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

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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 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

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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

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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
EfficientIn towns
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

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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:

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 ○ 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.

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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

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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,

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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

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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 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

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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.Cr (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

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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.

6.2 Supplier Scoring and Assessment

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 [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.

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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. 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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 High Strategic Items
CriticalItems

Criticality
Ensure longterm
Ensureavailability relationship
GasCO2 DrinkFormula
BulkPurchase
General Items Items
Ensure lowcost Ensure lowcost
Low Cansandbottles Sugar
Low High
Value/Cost
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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 (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)
8. www.logistics.about.com/od/supplychaintroduction/a/Lean
SCM.htm (accessed May 22, 2010)
9. www.entegreat.com/eg industrysolutions beverage SCM.htm
(accessed May 22, 2010)

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