Cotton CTRM and Commodity Management – An Overview

Cotton trading companies manage vast quantities of data across multiple teams and often, multiple systems. Manually managing these large data flows slows down operations and introduces a range of operational risks into the business, as well as making it more difficult to get the information needed for optimal decision-making.

Many older CTRM systems contribute to these challenges, but modern Commodity Management Systems can help address them by integrating your different data platforms and bringing your teams together, with added benefits including automated workflows and document creation to save time and reduce errors. In this overview, we explore many different elements of cotton CTRM and Commodity Management Systems, with links to further information on each topic we discuss. Read on for:

CTRM or Commodity Management?

CTRM, or Commodity Trading Risk Management, software has been around for several decades now. These systems help commodity traders manage financial and operational risks with features for managing counterparty and credit risks, positions, and market data tools. The actual depth and breadth of functionality provided varies considerably, especially in multi-commodity solutions where coverage for cotton may not be quite as complete as anticipated.

Commodity Management Systems subsequently evolved because of functional gaps in these traditional CTRM systems. Cotton Commodity Management Systems typically include all the features available in a standard CTRM, but also incorporate more of the supply chain. The major difference between these two types of system is that a Commodity Management System allows you to manage your operations in the same system as your trading and risk management. We will explore what this looks like for logistics, inventory management, and supply chain management below.

Breaking down these organisational silos and allowing data to flow between teams has many benefits for the entire business, including:

Improved collaboration
Improved efficiency
Better traceability
Better decision-making
Enhanced risk management

Find out more about the benefits of a Commodity Management System compared to a CTRM.

Flexibility is essential – particularly in cotton trading

Another potential pitfall of older CTRMs is that they tend to be less flexible and agile than modern Commodity Management Systems, and often don’t have the same depth of functionality when it comes to features that are specific to cotton.

Flexibility is especially important in cotton management systems as there is a great deal of quality data that informs both operations and valuations, and every organisation has their own way of processing and managing this information. And they typically also have multiple workflows, depending on regions, crops, and client locations. For example, some regions may include pre-payment based on take-up data, others may use gin files instead of take-ups, and others may use pre-takeup data.

Any cotton CTRM system should be able to manage all of cotton’s unique quality data fields and should also make it easier to use this information for valuation and pricing, and to update your records as the real-world data changes. But flexibility and cotton-specificity are even more important in Commodity Management Systems.

Because Commodity Management Systems automate your logistics workflows, these systems need the flexibility to handle any of the different processes that arise in cotton trading, and the unique ways your particular organisation manages them. They also need the flexibility to ensure your team can manage different crops or contracts through different workflows depending on the specific scenario, whilst ensuring that they all share the same high level of automation, efficiency, and operational risk management.

The power of automation

These automated workflows can play a role in many different aspects of your operations, including pricing contracts, creating and sending documents, updating reports, and notifying other business areas of actions they need to complete. A good Commodity Management System will also integrate with external software so that data can be shared between systems automatically and your business can operate within the one joined-up platform.

Automated workflows reduce operational risk as they ensure all your processes are being followed, and can include other controls such as alerting an operator if an allocation does not match the contract’s tolerance. They can also provide significant time savings across the business, in everything from importing HVI data and updating virtual lots, to creating shipping documents and recap reports.

Internal reporting is also automated, and data is shared across the business as soon as it is entered, with no need for busy traders and operators to re-enter information for reporting purposes. This means more efficient operations and better risk management, with decisions made more quickly and based on more reliable information.

The workflows also create a complete audit trail of every activity carried out as your people go about their daily roles. This means that you have complete traceability over all stock in your CMS and can trace any virtual lot back to the gin or farm of origination. And because the workflows are designed around your processes and accelerate day-to-day operations, every action can be carried out within the system, avoiding the risk of errors as well as the lack of transparency that comes from offline processes such as spreadsheets.

Ensuring your system has all the cotton-specific features you need

Cotton trading involves more complexity than most other commodities, so it is vitally important that any new CTRM or Commodity Management System can fully support that complexity for cotton traders.

Below, we explore some of the key activities that set cotton traders apart, and what they mean for the functionality that cotton CTRM and Commodity Management Systems need to provide. This functionality includes:

Pricing – the quality of cotton obviously affects its pricing, so it is important for a CTRM or CMS to be able to automatically calculate pricing based on your own formulae and any quality data you choose to use, including micronaire, length, and other HVI data.
Inventory and position management – with so many different quality fields affecting risk, pricing and allocations, inventories need to be viewable and controlled based on these quality fields. And the fields need to be easy to update across every record as the live information changes.
Workflows – as mentioned above, automation workflows need to be able to handle cotton-specific processes such as HVI data, but also crop-specific variations and your own custom processes.
Logistics – there can be thousands of bales attached to multiple shipment schedules in a contract, all with their own quality data to manage. Your system needs the specific functionality to manage virtual lots in bulk – creating shipping documents, managing lot references and weights, and creating container lists and recap reports.
Expert support – it can be easy for CTRM providers who have worked in other commodities to underestimate the complexities of cotton trading, so it is important to discover what specific experience the team have of working in cotton.

Explore what makes cotton different in more detail.

Zooming in on cotton logistics

Cotton logistics is complex largely because traders and operators need to manage large numbers of bales with unique quality data, and because regional variations mean that location has a significant impact on which processes contracts and shipments must follow.

A cotton Commodity Management System therefore needs to be powerful enough to simplify and automate bale management, whilst having the flexibility to manage these very different workflows concurrently.

For example, in Australia buyers need to create a RCTI invoice based on the number of bales, quality, and premiums and discounts. And as well as variations in standard processes, some regions may have more variation in processing, such as in Brazil, where contracts often include pre-payment after take-up approval, but equally can have on call or fixed pricing based on documents received or receipt at warehouse.

Information sharing can also take different forms. In Brazil, take-up files are standard, but they are not standardised, so different brokers may use different fields and formats. And Australian processes do not always include a take-up file, but instead can rely on the gin files. But logistics in Australia includes managing bale-by-bale packing lists that are not necessarily required elsewhere. Other regions, such as the USA may manage sales based on recap reports, whereas some use recap reports in shipping, or do not use them at all. And even HVI files can vary by geography, with some regions including more fields for each bale.

Logistics processes can also vary depending on where cotton is shipped next; exports require more document creation than domestic sales. Where a domestic sale needs a release note, overseas sales may also need an export packing order document with container numbers and seals, container packing list, inspections, and other shipping documents.

Other regional variations affecting cotton logistics.

Creating reliable cotton supply chains

Commodity Management Systems empower cotton traders to bring their entire business together in one place, creating more efficient operations and therefore more reliable supply chains.

Being able to manage cotton’s complex processes through automated workflows ensures that each process is followed accurately, reducing operational risks and the time needed to correct errors. And one of the major benefits of a good Commodity Management System is that it reduces organisational silos and allows the business to work as one, with traders, operators and risk managers all accessing the live information they need to make the best decisions quickly.

This means that operations can be faster and more responsive, and the team can identify issues as soon as they arise. And the traceability that comes with a good CMS also helps to power supply chain reliability as it allows your team to quickly identify any problem areas or unreliable suppliers through having ready access to all the information.

If your Commodity Management System can integrate with vessel tracking and warehouse systems to bring this data into your organisation in real-time, you can create even more reliable supply chains, both by making the best allocation choices and being able to proactively manage any disruption or delays. Your system workflows should also make it easier to step in when things go wrong, for example, by having workflow stages that allow for rejected shipments, and updating task calendars when ETAs change.

Your team can also work faster and in a more responsive manner as the Commodity Management System allows you to automate time-consuming inventory management tasks, such as data uploads, creating container packing lists, recap reports and risk reporting.

Creating more reliable supply chains.

Managing sustainable cotton

Sustainable cotton now accounts for 30% of the global cotton crop, with many different certification schemes that all have different requirements. Effectively managing sustainability data means that you can accurately price it and match sustainable cotton to the clients that are willing to pay a fair price, ensuring the best service for clients and the best value for traders.

As with other quality data, certifications should be managed at a bale level, whether the certification relies on self-certifying, chain of custody, or managing certificates. This is because certification needs to be managed as bales are split from their original lots and moved between warehouses and shipping containers in the real world.

Bales are managed in most Commodity Management Systems by virtual lots, which are a digital representation of the physical bales. In a good system, these virtual lots automatically update as the real situation changes, for example, when you receive HVI data or containers are loaded, so you have a complete picture of your operations. Managing sustainability data in these virtual lots is therefore as straightforward as managing any other quality data, as they ensure that sustainability attributes are tracked against every bale.

And as mentioned above, because the records in your Commodity Management System automatically update as lots move through your actual processes, you have a complete audit trail for every lot. This means unparalleled traceability and the ability to prove the provenance of any individual bale if required.

Explore cotton sustainability.

Introducing CommOS

CommOS Commodity Management System

So, having explored some of the benefits of cotton Commodity Management Systems in general, looking into the features of Gen10’s CommOS Commodity Management System specifically gives a better idea of just how much is possible.

Physical location management

As explained above, the virtual lots in CommOS allow you to view and manage inventory across physical locations. As containers are filled, bales moved, and HVI data updated, your virtual lot is updated by simply uploading the relevant warehouse or HVI file, so you know the exact status and location of every bale.

This physical location management is further enhanced by the cotton-specific workflows, which you can customise to your own processes too. Allocations are simple to manage, as contracts are automatically workflowed to operators when approved, with checks and controls to ensure operators are aware of all unallocated stock and that allocations match the contract’s quality specifications.

Location and inventory management in CommOS.

Traceability

The automated workflows in CommOS mean that your team are incentivised to manage every aspect of your business within CommOS or integrated systems as they accelerate and simplify many of the administration-intensive processes involved in commodity trading. And this means that you can trace stock back from the end client to the gin or grower of origin.

Traceability within CommOS extends to traders and risk managers getting a live view of physical positions, and if you choose to integrate systems such as vessel tracking software, they can even view positions for bales currently at sea, and their live ETA in port. You can also use this information to create more accurate Scope 3 carbon emissions reporting. Traders can also set up notifications based on inventory movements, and real-time management reports that update throughout the day.

Pricing

Contracts are automatically created within CommOS based on your own pricing formulae, with complete flexibility for traders to determine the best pricing strategies. The automated pricing tools calculate all premiums and discounts determined by the trader or by your standard formulae. And because CommOS automatically updates bale-level quality data whenever you upload new information, valuations and pricing can be re-calculated with a click.

Quality data

Uploading quality data to a CTRM can be a challenge as this data is not standardised, and can have many different file types involved in the process. And thousands of bales mean thousands of records to update.

However, CommOS automates the data upload process. Your team simply selects the file type, contract, and shipment, and CommOS will extract the data, even from PDFs, to create the lots or assign the updated information to them. When information is uploaded, CommOS can split virtual lots, create containers, and attach bales to these containers, all automatically in the background based on the file that updates your inventory.

These file uploads are designed to be flexible so that your team can upload any type of document by selecting it from your pre-programmed drop-down menu. You determine your own files and file types, and set your own workflows for what happens next, for example, whether you need to add a workflow to reject lots based on updated quality information when bales arrive.

Managing quality data in CommOS.

Document management

Cotton traders need to communicate with clients, banks, insurance providers, inspection service companies, shipping lines, freight forwarders, and more. Each partner requires different documents, and the volume alone means that the risk of errors when creating these manually is high. CommOS, on the other hand, automatically creates these documents based on your live system data, at the click of a button, and can be used to ensure they are sent on to the right counterparty or partner too.

You can generate packing lists that link to bale-by-bale HVI data and produce a quality recap report in just a couple of steps.

CommOS also provides a safe and secure central document storage location so the whole team can access the documents they need anywhere and at any time, with all documents linked to the relevant virtual lots and counterparties, even when lots have been combined or split during processing.

Managing cotton documents in CommOS.

5 steps to a successful cotton CTRM implementation

If your current CTRM system does not have all the time-saving and risk managing features described above, you may be considering an upgrade or replacement. For implementation projects, it can be helpful to consider the five steps below and have them in mind when speaking to potential system vendors.

Define the problem you want to solve. Most of our clients are looking to address multiple issues so we find it helps to sort these by urgency and importance. And retain some flexibility as vendors may be able to provide solutions to challenges you hadn’t considered initially.
Decide on the project team. As Commodity Management has an impact across the organisation, you may need wider involvement, and the project could be led by any department. At Gen10 we’ve worked with project leads from across commodity trading firms, including in trading, operations, finance, and sustainability.
Decide what results you’re looking for. You can’t determine whether the project is successful unless you know what you want to achieve. For example, what data and systems will you be integrating and what reports would you like to generate? Workflows are a particularly important consideration in cotton implementations as they need to be highly specific and based on both your optimal processes and any improvements the technology can add to them.
Think about your timelines. Is there functionality you need before a specific deadline? For example, a particular crop that you’d need to set up first?
Consider what go-live will look like. A more flexible CTRM gives you more go-live options, such as a limited proof-of-concept to generate wider buy-in, beginning with one team, or a big bang implementation. It’s important to find a vendor who really understands the cotton market and works with you to understand exactly what you need from a new system so that your implementation project works for you.

More information on successful cotton implementations.

Conclusion

The complexities involved in cotton trading mean that efficient logistics and effective data management can confer a real competitive advantage on cotton trading firms. Cotton traders therefore need a Commodity Management System that allows them to bring in more data more efficiently, integrate their diverse systems, and connect their teams like never before.

Commodity Management System implementations are not as complicated as they used to be, and you may be surprised to learn just how flexible both the systems and the implementation projects can be.

If you find that your current cotton CTRM leaves information gaps in your organisation, or your team are spending their time copying information between systems and reports, get in touch with us today to explore just how much your business could benefit from incorporating a better Commodity Management System.

The Importance of Effective Physical Contract Management in Commodity Trading