Published: August 01, 2010
The aim was to retain existing, familiar trade rules that have shaped the industry for so long, but to automate and accelerate the payment process, and enhance transparency for all stakeholders.
Tea is the second most popular beverage in the world. Only water has a higher global consumption than tea. It is estimated that somewhere between 18 and 20 billion cups of tea are drunk daily on our planet. Tea trading is a traditional industry, usually conducted through well-established channels using universally recognised conventions. Tea is often produced a long way from the central auction centre in Mombasa. Once picked, tea leaves are taken to the factory for processing, at which point the dried, rolled leaves can be sold at auction. Because of the long distances involved, most producers are far removed from the point of sale. Their tea is consigned to an appointed warehouse, and both the producer and warehouse owner are members of EATTA. Producers ask the broker, who acts as the epicentre of tea selling operations, to put a certain volume of tea in for auction. The broker then produces and circulates a catalogue to prospective buyers, and both the broker and potential buyers test the product.
At this stage, the tea can be auctioned. After the sale of tea at the auction, brokers prepare and send account sales reports to the producers, delivery orders to the warehouses and invoices to the buyers. Buyers then pay brokers for the full invoice value. On receipt of payment, as confirmed by the bank, the brokers issue copies of the delivery orders which are handed over to the buyers’ authorised agents. Buyers then use the delivery orders to collect the tea from producers’ warehouses. The brokers then remit the sale amount for the tea, less their commissions, catalogue charges and warehouse charges. Typically, it takes around 42 days between the date that the leaves are picked and the date that the producer receives payment.
Although relatively lengthy, this system, which is universally accepted and consistent across the industry, has worked successfully for many years. However, following an isolated event in 2008 in which a broker did not remit funds to the producer (notably the only incident in 54 years of existence), together with advances in technology, we made the decision to review the risk profile of the trading mechanism and address any perceived shortcomings. While there is a high level of trust within the industry, with very principled people across the production and sales process, we recognised that we needed to protect the interests of everyone in the case of an anomaly. In addition, we recognised that this would be an opportunity to accelerate and automate processes.
The catalyst for change was that one of the major producers wanted to enhance the collection process and approached its bank for help. However, there could not be different trade practices across producers, so there needed to be a new standard agreed across the industry. Consequently, the project was handed over to EATTA and a solution was developed from scratch.
We started in April 2009, and the project was completed by the end of 2009. The aim was to retain existing, familiar trade rules that have shaped the industry for so long, but to automate and accelerate the payment process, and enhance transparency for all stakeholders. We took a phased approach to the roll-out, starting first with a pilot project involving two brokers, gradually increasing to eleven. We then introduced more buyers. In all, the project took a year, with the solution in live operation on 26 March 2010. It involved a great deal of communication and collaboration, as the various stakeholders had very different needs, and we had to accommodate everyone’s requirements.[[[PAGE]]]
The process for distributing payments is now as follows:
The new system helps mitigate some of the original risks that we identified in a variety of ways, as outlined in figure 1. Essentially, by reducing the time between payment and release of tea, the period between purchase and shipment for buyers is shorter. All participants receive payment more quickly, and producers can pay their farmers promptly.
One of the primary benefits is that every stakeholder has direct visibility over the status of each consignment, whereas in the past brokers needed to deliver this information. Producers are often located a long way from Mombasa, but they are now in a position to pay farmers on time, as they can see remotely what has been sold, the sale price, and when they will receive the proceeds. This then enables them to obtain bank financing for these payments if necessary. Furthermore, every member is able to download information directly to import into their accounting system for reconciliation and posting without the need to input data manually.
In India, an electronic auction (eAuction) has been developed, compared with the physical auction that still exists in East Africa, although an electronic payment system has not yet been introduced in India. The eAuction has proved very successful so we are also looking to introduce a similar system in Mombasa. In reality, much of the data that would be required for an eAuction already exists in the payment system so we are well positioned to introduce this.
During our payment system project, there were inevitably some challenges along the way, as every organisation involved had its own concerns, and had to become accustomed to the new system. However, it took a relatively short time to gain this acceptance as business conventions remained unchanged. As we enhance our automation further by introducing an eAuction, we will seek to learn from the experiences of the trade association in India, as it is difficult to change business practices across a large number of participants. It is not in our interests to disadvantage any particular group, so we will adopt a similar implementation approach, with an initial pilot followed by a gradual roll-out across participants. We are currently preparing the pilot project which we will launch during the 4th quarter of 2010.
How Thought Leadership Can Reduce the Cost of Sales by Patrik Havander, Havander & Partners A focused attention on the costs incurred by the global sales and marketing processes is becoming increasingly important for corporate banks and their transaction banking departments. While the client/bank relationship remains vital, research has shown that in fact relationship selling […]
