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.

Plan Source Make Deliver

2. 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).

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.

Scorecard Assessment Technique- Logistics team developed this technique to review the
productivity and contract rates. Weekly scorecard assessment consisted
 Clear service metrics
 Clear cost metrics
 Clear productivity metrics
All these parameters were agreed with the vendors/partners. It was a simple method of assigning
simple numbers 0/1 where o stands for activity done correctly as desired and 1 for wrong activity.
These scorecards were reviewed weekly for the data collected for each store, delivery lane, and stock-
keeping unit (SKU). This technique helped company maintaining the transparency and delivering the
customers better.

Although Starbucks has a wide range of metrics for evaluating supply chain performance, it focuses
on 4 high level categories to create consistency and balance across the global supply chain team.
1. Safety in operations
2. Service measured by on-time delivery and order fill rates
3. Total end-to-end supply chain costs
4. Enterprise savings which comprises of the cost savings from areas outside logistics,
such as procurement, marketing, or research and development.

3. Lay the foundation for future supply chain capability- Once the fundamental structure gets
ready Starbucks will lay the foundation of future robust and sustainable supply chain. By taking all
the above steps and measures Starbucks have laid the foundation for the sustainable supply chain
capability. This transformed supply chain have earned the company’s confidence to deliver more
than 70000 deliveries a week, launch new products, manage product transitions, new product
introductions, and promotions and serve the customers better than the competitors.
In order to sustain this momentum of improvement and ensure a future flow of talent into the
organization, company started to recruit fresh graduates who studied supply chain management
programs. Also company started training the existing employees to enhance their supply chain
knowledge and skills. Supply chain head himself spent 40-50 percent of time in training. The
company is sure that the new recruits will be able to drive the growth and deliver the services, quality
on right time all across the globe.

Recent Issue at Starbucks due to the launch of mobile ordering-

After Starbucks launched facility of ordering online through mobiles/smart phones, during the peak
working hours the delivery counters become very crowded making it difficult for baristas to serve
them quickly. Pick up counter gets so much crowded and customers keep on waiting for their name
to be called. And by looking at the huge waiting line in the café some visiting customers go back. Thus
company is losing customers. Providing the digital platform to customers is one of the achievements
of Starbucks. Online orders account for 7 percent of the total orders. But due to the issue mentioned
above the sales at the retail has been decreased by 2 percent.
Measures taken by Supply chain group at Starbucks-
Starbucks have started sending text message notification to customers when the order is ready
alleviate the chaos and long lines in its stores due to mobile ordering. So the company is hoping that
sending notifications will prevent customers arriving before their gets ready to serve. But due to this
Baristas (The Starbucks employee serving the customers) have additional step in their jobs.
Sequence of steps-
1. A customer places the order online using the digital platform and receive the time range as
in when the order will get ready
2. An order gets printed at the retailer/shop
3. After the barista is ready to serve that particular customer order, he/she will scan the
barcode printed on the order
4. Scanning will automatically send the text message to the customer letting them know that
order is ready to serve.
5. Due to this technology, crowding & chaos at the retail chains has been decreased.

Starbucks’ wise use of 3PLs (Third party logistics Partners) & Excellent Conflict management-
To distribute coffee in supermarkets and grocery stores Starbucks tied up with Kraft for the twelve
years. But Acosta Inc. took over Kraft to distribute Starbucks VIA instant coffee by offering Starbucks
low cost distribution and develop sales and product strategies starting from 1March, 2011. After the
new launch of product (Starbucks VIA) company started distributing it on their own by passing third
party distributors to increase the profit margin. Team believes that leaving Kraft (3PLs) will generate
huge surplus in the entire supply chain. They also want to optimize/reduce the distribution cost by
switching to the cheaper distributor instead of Kraft Inc. In 2011, Starbucks signed a new agreement
with green mountain coffee roasters (biggest distribution network for single-cup brewing system in
the North American market). The new agreement has created win-win situations for both companies
evident from the fact that shares of green mountain coffee roasters increased by 32% whereas that
of Starbucks went up by 7.7% leaving Kraft Inc. with only 7.2% of the market share. Green Mountain
has dominated the market with 65% of the market share with its single serving product. So we
recommend that Starbucks should further continue this partnership with Green Mountain to thrive
in the market. This serves as an example that how brilliantly Starbucks negotiates with its third party
logistics partners to increase the entire supply chain profitability.

What learnings we as students studying the course on supply chain management and other
organizations can take from Starbucks supply chain management?
Why Starbucks is appreciated and what are the best practices in the supply management
sector?
What Starbucks as a company do differently from its competitors and other organizations that
sets them apart?

1. Starbucks sees itself as part of a larger community.

2. Starbucks tries to balance profit with social responsibility.,
3. Starbucks creates a “third place” between home and office where people can connect
comfortably.
4. Starbucks trains its employees to prepare the perfect “espresso” in order to ensure the
quality of its signature product is not sacrificed.
5. Starbucks doesn’t let major disruptions delay important actions and events that need to be
done.
6. Starbucks understands that employees feel far more committed to companies whose values
and mission they find inspiring.
7. Starbucks understands that customers and clients increasingly prefer to support companies
whose values are consistent with their own.
These company objectives can easily be translated to the supply chain organization success

1. Supply chain function should see themselves as a part of a larger company- All the
individual functions and units in the organizations should work in synergy and together for
the overall success and profitability of entire supply chain
2. There should be a balance between social responsibility and measures taken for cost
reduction by Supply chain organization- Company can procure raw materials from those
low cost suppliers but employing child labor but this can create backlash amongst the
media and consumers.
3. Company should train their employees so that they can serve the customers better.
4. Supply chain organization should keep themselves updated with the transformation
happening in technology and should collect the market intelligence data and should have
contingency plans ready with them
5. The supply chain management should hire A- team that believes in the mission and
vision of the company. Without the performance of employee company cannot grow.
6. Supply chain organization should give the priority to the needs of the organization
than their own.
7. Use of Vertically integrated supply chain which means Starbucks is involved in each &
every step of the supply chain process.

Starbucks Ethical Supply chain Practices and Global Responsibility Report

 Goal Progress

Ensure 100% of 84% of the coffee was

coffee is ethically ethically sourced under
sourced by 2015 C.A.F.E. practices in 2010,
up from 81% in 2009.

Invest in farmers Starbucks made $14.6 in

and their farmer loan commitments
communities by in 2010.
increasing farmer
loans to $20million
by 2015

Serve 25% of the Starbucks served 6.4 million

beverages made more beverages in reusable
in stores in cups in 2010, still they need
reusable cups by considerable innovation
2015 and customer engagement
this goal

Develop In 2010, Starbucks tested

comprehensive the recyclability of the cups
recycling and gained better
solutions for understanding of local
paper and plastic recycling process and
cups used in determined to take specific
Starbucks actions.

Purchase Renewable energy

renewable energy purchases increased to the
equivalent to euivalent of 58% of the
50% of the electicity used in the stores.
electricity used in
our company
owned stores

Source- https://supplychainminded.com/what-your-supply-chain-can-learn-from-starbucks/