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Retail Technology, Retail technology News

EXCLUSIVE: Starbucks transforms supply chain

Friday August 5 2011

Gartner’s Kevin Sterneckert analyses the global coffee shop chain’s path to excellence through supply chain technology and process transformation

Gartner’s Kevin Sterneckert analyses the global coffee shop chain’s path to excellence through supply chain technology and process transformation

 

Buoyed by unprecedented success and focused on rapid expansion in the early 2000s, an efficient supply chain was not a top priority for the world-renowned coffee retailer Starbucks.

 

But then the economic downturn set in, forcing Starbucks to re-engineer its supply chain. In 2010, the company removed more than $700 million (£428m) from its supply chain costs, and used an innovative set of metrics to achieve remarkable results.

 

Gartner research vice president, Kevin Sterneckert, discovered how it moved from a struggling supply chain to one of the best supply chains in the world.

 

Growth outstrips supply capabilities

 

Buoyed by unprecedented success and focused on rapid expansion, Sterneckert said an efficient supply chain was not a top priority for Starbucks. Then the economic downturn set in, forcing the company to reassess its business practices.

 

Customers could see changes, such as the removal of noncore products, value-priced offerings and store remodels. Starbucks was also working on a transformation that is less visible, but equally impactful, to its customers.

 

At the peak of Starbucks' growth, it was the darling of the retail industry, opening eight stores every day of the week across 51 countries. Its growth was seen as limited only by its own imagination.

 

However, two significant events caused a stir that had ripple effects on its business: the recession, and quality options from well-known and equally available purveyors of mixed beverages. For the first time in its history, Starbucks began to experience sale declines in comparative stores year-over-year. These declines outpaced the natural increase in supply chain costs, resulting in a higher ‘cost of goods sold’ COGS and a significant decline in supply chain performance.

 

Starbucks began to examine every detail of its supply chain, and found that its organisation had become very siloed and divergently independent. Performance metrics and objectives differed by organisation within the supply chain. In some cases, this led to competing activities that created unwarranted complexity and performance deficiencies. For example, the organisation was scheduling store deliveries without considering its warehouse capacity, so delivery trucks would routinely leave the distribution centre (DC) with less than the full order for a store.

 

Starbucks faced four key issues:

 

1. It lacked a supply chain strategy focused on delivering enterprise value.

2. It lacked organisation calibration of benefits.

3. It lacked focus on the right supply chain metrics.

4. It needed to increase investments in talent enhancement and acquisition.

 

Building the right recovery strategy

 

Starbucks developed a strategic framework that it applied to all aspects of its supply chain strategy. It identifies the areas of focus for each division, as well as the level of maturity expected. Further, the company recognised that enhancements to the way it manages and acquires talent would return significant benefits.

 

The retailer transformed its supply chain strategy to move from a traditional logistics mindset to an organisation purpose-built to deliver value. The company wanted its supply chain to accelerate speed to market and enable sales growth. Starbucks' management challenged the supply chain organisation to compress its cost to serve and elevate its service, while obtaining, training and retaining the best talent in the business.

 

Starbucks initiated a series of changes that aligned business practices with activities, as well as organisational changes that allow for a focus and direction to be placed on each, while avoiding the issues of "silos of excellence".

 

Starbucks infused a change in leadership concepts that encouraged change within its organisation. The company's traditional approach led to covering problems and resolving issues with as little attention as possible. Its shift in leadership direction now focuses on highlighting problems. Employees understand that their job is to know what's broken and what needs to be improved, changed or fixed.

 

Finally, when Starbucks' partners are faced with a challenge they don't know how to handle, they're encouraged to ask for help. Asking for help isn't looked down upon. Instead, it's rewarded and encouraged.

 

Reformulating supply chain metrics

 

Starbucks learned through its transformational process that some metrics mattered. However, the company also learned that not all metrics mattered, nor could all metrics lead to improved decisions that would lead to improved performance.

 

A key metric for Starbucks is ‘on time in full’ (OTIF), which the company defines as the state when everything ordered is on time and complete as ordered. This metric fell to a very low score at the apex of Starbucks' supply chain issues. Starbucks reports OTIF to be one of the single most important indicators of cumulative success. When this number moves down, a host of additional metrics will point to the source of the supply chain's inefficiencies. As the number rises, so do the improvements to COGS.

 

Talent enhancement and acquisition

 

An area of significant focus for Starbucks is the training, well being and productivity of its people. The company has invested in its people for decades, and increased formalised training and mentoring for supply chain associates to enhance and accelerate the level of people development. Many companies can make the same claims. However, Starbucks lifted its efforts beyond typical human resource (HR) programmes and activities.

 

A key enhancement to its training and recruitment is found in its work with specific university programmes. Starbucks works with a limited number of universities to help craft and enhance the supply chain curriculum. Several benefits have occurred through relationships with these universities. As Starbucks case studies are used in the curriculum, graduating students are familiar with the company, and may have developed affinities to the brand and aspirations of joining the organisation. This allows the company to attract top talent through these programmes. The students are better prepared to meet the demands of advanced supply chain practices.

 

Starbucks knows the programmes and the education that graduating students attained at these select universities. Further, through these efforts, Starbucks benefits from interacting with academic thought leaders as they exchange ideas regarding the next waves of innovation.

 

To learn more about how retail leaders have found success through supply chain transformation, register to attend the Gartner Supply Chain Summit in London, from 14 to 15 September 2011.