Supply Chain of Pepsi Co

Supply Chain of Pepsi co. 1.1 Understanding Supply Chain of Pepsi co. 1.2 Supply Chain Strategy or Design In order to ensure a good supply chain strategy, Pepsi co. plans two years in advance. It has several contracts with manufacturers, and receives raw material on a convenient basis. The company also decides where production plants are to be placed. The production process is 65% automated. The company has to provide and manage transport for the delivery of products as well as the arrangement of third party services for the procurement of products. The shipping department handles orders and the transport department decides the vehicles for safe delivery. Material planning and sourcing is carried out as well. Sources of supply of raw material both local and foreign are identified and terms and conditions are negotiated. Capacity planning is also done at this stage. Sales forecasting and production planning depends upon the capacity of the organization with respect to: 1. Production 2. Storage: Raw and packing 3. Storage: Finished goods The supplier is audited by the most cost efficient quality control department. Distributors are also decided by the company, keeping in mind past performances. 1.3 Supply Chain Planning The goal of planning is to maximize the supply chain surplus. Planning establishes parameters within which a supply chain will function over a 1| Page

period of time. Companies start the planning phase with a forecast for the coming year of demand. Pepsi carries out sales forecasting for local demand. The annual sales target is conveyed to the supply chain department, planning is carried out on a monthly, weekly and daily basis.

1.4 Supply Chain Operation Company makes decision regarding individual customer orders. The goal of supply chain operations is to handle incoming customer orders in the best possible manner. During this phase, firms allocate inventory or production to individual orders, set a date that an order is to be filled, generate pick lists at a warehouse, allocate to shipping, and set delivery and so on. There is less uncertainty about demand. The production, sales and supply chain departments get together to decide the inventory usually on a weekly basis. 1.5 Process Views of a Supply Chain Pepsi has a seasonal demand. Just in time concept is applicable in nonseasonal period and not applicable in seasonal period. All processes that are

part of

the

procurement

cycle, manufacturing

cycle,

replenishment cycle, and customer order cycle are push processes. Pepsi Sales order and processing: The Shipping Manager receives sales order from Sales Team, distributors through telephone, fax & email one day before dispatch. The sales are made to base distributors on advance payment against orders then shipping manager plans according to the demand of distributors on daily basis.

2.1 Supply Chain Strategy for Pepsi 2| Page

There are three major sustainable advantages that give PepsiCo a competitive edge as they operate in the global marketplace: 1. Big, muscular brands, 2. Proven ability to innovate and create differentiated products and 3. Powerful go-to-market systems. PepsiCo's overall mission is to increase the value of shareholder's investment. They do this through sales growth, cost controls and wise investment of resources. They believe their commercial success depends upon offering quality and value to their consumers and customers; providing products that are safe, wholesome, economically efficient and environmentally sound; and providing a fair return to their investors while adhering to the highest standards of integrity. A customer while purchasing a bottle of Pepsi will consider product quality, price and availability of the product. Thus, Pepsi particularly focuses its competitive strategy as to producing sufficient variety, reasonable prices, and the availability of the product. 2.2 Supply Chain Strategy Step 1: The Customer and Supply Chain Uncertainty a) Identifying Customer Needs Pepsi needs to understand the customer needs for each targeted segment and the uncertainty the supply chain faces in satisfying these needs. Pepsi deals with beverages, which are a fast moving consumer good, it knows the requirements of consumers. Pepsi is considered as a drink which is refreshing during summer, and taken regularly during winter, with demand hiking around festivals like New Year, Halloween occasions such as weddings. Pepsi caters to both cities and rural areas. It understands the needs of both. As demand for beverages is seasonal, the quantity of product needed for each lot is taken care of 3| Page

with past demand in mind. Consumers generally require a small response time, high service level, reasonable price and some variety (for example health conscious people favor diet versions of sodas). b) Demand Uncertainty and Implied Demand Uncertainty Demand for Pepsi varies by product. For example there is a greater demand for “Pepsi” as compared to “Mirinda Apple,” which is new. Hence, Pepsi has a low demand uncertainty as compared to “Mirinda Apple.” The product “Pepsi” is approaching its maturity stage in the PLC whereas “Mirinda Apple” is in the introductory stage. Pepsi’s implied demand uncertainty varies with the product type as well as the customer needs. Due to decreased lead time (the customer may purchase its competitor’s product if Pepsi is not available at that time), need for greater variety and higher level of service, implied demand uncertainty increases.

This is true for cities where unmet

demand by Pepsi is met by Coca Cola and other such competitors. Supply uncertainty is also affected by new products. New products have higher supply uncertainty. Step 2: Understanding the Supply Chain Capabilities

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Highly Somewhat Highly In towns Efficient Responsive Responsive

PEPSI

in cities

The efficiency and responsiveness varies according to the consumer needs,

implied

demand

uncertainty,

product

type

and

market

segments. In remote areas the company focuses on being somewhat efficient as other modes of transportation could turn the product to be highly expensive. According to the company it does not deal with distributors who do not have 20 to 25 vehicles, therefore as the company has focus on cost reduction, uses slow and inexpensive 5| Page

modes of transportation, the demand is certain, and uses economies of scale in production, the product Pepsi is more inclined towards being somewhat efficient. In cities, the company focuses its attention on being highly responsive as Pepsi has to meet short lead time, meet a high service level, handle a large variety of products and respond to wide ranges of quantity demanded especially at the retail stage. Step 3: Achieving the Strategic Fit Making one stage more responsive allows the other stage to focus on being more efficient. The Pepsi supply chain assign different roles to its different stages, the company has to decide either to transfer the responsiveness to the manufacture stage or to the retailer stage. While discussing the Pepsi’s supply capability it is seen that Pepsi tends to be more responsive in the cities and a bit less in towns. Therefore, transferring the responsiveness to the retailer and distributor, allowing them to face the higher implied demand uncertainty. This in return allows the manufacturer and supplier to be more efficient. At the same time, multiple beverage types contribute to a broader product portfolio causing Pepsi to adjust its strategies accordingly; tailoring the supply chain to best meet the needs of each beverage demand. 3.1 Distribution Channels ➢ Direct distribution: ○

Delivery of post mix cylinders & handling of key accounts: The key accounts are different wholesalers, restaurants and hotels like Pizza Hut, KFC which serve as a place for key sale. These are known as national key accounts and are very important in terms of competition.

○ Export Parties ➢ Indirect distribution: 6| Page

○ Through Base market distributors ○ Through Outstation distributors Pepsi uses light and heavy vehicles for safe delivery of goods to the distributors for timely delivery. It follows the just in time concept which is applicable in Non-seasonal period and not applicable in the seasonal period. 3.2

Review and Revise Distribution

This is usually done through taking over key revenue areas. If the distributor does not achieve its sales target, the distribution is taken back and an addition of new distributor is done. Therefore Pepsi’s supply is low supply uncertainty. Some of its supply source capabilities are: ➢ Less breakdowns ➢ High quality ➢ Flexible supply capacity ➢ Mature production process 3.3

Factors Influencing Distribution Network Design

At the highest level, performance of a distribution network should be evaluated along two dimensions: 1. Customer needs that are met 2. Cost of meeting customer needs The customer needs that are met influence the company’s revenues, which along with cost decide the profitability of the delivery network. While customer service consists of many components we will consider those measures that are influenced by the structure of the distribution network for Pepsi. 7| Page

Response Time for Pepsi is minimal as the direct customers for Pepsi are the retailers and then the consumers. Pepsi try to locate centre of gravity in every country , so that it can reach its retailer in less time. Product Variety in Pepsi is large. They have made their place in the market with their unique product line ranging from chips to water, the product variety includes beverages ranging from the water Aquafina to Mountain Dew, Pepsi, Pepsi Max, 7 Up, Mirinda, Mirinda Apple & Fountain Fresh, Pepsi diet , Pepsi light. Availability of Pepsi is very high and the product is always available in stock whenever an order arrives. The Distributors have 3 days stock as back up with them in order of any malfunctioning of the plant or other such external factors. Customer Experience for Pepsi has always been positive as they receive the product with ease and on time. The retailers are the direct customers as they place an order to the distributors. Return ability of Pepsi has always been very strong in a sense that unsatisfactory items can be returned and changed on the spot. This is true for both the consumers and the retailers. Pepsi has laid down a system through which they can effectively manage this requirement. 3.4 Distributor Storage with Carrier Delivery In Pepsi inventory is not held by the manufacturers at the factories but is held by distributors/ retailers in intermediate warehouses and package carriers are used to transport the products from the intermediate location to the final customer. This requires distributor storage to keep high levels of inventory because distributor/retailer aggregates

demand

uncertainty

to

a

lower

level

than

the

manufacturer. Transportation costs for Pepsi are somewhat lower because an economic mode of transportation (e.g. truckload) can be employed for inbound shipments to the warehouse, which is closer to 8| Page

the customer. Facility cost is high because of a loss of aggregation and often end up with higher processing costs. The information structure needed is not that complex. The distribution warehouse serves as a buffer

between

manufacturer and customer.

Real-time

visibility

between customers and warehouse is needed whereas visibility between customer and manufacturer is not required. Response time is also reduced. Customer convenience is high and order visibility with manufacturer storage becomes easier. Distributor storage is well suited for medium to fast moving goods and it can also handle higher level of variety

than retail stores. Source:( http://www.ijlm.org/images/info-flow520.jpg ) (Dated: 25-May-10 Time: 9:00 pm)

3.5

Value of Distribution System

There are basically two components of distribution: •

Storage

•

Distribution

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The storage facilities of Pepsi are designed in order to boost the timely availability of the product. For this purpose the distributors are fully equipped with facilities that are needed to ensure intensive supply of the product. The storage facilities are designed to contain the maximum possible inventory items that are needed at any given time. The distribution

does not work between specific supply chain

components but it performs a basic function of integration amongst all supply chain components. In case of FMCG like Pepsi, the value of systematic distribution process cannot be undermined. The Pepsi distribution system linked the entire supply chain for all product categories. The distribution centers and its information network play a key role in that regard. The major object is to carefully track sales of items and offer short replenishment cycle times. Whenever a store places an order it is immediately transmitted to the supplier through the distribution manager. 4.1

Demand Forecasting

Importance Demand forecasts form the basis of all supply chain planning . Forecasts of future demand are essential for making accurate supply chain decisions and ensuring the company’s success. Examples of such decisions include how much of the product to make, how much to inventory, how much to replenish and how much to order. Ease of Forecasting Beverages are a push product. Forecasting is not easy in the beverage industry as there are possible serious fluctuations in demand due to seasonal changes in winter and summer, which cannot be easily predicted before hand or controlled. Therefore, accurate forecasting can be difficult at times, and there is a margin for error. However, 10 | P a g e

having multiple product lines and daily planning procedures do decrease risk of error by high responsiveness. 4.2 Forecasting Methods A combination of three forecasting methods is used. The following methods are used in combination for the purpose of sales and demand forecasting:1. Time-Series Method Historical demand data can be effectively used to forecast future demand. 2. Qualitative Method Using historical data and market intelligence as a guide, PepsiCo management practices their own judgment to determine the demand forecast.. A yearly demand plan is forecasted in this way which is then further divided into monthly, weekly and daily plans accordingly. 3. Causal Method Causal forecasting assumes that the demand forecast is highly correlated with certain factors in the environment such as the state of the economy, interest rates, and product pricing that can cause a change in the demand. An example is how by introducing a product variant, such as Pepsi Twist, can influence demand for the original product that is Pepsi. 5.1 Transportation Network Pepsi supply chain strategy is closely linked to the appropriate use of transportation. In a typical market, quick response enables supply chains to meet the customer demands for ever-shorter lead times, and 11 | P a g e

to synchronize the supply to meet the peaks and troughs of demand. The major focus is to determine the processes that are to be integrated in the supply chain network with their corresponding suppliers, distribution centers and the associated transport links between them.

5.2 Modes of Transportation Land: Truck offers advantage of door to door shipment, a shorter delivery time and no transfer between pick up and delivery. Pepsi uses the TL (truck load) approach. This approach provides paves the way for economies of scale and is able to meet service requirements while minimizing both trucks idle and empty travel time. Truck loads are more suited Pepsi

because of the use of warehouses and larger

shipments therefore making it cheap. Raw materials from the suppliers are brought using trucks; finished products are transported to distributors and then retailers using trucks as well. Pepsi have its own fleet of small and large trucks and vehicles for carrying goods and raw material, while the distributors also use their own vehicles. Water: This mode forms only a very small part of the total transport network. It is used for shipping of empty cans . Air: It is again a very small part of the entire transport network. 5.3

Design Options for a Transportation Network

Shipment via central DC with inventory storage using milkruns: This is the main mode used for transporting goods to consumers who are far away. Products are transferred to the distribution center in a particular region and are stored there. Smaller trucks then carry these products to the local retailers as per demand in smaller vehicles using milk runs. This method is cost effective because it saves on high 12 | P a g e

transport cost that would have been involved in transporting to each retailer directly form the supplier, and also prevents stock outs because inventory is maintained closer to the retail outlets. Retaile D.C r

(Shipping via Central DC)

Direct Shipping: This method is used for transporting products to key account holders such as KFC and Pizza Hut. Direct Shipping with Milk-Runs: This method is used for transporting post mix cylinders to retailers within the for fountain fresh Pepsi. The shipment is made in milk runs. 6.1

Sourcing Decisions in Supply Chain

For Pepsi , outsourcing results in the supply chain function being performed by a third party. It is in fact one of the most important 13 | P a g e

factors facing the firm. Raw material for production and packaging is being

outsourced

through

contracts.

Inbound

and

outbound

transportation of products from the manufacturing place to the distribution center and then to the final customer is also being outsourced to a third party. The basic considerations are: •

Pointing out sources of supply and negotiate with suppliers

•

Sourcing of raw material from local and foreign suppliers

•

Deciding terms and conditions with supplier

•

Coordinating activities and documentation with suppliers

•

Cost comparisons and quality assurance.

Pepsi makes the decision from where to outsource by inviting bids for tenders in the local newspapers. The tender works as a general offer to all the interested parties whether they are related to the provision of raw material or distribution vehicles. Sourcing process of the company includes the selection of supplier, design of supplier contracts, product design collaboration, procurement of material and services and evaluation

of

supplier

performance

in

procurement.

6.2 Supplier Scoring and Assessment

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case

of

raw

material

[Source: http://www.etq.com/supplierquality/]

When comparing suppliers, Pepsi does not only focus on the quoted price but also other dimensions that may affect the total cost of the supplier. The following factors other than quoted price are being considered: replenishment lead time, supply flexibility, supply quality, pricing terms, exchange rates, duties and supplier viability. For Pepsi the supplier scoring and assessment is based on the feature that the supplier performance, in terms of replenishment lead time and on time performance, distinguish them amongst their competitors. Soon after the tender notice for the procurement of raw materials is advertised, the suppliers are asked to send sample of the products. For example, for the manufacture of Pepsi, concentrate and sugar are demanded of high quality which is the forte of the company. These samples are tested in the total quality laboratories. If the samples match with the standard set then the sales department selects that particular supplier. Pepsi being an ISO-9001 certified company cannot sell low quality products, therefore it has strict standards set for the purchase of raw materials from suppliers. 7.1 Other Activities In Relation With Supply Chain 7.2

Raw material Procurement

For the manufacturing of Pepsi products, raw materials procured are like packaging materials, bottles, cans, sugar and concentrate etc. 15 | P a g e

from both local and foreign suppliers. The materials used in the manufacture of beverages are primarily being procured from various parts of the country. Sugar is purchased from several different suppliers chosen from a list already selected by PepsiCo International. The concentrate is obtained directly from PepsiCo International. The management usually advertises in the newspaper to invite tenders for the supply of these raw materials. The basic components of raw material are: concentrate, CO2, sugar and gas. 7.3 Selection Criteria of Distributors Selection of distributors is a critical step, because the majority of supply to the retailers is handled by the distributors. Efficient and wellplaced distributors are essential for ensuring product availability, which is the main target of the company 7.4 Product Categorization by Value and Criticality Pepsi’s strategic item is its drink formula. It is considered to be a base line for the company’s business all over the world. The critical item is the gas component that is CO2; the company must ensure the availability of this item with less comparative accumulated cost. Cans and bottles come into the category of general items, the company tries to ensure maximum efficiency while buying these items. The use, type and specifications of bottles differ with different products. General items have more specific use as compared to bulk items. Sugar may rightly be placed under the category of bulk items. Maximum efficiency has been ensured while buying sugar and its related products in bulk. Bulk items are used invariably in all products of Pepsi with slightly variations of proportion.

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Criticality

High

Low

Strategic Items Ensure longterm relationship DrinkFormula BulkPurchase Items Ensure lowcost Sugar

CriticalItems Ensureavailability GasCO2 General Items Ensure lowcost Cansandbottles Low

Value/Cost

High 26

utdallas.edu/~metin

7.5 Revenue Management Seasonal peaks of demand are common every year. In Pepsi the seasonal demand varies as it increases considerably in summer than in winters. Off-peak discounting can shift demand from peak to non-peak periods. This is exactly what Pepsi does as it reduces its prices on litre bottles and comes up with new saving schemes just to attract customers. Pepsi charges higher price during peak periods and a lower price during off-peak periods.

7.6

Pricing and Revenue Management for Multiple Customer

Segments These are different segments which Pepsi has allocated and targets multiple customers from these segments such as children, teenagers and adults. The product range is available in tin, glass bottles, plastic liter bottles and fountain fresh.

 Using In Practice

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Managers do gather accurate and complete data relating to products, offered prices, competition and most important customer behavior. For Pepsi it’s equally important to quantify the expected benefits from revenue management. Historical data and a good model of customer preferences

are

being

used

to

estimate

the

benefits.

Pepsi

differentiates between the customers who truly need the supply chain asset during peak period and those who will benefit from moving their order to the off-peak period. This approach increases profits for the firm while also satisfying the customers creating a double impact. Revenue management tactics have brought in huge profits to the company.

References: 1.

Anderson, David L., Britt. Frank E., and Favre. Donavon J., The seven principle of Supply Chain Management, Logistics Management, 2007.

2.

Bearnon, B.M (1998), "Supply Chain design & analysis: Models & Methods," International Journal of Production Economics, Vol. 55 pp. 281-294.

3.

Cock, M, "The Complexity of Managing Complexity" Transportation and Distribution Magazine, 2000.

4. Paul R Murphy, Jr Donaald F Wood (2008) Contemporary Logistics

9th Edition, Pearson International Edition. Page 6-11.

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5.

www.cio.com/article/30381/Supply Chain Management Guru Hau Lee on Demand Forecasting

6.

(accessed May 20, 2010)

www.logistics.about.com/od.supplychainintroduction/Introduction to Supply Chain.htm (accessed May 20, 2010)

7. www.pepsi.com (accessed May 20, 2010) 8.

www.logistics.about.com/od/supplychaintroduction/a/Lean SCM.htm

9.

(accessed May 22, 2010)

www.entegreat.com/eg industrysolutions beverage SCM.htm (accessed May 22, 2010)

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