Question:Read Forbes Article about Pepsi Supply Chain (Pepsico'sPractical Application of Supply Chain Resilience Strategies) andanswer the following Questions: For full credit, total responsesshould be the equivalent to 3/4-1 page, college writing 1. WhichPepsico products are growing faster than soft drinks (why) and bywhat percentage? 2 Why do the fastest growing products experience amore complex supply chain? Explain. 3. What are some of thechallenges in sourcing and purchasing coconut products? Explain. 4.How does Pepsico source their copackers and why do they source themboth internationally and domestically? 5. How docs Pepsico managetheir inventory levels, balancing long lcad times with JIT?Explain
Article:
PepsiCo's Practical ApplicationOf Supply Chain Resilience Strategies
PepsiCo, the food and beverage behemoth with $63 billion inannual revenues, is best known for their carbonated soft drinks.But consumers’ preferences have shifted toward more nutritiousfoods. Organic products, for example, were up 11 percent in 2015while the overall food market is growing at 3 percent according toa report released by the Organic Trade Association. PepsiCoresponded by leveraging its premier health & wellness brandssuch as Naked Juice and O.N.E. Coconut Water.
These products, however, have much more complex supply chainsthan PepsiCo’s carbonated beverage value chains. First, theseproducts require ingredients from around the world; these areglobal rather than regional supply chains. Secondly, many of theserequire cold chains where products are refrigerated all the way tothe store shelves. Finally, consumers interested in nutritiousproducts also tend to want to buy from companies with sustainablesupply chain practices.
Tim Rowell, a Senior Manager of Supply Chain Planning working inthe chilled supply chain portion for PepsiCo's global nutritionsegment, spoke about how his company has adapted to these changes.Mr. Rowell spoke at the APICS2016 conference that took place earlythis week in Washington D.C.APICS is a professional association forsupply chain management known for its research, education, andcertification programs.
First of all, to address consumer’s sustainability preferences,PepsiCo has taken several actions: for the Naked Juice product linetheir packaging is made from other recycled bottles; the bottlesare square, allowing the company to squeeze more freight into theirshipments, thereby reducing their carbon footprint; their bottlingfacility and corporate offices are LEEDcertified; and this yearthey are in the midst of replacing current fleet vehicles withvehicles four times more fuel efficient and are also working toship more freight by rail.
To address nutritional concerns, Mr. Rowell pointed out that inaddition to using natural ingredients like juices and coconutwater, “we use non-GMO ingredients everywhere that is possible” andthese products are non-GMO Project certified. And for their organicproducts, which indicates products produced without the use ofpesticides, they are USDA Organic certified.
The PepsiCo coconut water supply chain starts with growers inIndonesia and the Philippines, uses copackers in Asia and in theU.S., imports goods through ports in California and New York,provides first line storage in warehouses near the ports, and thenredistributes the goods to other distribution centers across NorthAmerica based on demand. Packaging material is sourced from Europe,Asia, and the Middle East.
A resilient supply chain starts with a network design andpractices that help a company avoid events that will disrupt thesupply chain. But the coconut supply chain is in a region of theworld where typhoons are common. Disruptions are not totallyavoidable; Mr. Rowell has seen two typhoons that caused disruptionsin the three years he has been managing this supply chain, one ofwhich knocked out one of their copackers for three months.
So in addition to avoidance, it is necessary to developpractices that allow PepsiCo to return to optimal performance asquickly as possible after an adverse event. In one of Mr. Rowell’sslides, he detailed the specific strategies from APICs RiskManagement body of knowledge that were being used to help avoid andrecover from supply chain disruptions. These included early warningsignals, the use of buffers, an appropriate supply chainconfiguration, and protection of brand equity. “Much of this iscommon sense,” Mr. Rowell said, “but APICs does offer a goodframework.”
From a network design perspective, they built in some capacitybuffering by using three copackers in Southeast Asia, withadditional copackers in the U.S. to be used if necessary. Thecopackers in Southeast Asia are far enough apart so that if atyphoon knocks one offline, the others are not likely to be in thezone of destruction.
The communication with copackers, the critical capacitybottleneck, requires active collaboration. This is PepsiCo’s coreearly warning mechanism. According to Mr. Rowell, early in therelationship with some of these copackers, “weeks could go by whenthey didn’t produce anything for us and we wouldn't know it.”
PepsiCo had to improve the frequency and quality of the dataexchanged. Now the copackers report weekly on how many cases ofeach SKU they have produced, whether they have enough raw materialto continue scheduled production, and reason codes associated withany failures to produce what they committed to produce. “We have acontact person at each copacker tasked with alerting us in hours,rather than at the end of the month,” if a significant disruptionoccurs.
To support collaborative production scheduling, Pepsico needs tounderstand both the aggregate capacity of a packer, and linecapacity. The company also needs to understand the copackers’ laborstrategies, for example what the local holidays are and whetherworkers have weekends off.
To get this kind of collaboration, PepsiCo has to be a goodpartner. They lock the production schedule for two months,committing to purchase all the inventory produced over that period.“On occasion copackers can and will deviate from the plan toproduce what is needed,” particularly if PepsiCo is willing toallow less production of some SKUs to secure capacity for the SKUswith unexpectedly strong demand.
The U.S. copackers are there to provide backup capacity, forwhich they have to pay a premium. They can be used to shave thatlead time down if necessary. By eliminating the ocean transit, theU.S. copacker can “shave eight weeks of lead time.”
The inventory buffer is set to account for 20 weeks of inventorybased on the supply chain lead times – 8 weeks of lockedproduction, 2 weeks to hold and test the products, 8 weeks totransport the goods across the Ocean, and two weeks to redistributethe product once it reaches North America. But this is a balancinggame. Buffers can’t be too large or the products lose freshness andrisk expiration.
The company also engages in an inventory prebuild to support thepeak summer season. This prebuild begins before the standard 20weeks of lead time to account for the Typhoon season in SoutheastAsia. There is a ramp down in production at the end of the peakseason, but at times there is negotiation and compromise because“we can’t pull the rug out from under the copackers at the end ofthe season.”
In terms of protecting brand equity, the sustainabilityinitiatives mentioned earlier in this article serve to protectbrand equity. But PepsiCo is also Fair Trade Certified indicatingthey are fairly treating their partners in their extended supplychain.
In conclusion, this was the most interesting presentation I sawat the APICS conference. But all the presentations were good. Ihave never been to APICS before, but I was impressed by the depthof the presentations, APICS’ educational content, and theirbenchmarking services. I certainly hope intend to attend futureAPICS conferences.
