Opim 321 – Starbucks Supply Chain Management

Tables of Contents

OPIM 321 – Supply Chain Management        1

EXECUTIVE SUMMARY        3

I.        INTRODUCTION        3

II. STARBUCKS’ SIX KEY DRIVERS        4

Sourcing        4

Facilities        6

Inventory        8

Information        9

Transportation        11

Pricing        12

III. FINANCIAL PERFORMANCE        12

Profitability        12

IV. CHALLENGES AND ISSUES        13

Enhancing Adaptability        13

Challenge – Centralised supply chain structure        13

Recommendation – Geographic decentralization of roasting process        14

Enhancing Agility – Responsiveness        14

Challenge – Maintaining High Service Level        14

Recommendation – Safety Stock        14

Enhancing Alignment        15

Challenge – Enlarged bullwhip effect        15

Recommendation – Precise Product Demand Information        15

V. CONCLUSION        16

REFERENCES        17

EXECUTIVE SUMMARY

This report provides an overall analysis and evaluation of the supply chain model of Starbucks Corporation (Starbucks) specialty coffee business and its strategic decision to expand its business venture into Consumer Packaged Goods (CPG). Our team believes that Starbucks decision to break into the new market segment would be an interesting study on how Starbucks is going to alter its supply chain to fit its new strategy and value proposition.  Though Starbucks is well known for its premium coffee at its coffee house, Starbucks will have to develop new strategies to appeal to consumers in view of making Starbucks coffee as their necessity product at home too.

We will be analyzing how each of the supply chain drivers aids in the success of the strategies executed and whether the supply chain decisions made are well aligned with the company’s strategies. We have identified ethical sourcing, location of facilities and distribution network, JIT inventory, real time information, reliable transportation and high pricing strategy contribute to its success. By using the Triple-A supply chain performance model (Agility, Adaptability and Alignment), we had evaluated both the current supply chain performance and possible challenges arising from its penetration plan into the CPG segment. We have identified the problems of centralize location of roasting plants in United States (US) causing prolonged lead time and cost inefficiency, Starbucks has been aggressively increasing its product offerings, which would lead to larger bullwhip effect and possible overstocking problem to maintain service level. From there, our team has provided recommendations on how Starbucks can strive to better manage its supply chain to serve its traditional coffee and CPG segment simultaneously.

1. INTRODUCTION

Starbucks Corporation was founded in 1971 when the ideas of specialty coffee and specialty coffee shops were relatively new in the US. Starbucks gradually became the biggest specialty coffee company in the US as the number of small, specialty coffee companies steadily increases in the 1970s.

Business Portfolio: Starbucks has four main sales channels; company-operated retail stores, licensed store, CPG, and food service distributions. Starbucks has been expanding its CPG business, especially single-serve coffee. In Q1 2012, Starbucks’ CPG revenue increased by 72%. For food service distribution, Starbucks has significant presence in the office segment, with an array of product catering to corporate offices, commercial spaces, and government buildings.

Global Strategy: In 2007, Starbucks witnessed the first dip in the number of stores in the US – a sign that that the US market was saturated. Since then, Starbucks has concentrated on the emerging Asian markets such as China and India, which, traditionally, consume tea. The company now has over 3000 stores in China, with the sale growth of 28% over previous year. Half of the newly opened stores are in China, in which 50% are licensed (Starbucks, 2013). In India, Starbucks entered a joint venture with TATA group to open stores there. It also has an agreement in which TATA Coffee Limited will supply coffee for its store in India and worldwide.

Value Proposition: Starbucks’ value proposition focuses on the “coffee experience.” Starbucks sells not only coffee but also atmosphere and service. Each store has a dedicated coffee maker called “barista” to ensure the high quality of the coffee. Regarding service, baristas are expected to connect to the customer emotionally. With these components, Starbucks’ strategy is mainly about product leadership and customer intimacy.

Target customers: Starbucks’ main target audience is adults aged 25 to 40, with disposable income (“upscale coffee drinkers”). Starbucks’ value proposition is clearly aimed at this group. The high quality coffee helps fulfill the customers’ high expectation; the atmosphere provides a convenient place for customers to relax and work and the services make the customers feel valued.

Competition: Starbucks’ competitors fall into two major categories: the specialty companies like Peet’s Coffee, Costa Coffee and Caribou Coffee, and the national food retailers like McDonald’s and Dunkin’ Donuts. The specialty competitors have business model very similar to Starbucks, offering premium coffee and atmosphere, while national food retail competitors compete on value-for-money coffee and convenience are much smaller than Starbucks. Generally speaking, the national food retailers are the main competitors as their size is more comparable to Starbucks.  

Starbucks’ Supply Chain [pic 1]

Starbucks’ supply chain, Fig.1 starts with sourcing of raw materials. The unroasted coffee beans are then stored in six storage sites and transported to the roasting plants. After the beans are roasted and packaged, they are transported to various central distribution centers (CDCs) or regional distribution centers (RDCs) for storage and distributed to various retail outlets.

II. STARBUCKS’ SIX KEY DRIVERS

Sourcing

Coffee Procurement

Starbucks solely relies on high altitude Arabica coffee beans for its coffee. This type of coffee only grows in harsh and unpredictable weather conditions, which makes it more costly to acquire. Moreover, only 3% of the world’s quality Arabica coffee meets Starbucks’ standards.