Corresponding Author:: Thich - Nguyenvan@adelaide - Edu.au
Corresponding Author:: Thich - Nguyenvan@adelaide - Edu.au
Corresponding Author:: Thich - Nguyenvan@adelaide - Edu.au
ABSTRACT
In this paper, researchers develop causal relationships among different variables that
present enablers and outcomes – operating within many identified feedback loops. The
resulting causal loop model provides coffee managers with a snapshot of the dynamic
interactions among elements in the coffee supply chain, which helps to identify
proactive action in implementing the coffee supply chain philosophy for increasing the
competitiveness of coffee products. Based on this review and analysis,
recommendations are made regarding application of the causal loop method in coffee
supply chain management. Important future research directions are also indicated.
Key words: Coffee supply chain, causal loop diagram, competitive advantages
1. INTRODUCTION
In recent years, Vietnamese coffee enterprises have been seriously challenged in the
race against international competitors for improving their competitiveness. Many
firms have responded to the challenge by embracing a broad view of competitiveness.
It is no longer solely the production, processing, exporting or retailing, but the strategy
is beginning to emphasise the management of competitiveness in all phases and
aspects of the coffee industry, from production to retailing. Thus, supply chain
management is becoming a top priority in many Vietnamese coffee firms.
Supply chain management has been known as one of the most powerful operation
paradigms for increasing competitive advantages of a product in the international
market, including the improvement of customer value and satisfaction. It has also
played an important role in the competitive strategy for integrating suppliers and
consumers with the objective of improving responsiveness and flexibility of
enterprises to meet the changing market requirements (Vrijhoef and Koskela, 2000).
Supply chain management has been an increasingly applied operations paradigm for
increasing overall organisational competitiveness (Gunasekaran and Ngai, 2004).
System dynamic modelling and systems thinking approaches have in recent years been
widely applied in supply chain management, such as inventory decision and policy
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Corresponding author: thich.nguyenvan@adelaide.edu.au
development (Meade and Sarkis, 1998; Swaminathan et al., 1998; Georgiadis et al.,
2005), supply chain design and integration (Sabri and Beamon, 2000; Christopher and
Towill, 2001), international supply chain (Houlihan, 1985; Akkermans et al., 1999),
and especially in studying complex logistic behaviour (Minegishi and Thiel, 2000).
However, most of the literature discuss only the implication of one or two aspects of
supply chain management, but does not cover the supply chain system in its entirety.
Developing a comprehensive causal loop model for supply chain management to
enhance the competitive advantages of coffee products has therefore been regarded as
essential. The main objective here is to address issues related to the identification of
the important variables in coffee supply chain management, through the use of
relevant feedback loops to develop a framework for the Vietnamese coffee supply
chain for enhancing the competitiveness of coffee beans on the international market.
This study especially focuses on developing causal loop models for the four main
factors that influence the competitive advantages of coffee products, namely cost,
quality, customer satisfaction and the competitors in the international market. Future
research directions are also identified.
In Vietnam, the producers sell the dry cherries to private traders, to agents of
processing plants, or directly to processing plants.
Coffee roasters
Coffee
Coffee Coffee intermediate Coffee
production processing agents exportation
The Vietnamese coffee supply chain
Figure 1: General structure of the Vietnamese coffee supply chain Coffee traders
Almost all coffee processing firms in Vietnam are primary processors. Primary
processing involves the conversion of harvested coffee cherries into green coffee
beans. After processing, the processors sell green beans to either agents, exporters or a
larger processing plant, and in some cases they also sell directly to international
customers (coffee roasters, traders, and brokers).
Collectors (intermediaries) form the next stakeholder group in the supply chain and
are involved in many aspects of the chain. They may buy coffee at any stage between
coffee cherries and coffee beans. They go directly to farmers’ warehouses or
processors to purchase coffee cherries and/or coffee beans, which they then sell on to
larger coffee processors or exporters. Before selling to the larger processing
companies or exporters, the collectors may do some of the primary processing work
such as drying, grading or polishing of the beans to ensure standard moisture content,
colour and bean size.
Exporters are the last stakeholders in the coffee supply chain. In Vietnam, the coffee
export companies are not only involved in exportation, but in some cases they would
also become involved in the processing and transportation of the beans. There are
currently around 150 registered coffee exporters (Gonzalez-Perez and Gutierrez-
Viana, 2012), who buy coffee beans from intermediate agents/collectors or processors
and then sell to dealers, brokers or roasters. In fact, most of their export sales are to
agents of multi-national traders who take the coffee over at the port and ship it to their
clients.
3. RESEARCH METHODOLOGY
Causal loop diagrams (CLDs) are used to designate system elements and their
relationships in the supply chain (from producers to retailers and between sellers and
buyers). CLDs has become increasingly popular as a powerful methodology for
obtaining insights into problems of supply chain management.
The steps followed in developing the CLDs are based on the guidelines of Cavana and
Maani (2000). The main objective of this study is to use the model to assist
determining how to increase the competitive advantage of Vietnamese coffee through
supply chain management. Therefore, the following adapted steps were followed:
1. Identify main elements/variables that are involved in the coffee supply chain
2. Establish the links between related elements in the CLD of the coffee supply
chain
3. Indicate the direction (polarity) on each link.
4. Identify and label the reinforcing or balancing loops in the diagram of the
coffee supply chain system.
5. Identify key leverage points in the coffee supply chain where interventions
could increase competitive advantages of the coffee.
6. Identify and develop systemic intervention strategies to manage the
Vietnamese coffee supply chain more effectively.
A key feature of this process is to create diagram so that the CLD can be used as a
basis for developing actions and implementing supply chain management strategies. In
this study, developing a CLD for the Vietnamese coffee supply chain has been
developed after detailed discussion held with coffee producers, intermediate agents,
coffee exporters, local officers and experts in a workshop conducted in the central
highland of Vietnam, an area which is considered as the “coffee capital” of Vietnam
(see figure 9). In the workshop participants were divided into small groups in which
the participants were representing the same part of the supply chain. Second,
individual groups were required to create a causal loop diagram for each individual
stage or part of the supply chain in which both internal and external relationships
between elements in the coffee supply chain were identified. In the next stage of the
workshop, each stakeholder group was asked to review and added more variables to
the CLD which had been developed by another group. Last, a general CLD that shows
the correlations among coffee supply chain stages was developed by combining all the
CLDs. This general CLD was revised by Vietnamese coffee experts who are familiar
with the real Vietnamese coffee industry situation.
4. CAUSAL LOOP DIAGRAMS IN VIETNAMESE COFFEE SUPPLY
CHAIN MANAGEMENT
The key variables are indicated in the generic framework of the coffee supply chain
model. These could be divided into two parts; one the enablers and the other the
outcomes or results (Figure 2)
Enablers Results/Outcomes
Enablers
Intermediate
Production Processing Exporting
agents
Figure 3: Identification of coffee supply chain enablers
In the context of the Vietnamese coffee supply chain, four variables have been
identified as the main ones contributing to the competitive advantages of Vietnamese
coffee product: the level of customer satisfaction, quality of the product, the
competitors, and the price (directly impacted by cost) (Figure 4).
Improve the
quality of Reduce the
coffee price
beans
Increase
Reduce the
level of
competitor
customer
Results/ s
satisfaction
Outcomes
This study has developed causal diagrams of four key aspects which decided the
competitive advantages of the coffee product (price, quality, customer satisfaction,
and competitors). The results of the steps used to end up with a general diagram of the
Vietnamese coffee supply chain are discussed in the following sections.
The price of coffee product is decided by the total cost because a change in the total
cost leads to the change in price. Price is the first aspect of the competitiveness of
product. Therefore, many coffee firms try to give out pricing competitively to attain
higher profit or larger market share than one’s competitors as a desirable goal. In the
causal loop diagrams of total supply chain cost (Figure 5), there are two positive
feedback loops and two negative feedback loops that show correlations related to the
cost of coffee product in supply chain.
R1 (price – level of customer satisfaction – coffee export – profit – investment –
productivity – production/processing/transportation cost - price) shows that the effect
of price on customer satisfaction is significant. Since reduced price of coffee products
in the foreign markets will increase the level of customer satisfaction. This can be
explained that there are variations in purchasing power of consumer in the
international market. The coffee export volume is strongly affected by customer
satisfaction. Thus, an increase in the level of customer satisfaction will lead to
escalation in the coffee export volume. The profit of the coffee product increases as a
result of increasing export volume. It is important to note that increasing profit in the
coffee firms will lead to increased investment at all stages. The productivity of all
elements in supply chain therefore will increase (including production, processing,
packaging and transportation). As a result of increasing in coffee productivity, the
costs of production, processing, packaging and transportation would also decline. The
total coffee supply chain cost is determined by the costs of these components. The
Vietnamese firms will be in a position to offer coffee at a lower price in the
international markets if the cost of each unit is reduced. Price could therefore be used
as a very effective marketing tool to increase the competitive advantages of the coffee
product in the global markets.
S
Profit
O S
S
Investment R1 S
B1
Price O
S
Total cost S
S
Production cost S S
O The cost of S S
warehousing
B2 Coffee export
S
S S O
Processing cost Level of customer
S Storage O
satisfaction
O R2
Productivity
Transportation S S
cost International
O
competitors
B1 and B2 are vicious cycles (Figure 5). B1(Total cost – Price – Coffee export –Profit
– Investment – Productivity – Production/Processing/Transportation cost) illustrates
that reduced total cost of coffee supply chain leads to reduce coffee price in the
international market, this can be explained that a product of the company with a cost
advantage can be considerable flexibility to lower price. However, the decline of
coffee price on the international markets will lead to a decrease in the coffee export
volume because the coffee exporters have to consider the profit of the firm. Thus, the
less coffee exports, the less profit they will receive. Reduced coffee profit requires
supply chain members to cut down investment in all stages of the supply chain
(production, processing and warehouse facilities). This will lead to a reduction in
productivity in all stages since supply chain members have not enough fashioned
facilities. The unit cost of coffee in all stages will increase as a cause of the decline of
productivity. As a result of this, the total cost of coffee will again increase. Higher cost
of Vietnamese coffee will lead to a reduction in the competitive advantages on the
international coffee markets.
The B2 (balancing loop) formed by adding the variables storage and cost of
warehouse (instead of variable of profit, investment, productivity and cost of different
supply chain members). The decline of coffee price on the global markets will have a
negative effect on the coffee export volume. This is because when coffee export
volumes reduce, it requires more warehouses for storage. This leads to an escalation of
the cost of warehousing coffee. As a result the total costs in the coffee supply chain
will rise. Finally, as a result of increasing in total cost, the coffee exporters have to sell
their coffee at a higher price to remain profitable. Thus, in turn it affects the
competitive advantages of Vietnamese coffee on the international markets.
• Causal loop diagram of the coffee quality in the coffee supply chain
Profit S
Coffee export S
S
S
Investment R3
Price
Level of customer S
S
Warehouse satisfaction
S
S
Processing
S technology R2
Quality of coffee
cherries S
Quality of green
R1 S coffee beans
S
Figure 6: Causal loop diagram of the coffee bean quality in the supply chain
Customer satisfaction with the coffee is often seen as the pivotal role to a Vietnamese
coffee company’s success and long term competiveness in the global market. It is also
viewed as a central determinant, a key differentiator of customer retention and
increasingly has become a key element of business strategy. The level of customer
satisfaction is often decided by three main factors, namely the quality, price and time
it takes to deliver the coffee (Figure 7). A change in price will lead to a change in the
level of customer satisfaction of the coffee. An increase in the level of Vietnamese
coffee satisfaction will have a positive effect on coffee consumption, and therefore
lead to an increase in coffee export volume. This in turn affects profitability. When
the profit increases, the investment will be increased in all stages of the chain. This
will lead to a reduction in price and an increase in the quality of coffee through
increased productivity and better equipment and technologies.
R4
S Price S
Profit O
Productivity
S B1
R3 Level of customer
S S satisfaction
S
Investment Equipment O O
Duration of
O delivery
S R2
Processing
technology
R1
S Quality of green
coffee beans
S Quality of coffee S
cherries
Competition firms play a central role for measuring competitiveness. Suppose the
price of Vietnamese coffee rises to such levels that even the ideal consumer of
Vietnamese coffee finds it uncompetitive, they would buy coffee products from other
competitors instead of Vietnamese coffee. This would lead to a reduction of the export
volume of Vietnamese coffee (Figure 8). Lower export volume fetches lower profit for
coffee industry. As a result of this, the investment in all stages in the coffee supply
chain will also reduce. If the investment in coffee industry reduces, then the quality of
the coffee beans also decline. When the quality of coffee product declines, a number
of Vietnamese coffee competitors will increase because many other producers in the
world can also provide the same or even higher coffee quality compared to
Vietnamese coffee. In this case, the Vietnamese coffee will lose its competitive
advantage in the quality of coffee.
Coffee
export S
O
S
Profit
Price
B2 O
International
R1 competitors
O
B1
S
Investment
S
Quality of green
S
coffee beans
A general causal loop diagram of Vietnamese coffee supply chain has been developed
after detailed discussions with numerous experts from different stakeholder groups in
the coffee industry. Various positive and negative feedback loops are shown in Figure
9.
Figure 9 shows that increased investment will tend to increase two aspects of coffee
competitive advantages; one is the level of customer satisfaction and another is quality
of coffee beans (see loops R1, R2 and R4). Both customer satisfaction and the quality
of coffee are key competitive issues in the global marketplace. Increased investment
will increase the quality of seed and fertilisers, and the effectiveness of irrigation
systems in the production stage. This would lead to an increase in the quality of coffee
cherries that directly affects the quality of coffee beans (see loop R1: Investment –
Coffee cherries – Quality of green coffee beans – Level of customer satisfaction –
Consumption – Coffee export volume – Profit). Increased investment also reduces the
processing duration of coffee beans, because coffee firms can upgrade technologies in
both dry and wet processing methods. This also leads to an increase of the quality of
coffee beans (see loop R2: Investment – Processing technologies – Processing
duration – Quality of green coffee beans – Level of customer satisfaction –
Consumption – Coffee export volume – Profit). When the qualities of green beans
improve, the consumption of coffee product will increase because the number of
satisfied customers will increase. This will have a positive effect on coffee
consumption in the global market, which will increase the demand for coffee to be
exported. A higher volume of coffee export will bring higher profits for all
stakeholders in the coffee supply chain. As a result of this, the investment ability of all
channel members in the Vietnamese coffee industry continues to escalate. Thus the
feedback loop between investment, quality of coffee beans, level of customer
satisfaction, coffee consumption, coffee export and profit is a positive loop.
Production Processing Intermediate Exporting Competitive
S S factors
Profit
S
O R6
Duration of S
O
S Total cost delivery
Price S
Yield S R4
S S SO
S Facilities
B-c The cost of
S warehousing B3
Production cost Processing R3
O cost S O
O S O O
Coffee O
Coffee area
O consumption Level of customer R_I
S satisfaction
Storage O S S
S B4 S S
Productivity
Processing R7 O
O S technology Coffee S
O R5
export
Quality of coffee S
O S O
cherries S Processing Transportation S S O
S S duration cost S
S
International
O O competitors
S
S R2 Demand on O B1
Processing international market
technique B2
S
Investment S
Policy S
S S Quality of green
S- coffee beans
Climatic Quality S S
S
condition control
R1
Enablers Results
Increased investment will lead to a reduction in the price of coffee product (also note
that price is an important factor in the competitive advantage of coffee product. It is
influenced by the costs which incurs across the coffee supply chain). A reduction of
coffee price means that its competitiveness increases because price is one of the key
determinants of customer satisfaction. If the firms increase investment, they can invest
on modern technologies in all stages of supply chain (machines in the production,
types of technology in the processing, facilities and equipment in transportation and
storages, and infrastructure etc.) which have high productivity (see loop B_c:
Investment – Productivity – Cost – Price – Coffee export volume – Profit). As a result,
the cost of all stages in supply chain (production cost, processing cost, transportation
cost, storage cost) will decline. Thus, the total cost of coffee product will also decline.
When the total cost reduces, the price of product will reduce because coffee exporters
are willing to offer at lower price while they still receive profit as their expectation.
Increased volume of coffee export is a result of reducing the price. This can be
explained that the lower price will attract various objective customers who have
different purchase powers. Increased coffee export volume will lead to increase in the
profit which is a major factor effect on increasing investment of all channel members.
Thus the feedback loop between investment, productivity, cost, price, coffee export
and profit is balancing (or negative) loop.
The price which is affected by the cost of all stages in supply chain (production cost,
processing cost, transportation cost, storage cost) not only affects customer
satisfaction, but also competition in the international market (see loop B3 and R7 in
the figure 9). The negative feedback loop B3 (Price – Level of customer satisfaction)
shows the effect of price on the level of customer satisfaction. The price is one of the
key determinants of customer satisfaction because buyers will prefer a low priced
product to a high priced product. Thus, the coffee exporters will always want to offer
lower price to the customer for achieving high customer satisfaction.
The loop R7 (International competitors – Price) illustrates that, the increase of coffee
price in the international market will leads to an increase in the number of coffee
providers. This is evidence that the coffee traders tend to export their product to get
higher profit rather than they sell in the domestic markets when the coffee price in the
global market is high. In contrast, the decline of international coffee price will lead to
the decrease in the number of coffee exporters in the oversea markets.
The aforementioned causal loop diagrams of coffee supply chain provide an insight
into understanding the dynamic interactions among subsystems of the Vietnamese
coffee supply chain. It builds an understanding of these relationships, and it allows
coffee firms to take proactive action to ensure effective implementation of coffee
supply chain philosophy. In the CLD of Vietnamese coffee supply chain can be
extended and involved to looking for leverage points which then can be intervened for
evaluating various long term strategies to ensure more effective implementation of the
coffee supply chain philosophy and increase the competitiveness of Vietnamese coffee
products.
5. CONCLUSION
The causal loop diagrams in this study serve as a simple visual representation of
complex relationships between key variables and factors of different stakeholders in
Vietnamese coffee supply chain. One developed, the model can be used to identify
potentially high leverage interventions that could be affected to four aspects of the
competitive advantages namely the level of customer satisfaction, the quality of
product, the competitors, and the price of product. A general causal loop diagram of
whole coffee supply chain has been developed between these sets of enables and
results and is the basis for continued analyses and researches to looking for
intervention strategies to increase the competitive advantage of Vietnamese coffee
products. Therefore, in a forthcoming paper these relationships and influences will be
tested by using Bayesian Belief Networks (BBNs) model to intervene in the key
leverage points in the coffee supply chain to enhance the competitive advantages of
Vietnamese coffee product.
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