Introduction
Starbucks is now one of the leaders in Supply Chain Management and Procurement practices. However, at beginning of the decade the operational costs of the company were rising while the net sales were decreasing. This was owing to the fast expansion due to which the supply chain management was not rationalized and had to keep pace with business expansion. However, as an efficiency and rationalization drive, the costs of running the supply chain management as a percentage of total costs have been marginalized to a considerable extent. This is owing to the new approach of Total costs of Ownership that has made Starbucks realize the actual costs of procurement of goods and resulted in a better negotiation. While the realization of the Total Cost of Ownership is important, the additional efforts in terms of taking advantage of the revelation of TCO through improved inventory and procurement management was still required.
Discussion
Current Costs of Procurement
The initial TCO for Starbucks was worked out as shown below. The costs breakup is given in Table 1.
TCO = Purchase Price +Direct Costs + Indirect Costs associated with taking ownership of the product or material = Purchase Price or cost of goods sold + other operating expenses (Direct costs) + General and Admin. Expenses+ Interest expenses + Taxes
= 10720.8 million USD = 10.7 billion USD
Table1. Current Total Cost of Ownership for Starbucks
EDI versus e-procurement
While e procurement is a strategic procurement system based on ICT technologies which have evolved now to more advanced internet based technologies to achieve cost and process efficiencies for both buyers and suppliers, and uses various strategic models to achieve different strategic objectives such as the e- reverse auctioning model; EDI is a set of communication technologies that aid the business processes including the e-procurement. While EDI as a focus of the e-procurement mechanism of a firm, entails simplistic models of supply chain management, the other e-procurement models such as the e-sourcing or e reverse auctioning vary in the strategic objectives and methodology employed to do so. The focus in this case might or might not be on EDI however, EDI shall still be present as an underlying technology .
Analysis of the differences between the potential uses and impacts of e-procurement models and those of EDI is based on the following factors.
Cost savings- While e-Procurement can reduce cost of sales through better negotiating power, EDI can achieve the same through improved inventory management
Speed and Accuracy- As far as speed and accuracy is concerned, e-Procurement models can prove to be more direct and accurate, while EDI being a supporting or underlying mechanism to usually traditional procurement systems can be at a disadvantage.
Efficiency-While e-Procurement models are efficient in terms of the insight they provide for better decision making, the EDI are efficient in communicating the insights and critical information that is subject to intelligent interpretation for improved performance
Strategic Insights- As mentioned above, e-procurement models are better suited to provide ready Strategic insights on a real time basis, while the EDI systems leave scope for more interpretation and manual workout to arrive at valuable strategic insights.
E – Reverse auctioning as a means of e-procurement is recommended for the use of the corporation as opposed to a simplistic use of the EDI as means of ICT communication while using the traditional procurement processes and methods, wherein the price is the prime mover of the bid allocation while other attributes are fixed. EDI when seen as a strategic mechanism and not just as technology is a more generalized and traditional way of managing the procurement process and for a large corporation such a Starbucks with huge geographical and demographic market penetration as well as a range of product components that need to be sourced efficiently to manage the bottom line effectively, e-procurement strategies as compared to simplistic EDI strategy seems more feasible for the corporation .
RFID and EDI
RFID or Radio Frequency Identification is a technology that helps gather and process and product data at an unprecedented rate. The technology can be integrated into the overall Electronic Data Interchange (EDI) set of technologies and the resultant mechanism can be a powerful source of cost and competitive advantage especially for the supply chain processes. Since in retail businesses such as Starbucks with stores moving the food material inventory as a means of revenue generation, operating costs depend upon how efficiently the inventory is moved. In such cases limited visibility of the shelf inventory and lack of flexibility can often be the limiting factor in recognition of opportunities that could result in sales. This increases the storage costs per unit time. The RFID enabled EDI technologies enable such businesses to overcome these handicaps and thus reduce costs accordingly. While RFID is mostly used in a B2C environment, corporation such as Starbucks has great applications for it in terms of the supply chain efficiency it can provide by incorporating RFID systems in collaboration with the suppliers such that as soon as the supplier inventory turnover takes place at corporation end, the supplier is able to gauge the real time status of the inventory requirements of Starbucks and thus enable a cost effective and timely fulfillment of the inventory.
Recommendations for implementation of RFID
The Components and system required for implementing RFID for Starbucks include the following as mentioned below.
Tags- A Tag is a transponder or a Radio Transmitter- Receiver mounted on an underlying layer, which can be embedded in a packing or stuck on with an adhesive.
UHF reader- A reader is device that can communicate with tags using a variety of protocols.
Onboard data to be stored on the tag itself.
A requirements document including process flow.
RF spectrum analysis to be conducted prior to implementation.
Hybrid technology with bar code printed on individual items, while a tag can be incorporated on the lots to reduce costs.
Antennae to receive RF signals.
Cables- Ethernet, Power cables and cables for connecting a fixed reader to its companion antennas.
Each of the 5 company owned, 24 co-owned manufacturing units, 9 regional, 48 central DCs and 6 green coffee warehouses to be equipped with RF cables and Antennae and UHF readers.
The 23, 786 stores to be equipped with UHF readers and cables and antennae as well depending on the RF requirements.
The non-coffee supplier warehouses to be similarly equipped with RFID.
Benefits of RFID
RFID implementation has following benefits for Starbucks Corporation :
Better visibility and pipeline management
Improved inventory management
Improved procurement
Accurate determination of item based inventory requirements
Cost reduction due to reduced storage costs
Better shelf life management
Reduction in Cost of Sales
Limitations for Starbucks
There are however, the following limitations of implementation for Starbucks as well.
Huge initial costs in terms of implementation and installation of cables and antennae as the number of stores and warehouses that require the installations are huge.
Maintenance and security of such a huge RFID network becomes an issue .
Recommendation
Based on a careful assessment of the above advantages and limitations, it is inferred that although the initial and upfront costs of implementation of RFID for Starbucks shall be huge and also the maintenance and upkeep shall be a challenge, however over a period of time, the benefits in terms of reduced inventory costs, accurate demand forecast enabling better assessment of overall costs and greater negotiating power with the suppliers shall warrant incorporation and implementation of RFID into the procurement system of Starbucks .
Cost Reductions
Based on the above usages of the e reverse auction model, the cost of sales were reduced as the suppliers competed for best coffee and milk products at the most optimum prices that reflected the Total cost of Ownership (TCO) which was beneficial to both Starbucks as well as the vendors and suppliers. The breakup of the cost reductions is shown in the Table 2 below.
Conclusion
The e procurement and RFID technologies also contributed to reduction in the cost of storage at very nominal increase in technology costs included in the General and admin expenses. Further, the implementation of RFID did escalate costs to a great extent almost to the tune of 700 million USD, however, this cost was offset by a corresponding reduction in cost of sales owing to better inventory management, other operating expenses due to reduction in wastage and perishability costs, as well as huge savings in terms of the reduction in transportation costs by better batch planning .
References
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