Analysis of Starbucks’ Supply Chain Management
The Starbucks Corporation is a company which is engaged in the coffee retail trade in 60 countries. Starbucks purchases, roasts and sells coffee, tea and other drinks, as well as a variety of fresh food items through its network of stores. Today, the corporation not only offers coffee, tea and coffee roasting equipment to its customers. It sells espresso-based coffee, a variety of hot and cold drinks and snacks. There has been a sale of pastries and salads without the high fructose and artificial ingredients since June 2009. This move attracted health-conscious people. Since 2010, Starbucks has begun selling beer and wine in the United States. In 2012, the company began offering iced drinks, which contain extract of green coffee beans. There are coffee beans, accessories for serving and making coffee in the range of the company’s products. Besides, it distributes books, music albums, movies, as well as clothing (hoodies, T-shirts). Most of the goods and products are seasonal (Bussing-Burks, 2009).
The company development strategy is based on the work of the following areas: partners, customers, community, and suppliers. The company consists of four segments:
- Europe, Middle East and Africa;
- China and the Asia-Pacific region;
- Channels of sales development.
The main part of sales brings the American region. However, there is an active sales growth in China and the Asia-Pacific region over the last 3 years. The channel development segment includes packaged coffee, tea, a variety of ready-to-drink beverages, and other branded products of which are sold in grocery stores and shops worldwide. As it has been mentioned above, this sector includes ready-to-drink beverages that are made and distributed through the “coffee-partnership” and joint venture with the Pepsi-Cola Company. The development channel segment reflects a modest cost structure and high operating margins (Bussing-Burks, 2009).
Starbucks operates quite successfully in this market segment. Of course, the negative factors have some inhibitory effect of the expansion of its sphere of influence in the market. Nevertheless, today the company is in a great demand among consumers. Development of all economic indicators is persistent enough. Consequently, the organization is successfully operating in this area nowadays. Thus, it can be concluded that the corporation will develop and perform successfully in this market segment insuring the sustainable development of the whole system (Gilbert, 2012).
Nonetheless, faced with rising production costs and a reduction in sales, the world’s largest supplier of coffee has developed and introduced a three-point plan on improvement of the supply chain (logistics system), cost reduction and preparation for future activities. In order to provide each client with a nice cup of coffee, the supply system of the company should work flawlessly. The process of transforming a coffee bean in a cup of coffee is considered complicated not accidentally. Coffee beans and other raw materials have to be imported from various points on the world’s map and optimally delivered to 16,700 points network of Starbucks, weekly serving millions of customers in fifty countries (Gilbert, 2012).
Back in 2008, almost nothing has hinted that the supply chain (SC) Starbucks may face similar challenges. Only one detail pointed to the fact that not everything in the company goes smoothly: operating costs grew notwithstanding there was a decline in sales. Therefore, from October 2007 until October 2008, the costs of the supply chain in the U.S. increased from 750 million to 825 million, in spite of the fact that sales in Starbucks outlets, open for only one year, fell by 10% over the same period of time. The company opened outlets with such speed that the functions of logistics departments of the company focused only on expanding the sales network. Starbucks grew at such rapid pace that it did not handle the basic principles of supply chain. As a result, expenses of the supply chain activities – operating costs – have sharply increased. In order to keep control of operating costs and balance costs and financial results, Starbucks needed to significantly change their operations (Bussing-Burks, 2009).
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The company had delivered three key objectives to transform the supply chain:
- Reorganize the supply system;
- Reduce inventories maintenance costs and improve performance of supplies;
- Lay the basis for the successful functioning of the supply chain in the future (Munson, 2013).
Reorganization of the Starbucks’ supply chain has received support of the highest leadership of the company. In 2008, the CEO Howard Schultz instructed Starbucks’ supply chain management to Peter Gibbons Peter Gibbons was then a senior vice-president of the global manufacturing operations (production of products by orders). Gibbons was not a novice in this matter; before starting to work at Starbucks in 2007, he was an executive vice-president of the supply chain at Glidden Co., a branch of ICI Americas, Inc. (Mangold, 2010).
The first problems to be addressed were to assess the effectiveness of supplies to retail outlets and sources of costs. It soon became clear that over the half of the warehouse supplies are performed with a delay. At first glance, the company just did not pay necessary attention to the quality of the service delivery. Taking into account the findings, Gibbons began to visit personally Starbucks’ retail outlets and communicate with employees to shed more light on the situation. He inflicted these visits to make sure that the company’s supply chain can be seriously improved (Sople, 2012).
He considered that no one can better assess what changes are needed to the current system than the staff working directly with the clients. The cost analysis indicated the excessive costs on outsourcing. The latter involved the payment for transportation and logistics; contract manufacturing was 65-70% of total operating costs of the Starbucks’ supply chain. This method of operation was used to enable the rapid expansion of the SC and did not allow it to lag behind the rate of growth of the retail outlets network, but it also led the business to a substantial increase in costs (Mangold, 2010).
In response, Gibbons and his team developed a plan to transform the supply chain, consisting of three consecutive steps. In accordance with these steps, Starbucks first had to reorganize the logistics system by simplification of its structure and a clearer definition of the functional role of divisions. Then, it was necessary to focus on reduction of the cost on servicing the retail outlets while still working on the improvement of the SC. After the establishment of the full control over the basic principles of the system’s functioning, the company should have laid the foundation for improving the logistics system in the future (Sople, 2012).
The first stage in the transformation of the supply chain Starbucks launched in the beginning of 2009. Following the Gibbons’ plan on facilitation of the complex and confusing structure, execution of any work could be attributed to one of the four main functions of the supply chain: planning, sourcing, manufacturing, and delivery. For example, any person involved in the planning – whether it is replenishment, promotion or product launch – would be identified by the planning team. All activities of the company associated with the SC were divided into the areas of purchasing the coffee and procurement of all other goods (“non coffee”). Starbucks annually spends $600 million in the U.S. for the purchase of coffee. Acquisition cost of dairy products, baked goods, furniture, and paper products was $2.5 billion per year. Both own production and work of subcontractors had been attributed to the production team. All staff working in the transportation department has been engaged in the distribution of goods movement, or serving customers was attributed to a delivery team (Mangold, 2010).
After the reorganization of the functions of the supply chain, various departments have turned to the next goal of the system conversion: the reduction of costs and increase of economic efficiency. Within the framework of the task, a group of “procurers” had worked on the identification of sources expenses, leading to higher prices. Starbucks undertook a study of the existing contracts, set prices for goods, transport expenses, and started to change the status quo by converting all components of the structure, not just prices. They have built a more efficient model of optimal cost (or optimal value of expenses), including a comparative analysis of the components and processes that have shown the opportunity to reach agreement on better prices (Sople, 2012).
Meanwhile, the production team has been developing a more effective delivery model of coffee beans to processing enterprises so that the production was located in the area where the coffee is marketed. Starbucks already owned three coffee processing plants in the U.S.: Kent, Washington, Minden, Nevada, and York, Pennsylvania. In 2009, the fourth plant appeared in the company in Columbia, South Carolina, the USA. Advantages of such an approach quickly became apparent: the distribution of coffee production by region allowed Starbucks to reduce transportation costs and turnaround time (Munson, 2013).
Also, once the new scheme started to work, all American coffee processing plants were able to switch from a seven-day production cycle to five-day. Apart from the four enterprises owning the coffee processing plants in the United States, Starbucks also exploits a coffee processing plant in Amsterdam, the Netherlands, and the processing plant (processing of tea leaves) for its branch Tazo Tea in Portland, Oregon. Furthermore, the company is a co-owner of 24 enterprises-manufacturers, most of which are located in Europe, Asia, Latin America, and Canada (Mangold, 2010).
Despite the fact that the production was distributed over a vast area, the costs of transportation, distribution, movement of goods and logistics have constituted the bulk of operating costs of Starbucks. The point is the company shipped a large inventory of various products all over the world. Control of these processes was a major challenge for the supply chain team.
Regardless whether it is delivering coffee from Africa or other goods from China, the company’s goal was to combine these processes into a global logistics system covering all the physical movement of goods coming into the corporation and being sold. It was a daunting task because there were considerable costs accumulated, and a huge part of the entire service system depended on solving that problem. The organization wanted to unite all 70,000-80,000 of supplies implemented by the company per week into a single logistics system, as well as all incoming shipment of goods from around the world (Sople, 2012).
Creating a single, global logistics system was important to Starbucks because of its extensive supply chain. Typically, the firm delivers coffee beans from Latin America, Africa and Asia to the United States and Europe in the ocean containers. From the port of delivery, “green” (non-roasted) beans are transported in trucks to the six main storage sites located on the roasting plant or nearby. After roasting and packaging, ready beans are delivered to the regional distribution centers (distribution of goods), covering an area of 200,000 to 300,000 square feet. Starbucks operates via five regional distribution centers in the United States, two of which are owned by the company while the other three are operated by the third-party logistics (3PL) companies. Starbucks has also two distribution centers in Europe and two in Asia; they are all run by 3PLs. However, coffee is just one of many products distributed through these storage centers. All other goods necessary for the operation of retail outlets pass through them as well – starting with furniture and ending with the mix for preparation a cappuccino (Mangold, 2010).
Depending on the location, shops stocked the production, or more regional distribution centers or smaller warehouses have been arranged. Starbucks uses 33 such central distribution centers in the US, 7 – in the Asian region, 5 – in Canada, and 3 in Europe. Currently, all of them except one are in the management of the third-party logistic companies. Central distribution centers distribute dairy products, baked goods and paper products such as napkins and utensils. They conduct regular combined deliveries of coffee and the above-indicated goods through a dedicated truck fleet in their own selling points and other outlets that sell branded products (Sople, 2012).
As the cost of expenses for delivery of goods and implementation of the delivery are closely related, the company started to improve the system as a whole. One of their first steps was to build a global plan of transport costs – the task has included collecting information on the costs of the supply chain across regions and customers. An analysis of these costs has allowed Starbucks to weed out unnecessary transport carriers, leaving only those that provide the best level of service (Mangold, 2010).
Logistics team has also met with the third-party logistics companies, examined the impact of their activities and contract cost of services. In order to facilitate this process, the team created weekly result protocols for measuring the performance of contractors. There are clear quantitative indicators of the level of service, value of costs and performance, and they all were agreed with the company’s partners (Munson, 2013).
Ratings of the protocol performance the 3PL companies were based on a very simple system using only two numbers: 0 and 1. For example, if an employee of the warehouse or distribution center accurately staffed goods, he/she received a “1” point. If it was dropped at least one pallet while shipment, the employee received “0.” Starbucks also made operational data stores, delivery channels and assortment positions available to the supply chain partners. Weekly review of results of the protocol ensured transparency of information to improve the basic value of the goods, and at the same time, the company paid attention to its staff and the quality of customer service (Munson, 2013).
Starbucks has a number of quantitative indicators needed to evaluate the performance of the supply chain. However, to create a coherent and balanced work of the logistics team of the entire company, the focus is on the four key criteria of high quality: (a) security of activity; (b) service level measured in timeliness of supplies and the percentage of order fulfillment; (c) the total cost of the supply chain; and (d) the company’s cost savings. Reducing costs here concerns the fields of activity that are not related to logistics, such as material and technical supply, marketing, or scientific studies (Sople, 2012). From the moment Starbucks launched activities to transform the supply chain, the costs of the company have been reduced worldwide, while the quality of service was not affected.