Purchase and Supply Function of Starbucks - Essay Example

?Purchase and Supply Function of Starbucks In 1998, there were ample reasons for Howard Schultz, as the CEO of the company, to be proud of what the company has achieved during the past 11 years. The company had experienced astonishing growth and became one of the leading retail stores of the recent times by selling exceptional dark-roasted coffee and coffee making equipment as well as by making incomparable coffee drinks. This coffee making equipment allows customers to brew an excellent mug of coffee even at home. The brand of Starbucks was regarded as one of the widely recognized and most potent brand in United States. It had also been included in the list of Forbes, for the best companies of America to work in. It had firmly developed itself as the dominant coffee brand, coffee retailer and coffee bean roaster in North America. It owned more than 1,500 stores in the Pacific Rim and North America and opened new stores at the rate of more than one store per day. The closest competitor of the company had as fewer as 300 retail stores. Since launching its IPO in 1992, the company has seen an increase of nine fold in its stock price (Starbucks Corporation, n.d.). Introduction Originally, Starbucks was formed by three academics – in 1971. They were Zev Siegel, Jerry Baldwin and Gordon Bowker. The founders of Starbucks opened the first store in Seattle to which they called as “Starbucks Coffee, Tea and Spice”. Slowly and gradually, the company began to pave the ways of growth and by the early 1980s, the company had a plant for roasting coffee beans and four retail stores, which sold whole-bean coffee. Ever since it started trading, Starbucks has been very lucrative (Starbucks Corporation, n.d.). In March 1987, Gordon Bowker and Jerry Baldwin decided to sell entire operations of Starbucks in Seattle, including the roasting plant, the retail stores and the brand name, Starbucks. Howard Schultz raised capital and instantly bought the company. The new name of the company was Starbucks Corporation. Howard Schultz became the CEO and president of the company when he was 34 years old. In his first few years, Schultz spent most of his time in four Seattle stores – tasting different kinds of coffee, working behind counters, getting to know the personnel, talking with customers and educating himself regarding different aspects of coffee business. Schultz was abundant with ideas for developing and improving the company. Early on, Schultz observed that customers feel uneasy in stores due to their lack of knowledge regarding fine coffee and because store personnel get little arrogant sometimes. In order to resolve these issues, Schultz worked with employees to cultivate customer friendly sales skills and developed brochures to make it easier for customers to learn pertaining to fine coffee (Starbucks Corporation, n.d.). The specialty coffee industry began to grow dramatically between the period of 1980s and 1990s. A large number of experts believed that differentiated coffee reinforced by specialty coffee industry would continue to upsurge much faster than traditional coffees. However, the meaning of specialty continued to be refined in United States (Starbucks Corporation, n.d.). In 1991, the company ventured into the licensed airport stores, mail-order catalogue business, expanded to California and has more than 100 stores. In 1992, the company went publicized. By 2005, the company had more than 10,200 licensed and company operated stores in more than 35 countries. The retail stores of Starbucks offered food items, coffee drinks, beans, tea, coffee accessories and music. Starbucks Corporation owned over 5,200 stores in 10 countries, 80% of which were located in America, primarily in the areas such as airports and shopping centers whereas licensed stores were over 2,800 in 28 countries. In addition to that, Starbucks marketed coffee through local grocery stores and registered its brand for other beverage and food items. The most recent statistics from January 2, 2011 showed the total count of stores of Starbucks Corporation as 17,009 out of which 8,139 are licensed and 8,870 are owned stores (Starbucks Company Profile, 2011). Starbucks purchases, roasts, offers high-quality whole bean coffees, and sells them along with variety of pastries, fresh, rich brewed beverages if Italian styles as well as other confectionaries and coffee related equipment and accessories through its company owned retail stores. The company offers wide range of products, which include the following (Rodrigo, 2012). Handcrafted beverages comprising of Tazo teas, Vivanno smoothies, iced and hot espresso beverages, fresh brewed coffee, More than 30 brands of coffee Fresh food including sandwiches, baked pastries, oatmeal, salads, fruit cups, yogurt parfaits Merchandise including coffee grinders and brewers, mixed home espresso equipment, coffee accessories and coffee mugs, line of premium chocolate, variety of music, gift items and books Brand portfolio include Ethos Water, Tazo Tea, Torrefazione Italian Coffee and Seattle’s Best Coffee (Starbucks, 2010) In addition to that, Starbucks has introduced several brand extensions and successful products including selling premium teas through subsidiary company Tazo tea, offering coffee on flights of United Airlines, bottled version of Frappuccino, distributing ground and whole bean coffee at grocery stores and supermarket through an agreement made with Kraft and developing premium coffee drivers (Rodrigo, 2012). Schultz, as a CEO, told its personnel that the vision of Starbucks is to become a national company having guiding principle and values of which employees could be proud. He mentioned that he wanted to involve people in the process of decision-making and he would be honest and open to them. Schultz believed that establishing a corporation that respected and valued its people and encourages and inspires them, which share the fruits of success with those who contributed for the long-term value of the company, was not just an inspiring option but was essential. His aspiration for Starbucks led it to become the most reputable and respectable brand name in the specialty coffee industry. The company was admired because of its practices related to corporate social responsibility (Starbucks Corporation, n.d.). Driving Factors of Supply Chain Function Supply chain is another major component of those companies, which purchase raw material, process them, produce refined goods and then sell them. The subsequent sections of this paper aim to analyze three major drivers of supply chain functions as proposed by Lysons and Farrington (2006). According to Lysons and Farrington (2006), “A process that goes back to early civilization, it's only in recent times the importance of efficient purchasing has been realized - and even later still, the acknowledgement of its strategic importance”. Three most important components, which influence the nature of purchase function include: i. Globalization ii. Management Philosophy and iii. Information Technology (IT) Lysons and Farrington (2006) Globalization Globalization is a factor that increasingly influences the nature of strategic purchasing. Global purchasing is considered as an important tool in the pursuit of improved performance and profitability by way of price advantage and technological improvement. Due to international competition, the role of strategic purchasing has become more important. Corporations have to look for best available raw materials and other resources on one hand and low labor cost on other hand Lysons and Farrington (2006). According to Smith (1999), “global procurement can also provide strategic advantage by way of gaining knowledge of foreign markets, exploiting tax and currency opportunities and through improved availability & quality”. Present day businesses rely profoundly on their supplier network. Therefore, role of supplier has become significant, playing as pivotal determinant for achieving corporate competitive objectives. For that very reason, the determination, selection, recognition and control of suitable supply sources are of strategic importance. Management Philosophy Executives have modified their philosophies and have inclined them towards the vital components of businesses. Managers are coming to realize that operations and purchasing are intrinsically associated with each other. “The operations management system depends on inputs procured by the purchasing function from the organizations suppliers” (Krause, Pagell & Curkovic, 2000) Information Technology Advancement in information technology has served the purchasing departments with strategic and corporate goals. Applications for electronic procurement such as Electronic Data Interchange (EDI) have decentralized the non-strategic planning. It provides data in real time. With correct elucidation, these systems can help firms in gaining competitive advantage. Electronic systems have reduced that efforts associated with transactional work related to traditional purchasing. It helps in allowing professionals with more time for concentrating on those goals, which can take the place of strategic contribution to the firms’ objectives. Supply Management Function at Starbucks Starbucks has kept supply chain functions as the top priority of the company. In 2008, Howard Schultz appointed Gibbons for running the supply chain functions of the company. This was a familiar position for Gibbons and coincided with his prior experience of working as vice president of The Glidden Co, which is a subsidiary firm of ICI America Inc. However, the two new things which Gibbons did in his position at Starbucks was to assess how well the supply chain functions were serving its retail stores and determine from where the cost is coming. He soon found out that below 30% of the deliveries were arriving at store on time. He stated, “My quick diagnosis was ... that we were not spending enough attention on how good we were at delivering service to stores,” In order to follow the assessment, Gibbon started to pay visits at the retail stores of Starbucks and see the situation himself. He took inputs from personnel. He stated that, “The visits were made to confirm that our supply chain could improve significantly. The best people to judge the need for change were those at the customer-facing part of our business.” In response to the findings of his assessment, Gibbons along with his team devised a transformation plan, which was a three-step supply chain plan. He then, presented his plan to the board of directors of the company. The plan stated that at first, the company would reorganize its supply chain, streamline its structures and define the functional roles more clearly. After that, the company would focus on minimizing the cost to serve its retail stores and will enhance its day-to-day supply chain performance. Once these functions are under control, the company would then place the foundation for future improvements in the supply chain capability. Globalization and Supply Function of Starbucks In today’s environment, supply chain functions require more strategic decision-making and thinking. Although, the primary objective of global companies is to reduce procurement cost, labor cost and inventory cost, there are many other intricate problems behind the scene. Starbucks is one of the greatest examples of globalizing its brand. It has opened numerous stores in all major countries having suitable demographic profiles. In 1992 and 1993, the company developed a three-year strategy or geographic expansion to target markets which not only had advantageous demographic profiles but also be supported and serviced by the operations and infrastructure of the company. For each of its target area, the company selected a large city as ‘hub’ to serve. Team of experts were positioned in hub city to support the objective of opening 20 more retail stores in the hub cities in first 2 years. One of the core competencies of Starbucks lies in expert identification of good retailing sites for establishing new stores. The company was referred to as having the best real estate team for its retail outlets. The globalization strategy of the company led to opening number of new stores in countries like Canada, United Kingdom, South Korea, Mexico, Japan, Philippines, Taiwan and India. Currently, the company is downsizing itself in United States because of increased expansion globally. As mentioned earlier, the biggest problem which Starbucks faced was in its supply chain was the delivery time. Even if the company expanded globally, if this problem could not have been solved, then it might have led to a huge loss to company’s reputation. The two primary components of a supply chain are good customer service and cost cutting. These factors positively influence the profitability and the performance of the company. While tapping into international markets, the supply chain function, which affect the business performance of a company are mentioned in the subsequent sections of this paper. If these supply chain functions are taken care of, then there are substantial chances in the improved performance of a company while going global (Rodrigo, 2010). Lead-time Businesses face great pressure in order to reduce lead-time for manufacturing. Shorter lead-times mean that customer will be able to react swiftly to the changing demands of market (Rodrigo, 2010). Gibbons, Starbucks’ new head for managing supply chain functions, immediately grasped this problem and made all the possible efforts in order to overcome it. He paid visits all by himself to the retail stores and identified the reason of delays in delivery time. He took inputs from the employees and prepared a transformational plan accordingly in order to reduce the lead-time and to assure on time delivery at stores. Sales level The annual revenue of the company can determine sales level of Starbucks. The annual revenue of the company has been recorded as $13.3 billion in 2012 (market watch, n.d). The trend of past 5 years of the company shows consistent increase in its sales level. Fiscal year is October-September 2008 2009 2010 2011 2012  Sales/Revenue 10.38B 9.78B 10.71B 11.7B 13.3B (Source: http://www.marketwatch.com/investing/stock/sbux/financials) The figures reveal that Starbucks has remained consistent in keeping up with the adequate amount of sales level, which is the integral determinant of supply chain functions. The only weakening can be seen in 2009, where the sales level has declined to $9.78 billion. This decline in sales is primarily due to the financial crisis of 2008-2009. Apart from that, a continuous increase in the annual sales level of the company can be observed. Product return For companies, it is essential to have good quality products (Rodrigo, 2010). Unmatched quality products help a company in keeping the customers satisfied and capturing the market. Fortunately, it is one of the core components of strategic planning of Starbucks. The company never compromises upon the quality of raw material which its purchases as well as the quality of its manufactured products. One of the primary goals of the company is to get the best quality coffee beans and produce the exceptional quality of coffee, which no other competitor can offer. Starbucks prioritize quality over quantity. The company never comprised on quality and never produced goods consisting of inferior quality in order to reduce its cost. This is the primary reason behind the success of majority of products of Starbucks in domestic and international market. Inventory turnover This factor of supply chain function quantifies the speed with which products move through and are restocked by the system (Rodrigo, 2010). The strategies mentioned in the transformational plan of Gibbons allowed the company to reduce the lead-time of delivering raw material at store exactly on time. The plan proposed by Gibbons helped the company to overcome the weakest link of its supply chain. It not only helped in delivering material on time but also minimized the threat of potential problems, which might arise as a result of delays in arrival of material. Cost reduction The second new thing, which Gibbons did for eradicating the loopholes from the supply chain of Starbucks, was cost reduction. This cost was related to labor cost, procurement cost, wastage cost and operational cost. If a supply chain system is steady and efficient, then consequently these costs are reduced. Good customer experience The core purpose of all these transformational plans and strategies is to provide exceptional customer service. All these efforts are done in order to please customers (Rodrigo, 2010). As long as customers are having good experience, the companies are at peace. Good customer experience refers to satisfying customers beyond their expectations. All the developments and improvements in supply chain functions are done to provide better response to the expectations of customers. Starbucks serves this function of supply chain by providing best quality products at reasonable prices. The company never compromises on quality and produces fine quality goods for its customers. The ambiance of stores is welcoming and possesses every facility that customers demand nowadays such as facilities of Wi-Fi, music etc. Management Philosophy and Supply Function of Starbucks Its founders, Gordon Bowker and Jerry Baldwin, set the philosophy of the company. The core philosophy that was established by the founders was to become pioneer in providing premium quality coffee. By the passage of time, the philosophy of the company began to modify. Currently, the philosophy of the management revolves around number of significant variables. According to the official site of the company, the firm is committed to do business ethically and responsibly and in a way that it earns respect and trust for their partners, customers and neighbors. They call the company a shared planet where the inhabitants share three main areas of focus they include environmental stewardship, ethical sourcing and community involvement (Starbucks, 2010). Environmental Stewardship The philosophy of the company lies in the commitment with their customers to protect environment, believe in the significance of caring for the planet, and inspiring others to do the same. From the perspective of supply chain function, the goal of the company is to have their 100% cups recyclable or reusable by 2015. Another important aspect of the company is to recycle in their retail stores. Few years back, 70% of the company’s outlets recycled at least one kind of a waste. Some researchers mention that coffee-growing regions will be influenced by climate change directly. Therefore, since 2004, the company has been dramatically employing a strategy for climate change. In this regard, the company intends to focus on energy conservation, renewable energy, support, and collaboration. Ethical Sourcing In order to ensure the attainment of high-quality coffee beans for their customers, Starbucks have developed long-term and strong relationship with farmers globally. The company expects that by 2015, all of their coffee beans will be grown utilizing responsible growing practices and ethical trading. Environmental sustainable coffee that is purchased by Starbucks is of three main types. They include Certified Organic Coffee, Conservation Coffee and Fair Trade Certified Coffee. Researchers state that food retailers must make efforts to support and promote fair trade food products. In order to improve its supply chain functions, the company ensures that it purchases excellent quality coffee beans for serving its customers. Community Involvement Starbucks has different regions where their stores are located and different regions from where they purchase coffee. The company believes in being involved with the communities to which they are associated. A good neighbor is one, which can be helpful in bringing people together, in inspiring change and making a difference in the lives of people. Starbucks is planning to donate 1 million annual hours for their communities (Starbucks, 2010). In order to keep their customers healthy, the company provides nutritional information on each of its products. It has allowed increased customization and has reduced trans-fats from its products. Inside United States, Starbucks also play a role of advocate for healthcare reform. Information Technology and Supply Function of Starbucks Starbucks is a company, which seeks to develop its status as a multinational company while preserving its magnificence. Starbucks seeks to increase its coffee sales by increasing the demand of quality coffee in its targeted demographics. Presently, Starbucks own a sophisticated MIS, which assists the company in growth process by choosing locations based on the target demographics of the company. Furthermore, this system enables the company in quality management. In the next 50 years, Starbucks must predict its growth and conception as an e-commerce, business-to-business enterprise. Starbucks is widely recognized as innovative for the way it uses technology. Mobile App Starbucks introduced a nation-wide app for mobile payment in 2011. This app is available for Android, iPhone and Blackberry. Furthermore, it can also be used at 9,000 different locations of Starbucks stores. This app is helpful for tracking rewards, making mobile purchases and checking balance. It can also assist a customer in finding which stores of star bucks accept mobile payments. Social Media In June 2010, according to online statistics Starbucks was named as the most famous social media brand. Social media space of Starbucks included its official websites and social media platforms such as Foursquare, Twitter and Facebook. Starbucks became able to bring its customers back to the retails stores by providing them a space to provide feedback and submit ideas regarding the brand and their experience with it. Starbucks Digital Network In October 2010, the company came up with the move of offering the facility of free Wi-Fi. It allows users to access internet and share their experience on social media sites. Starbucks has integrated the element of digital network in its supply chain functions, through which it better leverages the overall activities of supply chain. Since the time Starbucks began to put transformation efforts in its supply chain, it has reduced cost without compromising on service quality in all of its outlets, which are situated in different countries. According to Gibbon, “We have talked publicly of over $500 million of savings in the last two years, and the supply chain has been a major contributor to that” Cooke, (2010). If Gibbon is asked, he says transformation effect played vital role for the success of supply chain functions of the company. Information technology at Starbucks plays a key role in not only increasing the sales of the company but also decreasing the cost of sales of the company. The cost of sales comprises a larger part of the material cost which Starbucks has to suffer. Under such circumstances, when food inflation is on top of everything, it has become a massive challenge for Starbucks to control the cost of sales. Starbucks has to combat on various areas such that it has suppliers of not only direct material which includes cost of coffee beans, sugar and milk but also various other costs such as cost of water, cost of paper cups and glass and many other costs. In order to implement a proper controlling mechanism on these costs, the company has developed a sophisticated management information system which keeps the track of these costs. Under following sections, the use of information technology especially in regards with suppliers’ management by Starbucks is discussed with various different objectives. Cost Controlling Mechanism The most important purpose of implementing a proper and sophisticated management information system by Starbucks is to make a strict control on its cost of goods sold. As discussed above, the cost of goods sold comprises of various significant components therefore the Starbucks’ procurement department has to carry out various online as well as by road surveys in order to find out the best suppliers who can meet the quantity, quality, rates and other standards of Starbucks. Management information system assists Starbucks in identifying those suppliers more conveniently than other methods of identification. Relationship with Suppliers Management information system of Starbucks also serves the all-important purpose of creating and maintaining the relationships with suppliers of the company. The relationships with the suppliers play a paramount role such that it enables Starbucks to set out the rates as per its own terms and conditions as well as allows the company to avail discounts due to stronger brand name of Starbucks. Management information system of Starbucks keeps track of those suppliers who can facilitate the company in these areas and keep their information in its database. For instance, on those occasions, when Starbucks require a certain quantity of raw material and especially at discounted rates, management information system highlights the best suitable supplier who can fulfill this kind of requirement of the company. Order Delivery on Time At Starbucks, one thing is ensured that the orders are delivered on time. This has been made possible through the assistance of management information system. The management information system tracks the sophisticated inventory management of the company such that it keeps a stringent control over the raw material positions. As soon as the desired inventory level for a specific raw material is reached, it starts giving the hints to the responsible personnel not to replenish more quantity of raw material. Conversely, when inventory level reaches to a dead level, its starts fiving cautions to the responsible personnel to purchase and fulfill the required quantity of the raw material. The management information system of Starbucks is also integrated with its suppliers in such a manner that the suppliers can also observe the inventory levels of Starbucks and can contact the company to fulfill the required inventory in order to ensure on time order delivery. Safety Stocks Safety stock is of key importance to Starbucks. It is something which can never be achieved through the cooperation of suppliers and with the assistance of management information system. The management information system of Starbucks not only track the inventory levels of the company but it also keeps a close eye on these existing level of safety stock. The system is so sophisticated that it adjusts the safety stock levels with the existing demands of the customers. In seasons of higher demands, the safety stock level is increased automatically by the management information system and in the times when the demands are on the lower sides, the management information system aligns the safety stock on the lower sides so that the holding cost of the company can be reduced along with the likelihood of perishing the raw material. Tracking the Suppliers’ Performance Another important feature of the management information system is to track the performance of the suppliers. Starbucks always aim at maintaining business with those suppliers who are strong strategically and financially. The company tries to keep a closer look at the financial prospects of its suppliers, checks out the chances of likely bankruptcy, their ability to manage sufficient amount of cash etc. All these important features are tracked by the management information system of Starbucks in order to safeguard itself from suppliers’ dependency. Works Cited Adkins, A., n.d. 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