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...…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…