Here’s an overview of the essential oil trade chain in Indonesia, which is complex and consists of several main stages. It begins with the cultivation of plants that produce essential oils. This stage involves farmers responsible for growing and harvesting plants such as patchouli, clove, or citronella. Once harvested, the plants are processed through distillation to extract pure essential oil.
After the distillation process, the essential oil is typically purchased by field buyers or small-scale middlemen. At this stage, the owner of the distillation equipment sometimes also acts as the first buyer, especially in areas where access to external buyers is limited. These initial buyers play a critical role as intermediaries between the distiller and the next stage in the supply chain.
The essential oil collected by the first buyers is then passed to aggregators, or large-scale middlemen, who generally have a broader network. At the aggregator level, the essential oil often undergoes a blending process to achieve specific qualities or characteristics desired by the export market. This blending is essential for achieving product consistency to meet the quality standards required by exporters. Can the oil obtained from small-scale middlemen enter this process directly? This depends on the quality of the oil produced in that area; in some cases, it may not meet the necessary standards and may require additional processing.
Aggregators play a strategic role by collecting oils from various regions, enabling them to obtain multiple grades of oil to meet the diverse demands of exporters. However, the role of aggregators often receives criticism, especially regarding price control, which is thought to impact farmers’ earnings. On the other hand, aggregators also bear the risk by financing the distillation process in advance or providing capital to small middlemen to distribute to farmers and distillers. In other words, aggregators become a source of operational financing for the initial layers of the supply chain, a role rarely assumed by exporters.
Exporters seldom engage in direct financing at the raw material or distillation stage due to the high risk involved. Providing direct funding would increase operational costs and could affect the cost of goods sold (COGS), which in turn impacts their competitiveness in international markets. A significant risk faced by exporters is delayed payments, often up to 90 days after shipment. This situation causes exporters to rely on aggregators, who already have funding mechanisms in place at the farmer and distiller levels.
In addition to their role as buyers, exporters also often function as refineries, refining the quality of essential oils to increase their market value. This refining process can include purifying the oil, adjusting its composition, or even processing the oil into derivative products that can be marketed specifically. Exporters are responsible for ensuring that the essential oil they export meets the desired standards of international customers, which sometimes requires additional modifications to the product’s quality.
The essential oil supply chain is intricate because it involves many parties, each with its own contributions and risks. This structure makes it difficult to streamline the essential oil trade chain, even though there are challenges in terms of price control and risk at every level. Aggregators play a crucial role as the primary bridge between distillers and exporters, and while they may sometimes receive negative perceptions, they are vital to maintaining the continuity of this supply chain.
