An interview with T.R. "Ted" Garcia, Starbucks Senior Vice President, Supply Chain Operations

With such a fast-growth history and plans to operate 2,000 stores by the year 2000, Starbucks has its work cut out for itself in terms of supply chain operation.

As a retailer that manufactures much of its own product, a number of supply chain opportunities exist for Starbucks. But the company's supply chain issues don't end there; third-party logistics concerns are brought into the mix as Starbucks continues to branch out from it coffee shop roots.

T.R. "Ted" Garcia, Starbucks senior vice president, supply chain operations, spoke recently with editor David Greenfield about how the company manages its resources and positions itself to achieve future goals.

With all Starbucks stores company-owned (no franchises), describe the basic structure of your supply chain and how it encompasses manufacturing, planning, inventory management, systems, purchasing, transportation and distribution.

All of these pieces — manufacturing, planning, inventory management, etc. — report in to my office. The first area involved in our supply chain operations is our retail business organization, which runs all of our retail stores; we currently own some 1,200 stores. Our retail business operation also supports, through supply chain operations, our international businesses.

The second area of our supply chain operation is our support of specialty sales and marketing. In this function we support major restaurants, United Airlines, Nordstrom's, etc. These are the specialty accounts that don't fall under our retail business unit operations.

The third area of our supply chain operations is our direct response. The functions handled here are typically referred to as direct mail.

Basically, we have created a centralized supply chain operations organization that supports each of these three areas. The company recognized that there is significant leverage in operating the supply chain operation in this way, as opposed to having three totally separate business units. And as we look at other opportunities in the future, the supply chain will obviously be an integral part of leveraging for those business units or ventures as well.

We believe the whole concept of supply chain can be found in the term "value added." We are in the business of delivering the value. The marketing and the retail organizations develop the value, but we (supply chain operations) deliver it. Every day the objective for every single person working in supply chain operations is: What value have we delivered today to the shareholders and our customers?

Each unit of our supply chain is integrated by common objectives. We have a mission statement. But even more important, we have strategic imperatives for each of our business units within supply chain operations. And these imperatives are all shared by the heads of each of those business units to such a degree that much of their financial compensation is based on achieving objectives that cross boundaries. Examples of this can be found in inventory control, inventory levels, inventory investment, service levels, and financial performance as a total delivered cost to our customers and accounts.

This sharing of objectives is set up so that we do not create a silo structure to our business. That's the value added. We do not maximize transportation at the expense of distribution; we do not make long runs just for the sake of improving the throughputs in manufacturing. Everything is done based on achieving the best total delivered cost out of our facilities.

In the face of the extremely fast growth of your business, what are the biggest hurdles in your supply chain process and how do you overcome them consistently?

The first thing we did to ensure the smoothness of our operations was to go out and find the best talent.

But the biggest challenge in ensuring the smoothness of our supply chain operations you've already identified. And that is: How do you support a company that has grown more than 40 percent for eight straight years? The first step was to install integrated supply chain operating systems. We went out and did a best-in-class search. We began with a purchasing piece and then expanded that out to the planning and inventory control systems, which feed into the MRP piece.

From there we went out to find the best-in-class finite scheduling system, which is now in place. All of these pieces are now in place on a worldwide basis, feeding in from each of the business units to us. These pieces alone have taken our forecast variance from 40 percent on a total aggregate basis in 1995 to 0.5 percent in April 1997. And this type of performance is largely due to the linkages we have with each of the business units.

It should also be noted that each of the business units mentioned earlier has teams that are accountable to supply chain operations from a forecasting and communications standpoint. They meet once a week to ensure that the information we have is the latest information they've been getting from the field.

Our ventures with Dreyers (coffee-flavored ice cream) and PepsiCo (Frappucino) are also set up with similar linkages to feed us information on a daily or weekly basis to assure that we are clearing the hurdles.

The next piece we are working on is control of the entire shop floor, and then we'll focus on the DRP (distribution resource planning) and TRP (transportation requirement planning) pieces. All of these pieces will be implemented during the 1998 fiscal year, which begins in October 1997.

What led you to choose finite scheduling software?

Given the complexity of the businesses we support, we cannot get away with weekly gross planning due to our short shelf life — 26 weeks on the outside with our coffee. As a result, we have to run our products often. We carry only about three weeks of finished goods inventory. And it became very important, with our high-technology manufacturing facilities, to be able to schedule them correctly. Thus, there is a need for finite capacity scheduling versus bigger picture scheduling packages.

It has been said that the sharing of information and supply chain opportunities is key to a successful partnership. Expand on this by describing how you move information to your supply chain partners and what type of opportunities you make available to them?

I have monthly meetings with my peers in the business units. We measure inventory accuracy, we adjust inventories where necessary if we know something's coming up, we measure to the SKU level for forecasting accuracy, and we feed that information back to the business units. We also do SKU performance analyses from the perspective of looking at high-level profitability; we work with the finance and planning group and the business units in this area.

From our perspective it's a real pleasure to do all of this, because at Starbucks the supply chain has always had the leverage of being an integral part of the organization. And because we have done such a good job, it continues to be highly thought of.

Explain the function of Starbucks' retail customer service representatives and how they're an important part of your inventory maintenance, especially as it regards the freshness of your product.

Before Fiscal Year 1997, the customer service organization reported into retail. It was recognized, however, that we needed to link customer service with where the product is manufactured and distributed and make them aware of inventory positions, etc.; so we moved the entire team into the supply chain organizational area. With customer service now linked directly into the supply chain organization, we have increased the coverage of our accounts (retail stores) by 50 percent. Where any one customer service rep (CSR) used to do X, that rep now does X plus 50 percent. This is possible because of the information they now have at their fingertips in order to be able to support the store level.

The key element for CSRs is shelf life. When we open coffee at our stores, it only stays open for seven days before we donate it. So the need to link to inventory store level and the three weeks of inventory that we carry here is critical, and the CSRs are the point people who help manage that.

With a goal of 2,000 stores by the year 2000 (nearly a doubling of your present size), how do you plan to adapt your supply chain strategy to the growing demand that will be placed on it?

People that know me know that I am a continuous improvement person. We have already built the integrated teams, and they are in place. And now, with our future growth opportunities, we are focusing on partnerships with outside service providers. We do not want to build the infrastructure for everything; so what we have done is build partnerships with third-party providers facilitated by our third-party logistics teams.

We have set up an east coast and a west coast new store construction distribution site run by a third party, thereby saving us thousands of dollars on each store opening by funneling all new store construction materials through those facilities to get the leverage on truckload quantities going to the stores. We also have plans on doing this in the future with distribution as well.

And although we have the people in place, we are about halfway finished with our systems implementation and integration. In order to achieve our goal by the year 2000, the systems will all have to be in place. We anticipate this taking place by the end of 1998.

The final piece in this puzzle is continuing to put in measurement and performance measurement systems. We've done that across the board, but we're refining it and improving it so that we have more real-time data to make and change our direction as necessary.

Describe Starbucks' approach to outsourcing — what you look for in a company to partner with, how well this approach has served you and any future plans in this regard.

We have a unique culture here at Starbucks. We look for partners that have a culture that values dignity and respect — that create a win-win environment. It's about sharing information. It's about achieving common objectives. And it's about sharing technology with each other. We do this with our third-party providers on a very open basis. Above all, we spend 50 percent of our time in looking at third-party providers, their culture and the way they treat their people.

We also consider core competencies. We spend a lot of time with our partners up front, before we ever form an agreement or alliance, understanding what our core competencies are and how we can best match the two together.

My philosophy is: Do not get involved in anything that is not a core competency or something that would require the building of a new infrastructure.

Starbucks is known for its initial focus not being on the company, but rather the employee. Describe how this approach has benefited you and how it could benefit other manufacturing operations as well.

Starbucks' approach is a map for success. We are the only fully vertically integrated company in the United States that I know of. We know of no other retailer that also manufactures its product. It has created the ability for us to support the retail stores with the freshest product of anybody in the industry in this field. And we have halved our inventories in the last two years with our approach.

Our approach also provides for one of the most cost-effective service structures in the industry — rivaling the companies that distribute to the grocery channels, etc.

But it's really about the people. The reason we're successful is because we have a phenomenally committed work force that gives off an air of excitement and results. We get thousands of résumés a month, and we've been very fortunate to be able to draw upon that talent to make our cost/service/quality the best of anybody in the United States that is doing this kind of work.

And to make sure that everyone has a chance to have their say, I have a "Let's Talk with Ted" session about every other month, where I go to all of our facilities and provide an opportunity for anyone to tell me about what they would like to see happen to improve not only Starbucks' bottom line, but our relationship with our customers and shareholders.

Just as important is our support from management. We have training programs for every one of our partners. Every one of the 500 people in my organization has been through supply chain conceptual training. Every one of these people know what supply chain operations is about.

Also, all of our teams — planning, inventory control, distribution, transportation — are becoming APICS certified. We've already had a number of graduates. Most of our people already have a good background in MRP planning, but the APICS certification gives them a solid foundation of how the supply chain operations fit together.

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