improving competitiveness of supply chains - cips 2016 papers/384099_ad3_p… · improving...

AD3/May 2016

Advanced diploma in procurement and supply

Improving competitiveness of supply chains

Date Thursday 19 May 2016

Time Start 09:30 End 12:30 Duration 3 hours

CASE STUDY

QP04

IMPORTANT

The examination format for this CIPS unit is open book

Please remember to take your case study into the examination with you

of 24 AD3 Case Study May 2016

INSTRUCTIONS FOR CANDIDATES

The pre-released case study examination is designed to assess your ability to apply the relevant theories, principles and techniques associated with the unit content to a realistic business situation.

The examination is a three hour open-book examination. The examination questions will test each of the learning outcomes from the unit content.

You will be expected to demonstrate your knowledge and understanding of relevant theoretical principles, concepts and techniques; to apply these appropriately to the particular situation described in the case study and; above all, to make sound decisions. You will not gain marks by writing a general essay on the topic. Prepared notes may not be included as part of the answer.

Please note that all work should be your own. Copying or plagiarism will not be tolerated and could result in no marks being awarded. If quotes or short extracts are used they should be attributed or the source of the information identified.

You should acquaint yourself thoroughly with the case study before the examination. You must take your copy of the case study into the examination.


A BETTER CUP OF COFFEE

This case has been produced for assessment purposes only. It has been sourced directly from the articles indicated within the bibliography, which are available in the public domain. It contains a number of direct

extracts and quotations, which have been referenced within the text.The views and opinions expressed within the case are those of the authors of the reference material and

are not necessarily the views or opinions of CIPS or the companies mentioned. The case may not reflect the actual situations of the specific companies mentioned.

This case was written in August 2015 and may not reflect the current situation. Candidates are advised to base their answers on the situation depicted in the case.

A bibliography can be found at the end of the case study.

The Coffee Market

PERUVIAN GROUND COFFEE

Intense and velvety with chocolate and almond notes.

Expertly selected by: (signed) ……. Specialist coffee buyer

100% Arabica Coffee

5

Dark Roast

The small farms dotting the slopes of the Peruvian Andes boast high altitudes, even temperatures and plenty of rain – perfect growing conditions for coffee.

It gives this coffee an exquisite flavour profile with notes of almond, walnut and bittersweet chocolate, making a velvety, intense and beautifully balanced cup.

Packed in UK with coffee from Peru

FAIRTRADE certified and sourced from FAIRTRADE producers. Total 100%, visit www.info.fairtrade.net

Fairtrade means fairer trading conditions and opportunities for producers in developing countries to invest in their businesses and communities for a sustainable future.

Taken from labelling information on a pack of retailer own-label ground coffee from a leading UK retailer August 2015.

The above information was taken from a pack of Peruvian ground coffee purchased from a leading UK retailer whose entire sourcing of beverages such as coffee and tea is Fairtrade™ certified. This retailer brand has a very high reputation and level of trust within the UK, so in a sense, the coffee has two levels of certification; one is the Fairtrade™ logo and the other is the brand of this particular retailer, known for stringent quality standards and sustainable supply management policies. This Peruvian coffee is sold at a premium price above that of other coffees, even though it is a retailer own-brand. Normally, such own-branded products retail at a discount compared to pricing of recognised manufacturer brands in the same way that a bottle of Coca-Cola sells at a much higher price than retailer own-brand cola, for example.


Professional coffee tasting is referred to as coffee ‘cupping’ and this can be done informally or professionally by ‘Master Tasters’ and is an attempt to:

measure aspects of the coffee’s taste, specifically the body (the texture or mouthfeel, such as oiliness), sweetness, acidity (a sharp and tangy feeling, like when biting into an orange), flavour (the characters in the cup), and aftertaste. Since coffee beans embody tell-tale flavours from the region where they were grown, cuppers may attempt to identify the coffee’s origin. (Wikipedia)

A significant market has developed and is growing for gourmet or speciality coffees such as this; coffees often produced in a specific region by a specific grower or coffee cooperative. An important and growing element of the coffee market is developing not only an appreciation of fine quality coffee, but also concern for the way in which it is produced and supplied to market. The rapid and sustained growth in markets for these ‘differentiated coffees’ is of benefit to producers and producing countries, since a higher price for the coffee can be obtained and a greater value retained. The more discerning consumer and commercial buyers are primarily concerned about quality, consistency and provenance. A report commissioned by the World Bank recognised the importance of consumers understanding the ways in which the origin and particular nature of individual coffees can be communicated and verified:

As markets for differentiated coffees grow, there is an increasing need for consumers to understand the sometimes complex verification or certification processes that apply to the standards-oriented coffees, such as organic, fair trade, eco-friendly, Utz Kapeh, and those using Geographic Indicators of Origin (GIO). The legitimacy of third-party certification is a vital market mechanism that can prevent indiscriminate use of these terms. (1)

The consumer purchasing the above Peruvian coffee is generally seeking assurance not only of the quality and the unique taste of the coffee, but also that it has been produced in an environmentally sustainable manner and that the farmers who grow it have been paid a fair price – often at a premium above the rate set by the commodity markets. The Fairtrade™ certification has become a very important element in providing that assurance. The growth of Fairtrade™ and the fair trade movement is a direct manifestation of the desire of consumers not just for a high quality beverage, but also for the assurance that the people who are providing the product are being treated fairly and that the sources of supply are sustainable.

A number of factors will influence the final price paid by the consumers:

Volatility in the producers’ share of the retail value will still be more influenced by changes in the price level of green coffee than by changes in any other cost component because the value-adding costs are independent of the price of green coffee. Green coffee prices are the single most volatile expense incurred in putting roasted coffee on the market shelf and, consequently one of the major determinants of changes in the producing countries’ share of the retail value. (1)

Fairtrade™ and Cafédirect

Fairtrade™ was founded in 1991 by a group of non-governmental alternative trading organisations (ATOs) including Oxfam (whose mission is to ‘make poverty history’), Traidcraft Exchange, Equal Exchange and Twin Trading (2). Cafédirect was also launched in 1991 and its first Fairtrade™ certified coffee was initially distributed via Oxfam, Traidcraft and other ethical stores and charity shops (ibid). Equal Exchange’s original mission was:

to build long-term trade partnerships that are economically just and environmentally sound, to foster mutually beneficial relations between farmers and consumers and to demonstrate, through our success, the contribution of worker cooperatives and Fair Trade to a more equitable, democratic, and sustainable world. (3)


Original ownership of Cafédirect was:

• Equal Exchange 25% • Twin Trading 25% • Oxfam 25% • Traidcraft 25% (4)

The actual beginnings of Cafédirect and Fairtrade™ were a little earlier and followed the coffee crisis in 1989, when an international agreement to set coffee quotas and prices collapsed. Middlemen, coffee buyers, intermediaries and speculators moved in and were able to secure coffee supplies at prices often well below the cost of production. This had a dramatic impact upon the lives of the coffee producers who were mainly small farmers. Cafédirect was created when a group of small coffee-growing communities in Peru, Mexico and Costa Rica sent some container loads of coffee to the UK on loan – the coffee was roasted and sold through charity shops, church halls and at local events such as village fetes. This proved very successful, and by 1993 Cafédirect had gained national distribution in the UK with Safeway and the Co-operative. By the year 2000, Cafédirect had launched freeze-dried instant coffee, Tea Direct, other new products (including gourmet and organic coffees) and had entered into a partnership with Costa Coffee shops to distribute its espresso and tea brands (4).

Ian Davies et al. (5) identified three distinct stages in the evolution of Cafédirect’s business development: solidarity launch stage (‘Fair Trade Solidarity’, 1993–1999); market development growth phase (1999–2003); and mass market stage (‘Mass-Markets: Marketing Uniqueness’, 2004 to present). In the initial stages of its growth, Cafédirect’s supply chain, marketing and sales were managed mainly by ATOs and, in particular, by the founders. It was important in the early stages of development to communicate the sustainable business model and, above all, to ‘demonstrate solidarity’ with smaller-scale farmers and producers in underdeveloped and developing economies throughout the world. According to Davies et al., this was the real beginning of the marketing of sustainable products. This period lasted from 1991 to 1999 with the main focus from Cafédirect on assisting farmers and communities and communicating to a wider audience about how purchasing Cafédirect could help them, with numerous testimonies to this effect from the grower communities and cooperatives themselves.

However, one of the problems in driving the growth of Cafédirect and other fair trade products was the poor quality charity image associated with them. The other was the extent to which the ‘core ethics’ behind the way in which a consumer product is produced and sourced can actually drive sales. This limit was considered to be around a 3% share of the market for coffee and cocoa in Europe (ibid). Clearly a more market-focused approach that incorporated and emphasised core ethical values, but also concentrated very strongly on quality and speciality, was required in order to grow further.

This led to the second phase of development, where Cafédirect focused strongly on high quality premium coffees and teas. The brand name of its instant coffee was changed to ‘5065’, the average height at which its coffee is grown, which reinforced the quality image of high mountain Arabica. Marketing during this period also tended to place more focus on the ‘coffee producing environments’ and regions and to limit the narratives from individual farmers and cooperatives, with one famous poster featuring the mountain of Machu Pichu (Peru) rising up at the aroma of fresh brewed coffee. The emphasis in marketing the coffee became increasingly focused on the quality of the consumer experience.

From around 2002, Cafédirect has been competing very much in the mainstream against the major coffee brands with a wide variety of qualities and brands at a range of price points, and relying less and less on its original trading partners for distribution. In 2004 Cafédirect floated on the London stock exchange, raising £5m in share equity. From this point, the private ownership of Cafédirect increased to 60% of the company with the founding members’ shares limited to 10% each. More traditional business partnerships were developed with Bridge Thorne (retail sales and distribution), Coffee Fresh (vending machines) and Suma (major warehouses and distribution centres) (5). However, since 2005, Cafédirect has underperformed relative to the growth of Fairtrade™, and this continued with a sales decrease in 2013 of 7% and a significant loss of £596,000 (6).


Mainstreaming Fair Trade

The fair trade movement and Fairtrade™ labelled products have grown substantially and consistently since their inception in the early 1990s. However, from around 2002/3, Fairtrade™ labelled coffee started to become increasingly popular in the mass market. Retailers such as the Co-operative Group and Marks and Spencer plc converted all their purchasing of tea and coffee own-brands to Fairtrade™. Other major supermarkets followed suit with their own-label products, not merely focusing on ethical sourcing with the Fairtrade™ label, but also on quality as evidenced by the region, or even the named coffee producer cooperative (e.g. ASDA’s Santa Rosa Guatemalan Arabica) and the nature of the roasts and blends.

During this period, major roasters such as Nestlé (Nescafé), Kraft (Kenco), Sara Lee (Douwe Egberts), Tchibo and Lavazza – which together accounted for a 45% share of the global coffee market in 2008 (7) – came under increasing advocacy pressure to be seen to be sourcing coffee ethically and sustainably. In response to this pressure, Nestlé launched Partners’ Blend instant coffee in 2005 with Fairtrade™ certification and carrying the Fairtrade™ label. However, this line is the only Nestlé coffee to carry the Fairtrade™ label and accounts for only 0.02% of its annual coffee trade, being sourced from cooperatives in Ethiopia and El Salvador. According to Verdier-Stott (8), ‘the launch of the coffee was greeted with outrage by many, who felt the move represented an undermining of the Fairtrade label and a “cynical marketing exercise” on behalf of the multinational’.

Nestlé’s stated contention with regard to wider Fairtrade™ certified sourcing of coffee is that the premiums paid by Fairtrade™ would encourage farmers to produce more coffee and that there would be global oversupply, resulting eventually in a dramatic adjustment of prices.

In 2004, after consultation with Oxfam, Kraft announced a sustainable development of its Kenco and Maxwell House brands. These would be made with beans certified by the Rainforest Alliance, a non-profit organisation, and would meet its sustainable development standards. This did, however, prompt the following statement from the Fairtrade Foundation of the UK:

Kraft’s commitment to develop more sustainable sourcing of coffee (Marketing, 6 July 2004) is welcome, but consumers should be in no doubt this is not fair trade. Certification by the Rainforest Alliance does ensure that coffee production has met certain social and environmental standards, but unlike Fairtrade certified coffee, it does not provide any guarantee that farmers have received a fair and sustainable price for their crop. Price volatility on the coffee market is legendary the current world market price of 75 US cents per pound for arabica is a significant improvement on the all-time lows of around 45–50 US cents in 2001–2. Throughout this period, the Fairtrade price has held steady at $1.26 a pound, providing much needed stability for farmers to sustain their livelihoods and plan for the future. Buying coffee with the FAIRTRADE Mark remains the only way of guaranteeing that 100% of the coffee in your cup is fair trade. (9)

However, in 2011 Mondelez International (the parent company of Kraft Foods) announced a new sustainability initiative, ‘Coffee Made Happy’, with a target to provide 100% of all of its coffee in Western Europe from sustainable resources by the end of 2015 (10). By the end of 2014 they had achieved 89%. The ‘Coffee Made Happy’ logo now appears on tins and jars of Kenco. An impressive list of advisory partners includes the WWF (World Wildlife Fund) and the 4C Association. Although the latter defines standards of conduct for its members which are applicable to intermediary (importers, exporters, traders and agents) and final buyers (roasters, manufacturers and retailers), this does not include the setting of a purchase price for coffee or a coffee premium such as Fairtrade™ rules provide. Commitments are required to transparency in market information and equity and economic viability at all stages of the supply chain. Members are required to employ third party auditors to report on compliance and to ensure a real commitment to improving the quality of coffee, and the final buyers have to commit to purchasing increasing quantities of 4C certified coffee over time. The final buyers are also required to:

develop long-term relationships with sellers and will strive to improve the efficiency of the supply chain. In this respect they will assist sellers by providing feedback on marketing and other key market requirements such as just-in-time delivery, OTA requirements, food and traceability legislation in consuming markets. (11)


By comparison the key objectives of the Fairtrade™ standards are to:

• ensure that producers receive prices that cover their average costs of sustainable production; • provide an additional Fairtrade Premium which can be invested in projects that enhance social,

economic and environmental development; • enable pre-financing for producers who require it; • facilitate long-term trading partnerships and enable greater producer control over the trading

process; • set clear core and development criteria to ensure that the conditions of production and trade of all

Fairtrade certified products are socially, economically fair and environmentally responsible. (12)

Key differences include the payment of a premium and the provision of pre-financing for producers. The smallest-scale producers have a further set of standards reflecting their particular vulnerabilities. From the above it is easy to see why the average coffee consumer may be rather confused.

It is therefore hardly surprising that Cafédirect has found itself under pressure, notwithstanding the fact of its high ‘triple Gold Standard’. This Gold Standard is a promise to create long-term partnerships with smaller-scale producers, who may find it difficult to market their product commercially, in order to improve the quality of the product at origin and therefore increase value. The long-term partnership is also aimed at reducing or helping them to manage the risks of dealing in a globalised commodity market. Cafédirect also gives representatives of grower communities a direct voice in their own operations, and pays a price for the coffee which they believe properly reflects the true costs to the farmers of sustainable development and which is above the Fairtrade™ premium. The company also invests one third of its profits into programmes that are led and managed by the growers themselves in order to create a positive cycle of sustainable development. Above all, Cafédirect is committed through its Gold Standard policy and KPIs (used to measure adherence) to total transparency in all its dealings with its partners, and ensures at least two seats on the board of directors are taken by members of the grower communities. It is interesting to note that Cafédirect is measuring the levels of transparency, i.e. openness in business dealings and willingness to share information, with grower communities whom it surveys directly. Cafédirect also measures the number of defaults on coffee contracts with growers and in 2013 recorded zero defaults on contracts in what is a very volatile market. There may be many reasons for this exceptional level of reliability, and Cafédirect attributed it directly to the strength of the relationship with its supply partners (6).

Raynolds, in her research into the mainstreaming of fair trade coffee (3), came to the conclusion that ‘some coffee buyers are using fair trade labels largely as a vehicle to capture markets and certification as a mechanism to enhance traceability’. However, this – and the proliferation of other certification labelling – really also serves to create some consumer confusion regarding the nature of ethical sourcing and what is or is not ‘fair trade’. There is no doubt that a new segment of ‘quality driven fair trade buyers’ has emerged for coffee and these buyers see Fairtrade™ standards and requirements as one further method of ensuring supplies of high quality ‘gourmet’ coffee. These quality-driven buyers create ‘new types of partnerships via collaborative engagements in improving bean quality, capturing gourmet flavours, protecting coffee origins and bolstering markets’ (ibid). This could work to the benefit of the producers if it helps them to define the quality and originality of their particular coffee and, in so doing, adjust the power balance between buyer and supplier. However, there is evidence to suggest also that Fairtrade™ labelling may be used by some buyers mainly as a means of improving traceability and that this may actually increase buyer control over their suppliers.

Coffee Supply

The market and supply chain, or supply network, for coffee (see exhibit 1) is rather complex and, as can be seen from table 1, coffee is the second most heavily traded commodity in the world, after petroleum products, with a retail value in excess of $70 bn. More than 100 million people in 50 or more coffee-producing countries depend on it for their livelihoods.


Other notable facts regarding coffee include:

Table 1 (13)

Coffee is the most valuable and widely traded tropical agricultural product

7.9m tonnes of coffee was produced in 2011, of which 6.2m tonnes was exported

Coffee-producing countries earned $23.5bn from coffee exports in 2011

25 million smallholders produce 80% of the world’s coffee

Coffee provides a livelihood for a further 100 million people in coffee-producing countries

An estimated 1.6 billion cups of coffee are drunk worldwide every day

Global consumption has almost doubled in the last 40 years and is forecast to reach 9.09 million tonnes by 2019

Consumption growth in the last decade was led by producing countries (57%) and the emerging markets of Eastern Europe and Asia

The global coffee market, including fresh and instant, was worth $70.86bn in 2011

The UK in-home coffee market was worth £831m in 2010

Five coffee companies control half the global retail coffee market – Kraft, Nestlé, Proctor & Gamble, Sara Lee and Tchibo

Three coffee companies control nearly 70% of the UK retail coffee market – Kraft, Nestlé and Sara Lee (Douwe Egberts)

Coffee growers receive 7%–10% of the retail price of coffee in supermarkets

Global sales of Fairtrade™ coffee reached 88,000 tonnes in 2010

UK sales of Fairtrade™ coffee increased in value from £15.5m in 2000 to £194m in 2011

More than 530,000 coffee farmers from 28 countries benefit from Fairtrade™ coffee

The coffee supply chain consists of the following stages in the cycle from cultivation to cup (see also exhibits 2, 3, 4 and 5):

• farm production of unroasted or ‘green’ coffee • the roasting of the coffee beans and production of roasted coffee • further processing such as decaffeination and freeze-drying (production of instant coffee) • logistics and distribution • consumption of the coffee • waste management. (2)

Production of Green Coffee – Farming

Arabica beans are considered to be the highest quality coffee and are grown at higher altitude than the Robustas, which are in more plentiful supply. Compared with Arabica, Robusta beans produce a coffee which has a distinctive taste and about 50–60% more caffeine. Robusta is primarily used in blends and for instant coffees.

Production of green coffee can involve conventional use of pesticides or organic farming methods and either hand or mechanical harvesting methods. Following the harvesting of the coffee cherries (see exhibit 6) a number of different methods of processing can be employed, either wet or dry, or a combination of both. The aim is to get the undamaged or ‘green’ coffee bean from the coffee cherry and to clean and sort out damaged fruit. The outer layers of the fruit need to be removed and this can be done by either


drying the cherries in the sun or with drying machinery (at larger farms and cooperatives) for several weeks and then passing them through a hulling machine where the outer parchment-like layers are removed mechanically or by fermenting them in liquid. This later wet method requires substantial quantities of water and is usually reserved for the higher quality Arabica coffees rather than the Robustas.

Production and Processing

Before the coffee beans can be roasted, any traces of dried fruit, mucilage or parchment must be removed in the hulling process, which is carried out mechanically and, again, carefully controlled to ensure the beans are not damaged. The beans are then sorted by density and bean size and any foreign matter removed. The final step in the sorting process is to sort the beans by colour and although computerised sorting is now being used, the most common method is still by hand. This is clearly the most labour intensive part of the process, especially when the step is repeated for the premium gourmet coffees where the growers expect to receive a premium price for quality and rarity.

A further optional polishing process can be employed which improves the appearance of the green bean, but is not favoured by some who regard it as having detrimental effects on the flavour. The green beans are stored prior to shipment or further processing. Some coffees are purposefully aged for a number of years (up to eight years), as it is believed that this improves the flavour; but most green coffee is stored for a year or less, since experts agree that the flavour of green beans will deteriorate after this point.

Further processing will include roasting and may also involve grinding, decaffeination and production of soluble coffee in the form of instant granules, powder or liquid. A wide variety of packaging is used such as jars, foil packs, aluminium cans and pods or sachets (a rapidly growing market for use in coffee machines, both domestic and catering).

Intermediaries

Intermediaries, sometimes referred to as ‘coyotes’, can be involved in every element of the supply chain for coffee, from coffee cherries to green beans. Intermediaries can be responsible for primary processing, consolidating purchases from a number of small farmers, and then selling or transporting to processors or to another intermediary or dealer. Coffee intermediaries have gained rather a bad name for the exploitation of poor farmers, who are usually poorly educated, live in remote locations and have little or no access to market information. In the past many farmers were forced to deal only with such buyers because there were limited alternative opportunities to sell their produce. However, in some cases today, the intermediaries are themselves quite poor and working on very low margins. Farmers are still prepared to deal with these intermediaries because they are not as concerned with compliance and will buy everything. Adhering or complying with the standards set by Fairtrade™ and other certification bodies comes with a lot of hard work and some farmers do not believe the rewards justify this when they can easily sell to the coyotes. Some commentators believe that there is a role for the coyote in the coffee supply chain in certain circumstances.

Processors

This involves the conversion of coffee cherries to green coffee beans ready to roast and is often carried out by separate processors. If the farm or cooperative has the resources, then it may have its own processing facilities. Ethical supply initiatives by Cafédirect, Vega, Equal Exchange and other organisations seek to help farmers to join cooperatives where they can afford to cut out some of the intermediaries and carry out important processes themselves.


Government Agencies

In some countries, e.g. Ethiopia, the coffee trade is regulated by the government; this may involve the government purchasing coffee at a set price and selling for export through auctions.

Exporters

Exporters purchase from cooperatives, processors and auctions using their own expert knowledge of the market and region to ensure quality. Exporters will then sell on to dealers or roasters.

Dealers and Brokers

Similar to agents, and often working on a commission basis, they ‘broker’ deals between the buyers and the sellers of coffee beans (other intermediaries) and help to negotiate or find the right price.

Roasters

Companies that roast and further process the coffee beans into the coffee products that are purchased by consumers – ready ground, whole beans, instant, decaffeinated, capsules, sachets, etc. These include companies such as Nestlé, Kraft, Sara Lee, Starbucks, and Cafédirect. Here the coffee cuppers (tasters) will help to ensure the right roast and blend of different coffee beans for the tastes of the target end consumers.

Retailers play a major role in the coffee market and these can range from the large supermarkets and coffee shop chains, such as Tesco and Costa Coffee, who also buy their own-label products, to vending machine distributors, mass catering organisations and small independents.

The Global Coffee Market

Some changes in supply and demand in the global market were identified in a report commissioned by the World Bank:

1. Demand in the major importing countries is growing only slowly. 2. New markets are emerging and growing fast, driven by the availability of cheap coffees in

soluble form. 3. New channels for higher quality and differentiated markets are emerging rapidly in many

countries. 4. Roasters have learned to increase their use of natural and Robusta coffees by processes, such

as steaming to remove the harshness of taste. 5. Roasters have learned to work with lower working stocks, but this has increased the logistical

demands made on suppliers which favour the largest trading companies. This has led to concentration of the supply chain in the hands of fewer major traders.

6. Roasters have become more flexible and willing to make short-term switches between coffee types in order to take advantage of lower prices.

7. The concentration of roasters, particularly in a period of oversupply, demonstrates the fact that consumer coffee markets are ‘far from a model of textbook economic efficiency’ with rapidly clearing markets and without high-cost barriers to entry (Lindsey 2003). Instead, price responses can be slow and lag well behind perceived changes in events. For instance, reported retail price falls hardly reflect the changes in green coffee prices in the world markets even though, as a report commissioned by the Dutch government states, ‘At the supply chain down to the countries of origin, there is no evidence of cartel behaviour of the roasting industry (RIAS 2002)’. (1) (See also exhibit 7.)


Clearly, the coffee farmer would be able to achieve the highest price by selling directly to the roaster or manufacturer such as Nestlé. However, this is simply not possible for many individual farmers, because they are too small. Nestlé, in its corporate communication, maintains that it is committed to increasing the amount of direct purchasing from farmers in countries where it also manufactures for export. In such markets, Nestlé asserts that it widely advertises the price it will pay as well as a minimum base price in order to ensure other traders are forced to keep prices competitive. In many markets such as the UK, however, this is not the case and coffee is purchased from dealers on the international market.

The Dilemma for Cafédirect

The rapidly changing nature of the global coffee supply and consumption market has clearly created a problem for Cafédirect as evidenced by its stagnant or declining sales and net loss of nearly £0.6m in 2013 (6). Its strategy appears to be: to work closer with growers and supply chain partners; to continue to focus strongly on the Gold Standard and triple bottom line; and to innovate more aggressively. With regard to the latter, it has recently entered the market for Nespresso Machine compatible coffee pods with a range of four varieties and has also launched new single origin roast and ground coffees from Costa Rica and Colombia (ibid). The company believes that this focus on innovation and new product development in the growing market for gourmet coffees has improved relationships with key customers as well as helping to fuel an improvement in sales.

The majority of customers have difficulty in understanding multiple messages on ethical or sustainability issues (5), so in order to survive and continue to provide support to grower communities, Cafédirect will need to embrace the competition that is now growing within ethical and sustainable supply networks. The Fairtrade™ approach to supply markets and supply chain development could be considered a lean model which should, according to theory, ensure the lowest costs. However, the Fairtrade™ premium may tend to counter this to some extent.


GLOSSARY

Term Explanation

Arabica coffee beans Originally from the high altitude, humid forests of Ethiopia and South Sudan, where it still grows wild, Arabica coffee (Coffea arabica) is considered to produce the finest coffee beans. Most instant coffee is made from a mixture of Arabica and Robusta (Coffea canephora), the latter having a less delicate flavour and aroma and more caffeine. Generally, Arabica is grown in upland plantations and Robusta in lowland plantations (Kew Royal Botanic Gardens).

ATO – alternative trade organisation

Organisations that made a commitment to work directly with indigenous peoples and to market their products directly to consumers. By cutting out middlemen, ATOs have been able to pay farmers substantially more while offering a competitive product.

Chain of custody These are requirements that prevent or regulate the mixing of certified and non-certified product at every single participant in the supply chain, ensuring that the certified product leaving the company is the same certified product that entered the company. It’s the rigor of that system that brings transparency to the market.

Coyote A type of wild dog – a scavenger, and also a name commonly given by coffee farmers in South America to certain common types of intermediary in the coffee supply chain (Chavez, 2011). They are called ‘coyotes’ because ‘they use their market position to eat away much of the farmers’ earnings’ (McKone-Sweet, 2004).

Coffee cupping Professional coffee tasting – can be done informally or professionally by ‘Master Tasters’ and is an attempt to ‘measure aspects of the coffee's taste, specifically the body (the texture or mouthfeel, such as oiliness), sweetness, acidity (a sharp and tangy feeling, like when biting into an orange), flavour (the characters in the cup), and aftertaste. Since coffee beans embody tell-tale flavours from the region where they were grown, cuppers may attempt to identify the coffee's origin’ (Wikipedia).

EMAF – Eco Management For Food

Research project PRIN 2008, ‘Improving sustainability and competitiveness of the Italian agri-food chain with innovative environmental management tools’, is co-funded by the Italian Ministry of Education, University and Research and is specifically designed for improving the sustainability and competitiveness of the agro-industrial food chains.

FLO – Fairtrade™ Labelling Organizations International

Develops and reviews Fairtrade™ standards and assists producers in gaining and maintaining certification and in capitalising on market opportunities in the fair trade market. To ensure the transparency of the system, the standards are developed and reviewed by the FLO Standards and Policy Committee, in which FLO members, producer organisations, traders and external experts participate (Investopedia).

FLOCERT – www.flocert.net

A global certification and verification body first established in 2003 to independently certify Fairtrade™ products.

4C Association The 4C Association is a platform that brings together stakeholders in the coffee sector to address sustainability issues in a pre-competitive manner. The 4C Association defines and maintains the 4C Code of Conduct, a baseline standard for sustainability in the coffee sector. The Code comprises 28 social, environmental and economic principles for the sustainable production, processing and trading of green coffee.


GIO – geographic indication of origin

A geographical indication (GI) is a sign used on products that have a specific geographical origin and possess qualities or a reputation that are due to that origin. In order to function as a GI, a sign must identify a product as originating in a given place. In addition, the qualities, characteristics or reputation of the product should be essentially due to the place of origin. Since the qualities depend on the geographical place of production, there is a clear link between the product and its original place of production.

Green coffee Green coffee beans are coffee beans that have not yet been roasted.

ICO – International Coffee Organization

The International Coffee Organization (ICO) is the main intergovernmental organisation for coffee, bringing together exporting and importing governments to tackle the challenges facing the world coffee sector through international cooperation. Its member governments represent 95% of world coffee production and 83% of world consumption. See more at: www.ico.org/mission07_e.asp?section=About_Us#sthash.TtJkeLVU.dpuf.

IDH – Indice de Développement Humaine (French: Human Development Index)

See www.idhsustainabletrade.com/about-idh: ‘IDH accelerates and up-scales sustainable trade by building impact oriented coalitions of front running companies, civil society organizations, governments and other stakeholders that will deliver impact on the Millennium Development Goals 1 (poverty reduction), 7 (safeguarding the environment) and 8 (fair and transparent trade).’

Mucilage A sticky gluey substance that surrounds the coffee bean and is removed in processing mechanically, either by heat or use of water. Combined methods are also used.

OTA Organic Trade Association

Parchment coffee Dried but unhulled coffee beans – still having a dry parchment-like layer of fibres attached, which must be removed without damage to the beans prior to roasting.

Robusta coffee beans Compared with Arabica, Robusta beans produce a coffee which has a distinctive taste and about 50–60% more caffeine. Robusta is primarily used in blends and for instant coffees (National Coffee Association USA).

Soluble coffee More commonly known as ‘instant coffee’, soluble coffee is a beverage derived from brewed coffee beans in the form of crystals, powder, granules or concentrated liquid.

Utz Kapeh This is the largest certification programme in the world for the sustainable farming of coffee. Founded as a producer-industry initiative, UTZ Certified is an independent organisation. By setting a 'decency standard' for coffee production, and helping growers to achieve it, UTZ recognises and supports responsible producers. See more at: www.thecoffeeguide.org/coffee-guide/niche-markets-environment-and-social-aspects/utz-certified/#sthash.Dxni6ekO.dpuf.


REFERENCES

1. Lewin, B, Giovannucci, D & Varangis, P, (March 2004) Coffee Markets: New Paradigms in Global Supply and Demand, World Bank Agriculture and Rural Development (discussion paper no. 3)

2. Vega, FE, ‘The rise of coffee’, American Scientist, 2008, downloaded on 03.09.15 from: www.americanscientist.org/issues/feature/2008/2/the-rise-of-coffee/1

3. Raynolds, RT, ‘Mainstreaming fair trade coffee: From partnership to traceability’, World Development 2009, vol. 37, no. 6, pp. 1083–1093

4. Venkatesh T & Vasudha, A (2009) Cafédirect (b): ‘Fair’ Success, IBS Research Centre (available from the case centre)

5. Davies, IA, Doherty, B & Knox, S, ‘The rise and stall of a fair trade pioneer: The Cafédirect story’, Journal of Business Ethics, March 2010, vol. 92, no. 1, pp. 127–147

6. Cafédirect plc, Annual Review and Accounts 2013

7. Wendelspeiss, R (2010) ‘Firm response to advocacy campaigns – a case study into how advocacy campaigns stimulate organizational change’, University of St Gallen Graduate School of Business Administration (dissertation)

8. Verdier-Stott, J, ‘Labels, lies and the law: Opportunities and challenges in mainstreaming fair trade’, Law, Social Justice & Global Development Journal, 2008, vol. 1 www.go.warwick.ac.uk/elj/lgd/2009_1/verdier-stott

9. Fairtrade Foundation UK, ‘Statement on launch of Kenco sustainable coffee’, 6 July 2004, downloaded on 01.10.15 from: www.fairtrade.at/nc/presse/pressemitteilung/article/fairtrade-foundation-uk-statement-on-launch-of-kenco-sustainable-coffee/

10. Nicholls, W, ‘Mondelez International brews up sustainable business ambition’, BusinessGreen.com, 17 November 2014, downloaded on 02.10.15 from: www.businessgreen.com/bg/feature/2381553/mondel-z-international-brews-up-sustainable-coffee-ambition

11. 4C Association, ‘Rules of participation – the business code V3’, November 2013, downloaded on 02.10.15 from: www.4c-coffeeassociation.org/the-standard/purchasing

12. Fairtrade Standards, www.Fairtrade.net

13. Natural Resources Institute, ‘A review of the impact of Fairtrade over the last ten years’, March 2010, downloaded on 05.09.15 from: www.fairtrade.net/fileadmin/user_upload/content/2009/about_us/ 2010_03_NRI_Full_Literature_Review.pdf


BIBLIOGRAPHY OF ADDITIONAL MATERIAL

Anon., ‘Guidelines for the Fairtrade-labelling of composite food products’, Fairtrade Labelling Organizations International, downloaded on 05.09.15 from: www.fairtrade.org.uk/~/media/fairtradeuk/what%20is%20fairtrade/documents/2_comp.ashx

Beverage Industry, ‘State of the industry 2015: Shrinking up, cooling down’, July 2015, downloaded on 03.09.15 from: www.bevindustry.com

Blinch, R, ‘Oddly sustainable: Can vanity coffee give farmers a boost?’ Guardian Sustainable Business, 29 August 2014

Business Case Studies LLB, ‘Nestlé coffee – the supply chain’, downloaded on 03.09.15 from: www.businesscasestudies.co.uk

Caulkin, J, ‘There is no sustainability without traceability’, CoffeeTalk, December 2011, downloaded on 03.09.15 from: http://magazine.coffeetalk.com/december11-traceability/

Chavez, LC, ‘Co-operative or coyote? Choice of sales channel for small scale coffee producers in Central America’, 2011, Norwegian Latin American research network NORLARNET, downloaded on 05.09.15 from: www.norlarnet.uio.no/research-in-norway/featured-research/2011/fairtrade-coffee.html

Confino, J, ‘Café Direct seeks to push the frontiers of the Fairtrade movement’, Guardian Professional, 9 March 2013, downloaded on 23.03.2015 from: www.theguardian.com/sustainable-business/cafe-direct-fairtrade-movement-coffee-competition

Cook, JA, ‘From bean to cup: How Starbucks transformed its supply chain’, CSCMP’s Supply Chain Quarterly, 10 September 2015, downloaded on 02.09.2015 from: www.supplychainquarterly.com/print/scq201004starbucks/

Durevall, D, (2015) Are Fairtrade Prices Fair? An Analysis of the Distribution of Returns in the Swedish Coffee Market, HUI Research and Department of Economics, University of Gothenburg

Emanagement for Food, ‘The coffee supply chain’, downloaded on 02.09.15 from: http://ww2.unime.it/emaf/index.php?option=com_content&view=article&id=57&Itemid=45&lang=en

Equal Exchange Inc., http://equalexchange.coop

Equal Exchange Trading Ltd., www.equalexchange.co.uk

Fairtrade Foundation (2012) Fairtrade and Coffee: Commodity Briefing, London

Fairtrade Labelling Organizations International (FLO), Guidelines for the Labelling of Composite Food Products, July 2003

Fairtrade USA, ‘Special price and premium terms’, downloaded on 06.09.15 from: www.fairtradeusa.org/sites/all/files/wysiwyg/filemanager/FTUSA_SpecialPriceTerms_EN_102413.pdf

Fairtrade USA, www.fairtradeusa.org

Field, A, ‘A supply chain overhaul to boost coffee farmers’ income 400%’, Forbes, 16 July 2014, downloaded on 02.09.15 from: www.forbes.com/sites/annefield/2014/07/16/a-supply-chain-overhaul-to-boost-coffee-farmers-income-400/


ICO – International Coffee Organisation, ‘Trade stats’, downloaded on 03.09.15 from: www.ico.org/coffee-trade-statistics-infographics.asp?section=Statistics

Investopedia, www.investopedia.com

Investorguide.com

Kew Royal Botanic Gardens, www.kew.org/science-conservation/plants-fungi/coffea-arabica-arabica-coffee

McKone-Sweet, KE, ‘Lessons from a coffee supply chain’, Supply Chain Management Review, October 2004

Murekezi A, Jin, S & Loveridge, S (2012) ‘Do organisational forms of the coffee supply chain matter in poverty reduction?’ Development in Practice, vol. 22, no. 7, pp. 962-977: DOI: 10.1080/09614524.2012.697127

National Coffee Association USA, www.ncausa.org/i4a/pages/index.cfm?pageid=67

Siegel, P & Ahlwang JR (2004), Export Commodity Production and Broad-based Rural Development: Coffee and Cocoa in the Dominican Republic, World Bank Publications

Valkila, J & Nygren, A, ‘Impacts of Fair Trade certification on coffee farmers, cooperatives, and laborers in Nicaragua’, Springer Science+Business Media B.V., 5 January 2009

Vasudha, M (2014) Cafédirect: Return of the Fairtrade Pioneer, Amity Research Centre Headquarters, Bangalore


EXHIBITS

Exhibit 1

https://saylordotorg.github.io/text_the-sustainable-business-case-book/s13-02-the-coffee-industry-s-supply-c.html 03.09.15Exhibit 2 Simplified Coffee Supply Chains


Exhibit 2 Simplified Coffee Supply Chains

Fairtrade Foundation (2012) Fairtrade and Coffee: Commodity Briefing, London, p.10


Exhibit 3 Roasted Coffee Supply Chain

Emanagement for Food, ‘The coffee supply chain’, downloaded on 02.09.15 from: http://ww2.unime.it/emaf/index.php?option=com_content&view=article&id=57&Itemid=45&lang=en


Exhibit 4 Comparing Traditional and Fair Trade Supply Chains

Comparing Traditional and Fair Trade Supply Chains

Small Farmers

Local Middlemen Exporters Importers Brokers Roasters/

Coffee Co. Distr. Retailers

Producers/Farmers

Fair Trade Importer

Roasters/Coffee Co. Distr. Retailers

Traditional Supply Chain

Fair Trade Supply Chain

Coffee Estates

Middlemen Processor

Co-ops

McKone-Sweet, KE, ‘Lessons from a coffee supply chain’, Supply Chain Management Review, October 2004, p.54

Exhibit 5 Increasing Need for Supply Chain Capabilities

Fuller, J, Mercier, P, Brocca, M & Morley, J, ‘Adaptive supply chains; Building capabilities for an uncertain world’, BCG Perspectives, The Boston Consulting Group, 4 September 2013


Exhibit 6

http://etc.usf.edu/clippix/picture/coffee-fruit-structure.html

Exhibit 7 Price Fluctuation in the Arabica Coffee Market 1989–2011

190180170160150140130120110100

908070605040302010

0

US

cent

s/lb

1989 1990 1992 1994 1996 1998 2000 2001 2003 2005 2007 2009 2011

179

120

17

33

http://etc.usf.edu/clippix/picture/coffee-fruit-structure.html


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