operations management and business strategy

Operations Management
Introduction to the Company
Fiyeli Coffee is an artisan coffee roaster in a mid-sized city. The company operates with a wholesale-only business model, which allows it to focus on the high end restaurant and hotel trade in the state, along with a mail order retail business. Fiyeli also sells to select coffee shops, but most of its market is on the restaurant and hotel side.
In the United States, the retail coffee market is worth an estimated $12.8 billion and saw a growth rate of 7.9% (Morder Intelligence, 2017). The market is highly competitive and highly stratified, but the growth provides opportunity for companies to grow, and to find specialized niche markets.
The Challenge
Fiyeli faces a long-term challenge to ensure a stable supply chain of high quality coffee beans. Rising consumption has increased demand, while climate change is threatening supply, the result being a spike in the price (Mersie, 2019) and decline in availability of high quality beans (Garza & Hoffman, 2019). Inability to resolve this challenge will make it more difficult to maintain the brand’s strong reputation, and could also impact the ability of the company to maintain growth going forward.
Demographics
Coffee is one of the most widely consumed beverages in the United States, with 64% of Americans drinking at least one cup per day (Sherman, 2018). The participants of this survey were adults, and children are not part of the target demographic. Most of the company’s customers on are the B2B side. They are usually men, middle aged, and white. They may or may not have a formal education, as some of them came through the ranks starting in kitchens, to their current roles. Younger buyers will often have some sort of college background. Fiyeli targets upscale hotels and restaurants, so its end users are middle-aged, with over $100,000 in household income, usually college education, and they skew more white than the general population.
Design of the Supply Chain
Khan and Creazza (2005) make the case that product design is integral to the supply chain management process. Their research suggests that products are typically designed to meet identified market needs, and the supply chain designed around the product. But, they argue, if product design is also taken into account, the supply chain management can be simplified. An example of this is that there might be a part that is difficult to source, but a similar part might be easy to source. Opting for the easier part would be building supply chain thinking into the product design. For coffee, the key is that super-premium coffees are built into the business model at Fiyeli, which means that having a consistent, reliable supply chain is of utmost importance.
It is worth knowing that super premium coffees are relatively stable in their green (pre-roasted) state, which means that the supply chain should be designed for quality. Speed is not that important as the beans can be warehoused for a year or more. Low cost is not that important because the target consumer is not particularly price sensitive. For these reasons, a supply chain that is designed around quality is the optimal choice.
Materials Resource Planning (MRP)
Overview
An MRP (materials resource planning) system is one tool for helping to manage the supply chain. An MRP system can help provide dashboards and metrics for evaluating the supply chain, and should have features that allows for tracking of items within the supply chain (Shebab et al, 2004). The MRP system should be tied into overall company goals and metrics, but should also add value, working with the company’s demand forecasting system in order to ensure that a sufficient supply of coffee is available to be roasted. For a coffee roasting business, the MRP should be input with things like harvest times in different parts of the world, demand forecasts, and a list of vendors.
Key Suppliers
The key suppliers are actually the farmers. A common business model for very high end coffee is a farmer direct model. There are wholesalers who can handle this function, but often the company works with farmers with high quality beans in order to ensure that sufficient supply can be procured. Fiyeli, with a supply chain designed for quality, can spend the money to get the absolute best, which would typically occur from visiting the growing region and making connections with individual coffee farmers. Paying a premium can ensure a stronger relationship with the supplier. Fiyeli needs to start building relationships is critical target companies – Ethiopia, Guatemala, Kenya, Rwanda, Costa Rica, Peru, Bolivia and others – in order to gain access to a diverse range of beans. Between 20 and 100 farmers or coorperatives should be contracted to produce for Fiyeli, depending on the size of the contract.
Supplier Relationship Management
Overview
The basic philosophy that underpins the supplier relationship management strategy is that there are only so many producers of super premium coffee beans in this world. They have both the right land and the skills to get the most out of it. There is increasing competition for the best beans, and therefore it is integral to have a sophisticated supplier relationship management system. Some key elements of an SRM are purchasing strategy, supplier selection and development, and collaboration with suppliers (Park et al, 2010).
SRM Strategy
The purchasing strategy is to purchase at the harvest for each target nation, and to do so in person. The beans can be shipped from there, and stored at the company’s site, at its roasting facility. Many suppliers appreciate the buyers who visit them locally. Not only does this give the buyer a chance to build a strong relationship with the farmer or co-op head, which in many supplier nations is the preferred means of doing business. Furthermore, these strong relationships will give Fiyeli preferential access to beans from the best farmers in subsequent years, something that could potentially form a source of competitive advantage. This development of suppliers is essential for allowing the company to scale in the future as well, since Fiyeli will have a strong reputation in the areas where it has existing supplier relationships. Again, farmers are often strongly motivated by family and community, so Fiyeli having an in-person presence in critical regions can help to build rich, contextual relationships that can bear fruit in many different ways.
Production
Forecasting
The first element of production is the forecasting function. While Fiyeli expects to have a minimum of one year’s worth of green beans on site, in inventory, roasted beans deteriorate almost immediately. Thus, the production function is almost entirely dependent on the ability of the company to forecast demand. This is good, because it creates a significant amount of temporal separation between the supply chain function and the production function. Inventory holding costs are minimal relative to the challenges associated with acquiring super premium beans, and the seasonal nature of the product means that one years’ worth of coffee from each region is most logical, so that the company can always offer a variety of African, Central American, and South American beans.
There are several approaches to demand forecasting. Many systems involve moving averages, which capture growth that the company is experiencing, while basically hedging against overproduction (Aburto & Weber, 2005). With a short production cycle, this approach is feasible for Fiyeli, and therefore should be adopted. If there are any instances where demand spikes, it will be easy to produce more beans to sell. Longer run adjustments can be made by purchasing on the open market, or tapping into larger purchases wherever the next harvest is As such, a fairly simple moving average system for demand forecasting should be sufificent to meet the needs of Fiyeli.
The production process itself is relatively straightforward. Green beans are loaded into a roaster, which is a large drum that simultaneously supplies heat and stirs the beans to ensure that the heat is evenly distributed through the batch. Top end roasters have the best temperature control, and thus are essential for any roaster with a premium position in the market. The process takes less than half an hour, depending on how manual the preparation process is, and what roast is desired. The beans are at their peak within a couple of days of roasting, so can be sent to market immediately, knowing that they will be sold either at their peak or just after. The longer the beans sit after the roast, the more they deteriorate, but this is not necessarily going to impact on the ability of the company to sell the beans. Because Fiyeli sells mainly to restaurants and hotels, its demand is relatively easy to forecast and it can produce on demand, with 24 hours notice and sometimes less. This flexibility is favorable for the company.
Packaging
Overview
Packaging is done in bags, with a few different sizes. Whereas the half pound or pound bag is a standard size for the retail trade, institutional packaging can be in larger sizes, and both 5 and 10 lb bags will be available. There is no difference in the production of the beans for the different bag sizes.
Customer Need
Institutional buyers require two things. One, they require larger bags than what would normally be sold on the retail trade. The second critical factor influencing packaging is the freshness of the bean. Inside the bag, the beans last longer, whereas outside the bag, beans will deteriorate more quickly. As such, five or ten-pound bags provide minimal packaging and bulk shipping, but with the added benefit of being small enough that the restaurant or hotel should be able to sell an entire bag on the same day that it is opened, thereby optimizing freshness, especially if the beans are pre-ground by Fiyeli. Packaging that emphasizes maintaining freshness is important because most clients will store a minimum of one week’s inventory on hand and it only takes 10 days for degradation to occur once the beans are exposed to oxygen (CT Magazine, 2012).
Transportation
Overview
Distribution for the company is regional only at this point, so transportation is generally not an issue – trucks get the job done. There is a small retail mail order business, but the company predominantly uses its own small fleet of vehicles in order to make deliveries. This mode meets customer expectations because the deliveries are done by Fiyeli employees. They generally work a route set out each morning for deliveries, based on the day’s orders. There is barcode tracking utilized in order to provide automated documentation of order fulfillment and initiate the billing cycle. For the vast majority of customers, there is no additional delivery charge; only in cases of long distance transportation would such a charge be incurred.
Supply Chain Transportation
Most coffee comes from very far away, and arrives via a combination of truck and ocean shipping. At the foreign country end, logistics are usually handled by the buyers, who take delivery at the farm, coop or local distributor level. Shipment to ports is arranged. There is not usually any aggregation of shipments, say from multiple regions of Ethiopia. Typically, ocean shipments are done on a less-than-container basis, because quantities are too small. Fiyeli must plan for disruptions during this stage of shipping – many supplier countries are politically unstable, have high crime or have poor infrastructure, or a combination of all three. Ordering once per harvest (annually) allows for some leeway, and having each lot shipped separately also reduces the risks associated with loss – the company is highly unlikely to lose an entire crop from any given country because the purchases do not travel together. At the American end, trucks are utilized, and there is much lower risk, plus there is also insurance available to cover risk where needed during this stage of transportation. For some supplier countries, such as Ethiopia, coffee harvest is one of the busier times at port, but the fact that the shipments are not time-sensitive minimizes the potential damage caused by delays (Santinello, 2017).
Cost of Goods Sold
Fiyeli’s target market has moderate price sensitivity. As high end buyers they are willing to pay a premium but competition limits the price control that Fiyeli has, and this creates a mandate for Fiyeli to manage the cost of goods sold. Other components – bags, roasting, labor, etc., - are generally stable and it is only the price of coffee that fluctuates. Some larger coffee companies will utilize futures contracts to guarantee a stable price, but Fiyeli does not. It negotiates contracts with suppliers, and will only accept significantly higher prices to the extent that it feels comfortable with its ability to pass those prices along to customers, such as when commodity price fluctuations mean that all roasters are facing increases.
The cost of goods sold, therefore, is held within a range that the market can bear, and Fiyeli uses its relationships with its customers to ensure that price changes are communicated fully. One tool is has at its disposal, for example, is to pass along dips in wholesale prices to its customers, knowing that they will not lower their prices (Del Valle, 2019). By allowing customers to earn higher margins at times of low wholesale prices, Fiyeli can earn goodwill that it can leverage when coffee prices increase.
CRM (Customer Relationship Management
Overview of CRM Strategy
Customer relationship management is about more than just sales. CRM is about the total customer journey from the moment that they first hear about a brand until they are a brand evangelist. As such, CRM means building and actively managing relationships with customers in order to increase sales, reduce churn, and increase company reputation. Customer relationship management, in this context, is a key component of corporate strategy that cuts across every touchpoint (Payne & Frow, 2005).
Creating Evangelists
To get to the stage where our customers are evangelizing for us, our sales and service teams will both be trained in gathering feedback, via a customer experience feedback loop. They often deal on the front lines, both with front line employees at our customers, and with the procurement staff as well. Our company culture should be built with the customer in mind – communicating openly and honestly with them, at a high rate of frequency, and often with specific objectives in mind. The details of these conversations will be logged into our CRM system, and analyzed for trends by our business analyst, in order to get the most value out of the information that we gather. It is important not just to gather data, but to use it, and that requires having a dedicated staff member to make use of this information.
Sustainability and CSR Plan
Overview
Sustainability is a challenging concept for a company that deals in a good that, while incredibly popular, technically nobody actually needs. But there are ways that we can minimize our carbon footprint, and reduce the waste generated by our activities, and these should be built into our strategy. The most effective way to ensure that sustainability and CSR initiatives are front and center strategically is to produce a public-facing report, as such reports will put our goals in writing, and our evaluation of how far we have progressed towards those goals. This document will be available both internally to our staff, and externally to key stakeholders and customers. There are several bodies that can assist with identifying best practices for producing such reports, so that the report is not simply a matter of corporate greenwashing or marketing spin (Manetti & Becatti, 2009).
Sustainability Plan
Fiyeli will develop a multitude of metrics that will help with determining our corporate social responsibility, and sustainability practices. There will be waste reduction metrics, fossil fuel usage, carbon footprint, water and electricity usage, and composting metrics. Having such metrics will drive initiatives to reduce packaging waste, to reduce energy intensity, and to eliminate to the best extent possible our carbon footprint. We will also be able to use carbon offsets, such as planting forests in our supplier countries, many of which are critical as carbon sinks.
Corporate social responsibility is a major issue in coffee. The typical issue is with regards to the farmers, and their ability to earn a fair wage and rate of pay for their work. Fiyeli works with star growers, and because of that, pays them a healthy wage, especially when buying direct. This version of fair trade, conducted without certification but with public reporting, helps the company and its key stakeholders to recognize the value of ensuring that the world’s best coffee farmers are able to maintain their livelihoods, even when prices are falling. In addition, with programs to provide education to children in supplier countries, and develop average farms into superstar farms, Fiyeli expects to delve to some extent into vertical integration to make this happen. The company will also have specific reporting on domestic issues such as fair wages, wage equity, and other initiatives that are generally of concern in America, where corporate social responsibility is concerned.
Recommendation
It is recommended that all of these plans are taken into account, and executed. Fiyeli has aggressive growth plans, but all of these plans work together in concert with one another. It is not sufficient to simply adopt one element of these plans, or another, as they are symbiotic in nature. When we pay suppliers a fair price for their product, we get a great product. With that great product, we have price flexibility that allows us to maintain margins and establish a brand with an exceptional reputation. When this is coupled with exceptional service, and that service is supported by a supply chain without disruptions,
Conclusion
Fiyeli Coffee, named after the Amharic word for goat, an homage to the alleged origin story of how humans came to discover the energy-giving properties of coffee, is a high end coffee company in a mid-sized city. With an eye to expansion, the company needs to ensure that it has a sufficient access to the best quality beans, but it competes for these beans with many other smaller roasting companies. While most competitors at the supply level end up selling via the retail café market, Fiyeli has focused on hotels and restaurants. While most institutional buyers focus more on price, or buy overpriced burnt beans from major international brands, Fiyeli has a successful appeal to quality that is hard to ignore.
Some of the attributes of coffee are favorable for supply chain management. Green beans can be stored for a year or two at least – only when roasted do they degrade quickly. Harvest times around the world vary, so there is always a fresh harvest somewhere. Buying a year’s supply from each major producing region may lead to higher inventory holding costs, but customers want their favorite coffees available at all times, and those inventory costs can be passed along to the customers. Building strong personal relationships with buyers and customers both will help the business to grow, as these personal relationships will help ensure a strong supply chain, and foster evangelism among customers.
References
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