This report provides an evaluation and analysis of the methods adopted by Howard Schultz to recover Starbucks Corp. from imminent economic instability. With over 16,000 stores across 60 different countries[1], the publicly listed Starbucks (SBUX) has endured a fiscal history of many troughs and peaks. From his return as CEO in 2008, this essay will identify and dissect Schultz’s changes to operations strategies, specifically, the strategies that directly resulted in the performance reversals akin to companies such as Steve Jobs’ Apple in the 1990’s and, under David Sokol, Berkshire Hathaway’s Net-jets in 2010.
It is first necessary to understand the state of Starbucks that he had left behind 8 years prior. Between Schultz’s departure from and return to the company, Starbucks had fallen from an all-time trading high of $39. 63 by almost 50%[2] – just one year after Jim Donald’s appointment as CEO in 2005. When Schultz publicly stated that the “Board asked me to return”[3] the company was valued at $15. 43 Billion and the Board of Directors had lost faith in Donald.
The 12 months following Schultz’s return, the new CEO had inherited a company that had been infected with complacency in it’s operations and was now dealing with the impact of the abrupt and concerning resignation of the company’s one-year-old CFO[4]. Schultz had been tasked with reinvigorating a company that was entrenched with inefficiencies, over-spending, a general lack of long-term planning, the internal disarray of resignations and low morale, all whilst navigating through the sever externalities of the ‘07/‘08 Global Financial Crisis.
Schultz outlined in his mind, and then to the board, a two-step remedy. Plan A was to shift company values back to a consumer-centric approach. Plan B was to employ cost-cutting techniques and reduce wastage within the company’s 16, 000 stores. As noted by Schultz at the time “We could not control the economy, but we could exert greater control over how we operated in it”[5]. It was at this point that the board intervened, “No… Plan B] should be your new Plan A”[6] It is the exploration of this new ‘Plan A’ that will highlight the major management theories that had been employed by Howard Schultz and his executive team – Six Sigma Approach, Total Quality Management and Lean Techniques – as well as how the actual convergence of these theories created the synergistic environment that lead to Starbucks’ success. Essay Body:
As the Starbucks team identified ways to cut costs, some “low hanging fruit”[7] gave the team cues to short-term strategies for reducing waste simply within the “four walls”[8] of their stores. This immediate waste-reduction was made possible through the five steps of the Six Sigma approach. Summed up by David Nave, the basis of this theory is that “the outcome of the entire process will be improved by reducing the variation of multiple elements”.
This reduction in variation ensures that each process can be perfected and then replicated continuously to ensure the product is defect-free. Antony and Banuelas explain that this is used to “improve profitability, to drive out waste, to reduce quality costs and improve the effectiveness and efficiency of all operations processes that meet or even exceed customers’ needs and expectations”[9] In the case of Starbucks, these elements were people rather than components and the customer’s expectations were quality of food & beverage and level of service.
Starbucks first defined this process by focussing on the activities that take place within their actual coffee outlets. This process, identified by Starbucks’ VP of Lean Thinking Scott Heydon, was then measured through the locomotion of store employees “the walking, reaching, bending”[10]. Once the data had been collected and analysed, Starbucks was able to gain insight into the simple inefficiencies that were taking place within their stores. Management were ble to distinguish between what constitutes as motion and what constitutes as work. This lead to the awareness of “non value-added activities”[11]. Clarity had been restored within Starbucks’ management – “Thirty percent of the partner’s time is spent on motion… I want to lower that”[12] Heydon states. The fourth and fifth step to Bill Smith’s Six Sigma approach is to improve and control the above process[13]. For Starbucks, this is where the convergence of theories began.
These final two steps required a unique solution – where most companies would improve and control one or multiple production lines, Starbucks was tasked with scaling their solutions globally, across 16,000 stores, and they looked to the theory of Total Quality Management to ensure these changes could actually be implemented and retained, specifically Cullen & Hollingham’s notion that “total quality, unlike a piece of equipment, cannot be purchased but must be developed in the minds of everyone in the organisation”[14]. This was really central to Schultz’s “Transformation Agenda”[15].
Rather than formulate and demand changes, the Starbucks executive team decided to take an inclusive approach. Howard Schultz sent his VP of Lean Thinking to visit a number of stores and carry out the process inclusive of the store managers. At one of the sites, measuring the motion showed that before opening the store, the baristas would make approximately 40 trips to and from the store carrying stock and various other items. One hour and 15 minutes every morning for all 16,000 stores that was costing the company resources that could be better spent on more value-add activities.
Together “Heydon and the stores manager came up with changes… that have shaved off an average of an hour-and-a-half off the task per store per week”[16]. A theme was established that included the Starbucks employees in the process of improving and controlling the inefficiencies surrounding them. In his book Onward: How Starbucks Fought For It’s Life Without Losing It, Schultz recounts when a barista adopted Heydon’s focus on efficiency – after identifying that on average, his staff would ask a customer to “please wait a few minutes” 30 times per day, he created his own solution that would eliminate such poor customer service.
The gentleman developed a system that ensured coffee was always freshly ground and all the ingredients for each drink on the menu was in arms-reach of the barista. This reduced the time to fulfil an order and stop customers from having to wait. Dubbed the “Eight-Minute Cadence”[17] he was sent around the country to spread to other managers so that they could “adapt it to their own store’s patterns”[18] In TQM, the focus is on employee inclusion and development of strategies to ensure long-term success.
The testimonial above really highlights the depth to which Schultz and his team had taken this on board. Upon observing Deming’s approach to TQM[19], Gabor perceived that the management theory was less compartmental and more “holistic in that it can only be conceived if it includes all the functions in the organization, all the people who work there”[20]. This was layered on top of the Six Sigma approach to actually facilitate it’s success. The fact that Howard Schultz chose to implement multiple theories of supply-chain management is actually what makes his approach so innovative.
Each theory as outlined by Mahesh Raisinghani[21] has it’s shortcomings. Six Sigma is criticised by Raisinghani for identifying inefficiencies yet not presenting effective rectification strategies. Schultz closed these gaps or areas of vulnerability within each theory by compensating with other theories as well. In referring to the new ‘Eight Minute Cadence’, Schultz cites one of the stores experiencing a “customer-satisfaction score of 56%; by June, it had jumped to 76%. His store has seen a 9% increase in transactions between April and June”[22]
Scott Heydon was actually a redistributed resource within Starbucks. On the team since 2005, Schultz changed his role to VP of Lean Thinking in 2008. Heydon’s new mission – study the theories of Toyota’s Lean Manufacturing thesis and bring these concepts back to Starbucks. Lean thinking focuses on the totality of the ‘flow’ of all the elements in the production process. [23] As mentioned above, the Six Sigma approach identified non value-add activities and the TQM theory involved employees in the process of developing solutions.
The concept of ‘flow’ is defined by Nave as the “uninterrupted movement of product or service through the system to the customer”[24]. For Starbucks this required interaction from barista-to-barista and also barista-to-customer. Store managers began rearranging their supply rooms, identifying items they “replenished most”[25] and having them easily accessible. Instructions for different beverages were “posted and colour-coded”[26] to streamline production and ensure consistency for consumers. Management also created a specialised role within each of their outlets.
Each team would consist of one “Starback”[27] employee who would have no direct contact with the baristas or the customer, but rather perform tasks that would improve the ‘flow’ of serving customers – brewing fresh coffee, steaming pitchers and making sure all inputs were stocked according to demand. This allowed the baristas to remain static at their stations without having to waste time moving around and reaching for items, as identified earlier. All together the combination guaranteed timely customer service and reduced wastage.
A top-down review of these processes really identifies a plan of action that can be broken into three parts. The first is that Schultz was to adopt a strategy for measuring and identifying the wastage that he knew was occurring, but could not quantify. In his book he remembers constantly going into different stores, noticing that his staff were always working hard and showing commitment and yet “somehow the line of customers and the line of empty cups waiting to be filled seemed too long”. This first part relied on the Six Sigma Approach.
The second category for Schultz was scaling – getting the solutions quickly and making sure they could last. Instead of completing the Six Sigma cycle, the Starbucks team created a dialogue with their managers to ensure they were empowered with the solutions that could be adapted to each store – TQM. The final component to his plan was the sustainability of efficiency. The Lean theory created an overarching set of procedures – non-negotiable procedures – to make sure that employees had a defined set of rules to make the flow of the process consistent and reliable.
In an executive team that was sporadic and short-sighted, Schultz restored order and strategy to bring the coffee house back on a path of growth and sustainability. Schultz and Heydon as key to the restoration and revitalisation of Starbucks have mentioned the aforementioned theories. What must be stressed, and what is not recognised by Schultz is that the overlaps evident from using multiple theories is what played the role of compensating for the pitfalls associated with just using one. The waste-reduction, efficiency and the financial relevance of these changes is reflected in the performance of Starbucks from 2007-2012.
SBUX is now trading around $50. 17 US, more than double it’s stock price since Schultz returned less than 5 years ago, Stores have seen employee turnover go from 60% down to even 0% in a 12-moth period[28], operating income has almost doubled as well to $1. 7 Billion and sales growth have now increased from 5% in 2007 to 8% in 2011. The company has now been entrenched with principles of austerity and efficiency rather than spontaneity and excessiveness. Reference List: • Abilla, P. (2010) Starbucks Lean, Results A3. [online] Available at: http://www. hmula. com/starbucks-lean-results-and-alignment-to-transformation-agenda/5683/ [Accessed: 13 Sep 2012]. • American Society for Quality (2002) How To Compare Six Sigma, Lean and the Theory of Constraint. [report] American Society for Quality, p. 73-78. • Antony, J. and Banäuelas, R. 2001), “Six sigma: a business strategy for manufacturing organisations”
• Barney, M. (2002) Motorola’s Second Generation. Six Sigma Forum Magazine, p. 13-16. • Demming, W. E. (1982) Quality Productivity and Competitive Position (Cambridge, MA, MIT Press). • Emeraldinsight. om (1969) Emerald | Industrial and Commercial Training | TOTAL QUALITY MANAGEMENT (TQM): PAVING THE WAY FOR FUTURETRAINING?. [online] Available at: http://www. emeraldinsight. com/journals. htm? articleid=837985&show=pdf [Accessed: 13 Sep 2012]. • Google. com (2012) Starbucks Corporation: NASDAQ:SBUX quotes & news – Google Finance. [online] Available at: https://www. google. com/finance? client=ob&q=NASDAQ:SBUX [Accessed: 13 Sep 2012]. • Millar, R. M. G. (1987). In foreword to J. Cullen & J. Hollingham. Implementing total quality. Bedford: IFS Publications • Money. cnn. om (2008) Schultz’ plans to save Starbucks – Jan. 18, 2008. [online] Available at: http://money. cnn. com/2008/01/17/news/newsmakers/starbucks. fortune/index. htm [Accessed: 13 Sep 2012]. • Online. wsj. com (2009) Latest Starbucks Buzzword: ‘Lean’ Japanese Techniques – WSJ. com. [online] Available at: http://online. wsj. com/article/SB124933474023402611. html [Accessed: 13 Sep 2012]. • Schultz, H. and Gordon, J. (2011) Onward: How Starbucks Fought For Its Life Without Losing Its Soul. [report] West Sussex: Wiley. • Starbucks Corporation (2012) FY11 Annual Report. [report] Starbucks Corporation, p. 2-22.
