Production costs


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Production costs

  1. 1. Production Costs<br />Starbucks Coffee Company<br />
  2. 2. Production Costs<br />All the costs, internal and external, to produce a good<br />Very important to businesses and the economy<br />Can determine if a business succeeds or fails<br />Directly affects prices<br />Examples of different costs at Starbucks<br />Dairy<br />Labor<br />Occupancy <br />
  3. 3. Starbucks: A brief history<br />1971- The first store opens at Seattle’s Pike Place Market<br />1987- First stores open outside of the Seattle area in Chicago and Vancouver B.C.<br />1988- Begins to offer health benefits to both full and part-time employees<br />1991- Becomes the first privately owned company to offer stock benefits to part-time employees<br />1992- Opens on the stock market at $17 per share. Ends at $21.50 per share<br />
  4. 4. Present Day Starbucks<br />Over 16,000 locations in 50 different countries<br />Has earned multiple awards for the ethical treatment of its workers as well as the ethical treatment from coffee bean suppliers<br />
  5. 5. Fiscal Third Quarter 2010<br />
  6. 6. Increases in Production Costs<br />Drink prices have increased nationwide<br />Covers increasing milk costs due to high demand for US milk<br />Covers rising costs of other commodities such as sugar and coffee prices.<br />Increased production costs are passed on to consumers<br />
  7. 7. Production Costs for the Better<br />Have become cheaper over time<br />Forces companies to be competitive<br />Companies strive to make a better product at lower prices to maximize profit<br />
  8. 8. Production Costs for the Worse<br />Government regulations may increase the cost of certain products<br />Excuses for companies to raise their prices<br />
  9. 9. Production Costs: Go Away!<br />Production costs affect every business entity that produces a good or service<br />Allocation of resources, management of labor, and efficient business practices determine whether production costs will severely hinder the business from making a profit.<br />
  10. 10. Low Production Costs in an Efficient Business <br />Bottled Water Companies<br />New technology, minimal use of laborers, economies of scale, and location, location, location.<br />Externalities- Air Pollution, Tapping of Precious Resources<br />
  11. 11. High Production Costs in an Efficient Business<br />Oil Industry<br />Low reserves, difficulty in retrieval, and liability of laborers<br />Externalities- Health Problems, Environment<br />
  12. 12. The Starbucks Company<br />Starbucks has rather high production costs but also enormous profits<br />
  13. 13. How They Do It<br />Lean Approach<br />Takes away unnecessary movement and changes time-wasting activities<br />Price Raises<br />2006-Raised price an average of a nickel per beverage due to higher labor and energy costs<br />2007-A substantial increase in diary prices led to an average increase of 9 cents per drink<br />2010-A increase in the price of raw coffee has lead to a recent increase of “labor-intensive” drinks like frappucinos and lattes<br />
  14. 14. Low Elasticity of Starbucks Consumers<br />As Starbucks increases prices costumers stay loyal<br />At the end of the last quarter the profits were triple the expected figure, 339.0 million with more stores to open in the next fiscal year including an expansion in China<br />Price raises are typically not added to coffee and espresso drinks<br />High Elasticity of Demand<br />Whereas, consumers who pay $4 for a Frappuccino are more willing to absorb the price raises<br />Low Elasticity of Demand<br />
  15. 15. Externalities of Starbucks<br />Employee Benefits<br />Paid vacation and sick leave, subsidized health benefits, 401(k) plans, and stock options for both full and part time employees<br />Environmentally Conscious<br />Fair Trade Coffee and Environmental Leadership<br />
  16. 16. The Goal of Starbucks<br />Expand the output of coffee<br />Starbucks owns company farms to produce high quality beans at low costs<br />By using company farms, Starbucks does not have to pay for the middleman costs of beans<br />
  17. 17. High Starbucks Bean Prices<br />2001- Starbucks purchased 90% of it’s beans at variable pricing<br />2002- Starbucks switches to buying 74% of it’s beans at fixed costs<br />31% of those suppliers turned into long term contracts<br />Increased purchases from small suppliers from 9% to 59% of their total purchases<br />
  18. 18. Corporate Responsibility: Starbucks <br />Donates portions of it’s profits to charities<br />Helped with reconstruction efforts in New Orleans after Hurricane Katrina<br />Being Environmentally friendly<br />“Grounds For Your Garden”<br />Restructured napkin and trash bag sizes<br />Recycled over 2.5 billion cups<br />
  19. 19. No Shortage of Negatives<br />2005 – Starbucks is forced to pay $165,000 to eight employees<br />Employees claimed they were retaliated against for being pro-union<br />2006 – Starbucks once again pays $2,000 to three employees and two fired employees were offered reinstatement<br />
  20. 20. New Competition: McDonalds<br />McDonalds has attempted to enter the coffee house market<br />Offers gourmet coffee at lower prices<br />Will cut into Starbucks coffee sales, as well as food sales<br />
  21. 21. Starbucks Partnerships<br />Apple<br />Customers were allowed to browse iTunes to find out songs on the store’s radio and were offered free songs as a “Pick of the Week”<br />PepsiCo<br />Frappuccino bottled beverages<br />Dreyer’s Ice Cream<br />Starbucks flavored ice cream<br />Acquired Seattle’s Best Coffee in 2003<br />Used as a franchise<br />