Institute of Rural Management Anand

Strategic Procurement in Agribusiness (SPA)

PRM 40
04.06.2020
PRIYANKA SAHOO, P40093

1) Competitors of Glenorna such as Nestle do not procure from plantations but

instead buy green beans from open market. This is because in a value chain there
are many factors to determine before selecting the level of intermediation.
The value chain of coffee: Coffee cherries → Green beans → Roasted beans→
Roasted ground /instant coffee.
• The trader/traders are involved in procuring from the plantations or farmers
directly and converting the coffee cherries to green beans. Nestle or other
firms will only procure directly from plantations if:
• they are more efficient than these traders.
• Higher savings potential than the existing intermediate.
• Costs involved are according to the profit margin they get. Transaction costs
and many other cost like resources and time adds up when we procure directly
from farmers.
• Government and legal related licence of the area for trading can be a problem
too.
• Negotiations and Dispute settlement
• Logistics (Buying point to Delivery)
• Rejections handling
• Additional cost of acquiring machinery and vehicles, with expected service
life of 20 years and would not have any salvage value.Buying from open
market will not give the cost, which they can purchase by procuring from
plantations. But all other costs and problems will be soaked by the trader from
open market. And it will can procure the quantity as per their specified quality.

2) The environmental issues facing the coffee business are:

• Climatic conditions like temperature, terrain etc. in which the coffee grows the
best.
• Increased incidences of pests affecting the coffee plant and coffee beans like
the fatal fungus.
• Altitude of growth
• Mechanisation is not feasible in high terrain
• To keep an eye upon global market and the changes made in the currency of
aggrements etc.
• Commodity market prices get affected with interest rate, inflation etc.

3) In Kraljic Matrix, the owner like Nestle will want to be in II quadrant i.e.
Leverage items as they would have large number of suppliers. But as owner of
Glenorna I would like to be in IV quadrant i.e. Bottleneck items because of the
complexities involved and speciality coffee is not done by many suppliers. Apart
from this Glenorna might not have that huge base of supplier and difficult to find
substitute for that, and also due to complexities involved it will be difficult to
measure and monitor performance. Apart from this Glenorna might not have that

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 Institute of Rural Management Anand
Strategic Procurement in Agribusiness (SPA)
PRM 40
04.06.2020
PRIYANKA SAHOO, P40093

huge base of supplier and difficult to find substitute for that, and also due to
complexities involved it will be difficult to measure and monitor performance.

4) If I was the sourcing manager, then I will consider the following points for
sourcing of the speciality coffee beans :-
• As speciality coffee bean is a premium product then the sourced material
should be graded and proper monitoring while cultivation.
• A long term relationship should be maintained with the suppliers and there
should sufficient number of supplier base for maintain the proper and timely
supply of quality specialty beans.
• A direct contract with the owners of coffee estates can also be established for
the demand of speciality beans.
• DIFOT (Delivery In Full On Time) should be strictly followed and
Corrective actions and preventive actions should be taken by the suppliers in
case of any low quality and rejection.
• Understanding the demand and supply of speciality coffee beans.

5) Coffee production is a tough practice as it requires a certain kind of weather

conditions and very labour intensive as also cannot be mechanized due to uneven
terrain. Being a sourcing manager, it becomes prime duty to keep an eye on
consistency of supply.
• Not only depending upon one source of production, but collaborate and buy
from various producers so as to minimize risk.
• The crop cycle should be monitored right from the start of the new season.
By doing this the manager will have a prior knowledge regarding the
cultivation problems like diseases incidence, pest attack etc. Responsive
measures can be taken in time.
• Building good rapport with the growers so that they can reach out to the
procurement manager in any difficulty. This will increase the loyalty of the
growers and will somehow abide them to sell to own company.
• Properly investigating the suppliers and having regular contracts with them
and the local region of sourcing so that you can know the difficulties in
production and accordingly plan your actions.

6) Problems that might arise from backward integration are:

o Most of the coffee estates were owned by families that us to prefer to pass on
their estates to the next generation. So it was difficult to purchase them.
o There was problem of sourcing labour due to loyality as most of the estate
owner use to employ local tribes for coffee cultivation and each tribe remained

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 Institute of Rural Management Anand
Strategic Procurement in Agribusiness (SPA)
PRM 40
04.06.2020
PRIYANKA SAHOO, P40093

associated with the estate for generation. It is difficult to predict whether they
were be keen to provide this kind of loyalty to the organization.
o This involves a lot of capital expenditure in machinery and hiring workers.
o There will also be additional expenses like input cost (seeds, fertilizer,
pesticides), labour cost, account salary etc.
o Also, if he lease the land that too will involve a lot of documentation and legal
work and will be a cumbersome process.
o Additional cost of acquiring machinery and vehicles, with expected service
life of 20 years and would not have any salvage value. Buying from open
market will not give the cost, which they can purchase by procuring from
plantations. But all other costs and problems will be soaked by the trader from
open market. And it will can procure the quantity as per their specified quality.

7) Different questions that Mr. Ranjan Appachu is pondering in the caseare:

• To venture into the acquisition of coffee plantation or to remain with the
existing business operation.
• If he ventures into the acquisition of coffee plantation will he be able to meet
the need of labour.
• If he ventures into the acquisition of coffee plantation will he purchase the
land or lease the land. Though leasing the land will require a lot of legal and
document work.
• As most the coffee estates are family owned which have a tradition to pass on
their estates to next generation, in this situation will he be able to purchase the
coffee estates.
• After integrating backwards, there is a lot of cost that will get added up like
capital cost, input cost, labour cost etc. In this situation will he be able to attain
economies of scale.
• Why the players like Nestle had been procuring from the local market if it was
profitable to purchase coffee plantation?
• What could be the reasons that the his competitors are not purchasing coffee
plantations?
• What problem might arise in backward integration?
• At what other stages of coffee value chain they should enter?
• Whether his company should enter into the business of specialty coffee.
• Additional cost of acquiring machinery and vehicles, with expected service
life of 20 years and would not have any salvage value. Buying from open
market will not give the cost, which they can purchase by procuring from
plantations. But all other costs and problems will be soaked by the trader from
open market. And it will can procure the quantity as per their specified quality.

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