Nestle's Coffee Supply Chain: Complexity & Small Growers - Paper Example

Introduction

A supply chain refers to the process a product takes from being a raw material to a finished product, ready for use by the customer. Nestle's coffee supply chain is complex since it involves getting the best coffee brands from different countries, and the fact that the coffee supply from within a single country is a tedious and rigorous activity. Majority of the growers from whom Nestle buys from growing their coffee on a small scale, and therefore tend to tend their farms on their own or involve using a few helping hands (Min et al., 2019). Accordingly, due to the small sizes of farms and the amount of produce being handled, the farmers can handle the primary processing step of hauling on their own. There are intermediaries involved in the supply chain, whose roles may vary according to the factors needed. For example, the intermediaries may buy the coffee at any given stage of growth, with more preferring buying it in the final stages to avoid incurring expenses associated with growing and primary processing. The intermediaries are also responsible for selling the coffee from different farmers and creating bulk to sell to the various processors available. Therefore, due to the different roles that intermediaries can play in a supply chain, a supply chain can have as many as twenty intermediaries per one supply.

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The processing stage of coffee requires the farmers to find places where their products can be processed and the basic preparation for the other supply stages. Therefore, individual farmers who may have the ability may opt to process the coffee by themselves. At the same time, some small scale farmers may also collaborate to purchase processing machinery. Others prefer to concentrate on growing the product and take them to co-operatives which can process the produce and to sell the coffee to the other people in the supply chain as a whole, due to the trust that they have amassed and the bargaining power that they possess due to the massive amounts of coffee that they process and have access to (Studies, 2019). In some instances, government agencies may be involved in the coffee supply chain. The government agencies may use the availability of funds by the government to provide the farmers with a fixed price for their coffee, and once they have accumulated a substantial bulk, sell the product to interested parties in auctions, with most of the buyers buying for export business.

The auctions involve handing over the bulky supply of coffee from the government agencies to the exporters who can transport the coffee to the different preferred countries of destination for the coffee. Once they have exported the coffee, they transfer the process to brokers in the countries. Brokers have links on whom to sell to in the countries they would be shipping the coffee to. Therefore, the brokers are the connection between the government agencies or individual farmers and the processors and ensure that the right amount of coffee is supplied at every given moment and that the needs of the two parties that they handle are addressed. The brokers sell the product to roasters like Nestle, who will now add value to the beans through the different processes that they undertake, like roasting to the degree which they will produce the coffee strains that their companies are known for. However, the roasters' value addition is final, with the final product being packaged and branded, and the supply chain is passed to wholesalers (Studies, 2019). The wholesalers know the retailers to whom to sell, and therefore they provide the best ways and incentives possible to the retailers so that they can offload the bulks that they have and get the best proceeds from the coffee that they have in stock. Once they sell to the retailers, the retailers have to ensure that they provide the best terms of sale to the buyers. The wholesalers have already done the majority of the work through advertising and marketing campaigns. Finally, after the processes described above, the final user, the consumer, will buy the product from the retailer.

The Trading Methods Applied by Nestle

Factors Affecting Pricing of Coffee

The world's coffee prices are set and determined by different factors. First, the trading prices of world commodities such as coffee are determined by the trading activities in world markets such as London and New York. In contrast, the prices may have been expected to be high or low; the market activities will help set the price for the world's coffee prices. Additionally, the number of intermediaries within the coffee supply will determine the prices of coffee (Lee et al., 2015). Therefore, the more the intermediaries, the higher the prices will be since all the intermediaries seek to have a share of the profits from the produce, hence setting the prices slightly higher for each stage of the chain, and the final consumer will bear the costs imposed by the different supply chain processes.

The forces of demand and supply also determine the pricing of coffee and therefore, whenever there is a high demand for the coffee, the prices will be higher since the demand will be stretched, thereby making the suppliers increase the costs, however, if the market is flooded by too much coffee in supply, then the prices will be lower since the dealers will look for ways to offload their supply of coffee, with the most common way of doing so being the reduction of prices to get the attention of dealers (Studies, 2019). However, there are some instances under which the coffee price can be ensured to be always high. For example, if the coffee quality is high, then the market will still be in high demand for it, thereby making the coffee prices high in every given moment. The stronger strains of coffee always fetch high prices, and therefore the prices are not determined by the factors which affect the common brands of coffee.

Additionally, if the coffee farmers undertook some of the processing activities independently, it would be possible for them to enjoy the benefits associated with better prices since they would reduce the number of players in the supply chain. The reduction of the number of people involved in the supply chain means that they will earn the profits that the eliminated supply chain members would have made. Direct selling is another option that may help in ensuring that the prices of the coffee sold are higher since the farmers will have cut out all the brokers who would have made the profits and left them out of them.

The Trading Strategies Employed by Nestle

Nestle has developed a tactic whereby it buys the product directly from the farmers of the coffee. Through direct buying, the organization ensures that it gets the best product at the best prices possible. Additionally, they can control their supply chain, since they oversee the product's transportation on their own, hence ensuring that they have enough product for processing and supply at any given moment. This tactic has helped to motivate farmers to produce a higher quality of coffee since Nestle pays higher prices for the product's higher quality (Studies, 2019). To give the farmers the incentive they need to sell directly to them, Nestle ensures that they publicly advertise their prices, so that the farmers will see the need to sell to them as well as the number of processes that Nestle will undertake on their behalf such as transportation of the produce from the farms to their facilities.

When the company is unable to procure the coffee from farmers directly, it opts to buy from select suppliers who work to the best of their interests. The dealers get the coffee from the different locations of the world, ensuring that it meets Nestle's expected standards. Once this is assured, they will gather the coffee to bulk before supplying it to Nestle to oversee the remaining processing steps (Studies, 2019). Nestle believes in establishing relationships with the members of the supply chain. Therefore, it works towards establishing strong relationships with the supply chain members to ensure continuity of the supply and the assurance of the quality of the product at all given times.

References

Studies, B. C. (2019, September 24). Coffee the supply chain. Business Case Studies. https://businesscasestudies.co.uk/coffee-the-supply-chain/

Min, S., Zacharia, Z. G. & Smith, C. D. (2019). Defining supply chain management: in the past, present, and future. Journal of Business Logistics, 40(1), 44-55.

Lee, K. H., Bonn, M. A., & Cho, M. (2015). Consumer motives for purchasing organic coffee. International Journal of Contemporary Hospitality Management.