1995 KrY ARrA PAPFR: SECURrTY AND ECONOMY OF LTAF
SUPPT rES
Mission Statement
Growing: To produce a domestic crop of tobacco of
acceptable quality with a
lower in stock cost than comparable grades of
imported tobaccos
and thereby provide a distinct competitive edge.
Exports: To secure long term proritability of the
business; protect BArs
sources of supply; and ensure a cost advantage to
BAT vis a vis
the compedtion.
Purchasing: To coordinate all buying to ensure
security ofsapply-, and equal
or lower cost than the competition (grade for
graded
Blending To ensure superior smoldng quality of our
blends compared to
competition; that kafstock durations meet security
ofsupply and
ageing requirements; to have professional and well
trained
blending speciali ts for the future.
Overall: To protect and use our No I position in
leafworidwide to leverage
the business to our adv2ntage and wherever
possible to place our
competition at a disadvantage vis a vis security
of supply, quality
and price.
L Domestic Tobacco Production
IJ Quantity: Plans for domestic crop trust reflect
the Operating Companies
requirements for domestic use (based upon the
individual Opaating Company
duration policy) and for exports (see later
section on exports). Uncontrolled
expansion with "the hope" of exporting any
surpluses Cie no committrient) is not
acceptable.
1.2 Quality- Plans must show quality improvements
and how these will be obtained,
particularly with regard to improving grade
turnout.
1.3 Yield: Minimum target yields/ha must be set
for the next crop (1996) for each
type growTL Yields must show progressive
improvement. However, these
not be to the detriment ofquafity.
1.4 Price: annual cost of production surveys
(tobacco and competing crops) must
be carried out to establish realistic and
competitive purchase prices so that
&mers' returns stimulate the required production
without adversely affecting
essential food crop production. Export pricing
implications must also be
considered.
Net returns to f-kmers should be competitive with
returns achievable from non-
tobacco crops. Returns should be increased by a
combination ofimproved
yields, reduced real cost ofinputvlabour etc Cie
efficiency) rather than having to
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resort to automatic price increases; our firmer
base and he= our key source of
raw material must be protected and managed
effectively and efficimtly.
You should compare the cost ofyour domestic
tobaccos to the cost of
comparable quality leaf avalable from the
International market.
Your objective must be %o produce a domestic crop
aftoba with an in
stockrm warehouse cost (per kg) lower than
imported tobacc s ofcomparable
quaJiry' - otherwise why grow when you could buy
tobacco from outside
cheaper. However, cue must be taken not to
over-react to the volatile world
market situation by looidng at your position over
the medrum term (ie five years).
(Obviously fi-eight/dutylexchange rztes/forex
avatlability have to be taken into
consideration and it should also be remembered
that International prices are now
beginning to rise over the Plan period, as
previously forecasL)
1-5 Master Farmer Schemes: Each Operating Company
must have an established
scheme for identifying and rewarding (prizzs.
greater range of crop'
available, etc) the better &rmers. It is
appreciated that these &MU3 have
higher yields and berter grade ourturn. Plans must
clearly show you scheme
(Master farmer, category A farmers, etc), how you
intend to identify then
&rmers and actions to support and motivate them to
achieve berter quaUty and to
provide a greater parentage of your purchases.
L6 Afforestation: Every Operating Company using
woodfuel (for all or part ofthe
atring - fluelfire - and for barn construction,
etc) must have in affbrestation
programme with the objectives ofaclieving
selfsufficiency in wood supply over
the shortest realistic time period. Plans must
show target dates for scIf
sufficiency. The BATCo PoNcy on Affbrestation must
be adhered to.
Afforestation schemes should be based around
flumer plantings, and where
fi:asi,ble, be supplemented by company man- ed
plant ons. Improvements in
specific fuel constwiption (amount offbel used to
cure one kg oftobacca) must
be achieved, ie, targets set and actions shown.
Alternative Fuels - Each Operating Company must
review the use of alternative
fuels to ensure that opportunities are not lost in
terms of con/efficiency andlor
replacement ofwoodfuel to ease the pressure on
afforestation issues. Plans must
reflect current situation and plans for
alternative fuels ifapplicable.
1.7 Crop Chemicals: The selection ofand need for
crop chemicals must be
critically evaluated and updated. BATCo poUcy on
sa&ry in the use and storage
of such crop chemicals must be stringently Wowed.
1.9 Food Crops: Tobacco production must not affect
food crop production but
should also seek to enhance it through increased
yields from residual fatilisa-,
rotations, improved agricultural techniques etc.
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1.9 Crop F-xpenses: Must be monitored and
controlled effectively. Increases in
crop expenses (on a per kS Vven weiglu basis)
should be less than domestic
iriftation Cie real savings). These can be
achieved by, for example, reduced
man;ning levels, improved loan recovery, improved
yields and perhaps cv=
reo . . on ofthe maerksion fimcdon to achieve same
or better coverage.
Howc,ww, tobacco quality must not be prejudiced.
Crop exparWon automatically reduces crop exImnses
(onz per kg basis) which
can sometimes bide inefficiencies. It is therefore
extremely important to obtain
real savings and to ensure that we are competitive
even without any crop
expansion.
1.10 Crop Advances and Capital Leam- Many
Operating Companies still fund
crop mputs and cash advances themselves andtor
guarantee local bank advances.
The objective should be to not only utilise bank
loans and do away with the
guar=ee, but also to reduce and eventually
eliminate loans to &rtriers. It is fially
appreciated that this is not currently feamible in
all operations, but you must
seriously investigate how far you can go to
meeting thm objectives and to
clearly state what you intend to do and by when.
Crop uxputsicash advances and capital loans to
fiwmers can, depending on the
type ofgrowing programme, vary from Me ofthe value
oftobacco to be
purchased up to 600/a. There have been cases in
the past where dtis was even
higher and the growing programme almost collapsed
with excessive debts and
demotivazion offumem Each company growing tobacco
must cleady stat in
their plan outstanding loans/debts carried forward
from previous crops, planned
zdvances./loans for the budget year, the value
ofthese loans as a percentage of
the value ofthe crop to be purchased and recovery
targets. (Further details will
be fbrwarded with each Comparrys specific
Guidelines.) The objective must be
to reduce zdvances/loans (as a % ofthe value ofthe
crop to be purchased) to
reduce nsk Targets and actions required should be
cleady stated.
1.11 Safetr. AgriculturWextension safity is a key
issue (eg chemical use, tractors,
storage etc) and BATCo's policy on safity must be
stringently fflowed. A ze:
accident target must be set and will bemme part
ofthe nomW performance
appraisal assessment.
2. 'FxDort ofDomestic Tobaccos
7-1 Quantity: Domestic requirement must first be
Wy mcL Quantities growrV
produced fbr export should be based on firm
indications from deaferst customers
(these should be written indications in which case
they may not be legally
bin&g. or part ofthe contracaW agreement in which
case they could be
considered legally binding). Any production over
and above fim indicated
orders must be approved by LeafDepartment and the
FLBU. It is therefore
ext: en ely important to know your customers and
have tight contracts with
deafen. With the new scanario on world supply
(shortage developing) and prices
Cmcrming) there is an opportunity to consolidate
and recover export markets
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and profitability. This must be well managed with
the objective of securing long
term es.
7-2 Run of Crop: Exports should be run of crop
otherwise there is a danger of
debasing your domestic cigarette quality wbich is
unacceptable in any market and
even more serious in a .o..pcLi6vc market. If
exports are not run of crop it is
difficult to truly cost these exports and we would
question your profit figures.
2 j PricelProfitability: Exports must be
profitable on the accounting basis
established by BATCo Finance (paper circulated
December 1991), unless them is
an overriding need for forex earnings, however
ifthe latter is the case this must
be cleuiy stated in the plans and agreed by your
Regional Director. Exports
mu be profitable even without any local currency
devaluations. Devaluations
are a bonus and not a realistic reason fbr pushing
exports.
T'he 'BATCo LeafExport Policy", circulated to all
exporting Companies on
September 1 1993, clearly states the direction the
Group is taking with regard to
exports. The policy must be followed and any
exceptions can only be approved
by LeafDeputment and the RBU.
MzZins in a normal year should be sufficiently
large enough to cater for
fluctuating export prices (ic the world tobacco
surplus depressed prices in 1994 -
the 1995 recovery is expected to carry on through
to the 1996 crop - for 1997
we will have to assess the reaction to increased
prim an crop volumes and
supply/demand.
2.4 Other Factom Tobacco quality must be
acceptable, continuity of supply must
be assured, crop chernical residues must be below
perrnirted lavds, processing
specifications must be met, and infestation
controls well established.
2.5 Export Conti : LeafExpon Contract Guidelines
have been circulated- Each
Company must incorporate the
recommendationstpoints made in these Guidelines
when their respectrve Export Contracts are next
renewed (usually every year).
Again it is important to take advantage of a
rising export market to negotiate
longer term sales secinity to protect our business
if and when the next downt=
occurs.
3. GLT Processine
3.1 Quality Control Protocols: All Operating
Companies have already received the
new quality control protocols Cie methods for
measuring processing
specifications). Then must be implemented so that
youtwe have confidence in
the various specification measurements reported
and that the figures are
comparable over our industry. The new
International Coresta screens must be
used as they are an ingral part of the protocol,
and a BAT QC Audit Team has
been fbrmed to ensure complince.
3.2 Processing Spedfications: All Operating
Companies will be receiving the
updated processing specification targets (move to
redried targets with upper and c-n
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lower lirrtits to achieve unifbrmizyftnin~imise
variabihty). WhUst these are for
tobaccos purchased internationally by the total
BAT Group, they should be used
as a standard by afl Operating Companies. Most
companies must plan to meet
&M even exceed these standards and the targets
must be clearly shown in the
fbrthcoming Company Plans. Some companim with
older equipmalt, may have
difficulties in the short tam However, in these
cases progressive improvements
must be shownistated, actions required to achieve
this improvement and a target
date set for meeting/exceeding BAT standards.
Export cust mers processing specifications must be
met.
It is important to remember that the domestic
cigarette factory is also &
customer just like any export customer.
3.3 Processing Costs: VVhilst it is &Uy
appreciated that we need to upgrade plant
and equipment with the knock-on effec: of
depreciation increasing processing
costs, we must remain My competitive. Processing
costs in some operations are
still too high and every effort must be made to
reduce these, targets must be
shown and actions clearly stated to achieve these
targets.
3.4 Infatation Control: Good housekeeping and
cleanliness are the basis ofgood
infestation control. The selection, use and
storage ofinfestation control
chemicals rm= be strictly in accordance with BATCo
poficy (isstied February
1992 with updated additions).
4. Imoorted Tobaccos
4.1 Purchase Requirements: All order3lrequirements
for imported tobaccos must
be placed through BATCo LeaMepartment, Woking. who
are respo=ble for
coordinati~ng, supervising and negotiating prices
for Group purchase&
4-1 Buying Commission: The BATCo Board have agreed
to a standardised
worldwide buying commission of3% which is now
appficable to aH tobaccos
from all supply sources. Wherever possible the
commission w0 be built into the
asgreed prices to aZow proper comparisons to be
made. Otherwise it wiU be
charged directly to the customer.
4.3 Import Restrictions: Where imported tobaccos
are essential to enhance the
smoking quality ofdomestic tobaccos and thus
provide a competitive advantage,
Government pressure to reduceleffininate imports
must be resisted.
4.4 World Supply/Stocks: With the end ofthe world
surplus situation in sight, a
dramatic shift to a shortage position is imminent
for afl types oftobacco. Prices
reached their low point in 1994 and an upturn,
necessary to support and
stimulate the E=er and tobacco production. is now
in progress. However, the
dramatic change in the economic situation in
Brazil, (a major player/supplier to
the world market) is exacerbating the price
scenario; the exceptions are those
sources with a market support system (eg USA,
Canada).
M.)
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Most major supply countries cut production in 1994
and have not increased 1995
production to force the sale of surplus stock and
revitallse the world market As
a result, the quantity to be =ded in 1995 is not
likely to change and therefore
may well be below world trade requirements.
1996 production ofall types is likely to increase
in response to this shift in overall
supply and reaction to higher prices. However, due
to the lead time of an
agricultural crop, major supply problem could be
prevalent in 1996 forcing
prices to increase fixther.
It is essential to protect the supply ofthe raw
material and green leafprices can
be expected to inc. Suppliers/dealers margin we
also c9ected to be forced
up as they try w compensate for losses4ow
profitability of 1993/1994.
Together these fi=ors will have a major influence
on prices in 1996. The fear ~s
what will happen in 1997/1998 ifproper and sc=ble
man- ement ofthis
situation does not occur.
The situation continues to be volatile and BATCo
LeafDepartmem win provide
updated information through their quarterly
review.
4.5 Visits: BATCo LeafDepartment have to approve
and coordinate all Visits from
BATCo Operating Companies to major producing
areas.
5. Stock Duration Policy/Stor-k Rer;-ters
5.1 Durations: BATCo Operating Companies must
establish stock duration levels
within the policy guidelines Sim by the BATCo
Board, re=pising the intrinsic
differences between "filler' and "Imur' tobaccos,
the ageing period required
and the use oftwo crop blending fbr flavour grades
- essential contributors to
smoking quality and hence consumer acceptance.
However, given the volatile natum of sales in
camin markets and the tobacco
supply scenario (see above~ BATCo Operating
Companies should work ad1bin
;he flexibilitv aim in the auidAin- to mairztain
higher than normal stock
durations ofthose imported tobaccos considered to
be at risk or to take
advantage of attractively priced tobaccos.
Any decision to purchase extz tobaccos at
attractive prices against future
requirements must be first approved by BATCo
LeafDcpa=cm and the
Regional Director. years
5.2 Stock Registers: Both the Imported Tobacco
Stock Register and a Domestic
Stock Register are now operational. BATCo
Operating Companies are required
to participate in returning information for these
schemes so that better control
and potential movement ofstocks can be organised
within the Group.
co
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6. Functional ExDertise
6.1 Recruitment: BATCo Operating Companies must
continue to recnlit high
calibre, high potential local national leafstafE
Particular ernphasis must be Sim
to recruitn=t for leafblending and product
developmenL
6.2 Training: Training/developmem programmes must
be drawn up and carried
through for all managers identified as having high
potential with particular
emphasis on the LeafFunctional Training Courses
being offiered by Souza Cruz,
the Oriental Courses being offered by BATCo, the
Blending Courses being,
offered by BATCo and a GLT training/development
programme currently being
developed by a subcommirtee ofthe LTG WTmding
Group). All leaf
managers should at some stap oftheir career attend
a detailed finance course
and need to be My aware ofthe financia impact
oftheir decisions on the
Company as a whole. AN requests fbr training must
be channelled through
BATCo LeafDcpartrncnt who will approve and assist
companies with their
training requiremc=.
6-3 Regional Blenders: BATCo Operating Companies
should maintain close Haison
with their Regional Blender, calling on his
services when required.
6.4 Blenders: The TSG initiative on Career
Development for blenders emphasises
the need to reward blenders and product managers
as specialim.
6.5 New Business Developments: The current
initiatives into Emern Europe/the
Former Soviet Union and the Far Eau could well
result in an inc=sed
requiremem for experienced lezfpcrsonneL These wiH
first be sourced int=ally
from within the Group. It is therefore imperative
that you train and develop high
ffiers as quickly as possible and tha you have
succession plans in place to allow
the Group to call upon Operating Companies to
provide leaf personnel
(Imernatioaal suff and local staff for 2 year
attachments) if and when required.
MW.&I"
21 MWft 1"s
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