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How Costa Express brewed up a better supply chain
In today's fast-paced, 24-hours-a-day world, our society has come to depend on coffee to keep the wheels turning. Whether we run into a coffee bar as we dash to work or a meeting, or serve ourselves a quick cup during a late-night session at a university cafÃ©, hospital cafeteria, or airport lounge, we've come to expect our favorite style of high-quality coffee to always be available.
Costa Express was created to serve this need in 2011 when the Whitbread Group, the largest hospitality company in the United Kingdom and owner of Costa Coffee, acquired Coffee Nation, a provider of self-service coffee concessions. The new company, Costa Express, partners on a revenue-sharing basis with retailers that service public places like airports, railway stations, hospitals, universities, convenience stores, gas stations, and offices, enabling them to profit from the growing consumer demand for premium coffee "on the go" as well as the strong Costa brand. (Costa Coffee is the largest coffee retailer in the U.K.) Costa Express provides its partners with up-to-date, self-service coffee machines and regularly restocks the coffee and supplies, so very little investment is required to get the business up and running.
After achieving early success in its first year, Costa Express set ambitious plans to increase the number of machines in operation—what it refers to as its "estate" —from 900 to 3,000 by 2016, and at the same time to expand internationally.
For months after the 2011 launch, the business was pushed to the limit as the existing machine estate was rebranded from Coffee Nation to Costa Express, and new partners signed on. Because it was necessary to justify Whitbread's UK Â£60-million investment, the business was feeling the pressure to grow rapidly.
In April 2012, the company realized that in order to deal with all the expected growth, it would need to make some changes to the way it managed its supply chain. That was when I joined Costa Express, specifically to fill the newly created position of supply chain manager and to join a strengthened operational leadership team. Prior to that time, there had been no dedicated supply chain function in the company. Instead, traditional purchasing and logistics activities were split between the finance and engineering teams.
One of my first tasks was to identify three fundamental supply chain functions that were driving the business. These were:
- Managing and replenishing coffee-making ingredients to partner sites
- Procuring and maintaining spare-parts inventory
- Effectively managing the process of procuring new Costa Express machines and preparing them to be installed at customer sites
For the purposes of this article, I will describe how we managed the first and most critical of these three functions: managing the ingredients supply chain.
Drawbacks of the old model
Costa Express's distinctive model involves pushing coffee-making supplies out to our partner sites free of charge, and then sharing the revenue collected. When I joined the company, the finance team carried out this replenishment activity with support from trained employees known as "Brand Guardians," who work in the field. The Brand Guardians' job was to train partners, replenish stock for them, and give them advice on how to maximize sales and improve the coffee experience for the customer.
In order to sustain this unique model during a phase of significant growth, Costa Express would need tight control over and visibility into its supply chain. Central to this would be an awareness of exactly when and how much stock needs to be replenished at each partner site, so that money would not be wasted on excess inventory or unnecessary logistics activities. That meant Costa Express would need to understand not just aggregated order information, but also the size and frequency of the individual orders.
To support this need for order-line-level detail, Costa Express's self-service coffee bars were equipped with integrated telemetry that provided real-time reporting on machine performance and beverage sales. These systems had a twofold purpose: to prevent waste and theft, and to improve service by ensuring that the bars were always being stocked to meet demand.
The system that informed replenishment decisions comprised thousands of linked spreadsheets that contained detailed information for each site and product. Based on the size of our partner network, the system had multiplied to host more than 50,000 replenishment combinations and was edging toward 100,000 as new sites were added. One thing that greatly concerned me: Despite having invested in coffee machines with built-in programs designed to provide real-time sales data, Costa Express could not take advantage of this capability because our spreadsheet system could not extract, consolidate, and present up-to-the-minute data.
The next area I examined within the ingredients supply chain was logistics. Our current logistics provider was furnishing a full service: purchasing all of our ingredients, managing direct relationships with the suppliers, and invoicing for the full product value and logistics costs at point of delivery. Although this setup might have worked well in the beginning, it meant we had very few direct relationships with ingredients suppliers, making it difficult to negotiate and communicate changes we wanted to make as our business grew.
It became clear to me that in order to deliver sustained growth, we would have to transform our supply chain and redefine roles within the wider business ... and quickly!
A fresh start
During my first month (April 2012), it was clear that I needed to make some changes without delay. These initial changes would lay the foundation for the rest of the strategic changes that would be necessary. I therefore immediately moved responsibility for partner replenishment from finance to the new supply chain team. This change would ensure that partner replenishment would receive the right amount of attention during the transformation. I next undertook a review of providers of replenishment and demand planning software, which included looking at how we could tap into our valuable telemetry data and use this to maintain the inventories at partner sites.
In June 2012, I initiated a tender process designed to seek out a new logistics partner. This process included reviewing relationships with suppliers and assessing whether Costa Express should start to purchase ingredients directly from suppliers.
By November 2012, my team and I had come up with both a new replenishment planning tool and a new logistics provider, Howard Tenens, and planned to have them both up and running by January 2013. As part of this plan, we had decided to start purchasing ingredients directly. By doing so, we would be able to negotiate and control our costs more effectively as our volumes grew.
Howard Tenens collects stock from suppliers (including coffee beans, flavored syrups, cups, lids, stirrers, and napkins), stores it in a central warehouse, and delivers stock as needed to Costa Express partners. Besides enabling us to purchase ingredients directly, having a new logistics partner has simplified our logistics model. Our previous model was more distributed, with one central warehouse and nine regional ones. Now that we hold everything in one central location, we are able to make more next-day deliveries. Another advantage is that Howard Tenens runs most of its fleet on either dual fuel (combined gas and diesel) or biomethane fuel. This means we are on track to save approximately 73 metric tons of carbon emissions in our first year working together. We have also started working with another division of Howard Tenens to support our coffee machine-installation logistics.
Despite initial reservations within the business, I was adamant it would be best to implement these changes all at once instead of sequentially, challenging the conventional wisdom. This meant that by January 2013 we were in the midst of three major supply chain changes: a new IT system, a new logistics provider, and a new purchasing process.
As part of the new IT system, we chose a software application from ToolsGroup called SO99+ that manages key supply chain planning processes, including demand planning, demand sensing, and inventory optimization. We chose it because it could help us improve forecast accuracy while at the same time maintaining high customer service levels with less inventory. This went live in January 2013 as planned and was fundamental to the enabling of other changes involving both people and processes.
Before implementing that application, Costa Express had used the spreadsheet system to estimate how much inventory to supply to each site, using a calculation based on current stock holding and average cup sales. The new system allows us to compare the actual sales data to the levels of stock on hand at the sites, a feature that gives far better visibility and control. The system uses sales data (produced every four minutes) collected from each of the 3,000 machines to identify trends and forecast future demand. It then calculates how the demand is likely to vary, and therefore how much backup stock must be kept at each site. Finally, the system creates a schedule for resupplying the right amount of inventory to each site in order to maximize availability without overstocking. All of this is done automatically and in the cloud.
The new system allowed the business to make an important fourth change: redefining the role of the Brand Guardians. Because the software was so much faster, more accurate, and easier to use than the old spreadsheet system, these people were able to take on the new role of Brand Excellence Advisors, whose main responsibility today is helping partners sell more effectively and deliver a great customer experience. With this new role, the Advisors help to increase sales, improve service quality, troubleshoot if necessary, and, in general, enhance the overall Costa Express experience for the customer.
Savings in six months
Just six months after going live with the new IT system, new third-party logistics provider, and new purchasing processes, we measured some very significant operational savings, including:
- 20-percent reduction in field stock being held at partner sites
- 50-percent fewer delivery refusals by our partners
- Centralized stock-holding locations reduced from nine to one
- Developed direct purchasing relationships with 15 suppliers providing 50+ stock-keeping units (SKUs)
- Negotiated new product prices and pack sizes, leading to a reduction in the purchase price of some items
- 30-percent reduction in annual logistics operating costs, and associated annual carbon dioxide (CO2) savings of 70 metric tons
Costa Express has been able to significantly reduce the quantity and value of inventory at each partner site. Previously, the average site was expected to stock well over 20 cases of various items. This has now been reduced to approximately 12 cases, just one case of each item. (Although we have approximately 50 SKUs, individual sites typically use 15 or fewer. For example, there are three different types of stirrers, but a site will use only one.)
Costa Express also needs to make managing stock as simple as possible, employees can focus on serving customers and increasing sales. This new system has given our partners the confidence that their stock will be replenished efficiently and in a timely manner, so that they can get on with running their businesses.
Along with the changes to the Brand Excellence Advisor role, statistics show that our Net Promoter Score, a popular customer-loyalty metric, grew by more than 10 percent in a six-month period. Furthermore, overall satisfaction and reuse scores (the likelihood of a customer using our services again) grew by 5 percentage points, and recommendation levels (the likelihood of a customer recommending our services) were up 6 percentage points.
A foundation for sustainable growth
When Whitbread acquired Coffee Nation, the target was to have 3,000 machines in place by 2016. The changes made in Costa Express's supply chain, including the implementation of the new software, has enabled it to achieve this target in 2013, a full three years ahead of schedule. With the help of our new systems, processes, and roles, we are confident that we can grow internationally while maintaining confidence in the brand with top quality and great service. Already, I have been part of a team that has helped Costa Express to install new machines in Poland, under the "Coffee Heaven" brand, and we will soon introduce Costa Express to Ireland.
The company is also about to embark on two important new projects. Firstly, Costa Express is now part of a new business-to-business division called Costa Enterprises. I will be responsible for managing an enlarged supply chain for Costa Enterprises, which comprises more than 7,000 locations worldwide and dispenses more than 100 million cups of coffee a year.
Secondly, in January we launched our new CEM-200 "intelligent" coffee station concession, based on advanced technology from Intel, Microsoft, and Bsquare. These multimedia machines will be placed in high-end properties, starting in Dubai. I will be responsible for the supply chain elements of bringing this multimillion-pound innovation to the U.K. and international markets. Along with those projects, we are also reviewing ToolsGroup's software with an eye toward using it to manage Costa Express's spare-parts supply chain, which utilizes three different coffee machine manufacturers, each at different stages of the product lifecycle.
Quite simply, without the changes implemented throughout the Costa Express supply chain, the U.K. business would have struggled to grow at the pace it has. Costa Express's supply chain systems are now firmly situated to sustain both U.K. and international growth. We have turned supplier and customer relationships into true team efforts. Partners at both ends of the Costa Express supply chain are engaged. Suppliers understand Costa Express's requirements, and we work together to mutual advantage. Partners who maintain the machines and sell the coffee are experiencing the kind of efficient, worry-free service levels that allow them to focus on running their businesses. With this foundation in place, I believe we are solidly positioned to sustain our growth while maintaining a trusted and highly respected premium coffee brand.
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