Starbucks purchasing management

Introduction
Starbucks Coffee Company was formed in 1971 and now has over 23,000 stores
operating in 64 countries. (Starbucks, 2014) The decision of whether to
manufacture a product in-house (make) or purchase it from outside
suppliers/manufacturers (buy) can have a significant impact on the operations
of a firm and is arguably the most fundamental component of a companys
manufacturing strategy. My assignment will focus on Starbucks Coffee Company
and their make or buy coffee bean strategy. I will also analyse Starbucks coffee
bean supplier selection and evaluation system and provide recommendations for
improvements and lastly I will provide a purchasing cost analysis on Starbucks.
Make or Buy Strategy
The Chief Executive Officer of Starbucks, Mr. Howard Schultz is on record as
saying that his company has no interest in vertically integrating. Starbucks
currently buys coffee from over 300,000 growers worldwide. However in 2013,
Starbucks bought their first coffee plantation in Costa Rica. This doesnt mean
that Starbucks plans on changing its manufacturing strategy from a buy to a
make, but rather this purchase can be seen as a foray into Research &
Development. The premier Arabica bean that Starbucks drinkers demand due to
its better taste is under threat from pests and disease and possible crop
extinction. The Arabica coffee bean thrives in high elevation climates, between
3,500 to 6,000 ft. above sea level. However, climate change is having a marked
effect within these high elevation ecosystems.
According to a report from the International Centre for Tropical Agriculture in
Colombia, they predict that temperatures will keep climbing and rainfall will
become more erratic, neither of which bodes well for Arabica. (Gruley & Patton,
2014) Higher temperatures at these elevations also make for fertile breeding
grounds for pests such as the coffee cherry borer and diseases such as the leaf
killing rust. A research project at Londons Kew Royal Botanic Gardens lists
Arabica as vulnerable to extinction. Climate change could shrink Arabicagrowing areas in Central America to almost nothing in a few decades. (Gruley
& Patton, 2014)
Starbucks bought Hacienda Alsacia, a 600-acre coffee farm in Costa Rica last
year to experiment with growing its own beans. The main objective of the Alsacia
nursery is to increase the genetic base for coffee (Gruley & Patton, 2014).
Starbucks hopes, through their own R&D programs to generate coffee seeds that
are able to better resist the current pests and diseases that are inflicting the
crops of their coffee growers. CEO Schultz says that Starbucks will share what it
learns about farming practices and new varieties, including new hybrid seeds,
with farmers in Costa Rica and elsewhere. What its not about is creating
anything thats proprietary. (Gruley & Patton, 2014)
Its unrealistic for Starbucks to tell its coffee growers to experiment with different
types of coffee seed. Economic survival doesnt allow them that luxury. If a crop
turns out badly, then Starbucks will be unwilling to buy their product, so the
grower will face financial ruin. Starbucks however, can experiment with the

different types of coffee beans and having their own farm allows them this
luxury. The company thinks being able to practice what it preaches on its own
working farm should give it more credibility (Gruley & Patton, 2014)
Supplier selection:
Suppliers are the direct recipients of coffee payments from Starbucks and they
currently source coffee from over 300,000 growers worldwide. (Gruley & Patton,
2014) To help them in this selection process they have established an internal
program called the Coffee And Farmers Equity C.A.F.E Practices which is a
comprehensive set of social, environmental and economic coffee buying
guidelines designed to support coffee buyers and farmers, ensure high quality
coffee and promote equitable relationships for the long term. Starbucks uses 3rd
party approved verifiers who then assess their coffee supply chains against the
internal C.A.F.E practices evaluation guidelines. If suppliers dont meet the
minimum standards set out in these guidelines then they will not be selected as
a supplier. This criterion covers all suppliers, whether they are offering coffee
beans, barista apparel or food products.
Starbucks places a high emphasis on the social responsibility of its suppliers.
They are cognizant of the fact that exploitation of workers in poorer countries
regularly occurs so they have set strict social standards that must be met by
their suppliers and indeed throughout their whole supply chain. Critical issues
such as
Full transparency by suppliers of their operations, policies, processes, and
company records.
Suppliers must provide for all workers a safe and healthy work environment.
Worker treatment and rights must be clearly set out by all suppliers
Worker hours and compensation must be clear to all
Environmental protection- Starbucks suppliers must fully comply with all local
environmental laws and regulations and shall conduct their operations in a way
that conserves natural resources. (Starbucks Coffee Company, 2014)
It is hard to recommend any obvious improvements to Starbucks supplier
selection process as it one of the most comprehensive sets of supplier guidelines
that exist. Constant monitoring and verification of suppliers will ensure this
process continues to work well. They have taken the importance of acting
responsibly beyond being just a direct Starbucks supplier and have expanded
that to the wider communities who rely upon those suppliers, which can only
benefit all parties within their supply chain.
Starbucks understands the effect of its business model on the surrounding
community and the surrounding community of those providing goods to the
stores. Becoming a supplier means meeting all standards and expectations.
(Small Business Chron.com, 2014)
Purchasing cost analysis
Starbucks supplies coffee to over 50 million customers through 23,000 stores in
in over 64 countries each week and with over 80,000 in store deliveries per week
the costs associated with that supply chain are complex. However by 2010

Starbucks costs were rising out of step with their profits and it showed up in their
financial results. Because of their rapid global store expansion policy, costs
associated with supply chain expenses in the US rose from US$750 mio to
US$825 mio, however same store sales in the US dropped by 10% over the same
period. We had been growing so fast that we had not done a good enough job of
getting the [supply chain] fundamentals and costs in place, says Peter D.
Gibbons, executive vice president of global supply chain operation. To address
this cost imbalance, Starbucks made significant changes to their operations. The
plan essentially had 3 main focus areas
1. Reorganize their supply chain organization
2. Reduce its cost to serve stores and improve execution
3. Lay the foundation for future supply chain capability.
The first step that Starbucks did was to work out where the costs were coming
from. Outsourcing agreements for transportation contracts, 3PLs and contract
manufacturing was 70% of Starbucks supply chain operating expenses. This was
simply too high. 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. The reorganization led Starbucks to simplify
the supply chain functions into four basic job groups: plan, source, make or
deliver.
Planning all staff involved in the production planning, replenishment planning,
new product launches
Sourcing split into Coffee and Non-coffee procurement groups. Starbucks
spends over US$600mio on coffee purchases and US$2.5 Bio on other items such
as dairy products, baked goods, store furniture and paper goods.
Manufacturing whether in house or contract manufacturers.
Deliver all personnel working in transportation, distribution and customer
services. After the reorganization each group was then assigned tasks to reduce
cost and improve efficiencies.
The sourcing group worked on identifying what were the cost drivers that were
pushing basic costs up. What contracts were in place with suppliers, what prices
were they paying for the goods, what were the logistics costs they were paying?
The purchase cost of the item was therefore only a small part of the total
purchasing costs analysis.
The manufacturing group reorganized their internal coffee processing plants with
the goal being to manufacture in the region where the product was being sold.
The benefits of that change allowed Starbucks to reduce their transportation
costs and lead times.
Because delivery costs and execution are intertwined they built a global map of
Starbucks transportation expenditures and created a single global logistics
system to monitor its diverse supply chain. An analysis of those expenditures
allowed Starbucks to reduce its transportation carriers, retaining only those that
provided the best service. They reviewed contracts they had with their 3PL
suppliers, reviewed productivity and contract rates they paid and created clear

productivity metrics with their supply chain partners. They focused on 4 main
areas which created consistency & price stability across the entire supply chain.
Safety in Operations, Services measured by on time delivery and order fill
rates,
Total end to end supply chain costs and
Enterprise savings. (Enterprise savings refers to cost savings that come from
areas outside logistics, such as procurement, marketing or research and
development.) By looking at all these various steps to reduce operating costs,
some of which directly related to purchasing costs, Starbucks laid the foundation
for future supply chain capabilities to support their growing coffee empire.
Conclusion
Starbucks will continue buying coffee from independent coffee growers. They aim
to support the coffee growers through their own foray into R&D and are willing to
share any improvements or advancements in coffee production with their
suppliers. They have a rigorous supplier selection procedure which ensures that
the whole supply chain is adhering to the social, ethical and environmental goals
that Starbucks demands of its suppliers. This has a ripple down effect throughout
the organization and finally when discussing purchasing cost analysis it can be
seen that Starbucks looks at the whole supply chain and breaks that down into
smaller components in order to achieve the greatest purchasing cost benefits for
the company.

Goals & Progress: Coffee Purchasing

Goal: Ensure 100 percent of our coffee is ethically

sourced by 2015.
ON TRACK
86% ofup
2011,
our
from
coffee
84%was
in 2010.
ethically sourced under C.A.F.E. Practices in

Includes green coffee purchases for all Starbucks brands. Visual representation of progress to goals, not
to scale.

We know our success as a company is linked to the success of the thousands of

farmers who grow our coffee. Thats why were working to ensure a long-term supply
of high-quality coffee through our responsible coffee purchasing practices and
by investing in farmers and their communities. We have found that we can serve a
great cup of coffee while helping to improve the lives of farmers and protecting the
planet.
Fluctuating commodity prices in 2011 made coffee purchasing exceptionally
challenging for specialty coffee roasters and retailers, including Starbucks. Despite
the volatile market, we were able to continue our commitment to buying and serving
high-quality coffee that is responsibly grown and ethically traded through our
responsible coffee purchasing practices, farmer support centres, loan programs and
environmental efforts with Conservation International (CI).

The cornerstone of our approach is Coffee and Farmer Equity (C.A.F.E.) Practices, our
comprehensive coffee-buying program that ensures coffee quality while promoting
social, economic and environmental standards. By 2015 our goal is that 100 percent
of our coffee will be ethically sourced, meaning verified or certified, either
through Practices, Fairtrade or another program.
Purchasing third-party certified or verified coffees not only meets our customers
needs, but also helps protect the environment and the livelihood of farmers in coffeegrowing regions. We have offered Fairtrade coffee since 2000. In 2011 34.3 million
pounds (8.0 percent) of our coffee purchases were Fairtrade certified, making us one
of the largest purchasers of Fairtrade certified coffee in the world. We also purchased
9.6 million pounds (2.2 percent) of certified organic coffee in 2011.

Another important component of our approach is a green coffee pricing model that
aims to pay the prices premium quality commands, while fostering price stability and
mutually beneficial relationships with suppliers. Starbucks paid an average price of
$2.38 per pound for our premium quality green (unroasted) coffee in 2011.