From bean to cup: How Starbucks transformed its supply chain
With operational costs rising and sales declining, the global coffee purveyor implemented a three-step plan to improve supply chain performance, cut costs, and prepare for the future.
It takes a well-run supply chain to ensure that a barista pours a good cup of Starbucks coffee. That's because the journey from bean to cup is a complicated one. Coffee and other merchandise must be sourced from around the globe and then successfully delivered to the Starbucks Corporation's 16,700 retail stores, which serve some 50 million customers in 51 countries each week.
But in 2008, Starbucks wasn't sure that its supply chain was meeting that goal. One clue that things were not quite right: the company's operational costs were rising even though sales were cooling. Between October 2007 and October 2008, for example, supply chain expenses in the United States rose from US $750 million to more than US $825 million, yet sales for U.S. stores that had been open for at least one year dropped by 10 percent during that same period.
In part, Starbucks was a victim of its own success. Because the company was opening stores around the world at a rapid pace, the supply chain organization had to focus on keeping up with that expansion. "We had been growing so fast that we had not done a good enough job of getting the [supply chain] fundamentals in place," says Peter D. Gibbons, executive vice president of global supply chain operations. As a result, he says, "the costs of running the supply chain—the operating expenses—were rising very steeply."
To hold those expenses in check and achieve a balance between cost and performance, Starbucks would have to make significant changes to its operations. Here is a look at the steps Gibbons and his colleagues took and the results they achieved.
Starbucks' Supply Chain Objectives
To transform its supply chain, the coffee retailer established three key objectives:
Reorganize its supply chain organization
Reduce its cost to serve stores and improve execution
Lay the foundation for future supply chain capability
A plan for reorganization
Starbucks' supply chain transformation had support from the very top. In 2008, Chairman, President, and Chief Executive Officer Howard Schultz tapped Gibbons, who was then senior vice president of global manufacturing operations, to run the company's supply chain. This was a familiar role for Gibbons; prior to joining Starbucks in 2007, he had been executive vice president of supply chain for The Glidden Co., a subsidiary of ICI Americas Inc.
The first two things Gibbons did in his new position were assess how well the supply chain was serving stores, and find out where costs were coming from. He soon learned that less than half of store deliveries were arriving on time. "My quick diagnosis was ... that we were not spending enough attention on how good we were at delivering service to stores," he recalls. Following that assessment, Gibbons began visiting Starbucks' retail stores to see the situation for himself and get input from employees. "The visits were made to confirm that our supply chain could improve significantly," he explains. "The best people to judge the need for change were those at the customer-facing part of our business."
A cost analysis revealed excessive outlays for outsourcing; 65 to 70 percent of Starbucks' supply chain operating expenses were tied to outsourcing agreements for transportation, third-party logistics, and contract manufacturing. "Outsourcing had been used to allow the supply chain to expand rapidly to keep up with store openings, but outsourcing had also led to significant cost inflation," Gibbons observes.
In response to those findings, Gibbons and his leadership team devised a three-step supply chain transformation plan and presented it to Starbucks' board of directors. Under that plan, the company would first reorganize its supply chain organization, simplifying its structure and more clearly defining functional roles. Next, Starbucks would focus on reducing the cost to serve its stores while improving its day-to-day supply chain execution. Once these supply chain fundamentals were firmly under control, the company could then lay the foundation for improved supply chain capability for the future.
Starbucks by the numbers
Headquarters: Seattle, Washington, USA Total net revenues in fiscal 2009: US $9.7 billion Employees: 142,000 worldwide (as of September 2009) Manufacturing:
5 company-owned coffee roasting plants (Nevada, Pennsylvania, South Carolina, and Washington, USA, and the Netherlands)
24 co-manufacturers (in the United States, Canada, Europe, Asia, and Latin America)
1 tea processing plant (Portland, Oregon, USA)
Distribution:
9 regional distribution centers
48 central distribution centers
6 "green coffee" warehouses
Deliveries: 2.7 million per year
Simplifying the complex
The first step of the transformation plan, reorganizing Starbucks' supply chain organization, got under way in late 2008. According to Gibbons, that involved taking a complex structure and simplifying it so that every job fell into one of the four basic supply chain functions: plan, source, make, and deliver. For instance, anybody involved in planning—be it production planning, replenishment, or new product launches—was placed in the planning group. Sourcing activities were grouped into two areas: coffee and "non-coffee" procurement. (Starbucks spends US $600 million on coffee each year. Purchases of other items, such as dairy products, baked goods, store furniture, and paper goods, total US $2.5 billion annually.) All manufacturing, whether done in-house or by contract manufacturers, was assigned to the "make" functional unit. And finally, all personnel working in transportation, distribution, and customer service were assigned to the "deliver" group.
After the supply chain functions were reorganized, the various departments turned their attention to the second objective of the supply chain transformation: reducing costs and improving efficiencies. As part of that effort, the sourcing group worked on identifying the cost drivers that were pushing up prices. "We went out to understand the contracts we had, the prices we were paying, and the shipping costs, and we began breaking items down by ingredient rather than just purchase price," Gibbons says. "We built more effective 'should cost' models, including benchmarking ingredients and processes, which showed that we could negotiate better prices."
Meanwhile, the manufacturing group developed a more efficient model for delivering coffee beans to its processing plants, with the goal of manufacturing in the region where the product is sold. Starbucks already owned three coffee plants in the United States, in Kent, Washington; Minden, Nevada; and York, Pennsylvania. In 2009, the company added a fourth U.S. plant, in Columbia, South Carolina. The benefits of that approach were quickly apparent; regionalizing its coffee production allowed Starbucks to reduce its transportation costs and lead times, says Gibbons. Moreover, once the new facility was up and running, all of the U.S. coffee plants were able to switch from seven-day operations to five days.
In addition to the four coffee facilities it owns in the United States, Starbucks also operates a coffee plant in Amsterdam, the Netherlands, and a processing plant for its Tazo Tea subsidiary in Portland, Oregon. The company also relies on 24 co-manufacturers, most of them in Europe, Asia, Latin America, and Canada.
Even though it spread production across a wide territory, transportation, distribution, and logistics made up the bulk of Starbucks' operating expenses because the company ships so many different products around the world. Getting that under control presented a daunting challenge for the supply chain group. "Whether coffee from Africa or merchandise from China, [our task was to integrate] that together into one global logistics system, the combined physical movement of all incoming and outgoing goods," says Gibbons. "It's a big deal because there's so much spend there, and so much of our service depends on that. ... With 70,000 to 80,000 deliveries per week plus all the inbound shipments from around the world, we want to manage these logistics in one system."
One world, one logistics system
The creation of a single, global logistics system was important for Starbucks because of its far-flung supply chain. The company generally brings coffee beans from Latin America, Africa, and Asia to the United States and Europe in ocean containers. From the port of entry, the "green" (unroasted) beans are trucked to six storage sites, either at a roasting plant or nearby. After the beans are roasted and packaged, the finished product is trucked to regional distribution centers, which range from 200,000 to 300,000 square feet in size. Starbucks runs five regional distribution centers (DCs) in the United States; two are company-owned and the other three are operated by third-party logistics companies (3PLs). It also has two distribution centers in Europe and two in Asia, all of which are managed by 3PLs. Coffee, however, is only one of many products held at these warehouses. They also handle other items required by Starbucks' retail outlets—everything from furniture to cappuccino mix.
Depending on their location, the stores are supplied by either the large, regional DCs or by smaller warehouses called central distribution centers (CDCs). Starbucks uses 33 such CDCs in the United States, seven in the Asia/Pacific region, five in Canada, and three in Europe; currently, all but one are operated by third-party logistics companies. The CDCs carry dairy products, baked goods, and paper items like cups and napkins. They combine the coffee with these other items to make frequent deliveries via dedicated truck fleets to Starbucks' own retail stores and to retail outlets that sell Starbucks-branded products.
Because delivery costs and execution are intertwined, Gibbons and his team set about improving both. One of their first steps was to build a global map of Starbucks' transportation expenditures—no easy task, because it involved gathering all supply chain costs by region and by customer, Gibbons says. An analysis of those expenditures allowed Starbucks to winnow its transportation carriers, retaining only those that provided the best service.
The logistics team also met with its 3PLs and reviewed productivity and contract rates. To aid the review process, the team created weekly scorecards for measuring those vendors. "There are very clear service metrics, clear cost metrics, and clear productivity metrics, and those were agreed with our partners," Gibbons notes.
The scorecard assessments of a 3PL's performance were based on a very simple system, using only two numbers: 0 and 1. For example, if a vendor operating a warehouse or DC picked a product accurately, it earned a "1" for that activity. If a shipment was missing even one pallet, the 3PL received a score of "0." As part of the scorecard initiative, Starbucks also began making service data by store, delivery lane, and stock-keeping unit (SKU) available to its supply chain partners. "The scorecard and the weekly rhythm (for review of the scorecard) ensured transparency in how we were improving the cost base while maintaining a focus on looking after our people and servicing our customers," Gibbons says.
Although Starbucks has a raft of metrics for evaluating supply chain performance, it focuses on four high-level categories to create consistency and balance across the global supply chain team: safety in operations, service measured by on-time delivery and order fill rates, total end-to-end supply chain costs, and enterprise savings. This last refers to cost savings that come from areas outside logistics, such as procurement, marketing, or research and development.
In undertaking all of those steps to reduce operating costs and improve execution, Gibbons says, Starbucks was laying the foundation for future supply chain capabilities. "We tell the stores that we have got to get the fundamentals right—the things that give people confidence. ... We don't ship things that aren't right," he explains.
Earning the company's confidence
Since Starbucks began its supply chain transformation effort, it has curtailed costs worldwide without compromising service delivery. "As a company," Gibbons says, "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."
In Gibbons' eyes, the transformation effort has been a success. "Today there's a lot of confidence in our supply chain to execute every day, to make 70,000 deliveries a week, to get new products to market, and to manage product transitions, new product introductions, and promotions," he says. "There's a lot of confidence that we now are focused on service and quality to provide what our stores need and what our other business customers need."
To sustain that momentum for improvement and to ensure a future flow of talent into the organization, Starbucks recently began an initiative to recruit top graduates of supply chain education programs. (For more on this initiative, see the sidebar "Starbucks: The next generation.") Along with its recruiting program, the company plans to provide ongoing training for its existing employees to help them further develop their supply chain knowledge and skills. "We want to make sure we have thought leaders [in our supply chain organization]," Gibbons says. Starbucks considers this initiative to be so important, in fact, that Gibbons now spends 40 to 50 percent of his time on developing, hiring, and retaining supply chain talent.
The infusion of new recruits will allow Starbucks to stay focused on its supply chain mission of delivering products with a high level of service at the lowest possible cost to its stores in the United States and around the globe. As Gibbons observes, "No one is going to listen to us talking about supply chain strategy if we can't deliver service, quality, and cost on a daily basis."
Starbucks: The next generation
When Starbucks' supply chain transformation was first getting under way in 2008, the company brought in professionals from the outside to support its re-engineering program. But the coffee retailer is taking a different approach to recruitment these days. "Now, we want to grow our own talent to support the growth of our business, in North America and globally, and to support normal staff turnover," says Peter D. Gibbons, executive vice president of global supply chain operations. "Creating a strong pipeline at all levels is part of our core mission to improve service, lower cost, and develop talent."
The initial phase of the recruitment program will be aimed at building out the U.S. organization, followed by a similar staffing process for the company's international operations. After that, Starbucks will focus on creating an internship program with an eye toward recruiting underclassmen interested in a supply chain career with the company.
Throughout the fall of 2010, executives at Starbucks visited six universities to interview undergraduates and graduate students with backgrounds in logistics, engineering, and operations research. From this process will come a select group of young talent who, starting in July 2011 and continuing for an undetermined number of years, will be hired and groomed to head Starbucks' supply chain for perhaps as long as the next two decades.
The company will only consider the top 10 percent of the graduating class of the schools it partners with. The ideal candidates will have exposure to Fortune 500 organizations either through prior work experience or through internships. In addition, they must demonstrate prior leadership experience and be willing to rotate between domestic and international positions.
To help improve employees' skills and knowledge, the company has developed programs covering 30 supply chain capabilities, as well as training manuals for new hires, Gibbons says. "The point is to ensure that development plans cover skill-building and development for each individual," he explains. The company also is testing a supply chain training system that will "provide the bulk of our technical training and will add formal coaching and mentoring to round the process out," he adds.
If successful, the strategy will yield multiple benefits, according to Gibbons and his team. It will brand Starbucks as a bona fide supply chain organization within both academia and industry. It will ensure a seamless human resources transition over time as Gibbons and his team near retirement. And the company will reap the intellectual windfall of advanced concepts that graduates take out of school and into the workplace. Gibbons says Starbucks expects to learn as much from its new hires as they will learn from the company.
Weather conditions in central Florida are forecasted to rapidly improve throughout the day as Hurricane Milton spins out into the Atlantic, leaving behind a trail of wind and flood damage.
Nurtured by historically hot waters in the Gulf of Mexico, the furious storm was stronger than Hurricane Katrina at peak pressure, and registered the lowest barometric pressure—and thus the most destructive storm power—in the Gulf since Hurricane Wilma in 2005, according to analysis by Everstream Analytics.
Fortunately, it weakened slightly to a Category 3 hurricane by the time it made landfall in Siesta Key, just south of Tampa Bay, at 8:30 pm on Wednesday night. However, extremely heavy rainfall totals caused major flooding in the northern portion of that region, soaking Tampa, St. Petersburg, and Clearwater. It also triggered storm surge levels of 4-9 feet, and spun off scores of tornadoes. The National Weather Service issued 126 tornado warnings in Florida on October 9 alone, which was the most in Florida history.
Supply chain impacts of that weather are occurring largely where the flooding hit, and have caused major disruptions on port operations, roads, rails, air travel, and interruptions to business operations – possibly for an extended period. The interior sections of Florida will also likely have significant impacts via overland and river/creek flooding and damaging winds (fallen trees), according to Jon Davis, chief meteorologist, Everstream Analytics.
As the weather clears, businesses in the citrus belt of central/southern Florida will also start to measure the damage. At this time of year, most of the citrus remains unharvested on the trees, so the impact on crop yields could be severe. And Davis says that tree damage is always the biggest concern since it impacts production for years.
But the group also warned that the true rebuilding process usually lags behind the initial emergency response. “During the first 48 to 72 hours after a hurricane, most of the work on the ground is focused on search and rescue efforts,” Kathy Fulton, ALAN’s Executive Director, said in a release. “Because of this, ALAN usually doesn’t receive the first substantial wave of donated logistics requests until after that, when humanitarian organizations can get in, conduct their initial assessments, and determine what’s most needed.”
“We know that can be frustrating for organizations that want to do something tangible as soon as possible. But we hope they will still be willing to provide their logistics help when the need arises, whether it’s in a few days, a few months – or even beyond that,” Fulton said. “The devastation Hurricane Milton and its many tornadoes have caused is heartbreaking. We mourn for those who have lost family members, pets and homes, and we are already working hand-in-hand with various non-profit partners to deliver help.”
Editor's note:This article was revised on October 10 to add input from ALAN.
For example, millions of residents and workers in the Tampa region have now left their homes and jobs, heeding increasingly dire evacuation warnings from state officials. They’re fleeing the estimated 10 to 20 feet of storm surge that is forecast to swamp the area, due to Hurricane Milton’s status as the strongest hurricane in the Gulf since Rita in 2005, the fifth-strongest Atlantic hurricane based on pressure, and the sixth-strongest Atlantic hurricane based on its peak winds, according to market data provider Industrial Info Resources.
Between that mass migration and the storm’s effect on buildings and infrastructure, supply chain impacts could hit the energy logistics and agriculture sectors particularly hard, according to a report from Everstream Analytics.
The Tampa Bay metro area is the most vulnerable area, with the potential for storm surge to halt port operations, roads, rails, air travel, and business operations – possibly for an extended period of time. In contrast to those “severe to potentially catastrophic” effects, key supply chain hubs outside of the core zone of impact—including the Miami metro area along with Jacksonville, FL and Savannah, GA—could also be impacted but to a more moderate level, such as slowdowns in port operations and air cargo, Everstream Analytics’ Chief Meteorologist Jon Davis said in a report.
Although it was recently downgraded from a Category 5 to Category 4 storm, Milton is anticipated to have major disruptions for transportation, in large part because it will strike an “already fragile supply chain environment” that is still reeling from the fury of Hurricane Helene less than two weeks ago and the ILA port strike that ended just five days ago and crippled ports along the East and Gulf Coasts, a report from Project44 said.
The storm will also affect supply chain operations at sea, since approximately 74 container vessels are located near the storm and may experience delays as they await safe entry into major ports. Vessels already at the ports may face delays departing as they wait for storm conditions to clear, Project44 said.
On land, Florida will likely also face impacts in the Last Mile delivery industry as roads become difficult to navigate and workers evacuate for safety.
Likewise, freight rail networks are also shifting engines, cars, and shipments out of the path of the storm as the industry continues “adapting to a world shaped by climate change,” the Association of American Railroads (AAR) said. Before floods arrive, railroads may relocate locomotives, elevate track infrastructure, and remove sensitive electronic equipment such as sensors, signals and switches. However, forceful water can move a bridge from its support beams or destabilize it by unearthing the supporting soil, so in certain conditions, railroads may park rail cars full of heavy materials — like rocks and ballast — on a bridge before a flood to weigh it down, AAR said.
The North American robotics market saw a decline in both units ordered (down 7.9% to 15,705 units) and revenue (down 6.8% to $982.83 million) during the first half of 2024 compared to the same period in 2023, as North American manufacturers faced ongoing economic headwinds, according to a report from the Association for Advancing Automation (A3).
“Rising inflation and borrowing costs have dampened spending on robotics, with many companies opting to delay major investments,” said Jeff Burnstein, president, A3. “Despite these challenges, the push for operational efficiency and workforce augmentation continues to drive demand for robotics in industries such as food and consumer goods and life sciences, among others. As companies navigate labor shortages and increased production costs, the role of automation is becoming ever more critical in maintaining global competitiveness.”
The downward trend was led by weakness in automotive manufacturing, which traditionally leads the charge in buying robots. In the first half of 2024, automotive OEMs ordered 4,159 units (up 14.4%) but generated revenue of $259.96 million (down 12.0%). The Automotive Components sector was even worse, orders 3,574 units (down 38.8%) for $191.93 million in revenue (down 27.3%). Declines also happened in the Semiconductor & Electronics/Photonics sector and the Plastics & Rubber sector.
On the positive side, Food & Consumer Goods companies ordered 1,173 units (up 85.6%) for $62.84 million in revenue (up 56.2%). This growth reflects the increasing reliance on robotics for efficiency in food processing and packaging as companies seek to address labor shortages and rising costs, A3 said. And the Life Sciences industry ordered 1,007 units (up 47.9%) for revenue of $47.29 million (up 86.7%) as it continued its reliance on robotics for efficiency and precision.
Economic activity in the logistics industry expanded for the 10th straight month in September, reaching its highest reading in two years, according to the latest Logistics Managers’ Index (LMI) report, released this week.
The LMI registered 58.6, up more than two points from August’s reading and its highest level since September 2022.
The LMI is a monthly measure of business activity across warehousing and transportation markets. A reading above 50 indicates expansion, and a reading below 50 indicates contraction.
The September data is proof the industry is “back on solid footing” according to the LMI researchers, who pointed to expanding inventory levels driven by a long-expected restocking among retailers gearing up for peak-season demand. That shift is also reflected in higher rates of both warehousing and transportation prices among retailers and other downstream firms—a signal that “retail supply chains are whirring back into motion” for peak.
“The fact that peak season is happening at all should be a bit of a relief for the logistics industry—and economy as a whole—since we have not really seen a traditional seasonal peak since 2021,” the researchers wrote. “… or possibly even 2019, if you don’t consider 2020 or 2021 to be ‘normal.’”
The East Coast dock worker strike earlier this week threatened to complicate that progress, according to LMI researcher Zac Rogers, associate professor of supply chain management at Colorado State University. Those fears were eased Thursday following a tentative agreement between the union and port operators that would put workers at dozens of ports back on the job Friday.
“We will have normal peak season demand—our first normal seasonality year in the 2020s,” Rogers said in a separate interview, noting that the port of New York and New Jersey had its busiest month on record this past July. “Inventories are moving now, downstream. That, to me, is an encouraging sign.”
The LMI is a monthly survey of logistics managers from across the country. It tracks industry growth overall and across eight areas: inventory levels and costs; warehousing capacity, utilization, and prices; and transportation capacity, utilization, and prices. The report is released monthly by researchers from Arizona State University, Colorado State University, Rochester Institute of Technology, Rutgers University, and the University of Nevada, Reno, in conjunction with the Council of Supply Chain Management Professionals (CSCMP).
Dockworkers at dozens of U.S. East and Gulf coast ports are returning to work tonight, ending a three-day strike that had paralyzed the flow of around 50% of all imports and exports in the United States during ocean peak season.
The two groups “have reached a tentative agreement on wages and have agreed to extend the Master Contract until January 15, 2025 to return to the bargaining table to negotiate all other outstanding issues. Effective immediately, all current job actions will cease and all work covered by the Master Contract will resume,” the joint statement said.
Talks had broken down over the union’s twin demands for both pay hikes and a halt to increased automation in freight handling. After the previous contract expired at midnight on September 30, workers made good on their pledge to strike, and all activity screeched to a halt on Tuesday, Wednesday, and Thursday this week.
Business groups immediately sang the praises of the deal, while also sounding a note of caution that more work remains.
The National Retail Federation (NRF) cheered the short-term contract extension, even as it urged the groups to forge a longer-lasting pact. “The decision to end the current strike and allow the East and Gulf coast ports to reopen is good news for the nation’s economy,” NRF President and CEO Matthew Shay said in a release. “It is critically important that the International Longshoremen’s Association and United States Maritime Alliance work diligently and in good faith to reach a fair, final agreement before the extension expires. The sooner they reach a deal, the better for all American families.”
Likewise, the Retail Industry Leaders Association (RILA) said it was relieved to see positive progress, but that a final deal wasn’t yet complete. “Without the specter of disruption looming, the U.S. economy can continue on its path for growth and retailers can focus on delivering for consumers. We encourage both parties to stay at the negotiating table until a final deal is reached that provides retailers and consumers full certainty that the East and Gulf Coast ports are reliable gateways for the flow of commerce.”
And the National Association of Manufacturers (NAM) commended the parties for coming together while also cautioning them to avoid future disruptions by using this time to reach “a fair and lasting agreement,” NAM President and CEO Jay Timmons said in an email. “Manufacturers are encouraged that cooler heads have prevailed and the ports will reopen. By resuming work and keeping our ports operational, they have shown a commitment to listening to the concerns of manufacturers and other industries that rely on the efficient movement of goods through these critical gateways,” Timmons said. “This decision avoids the need for government intervention and invoking the Taft-Hartley Act, and it is a victory for all parties involved—preserving jobs, safeguarding supply chains, and preventing further economic disruptions.”