An interview with David A. Norton, vice president of logistics at Starbucks

Starbucks Coffee Company

David A. Norton VP of Logistics

David A. Norton, vice president of logistics at Starbucks Coffee Com- pany, began his career with Nabisco in the inventory planning and customer service functions. After holding positions as vice president-logistics for United Distillers and Vintners and then Borden Foods, David joined the Starbucks team, where he is responsible for global logistics strategy development and management to support all channels. For the 52 weeks ended Sept. 30, 2001, consolidated net revenues for the Seattle-based company increased 22 percent to $2.6bn from $2.2bn for the same period in fiscal 2000. Retail revenues increased 22 percent to $2.2bn, and specialty revenues increased 18 percent to $419m.

Q. I see Starbucks outlets popping up in airports, shopping malls, at bus intersections - even my neighborhood Safeway hosts a Starbucks coffee bar. What expansion plans do you have for 2002, both here and abroad?

A. On a global basis, the company plans to open at least 1,200 new stores in fiscal 2002. In North America, we are scheduled to open at least 525 company-operated locations and 300 licensed locations. Internationally, our target is to open at least 100 locations in company-operated markets and 275 locations in licensed markets.

Starbucks anticipates total revenue growth of approximately 20 percent and expects to see comparable store sales growth in the low single digits, with monthly anomalies in fiscal 2002. And looking beyond the current fiscal year, the company is targeting 20 to 25 revenue growth for fiscal 2003 through fiscal 2005 and expects to have more than 10,000 stores in operation by fiscal year end 2005.

Q. What kind of stress does this place on your supply chain?

A. Rapid global growth requires comprehensive, integrated strategies focused on the needs of our retail stores, license and joint venture partners. We have a formal process for developing both strategic and operating plans which ensures we link manufacturing, procurement and logistics to the needs of the business.

Tactically, we are opening a DC in Singapore in January; moving and expanding a roasting plant from the UK to Amsterdam; building a third roasting plant/distribution center in Carson Valley, Nev.; and reviewing options for a roasting plant in the Asia Pacific region.

In light of all this activity, the greatest logistics challenge we face is appropriately managing our growth and developing the capabilities to support both stores in North America and abroad. We're adding multiple sites around the globe almost concurrently, so we need to keep up with bringing on new employees - we refer to them as partners here at Starbucks - to support those expansions; maintain an eye on our customers; and ensure that we have the proper systems and processes in place as we move forward.

Q. Were your supply-chain operations affected by the 9/11 incidents?

A. Yes, we had five stores in the immediate area of the World Trade Center. Fortunately, we experienced no loss of lives. However, servicing the stores in Manhattan, the surrounding communities in New Jersey and Connecticut and in Washington D.C. faced our distribution partners with the unique challenges presented not only by the prevailing physical circumstances but by local governmental agency restrictions in those affected areas as well. That said, our distribution partners overcame the challenges and fully serviced all stores, picking up pretty well where they left off on 9/11.

Q. Can you tell us about any contingency plans you have formulated in the event we see further disruptive activity on the domestic front?

A. We do not normally comment on our contingency plans. On a general level, the best contingency plan a company can have is good relationships with their key business partners - be they suppliers, distributors or vendors - and an up-to-date phone list. There's real value with having an understanding of basic backups. For example, if something were to happen, where are you going to go to physically collect your team and assess next steps? Who has key responsibilities for each major function?

If the building gets shaken and the computers fall over, typically there's an IT manager who knows he has to prop them back up and plug them back in. Now if the building is inaccessible, as we experienced during the earthquake up here in Seattle, then they need to figure out how to make alternative arrangements. We were out of the building for a week, but we were shipping the very next day, even though it took several days to get the computers fully back online. In the meantime, we reverted to some manual processes.

Most importantly is how the company focuses on the needs of the individuals who are affected by the disruption. We were severely impacted by the earthquake, and the executive leadership here at Starbucks did an outstanding job getting us back together. A large measure of success was due to the fact that we first focused on the people, then on our customer needs, and third on bringing the infrastructure back up. The mistake people often make is to worry about the infrastructure, then customers, then employees. At Starbucks, our primary focus is on our people relationships, and that approach has proven to generate superior financial results at the end of the day.

Q. What skills do supply-chain managers need?

The impact of globalization cannot be underestimated. It is not just the senior logistics leader that has to be comfortable operating around the world, but increasingly all levels within the organization. Second, we believe that to be successful globally, decentralization of operations is key. We have a significant supply-chain operations team in Europe and have begun developing our regional presence in Asia/Pacific [Hong Kong].

Q. How does this affect your hiring process?

A. At the entry level, basic language skills are critical because we are talking to people around the world in the regular conduct of day-to-day business and as we work to resolve transportation challenges and order issues. We look for people who are fluent in the languages of the countries we are servicing, so we have folks on our staff at the customer service and transportation analyst level who speak Korean, Chinese, Japanese, Spanish. Logistics experience is nice to have on their resumes, but that's typically something that we can train and teach.

At the project management level, those folks that we put on the ground at global locations need to be familiar with their respective regions, so we are looking for people who are pretty deep with the number of stamps they have accumulated in their passports over the years. These are not necessarily folks who are 20 years into their careers; these are people who more likely are eight to 15 years into their careers. We are also looking for individuals who have had experience setting up distribution operations around the world and have demonstrated success working with third-parties outside of the U.S. and/or working with people within each of those countries to assist in establishing a complementary distribution environment.

At the senior management level, we look for people who actually have negotiated arrangements and contracts and have had some international tours of duty.

Given our structure, a matrix approach to managing the business becomes a necessity. Traditional arrangements such as command and control type organizational structures don't work particularly well in an international environment. For example, I have global responsibility for logistics, and my partners in Seattle have global responsibility for manufacturing and procurement. Yet by the same token, we have established in the EMEA [Europe, Middle East and Africa] and the Asia/Pacific regions a senior operations person who, for that area, has the manufacturing, purchasing and logistics activities reporting to them. So, these senior op- erations people are both our peers and yet have to be comfortable with following directions from Seattle on matters of global impact. In matters of logistics, they ultimately have to align with a strategy that is developed out of my office, but in practical operations dealing with day-to-day issues, those same individuals function as the senior person in running their respective region. So it's not as simple as lines on a traditional organization chart, and we think that's representative of what happens when you do go global and you are growing fast.

Also with our joint venture partners where we may be a minority owner - I could end up sitting on that team, working with them to construct a logistics program. In other cases, I could be going over there essentially to "go to school" and learn from them as they could be four times larger than we are. So again, a traditional hierarchical organization is something that you need to be much more flexible about in a growing global environment such as ours.

Q. Is this a time to be aggressive in supply-chain strategies, or a time to retrench?

A. Starbucks Coffee Company's growth strategy drives our need to be very aggressive. On the average, we open 3 stores a day somewhere in the world. And we are moving into new countries almost every month. Combine that with our continuing development of contemporary, sophisticated information systems tools and processes in manufacturing, procurement and logistics and, well - we manage to keep busy!

Q. What are the more promising technologies or advances on the supply-chain horizon?

A. Technology has become increasingly a staple of the supply chain rather than a driver. There have been few significant advances on the physical distribution side of the supply chain in years. In the information arena, the pattern seems to be over-commit and under-deliver. Systems are generally harder, more costly and take longer to implement than has been the promise.

The evolution of systems over the past 15 years might be even characterized as a journey from homegrown proprietary systems through best-of-breed/homegrown combinations and finally to monolithic ERP environments. And my experience is that the integrated, monolithic ERP environments simply lack the flexibility to meet unique business requirements.

For example, I implemented SAP R3 in one business and helped build a proprietary system along with many others at RJR Nabisco in the mid-1980s, and I don't think I have seen a collection of applications or a solution today that is as good as what we put together at Nabisco. And even today, 15 years later, I don't think I've seen an integrated order management, planning, scheduling, forecasting environment that is nearly as good as Nabisco's was back in the early '90s.

We believe the best place to be today is combining the best of different applications. And, our IT professionals here at Starbucks are comfortable with this because of advances in business integration systems/ tools that en- able this approach.

And finally, we have yet to see an internet-based application service provider that we are willing to consider with mission critical work outside of the freight payment arena.

Q. So how does a company go about assembling those pieces and forming a synergistic whole without hiring and adopting consultants for multiple years?

A. That's the rub, and it's a very interesting question. And I think that's why the marketplace candidly values people who have been there and done that. Thankfully, there are some areas where a little bit of gray hair starts to pay dividends. There are a lot of people in this business who are bright and capable but have never done business without a PC in front of them. I started my career at a point when we were managing major distribution centers with 3X5 index cards, and sometimes I think those systems worked as well then as sophisticated WMS systems do now.

So if you have that experience, if you actually have been part of operating with systems that were no more sophisticated than what was necessary to support the accounting functions - and you understand those systems and functions in the most basic ways - it actually positions you well for managing systems implementations. A lot of folks come into the business and don't understand that you need a solid item master, a solid price master, a solid customer master, a solid order management system, a solid inventory system - all tied in nicely with AP and AR - and if you don't have any of that stuff right, you can just about forget everything else. So the short answer to your question is experience.

Q. What do you see happening in logistics outsourcing in the coming year?

A. Nothing really revolutionary. Like technology, outsourcing is a staple rather than a driver of logistics. We do, however, believe that some of the major transportation providers are pushing rate increases that are not well founded in current economic conditions. Fuel prices, for example, have come down over the last several months and at least a couple of major carriers have announced across the board 3 percent rate increases. We do not think that they are justified nor will they likely stick.