This report aims to analyze the challenges that globalization presents in a constantly evolving market, and evaluate the solutions that Starbucks has implemented to manage these challenges. 2. Background Starbucks started out as a small coffee retailer in Seattle, Washington in 1971, growing exponentially over the next 4 decades. With over 17,000 stores across 55 countries today, Starbucks stands as the leading specialty coffee retailer in the world and is one of the top 5 international coffee buyers (C. A. F. E. Practices, 2012).
In 2012, Starbucks sold 4 billion cups, or 428 million pounds of coffee (Munson, 2013). Since then, Starbucks has diversified to offer a variety of food and beverage options, including over 87,000 drink combinations, sandwiches and an array of commercial products (Eco-management for Food, 2012). Starbucks’ incredible growth (See Appendix A) in a short span of time required expansion of its global supply chain in order to cope with the demand. Due to the extensive diversification of Starbucks products, this report will focus solely on the globalization of Starbucks’ coffee bean supply chain.
Starbucks’ global supply chain of coffee is divided into 3 main steps: production, packaging, and distribution. These steps were strategically engineered for cost cutting, operational efficiency and profits. Production, or coffee cultivation occurs in countries across the equatorial belt to capitalize on optimal climate condition, while Starbucks has over 40,000 coffee suppliers from various regions and countries such as Columbia, Rwanda, China and Mexico (Starbucks, 2012a).
Upon harvesting, the coffee beans are sent for processing and packaging. The numerous processing plants are located strategically around the world to service Starbucks’ regional retailers in Asia, Europe and the U. S. Starbucks adopts a 3-step processing rule: storage and handling, roasting and packaging, and dispatch (Munson, 2013). Coffee beans deposited in the plants are separated by type, before being roasted, cooled, ground and sent for packaging.
After which, they are dispatched for distribution (Eco-management for Food, 2012) in regional distribution centers, with some distribution services outsourced to third party logistics to deal with Starbucks’ massive global reach (Ho, 2013) (See Appendix B for Starbucks’ coffee bean supply chain). Starbucks takes globalization and corporate social responsibility (CSR) very seriously, such as adapting its business to local laws, standards, tastes, and culture (Thompson & Arsel, 2004), resulting in multiple implications on the management of the supply chain.
For instance, Starbucks is proud to have their coffee beans 100% Fair Trade certified, aligning itself with an organized movement that imposes set of standards and practices on multinational companies. Moreover, Starbucks has also implemented a unique set of practices called the “C. A. F. E. Program” which sets quality control benchmarks for suppliers. These include regular wages which adhere to laws of the respective countries, supporting local schools, preserving natural forests and using pesticides only as a last resort (Newell & Frynas, 2007).
These requirements are part of the unique grading system used to evaluate suppliers and provide control over quality and standards of the global supply chain. However, this has led to criticisms, such as Macdonald (2007) who suggested that C. A. F. E. Practices are often considered buying requirements for a corporate client instead of public standards. Starbucks suffered from severe financial problems in the past because its growth rate outpaced its ability to manage their supply chain, with the company being the “victim of its own success” (Cooke, 2010).
Hence, this strict control over the global supply chain is essential for Starbucks’ performance and efficiency, which directly impacts profit. 3. Issues and challenges 3. 1 Problems with rapid growth Following its success in the United States, Starbucks ventured overseas and quickly became a globalization icon. With its rapid globalization strategy, Starbucks expanded from about 5000 stores to an estimated 15,000 stores in 2000 (Groth, 2011). By mid-2000s, Starbucks’ supply chain faced many issues, resulting with challenges of having to fulfill expansion strategies yet minimizing escalating operation expenses. By 2008, Starbucks’ stocks fell by 42% (Schultz, 2011). The rapid expansion took a toll on the sales growth and stretched the limits of the existing supply chain, which then rippled down to erode the customer-valued ‘Starbucks experience’ (Gibbons, 2011). Starbucks then reorganized their supply chain – developing new cost-effective models, relooking into suppliers and reconsidering expenditures by ingredient instead of purchase price (Cooke, 2010).
The supply chain was streamlined into 4 categories: Plan, Source, Make and Deliver, adopting a simplified system where coffee beans were manufactured in the same region where they are sold (Starbucks, 2012b, November 30). This was modeled by existing systems in the United States where coffee plants were built in Nevada, Washington, South Carolina and Pennsylvania (Starbucks, 2014). Coffee beans are transported in bulk to nearby cities before being shipped individually to its eventual destination. This optimized operations and significantly reduced transportation costs and lead times (Cooke, 2010).
With the new centralized global logistics system (Starbucks, 2012a), Starbucks was able to reap economies of scale and aggregate worldwide. A global map of its expenses spent on transportation, with costs broken down by customer and region, retained the most cost-effective carriers as well as connect its international distribution centers for efficient management (Cooke, 2010). Moreover, Starbucks’ purchase of suppliers and farms allowed for greater cost savings and improved efficiency, a solution known as backwards vertical integration (Simonetti, n. d. ).
Emphasizing on quality control, 4 main factors are consistently measured across the global supply chains, namely: service measured by order fill rates and on-time delivery, enterprise savings, total end-to-end supply chain costs and safety in operations (Cooke, 2010). In line with their belief in decentralization of operations being key to global success (Global Logistics & Supply chain strategies, 2002 January 1), the company started attracting talent from supply chain education programs and provide ongoing training for existing employees to upgrade their knowledge in supply chain management.
(Cooke, 2010). 3. 2 Supply of Coffee Beans Starbucks uses the Arabica coffee bean that originates from the southwest regions of Ethiopia (Burkill, 1997). However, to keep up with the high demand of coffee, Starbucks has outsourced its supply of coffee beans to various countries, hence majority of Starbucks’ coffee beans come from Latin America, Africa and the Asian-Pacific region (Pashman, 2013). Due to unpredictable forces of nature such as climate change and erratic weather patterns, harvest of coffee beans has decreased leading to an increase in prices.
The increase in occurrence of natural disasters brought about by global climate change has adversely affected harvesting of Starbucks’ beans, thereby disrupting the supply chain (Goldenberg, 2011). The supply chain might also be affected by non-climatic factors, such as the outbreak of Roya fungus in coffee trees. The highly resistant fungus grows on leaves of coffee trees, cutting off its nutrition (Ameson, 2000). Hence, affected trees will result in a loss of production for 3 years. In a recent outbreak of the Roya fungus across Central America in 2013, the estimated total damage was 2.
7 million bags of coffee, translating to a loss of US$500 million and around 374,000 jobs across Central America (Josephs, 2013). In reaction to this, Starbucks has increased its research and development expenditure and purchased a 600-acre farm in Costa Rica in 2013 to study the Roya fungus and develop methods to eradicate it (Best, 2013). They are currently working to develop new breeds of fungus-resistant coffee, and innovating for other resistant strains of coffee beans (Gruley & Patton, 2014). 3. 3 Starbucks in China
In 2010, Starbucks signed a deal with the Chinese provincial government of Yunnan to set up a coffee bean farm to cater to a rapidly growing population of coffee drinkers in China, amid a global battle for quality coffee beans (Burkitt, 2010). Costs of using imported Arabica coffee beans were increasing, and producing beans locally would mean reducing production costs. Through this venture, Starbucks hoped to appeal to both the local population and international customers, pledging that the quality of the coffee produced would be on par with global standards (Sanderson, 2009).
However, the consumption of coffee by the Chinese were still relatively less than other markets, with average store sales being US$600,000 compared to US$1 million in the U. S. (Burkitt, 2010). Nonetheless, Schultz was confident of long-term profitability, speculating that the growth in smaller cities would mirror that of Beijing and Shanghai (Burkitt, 2010). According to research company Euromonitor International, coffee sales in China climbed 9% in 2009, indicating an increasing demand by Chinese and thereby more opportunities in the market for Starbucks to target their expansion plans (Burkitt, 2010).
With Starbucks having a 61% market share (China Daily, 2013), China is positioned to become Starbucks’ second-largest market behind the United States. The Yunnan government plans to invest three billion Yuan in the next decade to increase production of coffee from 38,000 tons annually to 200,000 tons, as well as expand its coffee plantation area to over 66,667 hectares to capture a market value of about RMB10 billion ($1. 61 billion) (Barlow, 2013). Farmers were encouraged to grow coffee to reap higher profits.
In 2009, coffee beans were sold at an average of RMB16 per kilogram, increasing to a high of RMB40 per kilo in 2011, stabilizing in 2012 to about RMB30 per kilogram (Barlow, 2013). With the government’s support, Starbucks aims to liaise with Yunnan farmers to help reduce environmental impact and improve their livelihood – in line with Starbucks’ C. A. F. E. Practices program. In 2012, Starbucks opened its first Farmer Support Centre in Yunnan, strengthening commitment to China’s farming communities (McPherson, 2012); agronomists and quality experts can now work directly with the farmers to provide resources and expertise.
In the past, Yunnan-grown coffee was perceived as inferior, with massive variance in quality of beans produced, having an estimated 70 percent of coffee beans that did not meet standards (Barlow, 2013). Presently, with Starbucks professionals overseeing quality control efforts, tastings and observations at Yunnan coffee farms, quality of coffee beans produced has improved significantly. A blend of coffee grown by AiNi, one of the most established coffee operators and agricultural companies in Yunnan, achieved a cup score of 81. 5/100 and Starbucks now offers this blend globally as it qualifies to be “specialty coffee” of world-class standard (Barlow, 2013). To meet with the demand for coffee beans fuelled by rapid expansion in China, more than 700 stores across more than 50 cities – a joint venture between Starbucks and AiNi Group was established, opening a processing plant in Yunnan in 2012 with 20,000 tons of processing capability (Barlow, 2013). 4. Evaluation and lessons learnt With increased globalization, strategic global supply chain management is essential for an organization to stay competitive in their respective industries.
This is especially relevant with globalization as analyzed through Porter’s 5 competitive forces (1986), breaking geographical barriers to competition and lowering the barriers for new entrants to enter the industry. Bargaining power of suppliers and consumers will be weakened, as organizations establish their brands internationally, leading to increased supply of goods and services and threat of substitutes. Strategic planning in the supply chain is crucial – although supply chain management is primarily driven by operational cost reduction, certain trade-offs needs to be considered because of globalization.
For instance, management may need to consider subjective factors such as mission and vision of the organization, corporate culture and branding, while concentrating on objective factors of process costs and training. Also a trade-off between long-term and short-term outcomes is needed, especially evident in Starbucks’ sustainability program where they took the initiative to innovate their supply chain management, removing more than $580 million from its supply chain costs within 2 years to manage for its globalization strategies (Miller, 2011).
This can be seen as a worthy investment for long-term sustainability, also empowering them with control over distribution and logistics systems. Studies have shown that superior supply chain management can lead to competitive advantage and improve business performance (Li et al. 2006), highlighting a close relationship between supply chain management and organizational performance (Petrovic-Lazarevic et al. , 2007). With globalization comes with a plethora of unpredictable and rapid changes, especially with the new information age.
Therefore, an organization needs to be dynamic in capitalizing on ways to innovate and streamline processes. Risks such as Starbucks centralizing their logistics system, enabling easy monitoring and retaining best partnerships to streamline operational costs, were successful while others such as introducing instant coffee to China’s rapidly expanding coffee market, were unsuccessful. As production or distribution channels are scattered worldwide, the organization has to be vigilant to changes in the environment. Therefore, competitive intelligence
reports or SWOT analyses are important in forecasting or scenario planning and monitoring of an organization’s external and internal environments for threats and opportunities. This is especially important in making weighted decisions on taking on risks and new ventures. For instance, Starbucks’ investment in farms for research and development of disease-resistant varieties of coffee beans are effective risk management tools, as it will help minimize disruption of supply chain processes and losses in the event of a disease outbreak.
Venturing overseas may necessitate management on an international scale. This may mean outsourcing of certain processes to overseas vendors and scattered communications with different tiers of international partnerships to manage and monitor. Starbucks’ centralized global logistics system has effectively connected the various distribution channels to increase efficiency and optimize quality standards. It has also helped counter the bullwhip effect where variance of orders is distorted as one moves upstream the supply chain (Lee, Padmanabhan & Whang, 2004).
This may also bring factors of culture, legal and social differences into play, without which it may dilute the organization’s mission and vision and affect the organization’s quality standards. However, Starbucks’ centralized monitoring system allows for information about various stages of the system to be easily identified and measured – permitting for better risk management. Sustainability is also important when dealing with rapid expansion in globalization, and supply chain management will help produce differentiation from competitors by increasing customer value (Jutter, Peck & Christopher, 2003).
As seen in Starbucks’ expansion in China, a supply chain needs to be sustainable to increase profitability and establish a good branding. Starbucks’ vertical integration solution has provided the organization with tremendous cost-effectiveness and a steady supply of retail products, allowing for full control of its global processes. In order for sustainable development in globalization, strategic management and leadership are essential for dealing with complex problems; hence nurturing of talent is crucial.
Starbucks’ belief in attracting talents from supply chain education programmes and investment in continuous training for existing employees in supply chain management help nurture potential leadership. By cultivating and attracting talent at the respective global offices, Starbucks encourages a decentralization of authority, and this helps reduce bureaucracy and therefore promotes sustainable growth of the organization.