Starbucks Supply Chain Management

Background-

Starbucks, world’s number one specialty coffee retailer, is having more than 16700 stores globally spanning 50 countries. Starbucks operates 8800 shops out of 15000 on its own and rest of the stores is operated by franchises and retailers with license. The company is well known for Seattle’s Best Coffee and Torrefazione Italia coffee brands. In its product portfolio Starbucks also provides a variety of food items along with roasted beans, coffee accessories, and tea. All of these products are marketed by grocery stores and branded food and beverage products. Over the past 40 years, Starbucks has built robust supply chain network and focused on continuous improvement.

An excellent example of well managed supply chain distribution network is the US distribution network of Starbucks. Continuously increasing revenue also tells that the demand of the Starbucks products is continuously increasing at rapid pace. Recently in the year 2007 Starbucks observed that because of the tight supply and growing demand they were unable to meet this relentlessly growing demand. So after this they found out, profits have not increased in the same proportion as the sales have been increasing. From this it was evident that costs of operations are increasing at higher rate than sales.

Issue- 

Starbucks was not unable to meet its supply chain goal. One clue from the financials statistics was between October 2007 and October 2008, expenses from the supply chain rose from US $750 million to more than US $825 million whereas the sales from the US stores dropped by 10 percent during the same period.

Due to rapid expansion happening across the world, the supply chain organization has to keep up with that pace.  Peter D. Gibbons, executive vice president of global supply chain operations said that “We had been growing so fast that we had not done a good enough job of getting the supply chain fundamentals in place". It was very necessary to bring the supply chain costs done and reorganize the entire supply chain structure of the company.

A plan for reorganization of Distribution network and supply chain Strategy at Starbucks

Gibbon, after visiting the retail stores on his own, found out that less than half of the stores were getting deliveries on time. He realized that real time data and situations can only be received by actually interacting with the customers facing parts of the business. From cost analysis they found out that 65 to 70 percent of Starbuck’s supply chains operating expenses were spent to third party agencies, contract manufacturing, and transportation agencies. This outsourcing had grown due to rapid expansion of stores across countries.

Starbucks established three key objectives while transforming its supply chain-

1. Reorganize its supply chain organization- Simplifying the complex existing structure and properly defining the functional roles. They defined four basic supply chain functions to simplify the complex structure.

I. Plan II. Source III. Make IV. Deliver.

Plan- Whoever is involved in planning like production planning replenishment, new product launches will be placed in the planning group.

Source-Sourcing and procurement activities were divided into two groups viz. coffee and non-coffee. Starbucks purchases US $600 million worth coffee each year. Non coffee purchases of other items, such as dairy products, baked goods, store furniture, and paper goods contribute total of US $2.5 billion annually.

Make- All people involved in the manufacturing activities, whether it is in house planning or outsourced or contract manufacturing planning are placed in the make function of the supply chain

Deliver- Those working in transportation distribution and customer service were assigned to the ‘Deliver’ function of the supply chain.

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1. Reduce its cost to serve stores and improve execution- This was planned to achieve by improving day to day supply chain execution. As mentioned above that majority of the supply chain costs (almost 65-70 percent) were incurred in paying third parties, contract manufacturers. Team started breaking down these costs into individual costs and compared with others by benchmarking ingredients and processes.  Sourcing group worked upon identifying the cost drivers which were pushing the prices up. They finally concluded that, negotiations with the third party agencies can be done better. Manufacturing group came up with the efficient solution of producing in the same region or nearby from where raw material is procured in order to cut down the transportation costs. Three coffee plants were already owned by Starbucks in the United States Viz. I. Kent, Washington II. Minden, Nevada III. York, Pennsylvania. In 2009, the company added a fourth U.S. plant, in Columbia in South Carolina. After setting up this plant the transportation costs and lead time was reduced. Along with the cost benefits operation days of the US plants were also reduced from seven days to five days.

Outside the US it has a coffee plant in Amsterdam, Netherlands and a processing plant for its Tazo Tea subsidiary in Portland, Oregon. The company has also outsourced manufacturing to 24 co-manufacturers; most of them are based in Europe, Asia, Latin America, and Canada.

Due to such spread across a wide 1.territory 2.transportation 3. Distribution 4.logistics contributed the large amount of Starbucks' operating expenses. The company ships so many different products around the world. Getting that under control and under umbrella presented a daunting challenge for the supply chain function of the company. “Our task was to integrate that together into one global logistics system, the combined physical movement of all incoming and outgoing goods. It's very important because there's so much spend that area, and so much of our service depends on that. With 70,000 to 80,000 deliveries per week plus all the inbound shipments from around the world, we want to manage these logistics in one system." says Gibbons (Supply chain Head).

“One World, One logistic system”

It was very vital to establish single global logistics system to manage the cross country operation of Starbucks. Company generally procures coffee beans from Latin America, Africa, and Asia to the United States and Europe in ocean containers.

Movement of the coffee takes place in the following sequence

1. Port of the entry
2. Six storage sites (Roasting plants/nearby warehouse)—
3. Regional distribution centers- After roasting the green beans finished product is transported to Regional distribution centers.  Area of RDC varies from 200000 to 300000 square feet Starbucks has 5 RDCs in US out of which 2 are company owned and rest 3 are owned by third parties. Along with coffee they also hold other products like furniture, cappuccino mix etc.
4. Central distribution centers (CDCs)- Starbucks makes use of 33 such CDCs in the US, 7 in the Asia-Pacific region, 5 in Canada, and 3 in Europe; currently, all of the CDCs are operated by third-party logistics companies. These centers carry dairy products, baked goods, and paper items like cups and napkins. All these products are delivers along with the coffee to the retail stores and Starbucks- branded outlets
5. Retail stores- Depending upon the location of the store they are supplied by either the large RDCs or smaller warehouse called central distribution centers (CDCs).

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As the delivery costs and execution was interlinked Supply chain head along with his decided to improve both of these. They built a global map of Starbucks’s global expenditure . From this data Starbucks retained only those third party transporters who had the best services & prices.