from year-ago period. This growth was driven by in-store sales growth of 8% in the U.S. The

Transcription

1 Preethi Starbucks Kasireddy Coffee Distribution contents Network of the document.] [Type the abstract of the document here. The abstract is typically a short summary of the Preethi Kasireddy Billy Jung Esmeralda Ayala Ari Eryorulmaz [ C o m p a n y A d d r e s s ]

2 Table of Contents Abstract...2 Background and Problem Definition...2 Current Situation..2-5 Demand Supply Side Concerns..3-4 Prices 4-5 Distribution Network Phase 1: From Suppliers to Distribution Centers Phase 2: From Distribution Centers to Regional Retailers Recommendations 7 Starbucks Use of 3PL.8 References Appendix A 12 Appendix B 13 Appendix C 14 Appendix D 15 Appendix E 16 Appendix F 17 Appendix G 18 Appendix H 19 Appendix I.20 Appendix J.21 Appendix K 22 Appendix L 23 Appendix M...24 Appendix N 25 1

3 Abstract Background and Problem Definition Starbucks, founded in 1971, is the world s #1 specialty coffee retailer with more than 18,850 coffee shops in 40 countries. It operates approximately 8,800 of its shops, while licenses and franchises operate the remaining stores. The company also owns Seattle s Best Coffee and Torrefazione Italia coffee brands. Starbucks offers a variety of food items, as well as roasted beans, coffee accessories, and teas and also markets its coffee through grocery stores and branded food and beverage products. Due to the immense global network that Starbucks has built over the past 40 years, this report will focus strictly on the coffee bean supply chain network for Starbucks U.S. In particular, the report will analyze international coffee bean suppliers, Starbucks US distribution network, shipping and transportation costs, and regional distribution network. Because of the tight supply and growing demand, evident from strong revenue growth, of coffee beans, all of the demand is not being met. Thus, the goal of this project is to find an alternative method for 100% of the demand to be distributed and supplied. The Current Situation Demand Starbucks coffee, which maintains 4.5% of the US market share for coffee, is expected to see an increase in per capital coffee consumption. For the fiscal year ending September 2010, Starbucks reported $10.71B Sales, with a 1-Year Sales Growth of 9.54% and a 13.26% operating margin growth. They reported $946.60M in net income, which a 1-Year Net Income growth of %. For fiscal first quarter of 2011, EPS of $0.45 were reported and increased profits of 44% from year-ago period. This growth was driven by in-store sales growth of 8% in the U.S. The 2

4 strength of Starbucks growth in comparison to the industry median growth of -0.35% for revenue and 10.04% growth in net income is a strong indicator of high demand for Starbucks from Demand numbers were calculated based on 2009 imports. Risks that Starbucks faces include late delivery from supplier, slow replenishment lead time, damaged/unusable beans, random demand, unexpected increase in demand, and inaccurate demand forecasts. Therefore, to mitigate the risk of stock outs, a safety stock of 15% was applied. Coffee beans don t spoil or expire and so additional costs due to safety stock only come from storage costs (see Demand Analysis Tables in Appendix H). Despite higher commodity coffee costs Starbucks is expected to face in 2011 and 2012, the high prices are expected to reach normal levels starting Therefore, it follows the Starbucks will plan to meet 100% of the demand projected from Supply Side Concerns Starbucks uses C.A.F.E Practices to ensure sustainable supply of high quality coffee beans. C.A.F.E Practices are a set of guidelines set to ensure high quality coffee beans, promote equitable relationships with farmers, workers, and communities, and protect the environment. All suppliers for Starbucks coffee beans must meet the minimum prerequisites of high quality Arabica coffee bean, economic transparency, performance, supply network of farms, and coffee growing and processing practices. Suppliers were chosen meticulously to smooth the forecasted supply fluctuations and long supply response times. Brazil, Vietnam, and Columbia make up the majority of the global supply for Arabica coffee beans for Starbucks, with market shares of 38%, 14.5%, 12.3%, and respectively. 3

5 Brazil, the largest supplier for 2010, is expected to have a decrease in harvest of 25% percent from 2010, while Brazil s domestic consumption is expected to increase 5%, Mexico showed a decrease in exports of 17% in Columbia also poses a small risk due a major outbreak of fungus that affected supply in 2010, as well as Costa Rico due to adverse weather. Contingent upon these risks and the 2010 export growth/decline percentage, below is the proposed breakdown of import suppliers for We recommended a decrease in Brazil imports to 40% of supply, rather than 60%. We also recommended an increase in supply from Honduras and Kenya due to strong coffee harvests in 2010 (see Appendix I). Prices Coffee bean prices in 2011 are on average 90% higher than 2010 due to the La Nina weather patterns plaguing Central America and South America, significant coffee plant damage in Columbia due to fungus on coffee crops, bad weather in Vietnam, and concentrated supply. Another contributing factor to the 2010 severe rice in coffee prices is the declining of the U.S dollar. This decline results in higher coffee commodity prices for Starbucks. In addition, low interest rates maintained by the Federal Reserve, due to the financial crisis of 2008 and 2009, has led to investors to increase investment in commodities, including coffee, which is another driver for higher coffee prices for Starbucks. The price per pound in January, February, and March 2011 were $2.35, $2.47, and $3.56, respectively. Derived from Treasury inflation protected securities and survey-based estimates, the Federal Reserve Bank of Cleveland reports that its latest estimate of 10-year expected inflation is 1.82 percent. Expected prices for were calculated based on inflation rates, an existing contract Starbucks has with its suppliers for 2011, the assumption based on research 4

6 that prices will begin to decrease in due to improving crops, and the assumption that prices will remain steady from (see Appendices I - J for price chart and graphs). Distribution Network The team s alternative is to use the Facility Location model to see whether every supplier and every distribution center is necessary to meet 100% of demand for the years 2011 to If so, then each supplier will supply the appropriate number of pounds to each distribution center to minimize costs (Phase 2); and each distribution center will supply the appropriate number of pounds to each regional retailer to minimize costs (Phase 2). After finding the minimum costs for each year for both phases, the total annual costs per year will consist of annual Phase 1 and Phase 2 costs plus the buying cost of the coffee beans from the suppliers. Phase 1: From Suppliers to Distribution Centers For Phase 1 of the distribution network, we needed to find the appropriate allocation and costs to supply US distribution centers from outside countries. Four of the distributions centers in the US, which include Washington, Nevada, Pennsylvania, and South Carolina, are current Starbucks distribution center locations. When analyzing the IBIS US map (Appendix N) that highlights heavy areas of coffee demand, we observed that a reasonable amount comes from Texas. Assuming that distribution of coffee demand in the US as shown in figure only relates to Starbucks coffee, we found the absence of a distribution center in the south alarming and hence decided to add a distribution center in Texas to the existing Starbucks distribution network. Once the distribution locations were determined, supply, demand, and shipping costs needed to be found. We were not able to find specific exporting costs for each country so we assumed that Cameroons exporting coffee price of $1.70 per Kg ($0.77 per pound) was a good estimate for our 5

7 shipping rate. We assumed the available supply from each country was about 5% of their overall harvest considering that Starbucks is one out of their many customers. To calculate demand for each distribution center, we first needed to solve the Phase 2 network. Once we saw the distribution center to regional retailer allocation to meet each regional retailers demand, we added up the amount each state had distributed to each region, and that become our distribution center demand for the Phase 1 network. To then find the appropriate allocation and total cost we used solver. The average costs to distribute from the suppliers to the distribution centers for the next six years will be $352,041, The following are assumptions we made to calculate the minimum shipping costs from supplier to distribution centers: Shipping cost is $0.77 per pound Supply capacity from each country is 5% of overall country s coffee harvest Demand of each distribution center comes from the demand being supplied to regional retailers (Phase 2) The total costs to distribute from the suppliers to the distribution centers for six years can be seen in the table below. Phase 2: From Distribution Centers to Regional Retailers In this phase, the same solving method in Phase 1 was used. The goal was to find the total minimum transportation cost per year from 2011 to Based on IBIS (Appendix N), the demand for Starbucks coffee was spread throughout the United States by eight regions. Each region has state demand percentages, so the state percentages were added up to calculate the regional demand percentages. Figure 1 in Appendix A illustrates the various regions and their respective demand percentages. For each year from 2011 to 2016, the regional percentages were 6

8 multiplied by the 2011 total demand to calculate the regional demands. The distribution center capacities were calculated by researching plant square footage for each location on Century 21 s website. The team assumed that only 50% of the square footage of the buildings would be used for storage. The square footage was then multiplied by an assumed 30 feet building height to calculate the volume of the distribution centers. Assuming the dimensions of a 1-pound Starbucks coffee bag (0.25 x 0.25 x 1.00 ), the total distribution center volume was divided by the volume of the 1-pound bag. The following assumptions were made to calculate the total minimum transportation cost per year: Although the annual demand would change, the regional demand % would stay the same for each year Shipping by trucks ($0.88) costs a little more than shipping by sea ($0.77) The shipping cost of $0.88 per pound would remain the same for each year Square footage of plant Volume of plant Percentage of plant that would be used for coffee bean storage (50%) Recommendations The team s recommendations to Starbucks would be to keep open all suppliers to meet distribution center demands and to keep open all distribution centers to meet regional retailer demands. Starbucks should allocate the appropriate number of pounds from suppliers to distribution centers, as shown in Appendices A C, and it should allocate the appropriate number of pounds from distribution centers to regional retailers, as shown in Appendices D F. 7

9 Starbucks Use of 3PL Starbucks has used Kraft to distribute its coffee in supermarkets and grocery stores for twelve years. Acosta Inc, the distributor for Starbucks VIA instant coffee has plans to take over Kraft, which will save money for Starbucks. According to a research study, Acosta will help Starbucks to develop sales and product display strategies starting March 1, This business plan actually came with the release of Starbucks VIA. Starbucks sold its VIA Product for the first time directly to retailers, bypassing third-party distributors. The team believes that leaving Kraft out of the game will generate a huge surplus of income for Starbucks. Another option is switching to another distributor instead of using Kraft Foods. Folgers Coffee, owned by Proctor & Gamble, has merged with JM Smucker in the last quarter of This was a 3.3 billion dollar deal that benefited Folgers to use the current distribution network that JM Smucker already has. On March 10, 2011, Starbucks signed a new agreement with Green Mountain Coffee Roasters, which own and distribute the K-Cup Keurig Coffee Brewing system. Green Mountain Coffee Roasters owns the biggest distribution network for the single-cup brew system in the North American market. Shares of Green Mountain went up 32%, and Starbucks shares went up 7.7% because of this beneficial agreement. While Kraft Foods had only 7.2% of the market share with its single serving products, Green Market dominates the market with more than 65% market share. Thus, the team recommends that Starbucks should further pursue this partnership with Green Mountain to expand into the single cup coffee market. 8

10 Works Cited "Analysis of Starbucks - a Knol by Admin." Knol - a Unit of Knowledge: Share What You Know, Publish Your Expertise. Web. 11 Mar < Andrejczak, Matt. "Starbucks Taps Acosta for New Grocery Push - MarketWatch." MarketWatch - Stock Market Quotes, Business News, Financial News. Web. 11 Mar < >. Baertlein, Lisa. "Starbucks Sees Higher 2011 Coffee Costs - TODAY News - TODAYshow.com." TODAY.com: Matt Lauer, Meredith Vieira, Ann Curry, Al Roker, Natalie Morales - TODAY Show Video, News, Recipes, Health, Pets. Web. 11 Mar < Barnes, Jack. "Five Ways to Profit as Coffee Prices Soar - Seeking Alpha." Stock Market News & Financial Analysis - Seeking Alpha. Web. 11 Mar < "Brazil s Coffee Production Forecast Coffee Prices Today Stock Market Today - Penny Stock - Gold Prices - Car Insurance." Stock Market Today - Penny Stock - Gold Prices - Car Insurance. Web. 11 Mar < "Cleveland Fed Estimates of Inflation Expectations :: Federal Reserve Bank of Cleveland." Welcome to the Cleveland Fed! :: Federal Reserve Bank of Cleveland. Web. 11 Mar < "Coffee Prices 2011." Espresso Coffee Guide Everything You Need to Know about Espresso and Coffee. William Blair & Company Equity Research Report - L.L.C. Web. 11 Mar. 9

11 2011. < "Coffee: Supply Shortfalls Should Continue to Favor Put Sellers in Seeking Alpha." Stock Market News & Financial Analysis - Seeking Alpha. Web. 11 Mar < "Company Information from Hoover's." Hoovers Business Solutions from Hoovers. Hoover's. Web. 11 Mar < Kansas, Dave. "JDSU, Starbucks, Green Mountain Coffee Buck Sharp Downward Trend MarketBeat - WSJ." WSJ Blogs - WSJ. Web. 11 Mar < "Kraft Deal Costs Starbucks Potential Grocery Sales - Bloomberg." Bloomberg - Business & Financial News, Breaking News Headlines. Web. 11 Mar < LeTrent, Sarah. "Starbucks Plans to Stir up Coffee Market - CNN." Featured Articles from CNN. 26 May Web. 11 Mar < 26/living/starbucks.coffee.battle>. Lunkong, Pius. "Cameroon Robusta Coffee Export Price Rises 3% in Week to Dec. 6 - Bloomberg." Bloomberg - Business & Financial News, Breaking News Headlines. 7 Dec Web. 11 Mar < "News :: Coffee Crop May Shrink." Market Leader. Web. 11 Mar

12 < Real Estate Listings - Real Estate Agents CENTURY 21. Web. 11 Mar < "STARBUCKS CORPORATION BUILDING A SUSTAINABLE SUPPLY CHAIN." Google Docs. GLOBAL SUPPLY CHAIN MANAGEMENT FORUM, May Web. 11 Mar < d.edu/scforum/login/abstracts/documents/gs54.pdf starbucks coffee bean supply chain>. "Starbucks Opens Third U.S. Roasting Plant in Nevada. (Trade News). North America United States from AllBusiness.com." Small Business Advice and Resources from AllBusiness.com. Tea & Coffee Trade Journal, 20 May Web. 11 Mar < "USA QuickFacts from the US Census Bureau." State and County QuickFacts. Web. 11 Mar < 11

13 Appendix A 12

14 Appendix B 13

15 Appendix C 14

16 Appendix D 15

17 Appendix E 16

18 Appendix F 17

19 Appendix G 18

20 Appendix H 450 Demand Estimates Year Demand Growth % Safety Stock Expected Import % % % % E % 15% E % 15% E % 15% E % 15% E % 15% E % 15% * All values in millions of pounds 19

21 Appendix I Country % change in Coffee Production 2010 Brazil -13% Vietnam -3.7% Columbia -15% Honduras +149% Kenya +52% % Supply for Starbucks 40%, 47.2 mil 20%, 18 mil bags 10% 10.5 mil bags 20% 3.8 mil bags 10% 3.7 mil bags Average forecasted coffee harvest for B lbs 2.38 B lbs 1.39B lbs 501.6M lbs 488.4M lbs Supplier Imports Brazil Vietnam Columbia Kenya Honduras Year Price Inflation % % % % % (w. contract) 1.6% E % E % E % E % E % Coffee Bean Price/lb ($) & Inflation 20

22 Appendix J Price 2 Inflation

23 Appendix K 22

24 Appendix L 23

25 Appendix M Starbucks Revenue vs. Net Income 24

26 Appendix N 25