The Dilemma
As Jim Brewer sat in his office overlooking the packaging facilities of Creolé Coffee,
his thoughts returned to the date last Spring when he had assumed corporate
responsibilities for green coffee procurement at one of the largest family owned
coffee processors in the United States. The last twelve months had been a very
difficult time in Jim’s life; there had been dramatic swings in the price of green
coffee. Although his superiors assured him they were satisfied with his
performance, Jim couldn’t help but wonder if he was cut out for this type of work.
He knew that if Creolé Coffee were to continue its recent successes on the regional
and national levels, a long-term green coffee procurement strategy had to be
developed to guarantee a sufficient supply of quality coffee at stable prices.
Although Creolé Coffee had a long and rich history in the Louisiana coffee market,
it had only been in recent years that it had started to achieve success on the
regional and national levels. An influx of investment capital from the New Orleans
business community combined with a creative marketing campaign that focused on
the heritage of Creole culture served to launch Creolé Coffee onto the national scene
in the early 1990s. The honeymoon was short-lived, however, as dramatic volatility
in the world coffee market resulted not only in price instabilities, but also created
difficulty in procuring the high-quality product customers had grown to expect from
Creolé.
Jim knew that the problem facing the company involved more than simply
minimizing the price paid for coffee beans. As Creolé Coffee grows, it must develop
relationships with producers if it is to ensure the availability of the quality and
quantity of coffee needed to produce the premium blends consumers now associate
with Creolé. From Jim’s viewpoint, price stability was the key issue. Creolé Coffee
had to guarantee stable, profitable prices to coffee bean producers in return for a
reliable supply of quality coffee. In turn this would allow the company to provide
consumers with a high quality product at a steady price.
While this plan made sense to Jim, there were many details to be resolved before
Creolé Coffee could develop the type of procurement program he envisioned. As he
began to sort out the issues and potential solutions, his thoughts went to the core of
the problem: the instability in the world coffee market. Jim determined that to
develop a successful solution to this problem he must first familiarize himself with
previous attempts to mitigate coffee price fluctuations. Given their lack of success,
he knew he had a long road to travel.
Background
The dynamic nature of the global coffee commodity market directly impacts
decisions made by procurement specialists such as Jim. Price changes and production quantities have historically been extremely volatile and can be heavily
influenced by factors such as inclement climactic conditions, trade policies of
producing nations, and various consumer/producer preferences. As Figure 1
demonstrates, retail roasted coffee prices were dramatically low during the early
1980s and early 1990s (USDA/FAS 1999 and 2003). According to Figure 1, price is
negatively correlated with world coffee stocks, supporting the expectation that price
is directly affected by supply.