Supply chain management in Starbucks Critical Analysis

Introduction – background

Supply chain management has become a hot topic over the past twenty years. Before getting into the details, we need to define what supply chain management is. Even though it has been suggested that there is little agreement on a definition for supply chain management (Burgess et al, 2006), one definition we could use could be the systemic, strategic coordination of the traditional business functions and the tactics across these business functions within a particular company and across businesses within the supply chain, for the purposes of improving the long-term performance of the individual companies and the supply chain as a whole (Mentzer et al., 2001, p. 18). Companies now understand the importance of supply chain management better than the previous decades. In starbucks for example, with the increase of operational costs followed by the shrink of sales, they put into action a supply chain strategy in order to reduce their costs and maintain their competiveness in the market. An effective supply chain management could impact on the organisation’s financial performance: profitability, liquidity, and productivity or asset utilization (Christopher, 1998). A real difference “through the customer value that is created by superior service” (Christopher and Peck, 2003, p. 46) could also be generated from a successful supply chain management.

To get to that nice cup of starbucks coffee, it takes a smooth run of the supply chain to make that happen. The main reason is the fact that the journey from bean in South American or African farm to a cup in a starbucks coffee shop is a paved with obstacles. Coffee and other related commodities are to be successfully supplied from different parts of the world and conveyed to the 16,700 starbucks coffee shops, which are visited by around 50 million clients in 51 countries every week.

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However in 2008, faced with the increasing costs of its functioning, the decrease of its revenues, and when the costs of its American supply chain department went from $750 million to over $825 million, they started realising that the company’s supply chain management as a whole was not effectively carrying its mission. One reason could be the high tempo at which starbucks was opening branches all around the world with their supply chain finding it hard to keep up with that pace. According to Peter D. Gibbons, who is starbucks executive vice president of global supply chain operations, the company’s growth has been so fast and in a short period of time that even the supply chain basic ground rules were not set up. The direct result of that neglects the increase of the costs of the supply chain operations in general. To get the link between costs and performance here back in perfect synchronisation, many areas have to be looked at.

According to Porter (1980), the two basic competitive approaches are cost advantage and differentiation. A well led reducing costs plan create costs advantages, while a better level of customization and service tend to boost the profitability. One of the problems with starbucks supply chain was the delivery time. This latter could be solved with a better standard of services through well-organized order capture, by making sure that the different ingredients or materials are always available etc… Supply chain management produces differentiation “through the customer value that is created by superior service” (Christopher and Peck, 2003, p. 46). And on top of that, there is a strong relation between increased levels of service and increases in sales volume and customer maintenance (Parasuraman et al, 2004). This would just prove that an effective progress on the supply chain would have a direct effect on cutting costs with still a good customer service. Such initiative is meant to diminish the business cost tariffs which would positively impact on the profitability of the company. An initiative like this would incorporate:

Reducing inventory holding costs through improved inventory management (Stapleton et al, 2002)
Identifying and eliminating non-value adding supply chain activities (Hines and Rich, 1997) and the different costs related to them.

The inventory aspect of the supply chain management is really crucial. A significant reduction of the inventory would improve asset effectiveness and exploitation. Fewer inventories also means less functioning costs related to doing inventory. Basically, a decrease in inventory positively impacts on the cash-to-cash cycle therefore more liquidity (Christopher and Ryals, 1999; Farris and Hutchison, 2002).

Literature review

Previous work exists on the tie between supply chain and the performance of a company (Christopher and Ryals, 1999). However, businesses are said to be sourcing around 75 % of the value of therir services and goods from the supply chain (Trent, 2004).

Others researches based on the effects of amelioration in the supply on the financial sidehave shown that in the short term, when we have a high level of inventory, this would have no direct negative impact on the price-to-book ratio. However in the long run it could get to a reduced stock market value (Chen etal, 2005). In the retail industry for example, a connection between the floor space and inventory show better operating stores are the ones with a higher inventory turn per unit area (Raman and Gaur, 2005). It is important to find the right amount of stock to have; because too much stock is as bad as too little stock as they both affect the business performance. Businesses with low (not lowest) levels of inventory would be more likely to have a good long-term stock market performance (Chen et al, 2005); but it could also be due to better inventory management strategies.

Even if business performance is evaluated by market and financial criteria, a short-term approach of the supply chain management objectives would improve the efficiency and diminish the lead time and level of inventory; while on the other hand, a long term approach of supply chain management objectives would raise market share (Koh et al.2007). business performance is is affected through supply chain management through different elements such as : lead time, inventory turnover, product return, sales level, cost reduction and meeting customers’ expectations (Petrovic-Lazarevic et al. 2007)’

Lead time: time elapsed from the moment the customer makes an order and when it is completely satisfied (Chan 2001). Businesses are under pressure to reduce their manufacturing lead time. Shorter lead time means that firms will be able to swiftly react to changing market demands (Wadhwa et al., 2005; Chan and Qi, 2003).
Inventory turnover: this measures the speed with which goods move through and are replenished by the sytem (Sahay and Mohan2003).
Product return: to capture the market and keep the customers satisfied, it is crucial for a business to have good quality products (Chan and Kumar 2007).
Sales level: this indicator help showing whether the business has a good market share or not.
Cost reduction: in (Fawcett et al. 2008) it is clearly shown that a well operated supply chain will considerably help reduce costs.
Meeting customers’ requirements: at the end of the day, this is what the business is for. It is all about satisfying the clients and going beyond its expectations. As ( Huang et al 2002) mentioned, development in the supply chain management leads to a better response to customer expectations.
Innovation performance: a good supply chain management network allows businesses to share information both internally and externally. This help improving the company performance.

There are other works that also show the relationship between supply chain management and an organizational performance (Petrovic-Lazarevic et al., 2007). Others researches based their study on almost 200 firms realised that supply chain management could lead to competitive advantage and at the same time ameliorate the business performance (Li et al. 2006).

Research objectives and research questions

This project proposes to prove the importance and benefit of supply chain management within starbucks organisation and the vital role it plays for any business performance. Emphasis will be on the period from October 2007 onwards, since this is the period during which starbucks’ sales started going down, and its supply chain costs rose.

Particularly, concentration will be on the following questions:

What is starbucks supply chain management policy
What is starbucks corporate social responsibility
What are their coffee purchasing and supply chain practices
What is the effectiveness of Starbucks operational strategies
How does their supply chain management affect their expansion strategy

Research and design

The methodology which will be used here in order to cover the research objectives will for the most part be based on qualitative research through semi-structured interviews so that i will still be able to come up with questions during the interviews. If well led, these interviews could also help me collecting specific information needed to answer the research objectives.

There will also be use of quantitative methods, which will be presented through charts and diagrams.

Data collection and analysis

Primary data will be collected from interviews while secondary data will be collected from published documents on supply chain management, measurement of company performance from responsible and respected publishers such as supply chain digest, world trade logistics journal, supply & demand chain executive, logistic quarterly, 3PL wire, DC velocity. Data will also be collected from the university of Westminster database system.

Demands for interviews are being arranged. If accepted, they will be likely to last for an hour and will probably be conducted in July 2011.

Data will be analysed through the use of grounded theory. That will help verifying the hypothesis and identify the potential policies being implemented to easily solve them. Data will also be analysed through the process of going through and reading the data.

Time scale

Between the submission of the proposal and the submission of the project, i will arrange to meet up with my supervisor at least 4 times per month until the end of October. The project should be finished by the end of November when i will submit it.

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