Nespresso supply chain: a sustainable operation?

This was written as part of my undergraduate degree. The essay was written in 2016 so the information was accurate at the time of submission.

Nespresso is Nestlé’s speciality coffee brand. With its single-use coffee pods, Nespresso introduced customers to a high-end, barista experience at home. The core values rely on quality, sustainability and people first (Wilbers, 2015). As of 2013 Nespresso represented approximately 30% of Nestlé’s company of speciality coffee. With its single-use coffee pods, Nespresso introduced customers to a barista experience at home. The core values rely on quality, sustainability and people first (Wilbers, 2015). As of 2013 Nespresso represented approximately 30% of Nestlé’s operating profit (Daneshkhu, S., 2013). In this company, the product is innovative, so is the business model evolving in a niche market. They sell Nespresso coffee machine through retail then coffee pods in their own distribution channels.

Both of the items are protected by many patents. It is inspired from the razor-blade business model. Indeed, the machine has a broad selling platform – in partner retailers – in order to attract people. Customers are then captured and rely on buying expensive pods made of speciality within Nespresso’s exclusive channels: Nespresso boutiques, call centre or online. Coffee has been taken from a basic household product to a fashionable product with limited editions creating a market and turning Nespresso into a very profitable brand (Matzler K., et al, 2013). The coffee is produced then shipped across the globe, assembled in pods, finally able to meet demand. Nespresso’s supply chain requires a lot of transport, because of the great distance between the production and the customers. They also employ workers in developing countries, and their capsules are made of aluminium, generating a lot of waste. All those factors put the pods and their supply chain at the edge of sustainability issues. After
criticism, Nestle management decided to improve the operations targeting a supply chain that produces the same quality with less footprint. A lot of research and development studies recycling issues, implementing better wages or improved living conditions to their workers. Their supply chain is known for being effective especially for its return logistic winning the 2012 logistic award for best Web Shop of the Year (Wilbers, 2015).

In this essay, we will critically examine how sustainable Nespresso’s European supply chain is from beans to mugs and back.

In a first part, we will introduce the supply chain, its actors and propose enhancements. In a second blog post, we will study the implementation of sustainability within the coffee supply chain.

Study of the supply chain

Nespresso is positioned as differentiating product, holding a monopoly in its sector
based on the possible customisation of the coffee (Kashani, 2000). They sell their
machines and pods to households or businesses such as companies or hotels that
want a higher end coffee for their workers or clients. Nespresso’s product is
innovative, inspired from the functional product that is coffee. The efficient supply
chain is matching the demand being set. This reduces costs and gives higher
margins – approximately twice the other coffee brands’ margins (Levine, 2011).
Nespresso’s coffee beans are grown in Brazil, Colombia, Costa Rica, Guatemala,
Kenya, India or Ethiopia (Nespresso.com, 2016). The cherries are processed to keep
the seeds also known as coffee beans and milled. The green coffee beans are then
shipped in cargos to Europe. Nespresso owns three factories in Switzerland only, the
home country of Nestle where manufacturing is done they roast coffee beans. Whilst
road transportation used to be the only mean throughout Europe, in Nespresso’s
effort to create a more sustainable supply chain, they shifted towards a more
expensive mixed transportation made of train and road within Europe. They aim to
reduce the pollution linked to transportation (Nestle-nespresso.com, 2016). When
achievable, Nespresso created a rail-only distribution line deserving Austria,
Denmark or Sweden while Greece receives coffee by ships. Regional warehouses
are delivered at the end often by lorries from the closest rail station. Then they
distribute the production in their warehouses England, Germany, the Netherlands
and Norway through mixed transportation. When leaving warehouses, pods are
either dispatched in shops or delivered to customers directly.
Because of the increasing coffee market, the supply chain needs to grow in line with
its sustainable commitments to avoid future scarcity of coffee. Mixed transportation
has cut 35 to 40% of the transportation carbon emissions according to the Head of
the Supply chain Mr Michaud (Nestle-nespresso.com, 2016). Nespresso created a
responsive supply chain matching its innovative product (Fisher, 1997). The margin
for coffee pods is close to luxury sector’s margin (Letessier, I., 2010). It doesn’t outsource any operation within its supply chain for its coffee, as it is the core element of their activity (Matzler K., et al, 2013).

The selection of suitable coffee beans leaves only 1-2% of world’s supplies to suit Nespresso’s high standards. The company itself selects the productions and gives feedback on the quality. Nespresso’s power in the relationship puts under pressure the coffee farmers (Doorneweert, 2011). Timing
needs to be sharp during the delivery operation. Nespresso’s website claims a 48h
delivery when purchased online, this marketing promise needs to be delivered by operations. If this fast delivery is on time and correct, clients’ expectations of performances are fulfilled and waste is eliminated by meeting demand just-on-time (Dale B. G. et al, 2013).

Polished upstream lean supply chain

The supply chain put in practice upstream lean synchronisation in order to boost
operation’s performances and reduce costs from the producers to the factory (Jöhr,
2011). This “pull” system enhances the quality of the service due to continuous flow
between operations and a reduction of waste (Nash and Poling, 2007). As Ferdows
and de Meyer (1990) claimed, this quality upgrade should bring continuous and
lasting improvements to achieve the organisation’s objectives.
Nespresso’s supply chain is made of raw material sourcing, packaging,
manufacturing of the coffee, and distribution to customer. The manufacturing
process should fulfil no breakdowns, no small stops or slow running, no defects and
no accident thanks to Total Performance Management targeting prevention of any
failure through Six Sigma (Singh, 2015).

This practice withdraws the compulsory inventory between every stages of the
operations and the buffering stage before delivering to the next operation.
Operations are synchronised and organised through a pull system. The smooth flow
between operations make all stages more dependant as the “just-in-time” approach
of the supply chain reduces stocks. If the coffee beans shipping is late, the whole
chain will be affected which may lead – in the best circumstances – to the higher
management finding a solution not only the shipping team. If the worst scenario is to
happen, the issue would not be solved before sales being affected because of the
high dependency of the different actors of the chain. Lean permits a waste reduction:
“the elimination of anything that doesn’t add value” (Slack, et al, 2010). On one side,
waste is costly so it allows the brand to have those high margins. On the other side,
waste that may result in product shortage that a high end brand cannot afford.

A downstream hybrid supply chain

Nespresso sells an innovative and high-end product where value is supposedly high,
volumes low, predictability difficult and limited editions flavours have a short life
cycle. They would disappoint customers by not delivering the pledged quality service
(Cox & Chicksand, 2005 and Slack, et al, 2010). Moreover, coffee beans are
agricultural products, prone to fluctuations in their production especially due to climate
changes. Because of the natures of both the pods – product- and the coffee –
raw material- I would suggest the implementation of some agile elements in the
supply chain. It would benefit Nespresso’s supply chain and be more fitting to their
activity. Agile supply chains’ particularity is their reactivity to changes, due to the
almost constant flow of information (Levy, 1997 and Yusuf & Adeleye, 2002). Few
inventories should be kept for the less reliable processes. This supply chain
combining agile and lean is hybrid, responsive to unexpected but limiting waste
(Myerson, 2014). Pods are assembled in sleeves then flavours are gathered
according to deliveries requests since an e-shop is available to customers. This
requires more flexibility than boutiques and it is offered by a hybrid supply chain.

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