Coffee the supply chain

Today, a jar of instant coffee can be found in 93 per cent of British homes 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.

The Supply Chain

The supply chain is 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, a separate processor, or a farmer, 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 knowledge 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 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 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 Processing 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 a 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 60kg.

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 that someone else would otherwise be paid to do
• If they can sell direct to a manufacturer rather than to intermediaries.

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 directly to a manufacturer like nestlé.

However, farmers usually cannot choose the method by which