A Supply-Chain Espresso Caused by Domain Expansion
Summary
Coffee giant Starbucks decided to expand its business while maintaining its brand value proposition. As a result, the company faced various supply chain and operation problems. This research’s objective is to develop and analyze strategic alternatives to solve the expansion issues of the company related to its supply chain and operation.
This study focuses on the conceptual analysis of Starbucks’ supply lines and operations under rapid global expansion. This research will include evaluating supply chain strategies, partnerships, logistics and process, finance track records, and outsourced relationships of the company from the mid-2000s to 2020. This study does not cover detailed data on financial reports, statistical significance, and funding constraints. The methods used in this study include online journal articles and related studies to give qualitative data that support each argument.
Starbucks faced multiple issues with their supply chain and operations when they focused more on expanding their domain in other countries and lost control in managing the quality of their products and services, and handling logistic partnerships. As a result, in the mid-2000s, many loyal customers turned to other brands, and the famous coffee brand lost millions of dollars in revenue. To counteract this loss, Starbucks made significant investments in improving its labor productivity and the economies of scale in its production and supply chains, resulting in a hostile environment for both its employees and its suppliers.
The company’s supply chain strategy provided a more consistent experience for customers. Coffee giant Starbucks has been reorganizing its supply chain to increase efficiency and minimize risk. To expand their market into the competitive international market, a preferred alternative course of action is to improve their partnership with different shipping companies that can offer fast and smooth delivery services, address a saturated supply chain, and improve customer service.
Findings
Problem identification and analysis
Starbucks’ supply chain was struggling to keep up with the company’s rapid expansion, and the company’s operating costs were spiraling out of control. This scenario has become even worse because of the economic slump that occurred in the late 2000s.
Supply Chain Quarterly reported that, between October 2007 and October 2008, supply chain expenses in the United States increased from $750 million to more than $825 million, even though sales for U.S. stores that had been open for at least a year dropped by 10% during the same period, according to James A. Cooke. This crisis served as a wake-up call to the need for a new approach.
Starbucks made significant investments in increasing the efficiency of its labor productivity and the economies of scale in its production and supply chains, resulting in a hostile environment for both its employees and its suppliers. Because of this, Starbucks’ customer service, coffee beans, and coffee beverages were of lesser quality, which had a negative impact on the primary value propositions that had propelled the company to its original success. As a result, Starbucks’ customer experience quality decreased across the board, and the company’s brand reputation suffered a substantial setback.
Evaluation of the alternative solution
- Logistics
It was the responsibility of Peter D. Gibbons, executive vice president, and chief supply chain officer of Starbucks company, to assess the company’s ability to service its locations and understand its costs better. He discovered that less than half of all store orders were being delivered on time following a comprehensive inquiry. He also noted that Starbucks’ quick expansion had necessitated a reliance on third-party outsourcing. Outsourcing arrangements for transportation, logistics, and contract manufacturing accounted for around 65 to 70% of total supply chain expenses.
Gibbons and his team then created a three-step supply chain transformation plan:
- Reorganize and optimize its supply chain by defining functional roles for each department.
- Reduce cost while maintaining or improving service levels
- Ensure that the foundation is in place for sustaining and improving supply chain capabilities in the future
Reorganize
Starbucks completed a significant stride toward streamlining and centralizing its previously fragmented supply chain in the latter stages of the year 2008. The team restructured themselves so that every role fit into one of four main functional groups: plan, source, manufacture, and deliver.
As a result, they were able to form a cross-functional team that could work together to streamline operations and improve efficiency. By implementing a supply chain strategy, the company created a more consistent experience for customers in stores and online.
Evaluation
To find feasible alternatives in logistics and operation and other underlying problems that the firm may encounter in the future, it is prudent for them to conduct an analysis of their present supply chain and determine which places along it were the most vulnerable. They learned that their coffee roasters were less than 100 miles from a giant volcano in Guatemala, which posed a considerable threat to the company’s coffee supplies. They immediately shut down their operations.
Cut Cost and Improve Service
During the processes of these assessments and reorganizations, Starbucks boosted efficiency while simultaneously reducing risk throughout its supply chain. It achieved this by automating lower-value processes and concentrating its human capital on high-value duties like customer service, innovation, and strategic planning. After completing the reorganization, each functional group was tasked with identifying opportunities for improvement. The sourcing group, for example, was assigned to identify the reasons that were contributing to the price rises in the marketplace.
Evaluation
The stated procedure entails extensive research and evaluation to understand better how much things should cost and, as a result, to negotiate better contracts. Similarly, the manufacturing company calculated that establishing a fifth roasting unit in the United States could lower both costs and delivery times. Introducing weekly scorecards with apparent service, price, and productivity indicators was another critical turnaround component. This method provided a consistent frame of reference for the entire extended supply chain, with goals aligned with the organization’s overall success.
Understanding Future Capabilities
In addition to putting in place procedures to ensure supply chain execution in the immediate and long-term future, the company embarked on an extensive recruitment process to ensure that it hired only the best personnel available to replenish its supply chain management and leadership team. In addition, the corporation has committed to providing onboarding training for existing employees.
Evaluation
The outcomes of the transition were positive. It was able to lower supply chain costs by a half-billion dollars in each of the following two years. Starbucks continues to make strides in the next decades, guaranteeing 100 percent Fair Trade coffee, pursuing sustainability goals, and establishing its collaborative Coffee and Farmer Equality program with coffee growers. As part of its ongoing commitment to improving customer experience, it has implemented online ordering and supports additional digital innovations at its new megastores.
As a result, the company has continued to grow and establish its brand due to excellent leadership at all levels of operations and management. Using this technique, you may optimize your supply chain at every level. It is also a perfect strategy to use if your company is experiencing significant change, typically when supply chain restructuring occurs.
Following the implementation of these technologies, the company’s supply chain underwent a long-overdue transition, allowing Starbucks to return to its roots, namely the customer experience, and concentrate on what made the firm famous in the first place.
- Customer Service
When Starbucks was started in 1971, the company’s founders were concerned with offering customers high-quality coffee goods and a distinctive shopping experience. However, as the company grew, it began to lose sight of the need to provide excellent customer service. Starbucks CEO Howard Schultz wants to refocus the company’s attention on customer service in 2008, according to the company’s website. For his most famous order, he ordered over 7,000 Starbucks locations to close for 24 hours so that baristas could learn how to brew high-quality espresso drinks and recreate the distinctive Starbucks experience that had made the chain so successful.
Employee skills and knowledge development were a key component of Shultz’s plan, and it was one of the most notable aspects of his approach. Employers were able to enhance employee productivity and consistency by supplying them with state-of-the-art espresso equipment and training them to operate them appropriately. Schultz, Inc. In the end, this resulted in improved customer service and higher levels of customer satisfaction. In addition, the company added online ordering capabilities, which allowed personnel to spend more time making drinks for consumers rather than receiving orders from customers.
Evaluation
Customers who benefit from these strategies are expected to be loyal to your brand and will not shop anywhere else for their products or services; customer satisfaction will improve, which will, in turn, drive sales even higher; and the company will gain a reputation as one that provides excellent customer service to its customers.
However, putting so much emphasis on domain expansion did not come without its downsides. Concentrating on customer service might divert attention away from other growth areas for a company. For example, when Howard Schultz was appointed executive chairman of Starbucks in 2018, he stated that he would be concentrating on developing new areas of growth outside of the coffee business. The company anticipated that by focusing more on increasing its product line to include items such as ice cream and tea, it would increase revenues while also managing a decline in foot traffic at its stores.
Conclusion
Starbucks’ supply lines struggled to keep pace with rapid expansion, and the cost of running it was getting out of hand. This crisis signaled the need for a different approach. The company’s supply chain strategy provided a more consistent experience for customers. Coffee giant Starbucks has been reorganizing its supply chain to increase efficiency and minimize risk. It replaced lower-value tasks with automated systems and refocused human capital on customer service, innovation, and strategic planning.
In two years, it reduced supply chain costs by a half-billion dollars. Starbucks’ supply chain underwent a much-needed transformation that allowed the company to return to its roots. CEO Howard Schultz’s focus on employee training and efficiency led to better customer service. This is a great strategy to emulate if you’re looking to improve your supply chain at every level.
Recommendations and Implementation
Recommendation
As a modest, neighborhood coffee shop that sold solely coffee when it initially opened its doors in Seattle in 1971, Starbucks was a pioneer in the industry. Starbucks is currently one of the most well-known brands globally, with 30,000 outlets in over 100 countries and a market capitalization of $90 billion. A big part of its success can be due to its supply chain techniques, which are recommended to other firms wishing to control their domain expansion better like other Coffee companies such as Costa Coffee and Dunkin’ Donuts.
Besides from the alternative solutions previously mentioned, here are other recommendations for the Starbucks company:
Partnerships
Suppose a high-demand firm wants to keep up with consumer demand while also keeping its high-quality standard. In that case, it is recommended that the company form partnerships with shipping providers that can provide same-day delivery. Doing so can boost the efficiency and speed of its supply chain while simultaneously keeping costs low.
Improve the quality of customer service
Create a new and effective customer service policy that everyone can follow, such as the ‘no multitasking’ rule.
Sustainability
Ascertain that Starbucks capitalized on the opportunity of sustainable business for more significant improvement and rapid development of shop locations to achieve success. We recommend that management pursue long-term strategic initiatives such as Coffee and Farmer Equity (CAFE) practices, Fair Trade certified coffee, Farmer Support Centers in Africa and the Caribbean, and Leadership in Energy and Environmental Design (LEED) certifications to achieve long-term sustainability.
In the corporate world, expectations for long-term sustainability lead to a rise in profitability. It has made significant achievements throughout its supply chain, from the farms to the distribution network to the retail stores that serve them. It believes that its principles will resonate with customers and employees equally and that they will support them. Consider how you can make your supply chain more environmentally friendly by taking initiatives such as reducing energy use in your business, gaining LEED certification in your facility, procuring certified products, or eliminating waste across the supply chain.
Gain an understanding of the emerging market
It is recommended that companies solve a saturated supply chain and digitize the customer experience before expanding into an emerging market. First and foremost, Johnson must continue to develop distinctive products and services for a crowded North American market. These can be achieved by extending Starbucks’ product lines to include items such as Tazo teas, Doubleshot espressos, and Frappuccinos, among other things.
Remove any unnecessary complications.
Starbucks’ rapid expansion was accompanied by a high level of complexity, manifested in various outsourced partnerships and other lost synergies. Consider how you may streamline your operations by organizing your company and establishing a clear vision, and outlining roles and duties for your employees and customers. Employees in a small firm may do a variety of supply chain responsibilities rather than specializing in a single function; however, your supply chain should be organized with a clear focus on what is critical to the company’s overall performance. Identify and remove non-value-adding tasks as much as possible.
Modifying Costs
Starbucks could develop cost models to understand better the costs of inputs, which will help them negotiate better deals. Even if you may be more of a price taker than a price creator, knowing the cost structure may open the door to new options for your company. As an example, is it possible to negotiate a higher freight rate if you can expedite speedier unloading at your dock or receive the delivery at a different time of day? Instead of using a courier service to ship out all of your packages, why not use a less expensive LTL service for your complete pallet shipments?
Keep track of the metrics
The use of scorecards can assist you in keeping track of the most critical metrics or key performance indicators for your firm’s success. The use of scorecards can be a powerful tool for aligning operations within your organization and third-party connections, as seen in the example of Starbucks. With the help of frequent scorecards that keep track of leading indications, you can spot growing issues before they become serious. Even though scorecards are not a panacea in and of themselves, they may be highly effective tools if used with care to ensure that the essential indicators are recognized and then acted upon as needed.
- Supporting data
The corporation has introduced supplier diversity standards, and the company’s Supplier Social Responsibility (SSR) program encourages the development of existing suppliers. Since its inception in 1990, the Supplier Social Responsibility program has assisted suppliers in implementing solutions in the environment, health and safety, human rights, labor rights, ethics, and regulatory compliance.
Starbucks evaluates the performance of its suppliers based on their adherence to the policies and processes established by the company. In addition, the organization assesses the quality of products supplied by third-party vendors, if any.
Through strategic initiatives such as the Coffee and Farmer Equity (CAFE) practices, Fair Trade certified coffee, Farmer Support Centers in Africa and the Caribbean, and Leadership in Energy and Environmental Design (LEED) certifications, Schultz has transformed the company into a sustainable corporation that is profitable and environmentally conscious. As evidenced by the rapid expansion of Starbucks locations, this strategy successfully ensured that the company capitalized on the prospect of sustainable business.
- Possible results of the recommendations
A partnership with shipping companies that can offer same-day delivery services can maintain control of its products and give customers the option to choose when they want their items delivered.
Improving better employee training in Starbucks will allow the company to retain more staff that are fully aware of the actions needed to reach new levels of customer service and satisfaction. This will help ensure that Starbucks stays on top of its competitors in brand recognition and performance over time.
Suppose Starbucks pursues sustainable strategic initiatives such as the Coffee and Farmer Equity (CAFE) practices and other sustainability programs. In that case, it is expected that it would be able to increase its sales due to consumers’ growing awareness of environmental issues. This will also reduce costs associated with labor-intensive tasks like harvesting coffee beans by hand or using machinery for processing coffee beans into ground powder which require energy consumption, as well as transportation costs incurred when transporting raw materials from remote locations around the world back home for further processing into various products such as instant coffee mixes or whole bean coffee bags sold at local grocery stores across America where most people live within driving distance from one another.
To help Starbucks expand into emerging markets, it should address a saturated supply chain and digitize the customer experience. Suppose Starbucks were to expand by addressing a saturated supply chain in the near future. In that case, they will be better positioned to take advantage of new opportunities and improve operations.
Starbucks should build cost models to understand input costing better, allowing them to strike better deals with vendors. It will improve their supply chain management in the future by providing more visibility into purchasing practices, allowing them to make changes before costs are significantly impacted.
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