Starbuck Supply Chain Management Case Study
A supplemental video can be viewed through the following link:
YouTube Video: A Behind the Scenes Look at Starbucks Global Supply Chain
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.
But in 2008, Starbucks wasn't sure that its supply chain was meeting that goal. One clue that things were not quite right: the company's operational costs were rising even though sales subtly declining. Between October 2007 and October 2008, for example, supply chain expenses in the United States rose from US $750 million to more than US $825 million, yet sales for U.S. stores that had been open for at least one year dropped by 10 percent during that same period.
In part, Starbucks was a victim of its own success. Because the company was opening stores around the world at a rapid pace, the supply chain organization had to focus on keeping up with that expansion. "We had been growing so fast that we had not done a good enough job of getting the [supply chain] fundamentals in place," says Peter D. Gibbons, executive vice president of global supply chain operations. As a result, he says, "the costs of running the supply chain-the operating expenses-were rising very steeply."
To hold those expenses in check and achieve a balance between cost and performance, Starbucks would have to make significant changes to its operations.
Starbucks' supply chain transformation had support from the very top. In 2008, Chairman, President, and Chief Executive Officer Howard Schultz tapped Gibbons, who was then senior vice president of global manufacturing operations, to run the company's supply chain.
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. "My quick diagnosis was ... that we were not spending enough attention on how good we were at delivering service to stores," he recalls. Following that assessment, Gibbons began visiting Starbucks' retail stores to see the situation for himself and get input from employees. "The visits were made to confirm that our supply chain could improve significantly," he explains. "The best people to judge the need for change were those at the customer-facing part of our business."
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.
In response to those findings, Gibbons and his leadership team devised a three-step supply chain transformation plan and presented it to Starbucks' board of directors. Under that plan, the company would first reorganize its supply chain organization, simplifying its structure and more clearly defining functional roles. Next, Starbucks would focus on reducing the cost to serve its stores while improving its day-to-day 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.
To transform its supply chain, the coffee retailer established three key objectives:
- Reorganize its supply chain organization
- Reduce its cost to serve stores and improve execution
- Lay the foundation for future supply chain capability
The first step of the transformation plan, reorganizing Starbucks' supply chain organization, got under way in late 2008. 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 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. Purchases 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. "We went out to understand the contracts we had, the prices we were paying, and the shipping costs, and we began breaking items down by ingredient rather than just purchase price," Gibbons says. "We built more effective 'should cost' models, including benchmarking ingredients and processes, which showed that we could negotiate better prices."
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. "Whether coffee from Africa or merchandise from China, [our task was to integrate] that together into one global logistics system, the combined physical movement of all incoming and outgoing goods," says Gibbons. "It's a big deal because there's so much spend there, 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."
The creation of a single, global logistics system was important for Starbucks because of its far-flung 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 products held at these warehouses. They also handle other items required by Starbucks' retail outlets-everything from furniture to cappuccino mix.
Within the discussion forum, discuss the following:
Question 1 - What were some of the difficulties that Starbucks faced and what approach did they follow to improve the function of their SC?
Question 2 - What changes did they make to the structure and performance of their SC?
Question 3 - What was the impact and value of these changes and what are the key learnings from Starbucks?