Starbucks Operation Management Essay Example

Background of the Starbucks Сompany

Starbucks is the leading whole been and ground coffee retailer, with a global presence in 65 countries across the world. The history of the company started in 1971 with the single coffee, beans, tea and spices store in Seattle. Now, the company runs more than 20 500 stores in various locations, including Northern and Southern America, Europe, India, Indonesia, Japan, Australia, Asia, some African countries, etc. Most shops are located in the United States. About a half of the stores are owned by the company, whereas the second half works as licensees of the brand. Most stores are located in public highly visited places like airports, shopping malls, bus terminals and central squares of the cities. Today, Starbucks stores offer more than 30 blends coffee, handcrafted beverages, coffee- and tea-brewing equipment, brand mugs, gifts, books and accessories, and even some kinds of fresh food, salads, sandwiches, muffins, fruit cups, etc. The company is devoted to the highest standards in leading business; it respects the rights and virtues of human and empowers the sustainable development. According to the financial results of the company, Starbucks ended 2014 with a 10.4 percent revenue growth and 13.9 percent employee growth.

Industry in which the company competes. Starbucks operates in the industry of specialty eateries. This industry is represented by companies that run limited service restaurants specializing in non-alcoholic beverages and snacks. This industry includes various coffee-shops, bagel and doughnut stores, ice-cream, smoothie and juice shops. Examining the specialty eatery industry, it is significant to note that coffee-shops create 40 percent of the total industry’s revenue. To limit the scope, it is important to analyze the retail coffee and snacks market. This is a mature market with a high level of competition and medium level concentration. Due to the global financial crisis and alteration of consumer tastes, the retail coffee and snacks industry experienced a slowdown in 2009. The current industry’s annual growth rate is around 0,9 percent. The main factors that form the industry demand are the changes in household’s disposable income, per capita consumption of coffee rate, demographics, people’s attitude toward health and sustainable consumption and the price of coffee products. The barriers for entering the market are not high.

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Firm’s competitors

The top competitors of the Starbucks Company are the Dunkin’ Brands Group Inc., McDonald’s Corporation and Nestle. The companies spend inspiring amounts on their advertisement and marketing campaigns. McDonald’s Corporation is a leader in fast food industry. Besides, McDonald’s has its own brand McCafe, which serves various types of coffee-drinks, non-alcoholic cocktails and its own baking. McDonalds’ quarterly revenue growth is negative. The company comprises 440 000 employees and declares the gross margin at a level of 38 percent. The net income of the company is around 5 billion dollars. Dunkin’ brands Group, Inc. is smaller than McDonald’s and Starbucks. It has 1 144 employees and only around 166 million dollars net income. However, it has positive quarterly revenue growth rate and higher than McDonald’s gross margin (79%). Nestle has the most impressive scale of operations. However, only the small part of its operations account for the industry of specialty eateries. The main brands of Nestle that compete with Starbucks are Nescafe and Nespresso coffe-stores. The company employs 333 000 workers and records negative revenue growth. The gross margin of the company is at a rate of 48%, and its net income is around 9,8 billion dollars.

Company’s position in the market

Starbucks managed to operate at 10% quarterly revenue growth rate, which is the highest index comparing to its top-competitors who range from -5% to +3%. The company employs 191 000 of people and has gross margin of 58%, which is higher than the industry average. The net income of the company reached 2 billion dollars. Starbucks and Dunkin are the key players in retail coffee market and account for 60 percent of the total market share. Starbucks is the leader in this segment as it makes up 36,7 percent of the market share. It has impressive geographical presence and keeps developing its stores at global markets.

Strategy of the Company

Three main strategies:

According to the Porter, there are three generic strategies to compete at the market.

• First, low cost strategy means that company can win competitive advantage through increasing profits by minimizing costs of production. The company may get the market share by offering lower prices than competitors do while still having profits due to low production costs.
• Second, differentiation strategy implies positioning the products as unique, of a better quality and different from those of the competitors. In order to follow this strategy, a company needs to undertake excellent research, be innovative and constantly developing. Besides, it is important to launch an effective marketing campaign in order to make company’s customers believe that its product is different and superior.
• Third, response or focus strategy means winning the leadership by concentrating on some niche or activity and adapting company’s product/service to the specific needs of the customers (unique low-cost product or single product that is very important for some group of a society).

Strategy the company is following

Starbucks is using the differentiation strategy. The company sells exceptional high-quality products that target all age categories of customers. The price for the products is high, but the quality is superior. Starbucks differentiates its services as the best coffee-drinking experiences in clean places with polite and knowledgeable staff. In addition, the company differentiates itself as the most responsible coffee retailer in the world and publishes global responsibility reports each year.

Operational Areas

• Seven operational areas. There are seven operational areas that should be assessed in every company. Human resource area includes skills, training and qualification of employees. Facilities and equipment area is especially important for services and reflects the quality and design of the facilities. Financial part is the most significant part of company’s performance as resources are the basic need in creating any business. Another crucial operational area is customer relations management. Other important areas are the utility of the products/services (whether this product/service creates an additional value to a customer), the technological aspects of the production and effective supply-chain-management.
• Examples of operational areas. From Starbucks’ perspective, human resources are a key success factor in building a sustainable business environment. For this reason, the company follows the most ethical practices in dealing with its employees, customers and suppliers by developing various leadership, motivation, bonus, educational, among other programs. Starbucks pays much attention to the design of its stores, location of the stores and creating exclusive atmosphere that adds value to customers’ experiences. Starbucks implements technological innovations and tries to achieve the responsibility goals that are set by the company. These goals are directed towards building the most sustainable and responsible business in all aspects and all operations.

Forecasting

• Different forecasting approaches

Forecasting is a significant tool in operations’ planning. Forecasts are used to predict the possible changes in demand for the services and products, prices for the raw materials, industry growth rate and other important factors that influence management’s decisions. There are three main approaches to forecasting. First, judgmental forecasts use subjective information to form the opinion. These forecasts are used when information is unavailable and when decision is required in a short period. For instance, the manager should analyze the possible revenue from launching a new additional service. Due to the fact that the company did not deal with such service before, it has not available data to build the time-series forecast. The second forecasting approach is time-series forecasts. This technique is based on identifying the specific patterns of data and using trends to identify possible outcomes. This method is the most common in business management. The third approach to forecasting is associative modeling, which is the most complex one. This method is based on building the model of the market and predicting the value of some variable. Usually, the models make a forecast by analyzing relationship among the dependent variable and a number of independent variables. It is crucial that company understands that there is no best forecasting technique. The management of the company should be flexible and use the most appropriate technique under the specific conditions in a certain moment of time.

• Company’s forecasting techniques

Starbucks, as any other big player, uses judgmental forecasting. When they developed mobile application, they could not calculate the possible effect from this innovation. All they could do was to analyze the experience of other companies and make a judgmental forecast for their own case. The company uses time series to calculate the volume of sales in each quarter of the year or to predict the price of their shares based on the previous performance. Associative models are also used by Starbucks. For instance, the company may set their sales as dependent variable, and the prices for coffee, industry growth index and per capita coffee consumption as independent variables. Thus, they will have an associative model that allows predicting the changes in future sales.

• Time horizons of the forecasts

Forecasts may be classified by the time-horizon principles. Management theory defines three types of time horizons: short-range forecast (up to a one-year period), medium-range (one to three years) and long-range forecasts (more than three year period). Short-range forecasts may include planning the operations for the quarter and job scheduling. Medium-range forecasts include the annual sales and budget planning, as well as production capacity planning. Long-range forecasts are used for strategic planning. For example, in 2008, Starbucks set the goals to implement their responsibility strategy untill 2015. Thus, they forecasted that in 7 years, they could create a profile of the responsible company that trades ethically, builds in a green way and consumes rationally. They forecasted that in 7-8 years, the attention of the society would switch from simply “good taste” to “responsible consumption” and did their best to improve their operations according to particular strategic goals.

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Product and Service Design

There are basically few types of product designs, namely the standardization, mass customization, robust design, modular design and delayed differentiation. However, there product designs cannot be used for services. Starbucks offers premium expensive services that are carefully designed according to its strategy. The design of Starbucks’ stores is called to reflect the nature of the neighborhood where the shop is situated. Also, the company tries to reduce the environmental effect of their stores by using green technologies in building, lightning and equipping stores. It is possible to assume that in some way, Starbucks uses standardization strategy as the menu items, services and style of shops is highly standardized according to the company’s devotion to highest quality standards and responsible practices.

Company’s products or services and their product life cycles

According to the theory of product life cycles, a product or service undergoes some stages throughout its lifecycle:

• During the first stage, introduction, the product/service starts its life at the market. At this stage, it is crucial to undertake serious analysis in order to assess the potential of the product and meet the demand of the customers.
• The second stage is growth where the demand for the product is growing. At this stage, it is significant to calculate how long the product will stay at the market and make the improvements, alterations and developments of the product.
• The third stage is maturity. The product is developed to its best condition, no improvements are required; it has a steady demand, and the life of the product depends on the life of the particular market.
• The final fourth stage of the product’s lifecycle is decline that involves deteriorating the production, replacing the product with the new one or looking at alternative usage of this product.

Starbucks is now in a maturity stage. The coffee shop market is developed, and Starbucks has the biggest share of the market. This means that small companies that strive to enter the market will try to win the part of Starbucks’ share. Starbucks delivers high-quality comparatively expensive services that win customer’s loyalty by the positive image of the brand and excellent services. In my view, Starbuck’s services lifecycle may decline because of the depression in the retail coffee industry due to health issues. Thus, the services of Starbucks may go to decline stage because of the decline in coffee demand in the entire industry.

Product design and selected strategy

• Starbucks’ service design perfectly fits its differentiation strategy

As soon as service design is intangible, it is difficult to offer some quantitative analysis. Starbucks stores are always clean and friendly. Their personnel are knowledgeable and are always ready to help. Starbucks operates as a responsible company, and their atmosphere tells the same. They use green technologies, promote recycling in their shops and put an emphasis on the high quality of their menu and positive experience they give to a customer.

• Legal, ethical and sustainability considerations

Starbucks is one of the most responsible businesses that are totally devoted to legal, ethical and sustainable procedures. The company applies a holistic approach to its supply-chain-management. For instance, the company buys only high-quality coffee that is traded ethically and grown responsibly. To this effort, Starbucks initiated Coffee and Farm Ethical practices (C.A.F.E) setting ethical standards for growing and purchasing coffee and other cultures and serving farmers with Farmer Support Centers in many locations, including Costa Rica, China, Rwanda, Ethiopia, Guatemala,

• Colombia and Tanzania

In addition, Starbucks puts substantial effort in serving community needs. In 2013, the company allocated one-million-dollars grant for developing the non-profit educational organization with an aim to promote leadership among the unemployed job-ready youth.
Sustainable development of the company is expressed in its approach to natural resources. Starbucks keeps reducing its water consumption, promotes recycling technologies and green-building. Annually, the company publishes sustainability report that presents their achievements in eco-friendly goals fulfillment.

Capacity

Company’s capacity. Generally, the company can follow one out of the three capacity management plans – leading capacity, following capacity and tracking capacity. I think that Starbucks uses leading capacity management, which means increasing the capacity before the demand increases. The company chooses aggressive expansion and penetrates the new segments of the market by opening stores at rural places and expanding internationally. In my view, the company has enough capacity to serve the needs of customers. However, it has a chance to use the leading capacity plan in emerging markets (countries of Eastern Europe).

• Short-term and long-term capacity planning

Short-term capacity planning includes day-to-day planning in order to be ready to meet the daily demand of the customers. For instance, the existing Starbucks store should plan whether its baristas are ready to serve 10, 20 or 30 customers per hour depending on the customers’ traffic. The manager of the shop should calculate an average number of guests in different days of the week and engage as many employees as needed to fulfill the excellent service in busy days. Thus, this type of capacity planning can be called tactical planning. Long-term capacity planning includes the more complex decisions. For instance, the CEO of Starbucks analyses the growth in sales across different states and decides upon opening new store locations or closing some shops. This decision requires careful analysis of customer’s demand, tastes in particular state or country, coffee drinking culture and other significant aspects. Long-term capacity planning deals with strategic decisions regarding the satisfaction of customers’ demand, trends in demand and increasing or decreasing the company’s capacity as a whole.

• Company’s capacity and selected strategy

In my view, Starbucks manages its capacity in accordance with the differentiation strategy. It opens shops in premium places and manages to provide excellent services even in the most crowded places. This means that Starbucks carefully plans the capacity and does not allow operation under capacity, which may create a negative attitude toward their brand.

Location

Starbucks’ stores are located at the most high-traffic visible places that create the best strategic advantages for the business. Most shops are placed in large department stores, city malls, suburban areas, university campuses, select rural places and off-highway areas, which allows achieving the constant presence at premium (for the customers) places. Besides, many stores are located in airport and bus terminals where people usually pass the time when they wait for their arrival or departure.
In my opinion, the strategy to locate stores at the most traffic-loaded places is very beneficial. It creates the convincement that Starbucks coffee can be bought in the most convenient places for the customer. For instance, when a driver is tired and needs to have a break, visiting the off-highway Starbucks point is a good option. There, he can get a few minutes of rest, relax sitting with a cup of a tasty drink listening to the pleasant music or surfing the web through free Wi-Fi that is offered at all Starbucks stores. Another example is an airport or bus terminal. People will definitely visit Starbucks because it gives positive experience of spending time in a relaxing atmosphere instead of waiting for the bus/flight with crowds of people.

• Considered factors

I think that the locations decisions are carefully planed by managers. They try to locate coffee-shops at the places that are:
– Often visited by various groups of people for some purposes. Shopping center is a good example because people of all statuses and ages go to shopping centers for some reasons. Some of them want to spend time, some want to buy something, some go to entertain kids, and all of them will go across the Starbucks shop.
– Premium locations. City centers and main squares are often visited by tourists and people who go for a walk.
– Highly-traffic places. Suburban areas, airport and bus terminals, hospitals and university campuses are crowded all the time.
– Free from competitors places. For instance, off-road points or gas stations.

• Location and the strategy

In my view, the locations of the Starbucks shops represent the core idea of its strategy. Starbucks is positioning its cafes as unique, premium and excellent place to have a break and get the positive experience. The company wants to make its stores the third most important place in people’s lives, after home and work place.

Process Selection and Facility Layout

Process types and facility layouts. There are few possible ways to organize the production of goods or delivering the services. The distinguishing features of project process and job shops are the small scale. Batch processing is characterized by moderate volume and complexity of operations, and low standardization. Assembly line implies high volume of production, high capacity, and routine production of a standardized list of products. Continuous process is the most sophisticated process type, which is characterized by continuously repetitive and highly standardized production of high volume. Facility layout is the way the production system or work process is organized and maintained through certain departments, locations and coordination of actions. Basic layouts types include product layout, process layout, fixed-position and combination layout. Product layout implies using standardized operations in manufacturing in order to achieve constant fast flow of production. Process layout is the arrangement of equipment and manufacturing units by its functions. Fixed position layout is applicable when there is no possibility to transport the large size products. Instead, workers, equipment and materials are moved to the object. For instance, this type of layout is chosen for construction or shipbuilding.

• Process design of the company

Starbucks uses assembly line process design. This means that the company has few major products that are highly standardized. For instance, Starbucks has limited list of coffee products (around 30) and limited list of prepared food. All drinks and food are subject to a high standard that is a part of Starbucks’ marketing strategy. The barista cannot brew his own recipe of coffee; he has to follow the prescriptions of the brand-recipe.

• Layout of the firm

Starbucks is using product layout. Their stores are located in certain places. Thus, a customer needs to enter the store or make on online order. The product is highly standardized (there are certain types of menu offerings that are sold); the staff is trained to do the routine work (brew the different types of coffee, serve them, prepare tea and other drinks from the menu set). There is a clear sequence of operations (buying coffee, tea and cocoa from the suppliers, packaging, delivering coffee to the stores and preparing the drink on customer’s request), the last stage of which is selling product to a customer.

• Company’s process design and facility layout and selected strategy

Starbucks process design and facility layout fully corresponds to its differentiation strategy. They deliver highly-standardized service of excellent quality that is reached through wise assembly process design and product layout.

Quality

• Dimensions and management of quality

Management of quality is a set of actions that should be undertaken in order to not only meet but exceed the expectations of the customers in terms of quality of products and services. There are certain dimensions used to measure the quality efficiency of the service. The first dimension is convenience that measures the accessibility of the service. The second dimension is reliability, which assesses the ability to provide a service consistently and dependably. The next dimensions are responsiveness, courtesy and assurance that employees represent the willingness to be useful, help customers, treat them polite and be knowledgeable in the sphere the company operates. Another service quality dimension is time that shows the speed of operations. In addition, one of the most important dimensions is consistency that shows the ability of providing the same high level of quality on a constant basis. This dimension is especially important for Starbucks as customer wants to receive the same positive experience all the time. The last dimension, which is also very significant to Starbucks, is tangibles or the appearance of the exterior and interior of the place, personnel and equipment.

• Company’s actions to improve quality

Starbucks is devoted to the highest standards in terms of quality of service, human treatment and corporate culture. They work only with responsible suppliers and terminate contract with suppliers who use unethical principles in manufacturing. In addition, any customer can calculate the nutrition of any Starbucks’ product. In my view, today, society is getting obsessed with the idea of healthy nutrition. In order to meet the possible switch in demand, Starbucks can extend its menu by adding some healthy menu offerings. For instance, the company may put an emphasis on fresh juices or advertise their “Delicious Drinks Under 200 Calories list”. This strategy may find positive response from customers who see the word “healthy” behind the quality.

• Costs associated with quality

The costs associated with quality include appraisal costs, prevention costs and failure costs. Appraisal cost is the sum a company allocates in order to control the quality of the product. In the case with Starbucks, we can refer the money spent on soil tests through the farmer centers as appraisal costs. The company also employs special people who taste coffee before supplying it to the shops. Prevention costs are costs allocated to prevent poor quality of products and services. These costs may include quality trainings and meetings, supplier capability surveys, etc. Failure costs are paid when a product or service fails to meet customer’s expectations. These costs may be internal (discovered during the production, for example, a barista discovers that coffee-machine fails to brew a quality product) or external (when the defects are discovered by a customer, for instance, the packaged salad lacked some ingredient).

• Three quality tools

There are seven major quality tools a company can use to get the visual assessment of the operations quality. The examples of quality tools include flowcharts, various types of diagrams, check sheets, pareto-analysis, cause-and-effect diagrams and control charts. The Global Responsibility annual report of the company shows that the company widely uses flowcharts, histograms and cause-and-effect diagrams.

• Inspection and benchmarking

Inspection is the process of researching, testing and verifying the production system of a company in order to ensure the high quality and lack of deficiencies. Benchmarking is the process of setting quality standards by choosing the best quality in the industry and outperforming it. As soon as Starbucks is the leader in the industry, the company tries to improve its own standards and maintain the highest quality. Of course, Starbucks conducts inspection in order to find the flaws in the system.
Inspection can be used throughout the entire operation process as every element and every function is crucial for the final result. For this reason, a company performs inspection in every link of its operations’ chain (the inspection of supplier’s plants, warehouses, shops interior and exterior, cleanliness and accuracy, skills and appearance of workers, knowledge of workers, work of alternative distribution channels).

• Quality and selected strategy

Starbucks manages quality in strong accordance with the differentiation strategy. Any customer can visit Starbucks’ website and learn that the quality of their coffee is excellent because they choose only the best beans that grow at higher altitudes and have superior taste due to the climate factor. In addition, Starbucks created farmer centers that test the soil and help farmers. This allows Starbucks to state that their Arabica is different from regular Arabica beans.

Conclusions

Starbucks Company has an excellent operations management team that works in tandem with other departments of the company. The company pursues aggressive expanding strategy with mass presence in the US and developing operations in many countries across the globe. The key competitive advantage of Starbucks is its success in realization of the differentiation strategy. Thus, all processes, designs, controls and forecasts are dependable on the selected strategy. Operations management of the company is performed in order to build the entire system in the most effective way according to its specialization, marketing and competitive edge. The team of Starbucks copes with its functions and goals successfully.

Recommendations

In my view, the company should develop its geographical presence in other locations by undertaking the similar to the US business strategies. Thus, the entire company will benefit from the greater economy on scale. However, the licensees in other countries should undergo severe quality control measures in order to match the primary strategy of the brand. Therefore, it is important to develop the local operations management teams that would perform operations analysis and control in foreign countries.
Taking into account the performed analysis, it can be said that Starbucks follows the selected strategy (differentiation) and successfully achieves its goals.