International Operations in Coffee Industry - Essay Example

International Operations By Table of content Introduction………………………………………………………………… 3 2. Industrial Analysis………………………………………………………….. 3 3. Country analysis…………………………………………………………… 4 3.1 Coffee in Peru……………………………………………………………. 4 3.2 Coffee in Uganda………………………………………………………… 5 4. International Operations Strategy…………………………………………. 6 4.1 Why Peru? ................................................................................................... 6 4.2 Methods of entry………………………………………………………….. 6 5. Supply Chain Design & Management…………………………………….. 8 6. Conclusion………………………………………………………………… 9 7. References…………………………………………………………………. 10 1. Introduction This report is about supply of coffee and how Tesco can invest on this new opportunity thus enabling it to reach more market. Some of the topics covered in the report are industrial analysis. This will focus on coffee production and supply and the main consumers of coffee. The second topic of study will be country analysis. In this topic two countries of choice: Uganda and Peru will be discussed majoring on coffee that comes in these countries. Another topic is international operations strategy where the country of choice will be explored more and issues like entry mode and a SWOT analysis of each mode. Finally, the report will handle supply chain design and management, that is, how coffee from the country of choice will be transported and stored and how it will be processed. 2. Industry Analysis Coffee is the most popular hot drink around the world. It’s eminent if at the counters of most restaurant, commutes and kitchen. Also people who do jobs that involve the brain a lot preferred to take coffee as it acts as a “coolant” of the brain. Statistics show that most consumers of coffee are the modernised nations even though the third world countries are the major producer of it. This industry accounts for approximately $20 billion dollars of exports and is worth $100 billion worldwide (Bacon, 2008). Moreover, it has been shown that over 500 billion cups of coffee cups are drunk annually and this comes from 25 million people who work in coffee farms. Furthermore, over 50 countries all over the world grow coffee. Out of the five countries, Asia, South America, Caribbean, Africa and Central America, that grow coffee to the world, America contributes up to 67% of the global coffee output. Though coffee is manufactured in different flavours, depending on which country it has been processed from, coffee only exists in two different form: Arabica and Robust, being the only commercially cultivated and vended beans. Of the two types, Arabica is mostly grown and liked because of its flavour. On the other hand, Robusta is considered to be affordable and hardier Statistics has shown that coffee restaurants are on the rise with an approximately 7% annual growth rate. However, a large market for coffee is in the U.S where the third largest restaurant chain in the world, Starbucks, is the leading restaurant in coffee consumption worldwide accounting for 75% of Americans who take coffee. Other countries like Finland are known for drinking the most coffee per capita in the world. Supply of coffee from firms is fostered by fair trade (Daviron & Ede, 2005). Organisations that buy coffee from farmers must ensure that the farmer also gets a bigger portion of the profit. Mandates of the fair trade are any importer must have thru affiliation with the grower and should give the grower a lot of compensation to preserve that relationship. Renounce companies that import coffee and that uphold fair trade are Starbucks, McDonald and Dunkin’s Donuts. 3. Country Analysis 3.1 Coffee in Peru Peru is located in South America on the west and it border the Pacific Ocean. This country has diverse climatic conditions necessary to grow coffee. Coffee growing and production in Peru started in the 1700s and currently it has more than 110000 indigenous growers. The county exports of coffee is approximately 2% both on the national and the global market. Markets around the world are finding Peru’s coffee to be of good quality since it is produced using traditional methods and under the shade leading to production of superior quality Arabica beans. Coffee production, being one of the leading agricultural sectors in Peru, accounts for 216 million exports worldwide enabling Peru become one of the world largest producer of coffee. The common type of coffee grown is the Arabica type and it is spread on approximately 200000 firms. In other word, coffee is like the staple food of Peru since it is not limited to a certain region but its growth is wide spread in the country. Many coffee grower in Peru are in a cooperative that enables them sale their coffee in the outside markets through intermediaries. These cooperatives also ensure that infrastructures like warehouses and processing firms are establishes so the quality of coffee grown does not go down. The cooperatives also train the growers on best methods of organic cultivation. 3.2 Coffee in Uganda Uganda on the other hand is known for exportation of Robusta coffee. They county do export Arabica coffee but is grown in specific parts which makes it less dominating as compared to Robusta coffee. Growers of coffee in Uganda sometimes grow cocoa alongside Robusta coffee and as a result making the quality of coffee go down. On the other hand, growth of Arabica coffee is done alongside other food crops like maize and beans. The shade provided by some plants like bananas, offer shade for the growing coffee (Geunes, 2005). The leaves from the food crops when they drop and rot provide the necessary organic manure for the growing Arabica coffee. It is also good to note that when farmers intercrop coffee with other plants, the coffee is left, like the other plants, to grow naturally. Statistics show that there are around 500000 coffee firms in Uganda and the total number of workers around 2800000. Annual exports earning from this crop account for approximately 60% of the agricultural commodities produced in the country (Root, 2009). Harvesting is done twice in a year, in the month of September and December respectively. Globally, it ranks the 7th producer of coffee while in Africa it ranks 2nd. It is also important to note that this crop is not indigenous in the country. It was introduced in the year 1990 as a cash crop by missionaries from Malawi. 4. International Operations Strategy 4.1 Why Peru? The most appropriate and promising organisation in which Tesco can venture and invest in is Peru. It has been observed the global demand for coffee favours Arabica coffee which is the chief crop gr own in Peru while Robusta in Uganda. In Peru, coffee growing began a long time ago meaning that coffee produced in that country is high in quality as compared to that of Uganda which is grown alongside other crops (Tucker, 2011). Tesco has outlets in Peru, this means that it has already established its brand name there and it will not have to incur advertisements cost in creating its awareness. In Uganda however, there are no Tesco outlets. This means few people, if none, know about it and it will have to work hard to get known so as to enable it export coffee. Finally, coffee production in Peru is promising and does not suffer fluctuations of quantity produced. 4.2 Mode of entry In order for Tesco to enter the markets of Peru and start trading on Peru’s coffee, it should use Direct and indirect exports as a mode of entry besides the other modes: licensing, franchising, turnkey projects and countertrade. Exporting is a practice that involves selling of goods and services produced in one country to another country on businessmen of another country. Direct export requires a company that has a lot of resources and is enjoying large economies of scale in the global market. If one considers Tesco, it has a lot of resources and secondly it is well known in the global market. As a result, it can be able to effectively and efficiently export coffee from Peru. In direct exportation, there are no intermediaries (Arregle, 2006). Lack of intermediaries means cost reduction of the coffee exported. This will enable Tesco make more profit which will enable it expand more. Tesco has outlets in Southern America and some it Peru. This means that there are sale representatives of Tesco in Peru, even though, they are currently not dealing with promotion of Tesco coffee products. It is important to note that direct export only encourages small exports this is because exporting large volumes of merchandises might initiate protectionism. However, with the large of population of Tesco representatives, Tesco can still manage to export larger volumes by combining the little volumes that are individually exported by their salesmen in Peru. Tesco should however realized that direct exportation is an expensive method of entry and requires large capital to enable venture into it (Ward, 2010). If it adopts this method, it will also have to deploy people who will carry out research about policies pertaining to exporting of coffee, how to make connections with the local coffee growers and cooperatives. This is because, this method requires one to have wider understanding of the market. Finally, Tesco can also export the coffee indirectly through intermediaries in Peru. This method is very effective because work on payment basis. They are paid by the client firm, Tesco. Payment is a motivating factor and this will motivate the intermediaries to make more connections and channels through which Tesco acquires coffee. Increased channels means increment in volume of coffee exported to Tesco, an advantage to the company. 5. Supply chain design & management Tesco does not produce its coffee and will rely in exports from Peru, this means that they have to come up with a supply chain design that will maximise profits on the final processed product. The following is a proposed design of a supply chain model they can adopt. Coffee grower intermediaries Tesco Final consumer The coffee grower is the initial supplier of the product, coffee in this case. In Peru, there are cooperatives that ensure that trade fair rules are observed when foreign companies buy goods from coffee farmers (Chopra & Meindl, 2003). With this in mind, they should the largest share of approximately 40%. The intermediaries who are the secondary supplier of the chain can own 15%, this is because they are not so much involved in the chain and they do not suffer a lot of financial lose were any mistake to occur in the transaction. The manufacture, should own around 35%, this is because it is entering a new market and by owning this percentage and allowing the growers own a larger percentage, and it markets itself. Finally, the consumer owns 20% of the supply chain. The customer is the priority. By them earning 20% means low cost of the final commodity. Tesco already has a supply chain that has people who are managing it. This means that with the inclusion of a new supply more personnel will be required. As a result, Tesco will need to have a team that manages the local supply chain and one to manage the global supply chain. Conflicts may arise and there is therefore a need to bring the two groups together so that they can work in harmony (Neef, 2004). Management of the new supply chain needs experts who have previously dealt with global supply chain and this means that the company has to find such kind of people who can deliver. Conclusions As to conclusion, coffee is the hot beverage that is mostly taken in the whole world. It is therefore a business opportunity worth venturing into. Coffee is available in two categories, Arabica and Robusta with Arabica being preferred the most. Some of the countries that produces coffee and which are covered in this report are Peru and Uganda. Peru has invested on commercial production of Arabica while in Uganda, there is more of Robusta being grown. For Tesco to best invest in this field, it will have to target Peru. Peru being an oversee country in U.S, Tesco is advice to use direct and indirect exporting as a method of entry into this global market. This method will enable Tesco get coffee from Peru while it manufactures in locally, in UK and then distribute it appropriately. With the new market, Tesco will need a new design of supply chain and a new team of expertise who will effectively and efficiently managed this supply chain for the success of the business. References Arregle, J. (2006). Mode of International Entry: The Advantages of Multilevel Methods. Cambridge: Lynne Rienner Publishers. Bacon, C. (2008). Confronting the coffee crisis fair trade, sustainable livelihood and ecosystems in Mexico and Central America. Cambridge: MIT Press. Chopra, S., & Meindl, P. (2003). Supply chain management: strategy planning and operation. Isle of Wright: Cambridge University Press. Daviron, B., & Ede, N. (2005). The coffee paradox: global markets, commodity trade, and the elusive promise of development. New York: Zed Books in Association with the CTA. Neef, D. (2004). The supply chain imperative. Redmond Wash.: American Management Association. Geunes, J. (2005). Supply chain optimisation. J. Cambridge: Springer. Root, F. (2009). Entry strategies for international markets. New York: International Journal of Entrepreneurship. Lexington Books. Tucker, C. (2011). Coffee culture: local experiences, global connections. Boston: Routledge. Ward, K. (2010). The Arabica and Robusta Coffee. Lausanne: Cornell University. Read More