SUPPLY CHAIN MANAGEMENT OF STARBUCKS

Transcription

1 SUPPLY CHAIN MANAGEMENT OF STARBUCKS

2 STARBUCKS SUPPLY CHAIN MANAGEMENT Starbucks Corporation is an international coffee company and coffeehouse chain based in Seattle, Washington. Starbucks is the largest coffeehouse company in the world. Starbucks sells drip brewed coffee, espresso-based hot drinks, other hot and cold drinks, coffee beans, salads, hot and cold sandwiches and panini, pastries, snacks, and items such as mugs and tumblers. Through the Starbucks Entertainment division and Hear Music brand, the company also markets books, music, and film. Many of the company's products are seasonal or specific to the locality of the store. Starbucksbrand ice cream and coffee are also offered at grocery stores. The first Starbucks opened in Seattle, Washington, on March 30, 1971 by three partners: English teacher Jerry Baldwin, history teacher Zev Siegl, and writer Gordon Bowker. The three were inspired by entrepreneur Alfred Peet (whom they knew personally) to sell high-quality coffee beans and equipment. CUSTOMERS In the early stages Starbucks identified their target market as affluent, well- educated, white collar patrons specially females between the ages of 25 and 44 years. Over the time market research teams have recognized the new target market. At present their customer base is people in the age group of 18 to 24 years, higher average income group which comprise mostly of self employed people or those who work full time. THEIR SUPPLY BASE On the supply base side, the program served to lock in strategic and high quality suppliers. This consistent, quality supply provided Starbucks with a competitive advantage over other coffee 2 P a g e

3 roasters in the industry. Since suppliers would have invested resources in complying with Starbucks programs, they would have an incentive to remain with Starbucks and would face switching costs should they try to demonstrate their excellence to another coffee roaster. The large pool of high quality suppliers would also smooth supply fluctuations by providing a base supply of high quality growers. Since Starbucks long purchase cycle included signing purchase agreements before the crop had even been harvested, any reduction in supply uncertainties and fluctuations could lead to better planning of future supply in the form of faster procurement. C.A.F.E. Practices could also improve Starbucks reputation among suppliers, which would make it easier to expand into purchasing in different countries or locations. In the long run, C.A.F.E. Practices also sought to buffer against a form of bullwhip effect that existed in the coffee industry supply chain. As coffee sales increased during the 1990s with the growth of Starbucks and the specialty coffee industry, suppliers and farmers began to respond with a huge increase in the amount of land dedicated to coffee farming. The resulting glut of coffee beans on the market led to decreased prices and a shortage of high quality coffee. Such fluctuations in price and supply were common in commodity products that faced very long supply response times. In order to combat price and supply volatility, the C.A.F.E. Practices initiative induced longer-term supply relationships with a consistent set of suppliers. Starbucks was hopeful that this program would reduce its susceptibility to price and supply volatility in the global coffee market. C.A.F.E. PRACTICES Despite its domination of the specialty coffee industry, Starbucks did not use its purchasing power as a way to squeeze its coffee suppliers in order to improve margins. Instead, the company decided to use its market power as a way to implement social change within its supply chain through C.A.F.E. Practices. 3 P a g e C.A.F.E. practices were a way for Starbucks to ensure a sustainable supply of high quality coffee beans, which was an essential component of Starbucks business. The initiative built mutually beneficial relationships with coffee farmers and their communities. It also helped to counteract the oversupply of low-grade coffee on the world s market, which suppressed prices making it difficult for farmers to cover the cost of production. When Starbucks implemented C.A.F.E. Practices, it had six objectives in mind:

4 1. Increase economic, social, and environmental sustainability in the specialty coffee industry, including conservation of biodiversity. 2. Encourage Starbucks suppliers to implement C.A.F.E. Practices through economic incentives and preferential buying status. 3. Purchase the majority of Starbucks coffee under C.A.F.E. Practices guidelines by Negotiate mutually beneficial long-term contracts with suppliers to support Starbucks growth. 5. Build mutually beneficial and increasingly direct relationships with suppliers. 6. Promote transparency and economic fairness within the coffee supply chain. C.A.F.E. Practices was a set of coffee buying guidelines designed to support coffee buyers and coffee farmers, ensure high quality coffee and promote equitable relationships with farmers, workers, and communities, as well as to protect the environmentit was not a code of conduct or a compliance program. Instead, it was a way of doing business that was aimed at ensuring sustainability and fairness in the coffee supply chain. This sustainability and fairness was achieved through a set of global guidelines for Starbucks suppliers and a set of incentives to reward farmers and suppliers who followed those guidelines. The guidelines consisted first of a set of prerequisites, which had to be met in order to be considered for the C.A.F.E. Practices initiative. These prerequisites set a minimum standard for Starbucks suppliers, including coffee quality and economic transparency. The transparency prerequisite meant that suppliers were expected to illustrate economic transparency on the amount of money that was ultimately paid to farmers. 4 P a g e

5 THE SUPLLY CHAIN MANAGEMENT OF STARBUCKS 5 P a g e

6 Their supply chain operation starts from coffee growers as they believe that their success depends on thousands of farmers who grow coffee beans for them. They purchase coffee beans from all over the world specially equatorial belt where coffee production is highest. They ensure that the coffee beans they are purchasing are of high quality so as to yield high quality coffee. The dried coffee beans are shipped to storage facilities where they are stored as inventory. The USP of Starbucks supply chain is that all the shipping is tracked through GPS tracking device so mishandling can be avoided. According to the demand these dried coffee beans are sent to the roasting plants where it is roasted, de-stoned & further checked for the taste. After this process next stage is automated packaging where the café is palletized & then sent to warehouses through truck. Distribution they have outsourced to third party logistics which are located regionally and work 24 hours a day. They have vendors to provide other products & merchandise to the distribution centre through push/pull boundary. They have company owned & licensed retailers located globally who review the inventory like coffee and milk once per week & food products four times a week. OBJECTIVE OF THEIR SUPPLY CHAIN MANAGEMENT To transform its supply chain, the coffee retailer established three key objectives: 1. Reorganize its supply chain organization 2. Reduce its cost to serve stores and improve execution 3. Lay the foundation for future supply chain capability. 6 P a g e

7 HOW STARBUCKS TRANSFORM ITS SUPPLY CHAIN FROM BEANS TO CUP With operational costs rising and sales declining, the global coffee purveyor implemented a three-step plan to improve supply chain performance, cut costs, and prepare for the future. It takes a well-run supply chain to ensure that a barista pours a good cup of Starbucks coffee. That's because the journey from bean to cup is a complicated one. Coffee and other merchandise must be sourced from around the globe and then successfully delivered to the Starbucks Corporation's 16,700 retail stores, which serve some 50 million customers in 51 countries each week. Here is a look at the steps Gibbons and his colleagues took and the results they achieved: - A plan for reorganization:- The first two things Gibbons did in his new position were assess how well the supply chain was serving stores, and find out where costs were coming from. He soon learned that less than half of store deliveries were arriving on time. Gibbons began visiting Starbucks' retail stores to see the situation for him and get input from employees. A cost analysis revealed excessive outlays for outsourcing; 65 to 70 percent of Starbucks' supply chain operating expenses were tied to outsourcing agreements for transportation, third-party logistics, and contract manufacturing. "Outsourcing had been used to allow the supply chain to expand rapidly to keep up with store openings, but outsourcing had also led to significant cost inflation," Gibbons observes. Next, Starbucks would focus on reducing the cost to serve its stores while improving its day-today supply chain execution. Once these supply chain fundamentals were firmly under control, the company could then lay the foundation for improved supply chain capability for the future. Simplifying the complex: - The first step of the transformation plan, reorganizing Starbucks' supply chain organization, got under way in late According to Gibbons, that involved taking a complex structure and simplifying it so that every job fell into one of the four basic supply chain functions: plan, source, make, and deliver. For instance, anybody involved in planning be it production 7 P a g e

8 planning, replenishment, or new product launches was placed in the planning group. Sourcing activities were grouped into two areas: coffee and "non-coffee" procurement. (Starbucks spends US $600 million on coffee each year. Purchase of other items, such as dairy products, baked goods, store furniture, and paper goods, total US $2.5 billion annually.) All manufacturing, whether done in-house or by contract manufacturers, was assigned to the "make" functional unit. And finally, all personnel working in transportation, distribution, and customer service were assigned to the "deliver" group. After the supply chain functions were reorganized, the various departments turned their attention to the second objective of the supply chain transformation: reducing costs and improving efficiencies. As part of that effort, the sourcing group worked on identifying the cost drivers that were pushing up prices. In addition to the four coffee facilities it owns in the United States, Starbucks also operates a coffee plant in Amsterdam, the Netherlands, and a processing plant for its Tazo Tea subsidiary in Portland, Oregon. The company also relies on 24 co-manufacturers, most of them in Europe, Asia, Latin America, and Canada Even though it spread production across a wide territory, transportation, distribution, and logistics made up the bulk of Starbucks' operating expenses because the company ships so many different products around the world. Getting that under control presented a daunting challenge for the supply chain group. One world, one logistics system: - The creation of a single, global logistics system was important for Starbucks because of its farflung supply chain. The company generally brings coffee beans from Latin America, Africa, and Asia to the United States and Europe in ocean containers. From the port of entry, the "green" (unroasted) beans are trucked to six storage sites, either at a roasting plant or nearby. After the beans are roasted and packaged, the finished product is trucked to regional distribution centers, which range from 200,000 to 300,000 square feet in size. Starbucks runs five regional distribution centers (DCs) in the United States; two are company-owned and the other three are operated by third-party logistics companies (3PLs). It also has two distribution centers in Europe and two in Asia, all of which are managed by 3PLs. Coffee, however, is only one of many 8 P a g e

9 products held at these warehouses. They also handle other items required by Starbucks' retail outlets everything from furniture to cappuccino mix. Depending on their location, the stores are supplied by either the large, regional DCs or by smaller warehouses called central distribution centers (CDCs). Starbucks uses 33 such CDCs in the United States, seven in the Asia/Pacific region, five in Canada, and three in Europe; currently, all but one are operated by third-party logistics companies. The CDCs carry dairy products, baked goods, and paper items like cups and napkins. They combine the coffee with these other items to make frequent deliveries via dedicated truck fleets to Starbucks' own retail stores and to retail outlets that sell Starbucks-branded products Because delivery costs and execution are intertwined, Gibbons and his team set about improving both. One of their first steps was to build a global map of Starbucks' transportation expenditures no easy task, because it involved gathering all supply chain costs by region and by customer. The logistics team also met with its 3PLs and reviewed productivity and contract rates. To aid the review process, the team created weekly scorecards for measuring those vendors. "There are very clear service metrics, clear cost metrics, and clear productivity metrics, and those were agreed with our partners," Gibbons notes. The scorecard assessments of a 3PL's performance were based on a very simple system, using only two numbers: 0 and 1. For example, if a vendor operating a warehouse or DC picked a product accurately, it earned a "1" for that activity. If a shipment was missing even one pallet, the 3PL received a score of "0." As part of the scorecard initiative, Starbucks also began making service data by store, delivery lane, and stock-keeping unit (SKU) available to its supply chain partners. "The scorecard and the weekly rhythm (for review of the scorecard) ensured transparency in how we were improving the cost base while maintaining a focus on looking after our people and servicing our customers," Gibbons says. Although Starbucks has a raft of metrics for evaluating supply chain performance, it focuses on four high-level categories to create consistency and balance across the global supply chain team: safety in operations, service measured by on-time delivery and order fill rates, total end-to-end supply chain costs, and enterprise savings. This last refers to cost savings that come from areas 9 P a g e

10 outside logistics, such as procurement, marketing, or research and development in undertaking all of those steps to reduce operating costs and improve execution. Earning the company's confidence. Since Starbucks began its supply chain transformation effort, it has curtailed costs worldwide without compromising service delivery. "As a company," Gibbons says, "we have talked publicly of over $500 million of savings in the last two years, and the supply chain has been a major contributor to that." In Gibbons' eyes, the transformation effort has been a success. "Today there's a lot of confidence in our supply chain to execute every day, to make 70,000 deliveries a week, to get new products to market, and to manage product transitions, new product introductions, and promotions," he says. "There's a lot of confidence that we now are focused on service and quality to provide what our stores need and what our other business customers need." To sustain that momentum for improvement and to ensure a future flow of talent into the organization, Starbucks recently began an initiative to recruit top graduates of supply chain education programs. (For more on this initiative, see the sidebar "Starbucks: The next generation.") Along with its recruiting program, the company plans to provide ongoing training for its existing employees to help them further develop their supply chain knowledge and skills. "We want to make sure we have thought leaders [in our supply chain organization]," Gibbons says. Starbucks considers this initiative to be so important, in fact, that Gibbons now spends 40 to 50 percent of his time on developing, hiring, and retaining supply chain talent. The infusion of new recruits will allow Starbucks to stay focused on its supply chain mission of delivering products with a high level of service at the lowest possible cost to its stores in the United States and around the globe. As Gibbons observes, "No one is going to listen to us talking about supply chain strategy if we can't deliver service, quality, and cost on a daily basis." 10 P a g e

11 Supply Chain Visibility Finally, C.A.F.E. Practices increased the visibility of Starbucks supply chain by demanding documented and verified product and financial flows through its suppliers supply chains. In the past, Starbucks had very poor visibility into their supply base, as coffee farmers and processors were not very technologically sophisticated or mature in their business processes. By increasing the transparency of their supply base, Starbucks would be able to gain a better understanding of the needs and the conditions of their suppliers. The increased visibility would also allow Starbucks to improve its relationships with growers, who before had been isolated from them due to intermediaries coffee exporters and distributors that came between the two sides. On a more practical note, increased visibility in the supply chain could allow Starbucks to better predict supply shortages as they arose. Since the majority of Starbucks coffee was grown in developing countries in Latin America, Africa, South America, and Southeast Asia, Starbucks had a significant risk of supply shortage due to regional instability. Without visibility into the supply base, Starbucks did not have a good way to predict the impact of regional instability to its coffee supply. With increased visibility, an outbreak of regional instability could be linked to a particular quantity of expected coffee supply, giving Starbucks advance notice of the need to find alternate sources of coffee. This could allow Starbucks to be proactive in managing supply disruptions even before they arose. INNOVATION AT SUPPLY CHAIN MANAGEMENT OF STARBUCKS Peter Gibbons, executive vice president of global supply chain operations, told about the steps he took to improve performance and overturn traditional practices. Gibbons assumed his current role at Starbucks in mid-2008 a difficult time. Store managers were complaining that the company s delivery service was inadequate. Improving that link of the supply chain became his top priority. Starbucks took a new approach to collaborating with outside partners. The company had a reputation for creating contracts and almost leaving them in the hands of third-party logistics providers,. Now, it sought a closer relationship with key suppliers. It began positioning its own people inside of distribution centers, to keep watch over operations and forge stronger 11 P a g e

12 relationships with service providers. We made sure they got to know our leadership team, he says The Starbucks supply chain had been built just to keep pace with rapid growth in the number of stores and other outlets. Such a dizzying rate of expansion can cover up a lot of mistakes, says Gibbons. You eventually have to come back and fix things. At the same time, Starbucks is striving to create a greener supply chain, through selection of the best modes, service partners and equipment. It has been looking to extend its historical involvement in sustainable product to the way in which it gets goods to market. As a result, the company has become a lot better at collaborating with people on green and sustainability, Gibbons says. At the outset of Starbucks supply-chain transformation, the company was short of key skills in engineering and transportation management. Bringing in the right level of talent is very important in the short term, Gibbons says, adding that he has an eye on the more distant future as well. Now that we have gotten through the initial drama of turning the business around, my job is to make sure we have the right talent and the right skill base. SUPPLY CHAIN OPERATIONS PARTNERS These people help bring the Starbucks experience to life. With responsibilities that include more than 70,000 outbound deliveries a week to Starbucks retail stores, distribution channels and outlets worldwide, keeping Starbucks products flowing from suppliers to customers is, needless to say, a complex exercise but they are able to do so with a world-class Supply Chain Operations organization that manages its activities through four functions: Plan, Source, Make and Deliver. Peter Gibbons executive vice president, Global Supply Chain Operations. As Starbucks executive vice president, Global Supply Chain Operations, Peter D. Gibbons is responsible for all of the products that contribute to the Starbucks Experience from the coffee in your cup, to the cup itself and the table it rests on at every Starbucks store around the world 12 P a g e

13 Senior supply chain planning manager Kimberly A. - directs production planning across five roasting plants and multiple contract-manufacturing facilities. Guatemala native Peter T. - grew up around the coffee industry; his family has farmed there for generations. As one of Starbucks regional directors. Rachel S., vice-president of store delivery and customer service, leads in the management of 35 distribution centers serving our U.S. stores nightly. She also oversees a customer service team dedicated to supporting the product needs of our stores and nationwide grocery establishments. Katie W. is a manager in our international supply chain group, and she reports that it s been exciting to see Starbucks grow as a global company. Kim G. finds working here as a manager of green coffee quality to be a natural fit. She helps ensure that coffee beans meet our exacting standards for both Starbucks and Seattle s Best Coffee. Her coffee of choice would be one from Africa. 13 P a g e

14 Director of contract manufacturing Scott R. describes Starbucks as a fast-paced working environment, but notes the company continues to look for ideas from all partners to build and improve its foundation and performance 14 P a g e