Stacy Duda, LaShawn James, Zeryn Mackwani, Raul Munoz, and David Volk prepared this case under the supervision of Professor Hau Lee as the basis for class discussion rather than to illustrate either effective or ineffective handling of an administrative situation.
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BUILDING A SUSTAINABLE SUPPLY CHAIN
Over the last several years, Starbucks has instituted a new purchasing philosophy. We have done this because it is the right thing to do – for farmers, for our people, and for our business. Because we have persuaded our customers to pay high prices for quality roasted coffee, we are able to pay high prices for green unroasted coffee. We also believe that the high prices we pay for coffee allow us to be a potential force for positive reform in every part of our supply chain. —Orin Smith, Former President and CEO; and Dub Hay, SVP, Coffee, Starbucks Corporation1
Starbucks Corporation was the world's largest specialty coffee retailer, with $6.4 billion in annual revenue for the fiscal year ended October 2, 2005. The company continued to expand the number of retail stores worldwide, and consistently saw strong growth in the sales and net profits (see Exhibits 1 and 2). Since going public in 1992, its stock appreciated more than 4,000 percent after adjusting for stock splits.
In the 1990s, the specialty coffee industry experienced gigantic growth, fueled largely by the coffee-drinking habits of college graduates and other educated professionals. In the previous few years, however, a worldwide oversupply of lower-grade coffee had depressed the world’s market prices, making it difficult for coffee farmers to earn enough revenue to cover the cost of production. Although Starbucks only purchased the highest quality Arabica coffee and paid premium prices, all farmers suffered from the oversupply of coffee (see Exhibit 3). 1 This case is based on interviews with the following Starbucks representatives: Dub Hay, Vice President of Coffee Procurement; Brooke Brown, Project Specialist, Coffee; Stephane Erard; and Michelle Richardson. All subsequent quotes and references are from these interviews or information provided by Starbucks unless otherwise noted. Starbucks Corporation: Building a Sustainable Supply Chain GS-54 p. 2 By the end of 2005, Starbucks was at a challenging point in its history. It boasted more than 10,000 stores—up from 676 a decade before—and roasted 2.3 percent of the world’s coffee. Each day it opened an average of four stores and hired 200 employees. To support such a high growth rate, it was clear that an integral part of the company's future success would come from meeting increased demand through a secure supply of high-quality coffee beans. Coffee beans constituted the bread and butter of Starbucks’ business—the company had to ensure a sustainable supply of this key commodity. Consequently, Starbucks partnered with Conservation International, an environmental nonprofit organization, to develop C.A.F.E. Practices (Coffee and Farmer Equity Practices). C.A.F.E.’s goals were to contribute to the livelihood of coffee farmers and to ensure high-quality coffee for the long term. This initiative was based on three principles: (1) a sustainable supply of high quality coffee beans, provided by a stable source of...