One of the challenges of being a small, start-up roastery is accurate and effective inventory management. And it isn’t limited to just raw, green coffee.
Take for example my packaging, I have labels for the front of the bag that are unique for each type of coffee. I also have a label printed to place on the back of every bag. The company I used to print the labels has a relatively high minimum order per design. This keeps their cost down and allows them to sell the labels at a comparatively low, per-unit price..
I need to ensure that I have enough of each label to match the number of bags of coffee I expect to sell. As I get near to running out of labels, I need to ensure I order more in enough time to allow the printing company to print and ship them. The first order with this company took over a month and a half to get the labels to my front step.
Maintaining green bean inventory represents a different challenge. I have a fixed amount of investment capital I have put into the company to get started. That money needs to cover the costs of packaging, green beans, the cost to roast, which in my case is a per-hour fee, etc. Once that investment money runs out, if the business isn’t self-sufficient yet, I’ll need to raise more investment capital or close shop.
Economies of scale
There are several economies of scale that directly impact a small, startup roastery such as my own. Below are three:
- I pay a per-hour fee to roast and the fee is stratified by roaster capacity
- Green beans are cheaper as you increase the quantity purchased
- Wasted inventory increases the cost of used inventory
Roast capacity
I rent time on a roaster at a local facility. The bottom tier is a 1.5kg machine for $30/hour. You can get three roasts in an hour (can’t cool and roast at the same time) and the maximum, effective capacity for that machine for my roasting goals is 1.2kg. That yields three 12oz/340g bags of coffee. That means it takes me one hour to produce nine bags of coffee at a cost to me of $3.33/bag to roast.
The next tier in capacity is 10kg for $40/hour. However, having too much unsold, roasted coffee on hand could be bad. Roasted coffee’s window of maximum freshness is about two weeks. The flavor of a coffee begins to change noticeably after that. Therefore roasting more coffe than one can sell within two weeks can generate waste. That waste is increased if you immediately package the roasted coffee because you then lose the cost of bags and labels.
The ideal situation for me is to be able to roast exactly the amount of beans I expect to sell within one week. That way the beans have another week to be shipped to the customer before the flavor starts to really change.
Cost of green beans
The following are units involved in the green coffee industry:
- A shipping container can hold up to 21 tons of green coffee
- A typical pallet is 14-16 bags of coffee
- A typical bag of coffee is 60-70kg of coffee, depending on origin
- A typical ‘split bag’ of coffee is 30kg
- Below 30kg is considered hobby level and is typically available per-pound
As one moves down that list, the price (the roasters’ cost) per pound goes up. Like roasted beans, green coffee beans have a window of maximum freshness. That is about one year for green beans. After that, not only does the flavor profile change, but also the moisture content, which affects both the thermal dynamics of the roasting process and the chemical dynamics (free water is needed for various chemical reactions caused by the roasting process).
So a roastery needs to ensure they can buy only enough coffee to sell within one year, while ensuring they have enough on hand for what they do sell.
A startup roastery also doesn’t know exactly what their potential customers prefer. For example, when I was roasting in Virginia in 2013, I bought a full, 60kg bag of a natural, Ethiopian coffee that I loved. But it turns out my customers didn’t. I had a hard time selling that coffee and ended up selling the last of it as green coffee at a loss when I closed up shop to move to Singapore.
Therefore, the ideal situation for a startup roastery is to have enough inventory on hand in order to cost-effectively discover what their customers will buy at a price high enough for the roastery to make a profit.
Waste
The third point is that wasted inventory increases the cost to the business. For example; I had to purchase 300 labels for each product I sell. One of the coffees sold out quicker than I expected. When I went to buy more greens from my source, they too were sold out. As was everyone else (it was a small lot from the producer to begin with.)
I didn’t sell 300 bags of that coffee so I now have left-over labels that can’t be used on any other coffee. I can either wait for next season and hope I can get that coffee again, or I can write off the labels as a loss, or I can recoup the money through the sales of other coffees. For a startup with limited investment capital and even less cash flow, that’s a tough choice to make! Burning through investment capital too quickly while simultaneously not establishing sustainable cash flow is why so many startups fail within their first three years.
The ideal situation here is to tough to achieve: have access to enough inventory to be able to explore the market and determine what the market wants from you. Then sell the shit out of it.
It may be more cost-effective to purchase inventory at higher costs but lower minimum orders with the goal of minimizing waste. It may also be more effective to start with generic or flexible packaging solutions that allow for swapping items out easily.
Inventory management is one key aspect of running a small, startup roastery. One of the goals in the startup phase is to develop a customer base that will support rapid growth through the more expensive aspects of a startup until they reach economies of scale. It is therefore critical to understand one’s costs as well as the potential pitfalls of inventory management. That will help inform decisions based on a more accurate cost-benefit analysis.