONS 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 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

19 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

20 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 Planted Area of Oil Palm (hectares) 54, ,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, ,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 Export of Palm Oil (tonnes) 97, ,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) , , , , , , , ,928.6 I

21 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 1960s, to reduce the country's economic dependence on rubber and tin. In 1960, the total planted area under oil palm cultivation was 54,638 hectares. Two decades later, in 1980s, the total area planted under oil palm reached 1,023,306 hectares (PORLA, 1980). Since then, the total planted area increased marginally and in 2000, the total planted area reached 3,376,664 hectares (Table 1.1) Production Production of crude palm oil (CPO) has increased dramatically over 40 years. In 1960, Malaysia produced only about 91,793 tonnes of CPO, but by the year 1970s, production increased to 43 1,069 tonnes. Output continued to increase rapidly to 2.57 million tonnes in 1980 and 6.09 million tonnes in 1990 (Table 1.1). Based on the Table 1.1, production of palm oil increased significantly from 1990 up to However, production dropped from 9.07 million tonnes in 1997 to 8.32 million tonnes in The decrease in production was most probably due to the impact from the worldwide economic and Asian currency crises in 1997, resulting in deflated demand for industrial products. Nevertheless, production started to increase again in 1999 at million tonnes from In 2000, the production of CPO reached million tonnes.

22 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 1960 were 97,568 tonnes but the expanding output, which was increasingly channeled to overseas markets, saw total exports rising to 6.11 million tonnes in 1990 (Table 1.1). In 2000, total exports of palm oil increased two-fold to million tonnes. Total export value of palm oil has also increased dramatically since the 1960s. In 1995, 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 fo llowed next with exports totaling 1.04 million tonnes (11.4%), 1.02 million tonnes (11.3%) and 0.43 million tonnes (4.8%), respectively.

23 Figure 1.1: Export Volume by Countries Egypt (4.8%) PR of China (11.3%) European Union (11.4%) Pakistan (12.1%) Competitiveness of the Malaysian Palm Oil Industry The top five crude palm oil (CPO) producers, namely Malaysia, Indonesia, Nigeria, Colombia and Thailand contributed million tonnes or 82.4% of the world production in 1995 (Table 1.2). In 2000, these producers contributed about million tonnes or 90% of the world production and Malaysia remained the leader by producing 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

24 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, ). Table 1.2: World Major Producers of Palm Oil: ('000 tonnes) Country Malaysia 7,221 8,386 9,069 8,319 10,554 Indonesia 4,008 4,540 5,380 5,100 6,250 Nigeria Colombia Thailand 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, ,842 7, ,194 21, Contribution of Palm Oil Industry to the Malaysian Economy 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 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.

25 6 In 1998, 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 RM14.9 billion, thus maintaining its position as the second largest export earner for the country after electrical and electronic products 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 (1994), major challenges faced by palm oil industry include increasing value added,