Synopsis

On

Supply Chain Managentment In Pepsico

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.

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.

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,
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.

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.

2.2 Supply Chain Strategy

Step 1: The Customer and Supply Chain Uncertainty

a) Identifying Customer Needs

b) b) Demand Uncertainty and Implied Demand Uncertainty

Step 2: Understanding the Supply Chain Capabilities

Highly Efficient Somewhat Efficient Somewhat Responsive Highly Responsive

In towns PEPSI in cities

3.1 Distribution Channels

 Direct distribution:

 Indirect distribution:
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

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.

3.5 Value of Distribution System

There are basically two components of distribution:

 Storage

 Distribution
4.1 Demand Forecasting

Importance

Ease of Forecasting

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

2. Qualitative Method

3. Causal Method

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.

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.

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.
 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.

6.2 Supplier Scoring and Assessment

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 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.

High Strategic Item s

Critical Item s
Criticality

Ensure long term

Ensure availability relationship
Gas CO2 Drink Formula
Bulk P urchase
General Item s Item s
Ensure low cost Ensure low cost
Low Cans and bottles Sugar
Low High
Value/Cost
26

utdallas .edu/~ m etin

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.

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.
5. www.cio.com/article/30381/Supply Chain Management Guru Hau Lee on Demand Forecasting
(accessed May 20, 2010)
6. www.logistics.about.com/od.supplychainintroduction/Introduction to Supply Chain.htm
(accessed May 20, 2010)
7. www.pepsi.com (accessed May 20, 2010)