This continuing series on forest product Chain of Custody certification is based on a simple idea: CoC doesn’t have to be complicated! We have tried to illustrate this by breaking down the popular CoC standards (PEFC, SFI, & FSC) into their constituent parts. Part 1 looked at the “guts” of CoC: the nitty-gritty details of the invoices and packing lists that auditors are always asking for. Part 2 outlines the ISO-based management system requirements that come along with the third-party certification world. This installment will dig into the accounting rules and operating options of the three programs.
Three Options or Two?
Most explanations of Chain of Custody start with an outline of the three, optional systems for determining claims. FSC defines these most clearly as a) Transfer, b) Percentage, and c) Credit. PEFC and SFI offer much the same options, but define them somewhat less clearly. These standards refer to two optional “methods” that they call a) Physical Separation, and b)Percentage-based . The third method – called Volume Credit – is offered as a variation of the Percentage-based method. The good news is this is all just a matter of terminology. Here is a quick and simple table to sort it all out
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FSC options |
SFI & PEFC options |
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Transfer System |
Physical Separation Method |
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Percentage System |
Percentage-based Method |
Average Percentage Method |
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Credit System |
Volume Credit Method |
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Simple CoC
In practice, we have found it helpful to separate CoC into two basic categories, which I like to call simple and complex CoC.
For a large majority of certified companies, the rules for CoC accounting are simple and straightforward. You simply keep track of the certification status of things (products or materials) that you buy. When you handle or process your certified goods, you keep them separated from other, similar, non-certified goods. When it is time to make a sale, the “certification claim” that was provided by your supplier is “transferred” to the goods that are provided to your customer. Whether it is called the “Transfer System” or “Physical Separation Method”, the rules are same. Certification status is identified on input, and inventory control systems keep things properly separated.
This is CoC that is employed by most printers, merchants, paper converters, woodworking shops, and distributors. It is favored by companies who tend to run a “job order” business where production is customer-driven and inputs vary by order. Certification auditors also like it because it’s easy to audit.
Complex CoC
While it is true that a majority of CoC companies use simple, transfer-based, CoC; the products they handle are often not simple at all. In order for commodity-grade wood products to move through a complex marketplace from forests to consumers, a number of challenges have to be met. Many of these are not suited to the simple input-to-output processing model necessary for simple CoC. For this reason, all three programs offer more complex models for tracking, and assigning certified status to materials.
A good example to illustrate complex CoC is a small-scale sawmill. Most sawmills purchase their raw material – logs – from a variety of suppliers – loggers and landowners – who offer them for sale. Some of their suppliers may be certified, but others may not. Certified suppliers might have certified logs for sale one week, but not the next. Raw logs vary by species and grade. Market demand and pricing varies by season and in relation to the larger economy. This week’s customer might have a need for certified lumber, but the next one might be simply looking for the best price. Recognizing and recording the certification status of purchased logs is a relatively simple matter, but keeping separate inventories of certified and non-certified material quickly proves impractical and often prohibitively expensive. Another option is needed, and the complex CoC systems (Credit and Percentage) were designed to meet this need.
Most pulp mills (buying a lower grade of logs called pulpwood) and paper makers (buying pulp) face similar challenges to the sawmill I describe here. It is simply impractical – and sometimes impossible – to keep things separated. Instead, a different model is used, that follows these basic steps:
- Due Diligence – to keep unacceptable sources out of the mix
- Input Accounting – to recognize, record, and quantify the certified inputs
- Output Accounting – use a Credit- or Percentage-based accounting system to apply certification claims to the outputs
The “Due Diligence” standards of all three programs prohibit the use of “controversial sources” in CoC certified products. Unfortunately, the requirements (& terminology) vary considerably. This is a complex (sorry…) and confusing subject that deserves attention and will be the subject of a later installment in this series – stay tuned!
Input accounting protocols for complex CoC are virtually identical to those for simple CoC. Take a look at Part 1 of this series for more detail.
Output accounting for complex CoC is where SFI, FSC, and PEFC are the comfortably aligned. One set of straightforward rules can be applied for any combination of the programs.
Credit accounting is the most common option. Quantities are managed in much the same way as a common checking account. Received quantities of certified material (inputs) are deposited to the account. Sold quantities of certified products (output) are withdrawn. The account balance is reconciled on a regular (typically monthly) basis, and is not allowed to be overdrawn. Input/output conversion ratios, related to scrapping or production loss, have to be applied; and there are limits to how long credit balances may be maintained.
Percentage accounting rules are similarly straightforward. Production must be regularly summarized, and a quantitative calculation made which records the overall proportion of certified to non-certified material for the period (typically a month). This calculation yields a percentage claim (e.g. 75% certified) which is either applied directly, or over a rolling 12-month average. The resulting certification claim is then applied to all of the output of the production line.
Generally speaking, credit-based systems are used when either the supply or demand for certified products is low. It allows occasional purchases to be accumulated, and then applied later to specific sales. On the other hand, percentage-based claims make the most sense when a company has amble certified material on-hand and prefers to apply its certification claims to all of its outputs.
Which Option is Best?
The answer, of course, is – it depends. The trick is to find the system that best matches your business needs.
A company with a strongly order-based business system, such as a commercial printer or architectural millwork shop, tends to be a good match for the Transfer/Physical Separation system (i.e. simple CoC). This is especially true if raw material inputs are ordered on a job-by-job basis.
Companies who treat their raw materials as stock commodities applied flexibly to production on a continual basis, usually need to look at one of the complex models. Which model is often determined by the availability (& relative cost) certified material in their supply chain.
When certified material is scare, or only available at a significant premium, the credit model allows a company to accumulate a balance on-hand in the credit account, without disrupting day-to-day production. The credit balance is available to apply to a sales order when a customer order is received.
When certified material is readily available, with a minimal cost penalty, then may be possible to design a fairly “automatic” system that calculates a certification percentage that is applied to a whole production line. Administration of the program is focused on input accounting, and a marketing opportunity created.
Selecting the best fit for a particular business is trickier than it might appear, however. Beware of advice from auditors and certification firms. With the best of intentions, they routinely guide companies to CoC strategies that might be simple to manage (& audit) but often miss opportunities for adding value. Beware also of online “how to guides” like this one. This is a subject where a knowledgeable consultant can provide the best value.
Are we done?
For 80% of companies in the paper and wood products business, the first 3 installments of this series should provide a pretty good overview of “green” Chain of Custody certification. And viewed from that point of view, we think it is pretty straightforward – something any company can do. Do you agree?
There are, of course, more details to cover. Subjects like Due Diligence, Controlled Wood, Recycled Content, and Certified Sourcing. We will get to those in the coming weeks. Even as we explore through increasingly complex topics around the edges, though, I intend to keep pointing back to the basics we’ve covered so far. Because CoC SHOULD BE EASY! Right?