Operations and Supply Chain Management - Starbucks Case Study

NAME : TETRIANA VIVI OKTORA

pg. 1 Tetriana V Oktora

INTRODUCTION

There are many examples of companies operating in the food and beverage industry that
successfully manage their operations and supply chain (SC) on a global scale. Starbucks is a good
example, with a presence of more than 20,000 retail stores in 60 countries worldwide. Handling the
flow of goods is a challenging task, especially for a business that aims for extreme consistency of
products and services. The scope of tasks includes delivery of raw coffee beans from plantations to
centralized roasting facilities, and later to distribution centers together with many other items being
used in every retail store such as paper cups, napkins, and utensils. There is a massive operation and
SC involving activities of supplier management, production, distribution, and retail activities
worldwide. This writing will discuss the coordination and strategies implemented in this particular
business related to its operation and SC management.

COMPANY’S COMPETITIVE STRATEGY

Among the competition in the Food and Beverage (F&B) industry specialized in coffee products,
Starbucks was early to enter, positioning itself to a target niche market. Historically, Starbucks’
strategy was to respond to the unmet needs of gourmet coffee lovers by providing premium quality
coffee beans in a warm and welcoming European inspired environment - something that was not
available at that time in the USA (1980s development period). Now they have grown into a global
business that mainly operating in serving premium hand-crafted beverages in their retail stores.

Starbucks has proved that to achieve competitive advantage companies need to build defenses
against competitive forces or look for positions within an industry where these forces are weaker
(Lorenzo, Rubio, & Garcés, 2018). Along these lines, the company chose differentiation as a
competitive strategy. This is evident by the focus of Starbucks on making products and services that
are different than its competitors. The two factors are the determinant in their branding strategies
as well. This differentiation strategy leads to challenges such as quality of raw materials, production
process, distribution, quality of services, branding, ethical and sustainable sourcing. To ensure
consistent delivery of high quality product and services Starbucks were also quick to identify that
world class SC and and operations management were not only essential, but could become a point
of differentiation in and of itself.

DEFINITION OF OPERATIONS

Based on its business operations, Starbucks can be characterized along several parameters. In terms
of production volumes, they produce and supply a large volume of roasted coffee beans, and a
relatively low range of different product lines (variety). The challenge of handling a large volume of
products is complicated because of the immense logistical spread between production, roasting,
distribution and shop locations, which span many continents.

Demand is relatively stable for Starbucks products in normal economic circumstances. Customers
tend to act in forecastable and regular ways, though this varies by location of store – for example
tourist areas may be more prone to seasonal variations than shops located in office blocks. Under
normal conditions, Starbucks main product, coffee is in a higher price category than alternatives
such as coffee at home, but the share of discretionary spend is usually low and demand usually
remains reasonably steady even during economic downturns. Demand fluctuation is however
subject to external factors such as deeper economic downturns, pandemic, social unrest, industrial
action or targetted social protests. To avoid a shortage, Starbucks consistently tries to match
capacity to demand, which is known as the chase strategy.

pg. 2 Tetriana V Oktora

According to the Fisher model, the core product range being offered by Starbucks is characterized as
functional rather than innovative, given that they have low product variety but longer life cycle, and
that they are not frequently introducing new products or innovations. An exception may be new
products on same core theme, eg different flavours of frappucino that do not fundamentally change
the underlying product ingredients needed. Therefore a physically efficient process and SC is more
suitable to be implemented in the business model. However, one size may not fit all, in other words,
one type of approach may not be the best option suitable for each SC stage.

Most of the cycle inventories are beverage-related products, which then determines the order
quantity to meet the effective cost structure of the company or economic order of quantity. There
are also seasonal proucts based on mainly same ingredients, and accompanying merchandise
products. The differences in the type of inventories mean a different approach to managing them.

Management needs to consider the trade-offs between efficiency and responsiveness in designing
strategies at both upstream and downstream stage of the operations and SC. In each stage, it is
important to define what is the driver that determines decisions to be made, such as the type of
production, the network of facilities, types of inventories, and how the inventories will be managed,
transportation, information flow management, etc. A study shows that there is a positive
relationship between cooperative management of intra and inter-organizational processes that lead
to efficient and effective flows of goods, services, money, information; and overall business
performance (Chahal, Gupta, Bhan, & Cheng, 2020).

NETWORK DESIGN STRATEGY FRAMEWORK

The design of SC networks aims to determine the number, location, and capacity of production
facilities, as well as the allocation of markets (customers) and suppliers to one or more of these
facilities (Tordecilla, et. al, 2020). The operation and SC process in the context of Starbucks starts
from sourcing coffee beans from various plantations worldwide. Prior to the procurement of coffee
beans, there is a series of product testing, supplier assessment, including for example ethical
sourcing whereby the company works with internal specialists and third parties (eg NGO’s) to
ensure fair trade and sustainability. In terms of distance between suppliers and market, Starbucks
has a lot of offshore suppliers. The coffee beans from various coffee plantations are transported to
roasting plants in six locations in the United States, closer to most of its major suppliers in South

pg. 3 Tetriana V Oktora

America. At the same locations, a wide range of supporting items for the retail stores are procured
and prepared, such as concentrates for beverages, papercups, merchandise, etc.

With growing demand in Asia, Starbucks will build another roasting plant in China, integrated as a
full facility complex called Coffee Innovation Park. This strategy will allow Starbucks to localize their
production process especially with wider opportunities to sourcing in Asia, so that they can benefit
from tax incentives and avoid higher tariffs. In conclusion, this expansion strategy is aimed to
achieve the desired response time and logistic cost for operations in Asian countries.

Starbucks caters to a global market and is continuously expanding its presence worldwide. The
market consequently becomes heterogeneous which then requires a localized network to enable the
company to make final customization such as labeling, designs, etc. This requirement is fulfilled by
having distribution centers that serve retail stores in multiple locations. By having final
customization in distribution centers, Starbucks can reduce semifinished good inventories,
minimizing waste and ensuring the quality of coffee beans, which is especially important because
the critical final step of “production” only occurs in retail stores where baristas make and serve
beverages by order, in full view of customers. Facility location, inventory management, and vehicle
routing are closely interrelated issues in designing a logistics network for perishable products (Biuki,
Kazemi, & Alinezhad, 2020)

From the above explanations, it is evident that facilities strategies play an important part in
planning. In terms of production or manufacturing, Starbucks strives to have centralized facilities so
that quality and consistency of products can be ensured while enjoying the advantage of economics
of scale from having large scale production with one setup. However, when it comes to distribution,
they require multiple and decentralized distribution centers or warehouses to cater to the localized
retail shops (coffee shops) globally.

PRODUCTION STRATEGY

In view of the production process, the core product of Starbucks is processed in a mass production
setup. The mass production concept is suitable for Starbucks since the variety of product involved is
relatively low and basic but has a large volume. The main activities in their production process are
the roasting of coffee beans to be later packed and sent to distribution centers. Having mass
production operations benefits Starbucks with low production costs and standardized control of
quality and consistency.

Dealing with a large scale of production, Starbucks also needs to adopt a lean strategy in order to
identify areas that potentially create waste such as overproduction, waiting time, unnecessary
movement, incorrect process, unnecessary inventory, excess motion, and defect products. The main
focus of the lean strategy is to have the optimum level of inventory as a continuous improvement so
that other production wastes that are mentioned previously can be avoided. Firm performance is
therefore dependent on the interlacing of competitive strategies throughout the SC rather than on
strategies which seek to optimize one link in the supply chain (Green, Inman, Birou, & Whitten,
2013).

PHYSICALLY EFFICIENT SUPPLY CHAIN MANAGEMENT

Starbucks is implementing a distribution method where there is no intermediary involved in the SC

stages, hence they focus on the movement of goods (raw materials and finished products) mostly
within their own controlled network and with the assistance of third party logistic (3PL) companies.
The decision to hire 3PL companies is driven by economical factors after considering the service cost

pg. 4 Tetriana V Oktora

of doing their own logistics (Yaqi, Feng, He, He, & Zhao, 2020), but imposing a risk whereby the
quality and reliability of logistic services are vital in SCM. Starbucks has a performance assessment
system that allows them to assess third party logistic companies. This strict assessment helps the
company to achieve better SC management. The visibility of information and data to the SC partners
enables the company to manage the SC in a single global system.

The concept of information flow in the SC starts from market demand. The information about how
much the market demands will determine the size of orders the retailer makes from manufacturers,
then cascades from manufacturers to suppliers. However the size of orders made is normally slightly
larger than the initial information received, this is due to each SC unit wanting to achieve better
pricing in purchasing (economics of scale) and to have safety stocks to be able to respond towards
fluctuation. When there is a lack of visibility in this flow of information, it will easily create a bullwhip
effect in the SC process.

The advantage of being involved in most of the SC stages like Starbucks, is having visibility of
information, where normally the information is distorted between different stages of SC. This can
help the company make more accurate forecasting truly by market demand, not just based on
orders. This system can potentially be improved by implementing smart SC methods that provide
real-time data in logistics and operations, especially given that the nature of the SC management is
pull based - driven by demand rather than forecasting. In this way channel costs are lowered and
operation efficiencies can be improved (Li X. , 2020).

Since that Starbucks is involved in most of its own SC process from supplier, production, distribution
and down to retail level, they have the advantage of being able to avoid many common obstacles
around coordination in the SC. For example, the incentive and pricing obstacle by which only one
entity but not overall SC stands to benefit, for example an entity has incentive of reducing inventory
but eventually burdens the next entity in the SC by having excess quantity. Additionally, excess
materials can also be caused by long lead materials because it increases the tendencies to carry
buffer stock to anticipate uncertainties. Both of these examples are unlikely to be the case for
Starbucks, because the company has a high level of control over most parts of the SC where logistic
integration leads to many benefit of vertical integration (quality, dependability, planning and
control, and lower costs) (Prajogo & Olhager, 2012).

The lean concept needs to be implemented into various stages of SC management. The flow of
materials is the main element throughout the process, it needs to be synchronized to reach the
optimum level of distribution. This concept is known as JIT (Just-In-Time) where each stage of
operation and SC will be interdependent in terms of materials flow. This concept will ensure a
maximum and optimum flow of materials between stages (production – distribution – retail) so that
excess materials or inventory can be avoided along with responsiveness and faster distribution. The
company needs to develop a balance between the supplier up to users so that the flow of materials
leaves minimum excess unlike in traditional approach where the buffer inventories and obsolete
products create waste in the production and SC process.

The JIT concept is also known as pull based SC management where the production and distribution is
determined more by demand rather than forecasting. A study shows that in a company that has
vertical integration, pull SC may outperform a push SC (Li, Yang, Shi, & Zhai, 2020). However,
implementing JIT means it gives little room for disruption such as demand fluctuation. The
management needs to consider the trade-offs in implementing short-term or long-term planning in
every stage of the SC since no size can fit all.

pg. 5 Tetriana V Oktora

Based on the explanations above, Starbucks can benefit from implementing pull based SC in
downstream and gain the balance by implementing push-based SC in their upstream by having
safety inventories for production that enable them to respond towards fluctuations. In this way, they
are implementing aggregate planning where they constantly trying to match production to meet
demand by using safety inventory and backlogs.

From the supplier side, some events can disrupt SC planning as well. For example droughts, or
disease may cause certain beans to be less available. To mitigate this risk, larger inventories can be
held, but other strategies such as sourcing from several different plantation areas should be
implemented. Comprehensiveness is key for successful forecasting management. Therefore,
forecasts have to be built on a solid and comprehensive database that includes all necessary
factors (Nitsche & Straube, 2020).

Collaborative supply planning can be done between Starbucks and suppliers (eg coffee plantations)
by involving suppliers in early stages and in a cooperative, “win-win” manner. For example farmers
may be informed of future new products and impact on coffee bean needs. In this way, farmers can
start their process to provide the supply of coffee beans and sell it at the right timing and quantity.
Unlike a traditional SC management where the relationship tends to adversarial, this collaborative
approach can benefit both parties involved in the SC. Information sharing among different members
of a supply chain by proactively coaching them on various issues related to volatility management
(Nitsche & Straube, 2020) would be a constructive approach to strengthening firm performance and
creating efficient, flexible, and responsive SC (Shoukohyar & Seddigh, 2020).

QUALITY OF PRODUCT AND SERVICE

In every type of business, ensuring quality is considered paramount to achieve higher profit. One the
quality management methodologies (promoted by Deming) is to stop dependency on product
inspection. This point is relevant with Starbucks where the consistency of products (mainly coffee
beans) is a key factor to the business operation. To ensure the quality of the product being
processed, the company needs to have a proper QA procedure from suppliers. Other things need to
be done to ensure quality such as proper training of employees, conducting regular check ups on the
roasting equipment, so that the company can reduce inspection frequencies. This ultimately will
save costs because the inspection is non-added value activity. In implementing quality management,
it is important to do continuous improvement by doing planning, implementation, checks, and taking
appropriate actions to use the previous improvement to plan the next one. Therefore, it is also
important to keep on the lookout of areas to be improved, leading to new targets to be achieved.

In a retail operation, they have high interaction with customers and a relatively low level of service
customization. Since The company has been focusing on developing order-winning characteristics
which is their premium service, it is also important to develop standardization in the way service is
delivered to the customer. In the context of Starbucks, the last production process occurs in a coffee
shop where the barista makes coffee based on customers’ orders so that the quality of service
determines the quality of the product. The company needs to develop standardization of the last
production process which is preparing coffee drinks that engages barista, to ensure quality and
consistency of product being served.

Starbucks needs to identify what are the expectations from customers and continuously check
whether it is aligned with customers’ perceptions about the quality of service they received. This
requires observing how staff assist customers in choosing products and placing orders, the waiting
time required to serve customer orders, the satisfaction towards their orders, personalization

pg. 6 Tetriana V Oktora

service especially to regular customers. These standardizations can be planned through a
flow/process diagram.

A good example of how Starbucks performs quality inspections on both products and services is its
use of random mystery guests whereby the appointed ‘customer’ conducts inspection of the product
and service. The mystery guest will have a specific order, measure it against standard criteria, and
observe the service given by staff and the store’s ambiance as well, giving inputs back to
management as part of the continuous improvement process.

ETHICAL AND SUSTAINABLE SOURCING

There has been increasing concern of environmental conditions where companies needs to respond
by an efficient integration of global activities into a closed loop supply chain (Silva, Povoa, &
Carvalho, 2020) . However, the traditional approach in closed-loop SC may not be relevant in the
context of Starbucks due to the nature of products and services being offered. This concern then
being compensated in other ecological efforts such as launching a campaign to be a resource-
positive company, aspiring to give more than it takes from the planet by targeting to reduce carbon
emissions, water usage, and waste produced by 2030.

As a global brand of a coffee shop, Starbucks is enforcing ethical standards and social responsibility
within its company by different measures in different stages of the business process. Execution of
ethical and sustainable sourcing for the company is carried out by implementing supplier
management. From the early phase of sourcing, they have introduced the commitment to the so
called fair trade system. Under this, they help local farmers with infrastructure to improve the
quality of their crops and improve their methods to be more sustainable, through Farmers Support
Centers, regardless of who the farmers sell their crops to. Starbucks is also involved as a founding
member of the Sustainable Coffee Challenge as an effort to make coffee a sustainable agricultural
product. Starbucks proves that company can have a strategic orientation towards suppliers in its
upstream supply chain, which considerably enhances supplier cooperation with the buyer
organisation in sustainability matters (Lintukangas, Kähkönen, & Hallikas, 2019).

Appendix – Fishbone diagram

pg. 7 Tetriana V Oktora

References
Biuki, M., Kazemi, A., & Alinezhad, A. (2020). An integrated location-routing-inventory model for
sustainable design of a perishable products supply chain network. Journal of Cleaner
Production.

Chahal, H., Gupta, M., Bhan, N., & Cheng, T. (2020). Operations Management research grounded in
the resource-based view : A meta-analysis. International Journal of Production Economics.

Green, K., Inman, R., Birou, L., & Whitten, D. (2013). Total JIT (T-JIT) ) and its impact on supply chain
competency and organizational performance. International Journal Production Economics.

Li, J., Yang, S., Shi, V., & Zhai, S. (2020). Partial vertical centralization in competing supply chains.
International Journal of Production Economics.

Li, X. (2020). Reducing channel costs by investing in smart supply chain technologies. Transportation
Research Part E.

Lintukangas, K., Kähkönen, A., & Hallikas, J. (2019). The role of supply management innovativeness
and supplier orientation in firms’ sustainability performance. Journal of Purchasing and
Supply Management.

Lorenzo, J., Rubio, M., & Garcés, S. (2018). The competitive advantage in business, capabilities and
strategy. What general performance factors are found in the Spanish wine industry?

Nitsche, B., & Straube, F. (2020). Efficiently managing supply chain volatility – a management
framework for the manufacturing industry.

Prajogo, D., & Olhager, J. (2012). Supply chain integration and performance: The effects of long-term
relationships, information technology and sharing, and logistics integration. International
Journal Production Economics.

Shoukohyar, S., & Seddigh, M. (2020). Uncovering the dark and bright sides of implementing
collaborative forecasting throughout sustainable supply chains: An exploratory approach.
Technological Forecasting & Social Change.

Silva, C., Povoa, A., & Carvalho, A. (2020). Environmental monetization and risk assessment in supply
chain design and planning. Journal of Cleaner Production.

Tordecilla, R., Juan, A., Torres, J., Araujo, C., & Panadero, J. (2020). Simulation-Optimization Methods
for Designing and Assessing Resilient Supply Chain Networks under Uncertainty Scenarios: A
Review.

Yaqi, L., Feng, L., He, S., He, Z., & Zhao, X. (2020). Logistics service outsourcing choices in a retailer-
led supply chain. Transportation Research Part E: Logistics and Transportation Review.

pg. 8 Tetriana V Oktora