Opim 321 – Starbucks Supply Chain Management

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Starbucks sources its premium green beans from Latin America, Africa and Asia Pacific. It is important for Starbucks to have a diverse portfolio of suppliers as the origin of the beans largely determines the taste of the coffee. In 2012, Starbucks sourced its raw coffee beans from 29 different countries including Brazil, Columbia, Costa Rica, Guatemala, Mexico, Ethiopia, Kenya and Indonesia. By diversifying the coffee supplier portfolio, Starbucks is able to spread its risks across multiple coffee growing regions and reduce uncertainties in its sourcing process.

World coffee farming is mostly dispersed in nature since farms are small to medium in size. Coffee cherries are sold to the processors through local mediums such as mill, exporters or co-operatives. The processed cherries or green coffee are again purchased by suppliers, who in turn serve as distributors to key customers like Starbucks. Meanwhile, Starbucks also buys its coffee directly from individual farmers, processors and producer associations.

Ethical Sourcing

Starbucks practices ethical sourcing whereby the company maintains a sustainable and mutually beneficial relationship with its suppliers. The company ensures this through its commitment on responsible purchasing practices, farmer support, loan programs and forest conservation efforts. This is to be achieved by applying Coffee and Farmer’s Equity (C.A.F.E) Practices. Starbucks launched this programme in 2004 to be more actively involved in the very upstream area within its supply chain – coffee farming. As a dominant coffee buyer, Starbucks leverages on its purchasing power for successful implementation and adoption of such practices throughout its supply chain.

In 2012, Starbucks sourced 90% of its raw coffee beans, 509 million pounds, through C.A.F.E, while only 3% of the coffee such as fair trade coffee is externally audited. The company aims to increase its portion of ethically sourced coffee from the current 93% to 100% by 2015.

How C.A.F.E works

The C.A.F.E. Prerequisite comprises of two sets of guidelines named coffee quality and economic transparency. These are minimum requirements imposed by Starbucks that cannot be compromised. For instance, Starbucks only purchases quality Arabica type coffee. The company also requires its suppliers to disclose the amount of money that is paid to the farmers.

After the initial screening is done, the suppliers are graded based on their social responsibility and environmental leadership. These two categories cover how well the farming and processing practices of the suppliers preserve the environment and protect the basic rights of the workers and farmers.

The grades are in percentages with the maximum score of 100%. Candidates must achieve at least 60% to become Starbucks supplier. Those who earned above 60% and 80% will be granted Preferred Supplier status, and Strategic Supplier status respectively. Starbucks further incentivises the suppliers by offering Sustainability Performance Premium of $0.05 per pound of coffee for an additional 10% increase in scores over 80% within a year. Starbucks would purchase from these high-achievers first, offering high prices and preferential contract terms.

Coffee Auditing

Starbucks outsources its coffee audit operations to independent third party contractors. Their key function is to provide an on-site assessment of applicant suppliers in their compliance to C.A.F.E Practices. The company is currently working with SCS Global Services to train and oversee these third party verification organizations all over the world. Therefore, these contractors must in turn be evaluated and approved by SCS Global to ensure consistency in their service quality to Starbucks. Starbucks also partners with Conservation International for impact analysis of their program to understand how they are shaping best practices of their producers and how the program can be improved.

Coffee Roasting

Starbucks keeps its coffee roasting operations in-house. In order to preserve the freshness of the coffee, the beans must only be grounded right before brewing and the brewing must take place within 3 to 7 days after roasting. Therefore, the cooled and tested beans are packaged accordingly and shipped across the country within an average of three days. The beans are then either shelved or brewed for beverage in store for end customer purchase.

Sourcing Key Performance Indicators (KPIs)

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Days Payable Outstanding (DPO): DPO ratio shows the average number of days a company would take to pay off its suppliers. As a corporation working with hundreds of vendors, Starbucks should constantly monitor its DPO in order to realize the amount of time it is taking to honor its side of the deal after the supplier has performed his supply chain duty. High DPO means better cash position for Starbucks in the short term, but it inevitably hurts that of the vendors. As a responsible buyer that prioritizes supplier relation, Starbucks must gauge this in the most mutually agreeable fashion in order to preserve the ultimate supply chain relationship. Starbucks’ DPO improved by 4 days in 2013 as compared to 2012 as seen in Fig. 2 above.

Facilities

Roasting Plants

Starbucks owns 4 roasting plants in the US: Kent, Washington; Minden, Nevada; York, Pennsylvania and Columbia, South Carolina. Starbucks also owns a roasting plant in Netherlands and a processing plant for its Tazo Tea subsidiary in Portland, Oregon. The locations of the roasting plants allow Starbucks to regionalize its coffee production and reduce its transportation costs and lead times. The new roasting plant in Columbia, South Carolina helps Starbucks to shorten its lead time from seven to five days. York Roasting Plant, provides a wide variety of products with approximately 50 blends of coffee and 65,000 order picks per day on average to ensure sufficient supplies. The automated sortation system enhances its efficiency in the distribution process.

In line with expanding CPG segment, Starbucks is opening a new roasting plant in Augusta, Georgia in early 2014 with a capacity of 4,000 metric tons per year. The plant will produce the coffee base for Frappuccino blended beverages, Starbucks VIA Ready Brew, and other Starbucks ready-to-drink products. These products were previously manufactured outside US, the new plant would help Starbucks to save on its transportation cost.

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