Strategic Cost Management of Tea Industry:
Adoption of Japanese Tea Model in Developing Country Based on Value Chain Analysis
Sheikh Mohammed Rafiul Huque
Abstract
The products of the agriculture industry occupy a major portion of international trade. Export of agricultural
commodities from developing countries consists of tropical beverages (tea, coffee, cocoa) and other agricultural
products such as, bananas, sugar, oilseeds and natural rubber. Beverage like tea comprises a major fraction of the total
export of the agricultural products of the Asian countries. Tea industries in the developing countries of Asia are facing
huge competition. There also exists inefficiency in the value chain management in the tea industry especially related to
land management and plucking efficiency and manufacturing cost. This in fact hinders the growth of this industry. Value
chain analysis is one of the main components of strategic cost management. That is why the objective of this paper is
to investigate the structure of value chain of the tea industry and associated problems in the developing countries. This
paper attempts to find a strategic solution examining the strategic accounting model adopted by the developed countries
like Japan. It examines and compares the value chain models that are adopted by the tea industries of Bangladesh
and Japan. It has been observed that tea estate managers of Bangladesh are reluctant to maintain tea bushes which
actually cut down the level of production and create anomaly in the value chain and provide less yield and low price.
It is observed from the analysis that age of tea bushes has significant influence on production and young bushes have
very significant influence on production of tea. Bangladesh tea industries possess 82% of the tea plantation area which
has mature, old and very old bushes. The old bush plants comprise 42% of total tea producing area. The low yield tea
estates possess large number of old bushes. About 40% of the tea estates of the country produce less than 1,000 kg. tea
per hectare. About 50% of these low yield tea gardens produce less than 600 kg. tea per hectare. If the low yield gardens
had more young bushes, production would increase to 3,818 kg./hectare if other variables remain constant. On the other
hand, Japanese tea industries observe a very good operating result by introducing smallholding farmers cooperative
model. Strategic cooperative alliance model developed in this study in the light of Japanese cooperative model can
help the poor performing gardens of Bangladesh to device an appropriate strategy. This model can help to avert the
risks associated with the management of bushes. The firms can use funds of the cooperative for managing bushes and
modifying the manufacturing unit. It is understood that the adoption of this model by the tea industries of Bangladesh
will enhance tea production significantly. It is also found from cost analysis that SCA gardens will get higher profit after
the implementation of SCA model.
Key words: Strategic cost management, value chain analysis, smallholding farmers cooperative association, strategic
cooperative alliances (SCA) gardens, strategic growers, target costing, tea area, bush management
56
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横浜国際社会科学研究 第 11 巻第 4・5 号（2007年 1 月）
Introduction
The agriculture industry occupies a major portion of international trade. In recent years, though many countries are
shifting towards secondary activities or industrial activities, agro-based industry still plays a very significant role in their
economy. The agriculture products of the developed countries mainly comprise food grains like wheat, rice and coarse
grains. These commodities comprise a sizeable portion of their export. Developing countries, on the other hand, export
agricultural commodities such as, tropical beverages (tea, coffee, cocoa), bananas, sugar, oilseeds and natural rubber.
Malaysia is the largest producer and exporter of palm oil and occupies third position in rubber production. Sugar is the
main export items of Mauritius, which comprises about 56% of aggregate output.
Tea export markets of world are mainly dominated by China, India, Sri-Lanka and some other Asian countries like
Bangladesh, Indonesia. On the other hand, South American countries hold the lion share of coffee market. However, in
Fig. 1 it can be observed that trade balance of agriculture products in the developing countries is very significant in the
area like fruits and vegetables, tea, coffee and cocoa. Besides, these products are facing huge price competition due to
almost constant demand. This may be due to their low population growth. A reverse situation can be observed in cereal
consumption in the developing countries. Demand for cereal in the developing countries fluctuates due to the scarcity of
foods. An introduction of an effective value chain management system with an emphasis on strategic cost management
could help the developing countries to secure a sizeable export market share with proper brand image.
Literature review
Shank and Govindarajan (1993) state that strategic cost management results from a blending of value chain
analysis, strategic positioning analysis and cost driver analysis. Among these three core concepts, value chain analysis
occupies a significant influence on other concepts of strategic cost management. Porter (1985) introduces the concept
of value chain for the strategic improvement of firms or industry. This concept is further developed by Shank and
Govindarajan (1992, 1993). It is observed that the core idea of value chain is linked to the set of value creating activities
all the way from basic raw material sources to component supplier through the ultimate end-use product delivered to
the final consumers hands. Shank and Govindarajan (1993) mention that if the value chain can be expressive, strategic
decision can be made more easily basing on the understanding of the firm s competitive advantage. Porter (1980) states
that the basic choice of a business to compete either by having lower cost (cost leadership) or by offering superior
products (product differentiation). These two approaches seek very different conceptual frameworks (Dess and Devis,
1984; Gilbert and Strebel, 1987; Hall, 1980; Hambrick, 1983). The introduction of cost leadership or differentiation
strategy depends on managerial decision making and the nature of business. The introduction of cost leadership strategy
in the commodity business during the mature stage of business seeks careful analysis to attain the target cost. In this
situation, proper setting of target cost can help the firm to secure a position in the industry. Several studies have focused
on strategic cost management especially value chain concept and target costing concept of the manufacturing and
service industries. Chen et. al. (1997) do research on US based Japanese subsidiaries and they try to find out practice of
accounting system in those subsidiaries. The study concludes that US based Japanese firms practice similar management
accounting methods of target costing, value engineering, variable costing and strategic adoption of traditional methods
such as standard costing and budgeting like Japanese use the concept of activity based costing and internal rate of return
to evaluate the main firms. This study also concludes that US based Japanese firms are also influenced by US firms
to adopt the concept of activity based costing and internal rate of return to evaluate the capital investment projects.
Shank (1996) focuses on conventional Net Present Value (NPV) framework and relates this concept to strategic cost
Strategic Cost Management of Tea Industry (Sheikh Mohammed Rafiul Huque)
50
Cereals and
preparations
Tea, coffee, cocoa
20
Fruits and
vegetables
−20
2000
1999
1998
1997
1996
1995
1994
1993
1992
1991
10
1990
US$billion (current price)
30
0
57
Livestock
40
− 10
（563）
Natural rubber
Sugar
Bananas
−30
Oil corp products
−40
Year
Figure 1: Trade balance of developing countries
Source: Bruinsma (2003)
management for decision making purpose. He does an in-depth study on US firms and he gives suggestion based on
strategic cost management issues like value chain analysis, cost driver analysis and competitive advantage analysis.
Kato (1993) concentrates on target costing approach in Japanese companies with a motive of cost reduction. He explains
that information system is necessary for the adoption of target costing philosophy. Li and Whalley (2002) focus on
telecommunication industry s deconstruction and reconsolidation from transaction cost perspective and suggest how this
can be managed. Maitland et. al. (2002) study the European market for mobile data and possible form of the industry
wide value creation. On the other hand, Chang and Hwang (2002) undergo an intensive study on US and Hong Kong
manufacturing and service industry concentrating on value chain cost analysis.
Strikingly, no study was done on agriculture industry, especially on tea industry, with a focus on the strategic cost
management. Hazarika and Subramanian (1999) explain the technical efficiency of production factors in Assam tea
industry in India using Stochastic Frontier Production Function Model. Their study concentrates on the productivity and
production factors. This study does not adopt a value chain method, which is generally thought as an essential analytical
method for tea industry. Ariyawardana (2003) in an intensive study on value added tea producers in Sri Lanka examines
the sources of competitive advantage and studies how it relates to the performances of the tea growers. His study
provides a deep understanding of this issue from the management point of view but fails to appraise the value chain and
strategic solutions.
Objectives and methodology
The main objective of this paper is to find out the value chain system of the tea industry of the developing countries
and associated problems and side by side attempts to underscore the strategic solution in the light of the strategic
accounting model of the developed countries. This paper will further focus on the issues which affect the developing
countries tea industry and attempt to find an alternative solution to the problem. Moreover, this paper also focuses on
target costing approach which is one of the cost management tools.
Two countries, such as Bangladesh (a developing country) and Japan (a developed country) are selected as study
areas. Primary data for this study were collected through personal interview from two Japanese Tea Cooperative
Associations in Shizuoka prefecture and also from Japanese Tea Research Institute. Secondary data was collected from
Japanese Tea Industry Association. Data on structure of value chain in Bangladesh and their associated problems were
58
横浜国際社会科学研究 第 11 巻第 4・5 号（2007年 1 月）
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collected from Bangladesh tea industries. These data were collected through personal interview from four tea estates in
Bangladesh. These tea estates were selected based on ownership of these tea estates and level of performance. Besides,
cost related data were collected from nineteen tea estates based on their level of performance. In addition to these,
data on tea production, age of bush, price and yield of tea were collected from Bangladesh Tea Board, Bangladesh Tea
Association and from reports prepared by the organization of tea auction market in Bangladesh.
Background of tea industry and general problems
Use of tea started in 2737 BC when the Chinese Emperor, Shen Nong drank hot water with a mixture of
dried leaves accidentally from a tea plant unknown at that time. The concept of tea later on moved to Japan (An
Environmental Educational Program of the Prague Post Endowment Fund, 2003). Until now the Japanese people
remember a Buddhist priest, named Yeisei, as the Father of Tea in Japan, for his contribution to the spread of tea
drinking habit to the Japanese. Gradually, tea drinking has become a ritual in Japan. This habit later on had spread to
Europe by the Dutch and English people (The History of Tea, 2006).
During the British regime plantation of tea spread in India, Sri Lanka and Bangladesh. The colonial British
administration started tea plantation in the Indian subcontinent at the beginning of nineteenth century. Gradually tea
industries of the sub-continent have become a major producer of tea of the world. According to a recent report, India,
Bangladesh and Sri Lanka account for 55% of world production of tea (社団法人日本茶業中央会， 平成18年).In
recent years the dominance of these countries in the world tea market declines as some other countries like Kenya,
Indonesia, Vietnam, and Malawi are coming up with good quality tea with quite competitive price. At the global level,
tea industries is facing the problems such as rise of production cost, market stagnancy and sometimes fall of price. The
tea market observes a stagnant period in the recent years as the world demand and supply gap is not large. Sometimes
the supply of tea becomes too much and which in turn dulls the market situation. For this reason, the present world tea
industry is facing competition in quality production. The average market price was US $1.35 in 1992 and this price
dropped to US $1.24 during 2002 (International Tea Committee, 2003).
World tea industry scenario: Production and export
Major tea production in the world is limited to only few countries and among them China and India occupies a
major portion of the production share (28% and 20% respectively). Kenya, Sri Lanka, Turkey, Indonesia and Japan
produce about 3% to 10% of the total share of production. In addition, Bangladesh, Malawi and Argentina contribute to
some extent to this industry with a small share of around 2% for each country (社団法人日本茶業中央会，平成18年).
In Fig. 2 the trend of tea production of the major producing countries of the world are shown. It can be observed that the
production of tea in China, India, Kenya, Sri-Lanka and Vietnam are growing steadily with minor fluctuations.
Sri Lanka leads with 19% export market share and China and Kenya hold second position with a 18% of the market
share. India, Vietnam, Indonesia and Argentina on the other hand, occupy 11%, 6% and 4% export share respectively.
Bangladesh has less than 1% of export market share and it seems that its export is gradually declining (社団法人日本
茶業中央会，平成18年).
Tea industry and its value chain: A comparison of developed and developing countries
There are two major types of tea: Green tea and black tea. The process of production of the green tea is quite
different from black tea. Steaming of green leaves is needed after the withering stage of green leaves. The process of
production of green tea should skip the fermentation stage just to prevent oxidization. The oxidization process turns the
Strategic Cost Management of Tea Industry (Sheikh Mohammed Rafiul Huque)
1,000
Bangladesh
Malawi
Tanzania
Argentina
China
India
Indonesia
Sri LankaYear
Year
Indonesia
Sri
Lanka 1980
Japan
Sri Lanka
Turkey
Turkey
Vietnam
Japan
2005
Japan
Vietnam
2005 Vietnam
19952005
1995
1995
1980
1980
1980
Kenya
Bangladesh
Kenya
Malawi
Bangladesh
Tanzania
Malawi
Argentina
TanzaniaChina
India
Argentina
Kenya
Indonesia
Kenya
Bangladesh
China
SriBangladesh
Lanka
Malawi
Malawi
India
Turkey
Tanzania
Tanzania
Japan
Argentina
Indonesia
Argentina
China
Vietnam
Sri Lanka
2005China
India
India
Turkey
Indonesia1995
1000 ton
Turkey
Japan
59
Kenya
Kenya
900
1,000
1,000
900
800
900
800
1,000
800
700
700
900
700
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500 1000 ton 700
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200
100
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100
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-
（565）
Year
Vietnam
2: Majorcountries
tea producing countries
Fig 2: Major teaFig
producing
Bangladesh
Kenya
Malawi
Bangladesh
Tanzania
Malawi
Argentina
Tanzania
China
Argentina
India
China
Indonesia
India
Sri Lanka
Indonesia
Turkey
Sri Lanka
Japan
Turkey
Vietnam
Japan
Vietnam
Fig 2: Major tea producing countries
Figure
2: Majortea
teaproducing
producing countries
Fig
2: Major
countries
300
250
Malawi
200
Bangladesh
150 1000 ton
100
England
China
Vietnam
Kenya
Sri Lanka
India
Indonesia
Argentina
Bangladesh
Tanzania
Malawi
2000
1980
Year
1990
50
0
Tanzania
Argentina
Indonesia
India
Sri Lanka
Kenya
China
Vietnam
England
Figure 3: Major tea exporting countries
color of tea leaves into brown. For this reason the color of processed green tea is green. On the other hand, black tea
possesses nice flavor and light brown color due to the effect of oxidants, which makes tea leaves brown (Chaudhury,
1989). Besides, to prevent oxidization special type of processing, handling and storage are needed for green tea.
Japanese tea industry
Background of Japanese tea industry
Green tea occupies a substantial portion of Japanese tea industry and it is harvested four times in a year. Each
harvesting season has its name. In Japanese language ichibancha, nibancha, sanbancha, yonbancha, mean as first
pluck, second pluck, third pluck, and fourth pluck respectively. The first plucking season of green leaves is April May.
This harvesting period is called ichibancha and this type of tea is considered as the best quality tea in Japan. Moreover,
ichibancha occupies an important status in Japanese tea industry due to the good price and large quantity of production.
横浜国際社会科学研究 第 11 巻第 4・5 号（2007年 1 月）
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20,000
2,500
18,000
Production of Shizuoka
Price
Production in ton
16,000
2,000
14,000
12,000
1,500
10,000
8,000
1,000
6,000
4,000
Price in Yen
60
500
2,000
-
First tea
Second tea
Third tea
Fourth tea
Tea plucking cycle
Figure 4: Production and price comparison of Japanese tea
The quantity of production reduces gradually from nibancha (June) to yonbancha (September October) periods. Due to
this reason, most of the farmers attempt to capitalize their investment during the first pluck time (Hibiki-en, 2006).
Fig. 4 depicts the production and price of tea of the largest tea producing area of Shizuoka prefecture in Japan. This
prefecture produces 45% of Japanese tea. It can be seen that the price and quantity of production of Japanese green tea
remain high during the first pluck. Price gradually declines from 2,327 yen to 1,117 yen from first to second pluck (社団
法人日本茶業中央会，平成18年). From the graphical analysis it can be concluded that the tea gathered from the first
tea plucking (ichibancha) comprises lion share of the tea production.
Value chain structure of Japanese tea industry
The value chain of Japanese tea industry begins from tea farmer and tea processing plant. It belongs to a group
of farmers who runs the business with cooperative farming system. The farmers pluck green leaves depending on
the capacity of the processing plants. Managers actually decide how much a farmer should pluck and this decision is
taken on the basis of the capacity of production of the manufacturing plant on a specific day. The manufacturing plants
process the green leaves up to aracha1) and agents keep in touch with the processing plant to fix the price and rank the
quality of aracha. The agents keep contact with the processing companies/distributors and also the cooperative farming
associations who sell aracha. The distributors process aracha into final green tea, then grade them and finally sell them
to retailers (Fig. 5).
Bangladesh tea industry
Background of Bangladesh tea industry
Tea is a major cash crop as well as a consistent export earner of Bangladesh. The structure of industry of the
country differs from Japanese tea industry. The garden size and management structure are quite different in Japan. In
Bangladesh, on average the area of a tea estate is around 337 hectare. At present there are very few newly established
smallholding tea gardens operating in the north-western part of Bangladesh. They have very insignificant contribution to
the tea industry of Bangladesh. The first tea garden was established in 1857 at Malnicherra, two miles away from Sylhet
town, situated in the north-eastern part of Bangladesh. The British companies were the pioneer of tea plantation in
Strategic Cost Management of Tea Industry (Sheikh Mohammed Rafiul Huque)
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61
Figure 5: Shizuoka prefecture tea market value chain
Source: 社団法人日本茶業中央会 (平成18年) (This figure is translated from Japanese to English)
Bangladesh. By 1903, there were 15 European planters in Northern Sylhet, 102 in Southern Sylhet and 26 in Habigonj
district of Sylhet (Sana, 1989). At present Bangladesh has 162 tea gardens and among them Sterling Companies2)
operate 28 gardens and 128 gardens are operated by Bangladeshi owners (National Tea Company, Bangladesh Tea
Board, Private limited companies and proprietary owners). Besides, six gardens are operated by smallholders which
are situated in the north-western part of Bangladesh. At present about 51,825 hectare of land is under tea cultivation in
Bangladesh. This occupies around 46% of total area allocated by the government for the purpose of tea production. Due
to the lack of appropriate initiative, 11,406 hectare of land is remained outside tea cultivation (Bangladesh Tea Board,
2004). It is understood that inefficient management and very old age bushes adversely affect tea production of the
country. If this situation persists Bangladesh may become a tea importing country in the near future (Fig. 6).
Aging of tea bushes drops tea production and this is a big threat for the sound growth of the tea industries of the
country. Undertakings strategic decision may help to overcome this situation and make the tea production profitable.
Fig.7 depicts the situation of tea bush depending on various age groups. The tea industry of Bangladesh comprises 82%
of the area and these areas contain mature and old bushes. The old bush area comprises 42% of total area. Moreover, a
large portion of the total cultivated land is left with late mature stage plants (Bangladesh Tea board, 2004). It seems that
the smooth development of this industry may be at stake.
Value chain structure of Bangladesh tea industry
The value chain of the tea industry of Bangladesh concentrates on tea estates rather than on farmers cooperative
mechanism. The quantity of production largely relies on large and small tea estates, which is quite opposite to Japan.
Most of the tea estates in Bangladesh have tea manufacturing plant. Each tea estate is involved in the process of
plucking tea leaves up to the delivery of product to the broker s premises.
Most of tea estates do not manage the land under tea cultivation properly, that is why the quality of tea leaves
becomes inferior. Besides, lack of appropriate handling practice and suitable withering of green leaves downgrade
the quality of processed tea. In case of Japanese cooperative mechanism, before buying the green leaves from each
tea farmer, quality measuring section of the each manufacturing plant grades the quality of green leaves adopting a
sampling method. The price of the lot is fixed on the basis of quality. This type of rigorous procedure does not exist in
Bangladesh. Each tea estate should go under the specified process (Fig. 8). After the bulk packaging on premises of the
62
横浜国際社会科学研究 第 11 巻第 4・5 号（2007年 1 月）
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70
60
1,000 ton
50
40
30
20
10
0
1980
1985
1990
Year
1995
2000
2004
Production
Export
Domestic consumption
Fig: 6 Production, export and domestic consumption trend of Bangladesh tea
Figure
6: Production, export and domestic consumption trend of Bangladesh tea
Source: 社団法人日本茶業中央会 (平成18年)
45%
40%
Percentage of area
35%
30%
25%
20%
15%
10%
5%
0%
Immature
Young
Mature
Old
Age of the tea bush
Bangladesh tea
on on
bush
age group
FigureFig:
7: 7Bangladesh
teaarea
areabased
based
bush
age group
tea estate, the processed black tea is sent to the broker s warehouse. The delivery and partial storage cost of the broker s
warehouse is carried by the individual tea estate. The total value chain process is shown in Fig. 8.
There is no cooperative farming system in Bangladesh which is quite opposite to Japanese industry. Cooperative
manufacturing system helps to share the leaf production risk among farmers. In Bangladesh, tea gardens are owned
by companies. Companies take all risks. In Japan, the smallholding farmers cooperative associations have their
own manufacturing system and they have the capacity to meet the demand of the peak season. On the other hand,
Bangladeshi owners do not have any powerful manufacturing capacity which can meet the demand of the peak season.
In addition to this, Japanese smallholding farmer s cooperatives get fund from the cooperative association for replanting
tea bushes. Farmers who can show good performances get extra monetary incentive after the selling of the aracha at the
end of the year. This system does not exist in Bangladesh.
In Bangladesh, black tea is sold through auction market by open bidding. In the auction market, on behalf of the
Strategic Cost Management of Tea Industry (Sheikh Mohammed Rafiul Huque)
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63
Figure 8: Value chain of Bangladesh tea industry
Table 1: Regression analysis of area under tea and the production level
Model
1
r
0.898
r2
0.806
Adjusted r2
0.802
Std. Error of the Estimate
206161.4252
Coefficients
Model
1
(Constant)
YOUNG
MATURE
OLD
Unstandardized Coefficients
Beta
−80805.240
3817.495
1941.185
656.394
t
Sig.
−2.928
6.189
9.025
4.993
0.004
0.000
0.000
0.000
Dependent Variable: PDN
bidders, tea tasters judge the quality of tea from each lot by tasting samples and the price is determined accordingly.
Due to the above mechanism in auction market, good quality tea gets higher price comparing to inferior quality tea. In
the auction market both local and foreign buyers participate. Mahmud (2004) observes that the demand of tea in the
market of Bangladesh is increasing by 3.5% each year and the supply of tea is increasing only by 1% each year. This
high domestic demand is also increasing the level of price. If the price of tea gets higher than the expected price, foreign
buyers may become reluctant to buy tea from Bangladesh and they may switch over to other foreign markets.
Data analysis and strategic decisions
Earlier parts of this paper discusses the current situation and problems of the tea industry of Bangladesh and its
value chain structure and attempts to compare them with the tea industry of the developed country taking Japan as an
example. This study adopts some statistical analyses to test the previous findings drawn from theoretical analysis. It is
understood that a combination of theoretical and statistical analysis may provide strategic solution for the tea industry of
Bangladesh.
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横浜国際社会科学研究 第 11 巻第 4・5 号（2007年 1 月）
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Table 2: Regression analysis of yield of all tea estates and price
Model
1
R
0.517
r2
0.268
Adjusted r2
0.261
Std. Error of the Estimate
7.0283
Coefficients
Model
1
(Constant)
YIELD_HA
Unstandardized Coefficients
Beta
50.786
8.998E-03
t
Sig.
28.111
6.396
.000
.000
Dependent Variable: PRICE
Relationship between production and tea bush age
This part at first concentrates on area under tea depending on different age groups of tea bushes and their
relationship with tea production. The model is given below:
Here,
Here,
Here,
Here,
Here,
Yˆ � a �bˆ1x1 �bˆ2 x2 �bˆ3 x3 ��
=Production
Production
level
(PDN)
Production
level
(PDN)
level
(PDN)
Ŷ
Production
level
(PDN)
Production
level
(PDN)
Ŷ ===
Young
bush
(YOUNG)
[4-10
years]
Young
bush
(YOUNG)
[4-10
years]
Young
bush
(YOUNG)
[4-10
years]
Young
bush
(YOUNG)
[4-10
years]
Young
bush
(YOUNG)
[4 10
years]
x1111 ====
x 2 = ==
Mature
bush
(MATURE)
[11-40
years]
x
Mature
bush
(MATURE)
[11-40
years]
bush
(MATURE)
years]
= Mature
Mature
bush
(MATURE)
years]
bush
(MATURE)
[11 [11-40
40[11-40
years]
22 Mature
x
= Old bush (OLD_BUSH) [Above 41 years]
3
bush
(OLD_BUSH)
[Above
4141
years]
bush
(OLD_BUSH)
[Above
41
years]
= Old
Old
bush
(OLD_BUSH)
[Above
years]
bush
(OLD_BUSH)
x33= =Old
[Above
41 years]
The result of the regression analysis shows that the independent variables are significantly influencing the
production of tea (Table 1). The high adjusted r 2 value (0.802) reflects the significance in the model. The beta
coefficients of independent variables reflect that young bush (YOUNG) area which is significantly influencing the level
of production (highest beta coefficient, 3817.50). This means that changing the young bush area by one unit will change
the level of production by 3817.50 kg. In addition, mature bush (MATURE) area also have some significant bearing
on production (1941.19 beta value). On the other hand, old (OLD) bush area provides very low level of production
(656.39 beta value). The average yield of tea is around 1,255 kg. per hectare. The result of the above analysis suggests
that the tea industries of Bangladesh need to transform their old and very old tea bushes into young tea and mature tea
Here,
Here,
Ŷ = Production level (PDN)
respectively. The regression model is given below:
Here,
(PDN)
Ŷ = Production
x1 =level
Young
bush (YOUNG) [4-10 years]
Here,
(PDN)
Ŷ = Production
xbush
=
Mature
bush[4-10
(MATURE)
x1 =level
Young
(YOUNG)
years] [11-40 years]
2
Production level
(PDN) x +=1941.185
Ŷ ==−80805.240
+ 3817.495
+
656.394
x
=
Old
bush
(OLD_BUSH)
[Above 41 year
Young
bush
(YOUNG)
[4-10
years]
x 2 = Mature 3bush (MATURE) [11-40 years]
1
x1 = Young bush (YOUNG) [4-10 years]
= Old
bush (OLD_BUSH)
[Above 41 years]
x 2 = Maturexbush
(MATURE)
[11-40 years]
3
bushes and this may significantly increase the yield of the two types of bushes at around 3817.50 kg. or 1941.19 kg.
x 2 = Mature
(MATURE)
[11-40
years]
Relationship between management
of teabush
estates
(yield) and
Price
(quality)
x3 = Old
bush (OLD_BUSH) [Above 41 years]
x3 analysis
= Old bush
[Above
41 years]
it (OLD_BUSH)
is clear that for
efficient
production of tea, young and mature tea areas
From the above regression
are essential for Bangladesh tea estates. High yield tea gardens3) have better bush management comparing to poorlymanaged gardens4). This may have a positive linkage with the price of tea. In the following it is examined that
whetherthere exist any relationship between high yield tea gardens and the price of tea. The analysis of this model is
shown below:
Strategic Cost Management of Tea Industry (Sheikh Mohammed Rafiul Huque)
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65
Yˆ � a �bˆ x ��
Here,
Here,
Price (PRICE)
Ŷ = Production
level (PDN)
(YOUNG)
[4-10 years]
=Young
Yield
per
hectare
(YIELD_HA)
perbush
hectare
(YIELD_HA)
x1 ==Yield
x 2 = Mature bush (MATURE) [11-40 years]
x3 = Old bush (OLD_BUSH) [Above 41 years]
result of the regression analysis shows that yield has a significant influence on price (Table 2). Though the r2
The
value (0.268) is not very high, moderate relationship exists between yield and price. It seems other factors have influence
on the low r2 value.
The beta coefficient indicates that if yield per hectare (YIELD_HA) increases by one unit, price will increase by
8.998E-03 unit. It can be concluded from this analysis that good land management has a direct link with the production
Here,price. The model is given below:
of good quality tea and tea produced by well managed gardens fetch higher
Ŷ = Production level (PDN)
Here,
Production
level (PDN)
+ 8.998E-03
Ŷ ==50.786
x1 = Young bush (YOUNG) [4-10 years]
x1 = Young bush (YOUNG)
years] bush (MATURE) [11-40 years]
x 2 [4-10
= Mature
x 2 = Mature bush (MATURE) [11-40 years]
Strategic decisions and value chain modification
x3 = Old bush (OLD_BUSH) [Above 41 years]
x3 = Old bushgardens
(OLD_BUSH)
[Above
41 level
years]of production. The strategic
to increase
their
Strategic decisions are needed for the poorly-managed
alliance of the poorly-managed gardens can be an option to improve their yield, production and quality of leaves. In this
regard, the model of Japanese tea industry can be replicated with some modifications. The modification is necessary
to make it more applicable for the tea estates of Bangladesh. In Japan, cooperative farming model is widely practiced
among the tea farmers (Fig. 5). Moreover, Japanese model can not be adopted without a modification due to the sizes
of the gardens are quite big in the developing countries like Bangladesh. It seems that strategic cooperative alliances
among the tea estates may be a better option for the tea industry in Bangladesh. Huque (2006) explains the possibility
of alliance among the closely located tea gardens situated in the south-eastern part of Bangladesh. In that case, small
gardens operate as leaf growers and there exists a central leaf buying unit which is operated by the government.
The responsibility of the central leaf buying unit is to buy leaves from the growers and sell them to the central leaf
processing unit. The two stage handling of green leaves actually reduces the quality of made tea5) and which in turn
reduces the price of tea in the auction market.
The strategic alliance model is a combination of Japanese model and the model which is proposed by Huque (2006).
Huque (2006) proposes a two stage handling green leaves. In the present model, central leaf manufacturing facility
will have a buying place equipped with quality measurement device. Leaf producing firms will carry the green leaves
until central leaf processing plant. That machine measures the quality of green leaf before buying from the strategic
growers and set the price accordingly depending on the grades of the leaves. As the quality of green leaves deteriorate
very fast, proper handling is necessary for maintaining the quality. This proposed model is adopted would improve the
situation which may maintain the quality of green leaves due to one level handling and at the same time encourage the
high performing tea gardens to receive elevated price. This proposed model uses a common leaf processing facility
established by strategic cooperative alliance farms. This new model, if adopted, can also reduce fixed cost related to
the establishment of multiple factories. Tea gardens either can use their existing machineries for the establishment of a
manufacturing unit or can share their common fund for this purpose. Besides, cooperative alliances model can use their
common fund for land development and maintenance of tea bush which may solve scarcity of resources. This proposed
model may change the value chain structure of the tea industry of Bangladesh (Fig. 9). In current value chain system
of Bangladesh each tea estate is responsible from the stages of plucking to delivery of the product to the brokers. In
the proposed value chain plucking and leaf carrying type of primary activity cost is shifted to leaf producing company.
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横浜国際社会科学研究 第 11 巻第 4・5 号（2007年 1 月）
Figure 9: Strategic cooperative alliances
Table 3: Low yield tea estates comparison
Yield below 1000 kg./hectare
(62 tea estates)
Number of tea estates
Tea area in hectare
Number of tea estates
Suitable extension area in hectare
Yield below 600 kg.
per hectare
28 tea estates
Large
Small
gardens
gardens
Below 200
Above 200
21
7
3 360
16 400
Yield 601 1000 kg.
per hectare
34 tea estates
Large
Small
gardens
gardens
Below 200
Above 200
13
21
15 400
3 375
Source: Bangladesh Tea Board (2004)
This may help the strategic alliance firms to concentrate more on production and producing better quality leaves by
nurturing and maintaining the tea bushes. Currently, tea estates are reluctant to uproot their old tea plants due to the
risk of lowering the production of tea. The proposed model reduces this type of risk as few gardens will supply the
green leaves without hampering the production. The cooperative alliance model can keep the production level to an
optimum level. In the Japanese cooperative association, profit sharing system is common among the farmers depending
on the performance. Replication of this type of incentive system may enhance the strength of the strategic alliance tea
gardens. Bangladesh Tea Board will monitor the implementation process of the proposed model. They have the supreme
authority of evaluating performance level of the tea estates and they also give lease of the land to the tea estates. Besides
they put comments to the banks about the level of performance of the tea estates while sanctioning loans. Due to the
evaluation authority of Bangladesh Tea Board, they may encourage the low performing tea estates to form a strategic
alliance among them to improve their level of performance.
This model of strategic cooperative alliances is applicable to both large and small gardens who have intention of
increasing production and making good quality tea with low cost and risk. As this alliance uses a common production
facility, manufacturing cost should be lower. This model stresses that one should identify small tea gardens (below 200
Strategic Cost Management of Tea Industry (Sheikh Mohammed Rafiul Huque)
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67
Table 4: Regression result of production and tea area of well and poorly-managed tea estates
Well land managed
Tea estates
Poor land managed
tea estates
Above 1500
0.973
0.970
292.583
2082.21
(0.006)*
1690.89
(0.000)*
1654.13
(0.000)*
From 601 1000
Below 200 hectare
0.917
0.892
36.95
1063.53
(0.001)*
907.74
(0.000)*
642.30
(0.001)
Yield per hectare
Tea area
r2
Adjusted r2
F value
Young
Unstandardized
beta coefficient**
Mature
Old
Dependent variable: Production in kg.
*
Parentheses represent the significance level
**
Immature bush area has been omitted due to insignificant value and high multicollinerity
900
Tea area in hectare
800
700
600
500
400
300
Yield from 601-1,000 kg. and
tea area below 200 hectare
SCA gardens
200
100
0
Immature
Young
Mature
Old
Age of tea bush
Figure 10: Tea area of SCA gardens and poorly-managed tea estates
hectare) situated in close proximity with low yield, as uprooting and maintaining of tea bush is easier in these gardens.
These gardens have less complexity in management. It is understood that after the successful implementation of this
approach, large tea gardens may be inspired to adopt this approach.
Table 3 shows that 62 tea estates in Bangladesh produce less than 1,000 kg. tea per hectare. These gardens need
to improve their performance by adopting the policy of strategic alliance model mentioned earlier. The yield of the 28
gardens of the country is below 600 kg./hectare. There are 21 gardens in this group in the country which have garden
size with less than 200 hectare each. It is understood that strategic cooperative alliances could be start from these small
gardens depending on the close location among them. It is also understood that after the successful implementation of
this approach, other tea estates (yield 601 1000 kg. per hectare) with low yield may be inspired to adopt this model.
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横浜国際社会科学研究 第 11 巻第 4・5 号（2007年 1 月）
Strategic cooperative alliance (SCA) model and cost implication
The previous part of this paper focuses on the strategic solution of tea industry in Bangladesh and proposes SCA
model as a solution for the tea industry. It is needed to compare the cost implication of the proposed model in poorlymanaged tea estates. In this regard, it is needed to assume that poorly-managed tea estates will be functioned like wellmanaged tea estates considering land management, cost and price aspects after the implementation of SCA model. It is
understood from the regression in Table 1 that young and mature bush area are essential for Bangladesh tea industry. It
is found from the survey that yield of the least developed tea estates in Bangladesh is below 600 kg. That is why 600 kg.
is considered as point of demarkation between operating and non-operating gardens. It is needed to understand whether
this scenario differs in well and poorly-managed tea estates (yield from 601 1000 kg. and tea area below 200 hectare).
The results of the regression analysis in Table 4 depict that tea area in both well and poorly-managed tea estates
significantly affect production. The high adjusted r2 values (0.970 and 0.892) reflect the significance of the models. The
beta coefficients of independent variables reflect that condition of well-managed tea estates is much better than poorlymanaged tea estates. The beta coefficients of young bush area (YOUNG) in well-managed and poorly-managed tea
estates are 2082.21 and 1063.53 respectively. This means that changing the young bush area by one unit will change the
level of production by 2082.21 kg. and 1063.53 kg. in well and poorly-managed tea estates respectively. The result of
the above analysis concludes that the condition of poorly-managed tea estates will be improved after introducing SCA
model. Fig. 10 simulates the situation of SCA gardens after the implementation of proposed model and compares the
situation with poorly-managed tea estates. The simulation model tries to maximize young bush area and minimizes old
bush area in SCA gardens and compares the situation of SCA gardens with poorly-managed tea estates after five years
of implementation. It is assumed that the successful implementation of this model would increase production level
significantly. Besides, young bush area will also be constant source of good quantity green leaves in the mature stage.
From the above analysis it is clear that SCA model can improve the condition of poorly-managed tea estates. At
this stage, it is needed to understand the financial implication of this model which can motivate them to form this kind
of alliances. Table 5 compares the financial implication of SCA gardens and poorly-managed tea estates. The table uses
data related to production and land utilization from Table 4 and Fig. 10. In addition, data related to costs and prices were
collected by primary survey among the tea estates and tea auction market in Bangladesh. It assumes that other factors
related to cost and price will remain constant for few years (five years). Five years is considered in this analysis due the
simulation model analyzes the situation of SCA gardens after five years. Table 5 depicts that average unit variable cost
in poorly-managed tea estates is 22.55 Tk6). and average total fixed cost is 10,549,630 Tk. On the other hand, average
unit variable cost in well managed tea estates is 19.49 Tk. and average total fixed cost is 9,876,719 Tk. In addition to
average fixed cost, SCA gardens have to incur depreciation cost of re-planting new tea plants in the old bush area. From
the financial analysis in Table 5 it is apparent that profit of SCA gardens is around twelve times higher than poorlymanaged tea estates. In addition, another strategic cost accounting methods, target costing approach, is used to evaluate
the condition of SCA gardens which is different from direct costing approach. Well-managed tea estates average price is
considered as target price for the SCA gardens and target profit in considered as 15%, which in industry average. Target
cost of the SCA gardens is derived by deducting target profit from total sales. The calculation is given below:
Target price – Target profit = Target cost
104,352,901 Tk. (Unit cost is 65.69 Tk. ) – 13,087,538 Tk.
= 91,265,362 Tk. (Unit cost is 56.45 Tk.)
It is derived from Table 5, direct costing approach gives higher profit comparing to target costing approach. It can
be concluded that both approaches (direct costing and target costing) give higher profit to the SCA gardens comparing
Strategic Cost Management of Tea Industry (Sheikh Mohammed Rafiul Huque)
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69
Table 5: Strategic cost analysis of SCA gardens and poorly-managed tea estates
Target costing
approach for
SCA gardens
Young bush area (Hectare)
Production change/Hectare
Total production
Sales price****
Unit cost****
Unit variable cost****
Total sales
Total variable cost
Total fixed cost
Depreciation cost for
re-plantation**
Total cost
Profit/Loss
SCA gardens
using variable
costing
approach
763
2,082 kg.*
1,588,566 kg.
(1,589 ton)
65.69
56.45
104,352,901 Tk.
(102,615,870
Tk./40 years***)
= 2,565,397 Tk.
91,265,362 Tk.
13,087,538 Tk.
763
2,082 kg.*
1,588,566 kg.
(1,589 ton)
65.69
19.49
104,352,901 Tk.
30,961,151 Tk.
9,876,719 Tk.
(102,615,870
Tk./40 years***)
= 2,565,397 Tk.
43,403,267 Tk.
60,949,633 Tk.
Poor land managed
tea estates using
variable costing
approach
(Yield 601 1000 kg. and
tea area below 200 ha.)
369
1,064 kg.*
392,616kg.
(392 ton)
62.70
22.55
24,617,023 Tk.
8,853,491 Tk.
10,549,630 Tk.
19,403,121 Tk.
5,213,902 Tk.
*
Data has been taken from Table 4
[763 hectare (old and very old bush area)*13,449 bushes/hectare]*10 Tk./ bush = 102,615,870 Tk.
Maintain until end of mature stage (40 years)
****
1 US$=60.21 Tk.
**
***
to poorly-managed tea estates. It is also apparent from both analyses, SCA gardens enjoy higher profit due to high yield,
good land management, high price and low cost comparing to poorly-managed tea estates.
Conclusion
Agriculture commodities (like tea) in the developing countries are facing price competition. Poor land management,
plucking inefficiency and high manufacturing cost which may be observed in the value chain, hinders their growth. It can
be concluded from the study that the managers of the tea estates of Bangladesh are reluctant to maintain the tea bushes
which further reduces tea production and abruptly affects yield and quality of green leaves. This in turn raises cost in
the value chain and lessens price of tea in the auction market. About 40% of tea estates of the country have yield below
1000 kg./hectare. Among these low yield gardens, yield of around 50% gardens is less than 600 kg./hectare though they
possess large areas of land for tea cultivation. Moreover, these low yield gardens also receive lower price comparing to
high yield gardens due to the poor quality of green leaves which they produce. The regression analysis shows that if the
low performing gardens possess more young tea bushes, production level can be increased up to 3,818 kg./hectare keeping
other variables constant. In this respect old tea plants of these gardens should to be uprooted and new plants must be
planted soon. But due to poor land management and worry of lowering production, this type of initiative is not taken by
the management of the low performing gardens. Strategic cooperative alliance model which is developed in the light of
Japanese cooperative model can be a solution for these poor performing gardens. This model, if adopted, may significantly
reduce the problems of land management and at the same time strategic alliance farms can enjoy benefit of using the
common fund for bush management and improve the overall manufacturing facility, which may further improve the
quality of finished tea. It is also found from financial analysis that SCA gardens will obtain higher profit after successful
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横浜国際社会科学研究 第 11 巻第 4・5 号（2007年 1 月）
implementation of the model. In addition young bush area will not only give high yield during young stage, but also be
a constant source of good quantity and high quality of green leaves during mature stage of the plants. This will certainly
boost this industry to secure a strong position in the world tea markets.
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Notes
1) Aracha is simply green tea that has been freshly picked at near-by farms and steamed immediately to prevent oxidation. Upon
steaming the tea gets rolled and dried. In Japanese, this tea is called aracha (Japanese tea production, 2006)
2) British companies
3) Yield above 1,500 kg. per hectare
4) Yield below 1,500 kg. per hectare
5) Processed tea
6) Taka
［セイク モハメド ラフィール ハーク 横浜国立大学大学院国際社会科学研究科博士課程後期］