Purchasing and Supply Chain Management of Coca-Cola - Report Example

PURCHASING AND SUPPLY CHAIN MANAGEMENT AT COCA COLA COMPANY PURCHASING AND SUPPLY CHAIN MANAGEMENT AT COCA COLA COMPANYIntroduction As the global economic environment become more and more competitive, there are a number of factors that corporations and organisations must put in place so as to ensure their success. One of these is the need to ensure that customers get their supply of goods and services as and when they demand for it. The ability to supply according to demand has therefore become a very important factor in the determination of competitive advantage for a number of multinational companies (Bispo and Tayur, 2011). Apart from the fact that an ability to supply according to the demand needs of customers help organisations to be competitive, it also helps in ensuring that companies keep the right stock of raw materials and products so that their inventory can be calculated as right. Once this is done, it can be assured that such companies will avoid waste within their production. It is for this reason that the concept of supply chain management remains very important for all modern day companies. Through supply chain management (SCM), companies are able to adequately monitor and regulate the flow of their goods (Morton and Pentico, 2005). As soon as this is done, the ability to make the right purchases is achieved. Goods as used in this context however refer to an interwoven concept where companies are expected to have a very good management for the flow of raw materials, work-in-process inventory, and finished products (Chen, 2009). This means that SCM takes care of all production activities from the source of goods to their destination of consumption. Coca Cola Bottling Limited has for long been held in prestige as a very responsible multinational company that have been trusted by its consumers and customers for a number of reasons. In a study by Sellers and Woods (2013), it was indicated that one of the key competitive advantages that Coca Cola has depended on over the years is its ability to avoid shortage and waste at the same time. Meanwhile, Morton and Pentico (2005) had also mentioned that the only situation under which companies can be assured of avoiding shortage and yet preventing all forms of waste is by ensuring effective purchasing and SCM. It is based on this assertion that the current essay seeks to use Coca Cola Bottling Limited as a case study to know how the company has used purchasing and SCM to keep its production house clean by avoiding both shortages and wastes. The study will begin by first giving a general overview of Coca Cola as a company, so that the discussions that will follow can best be put in the right context of how purchasing and SCM has influenced the company. After this, various models of purchasing and SCM will be reviewed. This will be done as a way of keeping the company’s activities with purchasing and SCM in line with existing market practices. Some of the key strategic decisions that have been made by the company in terms of purchasing and SCM will also be reviewed so as to gain grounds for analysing how the company’s decisions have impacted on its recent successes. Overview of the Company Since the invention of Coca Cola Company’s hallmark product Coca Cola in 1886, the company has not looked back in terms of its growth and expansion agenda. Known to be one of America’s most successful multinational beverage corporations, Coca Cola has become the official refreshment company for most companies, countries, and people of the world, using such products as Aquarius, Beverly, Coca Cola, Minute Maid, Dasani, and Odwalla. Currently, there are more than 100 known brand of food and beverage products that are exclusively manufactured by Coca Cola Company (Esterl, 2013). Meanwhile, the company started in 1886 with only the Coca Cola formula. Bought by Asa Griggs Candler in 1989, the company became incorporated in 1892 but actually started operating franchised distribution system at the time of the purchase in 1989 (Sellers and Woods, 2013). From the chart below, it will be noted that as of 2011, Coca Cola commanded over a quarter of world market share of all beverage companies. Fig 1: Global Market Share of Coca Cola Source: Statista (2012) Coca Cola Company is today praised for a number of successes and factors, including the rapid rate at which it has become one of the companies of the world with the most number of registered products to its credit. The company is also praised for maintaining very high standards of corporate practice, despite the fact that it has depended heavily on franchising over the years (Esterl, 2013). Today, Coca Cola Company has a global market operation with a worldwide operating income of US$ 10.228 billion as of 2013. There have been several accolades associated with the growth of the company including the fact that it is part of DJIA and a member of S&P 500 index. As of the end of 2013, the company employed a total of 130,600 people (Esterl, 2013). Currently, Coca Cola Company is focusing on more purchases than sales as it is showed in the diagram below. Fig 2: Insider Action of Coca Cola Company for 2014 Source: Market Watch (2014) Models of Purchasing and SCM and how they affect Key Strategic Decisions at Coca Cola There are a number of purchasing and SCM that are discussed in literature. Interesting, most of these are reflected in the day to day management of production at Coca Cola Company. Three of these models are downstream parameters, upstream parameters, and facility parameters. Each of these parameters indicates to the company the nature of decisions to take concerning its purchasing and SCM. In this section, the three parameters are discussed along with very specific key strategic decision for purchasing and SCM taken by the company. Downstream Parameters Downstream Parameters in purchasing and SCM, downstream parameters are those factors that depend largely on actions of the facility at its customer level, including the way information is obtained by customers, and any contractual relationships that exists downstream. At Coca Cola Company, SCM model for single facilities are focused on three major downstream parameters. The first of this is demand process. By demand process, reference is being made to the level and degree to which the company receives demand downstream, which is, demand that comes directly from customers. Strategically, the company operates both internal and external market research modules that make it possible to track consumer behaviour and purchasing style of its customers (Anupindi and Akella, 2013). Because of this, it is always possible to know the demand process that is run at the downstream. As part of the demand process of Coca Cola, the company has knowledge of its peak and off peak seasons for demand and as such makes supplies according to such demand flow. This means that the company operates a very flexible demand process whereby supplies and purchases are made as and how they are necessary and not through any fixed format. Another model that is used to determine downstream parameters at Coca Cola Company is forecast and information. Both forecast and information have been described to be very important modalities that help in SCM (Chen, 2009). There are some who have also argued that forecast and information are not independent components of SCM but must be used interdependently. The latter opinion is shared by Coca Cola, as the company uses the about of information available to it to make the right forecasts on how demands will be at the downstream level. As already indicated, the company has a very sophisticated and reliable research team that is constantly on the ground with the ordinary consumer. Because of this, information is taken from consumers and customers through the use of various information seeking mechanisms. Through the information sought, the company is able to adequately analyse the information and make decisions on what the future may possibly hold for it. Once such information and forecasting has been done, supplies are made in quantities that best corresponds with the inventory needs of the company. It has been noted that in terms of strategic decisions, the company uses forecasting and information models to make short term decisions on supplies, knowing how fragile such forecasted information can be (Gavirneni, Kapuscinski and Tayur, 2012). The last aspect of downstream parameter model used by Coca Cola Company in making decisions on purchasing and SCM is contracts. By this, reference is made to the company’s dealing with its known contract customers, most of who serve as the wholesale unit of the company. Because it is these wholesalers and agents that are always down with the retailer and the consumer, contracts signed between these wholesalers and agents give the company an indication of demand, based on which the right supplies are made. Knowing that the company has a very large raw material need, proper management of supply chain remains a necessity to ensure that the company does not suffer any forms of shocks that will come as a result of late placement of orders from suppliers of raw materials. What is more, the company’s core raw material, which is cola is a seasonal food product, which comes and goes with changing seasons, right information from those the company has contracts with therefore help the company in making medium term decisions so that it will not suffer any forms of seasonal shocks (Toktay and Wein, 2001). Indeed, contracts also affect all components of supply chain including the kind of shipment needed and distribution channels to use (Bassok, Anupindi and Akella, 2009). Upstream Parameters Whereas downstream parameters affect supply decisions made with influences of customers, upstream parameters focus largely on supply decisions made with the production process in mind (Henig and Gerchak, 2010). Generally, this parameter provides that the company should be in a position to control or manage supply in a manner that its production process can cater for. There are two major models here that influence purchase and SCM at Coca Cola. The first of this has to do with lead time. The lead time generally refers to the time spent from the moment a supply order is made till the time the supply arrives at the production unit (Bispo and Tayur, 2011). The rate of reliability differs from supplier to supplier. There are also some genuine cases and factors such as distribution schedules and time of placing supply that affects lead time. The smaller the lead time, the more certain companies can be that they can meet their demands. At Coca Cola, the company uses a key strategic decision that focuses on achieving a zero lead time from its suppliers. There are two major strategies that guide this. The first has to do with the use of site hubs, where the company negotiates with its key suppliers to have hubs situated very close to the premises of production plants (Bassok, Anupindi and Akella, 2009). This way, time of transportation of raw materials is always trusted to be accurate. The second is the use of auxiliary suppliers, whereby the company refuses to rely on only one supplier as a means of avoiding shocks with lead time. The second model that is used as part of the upstream parameters is yield. Yield as used in this context refers to the quantum of supply that actually arrives out of the total supply request made from the supplier (Henig and Gerchak, 2010). Where there are smaller yields, the manufacturing company may suffer negatively because it will have lapses with the quantity of raw materials available to it to go through the process of production. A number of theories have been developed as to how companies can avoid issues and problems with yield. One of these is by the use of alternative raw materials. In the case of Coca Cola however, this theory is virtually inapplicable when it comes to the core content of its beverages. This is because the manufacturing of the beverages follow very strict routines that cannot be changed if the company wants to adhere to the same level of quality of finished product. Because of this, what the company has always done is to use the services of more than one supplier at a time as indicated earlier. This way, as soon as there are shortages in the yield, there can be other suppliers who will be relied upon to make up for the lapses. Facility Parameters The last parameter is the facility parameter. As the name implies, this refers to those factors and conditions that determine the amount of capacity available for the facility to produce. Yet again, the fact that a company continues to have demands from the downstream or has a supplier base that can guarantee timely and sufficient supplies do not mean that the company can be in a position to meet its demands. At the company level, facilities must have the capacity to produce. There are a number of models and factors that are therefore considered here. The first has to do with product and process characteristics. Product and process characteristics refer to the determinants that are commanded by the nature of product produced and processes involved in production. For example, some products have very fast perishing periods. With such products, purchase and supply must be done with caution so that there will not be waste in the long run. Most strategic decisions that are made at Coca Cola therefore factor product characteristic, whereby supplies are made with the lifespan of finished products in mind. Consequently, products that can guarantee longer lifespan have higher supplies being made for them as against those with shorter lifespan, when all other downstream and upstream parameters remain constant (Anupindi and Tayur, 2008). Another issue has to do with capacity. Capacity can be referred to as the degree to which a company has resources adequate enough to produce to a constant level (Anupindi and Akella, 2013). In most cases, the resources are both human resources and logistics. At Coca Cola, the capacity of the company is a finite one. This means that it is possible to measure the amount of production the company can make in quantitative terms. Whenever this happens, it is very easy to know how much demand from the downstream the company can actually handle. Consequently, whenever demands fall over and above the capacity, the company must put in place strategies that ensure that it is able to meet demands. At Coca Cola, a key strategic decision that has always been taken in terms of managing supply to avoid waste when demand or about of raw materials supplied is more than company capacity is to use outsourcing of production (Gavirneni, Kapuscinski and Tayur, 2012). By this, the company takes some of its production outside its own scope of production so that the available supply will not go to waste. This has however been done with caution by ensuring that whenever outsourcing is done, it is done with a franchised company whose integrity of production can be trusted by Coca Cola. At Coca Cola, the last facility parameter that influence decision making in terms of purchasing and SCM is cost. By cost, reference is made to how much the company invests in the supplies it requires. Because there must be value for money, the company ensures that there is always competitive bidding among suppliers that want to supply raw materials. It has been noted that the selection of the best bidders for supply is one of the most important SCM elements required of supply managers to observe (Anupindi and Tayur, 2008). By observing these, they ensure that the amount of money they spend by way of expenditure becomes valuable enough for the company so that it can be refined into profits. Consequently, supply managers at Coca Cola have always focused on four major types of cost, all of which are considered before suppliers are selected. The first of this has to do with per unit production cost, which looks at the cost incurred for producing one piece of product. There is also fixed cost, which refers to those cost such as salaries and utilities, which are always present for production to be possible. Thirdly, there is per unit holding cost, which refers to cost incurred for holding inventory. Finally, the company considers salvage cost, which is a negative type of cost that must be avoided. The parameters and models discussed have been summarised in the table below Parameter Models Downstream Demand Process Forecast and Information Contracts Upstream Lead Time Yield Facility Product and Process Characteristics Capacity Cost Adopted from Anupindi and Tayur (2008) Conclusion and Recommendations The discussions have been very important in establishing the place of purchasing and SCM at Coca Cola. Generally, it has been known that purchasing and SCM are important phenomena that cannot be excluded in modern business management if companies want to be very competitive. The mere presence of these phenomena does not however guarantee an automatic success for the companies practicing them. As exemplified in the case of Coca Cola, it is important to apply the right models of purchasing and SCM in key strategic decisions if companies can make the most out of purchasing and SCM. Three important parameters of purchasing and SCM have been noted to be the secret of Coca Cola’s success when it comes to key strategic decisions. These are downstream parameters, upstream parameters, and facility parameters. Until now, it can be concluded that Coca Cola has been the reason for its own successes as the company has calculated its way out in the success agenda and in the application of key purchasing and SCM models. Whiles this conclusion is being made, there are a number of recommendations that will be made. In the first place, it is recommended that the company incorporates various continuous improvement methods into its purchasing and SCM. Particularly, lean production and six sigma are recommended. This is because with these, the company a much proactive way of avoiding waste. It is also recommended for the company to restructure its organisational structure so as to make the monitoring of SCM easier than it currently is. References Anupindi R. and Akella R., (2013). ‘Diversification under Supply Uncertainty’, Management Science, 39(8), 944-963. Anupindi R. and Tayur S., (2008). ‘Managing Stochastic Multi Product Systems: Model, Measures and Analysis at Coca Cola’’, Operations Research, 98-111. Bassok, Y., Anupindi R. and Akella R., (2009). ‘Single period multiproduct inventory models with substitution’, Operations Research, 47(4), 632-642. Bispo, C. and Tayur S., (2011). ‘Managing Simple Re-entrant Flow Lines: Theoretical Foundation and Experimental Results at Coca Cola’’,IIE Transactions, 33(8), 609-623. Chen F., (2009) Policies Serial Inventory Systems, Quantitative Models for Supply Chain Management, Kluwer Publishing: Norwell MA, 71-110. Esterl, M. (December 1, 2013). "A Frosty Reception for Coca-Colas White Christmas Cans". The Wall Street Journal. Retrieved mAY 10, 2014 Gavirneni S., Kapuscinski R. and Tayur S., (2012). ‘Value of information in capacitated supply chains’, Management Science, 45, 16-24. Henig M. and Gerchak Y. (2010). ‘The structure of periodic review policies in the presence of random yield’, Operations Research, 38, 634-643. Morton T. and Pentico D., (2005). The finite horizon non-stationary stochastic inventory problem at Coca Cola’, Management Science, 41, 334-343. Sellers, P. and Woods, W. (October 13, 2013). "WHERE COKE GOES FROM HERE". Fortune. Retrieved mAY 10, 2014 Toktay L.B. and Wein L.M. (2001). ‘Analysis of a Forecasting Production Inventory system with Stationary Demand’, Management Science, 47(9), 1268-1281. Statista (2012). Coca Cola World Market Share. [Online] available at http://www.statista.com/statistics/216888/global-market-share-of-coca-cola-and-other-soft-drink-companies-2010/ [June 5, 2014] Market Watch (2014). KO Key Statistics. [Online] Available at http://www.marketwatch.com/investing/stock/ko/profile [June 5, 2014] Read More