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In the file

Coffee –

The Supply Chain

A Nestlé case study

Page 1: Introduction

Today, a jar of instant coffee can be found in

93 per cent of British ho

es and increasingly consumers are trying out different types of

coffee, such as cappuccino, espresso, mocha and latte. The expanding consumer

demand for product choice, quality and value has led to an increase in the coffees being

made available to a discerning public. ‘value’ is the way in which the consumer views an

organisation’s product in comparison with competitive offerings. So how does coffee get

from growing on a tree perhaps 1,000m up a mountainside in Africa, Asia, Central or

South America, to a cup of Nescafe in your home, and in millions of homes throughout

the world?

This case study explains why Nestlé needs a first class supply chain, with high quality

linkages from where the coffee is grown in the field, to the way in which it reaches the

consumer.

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The Supply Chain

The supply
chainis the sequence of activities and processes required to bring a product from its raw
state to the finished goods sold to the consumer. For coffee, the chain is often complex,
and varies in different countries but typically includes:

 growers – usually working on a very small plot of land of just one or two hectares.
Many do some primary processing (drying or hulling) themselves

 intermediaries – intermediaries may be involved in many aspects of the supply
chain. They may buy coffee at any stage between coffee cherries and green beans,
they may do some of the primary processing, or they may collect together sufficient
quantities of coffee from many individual farmers to transport or sell to a processor,
another intermediary, or to a dealer. There may be as many as five intermediary links in
the chain

 processors – individual farmers who have the equipment to process coffee, or a
separate processor, or a farmers, co-operative that pools resources to buy the
equipment

 government agencies – in some countries the government controls the coffee
trade, perhaps by buying the coffee from processors at a fixed price and selling it in
auctions for export

 exporters – they buy from co-operatives or auctions and then sell to dealers.
Their expert know-ledge of the local area and producers generally enables them to
guarantee the quality of the shipment

 dealers/brokers – supply the coffee beans to the roasters in the right quantities, at
the right time, at a price acceptable to buyer and seller

 roasters – people like Nestlé whose expertise is to turn the green coffee beans
into products people enjoy drinking. The company also adds value to the product
through marketing, branding and packaging activities

 retailers – sellers of coffee products which range from large supermarkets, to
hotel and catering organisations, to small independent retailers.
A supply chain is only as strong as its links. Different relationships exist between
organisations involved in the separate stages of the chain – whether it is in the
structuring of product distribution, arrangements for payment and arrangements for
handling, or in storing the product. At the heart of these relationships is the way in which

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people treat each other. Long-term business relationships need to be based on honesty
and fairness – parties to a trading agreement need to feel that they are getting a fair
deal.

Growing and Proccessing coffee
Coffee grows best in a warm, humid climate with a relatively stable temperature of
about 27°C all year round. The world’s coffee plantations are therefore found in the so-
called coffee-belt that straddles the equator between the tropics of Cancer and
Capricorn.

Processing

Coffee from the tree goes through a series of processes to end up with the saleable
product – the green coffee bean.
1. Picking – Coffee is picked by hand. Coffee cherries are bright red when they are ripe,
but unfortunately the cherries do not all ripen at the same time. Picking just the red
cherries at harvest time produces better quality coffee, but it is more labour intensive as
each tree must be visited several times during the harvest season. Many farmers
therefore strip the tree of both ripe and unripe cherries in one pick.
2. Drying and hulling – The cherries each contain two beans which have to be
separated from the surrounding layers – the skin, the pulp and ‘parchment’ – by hulling.
The beans also have to be dried, usually in the sun but sometimes by using mechanical
dryers.
3. Sorting, grading and packing – Beans are sorted by hand, sieves and machines to
remove stones and other foreign matter, to remove damaged or broken beans, and to
sort beans into different qualities or ‘grades’. Coffee is packed into sacks, usually of
60kg.

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4. Bulking – Roasters, like Nestlé, will need to buy large quantities of coffee of a
particular grade, so exporters in the country of origin will bulk together numerous small
batches of coffee to make up the necessary amount of the required grade.
5. Blending – At the roasters, experts with fine palates and much experience decide
which blend of coffees from various origins to use to make the coffee products to meet
the taste of their consumers.
6. Roasting – On leaving the plantation, the coffee is pale green – hence the name
‘green coffee’ for the traded product. Only when it is roasted does it turn brown taking
on its characteristic aroma and flavour. It is the roasted beans which are used to make
the coffee product.

Price – Balancing Supply And Demand

Coffee prices are determined day-to-day on
the world commodity markets in London and New York and with so many intermediaries
standing between the producer and the consumer, how can we ensure that coffee
growers receive a fair reward for their labours? Is the answer – as some believe – for
coffee manufacturers to cut out the intermediaries, buy their coffee direct from farmers
and guarantee a minimum price? The price of coffee is determined by the relationship
between the amount of coffee available to be sold (supply) and the amount which
people want to buy (demand). If there is more coffee available than people want to buy
at current prices, the price will fall. The market thus ultimately determines the price that
the farmer receives.
There are circumstances in which farmers can receive more than the market price, for
example:

 if the quality of their coffee is high
 if they undertake some or all of the processing stages which someone else would

otherwise be paid to do
 if they can sell direct to a manufacturer rather than to intermediaries.

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Farmers can also reduce their costs if they
are able to share processing and transportation facilities with other farmers.Coffee
farmers may sell their coffee in a number of ways

 they can sell to the next link in the traditional supply chain – the collector or
processor

 they may sell to government agencies in countries where the coffee trade is
government controlled, although this is becoming less common

 or, they might sell direct to a manufacturer like nestlé.
However, farmers usually cannot choose the method by which they sell their coffee.
Selling directly to manufacturers is attractive as farmers potentially receive above the
market price. However, it would be impossible for all the world’s coffee to be bought
directly by manufacturers from individual farmers a few bags at a time. Although direct
purchasing is attractive, it is only one of a number of methods of trading, all of which
have their merits and none of which is necessarily fairer than the others. Ultimately it is
the market price which determines how much farmers receive.

Nestle´s Trading Methods
Nestlé is a pioneer in purchasing coffee direct from growers. A growing percentage of
the company’s coffee is bought direct from the producer and it is now one of the world’s
largest direct purchasers. In countries where this is not possible Nestlé operates in a
way that takes it as close to the growers as possible.

Buying Direct

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In coffee-growing countries where Nestlé also
manufactures for export or local consumption, it has a policy of buying coffee direct from
the farmers. The company offers a fair price to the farmers, and so ensures regular
supplies of guaranteed quality for its own factories. Higher quality commands a higher
price – a premium that Nestlé is happy to pay, since good quality raw materials are
essential to its business. In countries where direct buying takes place, there is a widely
advertised Nestlé price, and a minimum base price. By providing a reference level for
growers, other traders are forced to keep their offer prices competitive.
Nestlé began its direct buying policy in 1986 and the amounts involved have steadily
increased. In 1998, around 15 per cent of its green coffee purchases were bought
directly. As an example, in the Philippines, farmers bring their produce to Nestlé’s
buying centres situated in the coffee growing regions. Quality is analysed while they
wait and growers are paid on the spot. In 1998, direct purchases accounted for over 90
per cent of the green coffee destined for its two instant coffee factories in the country.

Buying From Dealers

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In countries like the UK it is simply impossible
for companies like Nestlé to buy from the hundreds of thousands of farmers who
ultimately supply the company, and so the coffee is bought from dealers using the
international market. However, Nestlé visits and gets to know as many people as
possible in the supply chain. The company oversees the relationship between the
dealer and exporter and often invites shippers to the UK to train alongside its own
quality assurance staff. Nestlé agrees procedures on everything from pest control to
methods of packing to ensure everyone is working towards the highest standards of
quality.

Conclusion
Creating wonderful cups of coffee is not only Nestlé’s business, it is the business of
everyone involved in the supply chain. It is in everyone’s interest – the farmers’ and
Nestlé’s – that farmers receive a fair income from their coffee. This ensures that they will
continue to grow coffee, and to invest in increasing their yield and quality, and this in
turn guarantees the supply of quality coffee which companies like Nestlé require.

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http://www.tcpdf.org

Look again at the issues of organization structure. Both supply chain structure and organization structure impact a company’s ability to successfully pursue its vision and strategies.

You will use this week’s readings as a guide to your research, investigating sources that will explain Apple Inc.’s marketing initiatives and finance philosophy.

Then review the case study on coffee provided. You will apply your analysis for this assignment to develop a process for analyzing your own company. Feedback from the instructor on how you approached this case analysis can then be applied to your chosen company for the final report in Unit 1

Determine the issues raised in the readings, and in your personal observation and study, that you will focus on in your case study analysis

*****Please note: You will be reviewing the coffee supply chain case study as an example to draw upon for your own paper. Do not write about the coffee chain case study but use it as a guide for your own paper. You need to focus on your organization that you are researching no the coffee supply chain case study.

Read the case study, Coffee – The Supply Chain: A Nestlé case study, carefully, and gather from it information you will need for your analysis.

Submit a 5-page paper in APA format, excluding title page and reference page. Analyze the coffee case study and integrate any pertinent implications you have learned from the analysis into your report

Evaluation

Activity/Competencies Demonstrated

% of Final Grade

Content (60%)

a. Identifies the elements of the case study

/10

b. Identifies the methods of research used in the case study

/10

c. Evaluate the appropriateness of the case study methods in this case

/15

d. Determine the criteria by which the company was suitable for case study research

/25

Communication (25%)

a. Uses language clearly and effectively

/10

b. Information organized intelligently and holistically (i.e., not simply answers to questions)

/10

c. Proper introduction and conclusion to paper

Attention to Detail (15%)

a. APA Formatting (title, headings, and references)

/10

b. Spelling and Grammar

Total

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