For many people, coffee is the drug of choice—a regular part of the morning wake-up routine. But few coffee drinkers think about the long and complicated supply chain that delivers the product to their local coffee shop or retailer. Even fewer will pause to contemplate whether this cup of caffeine can actually teach something about supply chain best practices.

Coffee is one of the world's most heavily traded commodities; the United States consumes one-fifth of the world's coffee.¹ As the specialty coffee business continues to grow, expanding into premium and organic coffee lines, most people assume that the industry as a whole is benefiting. However, market prices for green coffee beans continue to decline; increasingly, revenues fail to cover costs of production, and the farmers are forced into poverty and debt. Between 1975 and 1993, the price of coffee fell 18 percent but coffee prices to U.S. consumers increased 240 percent.² As market prices have continued to decline dramatically over the last decade, the consumer prices of specialty coffee have remained stable and the prices of mass-marketed canned coffees have dropped only slightly, adding to the bottom line of the larger coffee roasters.

There is an alternative. The Fair Trade business model attempts to share the benefits more equitably across the supply chain. For coffee to be officially "Fair Trade Certified," coffee brokers and/or roasters must pay a premium price per pound for their coffee and source the coffee from farmer-managed cooperatives that meet certain labor and farming standards. Even though the companies pay a premium price for the coffee, most of them continue to be profitable.

In some European countries, for example, Fair Trade coffee penetration has reached five percent of total coffee sales.³ In the United States, however, the penetration rate is less than one percent. In recent years, America's typical corporate response has been to adopt Fair Trade under pressure from consumers, investors, and activist organizations.⁴ A letter campaign by activists helped persuade Sara Lee Corp. to add a Fair Trade coffee—its Prebica Whole Planet blend. Starbucks rolled out its own Fair Trade brand after campaigners raised pointed questions at a shareholders' meeting. Procter & Gamble now offers one Fair Trade coffee as part of its Millstone coffee line, although the product is only available to consumers online.

However, there are other for-profit companies that take Fair Trade more seriously. One such company, Equal Exchange Inc., sells only Fair Trade products. Given Equal Exchange's annual growth rate of 34 percent, the Fair Trade model appears to be not only viable but also an attractive business model.

The pros and cons of the Fair Trade business model have been thoroughly discussed from both ethical and economical perspectives.^5,6 The purpose of this article is not to reinforce or to rebut those arguments. Instead, we use the Equal Exchange Fair Trade approach as an intriguing example of supply chain best practices—of partnerships properly managed, of values aligned among stakeholders, of transparency and strong communication up and down the supply chain, and of a consistent focus on long-term benefits for all participants.

Fair Trade is an alternative approach to conventional international trade. It covers an array of products, from coffee and coconut oil to wood carvings and pottery. It is a trading partnership that focuses on sustainable development for excluded and disadvantaged producers. It seeks to do this by looking at the "triple bottom line"—a fair deal for farmers and workers, environmental sustainability, and profitability for all parties in the chain of production.

TransFair USA is the only independent, third-party certifier of Fair Trade products in the United States.⁷ It works with importers and manufacturers in the United States to document business practices, providing consumers with a reliable guarantee that the coffee is produced according to international Fair Trade criteria. For coffee, those criteria are:

• A fair price: Producer cooperatives are guaranteed a fair price (a floor price of $1.26 per pound or 5 cents above the prevailing market price; $1.41 for certified organic coffee or 15 cents above the market price). The premium over market prices is shown in Exhibit 1.
• Democratic organization: Producers must belong to cooperatives or associations that are transparent and democratically controlled by their members.
• Direct trade and long-term relationships: Importers must purchase coffee directly from Fair Trade Certified producers and agree to establish long-term and stable relationships.
• Access to credit: When requested by producers, importers must provide preharvest financing or credit (up to 60 percent of each order).
• Environmental protection: Producers must implement integrated-crop-management and environmental protection plans.

Although the traditional supply chain for coffee is rather complex and varies by region and company, there are many steps common to all supply chains. The crop grows in countries such as Mexico, Guatemala, Costa Rica, and Tanzania. Interestingly, almost 80 percent of growers work areas of three hectares (about 7.5 acres) or less.⁸ Given the scale of production, most farmers must sell through intermediaries, commonly referred to by farmers as "coyotes" since they use their market position to eat away much of the farmers' earnings. The intermediaries buy the coffee and may conduct the primary processing or simply transport the beans to a dealer or processor. In some countries, government agencies also control the coffee trade. For example, some governments buy the coffee from processors to sell it in auctions for export. The exporter's role is to ensure the quality of the coffee shipment when it is bought from local cooperatives or auctions and sold to dealers or importers.

In the destination countries, the importers typically sell the beans to brokers who then supply the coffee beans to the roasters. The roasters—companies such as Nestlé, Sara Lee, and Procter & Gamble—convert the green coffee beans into the products seen on retail shelves. They are also responsible for the marketing, branding, and packaging of the product. They usually rely on third-party distributors to deliver to supermarkets, hotels and catering organizations, or to smaller retailers. Each of the many supply chain participants takes a share of the profits, generally leaving very little for the actual producers of the beans.

The Fair Trade standards affect both the structure and the relationships of the supply chain. As shown in Exhibit 2, the model eliminates many of the middlemen and instead encourages direct relationships between the suppliers and roaster organizations.

The farmers are members and often owners of Fair Trade-registered cooperatives that are democratically organized and that provide education, establish processing sites, and develop economies of scale for the farmers. Essentially, the cooperatives take on the roles of the middlemen, processors, and exporters. The cooperatives also receive the above-market Fair Trade prices for their coffee. The farmers within the cooperatives decide how to use the premiums—typically the funds either go directly to the farmers or to support community projects. The importers buy directly from the cooperatives at the Fair Trade prices. The Fair Trade Certified licensee—the manufacturer or roaster—buys the coffee from the importers and typically distributes the products in a similar manner to the traditional coffee supply chain. But by eliminating supply chain steps, costs are saved, and the savings are shared directly with the farmers.

In the Fair Trade model, farmers are paid a price that is approximately 28 percent of the wholesale revenues vs. 11 percent in a traditional model. Exhibit 3 shows how the benefits are shared across the supply chain for both the traditional and the Fair Trade model.⁹

The vertical integration achieved by the farmer cooperatives means that the Fair Trade supply chain is far more streamlined than the traditional coffee supply chain. By purchasing directly from producers, developing long-term trading partnerships, and assisting suppliers, the Fair Trade model not only supports the economic development of the farming communities but also helps to simplify the supply chain.

To bring the Fair Trade model to life, we selected Equal Exchange Inc. as a case study. While many of the numerous Fair Trade organizations are nonprofits, Equal Exchange was formed as a for-profit organization specifically to demonstrate the viability of the Fair Trade model.

Equal Exchange was chosen for several reasons: First, the company pioneered Fair Trade in the U.S. coffee industry in 1986. Then in 1991, it became the first U.S. company to adopt international Fair Trade standards. Equal Exchange now imports coffee from Fair Trade-registered farmer cooperatives in 15 countries. Second, Equal Exchange has developed a sustainable model. Launched 18 years ago, its revenues have grown an average of 34 percent annually, reached $13 million in 2003, and are expected to exceed $16.5 million in 2004. (See Exhibit 4.) Third, the company imports Fair Trade Certified coffee and manufactures and markets its own Fair Trade coffee. Finally, all of its coffee, cocoa, and tea products are Fair Trade—a markedly different approach from that of major retailers such as Starbucks.

The company's mission helps explain its basic business model: To build long-term trade partnerships that are economically just and environmentally sound, to foster mutually beneficial relations between farmers and consumers, and to demonstrate through our success the viability of worker-owned cooperatives and fair trade.¹⁰ Founders Rink Dickinson, Jonathan Rosenthal, and Michael Rozyne wanted a corporate structure that would maximize social contribution, so they built the organization in a very unusual way. Under the worker-owned cooperative structure, an employee can buy one share of Equal Exchange and one vote after one year of employment. Even the co-directors have only one vote. External funding comes from investors who have enjoyed an average 5.1-percent annual dividend over the last 15 years—but the investors have no voting rights and can only sell their class-B shares back to the company. Also, if Equal Exchange was to be sold, net proceeds would be given to another Fair Trade organization. This eliminates the temptation to sell the company to gain quick profits.

As the company has grown from the original three co-founders in 1986 to 80 employees today, Equal Exchange has hired very selectively. Clearly, the company's organizational structure and its mission create a self-selection bias. But Equal Exchange actively seeks people who have experience with cooperatives, union organizations, or social causes so they fit well with its culture and work well with the producers and cooperatives. This unique structure not only ensures that employees are aligned with the company's mission but also provides leadership continuity—and thus a longer-term perspective than in most companies.

Equal Exchange today operates on a large and complex scale. The company helps to link more than 191,000 farmers from 29 cooperatives in 15 countries on four continents (and two islands) with 3,000-plus retail locations reaching 900,000 consumers.

Several other factors make the Equal Exchange model unique. First, the founders developed an internal structure that, like Fair Trade, was based on the principles of democracy, transparency, and equitable distribution of benefits. This provided the capabilities to facilitate supply chain collaboration. Second, the founders streamlined the supply chain from the farmers to the consumers. They also worked to develop strong partnerships with the farmers and with the retailers. Finally, they have educated the customer—creating new demand for Fair Trade products. In short, they have made connections, fostered collaboration, and facilitated change throughout the entire supply network. Here are glimpses of how Equal Exchange approaches supply chain management differently.

A Leaner Supply Chain

Equal Exchange takes the Fair Trade lean supply chain quite a bit further. Licensed as a Fair Trade importer and manufacturer, the company combines two supply chain steps right away. Second: While it does distribute through traditional channels, Equal Exchange also sells about 94 percent of its products directly to retail stores, church parishes, and individual consumers. Equal Exchange continues to work to simplify its supply chain wherever possible.

Real Partnerships with Suppliers

On the side of all Equal Exchange boxes you will find "From Small Farmers with Love." To deliver products directly from small coffee farmers, Equal Exchange partners with small Fair Trade cooperatives. Equal Exchange provides not only the Fair Trade premium prices (paying $2 million in excess of market prices in 2003) directly to these cooperatives and farmers but also additional financial and educational support. The company makes credit available to the cooperatives, allowing them, at a minimum, to finance the preharvest resources needed to farm their land. Traditionally, this credit was either unavailable or only offered at exorbitant interest rates of approximately 25 percent.

Equal Exchange and other Fair Trade loaning institutions typically given farmers a rate between 8–9 percent, pegged to the Libor (the benchmark for short-term interest rates.) By providing these credits, Equal Exchange ensures that the farmers continue to invest in the farms and develop sustainable sources of coffee. Equal Exchange also indirectly supports ecological farming methods by constantly requesting organic coffee and by paying more for organic beans. When the cooperatives provide education on ecological farming methods, the farmers can build a long-term economic base while protecting their families, their communities, and the environment from toxic chemicals.

Equal Exchange also shares critical market information, giving farmers important windows into how their products are received. For example, when farmer cooperatives are considering converting to organic cultivation, Equal Exchange provides data about the market trends for organic coffee. The company also provides detailed reports on product quality. When its quality control teams evaluate a crop, based on the controls set by the Specialty Coffee Association of America, they regularly share the results directly with the farmers to encourage crop-improvement practices and continued investment to meet future market needs.

Equal Exchange and its investors benefit from the more collaborative supplier partnerships. "The direct relationships with the actual producers, combined with our financing support, provide us with more consistent quality and a stable supply base," says Todd Caspersen, the company's purchasing director. In years when coffee was in short supply, Equal Exchange's producers gave the company priority for their best beans. In addition, several cooperatives have sometimes given Equal Exchange discounts when shortages forced market prices to spike well above the Fair Trade levels. By providing support to the farmers during difficult demand conditions, Equal Exchange was able to benefit during challenging supply situations.

Collaboration with Customers

Equal Exchange initially offered its products to small independent distributors and consumer-led cooperatives that focus on organic products or have a social mission. The company gradually expanded by seeking out more traditional retail environments. In the early 1990s, Equal Exchange added bulk coffee to its line-up; demand for retail bulk product was beginning to grow while demand for retail packaged coffee was declining as consumers bought more of their coffee outside of supermarkets. By 1994, Equal Exchange was the market leader in organic bulk coffee; by the late 1990s, the company began to target larger supermarkets at a time when most store formats were growing in size and offering specialty sections. Typically, Equal Exchange's coffees, cocoas, and teas fit well into the natural food sections. In the last few years, its products have become available on the shelves of Stop & Shop, Shaw's, Kroger, Albertsons, and other large grocery chains.

Shaw's Supermarkets offers an interesting example of the Equal Exchange approach. Negotiations with the regional grocery chain began eight years ago. Shaw's appeared to be a good target—its parent company at that time, Sainbury's, was the first large U.K. retailer to launch fairly traded products. Shaw's was initially cautious about Equal Exchange's ability to meet the demands of its larger stores. So the retailer established a test plan, starting with 10 stores, then 18, and finally growing to full distribution to all 200 stores in the Northeast.

Equal Exchange provided Shaw's with the advantage of being the first supermarket chain to offer organic and Fair Trade coffee. "It gave consumers an opportunity to choose an alternative to the mainstream coffee and to support the environment," says Equal Exchange sales manager Jessie Myszka. Equal Exchange also provided support for its products: For example, when it introduced its bulk coffee to Shaw's, the Equal Exchange also shared much of its experience with managing bulk foods: controlling quality, managing the product line, pricing the product, and educating consumers. Equal Exchange prizes its strong partnerships with retailers and considers it vital to help the stores to grow and improve their own processes.

Educating Supply Chain Partners

Equal Exchange uses larger religious organizations such as the Lutheran World Relief (LWR), Catholic Relief Services, and the United Methodist Committee on Relief to communicate its mission effectively. Its partnership with Lutheran World Relief, for example, launched the LWR coffee project, an initiative encouraging Lutheran parishes to use Fair Trade coffee. "The project is a way for Lutherans to help people in need overseas—a complement to the kind of work we've been doing for more than 50 years," says LWR president Kathryn Wolford. Such partnerships with religious organizations allow Equal Exchange not only to distribute to more than 9,000 places of worship—almost 25 percent of its sales—but also to reach many congregations with the Fair Trade message. Subsequently, members of those congregations often ask for Equal Exchange and Fair Trade coffee at the cafes, grocery stores, and colleges in their communities.

Equal Exchange also educates customers and retailers by organizing trips to visit the coffee producers. In 2003, the company sent five groups—consumers, buyers, partners, and staff—to every Central American country it traded with. The groups visited the families, farms, and facilities, gaining insight into the challenges confronting producers. They also brought farmers to the United States to spread the message to consumers. These trips help to build bridges between customers, retailers, and farmers (See Exhibit 5).

Equal Exchange has also helped to drive change in the coffee industry. As co-founder Rink Dickinson states: "It is important to have a successful Fair Trade business so that it can be pointed to as an example...and can push others to address the issues of the farmers." By educating consumers, Equal Exchange has raised the awareness of the coffee industry situation and the alternative Fair Trade model. In addition, the company has an active public-relations campaign that targets the industry directly. The campaign has involved participation in the Specialty Coffee Conference, publicity in trade journals, and letters to the editor in publications such as Harvard Business Review, Fast Company, and The New York Times.

The campaign has often challenged the industry to conduct more Fair Trade business: In 2003, Equal Exchange offered to provide $25,000 to Procter & Gamble's farmer cooperatives if they matched Equal Exchange's Fair Trade sales, pound for pound.

In this article, we have attempted to show that the Fair Trade model makes good business sense beyond the ethical treatment of farmers. Many of the Fair Trade supply chain practices are applicable to other businesses and industries. (See sidebar on page 56.) Of course, we don't pretend that these practices are easily applied or do not need to be modified to fit specific supply chain needs. Obviously, there are few practical parallels in ensuring the viability of hundreds of thousands of small suppliers in, say, the automotive or computer sector. Nor is there the same level of empathetic appeal and consequent pricing flexibility with, say, a switch module or an industrial meter as there is with Fair Trade products.

But our central argument is that there is much to recommend collaborative practices rooted in a long-term perspective that spans the entire supply chain, as demonstrated by Equal Exchange. There are clear downstream benefits—to retailers and consumers—of continually nurturing a community of healthy suppliers. Short term, Equal Exchange's customers have been insulated from pricing spikes during times of shortage; long term, they have been assured steady supplies of high-quality product. Additionally, tremendous cost and cycle-time benefits result from simplifying supply chains that are reaching staggering levels of complexity.

Businesses will always be hamstrung by economic constraints, weighed down by regulatory burdens, and bound by corporate culture and standard industry practices. But Equal Exchange's experiences show what can be achieved by focusing firmly on the supply chain fundamentals and by viewing the supply chain in its entirety. The lessons include simplifying the steps across the supply network, creating demand by continually reinforcing the product's value, working hand-in-glove with suppliers to create high-quality products, and ensuring the long-term health of valued participants.

Author's note on the research approach: To define the Equal Exchange Approach to Fair Trade, we first reviewed press releases, annual reports, and other formal reports from the company. Based on this review, we developed a set of interview questions. We interviewed experts in procurement, operations, and sales and marketing as well as the executive leadership team. Upon completion of the first draft of the paper, it was distributed and reviewed by all interviewees to check for accuracy. Modifications to improve the clarity of the paper were made when necessary.