Global
supply chain management: PepsiCo case
1. Introduction
As people known,
international distribution channels link manufactures and final international
consumers. Internationally, distribution channels vary significantly from one
country to another and from one market to another (Christopher, 1998). For most
markets, consumer product channels of distribution tend to be longer than
industrial product channels. Beyond this general trait, however, channel
characteristics differ worldwide. Especially in America, there are many more
levels of distribution for consumer products than in most other counties, at
the same time, for most industrial goods, the large trading companies will adopt
the strategy in dealing directly with retailers. In most emerging markets and
low-income countries, the “direct to store” delivery strategy marketing is
rapidly becoming a popular channel of distribution.
Since 1898,
PepsiCo Beverage Company was available in the United State, after a lot of
business restructuring; now PepsiCo has been the main beverage industry in
America. With the global turnover of $27 billion in 2003, operating profits of
$5.8 billion, as well as the company have 140000 employees around the world.
Pepsi cola is a
flagship product commonly associated in the product of PepsiCo. As a
considerable part of PepsiCo revenue stream, PepsiCo has significant income
actually came from a lot of other products and departments such as Pepsi cola
beverage in North America. Pepsi has been the main market share of the
Coca-Cola and Pepsi. They have become a legend as the competitor in the
business of the marketing strategy. However, due to a series of strategic
acquisitions and as a company in the international market, Pepsi finally get
more market share in the overall market and the performance of the beverage
industry. Pepsi profits grew by 18% last year, to $4.2 billion and operating
income of $29.3 billion, increased by 8.5%, coke's earnings growth of 11.5%,
revenue rose 4.4% to $22 billion for 2004" (steiner, 2005, crime). It can
be said that Pepsi has lost the battle, but won the war with its main rival
Coca-Cola. Pepsi has done this as a snack food and beverage companies, business
in more than 200 countries around the world, more than 143000 employees,
international and domestic more than $4 billion in revenue (Pepsi Company, in
2004, and pages). Increasingly, Pepsi cola, as in most other large
multinational companies have done, is relying on overseas expansion to promote
its future growth and profitability.
2. Evaluation of PepsiCo’s overall distribution
strategy
PepsiCo’s
strategic sights are set on international expansion. Steiner points out that
Pepsi International became Pepsi’s largest division in 2004, and this trend is
likely to continue (2005, para.3). Although the United States and more broadly,
North America, is the world’s largest snack market, its growth is relatively
flat (Flannery, 2004, para.4). These two strategic observations certainly lend
much credence to an outward focusing strategy of growth and expansion. In fact,
this appears to be the driving force behind PepsiCo’s overall strategic plan:
international expansion. Even more specifically, PepsiCo seems intent on
establishing dominance in the two main markets of China and India: “China is a
generous prize” said PepsiCo Asia President. With the opening up of China in
the pate ten years, there is a kind of foreign product’s intrinsic need
(Flannery, 2004, para5). The global strategic orientation is reflected in the
opportunities available on the market, which is an easy access to many
countries. Such as PepsiCo, that is well-funded and has the research and
marketing capabilities to manage a unified market entry campaign.
In response to
changing the market conditions, PepsiCo’s channel management conducted a series
of changes. Before the channel turn the trend of change, Pepsi had done through
with the dealers network, which coverage’s across the country, in this way, the
dealers responsible for the supply of the entire retail terminal. Modern
channel operations often need the distributor to do business with the
manufacturer directly, as well some dealers also provides supporting sales and
service (M. & David, 2000). On one hand, due to there are a number of
dealers, the overlapping coverage is narrow, and even will result in channeling
goods, and out of control for the price. In this context, PepsiCo in the world
especially in China was forced to re-examine their channel strategy. On the
other hand, through innovation and reformation, Pepsi has broken the original
channel pattern; they make the hypermarkets, supermarkets, convenience stores
and other modern path separate from the traditional distribution channel. As
the important customer, by the modern channels, the key account will directly
responsible for delivery by the Pepsi. All the rest of the customers could be
classified to the traditional pathway, however, as the traditional channels,
the dealer is still responsible for the delivery (Cooper et al., 1997).
In particular,
the “Direct to store” delivery model could be understood that Direct-to-store
distribution concentrates all the benefits of operating and sourcing and
logistics in a relatively low cost country. It also takes advantage of the
speed provided by the DC bypass strategies based on cross-docking flows
(Douglas & Martha, 2000). Compared to the traditional distribution,
adapting the direct-to-store does reduce total supply chain cost by cutting
down product total storage, handling and transportation and improve the speed
to market. As for this model adopted, the PepsiCo Company will achieve
significant benefits. First of all; the continuous work flow of product from
the original vendor to the final customer, do not with the storage or
processing in distribution centers or warehouses. This vastly reduces total
order-cycle time. Secondly, reduce end-to-end inventory carrying costs: as a
result of less production storage and production moving faster and directly
from the original vendor to the final customer. After that, reduces cargo
damage and loss: by eliminating multiple “touch” points and cargo loading and
unloading. Fourthly, as a result of improving distribution efficiencies, supply
chain cost per unit and inventory holding cost will be reduced and lower than
through traditional distribution (Douglas & Martha, 2000). At Last, growing
business with lower infrastructure cost is helpful; for example, decreasing the
need to expand current distribution network while expanding to some new
markets. Therefore, this strategy adopted by the PepsiCo was undoubtedly a
successful decision in the company operation.
3. Discussion about how PepsiCo handles
relationships with its suppliers
Obviously, in
order to have a truly successful supply chain, people need to have a good
relationship with the company’s partners and suppliers. In order to ensure that
the key factor is not to only understand your order, but also make sure that
your company’s philosophy is similar to your suppliers (Davenport, 1993). Both
parties understand and agree with the expected success, which is critical to
the company of beverage. If the company is planning to 15%, your suppliers have
the ability to grow in the development of the company. Unless people have the
key suppliers of high-level relationship, where people certainly do not know
these suppliers will be with you in the future. Finally, people will want to
replace the key suppliers when the company is in a growth mode.
When making the
analyses of how the PepsiCo handle relationships with its suppliers, it is
clear to know that the company with their own characteristics. There are a few
helpful hints to handle relationships with their own suppliers, the PepsiCo
Company set clear expectations, therefore, the company and the suppliers know
where they stand. Most of their strategies will include the following measures.
Firstly, they will share the growth goals with their own suppliers. PepsiCo
adapts the purposes to have the synchronous development with suppliers and
build up the psylosophy of the common goal. Secondly, set expectations with
suppliers. It is necessary to make the achieve targets for the suppliers,
PepsiCo lead the trend of the times of dealing with its suppliers. However,
those exceptions should be measured on a regular basis. Under the
circumstances, PepsiCo company will choose the relatively on an appropriate
way. Thirdly, PepsiCo will always communicate the results of those measurements
to their suppliers. This point is especially valuable for the future
development of the company. Communication is the key factor in the relationship
of the different companies, whereas, as for this point we could learn many
experiences from the PepsiCo company.
As for the
methods adopted by PepsiCo Company in the operation of the company, the
benefits of the above measures, they will chose to use this relationship to
increase its efficiency in the supply chain. It is obvious that when the
company chooses the method, as superior competitive advantage, companies should
implement a “closed-loop “supply chain management system that coordinates with
its ERP system. In a closed-loop, the ERP system includes tactical and
strategic planning tools, operational data (customer orders and inventory
movement) brought together into an awfully-integrated environment (Douglas
& Paul, 1996). This environment must also be able to adapt to adjust the
ever-changing as the PepsiCo have done, it is certain to improve the efficiency
of the supply chain. On the other hand, the company will get the benefits of
the different innovation measures. In a word, we should communicate with
suppliers and learn the experience of what PepsiCo have done in the operation
of the company.
Effective supply
chain management realizes that different products and different companies
require different supply chain strategies (Bechtel & Jayaram, 1997).
Generally speaking, there are two kinds of products: innovative and functional.
Fully understood which kind of product you carry (maybe even a mix of the two)
will provide the appropriate direction in managing the supply chain. Innovative
products are new products or those products with short lifecycles and often
tend to have highly demand which may be unpredictable (Tom, 1993). Responsive
supply chains which quite meet the needs of customers will result in the
success of the operation. Functional products, which are products that are
familiar to customers in their industry and tend to have varies stable demand
and long life cycles. As consequences of profit margin pressures, these
products call for efficient supply chains which are concerned with meeting
customer demand at the lowest cost. PepsiCo aimed to minimize inventory
throughout the chain, short lead times (without increasing cost), and low-cost
suppliers (Tom, 1993).
4. Personal view of how well PepsiCo deals with
fluctuations in demand and supply within its supply chain
With the
fluctuations in demand and the supply retailers, commercial partners will use
all sorts of raw material and other supplies in the daily business (Richard,
1997). Main ingredients of Pepsi, they used to include apple, pineapple, orange
juice and other kind of fruit juice concentrate, aspartame, corn, corn
sweetener, flour, spices, grapefruit and other fruits, potatoes, vegetables, raw
milk, rice, oats, sugar and essential oils and wheat.
PepsiCo’s main
packaging materials, including the plastic resin, polyethylene terephthalate
(PET) and polypropylene resin for plastic bottles and film packaging used for
snacks, use glass bottles, aluminum cans and closures, cardboard and cardboard
cartons. Fuel and natural gas are also essential goods for people as a result
of its use in our facilities and truck in our products. The laws, regulations
or market measures to tackle climate change, which will adversely affect the
business and operations. PepsiCo are exposed to the market risk caused by the
adverse changes in commodity; adverse economic conditions may have an adverse
effect on the business results and financial performance (Michael et al.,
2005). Such as the climate change, or laws, regulations or measures’
fluctuations will urge the PepsiCo Company adopt measures to tackle the change
of the fluctuations, which may negatively affect our business and operations.
As we know, some
of these supplies and raw materials are sourced from abroad, and some are
available format limited number of suppliers or are in very little supply when
seasonal demand is at its peak time (Douglas et al., 1996). In addition, we
will chose to use derivatives to hedge price risk prediction to purchase of
some raw materials, fuels and energy. When we make the determine that these
derivatives are not in conformity with the hedge accounting, the PepsiCo
company will pay much attention in the net income at any time due to the
changes of supply prices.
PepsiCo has done
well in the fluctuation of the demand and supply of the supply chain; it will
result in the disruption of the supply chain which could have an unfavorable
influence on the business, such as financial condition and operations results.
The capabilities, suppliers and third party business partners, including
contract manufactures, independent bottling plans as well as the joint venture
partner are the key to the success of the PepsiCo Company. It is necessary to
emphasis the defacement and the destruction of the manufacture will reduce the
cost bonus in transportation, distribution and the raw materials in the
fabrication and sales of the product (Martha & Lisa, 1993). Failed to take
adequate measures to mitigate possible or potential impact of such events, or
effective management if they occur, these events may affect the whole business,
as well as the need for additional resources to renew our supply chain.
5. Conclusion
Since most of
PepsiCo’s growth is already projected to originate from international markets
in the years ahead, PepsiCo should develop a 5 year growth plan for the Asia
Pacific Rim spearheaded by the China market. Considering PepsiCo already has a
mammoth presence in China: “PepsiCo has since invested more than $1 billion in
40 joint ventures, some state connected, a few of them troubled. Today China is
among the five fastest-growing markets for Pepsi” (Flannery, 2004, para.6); by
maximizing this market presence, PepsiCo could use this momentum to capitalize
on markets currently underperforming around the Asia Pacific Rim.
This strategy is
further enhanced by several leading international events scheduled to take
place in China in the coming years: the 2008 Summer Olympics and the 2010 World
Expo. By increasing its profile in China
and throughout the region, PepsiCo would be well-positioned to capitalize on
its increased brand equity and marketing cache to re-launch its product lineup
in the all-important North American market.
PepsiCo’s recent strong financial performances, illustrated below, have
given it the resources requisite to introduce such an expansive regional and
country marketing campaign.
Form the above
analysis; we could know that the operation experience of PepsiCo in the supply
chain is the foremost innovation in the beverage industry. It is clear to get
that the supply chain-wide initiative can help develop the distribution of
short shelf- life products to an extent that would provide quick pay back of
the capital investment. The key set out lies the technology in recyclable
transport containers and develop a process through the technology in the supply
china strategy. In a word, PepsiCo has done as a model in the modern beverage
industry.
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