Supply Chain Management In Starbucks

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Supply Chain Management:

Overview:

Supply Chain is defined as an operation which coordinates flow of material and services starting from sourcing, acquisition, inventory management and production. The goal of supply chain management is to provide competitive advantage to the organization through achievement of quality and timely deliverables to the customers, optimum investment and optimum cost. Supply chain management keeps business ahead of market changes. Starbucks purchases green coffee beans from coffee growing parts across the globe and process them according to their standard processes. Supply volume and price depend on multiple factors like weather, crop yield, political and economical condition etc. With well maintained relationships with suppliers, Starbucks believe that risk of non-delivery on committed deal is very rare.

Starbucks global operations strategy and surrounding macro-environment:

Supply volume and price depend on multiple factors like weather, crop yield, political and economical condition. To find suppliers who can provide quality material on time is very challenging. In addition to cost and time, long term relationship is essential.

If there is a natural disaster in the supplier’s country there will be shortage of materials and eventually its price goes up. Weather and crop diseases also play important role in supply of raw materials. Transportation is the biggest challenge for global supply chain management. Transportation cost itself is dependent on multiple factors like mode of transportation, fuel price etc. Economic condition in supplier’s country is key factor to decide price of the raw materials. For example, in emerging countries labour work is cheap and so political factors come into picture when company is sourcing materials internationally. There is always some lead time to establish relationship with customer from newer geographical area which is due to approval according government policies. War and cold-war between two countries can impact global market of the material. If there is more volume of available raw materials than demand, price goes down and supplier may leave the business and opt for another business. That is the biggest threat for long-term business goals. In the 90’s due to oversupply of lower grade coffee beans led lower price of coffee beans across the globe. Farmers were so depressed due to lower revenue than production cost that they started to leave growing coffee beans. Starbucks were expanding that time and they require premium coffee beans for long term. Starbucks partnered with a non-profit organization Conservation International to develop (Coffee and Farmer Equity Practices) C.A.F.E for welfare of farmers and long-term premium quality coffee beans supply. Most of the coffee growing farms are very difficult terrain and difficult to access. Farmers are uneducated and living in poor conditions. C.A.F.E practices increase economic, social and environment sustainability to speciality coffee cafe industries. It also builds mutually beneficial relationship with suppliers.

Key requirements, capabilities and challenges

C.A.F.E guidelines are designed to support buyers, suppliers, farmers and to maintain high-quality coffee beans for long-term.

As of September 2018, Starbucks operate approximately 29,324 stores in 78 countries across the globe. Starbucks supply chain is centralized system with multiple distribution centres spread in different continents. Starbucks follows make-to-stock strategy. Starbucks measures four parameters to evaluate efficiency:

Operations safety
Delivery timeliness
End-to-end supply cost
Enterprise savings

Starbucks uses digital platform for inventory management. Starbucks has mutually beneficial engagement with suppliers for sustainable supply chain. Coffee and Farmer Equity (C.A.F.E) enables supplier to maintain quality with farmer welfare which eventually strengthen long-term relationship and sustainability. Raw coffee beans suppliers must have follow Coffee Sourcing Guidelines (CSG). Starbucks emphasises on research and innovation. Starbucks is rated at number 10 by ‘The Gartner Supply Chain Top 25 for 2018’. Starbucks supply chain is agile, adaptive and aligned.

Challenges:

Management at global scale: Operate in the global market is very complex when it comes to supply chain management. To maintain inventory and distribution to regional stores from centralized global centre is complex and time consuming.

Risk management: To make product available according to demand and irrespective of macro-environmental parameters such as weather, natural disaster, politics, international relations, and crop yielding or economical parameters is very essential.

Laws and regulation: When company is operating globally, they must be aware of local laws and regulation. They must also have to be aware of any latest update on change in such laws and regulations. As far as supply chain management is concerned, employment laws, minimum wages law, labour welfare laws, laws regarding transportation, minimum base price to the commodities, taxes and duties etc comes into the picture.

Analysis and Evaluation of Supply Chain Management:

In this section, resources and capabilities of Starbucks are discussed along with analysis of supply chain management system. There are two types of resources found in any organization. One is tangible resources which are physical resources such as land, offices, manufacturing units and money. For Starbucks, its globally spread stores, distribution centres and manufacturing units are tangible assets. Other is the intangible resources. Intangible resources are non-physical identities like intellectual property and expertise. For Starbucks, its intangible resources are its globally recognized brand name, its skilled labour, its long learning curve etc. Resources are more useful when it’s rare. Having healthy relationship with suppliers, Starbucks has upper hand when it comes to raw material, especially premium coffee beans. Supplies also found their business safe when they have giant client like Starbucks who purchases raw material in huge volume for longer duration.

Starbucks emphasises on welfare of its employees. Starbucks provides benefits such as medical, insurance, paid holidays and employee assistance program to all his employees including part-time employees. Starbucks provides training sessions for its employees on regularly. Good management of employees and their skills is very important to operate such a giant supply chain.

The positive point of Starbucks regarding decision making is its flexibility. For example, To purchase green coffee, Starbucks signs contract under both fixed-price and price-to-be-fixed contracts. Price-to-be-fixed contracts are deal in which parameters such as quality, quantity and delivery period are fixed but delivery date and price are not fixed at the time of agreement. As of September 2018, Starbucks committed to $996 million under fixed-price contracts and $166 million under price-to-be-fixed contracts for green coffee bean purchase.

Starbucks purchases most of raw coffee beans from Latin America and East Africa. Most of these countries are emerging countries. Their economic structures are not matured yet and there are significant social and political transformations take place frequently. Sourcing raw materials from these countries are highly unstable and risky. However, Starbucks think-tank came with a novel idea. They started to emphasis on the problems of farmers, labours and suppliers along with environment and ecology. Starbucks established developed Coffee and Farmer Equity Practices (C.A.F.E) with the help of an NGO called Conservation International.

C.A.F.E contains product quality guidelines for green coffee beans and cups. It’s also consist of Social Responsibility guidelines which address hiring practices, minimum wages, working condition, child labour prohibition, safety, medical care etc. It also emphasises on water quality, water conservation, improving soil quality, protecting wild life, energy conservation and waste management. By resolving farmer’s issues, premium coffee beans production can be increased and the possibility of coffee bean’s scarcity can be reduced. Moreover, as farmers can earn better, they are willing to be in this business for longer duration which eventually strengthen the supply chain.

Recommendations:

After analysing a successful supply chain management system, there is very less left to recommend for sustainable supply chain management. However some of the potential factors are discussed in this section.

Exploring and developing new sources with the help of research:

For Starbucks, major raw materials are premium green coffee beans, tea, fluid milk, vegetables, bakery products etc. Except coffee beans and tea, Starbucks purchase other materials from local markets. Yield of this agriculture products swings drastically depending upon various factors such as climate, crop diseases and natural disasters. Sourcing these materials from international markets also depends on economical and political situation in supplier’s country. Considering all this, unavailability of the raw material is a big threat.

To counter this, Starbucks should look for other potential region where these agriculture products can be grown. As Starbucks operates in global market, they should establish some research labs across the globe to find potential regions. The key role of these labs is to study climate and soil for particular agriculture product, especially coffee beans. They can grow coffee plants there for experimental purpose and can estimate production per unit land area. They can also experiment with nutrition and fertilizer required to the crop and paste control. By doing this, Starbucks can help the farmers who already grows coffee plants. Secondly, they can find and encourage the farmers in the other region where coffee can be planted.

Innovative Way to Store and Preserve Coffee Beans for Longer Time:

Many times it happens that there is more than enough quantity of raw materials in present but the near future is unpredictable. To compensate scarcity of coffee beans, it should be stored for longer time. However, quality and aroma of the coffee beans change with time. Starbucks should focus on to find out innovative and scientific way to store and preserve coffee for longer time maintaining its quality.

Sourcing from Local Market:

Starbucks should focus on local market in case where total cost including transportation and taxation is greater compared to local market product cost.

Dynamic and Agile Supply Chain:

Supply chain should be dynamic and agile. In the traditional methods, decisions are taken monthly and quarterly. In dynamic model, decisions are taken rapidly on market changes.

Redundancy in Manufacturing Unit:

Manufacturing units are active and important part of supply chain. If there is breakdown in manufacturing unit, product can’t be delivered on time. To avoid this, there should be redundancy in manufacturing units.

Conclusions:

We have discussed that supply chain is integral part of business and it depends on multiple factor like climate, political, economical factors and which is highly unpredictable. To cope up with this sustainable supply chain model is required. Starbucks achieved this by developing C.A.F.E guidelines. C.A.F.E enables farmer welfare, ensures high quality of coffee beans, reduce threat of supply scarcity over long time. It encourages farmers and suppliers to be in business for longer time. It also takes care of environment and ecology. Involvement of science and technology can find new dimensions of supply chain management beneficial for the business.

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