Coffee colossus Starbucks has developed a supply chain that spans 19 countries and funnels everything from cups to coffee beans into nearly 20,000 retail stores worldwide, all while maintaining the corporate commitment to green and sustainable practices.

Tapping resources from around the globe makes it easier for the company to expand and reach more customers. Yet Starbucks maintains only six centers where all raw materials are sent to be roasted and packaged for delivery.

The roasting, manufacturing and packing are done exactly the same in each process center.

The Starbucks supply chain operates on an integrated make-to-stock supply model, focusing on tracking demand in real time to meet the requirements of several different distribution channels. Starbucks uses Oracle’s automated information system for manufacturing, GEMMS, to monitor real-time demand, allowing production plans and schedules to be developed and modified as needed. To coordinate supply levels with multiple distribution channels, the company must have access to constantly updated information detailing demand, inventory, storage capacity, transportation scheduling and more to keep things running smoothly.

One Logistics SystemThe company is streamlined logistically across six continents. Materials are housed in regional distribution centers which range from 200,000 to 300,000 square feet in size.

Starbucks runs five distribution centers in the U.S. Two are company owned while the others are operated by third party logistics companies (3PLs).  

Offshore distribution centers, two in Europe and two in Asia, managed by the 3PLs.

Starbucks evaluates its supply chain efficiency with a simple scorecard system at the warehouse level and focuses on four high level categories across the global supply chain:

·         Safety in operations ·         On-time delivery and order fill rates ·         Total end-to-end supply chain costs ·         Enterprise savings

The company strives to reduce operating costs and improve execution.

A Green and Sustainable Supply ChainStarbucks tries to balance supply chain demands with its green and sustainable corporate practices, which include maintaining quality while buying responsibly grown and ethically traded coffee. The company’s efforts include responsible coffee purchasing practices, providing farmer support centers, farmer loan programs and forest conservation.

The company also sets social responsibility standards for its suppliers and works with suppliers to improve business practices. If problems arise with a supplier, Starbucks will stop doing business with it until problems are resolved.

In 2015, Starbucks achieved a milestone of 99% ethically sourced coffee through its partnership with Conservation International. Conservation International is an American nonprofit environmental organization. It’s a result of Starbucks’ 15-year journey to embed sustainable practices in its sourcing structure.

Starbucks has invested more than $70 million in its quest for ethical sourcing supporting coffee farming communities, reducing climate change impact and continued support of farm sustainability.

Supply Chain Best Practices

Established in 2004, the company’s Coffee and Farmer Equity (C.A.F.E.) is a set of sustainability standards established for the coffee industry and verified by third-party experts. The standards help farmers grow coffee in ways that are better for both people and the planet.

C.A.F.E practices include key guidelines for farmers in four areas:

Quality Economic accountability and transparency Social responsibility Environmental leadership 

The company purchased a farm in Costa Rica two years ago for research and development. It is an operational coffee farm to help continue to develop sustainable farming practices.

Starbucks has an open source approach to its research and developments. It shares its discoveries and best practices to help all producers and competitors make long-term sustainable improvements of their farms. They strive to improve the program by working with Conservation International to measure the true impact purchasing programs have on participating farmers and producers.

Developing these standards allows the company to ensure its products are sourced according to company guidelines and provides information to improve the supply chain verification program. Many companies develop supplier certification standards but Starbucks has created a method that can determine if the investment in the program yields results.

Starbuck has become a giant global company, but what exactly goes into the process from coco beans in a field to a steaming cup of delicious coffee?

Starbucks has acquired an amazing supply chain that spans across almost nineteen countries.

Coco beans can come from one country while milk could come from an entirely different country hundreds of miles away!

This global resource span is a great way for Starbucks to expand the company and reach more countries than ever before.

Not only that, but Starbucks Coffee is able to supply the best ingredients to their customers for a lower price.

All raw materials are then sent to a roasting, manufacturing, and packaging plant.

Starbucks has six roasting centers where the beans are prepared. This number may seem very small for such an incredibly large company like Starbucks, but this centralized system is very effective.

These roasting centers make sure every single one of the beans is prepared, manufactured, and packaged in the exact same way and quickly through a series of well-designed manufacturing processes.

Once the beans are prepared, Starbucks has a tedious, well thought out delivery process.

The amount of coffee being deliver each day is astonishing (hundreds of thousands of pounds), but with over seventy thousand deliveries daily, Starbucks is able to supply each store with adequate amounts of coffee!

Originally published by Operations Management: Everyday Challenges and Opportunities

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.

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 were

cooling. 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. Here is a look at the steps Gibbons and

his colleagues took and the results they achieved.

Starbucks' Supply Chain Objectives

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

A plan for reorganization

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. This was a

familiar role for Gibbons; prior to joining Starbucks in 2007, he had been executive vice president

of supply chain for The Glidden Co., a subsidiary of ICI Americas Inc.

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.

Starbucks by the numbers

Headquarters: Seattle, Washington, USA

Total net revenues in fiscal 2009: US $9.7 billion

Employees: 142,000 worldwide (as of September 2009)

Manufacturing:

5 company-owned coffee roasting plants (Nevada, Pennsylvania, South Carolina, and Washington, USA, and

the Netherlands)

24 co-manufacturers (in the United States, Canada, Europe, Asia, and Latin America)

1 tea processing plant (Portland, Oregon, USA)

Distribution:

9 regional distribution centers

48 central distribution centers

6 "green coffee" warehouses

Deliveries: 2.7 million per year

Simplifying the complex

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."

Meanwhile, the manufacturing group developed a more efficient model for delivering coffee beans

to its processing plants, with the goal of manufacturing in the region where the product is sold.

Starbucks already owned three coffee plants in the United States, in Kent, Washington; Minden,

Nevada; and York, Pennsylvania. In 2009, the company added a fourth U.S. plant, in Columbia,

South Carolina. The benefits of that approach were quickly apparent; regionalizing its coffee

production allowed Starbucks to reduce its transportation costs and lead times, says Gibbons.

Moreover, once the new facility was up and running, all of the U.S. coffee plants were able to

switch from seven-day operations to five days.

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. "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."

One world, one logistics 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.

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,

Gibbons says. An analysis of those expenditures allowed Starbucks to winnow its transportation

carriers, retaining only those that provided the best service.

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

outside logistics, such as procurement, marketing, or research and development.

In undertaking all of those steps to reduce operating costs and improve execution, Gibbons says,

Starbucks was laying the foundation for future supply chain capabilities. "We tell the stores that

we have got to get the fundamentals right—the things that give people confidence. ... We don't

ship things that aren't right," he explains.

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."

Inventory is described as “ a stock of materials used to facilitate products or satisfy customer demands.” Typical inventories include raw materials, works in progress and finished goods. (pg 363 of the text) Inventory Management is described as specifying the size and placement of stocked goods.

With the nature of the business the finished goods tend to be perishable inventory, Starbucks uses a P-system and a EOQ system for inventory management on a store level. This system helps the company reduce unnecessary waste and shrinkage within their inventory. The inventory is tracked by computer programming that is attached to the point of sale registers and through the closed network online ordering with Bartlett Deliveries, the delivery company for stores. This program is called Inventory Management Systems (IMS).

Starbucks does its shipping and ordering in two ways. The first is for the retail of the store using the P-system. This order is placed every seven days with a three day lead time. Various pars are set for the different SKUs throughout the store. Over stock for the entire inventory is set at 15% to ensure enough retail for customers. The second order is done on a daily basis using EOQ. This order has a two day lead time. This order is placed for all the materials, for example milk, espresso, and cups, that are needed to make drinks as well as the short life pastries. Sales for Starbucks generally have constant demand patterned with the days of the week. Only on rare occasions does the demand vary. This coincides with the changing of the seasons and school breaks.

On a corporate level, the Starbucks roasting plants/warehouses use a Q-system and a P-system as well. Starbucks uses the Q-system for roasting their coffee. They have set reroasting point for their whole bean inventory. Because it takes on average 3 hours to roast a batch of Starbucks Coffee, they are able to keep up with the demand of the many varieties that they sell. This ensures that they can meet the demand of the stores. The plants use P-system for all other product, for example bottled beverages. These products are bottled for Starbucks by the Pepsi Bottling Corporation and are shipped only on a monthly basis to the plants.

Inventory Management Inventory management is among the most important operations management responsibilities because inventory requires a great deal of capital and affects the delivery of goods to customers. Inventory

management affects all business functions, including operations, marketing, accounting, information systems, and finance. Decisions related to managing inventory can be improved through the use of basic tools, such as bar coding, Ratio-frequency identification(RFID).

In retail, good service is paramount for customer loyalty. But when a supplier is knocking at the back door with a delivery during business hours, sometimes a retail clerk has to momentarily neglect a customer to receive it.

For the omnipresent coffeehouse chain Starbucks Corp., radio-frequency identification technology could help address those types of dilemmas. Sean Dettloff, manager for partner and asset protection at Starbucks, told attendees at the national Cargo Security Council Radio Frequency Identification conference Monday in Long Beach, Calif., that the company is considering using Radio-frequency identification technology RFID to help with deliveries.But there are challenges with this new delivery process, including managing physical security and inventory control, so that delivery people "don't walk out with as much stuff as they dropped off," Dettloff says. "So we envision an RFID license-plate signature," he says, that a supplier would use to deliver goods. Using a card, the supplier would gain access to an RFID-enabled system that records the time, disables the alarm, and confirms a supplier's identity before it unlocks the door and lets the person in. Ideally, the system also would record the inventory that's being delivered. "That's not going to happen tomorrow," Dettloff says. "But you can't get the projects going until you develop these ideas."

Besides, it is also important to realize how Starbucks records their inventory on their consolidated financial statements. Since they sell products, not services, they have a large inventory, which they record at the lower of cost or market. It is also crucial how a firm records and depreciates its inventory, and can give investors wrong information if not done correctly.

CONCLUSION

Through the vision of its CEO Howard Schultz, innovation, perseverance, patience, the contribution of all its employees and the use of information technology Starbucks became a formidable global presence. Due to their experience and high label training Starbucks employees have the ability to recognize when they need the right tools to do their jobs correctly and efficiently.

The use of business intelligence software has allow Starbucks to plan, lead, control, organize employees, and supply link efficiently. Starbucks have differentiate from the rest of its competitors through its top line strategy not only by providing high quality products to its customers, but also by focusing on customer wants and needs through the use of customer relationship and database management systems. Going beyod the line and offering customers a place to escape the chaos of daily life.

Starbucks marketing mix is simply but smart. It uses places as Facebook social platform, or Wi-Fi hotspot to encourage friends and family to share a coffee and coffee gifts, allowing Starbucks at the same time to attract potential customers and increase switching costs, location and convenience all at the same time. These are the reason why Starbucks still holds a dominant position in the specialty coffehouse market and has no single potential rival in the sector

VI. Conclusion and Recommendations: Starbucks has been a very successful company, though innovative ideas and persistent slow-growth it has gained a competitive advantage. The challenge now is continue to grow and increase its market share. Expansion into the international market will especially prove challenging. If Starbucks is to remain a stellar success, they need to implement a plan to explore alternate sources for product procurement and find solid partners in the international marketplace.