An all too common problem for trade related businesses is one of unexplained losses, in other words fraud, usually perpetrated by staff members. The warehouse is the most prized location for any trader as it's where the businesses biggest assets resides. Once the product been traded arrives, the race is on to get it back out again, either transported or picked up by the buyer(s). Unfortunately the problem of stock theft is a prevailing issue that negatively impacts on a business in more ways than one. What may seem like a harmless kilo here and here to the Warehouse staff is more than revenue lost to the trader.

Imagine the scenario 10,000 metric tonnes of cashew arrives in the warehouse on the port, waiting to be picked up by the freight forwarding company who'll load the container on to the vessel to Vietnam. The cashew was purchased using a factoring facility due to lack of working capital, the exporter has to wait 14 days for the cashew to arrive in Vietnam then another 45 days after that for the bank that provided the facility to pay the difference between the facility and what the buyer is paying. During the weigh-in with a representative from the buyer's company only 8,000 metric tonnes are weighed. Yet 2 days ago, when the cashew arrived, the delivery weighed 2 tonnes more. The trader has not met the promised volume of cashews, damaging his reputation with the buyer. Every effort has now got to be made to ensure they don't lose the contract.

The buyer who's selling on to food processors in Vietnam will not be able to fulfil one the processors order. The best they can hope for is to increase the volume of cashews ordered from one of their other suppliers, inform the buyer at their end that either they deliver in two batches or delay for a couple of days and deliver everything together. They offer monetary compensation for the inconvenience caused. Both seller and buyer have to take a financial hit.

If it is a larger exporter doing something like 50,000 metric tonnes, they will have worked hard to secure a letter of credit (LC). The moment the issuing bank becomes aware of any ongoing losses, the LC will be withdrawn. The exporter now has to go through the process of finding another bank that can issue an LC whilst trying to convince them that the fraud issue is under control. Unfortunately this can take months plus there are limited number of banks on the continent that have the investment rating to be able to issue an LC at the value of what would be required for this transaction. The search then begins in international markets.

All of this from a seemingly inconsequential couple of kilos of cashew.

There are 3 choices here:

  1. Sack all the warehouse staff, recruit new ones and hope they're trust worthy. Hope is not a business strategy however. In an environment where theft of stock is deemed harmless, the exporter is fighting a losing battle
  2. Keep the warehouse staff, talk to them, make threats and hope they reform their ways. As above the behaviour is likely resume following a period of non-activity lulling the exporter into a false sense of security
  3. Both of the above could work but the reality is that it won't resolve the problem in the majority of cases.

  4. Both of the above and appoint a collateral management company. This is the safest way to resolve the problem

Whilst appointing a collateral manager means additional cost on top of existing warehouse staff and is not an option for rural traders, the benefit outweighs the cost. Their job is to prevent loss.

Benefits of a 3rd party collateral manager:

  • Their appointment reduces credit risk in a trade transaction
  • The security of the warehouse becomes their responsibility, tracking and recording all collateral and people movement in and out of the warehouse
  • An independent pair of eyes at the loading or disembarking vessel helps to prevent disputes with buyers especially around weigh-in disparities
  • Local banks and trade finance providers work with collateral management companies often appointing them as part of the criteria for lending capital or issuing an LC especially if the product being traded has been put up as collateral. A business owner self-appointing gives the financial institution comfort over the security of the collateral and the credit
  • They can contribute to improving warehouse operations plugging efficiency gaps they identify. It's important to note that a process must be in place already however
  • It opens up another financing option for commodity traders - warehouse receipt finance also know as agricultural commodity financing

That said, fraud has known to be an ongoing issue even with the appointment of a 3rd party Collateral Manager in some instances. The individual appointed to the warehouse simply colludes with the warehouse staff. There are many with tarnished reputations on the continent. In response, collateral management companies have put liability insurance in place to cover for any such act alongside procedures to disincentivise their staff from succumbing to temptation. If you are considering using a collateral manager, make sure you do your homework, appoint an approved and regulated company. Also get recommendations by asking your bank who they use as well as asking other business owners.

In the meantime, the battle to find trustworthy warehouse staff goes on.

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