Operation Management of PepsiCo - Case Study Example

Introduction PepsiCo was created in 1965 through the merging of Pepsi Cola Company and Frito Lay Inc. the resultant company became the namesake of its larger party and is today PepsiCo, Inc- a global beverage and food company that was incorporated in 1986. The company (through its contract manufacturers, bottlers, among other partners) manufactures, markets, sells and distributes a variety of foods in over 200 territories and countries (Reuters.com, 2014). PepsiCo carries out its global activities through its four major units of business: PAF (Pepsi Americas Foods [which constitutes of QFNA (Quaker Foods North America), FLNA (Frito-Lay North America), as well as LAF (Latin American food and snack businesses)]; PAB (PepsiCo Americas Beverages) comprising of all of PepsiCo’s Latin and North America beverage businesses; PepsiCo Europe including all its south African and European snack, food and beverage businesses; and finally AMEA (PepsiCo Asia, Middle East and Africa) comprising all snack, food and beverage businesses within those territories excluding South Africa (Reuters.com, 2014). The products sold by PepsiCo include a variety of sweet, salty, and grain-based snacks, beverages—both carbonated and non-carbonated, and dairy products among other types of consumable products. Though PepsiCo is headquartered in New York in the United States, it has four operation posts in North America (Canada and the United States), the United Kingdom, Mexico, and Russia. In the UAE, PepsiCo is run under the Dubai Refreshments Company (DRC)—PepsiCo’s sole distributor and franchisee in this region. The company’s vision is to be one of the leading beverage companies in the gulf where a wide network of distribution all over the UAE ensures that Pepsi products are made available to consumers in the area (Pepsidrc.com, 2014). This paper will analyze the operation management of PepsiCo in the UAE by examining the strategic importance of its supply chain—its management, shipping costs, and performance. Supply Chain of PepsiCo Supply chain management is the process through which a company plans, implements and controls the operations comprising its supply chain. This is done in order to satisfy the requirements of the customer in the most efficient manner. Supply chain management covers all raw material storage and movement, work-in-process inventory, to the end-products' point-of-consumption from point-of-origin. This approach manages the arrival of raw materials at the manufacturing point and the shifting of finished goods from the company to the consumer(s) (Ferrari, 2010). It improves the way a company sources for raw materials. In this process, the company's competitive performance is enhanced through close integration of internal functions in a company and their effective linking with the channel members' and suppliers' external operations. This is a concern for every company, large or small, as they strive to improve the quality of their products, increase customer satisfaction, and to get and stay ahead of other competitors in the market place (thus increasing their market share). Supply chain management is likened to a river—where a company links to its raw material suppliers upstream and its consumers downstream. The goal in supply chain management is profit maximization by providing maximum services to customers at the lowest cost achievable for the company (Ferrari, 2010). Competition among companies is today carried out at the supply chain-to-supply chain level as opposed to enterprise-to-enterprise which calls for more closely connected functions of the global relationships among stakeholders. An organization's success today depends on proper supply chain management—this dictates its aptitude for delivery of the chain correct product to the correct market at the correct time. This therefore makes supply chain management one of the more complex processes in a company especially for those spanning continents and dominating markets. It calls for thorough strategies and highly adaptable systems. The management of supply chains for global competitiveness examines all essential functions of the chain including outsourcing, product design, manufacturing, sourcing, distribution, forecasting and planning, logistics, and fulfillment (Ferrari, 2010). PepsiCo’s supply chain in the UAE can be broken down in the following ways. For easier understanding, the supply chain will be broken into three major categories: upstream (supply and transportation of raw materials or other resources required in the manufacturing process); internal (manufacturing process); and the downstream segments (comprises of the distribution, vehicles of delivery, warehousing/storage, and retail stores). A. Upstream Suppliers PepsiCo maintains a small number of suppliers on long-term contract basis. The suppliers are requires to provide the same quality of materials that they supply the company at all times. This relationship also allows the suppliers to get financing while PepsiCo benefits by achieving more profitable economies of scale within other areas of the value chain. This step ensures the company a stable supply of raw materials—also another way to cut costs while maintain the standard of product supplied to customers (Khattar, 2006). B. Internal (Manufacturing) The main production facility of PepsiCo in the UAE is located in Dubai. Sheikh Zayed Rd. 2nd Interchange, beside Al Yousuf Motors, Dubai, UAE to be precise. Products are then sent to warehouses from the manufacturing plant. The three main warehouses used are Sharjah Warehouse and Ras Al Khaimah Warehouse (Pepsidrc.com, 2014). The manufacture of Pepsi-Cola, for example, involves an intricate system. It begins with the riches available ingredients including vanilla beans, cola nuts, sweeteners, flavor oils, pure distilled water. The best technology is utilized to blend the ingredients. The standards of quality and extracting production are also maintained at a high level through intricate monitoring and constant testing to assure consistency and a standard product quality. Flavor concentrates are shipped from specific plants which manufacture Pepsi-Cola in heavy duty containers that are made air-tight. The liquid sweeteners are shipped in special tanker trucks. All the ingredients are then kept in cool, dry, and sanitary areas while those that need to be refrigerated are stored in areas where temperature control is enabled (PepsiCo, 2011). The cans and bottles inside which the drink will be sealed are manufactured in another place and transported to the plant while sealed and wrapped for their protection. Other materials also produced elsewhere include the carbon dioxide utilized in the carbonization of soft drinks, cartoons, caps, and labels. All supplies are subject to inspection upon arrival at the main plant in order to ensure that they meet the standards of Pepsi. At the plant, unique machines are made use of to depalletize as well as uncase the cans and bottles just arriving. They are then transferred to a conveyer belt through which they move quickly while a code is applied to the containers, turned upside down, and thoroughly rinsed with distilled water (PepsiCo, 2011). Since water is the main ingredient in soft drinks, PepsiCo takes special precautions in the distillation and purification of the water it used through treatment and filtration procedures. The ingredients are then carefully combined while audits are performed to control the quality by technicians who are specially trained to ensure the highest standards attainable are met. Finally, the containers are then re-inverted and filled with the Pepsi-Cola at a mean speed of 1,200 containers per minute. The liquid is then carbonated, freshness dates printed on the containers, and a final quality check is conducted. The final products leave the line of manufacture sealed in packs of twelve or six, or can cases of 30 or 24. They are now arranged on shipping pallets and moved to a central warehousing for shipping or to a temporary holding area (PepsiCo, 2011). C. Downstream Warehousing and Inventory Sharjah Warehouse and Ras Al Khaimah Warehouse are the two main warehouses used by DRC. They are both located at convenient locations and are easily accessible by road through the rich transport networks within which they are situated. Trucks are used to transport goods from the warehouses to the retailers. They use modern technologies in their inventory processes and all orders and arrivals are electronically monitored to ensure that the process is smooth and easy. Lack of paper work makes this work a lot simpler, quicker and a lot more organized. Time saving eventually leads to cost savings (Pepsidrc.com, 2014). Distributors In the UAE PepsiCo DRC is the only distributor of PepsiCo product. A local system of distribution is used which guarantees that the products consumed by the customers upon acquisition are just as fresh as they were upon their sealing at the manufacturing plant. The products distributed include carbonated, non-carbonated drinks and Aquafina. DRC and Pepsi intend to invest in a big way to expand distribution, grow the product portfolio and vigorously market brands in order to build a stronger connection with consumers (Pepsidrc.com, 2014). The product range produced by DRC has grown beyond recognition from those first days of production four plus decades ago. New line extensions continue to be added and the product portfolio today includes Pepsi, Pepsi MAX, Diet Pepsi, Mirinda Orange, Mirinda Lemon, Mirinda Green Apple, Shani, Mountain Dew, Evervess Soda, Evervess Ginger Ale, Evervess Tonic, and 7UP, Diet 7UP and Aquafina Pure drinking water (Pepsidrc.com, 2014). Transportation and Fulfillment PepsiCo set two goals for the management of transport; to improve on-time delivery rate to 99.1% and to reduce the costs incurred on transportation. In terms of technology, i2 transportation optimization solution (provided by Penske) has been utilized in place of the previous propriety software since the year 2000. The i2 transportation platform was enhanced with the addition of interface between the companies. It allows for better supply chain visibility, improves data organization, and provides access to better near-real time and real time information on transportation. All transportation is in-house (internal fleet) by way of trucks using the intricate road network of the UAE (Gartner Inc., 2013). Comprehensive supply chain data is provided from the warehouse, and applications dealing with management and analysis. i2 transportation tracks performance at every stage of the transportation process allowing for increased flexibility and more control over the operation. Because visibility is increased, routes and schedules are easily revised thus unforeseen changes are easily dealt with and accommodated so that delays are easily countered. Through i2 transportation, PepsiCo has been able to reach and surpass their on-time delivery performance goal—it is now at over 99%. The strategies employed have also allowed transport costs to be reduced as the technology enables easy determination of the quickest possible routes to the destination at all times. On-time delivery has also improved customer satisfaction and reduced transportation costs overall (Khattar, 2006). cpm cost per mile Dab distance from point "a" to "b" W weight per unit of product u utilization of truck tc capacity of truck The cost of shipping a unit of product can be defined as: cpm x Dab X W ­­­­­­­­­­­­­_________________________ U X tc (Khattar, 2006) Sharing customer, forecasting, and production information PepsiCo uses an Integrated Planning (IP) group to ensure that customers get the right product at the right time, and in the right quantities. This group does so by focusing on four main aspects; procedure, execution, technology, and constant improvement. This combination of aspects works together towards improving the efficiency by which customer demands are met. The past few years have seen PepsiCo take up new technology to help in supply planning, demand forecasting, and inventory policies. The IP group also executes a list of tasks related to the demand forecasting and planning of the supply chain. Detailed sessions are set up to train the members of this group who have to travel to each business unit location for extensive training on-site (Khattar, 2006). Supply chain performance In 20113, the ninth annual Gartner Supply Chain (which is a group that analyzes supply chains of certain big companies and ranks them in order from best to worst while highlighting their best practices) ranked PepsiCo as position 16 on their top 25 list. This was not so good in comparison to the Coca-Cola Company which ranked at position 9. The Gartner Inc measures supply chain performance partly by calculating the financial performance of the company as follows. Three financial metrics are used in the ranking: ROA — Net income / total assets Inventory turns — Cost of goods sold / inventory Revenue growth —Change in revenue from prior year (Gartner Inc., 2013) Conclusion It would benefit PepsiCo to compare their supply chain with that of Coke and make improvements to counter the weaknesses of coke, which is a major competitor. Adopting a better just-in-time solution approach to their problems will also go a long way in making the company more efficient, increasing profits and decreasing losses. Capitalizing on what is already working (such as the IT solutions) and doing away with what is not working so well should help push PepsiCo way ahead of its competitors, and subsequently keep it there. References Ferrari, B. (2010). Supply Change Structural Change Begins to Emerge Within the Beverages Industry | Supply Chain Matters. Theferrarigroup.com. Retrieved 29 November 2014, from http://www.theferrarigroup.com/supply-chain-matters/2010/03/03/supply-change-structural-change-begins-to-emerge-within-the-beverages-industry/ Khattar, S. (2006). An approach to sourcing optimization at a high volume soft drink manufacturer. Dspace.mit.edu. Retrieved 8 December 2014, from https://dspace.mit.edu/bitstream/handle/1721.1/37135/85812019.pdf?sequence=1 PepsiCo,. (2011). the Power of PepsiCo. PepsiCo.com. Retrieved 7 December 2014, from http://www.pepsico.com/annual11/downloads/PEP_AR11_2011_Annual_Report.pdf Pepsidrc.com,.(2014). Dubai Refreshments (P.S.C.)|Company Overview. Retrieved 27 November 2014, from http://pepsidrc.com/our-company/company-overview.htm Reuters.com,. (2014). PepsiCo Inc (PEP) Quote| Reuters.com. Retrieved 27 November 2014, from http://www.reuters.com/finance/stocks/overview?symbol=PEP Gartner Inc., (2013). The Gartner Supply Chain Top 25 for 2013, Retrieved 7 December 2014, from http://www.gartner.com/imagesrv/summits/docs/na/supply-chain/Gartner-2013-SupplyChain-Top25.pdf Appendices Table 1. Metrics for Operational Excellence and Innovation Excellence Performance Dimension Key Metrics Operational Excellence Perfect order rates Total supply chain costs Innovation Excellence Time to value Return on new product launch Source: Gartner (May 2013) Figure1. Operational excellence and innovation excellence Source: Gartner (May 2013) Figure 2. The Hierarchy of Supply chain Metrics: Operation Excellence Source: Gartner (May 2013) Figure 3. The Hierarchy of Product Metrics: Innovation Excellence Source: Gartner (May 2013) Read More