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 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.

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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 non-seasonal 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

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

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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 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.

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Highly Efficient Highly ResponsiveSomewhat Efficient Somewhat Responsive

In towns PEPSI in cities

Supply uncertainty is also affected by new products. New products have higher supply

uncertainty.

Step 2: Understanding the Supply Chain Capabilities

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 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

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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:

o 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.

o Export Parties

Indirect distribution:

o Through Base market distributors

o 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

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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.

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.

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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 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)

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3.5 Value of Distribution System

There are basically two components of distribution:

Storage

Distribution

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, having

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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 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.

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Retailer

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Retailer

Retailer

Retailer

D.C

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 milk-runs: 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 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.

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(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 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 case of raw material procurement.

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6.2 Supplier Scoring and Assessment

[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. 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

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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 well-placed 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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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

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

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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.

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Supply Chain Management, Logistics Management, 2007.

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Distribution Magazine, 2000.

4. Paul R Murphy, Jr Donaald F Wood (2008) Contemporary Logistics 9th Edition, Pearson International Edition. Page 6-11.

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

Forecasting (accessed May 20, 2010)

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Chain.htm (accessed May 20, 2010)

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(accessed May 22, 2010)

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(accessed May 22, 2010)

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