From Bean to Cup: Starbucks Global Supply Chain Challenge

Starbucks Corporation is the largest coffeehouse company in the world with over 17,000 stores in more than 50 countries. The company serves some 50 million customers each week.

Forecasting demand for a Starbucks is an amazing challenge. The product line goes well beyond drip-brewed coffee sold on demand in the stores. It includes espresso-based hot drinks, other hot and cold drinks, coffee beans, salads, hot and cold sandwiches and Panini, pastries, snacks, and items such as mugs and tumblers. Through its entertainment division and the Hear Music Brand, the company also markets books, music, and videos. Many of the company's products are seasonal or specific to the locality of the store. Starbucks-branded ice cream and coffee are also offered at grocery stores around the world.

The creation of a single, global logistics system was important for Starbucks because of its far-flung supply chain. The company generally brings coffee beans from Latin America, Africa, and Asia to the United States and Europe in ocean containers. From the port of entry, the "green" beans are trucked to six storage sites, either at a roasting plant or nearby. After the beans are roasted and packaged, the finished product is trucked to regional distribution centres, which ranges from 200,000 to 300,000 square feet in size. Starbucks runs five regional distribution centres (DCs) in the United States. It has two DCs in Europe and to more in Asia. Coffee, however, is only one of the many products held at these warehouses. They also handle other items required by Starbucks retail outlets, everything from furniture to cappuccino mix.

Starbucks actual distribution system is much more complex, but for the purpose of this assignment, let's focus on a single item that is currently distributed through five distribution centres in the United States. The item is a logo-branded coffeemaker that is sold at some of the larger retail stores. The coffeemaker has been a steady seller over the years due to its reliability and rugged construction. Starbucks does not consider this a seasonal product, but there is some variability in demand. Demand for the product over the past 13 weeks is shown in the excel sheet (shared).

The demand at the DCs varies between about 40 units on average per week in Atlanta and 48 units in Dallas. The current quarter's data are pretty close to the demand shown in the sheet.

Week	-5	-4	-3	-2	-1	1	2	3	4	5	6	7	8	9	10	11	12	13
Atlanta	45	38	30	58	37	33	45	37	38	55	30	18	58	47	37	23	55	40
Boston	62	18	48	40	35	26	35	41	40	46	48	55	18	62	44	30	45	50
Chicago	62	22	72	44	48	44	34	22	55	48	72	62	28	27	95	35	45	47
Dallas	42	35	40	64	43	27	42	35	40	51	64	70	65	55	43	38	47	42
LA	43	40	54	46	35	32	43	54	40	46	74	40	35	45	38	48	56	50

Management would like you to experiment with some forecasting models to determine what should be used in a new system to be implemented. The new system is programmed to use one of the two forecasting models: simple moving average or exponential smoothing.

Q.1 Consider using a simple moving average model. Experiment with models suing five weeks' and three weeks' past data. The past data in each region are given in the excel sheet (week -1 is the week before week 1 in the table, -2 is two weeks before week 1, etc.). Evaluate the forecasts that would have been made over the 13 weeks using the overall (at the end of the 13 weeks) mean absolute deviation, mean absolute percent error, and tracking signal as criteria).

Q.2 Consider, using a simple exponential smoothing model. In your analysis, test two alpha values, 0.2 and 0.4. Use the same criteria for evaluating the model as in Q.1. When using an alpha value of 0.2, assume that the forecast for week 1 is the past three-week average (the average demand for periods -3, -2, and -1). For the model using an alpha value of 0.4, assume that the forecast for week 1 is the past five-week average.