Starbucks's Effective Machinery of Global Outsourcing - Case Study Example

Global Outsourcing Introduction The current rate of global outsourcing ranges between 20% and 25% per annum (Sharma, 2007, p. 21). Outsourcing is characterised by complexity and dynamism caused by rapid changes occurring in the world market and production units. Professionals have developed various theories, tools, and techniques that are essential for shaping supply chain strategies and processes within business enterprises. The economic benefits that companies expect constitute one of the reasons for widespread adoption of outsourcing. Various theories have been applied in understanding the nature of outsourcing among academicians, and enhancing the capability of practitioners in outsourcing management. Outsourcing primarily involves contracting out of a business process to a third party, which involves transferring employees and assets from one enterprise to another (Schniederjans, M., Schniederjans, A. and Schniederjans, D., 2005). Global outsourcing, therefore, implies contracting out businesses processes to another firm in a foreign country. Outsourcing poses various risks to the company; however, Starbucks has successfully applied the theories, tools, and techniques of global outsourcing to gain from the benefits associated with the process. Company Background Starbucks is a global coffeehouse, with the headquarters in Seattle, United States of America. Under the International Standard Industrial Classification of AII Economic Activities, Starbucks is classified as C(10)-Manufacture of Food Products. The company is the largest coffeehouse company in the world with 20,891 stores in 62 countries (Schultz, 2012, p. 11). Starbucks opened the first store in Seattle, WA in 1971 and grew from one location to 84 locations between 1971 and 1990. The total number of stores owned by Starbucks had increased to 16,858 by 2010, (Schultz, 2012, p. 12). The company has adopted various strategies to ensure proper management of its stores with the objectives of ensuring efficiency, effectiveness and customer satisfaction. As the largest coffeehouse in the whole world, its supply chain management is a critical issue because the company relies on it to satisfy its customers scattered across the globe. Starbucks produces more than thirty blends and single-origin premium coffees. The laws of the State of Washington incorporated Starbucks on November 4, 1985. Starbucks went public on June 26, 1992 at a price of $17 per share and closed trading on the first day at $21.50 per share (Schultz, 2012, p. 5). The stocks of Starbucks Corporation are listed on NASQD under the trading symbol SBUX. Starbucks believes in the necessity of building a great and enduring company that strikes the balance between the profit motive and social conscience. The company’s ethical sourcing, environmental stewardship, and community involvement provide a clear evidence of devotion to responsibility. Ethical sourcing involves taking a holistic approach in sourcing the highest quality coffee. The process of ethical sourcing constitutes responsible purchasing practices, extending loans to farmers and participating in forest conservation programs. Starbucks believes that ethical purchasing fosters a better future for farmers and promotes the stability of the world climate. Additionally, ethical sourcing creates a long-term supply chain of high quality beans that the company blends, roast and package. Starbucks hired Peter Gibbons in 2008 to manage the company’s supply chain. Peter Gibbons launched his role by assessing the effectiveness of the supply chain in serving stores by thoroughly investigating the sources of associated costs. Cost analysis revealed that the company’s operating expenses were tied to outsourcing agreements in functions such as contract manufacturing, transportation and third part logistics (Schultz, 2012, p. 15). Starbucks has been using outsourcing to provide for rapid expansion of the supply chain strategy and process to match with increase in number of stores; however, outsourcing was identified to constitute the cause of inflation in the company’s budget. Gibbons took the initiative of simplifying the supply chain process. According to Gibbons, the transformation plan involved taking a complex structure and simplifying it so that every function fell into one of the four supply chain processes: plan, source, make and deliver. The various departments embarked on reducing costs and improving efficiencies. The problem of inefficiency in the supply chain began during early 2000s (Schultz, 2012, p. 12). The challenge was caused by oversupply of low quality coffee beans. This led to farmers suffering from low and sometimes negative profits, which could not cover costs of production. Most farmers were going bankrupt at the time when stable supply of high quality coffee beans was necessary to support rapid expansion of Starbucks. The company’s management was forced to take steps to counteract further adversities as Starbucks became the victim of its own success. Effective outsourcing process backed by theories, tools and techniques constituted one of the initiatives. The Process of Outsourcing in Starbucks The process of global outsourcing seeks to establish and manage contractual relationships with external suppliers for provision of certain capacities (Li and Wang, 2010, p. 134). Outsourcing in Starbucks involves determining the functions that require outsourcing in the organisation’s overall strategy, identifying actions that can be outsourced, and monitoring the outsourced activities. These processes can be categorised into preparation, vendor selection, transition, managing relationships and reconsideration. Preparation During the stage of preparation, Starbucks’ management identifies areas that need to be outsourced. Starbucks relies on the theory of Transaction Cost Economic theory to provide the best decision-making tools for forthcoming outsourcing arrangements. TCE also provide a clear explanation of contractual complexity (De, 2009, p. 23). This stage is characterised by thorough competence analysis of the applicants to identify their potentials in achieving the desired strategy. The company also explores strategic implications of the function that is intended to be outsourced through cost and performance analysis. For example, on July 29, 2009, Starbucks realised that there was a necessity to outsource its Data Centre Services in China. The company did thorough analysis of the Unisys and found out that it had the potential for providing systems management, voice systems, software image, and asset tracking for a two years contract. If the management accepts to outsource, it has to discard all the myths concerning outsourcing, prepare the requirements for the strategy, target the services and design the future (Guster, Lee and McCann, 2012, p. 169). Vendor selection Starbucks launches the process of vendor selection by announcing the intention to outsource. Vendor selection involves choosing the providers with the best terms that rhyme with the company’s overall strategy and budget (Stanimirovic, 2013, p. 22). The two companies engage in negotiations to find the terms that are most favourable to both Starbucks and the vendor firm. If they agree with the firm, a contract for providing the outsourced services is signed. Starbucks consider selecting another firm if the terms of the current one fail to favour both parties in the negotiation process. Transition This stage involves defining communication between Starbucks and the outsourced firm. There is widespread exchange of knowledge and information between the two parties. This information is essential as it enables the outsourcing company and the outsource service providers to understand the critical element of each other (Kavcic and Tavcar, 2008, p. 242). Transition also involves transferring assets, labour force, hardware, software, and information from the firm to Starbucks. These elements are used for doing the required functions in order to achieve the desired strategy. Starbucks actively engages in change management, re-engineering, and adopting a proper organisational structure that is suitable for global outsourcing. Managing relationships Several of relationships exist between Starbucks and its outsourcing firms. These relationships can be reciprocal, vendor preferred, vendor dominant or client dominant. Strategies for effective management of the relationship are critical in ensuring that the outsourcing process maintains meaning. Managing relationships occurs across the stages of outsourcing process such as handling meetings, solving problems, managing variations, performance monitoring and appraisals, and managing success factors (Chirico, 2010, p. 90). When Starbucks outsourced its call centre operations to Sitel in January 2010, both companies promised one another extensive character of exchange, continued cooperation, and gap reduction. Effective management of relationship eliminates all doubts and creates a collaborative environment where Starbucks and the contracting company can gain from outsourcing functions. Reconsideration The reconsideration stage occurs at the end of the contract period. Starbucks determines whether to renew the contract, terminate it or consider other options available at the reconsideration stage. Starbucks applies the Transaction Cost Economics theory is when determining the possible impacts of switching costs during the reconsideration stage. The decision at this point will depend on the extent to which Starbucks has been contented with the outsourced company’s services. Outsourcing companies that succeed for contract renewal at Starbucks provide services that rhyme with Starbucks’ long-term strategies, polices, and company objectives. Reconsideration also involves comparing various outsourcing programs within an organisation to determine best practices for its overall future outsourcing plan (Brown and Wilson, 2005, p. 23). Starbucks consider benchmarking in its outsourcing activities and plans. Benchmarking involves comparing activities of one company against competitors and non-competitors with similar functions. This helps Starbucks identify new areas that it can outsource in order to increase efficiency and effectiveness in the market. Impacts of Outsourcing on the Business Global outsourcing causes widespread impacts on the business that seeks outsourcing services. The main areas of business operation in Starbucks that global outsourcing has affected include management processes, security, communications and customer service. Outsourcing has created greater physical distance between the strategic management and operation-level employees. Physical distance in organisations requires an alteration in management methodologies such as inspection and feedback, which may not be as direct and frequent as internal processes (Stanimirović and Vintar, 2012, p. 14). There is need for the Starbucks to assimilate new communication methods such as Issue Tracking Systems, Time Tracking Software, Voice over IP, and new schedule assessment tools. Installation of these additional techniques sometimes causes additional costs on the company. However, these additional costs cannot exceed the benefits of outsourcing. Starbucks assumes the responsibility of liabilities of the staff members even if they involve a substantial liability prior to outsourcing. If the company transfers these people to outsourcers, their legal status changes even if there is no change of their workplaces. The responsibility of employees shifts from the Starbucks to the outsourcer. This causes legal, security and compliance issues that are in most cases addressed through the contract between the client and the suppliers. Most companies belief that end-user experience tends to be lower when call centres are outsourced (Tho, 2005, p. 22). Starbucks face the same challenge because of combining outsourcing with offshoring especially to regions that are characterised by variations in first language and cultures. When Starbucks hires foreign call centre agents, comprehension is impeded due linguistic features such as phraseology, accents and word use. The situation is worsened by lack of visual cues that miss in telephone calls, leading to misunderstandings and difficulties in communication processes. Benefits of Outsourcing Outsourcing enhances flexibility and control (Chua and Pan, 2008, p. 268). Engaging in outsourcing allows organizations to pay for only the services they need at the exact time when they need them. The company avoids hiring and keeping employees throughout the year, while they need them perhaps on limited time during year. The business that outsources can hire the services of specialists at the time when they need them and stop spending on employees when they no longer need them. Starbucks has the power to regulate providers of the outsourced services without rigidity or standards. Outsourcing, thus, bring in fresh engineering expertise and reduces capital and operating expenses. Global outsourcing allows the management to focus on enhancing core activities of the business (Aron and Singh, 2005, p. 138). During this rapid growth period for Starbucks, the operations of the back offices expand. This expansion is usually associated with consumption of both human and financial resources. Outsourcing the operational activities allows the strategic management to concentrate on critical activities without sacrificing quality of services in the back-office. The vendor company acts as an agent supplying the required services. Starbucks applies the Agency theory when screening vendors at the preparation phase and defining its own attitude towards the relationship at the managing relationship phase. Another benefit of outsourcing to Starbucks is maintenance of competitive advantages. Starbucks applies the Relational View theory to gain and sustain competitive advantage in both intra-organisational and inter-organisational relationships. The company applies the concept of relational rents in choosing future outsourcing partners and the preferred type of relationships. The relational view theory is applied during transition, managing relationship and reconsideration stages of outsourcing. Competitive advantages accruing from global outsourcing constitute economies reduced costs of production, effectiveness and efficiency in manufacturing and supply chain processes (Blind, Gauch and Hawkins, 2010, p. 3). Starbucks also applies the resource-based view in global outsourcing endeavours. The resource-based view holds that resources and capabilities vary across firms, and these differences are characterised by stability. The company uses the resource-based view during preparation, managing relationships and reconsideration phases. Global outsourcing leads to significant reduction of labour costs (Sharma, 2007, p. 23). Starbucks hires firms constituting labourers from the developing world. These labourers demand less in terms of wages and salaries due to oversupply of labour in their respective countries. Starbucks, therefore, saves approximately 50 percent of labour costs on labour expenses (Schultz, 2012, p. 32). Risks of Outsourcing Regardless of its advantages, outsourcing may expose the company to several risks. Starbucks expects cost-reduction and savings that it will make from offshore sourcing. Unfortunately, the executives that labour arbitrage will yield savings. Prevalence of hidden costs and differences in operating models turns to be costly to the company to the extent of diluting the expected savings (Kotabe, Murray and Chandra, 2007, p. 18). Outsourcing is threatens the security and protection of intellectual property since most vendors do not have internal practices that can meet security requirements. The threats to security cause Starbucks to invest in raising intellectual property protection when working with offshore vendors. Most vendors abroad do not have Capability Maturity Model (CMM); companies that do not have CMM undermine the expected cost-savings (Chirico, 2010, p. 94). The greatest risk associated with global outsourcing is the possibility of vendors failing to deliver (Kavcic and Tavcar, 2008, p. 245). Delivery failures are adversarial to Starbucks as they expose the company to other risks and impede achievement of organisational objectives. Differences in time zones, language and other types of communication barriers shrink the benefits of outsourcing. A plan for Outsourcing The outsourcing plan should constitute the following steps: 1. Identify the services to be outsourced. The outsourcer should be clear about the reasons for outsourcing and define objectives to ensure that the parties are aware of their expectations. 2. Define the relationship that is necessary for ensuring that both the outsourcer and the vendor benefits from the process. 3. Define the objectives of global outsourcing. The outsourcing objectives could be cost saving, enhancing service quality, or improving functional units where the company does not have expert labour force. 4. Identify and asses all potential risks that may pose challenges to the company. This will involve identifying and instituting contingency plans that will manage the Disaster Recovery Plan. 5. Negotiate with the vendor to make all critical agreements concerning time, scope and length of service. The period should be long enough to make a difference and short enough to maintain flexibility. 6. Execute the transition plan; here, all human resources, machinery and equipment are delivered and put into functional use. 7. Make internal communication. Internal communication will be made as soon any possible outsourcing endeavour is considered. 8. Institute compliance plans if legislation and other codes of conduct need to be taken into consideration. Outsourcing companies should keep records of any legislation concerning outsourcing. Suggestions and Recommendations Companies that intend to outsource should seek advice from outsourcing experts and consultant firms. Outsourcers who think that it is easy to contract their services abroad or to other firms stand high chances of losing their finances. Outsourcers should base their contracts on relevant theories, tools and techniques since these provide foundations for understanding and executing proper contacts of outsourcing. All relevant stages in the process of outsourcing should be followed strictly and each phase should be guided by the relevant principles. The need to design a proper plan for outsourcing should maintain relevance throughout the process of global outsourcing. Starbucks and other companies seeking to offshore some of their services should device counteractive mechanisms to deal with risks prevalent in the international arena. Conclusion Outsourcing is currently rising at a rapid speed. Companies cannot contract firms that may lose money and dilute organisational performance. It is the responsibility of outsourcing companies to begin with smart and strategic choices concerning the functions to outsource. Most client companies are sometimes reluctant to seek advice concerning outsourcing because of believing that outsourcing is as simple as procuring manufacturing components, providing utility resources, and maintenance services; however, outsourcing may involve a fundamental change in business models, internal resistance and increased conflicts in evaluating performance. Stable supply of coffee is vital as the starting point in delivering value to customers and sustain high growth rate. The supply chain begins from the farmers then to processors to suppliers and finally to Starbucks. Starbucks applies relevant theories, tools and techniques across the five stages of global outsourcing to ensure streamlined process. Starbucks has instituted effective machinery meant to deal with the adversities associated with global outsourcing. The effectiveness of the company’s outsourcing plan is the foundation for its success in global outsourcing. 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