Edgar Ramos Professor of Supply Chain Management Universidad Peruana de Ciencias Aplicadas Lima-Peru

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Frameworks and Potential Solutions for Peruvian Coffee Supply Chain, a supplier perspective Edgar Ramos E-mail:

1 Frameworks and Potential Solutions for Peruvian Coffee Supply Chain, a supplier perspective Edgar Ramos edgar.ramos@upc.edu.pe Professor of Supply Chain Management Universidad Peruana de Ciencias Aplicadas Lima-Peru

2 Peru: Latin America Country Peru

3 Background of Peru

4 Peru by the numbers Population 31.2 million GDP $192.1 billion GDP growth 3.0 % GDP expected % Inflation 2.0 % Source: Banco Central de Reserva del Peru, 2018

5 Peru by the Numbers Top 9 In global production of coffee 1 st Supplier of organic coffee in USA, certified by Fair Trade 40% of coffee exported are Purchased by USA y Germany 35% of production (150 miles of Ha) is belonging to special coffee 2 nd Global producer of organic coffee 228 miles of TM is the total production of coffee 223 miles of family are involved in the local production 48 countries Imports coffee from Peru

6 Peruvian Coffee Bean Profile Location: Quillabamba Cusco - Perú. Varietal: Arabica: Typica, Bourbon and Caturra Processing: Harvest, Hull, washed, Drying, bulking Elevation: 1,200m 2,700m

7 Peruvian Coffee Bean Profile (continuation...2) Organic Certifications USA Union European Korean Japan Sustainable Certifications FAIR TRADE Rainforest Alliance UTZ Certified SMBC C.A.F.E Practices

8 The world top s producers of coffee (in thousands of 60kg bags) 1 Brazil 51,500 2 Vietnam 28,500 3 Colombia 14,000 4 Indonesia 10,800 5 Honduras 8,350 6 Ethiopia 7,650 7 India 5,833 8 Uganda 5,100 9 Peru 4, Guatemala 3,500 Source: International Coffee Organization, 2017

9 Current Regional Production 65% North Region 20.4% Central Region 14.2% South Region

10 The supply chain process of Peruvian coffee The supply chain process of coffee beans: 1 st Level: Growing 2 nd Level: Harvesting 3 rd Level: Hulling 4 th Level: Drying 5 th Level: Packing 6 th Level Bulking 7 th Blending and roasting

11 The supply chain process of Peruvian coffee (continuation 1) 1 st Level: Growing Grow and select the Young plants 2nd Level: Harvesting

Mostly made by the farmer 4th Level: Drying Peeled grains are let

12 The supply chain process of Peruvian coffee (continuation 2) 3rd Level: Hulling Peeling the external hull and remove impurities Mostly made by the farmer 4th Level: Drying Peeled grains are let to dry in the intense sun of the mountains of Perú. It takes up to 2 weeks.

13 The supply chain process of Peruvian coffee (continuation 3) 5 th Level: Packing The productto export its called café pergamino 6 th Level Bulking Coffee ready to be transported to intermediary/trader

14 The supply chain process of Peruvian coffee (continuation 4) 7 th Blending and roasting Source: perfectdailygrind.com

The Peruvian coffee supply chain from Quillabamba Small Farmers Cooperative/ Intermediary

and Bulking Blending and Roasting Located in the Andes/Amazon Elevation: 1,200m 2,700m

anywhere in the world Grouped between 100-300 farmers Small trucks or Animals for

15 The Peruvian coffee supply chain from Quillabamba Small Farmers Cooperative/ Intermediary Intermediary/ Exports Retailers Growing and Harvesting 1Ha to 5Ha Hulling and Drying Packing and Bulking Blending and Roasting Located in the Andes/Amazon Elevation: 1,200m 2,700m Located in the Andean/Amazon cities nearly to farmers Located in coast of Peru Located in anywhere in the world Grouped between farmers Small trucks or Animals for transportation Trucks Transportation 3PL s for road Transportation International Shipping 96% by sea 4% by road

16 Logistics costs for internal operations from Farmers to Callao Port 24% 20.4% 19.2% 11.2% 9.6% 8.3% 3.9% 3.4% Source: World Bank, 2015

Logistics costs for internal operations from Farmers to Callao Port Payment

of 1,562Kg Processing on ranch Packing Load Transport Unload Cost for an average

$3,574 USD Cost for an average shipping of 36,790 Kg Certifications Senasa

17 Logistics costs for internal operations from Farmers to Callao Port Payment Product Farmers COOPERATIVE / INTERMEDIARY Exporters Cost for an average shipping of 1,562Kg Processing on ranch Packing Load Transport Unload Cost for an average shipping of 21,154 Kg Processing Waiting time Load Transport Unload $436 USD $3,574 USD Cost for an average shipping of 36,790 Kg Certifications Senasa Inspections Customs Transportation Administrative expenses Temporary deposit Load Unload $4,402 USD

18 Inventory Flow and Prices in the Supply Chain Small Farmers Order Payment Information Product Cooperative/ Intermediary Order Payment Information Product Intermediary/ Exporters Order Payment Information Product Retailers/ end consumer Farmers cost $0.35 Other Cost and profit $1.40 Variable cost of coffee bean $1.75 Other Intermediary Cost and profit $0.33 Variable cost of coffee bean $2.08 Other Exporters cost and profit $1.22 Exporters Cost (FOB price) $3.30 Other Imports cost and Net income $20.2 Selling price Selling price Selling price Selling price (*) $1.75 $2.08 $3.30 $23.5 (*) Selling price (USD/kg) per arabic coffee in USA store

19 The Hidden Costs of Complexity Peruvian supply chain Small Farmers Cooperative/ Intermediary Intermediary/ Exporter Retailer Poor performance of production, affected by plague roya or broca (10% waste) Waste in warehousing process : -Hulling (5%), -Drying (3%) Increased transportation cost due the distance Located any where in the world. Small quantities for transportation with small truck or animal Poor performance of transportation Higher administration cost to manage the products certification Lack coordination between inspeccion s agency Lower utilization of transportation resource Long distance and dificulties in the road between the Acopiers and Plant for processing Higher expediting, handling & temporal warehousing to exports Heavy trafic for access to Callao Port Increased cost for local transportation due poor infrastructure Security Problem at Callao Port Clearence for export at Customs in Lima, Callao (5-60 days)

20 Actual Value Stream Map for Coffee Supply Chain

21 Supply Chain Collaborations: Concepts Supply Chain Collaboration In the supply chain collaboration, the chain members work together and coordinate activities to achieve the desired supply chain results. The Collaboration Framework Should be used to structure relationship with key customer or suppliers, and get them to work together in two directions in order to be successful. The operational integration along the supply chain is a component of supply chain collaboration

22 A framework of Supply Chain Collaboration A framework of supply chain collaboration should be used to structure relationships with key customers and key suppliers to work across the supply chain and add value to all participants

23 Modelling Supply Chain Collaborations Supply Chain Collaboration Feedback Operational Components Partnership Methods, tools Information and data the build the collaborations Managerial Components Sharing risks Sharing rewards Trust Methods, tools Contract style and scope Outcomes Source: Adapted from Lambert (2010)

24 Supplier Relationship Management Identify partners in the coffee supply chain Design important activities for collaboration, and determine the level of involvement and close relationship Cooperative, Farmers and Companies in the coffee supply chain could collaborate in strategic, tactical or operational level.

Managing coffee supply chain activities: a supplier perspective Tier 2 Suppliers Tier 1 Suppliers Focal Company Tier 1 Customers Tier 2 Customers Tier 3 Customers Truck Rentals Informal Traders Cusco

25 Managing coffee supply chain activities: a supplier perspective Tier 2 Suppliers Tier 1 Suppliers Focal Company Tier 1 Customers Tier 2 Customers Tier 3 Customers Truck Rentals Informal Traders Cusco Manufacturer Harvest Tools Markets Farmers Cooperative National Companies National Market End consumers Informal Labor Financial Entities Agroveterinaries Agricultural Production Associations International Companies International Market End consumers Goverment Programs Hermetic Bags Providers Private Companies Exporter Company Managed Process Links Monitored Process Links Not-Managed Process Links Non-Member Process Links

26 Modelling Supply Chain Collaborations According to our academic research and interviews in the industry field, we have presented two supply chain collaboration models: 1) Strategic Sourcing in coffee supply chain 2) A short food coffee supply chain

27 1) Strategic Sourcing in coffee supply chain Tier 3 Suppliers Tier 2 Suppliers Tier 1 Suppliers Focal Company Tier 1 Customers Tier 2 Customers Tier 3 Customers Truck Rentals Cusco Manufacturer Harvest Tools Markets Cooperative Farmers Cooperative National Companies National Market End consumers Informal Labor Agroveterinaries International Companies Holanda Francia Colombia Goverment Programs ProCompite Agrorural AgroBanco Senasa Innovate Perú Bags Providers Exporter Company Japan Germany USA Sweden End consumers Belgium Managed Process Links Monitored Process Links Not-Managed Process Links Non-Member Process Links

28 Actual coffee supply chain Truck Rentals Harvest Tools supplier International Manufacturer Store End Consumer Informal Labor Farmer Cooperative Intermediary /Exporter Agroveterinaries National Manufacturer Store End Consumer Goverment Programs ProCompite Agrorural AgroBanco Senasa Innovate Perú 2w 3m 2w 1m 1m 1m 1w 2w 1w Total cycle time = 8 months

29 2) A short food coffee supply chain Truck Rentals Harvest Tools supplier International Manufacturer Store End Consumer Informal Labor Farmer Cooperative Agroveterinaries National Manufacturer Store End Consumer Goverment Programs ProCompite Agrorural AgroBanco Senasa Innovate Perú 1w 3m 1w 1m 1m 2w 1w 2w 1w Total cycle time = 7 months

30 Advantages for Collaboration in Agribusiness SC q Sourcing activities: Reduce supply base Monitoring and established operational costs and prices q Inventory Management: Increase the velocity of inventory Waste minimization q Manufacturing: Increase the quality of coffee bean Production stabilization and minimization of disruptions

31 Advantages for Collaboration in Agribusiness SC (continuation 1) q Distribution activities: Faster delivery Increase the responsiveness q Customer Relationship Management: Connect rapidly to the global market q Customer service: Reduction the lead time Improve the product availability

32 Conclusions Given several problems and scarcity resources, the supply chain collaboration applied in Peruvian Agri-food Supply chain has opportunities to improve operational performance The research in Quillabamba- Cusco confirmed the Modeling supply chain collaboration in all cases, allowing participants to obtain better operational results. One of the principal drivers for supply chain collaboration in upstream side are the higher costs, so participants in the coffee supply chain must work priorities with each supplier.

34 Thank you! =!Muchas Gracias! (Spanish) Yusulpayki! Pasonke! (Quechua) (Ashaninka)

THIS REPORT CONTAINS ASSESSMENTS OF COMMODITY AND TRADE ISSUES MADE BY USDA STAFF AND NOT NECESSARILY STATEMENTS OF OFFICIAL U.S.

THIS REPORT CONTAINS ASSESSMENTS OF COMMODITY AND TRADE ISSUES MADE BY USDA STAFF AND NOT NECESSARILY STATEMENTS OF OFFICIAL U.S. GOVERNMENT POLICY Required Report - public distribution Date: GAIN Report