So as we talked about coffee, just looking at the coffee, we can think of several things that one must consider. We have to consider about, what is the source of the coffee? Where is it produced? What's the best place for us to source this? Why should a company in Germany source part of their coffee from Brazil, part of it from Vietnam, part of it from Africa? How do you decide where to source your product? Having sourced the product, notice that we are talking about global trade now. How do I move this product? As I think in terms of moving this product, how do I think of what information I need to make this possible? How do I know the coffee that I'm getting is the coffee that I bought in Africa? How do I know that the quality of coffee is good? How do I know what the crop is going to be like in the producing country so I can plan as an importing company, I can plan for purchasing this coffee? So there's a lot of different information that I need to be aware of. I need to make contracts with my suppliers. I need to make sure that when I make this contract, that these contracts are enforceable. And that if things go wrong, I'm insured against damage. So, as I think about my supply chain, I have to worry about all these different things. Increasingly, I have to worry about sustainability. Is my practice of obtaining this particular product sustainable? Am I in the danger of running out of this product? Is this something that I can consume now and the product will still be available for future generations to consume, or is this that I'm going to use up all this? So I have to start thinking in terms of sustainability. And lastly, I need to start thinking in terms of risk. What happens, for example, If my supplier goes bankrupt? What happens if the ship that I was bringing this particular product in runs into a storm? What happens if the currency rate changes? What happens if there is political unrest? So as I think in terms of this whole process by which I bring products from where it is produced to where it is consumed, I have to have very different views of my supply chain. So let's talk about one of them. When I talk about sourcing, I may have to worry about the country of origin. The country of origin may dictate the quality that I can expect, may dictate the variability in that quality that I can expect. I have to worry about where the location of this country is because that's going to affect the cost of transportations. I have to worry about how much does it cost me to produce in that particular country. We are talking coffee, but remember, everything that we've said can be extended to any other product. So I might be worried about labor costs. So as I think in terms of sourcing, I have to worry about the labor costs. Labor cost depend on labor availability. I have to now worry labor availability. I have to think in terms of sourcing product, that when I source this product, at what level of completion do I want to source this product? Do I take the coffee cherries, the fruit? Do I take them after the pulp is removed? Do I take them after the husk is removed, or do I allow it to be roasted and then take the product? At what point do I do value addition? Because this is a very critical thing that affects how I decide the sourcing country. So Germany, for example, if you import green coffee beans, you don't pay any tax on them. But if you import roasted, you pay a 9% tax on it. Taxation becomes an important issue, so I have to worry about tax regimes in the producing country, in the consuming country. I have to worry about customs, I have to worry about other kinds of restrictions. I have to worry about whether there are trade embargoes against a particular country. I have to worry about sanctions on particular countries and particular companies. So I have to worry about all of these as I think in terms of sourcing. We've all heard about conflict diamonds. These are diamonds that come from certain regions of Africa where there is conflict and where militia are causing lots of problems and creating human rights violations who tried to sell diamonds. And so to avoid buying those diamonds so that those militias are not enriched, we have a restriction on buying conflict diamonds. So if I was in the diamond trade, I have to worry about which country are they coming from, how do I guarantee that this product, which otherwise is indistinguishable, how do I make sure that it didn't come from one of those countries? So as a supply chain person, I need to worry about sourcing and those kinds of issues that don't seem to be sort of obvious when you first think about it. Having sourced a product, having decided where I will purchase the product, now I have to think in terms of transportation. Do I move this product by land or do I move it by sea? Increasingly, we move the product by air shipment. Many expensive products that are small but high value are airshipped, because it's a lot cheaper to airship than to have a larger amount of expensive product take weeks to be transported by sea. So I have to worry about the transportation. I have to worry about intermediate storage of the product. Depending on where I store the product, my tax consequences could be different. So I have to worry about, do I store it in the country that produced it? Do I pull it out of the country immediately and then store it? I have to worry about whether I have my own storage, storage that I own. Or do I go into the public storage area where there are third parties which have storage facilities and I can keep my product there? So not only do I have to worry about transportation, I have to worry about the storage of the product at intermediate locations. Now, if I'm doing all of this, I don't own the shipping company, I don't own the storage company, I obviously may not own the producer. So now, as I deal with each one of them, I need to worry about contracts with these different intermediaries, these different companies that I'm dealing with. What should my contract specify? Well, some obvious things I might want to specify is I might want to specify the quality of the product. I might want to specify how much of the product, and I might want to specify the time at which I want the product. But then I may have more specific requirements. I might want delivery to occur in specific time vendors. I might want to make delivery commitments which tell me that the product that I received will have certain quality. So that has to be specified. I may have to specify the shipping method. Either I have to take care of the shipping myself or I have to tell my supplier this is how we are going to ship. Companies, large companies like Walmart are very particular about how products are shipped. To their warehouses by their suppliers. Why, because poorly package product, product that comes in without advance notice to Walmart, messes up Walmart's process in the warehouse. So, as a supply chain person, I have to worry about how shipping is going to be done, how packaging is going to be done. Obviously that all has to be specified in the contract to make sure that my suppliers are the counter party in my contract knows exactly what is expected of them. I would have to specify the payment conditions, when are they going to get paid? Is it going to be 30 days after the product is received? Is it going to be 60 days after the product is received? So I have to have the payment conditions, do I pay lump sum? Do I pay something in advance? All those issues have to negotiated. I may have to involve 3rd parties such as banks, insurers, etc. To make sure that this contract goes as promised. So that if there is any problem that arises, there are these third parties that will take some of this risk away from me or are they actually making the payments. So I have to worry about all these issues as I think in terms of contracts. Now, beyond the things I need to specify in the contract, one of the things I find is that I do this on a routine basis. I don't go out and buy coffee only once. I buy coffee regularly, I buy it from many different suppliers and so if I have to have a contract, and if each company wants to buy such a contract have to negotiate terms separately every time it becomes very difficult. So, it has become common to have what are called standard contracts. So, in the case of coffee there is an ECF or an European Coffee Federation contract. For North America, primarily for the US, there's the Green Coffee Association standard contract. The green here is not as in sustainable, the green here is because there's green beans. So you're talking about the green coffee. So these two are fairly standard contracts and so instead of having to specify everything for each contract separately, we use a standard contract. We still have to negotiate price, we still have to specify certain things about delivery period, etc. But every possible term of the contract does not have to be specified because this is a standard contract. It's a pro forma contract. Similar to the standard contract, there's a contract that extends more generally, it's called the Incoterms or International Commercial Terms. And this contract is used for all different kinds of products, and it specifies whether the supplier is going to be responsible for part of the shipment or who's going to specify how the product is going to be shipped and so on. And so this is called incoterms and so now not do I have contract, I have a very specific forms of this contract that I can use to make my transaction with my courter part parties somewhat easier. And this becomes part of understanding what supply chains are. Increasingly now, I have to worry about other issues. We are now worried about sustainability. With coffee, we worry about the fact that maybe rain forests are being cut down to help coffee plantations. And that may not be good for our environment. So one of the things we may be concerned about is our coffee being grown in a sustainable fashion? And, so there companies and associations that assure us that the coffee that comes to us has been produced in a sustainable fashion. We worry about fair trade. Are the people who are growing our coffee, are they getting sufficient compensation for their efforts, or is the intermediary siphoning off most of the value of that particular product? So we worry about fair trade. Part of the worrying about fair trade are the labor practices that are used. So we don't want to have slave labor for example, picking our coffee. We don't want to have child labor for example. So we have to worry about these kinds of issues when we think in terms of supply chains. And lately we are now worried about whether our coffee is organically grown. So there's this whole movement about having organic coffee. And so how does one make sure that the coffee we're getting is indeed organic? So that's another social aspect of a supply chain that we have to concerned with. We talked about risk, what kinds of risk are these? Well, obviously, there's the risk to the product, there's a physical risk to the product, or the product getting damaged. If I'm bringing coffee beans in, if the coffee beans are damaged or if mold grows on the coffee beans, that's a problem for me. So I have to worry about the physical condition of the product. I have to worry about the security of the product. What prevents someone from stealing my product as it's being transported? So there are these risks? We've all heard of piracy. And we've all heard of companies having to pay ransoms for ships that pirates have captured. So there's a risk now that is a security risk that I have to be concerned in my supply chain. I have to worry about quality. So when somebody buys coffee from let's say Brazil. So a company in Germany buys coffee from Brazil, they want to make sure that the coffee that they are getting is the right quality. So even now, with all the different systems that we have put in place, the company will ask for a sample to be sent. They take the sample, the roast it, they make coffee out of it, and then they taste the coffee to figure out if the coffee was any good. Now, once they have tasted the coffee, they say yes, this is the coffee that I'm willing to buy. When the coffee is shipped and received by the company. They check it again to make sure that what the received was exactly the same as what they were promised. So there is still this process that has to be followed to make sure that the quality is right. Now what happens if the quality that we receive is not the same? Who takes responsibility for this eventuality? Does the company that bought the coffee have to pay for this now, or does the company that supplied? Who pays for the transportation where the transportation company just had nothing else to do with it that would ship, and so a cost was incurred. Who pays for that cost? So I have worry about quality risk. I clearly have to worry about price, fluctuations in price, because if I buy a product now, do I buy it now, do I buy it later? So I have to worry about price. Fluctuations when I worry about supply chains. I also have to worry about macroeconomic issues. The fact that currency Values change between countries is a risk. All coffee, because of the fact that the US consumes, is the largest consumer of coffee, all coffee transactions are done in US dollars. I find a company in Europe, I will put Euros. So if the value of the US dollar changes, it changes what it actually costs me to buy the product. So I have to worry about macroeconomic issues. And then finally, I have to worry about performance issues, the performance of the counterparters that are involved in my supply chain. My suppliers, my transporters, my warehouse operators, what if they don't do what they are supposed to do? So I have performances that I have to worry about. Now, if that wasn't bad enough, I also have to worry about how do I finance on my operations? And so I have to worry about obtaining letters of credit. I have to figure out who the banking intermediaries are, who are going to provide these letters of credit. I need to have working capital to be able to buy things, who do I borrow things from? I have to worry about risk, and I have to buy insurance to protect me against that risk. And so I have to worry about dealing with insurance companies. And because coffee is a commodity, I would worry of about hedging against suppliers uncertainities, demand uncertainities. Pricing incertainities, fructuations in exchange rates, problems with changes in tax structures in different countries, so I have to worry about that. And there's a whole futures market that I have to worry about, where I have to trade for coffee futures. And all of that affects my supply chain, because oftentimes when I trade for coffee futures, I end up having to buy and transport coffee from a location that I did not originally intend to buy it from. And so there's a lots of different issues that I have to worry about as I think about my supply chain. So now that we have looked at the coffee supply chain, it's good to sort of step back. We looked at one particular product and a product which even though the taste is very complex, coffee, as you may know, is considered the second most complex taste product consumed by man. The most complex is barbecue meat, so it's a complex tasting product. For the overall supply chain is not as complex as they supply chain for many other different products. So what do we mean by a supply chain? Essentially a supply chain is a set of firms and intermediaries who are bringing things from raw material to the final product. And accordingly when you talk about supply chain management, what we're looking at is the active management of the activities that happened between these forms. So all the intra-firm activities that occur, we are worried about how they will occur. We worry about how things are going to be moved physically from one form to the other. We worry about how information to facilitate that movement is going to occur. We worry about how cash is going to flow between the forms. We worry about how we are going to make sure that the forms that are talking to each other in the supply chain are working with each other in the supply chain. How they are going to be held accountable for whatever it is that they are supposed to be doing? Now we do all of this in the hope of maximizing customer value. We would like to add as much value as possible to the product without increasing or adding too much cost to be able to achieve this value. And the final goal as a supply chain or as a company in the supply chain, is that in this valuation process, that we do it in a sustainable form. So that we have a competitive advantage or our competitors in the market. And the way we get this competitive advantage is to create the most value at the lowest cost. Another way to think about supply chains is to think about it in layers. This is similar to looking at the different views of the supply chain. The only difference is that we are now going to separate out the physical aspects of the supply chain from the information aspects, etc. At the basis level that we can look at the supply chain is the logistical layer of the supply chain. This involves the physical movement of goods between companies. And so often times, the study of logistics is confused with the study of supply chains. But logistics is just one part of the supply chain. We also have to worry about the information network that has to be created so that the supply chain can work efficiently. What information should be shared within the different parties or the different companies involved in the supply chain? Which of this information should be shared? What information should not be shared? What should be kept private? We have to figure out those issues when we think in terms of the supply chain. What are the consequences of not sharing some of this information in the supply chain? And we'll talk about one such consequence later on. We then can look at the financial layer of the supply chain, we can look at the cash flow through the supply chain. For some people, the supply chain, the main concern is the cash flow, cash to cash cycle. When do I invest cash in it? When do I get my returns back? And that might be the only thing that I might be interested looking at my supply chain. But that's not the only part of the supply chain as we've looked at so far. And finally, we are to look at the governance of the suppy chain. And what do we mean by the governance? We want to look at what kinds of contracts are being signed between companies, so that the supply chain holds together. So that we can have a sustainable supply chain. When do we need contracts? When are those contracts not adequate? And if these contracts are not adequate, when do we stop buying things from someone and start making them ourselves? So we have to think in terms of this governance layer. So we can think of this in those four layers, the logistics layer, the information layer, the financial layer and then the governance. And then obviously, there's interplay between these layers because nothing in logistics works without information. As you try to do financial layer and look at cash flows, we still need information sharing to do that. Governance requires us to have knowledge of the financial structure of the supply chain. It also needs us to have knowledge about how information is going to be shared, so the parties can do their work. And finally, the governance manages the logistics as well. So all this layers, even though we are looking at them or talking about them as four different layers, they are interconnected. And the central connection across the different functions that allow supply chains to work well. This is what makes supply chains more interesting and complex and difficult to manage. This is why we need to study supply chains. So what we have seen so far, is that we have multiple forms involved in this process. They our locator globally, they are not collocated so that it's easier to communicate. And we have to worry about all kinds of details to make sure that we can have a functioning supply chain for any given product.
