Starbucks Case Study : Building Sustainable Supply Chain

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This presentation is made by my classmates for Supply Chain Class. Discussion focus on C.A.F.E strategy used by Starbucks. Sustainable supply chain is one of the key issue especially about ethical …

This presentation is made by my classmates for Supply Chain Class. Discussion focus on C.A.F.E strategy used by Starbucks. Sustainable supply chain is one of the key issue especially about ethical coffee trade.

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  • 1. [MSB446 Supply Chain Management]StarbucksCase Study- Stanford Graduate School of BusinessStarbucks Corporation: Building a Sustainable Supply ChainKim, NamwookJeong, YongjaeKim, Seulgi2013.06.13.
  • 2. ContentsCopyright © 2013 Supply Chain Management_ Kim, Namwook, Jeong, Yongjae, and Kim, Seulgi. All rights reserved.1. Overview on Starbucks: Why This Company and Why This Issue Matters2. Case: Starbucks- Building a Sustainable Supply Chain2.1 Case Introduction2.2 C.A.F.E. Practice and results3. Current Situation of Starbucks4. Starbucks in Korean Market5. Conclusion
  • 3. Overview on StarbucksCopyright © 2013 Supply Chain Management_ Kim, Namwook, Jeong, Yongjae, and Kim, Seulgi. All rights reserved.Starbucks is a global coffeehouse based in Seattle, the U.S.A. It is the largestcoffeehouse company in the world, with 20,891 stores in 62 countries5 Why Analysis• Why this company? Starbucks as the largestcoffeehouse globally that SCM is the criticalissue to satisfy their world-wide customers• Why this time? In 2005, at the time when thecoffee consumption exponentially increased• Why this matter? At the same time, the priceof coffee bean decreased because ofoversupply so that farms got under bankrupt• Why important to Starbucks? Coffee bean isthe starting point of Starbucks SCM• Why this issue? “Challenging point in itshistory” (Details by the case study)Why this Company and Issuehttp://www.starbucks.com/career-center/professional-services-careers/supply-chain-operations-partners
  • 4. Case: Starbucks – Building a Sustainable Supply ChainCopyright © 2013 Supply Chain Management_ Kim, Namwook, Jeong, Yongjae, and Kim, Seulgi. All rights reserved.Starbucks Corporation5W+1H Analysis• Who? Starbucks Corporation• Where? Global• When? October in 2005• What? Building a sustainable supply chain• Why? To get stable supply of coffee beans withright quantity and right price• How? Case study with relevant data analysisProblem Statement“How can Starbucks get the stable supplyof premium coffee beans with appropriateprice?”
  • 5. Copyright © 2013 Supply Chain Management_ Kim, Namwook, Jeong, Yongjae, and Kim, Seulgi. All rights reserved.Where the story begins – early 2000sProblem RecognitionCoffee price dropped…• Due to oversupply of low grade coffee• Thus farmers suffer from low, even negative profit,not covering its cost of production, going bankrupt• When stable supply of high quality coffee beanswas essential to support explosive growth of SBUX• So SBUX had to do SOMETHING!Source: International Coffee Organization (ICO) Statistics050100150199019911992199319941995199619971998199920002001200220032004ICO Composite PriceSource: Global Financial Data (from the case)Arabica and Robusta Prices, 1970-2002Solution FoundC.A.F.E. Practice• Coffee and Farmer Equity Practice• Comprehensive set of environmental,social and economic guidelines tosource ethical coffee
  • 6. Buyer• Switching cost ≈ 0• Many other options• High brand loyaltySubstitute• (product-wise) instantcoffee, tea, juice, soda,alcoholic beverages∙∙∙• (culture, place) Dunkindonuts, McDonalds,Baskin Robbins ∙∙∙Coffee Industry – 5 ForcesCopyright © 2013 Supply Chain Management_ Kim, Namwook, Jeong, Yongjae, and Kim, Seulgi. All rights reserved.HMHLNew EntrantsSuppliersBuyersSubstitutesCompetitiveRivalryMMNew Entrants• Low entry barrier w/low initial capitalrequirements• Major fast food chainsalready in the business• Little productdifferentiationPorter’s Five ForcesSupplier• Small in size, so SBUX isimportant to their sales• Commodities (coffee,cups, napkins, bottles)• Many suppliers existInternal Rivalry• Mature & Saturated mkt.• Many direct/indirectcompetitors in the mkt.• Low level of productdifferentiation
  • 7. Copyright © 2013 Supply Chain Management_ Kim, Namwook, Jeong, Yongjae, and Kim, Seulgi. All rights reserved.Upstream Supply Chain of Starbucks: From farmers to StarbucksStable supply of coffee is critical, as a starting point to deliver its value tothe customers and to sustain high growth rate.FarmersProcessersSuppliersStarbucksThe Starbucks Coffee Supply ChainRef.) Stanford Business School Case supervised by Professor Hau Lee (2007)
  • 8. C.A.F.E. PracticeCopyright © 2013 Supply Chain Management_ Kim, Namwook, Jeong, Yongjae, and Kim, Seulgi. All rights reserved.C.A.F.E. (Coffee and Farmer Equity) Practice is the comprehensive set ofenvironmental, social, and economic coffee buying guidelines, designed tosupport coffee buyers and farmers, ensure high quality coffee and promoteequitable relationships for the long termFarmer Processor Supplier(Exporter orDistributor)Starbucks CustomerC.A.F.E. Practices
  • 9. Initial Objectives of C.A.F.E. PracticeCopyright © 2013 Supply Chain Management_ Kim, Namwook, Jeong, Yongjae, and Kim, Seulgi. All rights reserved.Neither a code of conduct or a compliance program.Instead, it is a way of doing business.Objectives of the Practice• Increase economic, social, and environmental sustainability in thespecialty coffee industry, including conservation of biodiversity.• Encourage Starbucks suppliers to implement C.A.F.E. Practicesthrough economic incentives and preferential buying status.• Purchase the majority of Starbucks coffee under C.A.F.E. Practicesguidelines by 2007.• Negotiate mutually beneficial long-term contracts with suppliers tosupport Starbucks growth.• Promote transparency and economic fairness within the coffeesupply chain
  • 10. How C.A.F.E. Practice is constitutedCopyright © 2013 Supply Chain Management_ Kim, Namwook, Jeong, Yongjae, and Kim, Seulgi. All rights reserved.C.A.F.E. Practice made of prerequisites and grade criteriaPrerequisites Verified and audited by third-party certification companyQuality Standard• High quality coffee isthe bottom line ofStarbucks business.Economic Transparency• Evidence of paymentsmade throughout thecoffee supply chain todemonstrate how muchof the price was actuallypaid to the farmer.Criteria of the Practice• Not solely by individual,but by supply network• Eco-friendly farming andprocessing of coffee• Worker’s wage, health,safety, living conditions• Prohibition of child andforced labor (slavery)• Documentation for proof
  • 11. How C.A.F.E. Practice improved SBUX Value ChainCopyright © 2013 Supply Chain Management_ Kim, Namwook, Jeong, Yongjae, and Kim, Seulgi. All rights reserved.Porter’s Value ChainMargin
  • 12. How C.A.F.E. Practice improved SBUX Value ChainCopyright © 2013 Supply Chain Management_ Kim, Namwook, Jeong, Yongjae, and Kim, Seulgi. All rights reserved.Porter’s Value ChainFarmer Processor Supplier(Exporter orDistributor)Starbucks CustomerPremium Price• >60 Preferred Supplier• >80 Strategic Supplier (SustainabilityConversion Premium of $0.05/lb)• +10>80 Sustainability PerformancePremium of $0.05/lb
  • 13. How C.A.F.E. Practice improved SBUX Value ChainCopyright © 2013 Supply Chain Management_ Kim, Namwook, Jeong, Yongjae, and Kim, Seulgi. All rights reserved.Porter’s Value ChainFarmer Processor Supplier(Exporter orDistributor)Starbucks CustomerOthers• Preferential contract terms• Access to affordable credit (loans)• Farmer Support Center
  • 14. How C.A.F.E. Practice improved SBUX Value ChainCopyright © 2013 Supply Chain Management_ Kim, Namwook, Jeong, Yongjae, and Kim, Seulgi. All rights reserved.Porter’s Value ChainFarmer Processor Supplier(Exporter orDistributor)Starbucks Customer
  • 15. How C.A.F.E. Practice improved SBUX Value ChainCopyright © 2013 Supply Chain Management_ Kim, Namwook, Jeong, Yongjae, and Kim, Seulgi. All rights reserved.Porter’s Value ChainFarmer Processor Supplier(Exporter orDistributor)Starbucks CustomerSupply Base• Stable andsustainablesupply of highquality coffeeMarketing-wise• Increasecustomers’perceived valueSupply ChainVisibility• Better handlingof problems
  • 16. Copyright © 2013 Supply Chain Management_ Kim, Namwook, Jeong, Yongjae, and Kim, Seulgi. All rights reserved.Supply Base• Lock in strategic suppliers• Smooth supply fluctuations• Better planning and procurementdespite long purchase cycle• Improve Starbucks’ reputation forfurther expansion of supply chain• In the long run, buffer against aform of bullwhip effect• Reduce vulnerability to price andsupply volatility in the global marketMarketing-wise• Justify premium prices w/ increased customer awareness and perceived value• Motivate employees by fulfilling corporate social responsibility• Chance of branding the program itself and sell it to other coffeehouses• Spread the ethical sourcing and fair trade, then ultimately enhance the supply baseSupply Chain Visibility• Require documented and verifiedproduct and cash flows• Increased transparency in their SC• Better understanding of the needsand the conditions of their suppliers• Improved relationship with farmerswho once were isolated• Better handle supply problemsthanks to established communicationchannels and reliable relationshipBenefits for StarbucksHow C.A.F.E. Practice improved SBUX Value Chain
  • 17. Current Situation_ Challenges and Its ResolutionCopyright © 2013 Supply Chain Management_ Kim, Namwook, Jeong, Yongjae, and Kim, Seulgi. All rights reserved.Two major challenges upon C.A.F.E. implementation arouse but the issueshave been resolved by internal management and external support1) Lack of Integrated Information Technology2) Labor-Intensive and Slow Process- As some members of the supply chain had verypoor information system and it may haveresulted difficult to gain economic transparency- Since there were much updates and refinements,it became a daunting job to effectivelycommunicate the revised requirements andpractices- Because the auditors had not choice but totravel to the farms, which were often located inbarely accessible areasCurrent ConditionCurrent ConditionFarms and mills areevaluated using acomprehensive scorecard ofmore than 200 indicators bythird-party verificationorganizations, overseen bySCS Global ServicesInternalIntegratedInformationDatabaseExternal AssuranceVerification Process(Moss AdamsCompany)
  • 18. Current Situation_ CoffeeCopyright © 2013 Supply Chain Management_ Kim, Namwook, Jeong, Yongjae, and Kim, Seulgi. All rights reserved.In 2012, 93% of Starbucks coffee was ethically sourced through C.A.F.E.Practices, Fair trade and other certified programsC.A.F.E. PracticesThe comprehensive coffee-buyingprogram that ensures coffee quality whilepromoting social, economic andenvironmental standardsCI (Conservation International)The significant social and economicimpacts for more than one millionworkers, and environmentalimprovements on thethousands of participating farmsSCS Global ServicesFarms and mills are evaluated using acomprehensive scorecard of more than200 indicators by third-partyverification organizations, which areoverseen by SCS Global ServicesImprovement of C.A.F.E. PracticesRef.) 2012 Global Responsibility Report: Year in Review“More than 56 types of Coffee is available globally”
  • 19. Current Situation_ Tea, Cocoa, and Store Merchandise SourcingCopyright © 2013 Supply Chain Management_ Kim, Namwook, Jeong, Yongjae, and Kim, Seulgi. All rights reserved.In addition to C.A.F.E. Practices, Starbucks expanded its ethical sourcing plannot only on coffee, but also toward tea, cocoa, and store merchandiseTea Cocoa Store Merchandise ETP (Ethical TeaPartnership)Since 2006, Starbucks helpedsupport farmers and theircommunities throughout teasupply chain in the ETP standard CHAI (Community Healthand Advancement Initiative)75,000 people and 200 farmingcommunities were supported inIndia and Guatemala SCS Global ServicesCocoa Practices programinspections are performed byindependent verifiers overseenby SCS Global Services Strong Internal StandardStarbucks has set strongstandards for their suppliers andoffer them assistance in sourcingdecisions regarding ethicalsourcing
  • 20. Regarding the total sales, net income and the number of stores, those 4franchises are considered as dominant playersCopyright © 2013 Supply Chain Management_ Kim, Namwook, Jeong, Yongjae, and Kim, Seulgi. All rights reserved.In Korean coffee market, there exist 4 dominant players in terms offranchise industry: Starbucks, Café-bene, Angel-in-us, Coffee BeanFranchiseCoffee mixRTDFacility and Raw MaterialCoffee Mix11,000Franchise6,000(Unit: 100 millionwon)Ref.) Financial News (2012)Korean Coffee MarketRTD2,000Total Sales & Net Income Number of StoresRef.) DART (2012)(Unit: 1,000 million won)StarbucksCafé-beneTom&TomsHollysCoffee BeanGrunaruRef.) Chosun Biz (2012)(Unit: no. of stores)1st. Café-bene2nd. Angel-in-us3rd. Starbucks Starbucks, Café-bene, Angel-in-us, Coffee BeanKorean Coffee Market
  • 21. Competitor AnalysisCopyright © 2013 Supply Chain Management_ Kim, Namwook, Jeong, Yongjae, and Kim, Seulgi. All rights reserved.Information acquired viaCold call interview on June 10Café-bene : Mrs.Jang(Supervisor of PR)Angelinus : Mr. Seo(Supervisor of purchasing)Coffee-bene : Mr.Kim(Member of purchasing)Starbucks : Mr.Yoon(Supervisor of SCM part)HighLow Medium1 2 3 4 5Only Starbucks got a purchasing Fair trading Coffee been andprofessional SCM part not as a purchasing part.QC Control : is there any Quality control at the aspect of final customer taste?Specialized Logistics : is there any specialized method to deliver the blended coffee?Fair-trading policy : is there any ethical purchasing system?Global supply system : Is there a global supply chain management system?QCControlSpecializedLogisticsFair-tradingPolicyGlobalSupplysystem
  • 22. Copyright © 2013 Supply Chain Management_ Kim, Namwook, Jeong, Yongjae, and Kim, Seulgi. All rights reserved.Current Situation _ Real applicationThe CA Transparency in Supply Chain Act (SB 657) is acted as a 1st try in US.So the every product which sold in CA have to keep the Ethical Supply chainCompanies required to publiclydisclose by January 1st 2012.How they are approachinghuman trafficking and modernday slavery in their supplychains. US, European and Asiancompanies impacted(retailers andmanufacturers) Audit Approach:Assessment, training,auditing, and disclosure
  • 23. PEST Analysis_ Macro FactorsCopyright © 2013 Supply Chain Management_ Kim, Namwook, Jeong, Yongjae, and Kim, Seulgi. All rights reserved.Aggregating the outcomes driven by C.A.F.E. Practices, PEST(Political,Economical, Social, and Technological) analysis is as followsC.A.F.E.Political ImpactEconomical ImpactSocial ImpactTechnological Impact CA(California Act) –California Transparency inSupply Chain Act islegislated after C.A.F.E.practices since 2010 Ethical Sourcing affects notonly to the coffee beansourcing but also to tea,cocoa, store merchandises,to other members in theSC, and to the society Economical transparencyhas increased that mutuallyprofitable relationship gotstronger Internal integratedinformation technology hasbeen developed as fordatabase with its internalexperts and data
  • 24. Conclusion - C.A.F.E PracticeCopyright © 2013 Supply Chain Management_ Kim, Namwook, Jeong, Yongjae, and Kim, Seulgi. All rights reserved.Video Clip