Just-In-Time (JIT) inventory is a strategy that businesses use to increase the efficient use of resources by having parts of the production process delivered by the supply chain at just the moment that they are needed. This minimizes the amount of inventory required on hand, which minimizes storage costs and frees up capital to be used in other aspects of the process. An example would be a car manufacturing company that has a supply chain that locates close to the manufacturing plant so that they can deliver the proper number of widgets just when they need to be installed and moved down the line.
This strategy also places a lot of responsibility on the supply chain to deliver with precision. While JIT may be excellent for something like a car that has parts that should last many years, green coffee is a perishable agricultural good that presents a different set of challenges. Coffee roasters need to weigh the costs and benefits of JIT to be able to design an inventory strategy that is right for each circumstance.
The benefits of JIT inventory for green coffee are in efficiency and freshness. Not having your capital tied up in inventory means you can be using it for other ends such as labor, marketing or capital expenses like a new roaster, for example. Roasting facilities don’t have to store large amounts of coffee inventory, therefore they can have a smaller physical footprint and rent can be more affordable. JIT is better for cash flow, allowing you to capture the value added more quickly and re-invest in your business. Obviously, the coffee is also fresher. In Colombia, for example, year-round harvesting offers smaller, frequent shipments of coffee that are always arriving at peak flavor. This provides a level of consistency in raw material that is ideal for the base of a year round espresso or house blend.
But green coffee also carries risk, especially for an inventory management system that requires precise delivery. Being an agricultural product, the quality and volume of the coffee may vary each delivery period. If the quality does vary, then it may take a longer to meet contracted volumes that meet strict quality criteria. The transportation of coffee relies on third-party providers such as ocean freight lines and trucking companies and breakdowns do happen. And there is always force majeure, unforeseen acts of God, outside our control.
At Caravela, we have many years of experience working with specialty roasters in growing markets. It is not uncommon for us to find a coffee to fill in a gap in an emergency or to be creative to satisfy a roaster’s pressing needs. Along the way, we have gleaned five ways that roasters can actively approach JIT and avoid putting themselves in an emergency situation.
So how can you take the best parts of Just-In-Time and apply them to buying top quality green coffee?
1. Forecasting: Invest a lot of time and energy into building a reliable forecasting system. Being able to adjust your forecasts for variables that affect demand helps you to be able to accurately plan for when your supply should arrive. Accounting for growth, seasonal and cyclical changes allows you to forecast further out into the future, and that increased time allows the green coffee supplier to make adjustments as needed so that shipments leave on time.
2. Forward Contracts: By committing to a forward contract, roasters are sharing the risk with the exporter and importer. The reward is that forward contracts are usually less expensive than spot coffees. But keep in mind, in the best of circumstances from Latin America, when everything works like clockwork, it can still take six weeks for a coffee to become available at the destination warehouse. Forward contracts provide the hedging benefits of differential pricing, which can be done for as little as a five-bag contract. So for price stability, delivery choices and overall value, forward contracts are an excellent tool.
3. Overlap: With the above-mentioned variables, there will inevitably come a time when there is a shipment or delivery delay. In strict JIT terms, green coffee would arrive the same day it is roasted and shipped out. But in the real world, you must plan for a minimum of two weeks overlap to ensure that you have the supply you need to operate. So for green coffee, you need a little bit of Just-In-Case in your Just-In-Time strategy. It is not ideal, but spot coffee is always there to cover in an emergency.
4. Back-up Plan: Can you re-arrange your blend components to cover a gap? Do you have workhorse coffees that can serve as both a blender and a single origin? Do you know where to go to get a farmer specific coffee when you need something for the top shelf? Complements and substitutes? Have a back-up plan for the moments when things don’t work according to plan.
5. Merchants: Roasters should consider your green coffee provider as either a vendor or a merchant. A vendor is someone who sells you a product and the transaction is the end of it. A merchant is someone that you can talk to, who is an expert and who you can trust to give you advice when you need it. A merchant knows the product and the industry well enough to be a resource and someone to consult on your strategy, who can help you formulate a back-up plan and who you can turn to in a pinch when you have an emergency.
If you are a roaster or green coffee buyer and you would like discuss a strategy to implement Just-In-Time inventory, we are here to help.
Badi Bradley, North America Sales Director