How Starbucks Changed Supply Chain Management From Coffee Bean to Cup
What Your Small or Medium-Sized Business Can Learn From Starbucks
For an average business operator, supply chain comparisons made with Starbucks might seem a little daunting at first blush. After all, the coffee juggernaut generates annual revenues of over $22 billion, operating over 25,000 stores in six continents. And considering that it is opening new stores in China at a rate of one shop every 15 hours, it is showing no sign of taking a breather. Starbucks currently operates 3,000 stores in China and intends to have 5,000 outlets there by 2021.
While there are important lessons that Fortune 500 companies can glean from the Starbucks approach, there are also crucial insights that can help the operators of small and medium-sized businesses take their supply chains to the next level. After all, remember that Starbucks began its coffee-infused romance with customers back in 1971 with its single storefront in Seattle’s Pike Place Market.
For the operator of a small commercial enterprise, there are a lot of urgent business priorities that seem to trump supply chain. One of your “must-do” tasks, however, should definitely be mastering how the affordable movement of ingredients, materials, products, and services coalesces to help make your offerings spectacularly unforgettable to customers. Let’s take a closer loop at the Starbucks case study and then explore some ideas about how to “caffeinate” your approach to supply chain excellence.
The Urgency for Supply Chain Change
The Starbucks transformation continues to be cited as a leading example of how to get supply chain right, even in the face of overwhelming complexity and staggering growth. In the 2000s, Starbucks was already a racehorse, with an increase in revenue from $4.1 billion in 2003 to $10.4 billion in 2008.
Starbucks’ supply lines struggled to keep pace with that rapid expansion, and the cost of running it was getting out of hand. This situation was exacerbated by the economic downturn of the late 2000s.
As James A. Cooke reported in Supply Chain Quarterly, “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.” This crisis signaled the need for a different approach.
Peter D. Gibbons, who previously oversaw global manufacturing operations, was put in charge of Starbucks’ supply chain. His first actions were to determine how well the company was servicing stores and to better understand costs. He found that less than half of store orders were arriving on time. He also identified that the rapid growth of Starbucks had required it to lean heavily on outsourcing. Around 65 to 70 percent of supply chain expenses resulted from outsourcing arrangements for transportation, logistics, and contract manufacturing.
The Starbucks Supply Chain Transformation
As Cooke recounted, Gibbons and his team then created a three-step supply chain transformation plan.
First, it would reorganize and simplify its supply chain with clearly defined functional roles. Secondly, it would reduce cost while improving service levels. Finally, it would create the basis for sustaining and enhancing supply chain capabilities into the future.
- Reorganize: In the latter stages of 2008, the company took an important step to simplify and centralize their previously fragmented supply chain. The team reorganized it so that every role fell into one of four basic functional groups: plan, source, make, and deliver.
- Cut cost and improve service: With the reorganization accomplished, each functional group was tasked with finding improvements. The sourcing group, for example, worked on identifying the factors that were causing price increases. Through research, it better understood what products should cost, and as a result, could negotiate better contracts. For its part, the manufacturing group determined that it could reduce cost as well as delivery time by opening a fifth U.S. roasting plant. Another important aspect of the transformation was the introduction of weekly scorecards with very clear service, cost, and productivity metrics. This approach allowed the extended supply chain to have a common frame of reference, with goals aligned with overall enterprise success. One of the key logistics measures was that of order receipt “On time in full.”
- Future capabilities: With systems established to ensure supply chain execution in the present and into the near future, the company began a process of taking particular care to hire only the best talent available to replenish its supply chain leadership team. The company also committed itself to onboard training for existing staff.
The results of the transformation were laudable. In each of the two subsequent years, it reduced supply chain cost by a half billion dollars. In ensuing years, Starbucks continues to make strides, guaranteeing 100 percent Fair Trade coffee, pursuing sustainability goals and establishing its collaborative Coffee and Farmer Equality program (C.A.F.Eu.) with coffee growers. It also continues to adopt technology with an eye to improving customer experience, such as through online ordering, as well as supporting other digital innovation at its new megastores.
Starbucks Supply Chain Tips for Other Businesses
Eliminate unneeded complexity: Complexity, in the form of numerous outsourced relationships and other lost synergies, was the dark side of Starbucks’ spectacular growth. The company started getting back on track by categorizing jobs into just four functions. Think about how you can simplify your operation by getting your business organized and providing a clear vision, as well as defining roles and responsibilities. In a small business, employees may fulfill multiple supply chain functions rather than specialize in just one, but organize your supply chain with a clear focus on what is important for overall success. Work to identify and eliminate non-value adding activities.
Know your costs first, and then act: Do you have a grasp of the cost drivers for the goods or materials you buy or the cost drivers for the goods or services you offer? In the case of Starbucks, they built “should cost” models to better understand input costing, them, allowing them to strike better deals. As a smaller business you may be more of a price "taker" than a price maker, but by understanding cost structure, you may discover new opportunities. For example, is there a possibility to negotiate a better freight rate if you can expedite faster unloading at your dock, or take delivery at a different time of day? Instead of shipping out all parcels by courier service, how about switching to cheaper LTL for the full pallet shipments?
Use scorecards: The use of scorecards can help you track the most crucial metrics or key performance indicators for organizational success. Scorecards provide a powerful method to align activities within your company and among third party relationships, as they did in the case of Starbucks. The use of frequent scorecards that track leading indicators can enable you to identify emerging problems. While scorecards are no panacea in their own right, they can be powerful tools if care is taken to ensure that the most important metrics are identified, and then acted upon as required.
Commit to sustainability: Starbucks has found a healthy mix between sustainability aspirations and profitability. It has made strides all along its supply chain, from farms and its distribution network to its retail outlets. It believes that customers and employees alike will resonate with its values and support it. Think about how you can you make your supply chain greener through such steps as a reduction of energy usage in your store, achieving LEED certification in your facility, undertaking the sourcing of certified products, or the elimination of supply chain waste.
Make your facility your innovation laboratory: At Starbucks’ new megastores, the company is treating them as an innovation laboratory for the other stores in its system. Whether you have one business location or several, never lose sight of the importance of systematically supporting innovation, and the opportunities to help improve customer experience as well as reduce costs in the process.
The key to the success of Starbucks has always been its customer experience, and over the years, it has been able to leverage its supply chain not only to support but also to enhance customer delight - while better managing its supply chain expenditure. You may have much less control over your supply chain than a powerhouse like Starbucks, but by better understanding and actively managing it, you are helping to ensure the success of your company.