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COLA_Pepsi_GSCM

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  1. 1. ANALYSIS OF GLOBAL SUPPLY CHAIN MANAGEMENT; COCA-COLA and PEPSICO Subject: Global Supply Chain Management Student Name: Charles Hanson Setiawan Student ID no: 23041320 Tutor & Lecturer: Natalie Wilmot, Fariba Darabi, Song Hanh Pham, Alexandra Anderson
  2. 2. INTRODUCTION Due to various understanding to the term "Supply Chain Management", Mentzer (2001), has claimed based on his research that SCM is a philosophy of managerial implementation. Although it is generally understood as the flow of materials or products, which are all related to operational management. In depth perspective of Supply Chain Management is explained based on Raj Research (2010), that the core functions includes extensively from product design, planning, sourcing, manufacturing, logistics and distribution. Moreover, due to the evolution of globalisation, many firms have encountered pressures from its frequent global competition. Besides the increase of global economy, operational challenge in the global environment that differs from domestic has been an issue. In order to dominate global markets, identifying and implementing in-depth supply chain techniques, especially in food and beverage businesses, is complexly managed. Nowadays, firms have adopted multiple approaches with the purpose to improve their supply chain system and the implications of these are highlighted. As the leading firms in the food and beverage business and considering their competitive ambitions, Coca-Cola and Pepsi are the spotlighted two examples. Although, their products, especially their cola drinks are relatively similar, it has been identified that both Coca -Cola and Pepsi are pursuing peculiar path of integration models. Considering the progress on their competitive strategies, each company has applied the concept of SCM, while their limitations are explained. Depending on their SCM performance in terms of sourcing, distribution, logistics, and sustainability, this relevant comparison of two gigantic food and beverage corporations is critically analysed in this paper.
  3. 3. Strategic Sourcing - Bottlers Acquisition COCA-COLA When it comes to soft drinks, Coca-Cola is the most iconic brands out there. Referring on product categorisation (Chopra and Meindl, 2013), normally food and beverages are classified to be low in criticality. Therefore it is very possible to apply strategic sourcing to eliminate manufacturing risks as well as opening up new markets. However, this does not apply to Coca-Cola, where its secret recipe is closely protected and is one of their highest competitive advantages. Chris Horace, a Director of G&A and IT in Coca-Cola (2010) stated that it is necessary to know more about the partnership supplier and it is all based on trust. Outsourcing has to be taken perso nally and should only conduct basic tasks. In other words, sensitive parts of the competency should not be involved; concerning it would be problematic if there are leakages. Therefore, it has been argued that a type of outsourcing Coca-Cola mainly applies could be specified as Business Process Outsourcing (BPO). BPO is a suitable candidate for Coca-Cola due to its low-added value functions. The outsourced operations included several business sectors such as customer services, accounting, technical support and human resources. On the contrary, due to its criticality, R&D department has to be outsourced to other corporation. And for this reason alone, Coca-Cola decided to maintain it in- house. Horace (2010) admitted that multiple/network sourcing has been strategically practiced. Besides gaining benefits from the competition, multiple sourcing provides flexibility to the customers. Although, it might create complexities due to the difference of contract agreements and governance models, the implementation of multiple sourcing is to prevent emergencies that might occur in single or dual sourcing. Moreover, as the biggest stakeholder in the business, customers' satisfaction should be maintained high and a protection of any unwanted cases is crucial. In addition, based on Chamberland (2003), Coca-Cola has long adopted the concept of outsourcing, even before it was known by that term. By the end of 1890s, Coca-Cola was lacking of potential sources and apparently, investing new bottling plants were considered risky. Therefore, Coca-Cola outsourced its packaging operation, which is in the form of bottles. Due to inconsistency and lack of quality, Coca-Cola decided to license some of the best bottlers to whom that its 'secret ingredients' syrups sold to. These small independent businesses used to bottle Coca-Cola products and distributed them to stores within their geographic areas. By handing over parts of their non-core products to other supplier, Coca-Cola is able to strengthen the development on its core product. While concentrating on its product quality and brand awareness, Coca-Cola is able to lead to the growth of market share.
  4. 4. However, after gaining technical skills, Coca-Cola captured an opportunity to control the whole operation flow by acquiring these bottlers. By 1980s, Coca Cola has managed to deal multiple acquisitions of these bottling companies. CCE (Coca-Cola Enterprises, Inc.) was then established, which is a subsidiary distributor of Coca Cola Company, and it was designed specifically to buy up the bottler businesses. It was so aggressive in fact, that nearly $12 billion have been spent to purchases these bottlers, according to Bloomberg (2010). To develop superior internal capabilities, Coca-Cola Company recognized that it has to begin from accessing their ability to control by these acquisitions. Referring to global value chain governance typologies (Gereffi, 2011), this decision is assumed as a shift from networking coordination towards hierarchical. In this regard, judging from the development pattern, Coca Cola Company could be described as a type of vertically integrated corporation. PEPSICO Practically, Pepsi is the biggest competitor of Coca-Cola, whereby it presents identical cola carbonated drink and has also been marketed throughout various parts of the world. Based on Reuters (2010), the parent company of Pepsi drinks, PepsiCo has manufactured and distributed foods and beverages products in more than 200 countries worldwide. In fact, PepsiCo is ranked to be the second largest corporation in food and beverage business according to their sales revenue. Similar to Coke drinks, Pepsi has their own bottling distribution centre, Pepsi Bottling Group (PBG). Although PepsiCo has promoted few carbonated drinks, juices, mineral waters, and many other diverse drinks, PBG has only exclusively bottled and sold Pepsi-Cola beverages. Back then, PBG used to be an independent distributor before the year 2009, by which it was purchased by PepsiCo along with many other major bottlers. Hereby, it could be signified that PepsiCo has followed the path of Coca-Cola Company. Being in rivalry with Coca-Cola, Pepsi has to focus on alternative competitive strategy aside from branding battle. Nonetheless, the strategy should bear upon a operational system that emphasizes sufficiency and efficiency. Whereas it is ambiguously debated that supply chain management could enhance competitive advantage of a firm, the outcome can be identified from the improved performance rather than instant results. Customer's satisfaction is the objective in this matter, controlling the flow of goods and materials competently is required to provide maximum service at the minimum price. A strategic operation researcher, Rajesh Raj (2013) has determined that PepsiCo's product diversity is the main competitive advantage of the firm. Since 1980s, the company has gone through several acquisitions, even beyond soft drinks. From then on, numerous brands has been owned under PepsiCo, such as Mountain Dew, Aquafina, Gatorade, Lay's potato chips, Tropicana juices, Quaker, 7 Ups, Lipton teas, Ruffles potato chips, and Cheetos. Moreover, Raj (2013) stated that PepsiCo has
  5. 5. now been oriented towards healthier food products, with the focus to sustainably reposition the brand towards healthy direction. For instance, in the recent 2007, PepsiCo has bought a premium organic juice brand labelled 'Naked Juice'. According to Mangan (2012), the terms outsourcing and offshoring are often puzzled, whereby both of the processes are related to the theory of sourcing/procurement. He explained that offshoring is the movement of a particular process to increase the speed to market, whereas the company may still own and control the management of the process itself. On this subject, the acquisitions approach is hardly argued as a conversion to offshoring, despite of outsourcing. Correspondingly, it can be indicated that PepsiCo has applied the concept of economies of scope. In opposition to Coca-Cola, considering the immense acquisitions of similar productions, PepsiCo is best specified as horizontal integrated corporation. Logistics - Information Chain COCA-COLA - VMI (Vendor-Managed Inventory) Based on IGD-Supply Chain Analysis (2010), CCE (Coca-Cola Enterprises) is covering the whole Western Europe markets and has represented 16% of Coca-Cola volume worldwide. As the biggest distributor of Coca-Cola products, CCE supposedly encounters massive challenges in operating its logistic framework. Relating to logistics, relationship with retailers has been one of the cases within Coca-Cola. For more than a decade, Booker, United Kingdom based wholesale retailer, has been in the business with Coca-Cola. As a large grocery store, Booker has placed its stocks diversely in over 100 warehouses across the UK. Due to lack of inefficiency, CCE has managed to develop a new inventory management system, known as VMI (Vendor-Managed Inventory). Mentzer (2001) declared that the success of supply chain management is based on the flows of information chain. An exchange of substantial quantities of information is compulsorily conducted amongst the supplier, distributors, retailers and consumers. In theory, VMI might be an implementation of Just-in-Time philosophy that commonly aimed to eliminate waste. The process has been illustrated as a retailer working together by sharing information with a supplier (vendor) in order to optimise value added by removing waste. CCE obtained demand data from Bookers' store as an exchange to help the sales. Conducting VMI has provided mutual advantages for both firms. Explained by Mentzer (2001), efficiency and effectiveness of supply chain management could create customer value. This value however, is neither perceived from the products nor services, but rather is experienced by the customers personally. Therefore the benefit towards CCE is relatively intangible. Besides the
  6. 6. importance to understand the demand fluctuations, this practice of synchronization helps Booker to deliver greater asset utilisation, also it simultaneously affects Coca-Cola's brand value. In addition, vendor representatives occasionally helped to promote and display their products to be strategically organized inside the retail store. Nevertheless, Booker could improve their supply chain performance by the reducing the cost of inventories as well as to avoid overstocks with all the support from the supplier. In reference to IGD Supply Chain Analysis (2011), key capability of supplier-retailer logistic system, is to restructure the route-to-market network with the objection to reduce unnecessary costs from stockholding and transportation (road miles/gas). Within Booker network, it was proposed that the orders delivered directly to the Booker stores, instead of stocking them to the main warehouse, called RDC (Regional Distribution Centre). Genuinely, it is intended to reduce Booker storage cost, including labour costs at the distribution centres. However, a limited space volume at Booker stores has been the problem and so it is impossible to stock everything in the stores. According to IGD (2011), the delivered volume has been resulted to be 70% in Booker RDC, while 30% of the remaining has been stocked at Booker stores. This transportation network design might be viewed as mobile or probably described to be tailored network (Chopra, 2013), where it applies to both direct shipments and shipments via intermediate distribution centre at the same time. From different perspective, in spite of the increase of complexity, this configuration helps to match the demands of each individual store. Despite of its productivity, direct deliveries to each Booker store was not dynamically efficient in this matter. Another strategy that had been suggested was to combine two stores that were close in terms of geographical area. This 'Paired Store' method had been argued to be a cheaper solution in regard to fulfil the concept of route-to-market. By pairing stores, CCE were able to drop extensively to one of the paired store and that was the split of stocks for two stores. Therefore, the concept of this delivery has literally reduced the transportation costs into half. (Source: IGD Research, CCE, 2011) As it shows on the graph, within 1 year the RDC stock volume has reduced from 70% to 60%. Eventually, the result has concluded as an accomplishment of the concept, with 10% reduction of inventory inside the distribution centre. This change of logistics affects the performance of Booker
  7. 7. retailing. It has been ascertained (IGD Research, CCE, 2011) that the change of volume stimulates the reduction of total Booker's stockholding at the same time. Obviously, there were some risks to the solution, such as potential loss of RDC's volume and orders pending. Nonetheless, the benefits, which have already been proven, outweigh these concerns. Furthermore, on account of VMI application, CCE could forecast the demand on each store depending from the data of replenishment and sales volume. Hence, it should have been easier for CCE to control demand volatility in the long run. PEPSICO - i2 Transportation Technology The evolutions of logistics providers are substantial in these recent years. These companies have developed in scale, to the extent that they are now providing various services, more than just transport. As explained by Mangan (2012), concerning the issues of import and export taxes, barriers, and other varieties of reasons, 3PL has been a popular outsourced partner to look for. By outsourcing its non-core activities, such as logistics, a company could concentrate wholly towards their core competencies. Nevertheless, PepsiCo assumed that it is essential to pick 3PL providers, considering from their costs, volumes, reliability, and speed. As recipe ingredients are their highest intellectual property, like its competitor and most F&B companies, PepsiCo predominantly outsources in the area of business activities. With nearly one- third of the total sales of soft drinks in United States, PepsiCo need to ensure the quality, packaging, and on-time deliveries in their distributed products. It could be assumed that these aspects are related to logistics and partnership with 3PL (Third Party Logistics) is speculated to be a way to manage the implementation of JIT (Just-In-Time). Cutting off costs from logistic sector has been the focus, but there are complications on managing the inflow of raw materials and outflow of the finished products to be distributed and delivered to customers. Hereby, the challenge seemed to be a mismatch on communication, whereby the performance was not reliable. To find out the solution to this, PepsiCo must understand that it is not merely about lowering down the costs supposing to maximise profits in overall. Primarily, the driver behind cost reduction needs to be identified; in this case, communication with partners has to be taken into consideration. Supply chain director of PepsiCo in North America, Laszlo Molnar admitted that PepsiCo has been collaborated with Penske Logistics for more than a decade, and their partnership is critical (Penske, 2012). Besides its contribution on transportation, Penske has handled warehouse management inside PepsiCo distribution centre. Visibility of the products and coordination between both parties are crucial in order to provide optimum logistic performance. Therefore, Penske has applied new technologies to Pepsi's route. Much the same like IBM, a Texas USA based company, called i2 Technology has developed new supply chain management software (i2 Transportation) that is
  8. 8. deliberately designed to spot daily transportation network. Through this i2 Transportation application (an example is on the graph below), visibility can be accessed by which it increases flexibility during the shipment process. (Source: http://www.ibm.com) Thus, i2 Transportation is designed to forecast the inflows and outflows of products as well as to prevent impracticalities. The flow of information is nearly subjected as real-time, in which both teams practices the greatest control of communication. Furthermore, the increase of visibility has assisted both firms to track the shipments, restructure the routes, and organize new plans immediately, just in case if there are delays or any emergencies. As the result, on-time deliveries have eventually increased customers' satisfaction; along with an additional transportation cost reduction. After all, i2 Transportation is an advanced technology that could be the solution to manage transportation chain in the whole new level. This technological improvement is rec ognized as a system that is originally inspired by Toyota's JIT philosophy. To the extent that Coca-Cola has implemented dissimilar logistic approach, it can be wrapped up that these two organisations have missioned to avoid unnecessary optimisation on productions equipment and labours through JIT. Sustainability Challenges COCA-COLA - The PlantBottle™ In order to maintain its competitive advantages and value, Coca-Cola has to develop a sustainable strategy towards their network. The interpretation of sustainability is often captured as 'green' issues towards the environment. It should be noted that, according to Mangan (2012), the dimension of sustainability is covered from broader perspective, the drivers behind green revolution are evaluated from four sources; legislation, social responsibility, cost reduction and market pressure. He claimed that sustainable management is determined as a system developed at the moment with the goal to ensure positive impact for the future. Although, direct advantage is arguably detected, it is rather seen
  9. 9. as an improvement to scale down the disadvantages. In this regard, elimination of inefficiencies and unnecessary processes could be the benefits, through redesigning the system of sourcing and distribution (Mangan, 2012). Based on IGD (2010), CCE has distributed Coca-Cola products of a total 42 billion cans and bottles by 2008. Due to CCE's intense productions and coordination, and from their analysis, they have produced 796,000 tonnes of carbon emissions by 2007, and 65% of that was from cold drinks equipment. A calculation from the breakdown indicates that Coca-Cola's packaging (500ml bottles and 330ml cans) is the major source of their entire carbon footprint. Therefore, as a solution, CCE has executed a progress of weight reduction to their bottles and cans since 2008. By this light weighting method, an approximate 31,000 metric of tons was reduced and it automatically impacted to a decrease of carbon footprints from the production (IGD, 2010). Secondly is the recycling approach, which allows CCE to purchase recycled materials and efficiently reproduce them into new bottles and cans. In fact, to increase social engagement, CCE has introduced 'Recycle Zones' across the UK. These recycled zones literally function as a container/bin to collect Cokes' drinks packaging from post-consumers. Also, another new innovation system has been recently unveiled, The PlantBottle™. (Source: http://www.thecoca-colacompany.com) As part of the CRS (Corporate Responsibility and Sustainability), The PlantBottle is a new bottling innovation that uses natural resources from plants, a combination of sugar cane and molasses as a fundamental element. In reference to IGD (2010), 30% of the PlantBottle components are applied as the base to create Polyethylene Terephthalate (PET) plastic, which is then formed into bottles. It was then analysed and assured that as a result of 30% of plant-based components used, the carbon emission footprint has been reduced to 25%. What is more, the packaging performs as fine as the original, and it is 100% recyclable.
  10. 10. PEPSICO - Frito Lays' CSR According to PepsiCo (n.d.), sustainable agriculture practices have been organised, considering its importance of growing crops to PepsiCo's products. The company has openly looking of partnerships with public or private Non-Governmental Organizations (NGOs) and even universities to conduct green revolution regarding the reduction of GHG emissions and water use. Furthermore, a supplementary support to improve livelihoods of farmers has been considered, supposing to guarantee the sustainability of suppliers. In this matter, Frito -Lay is one of the examples. Under the management of PepsiCo, a Frito-Lay potato chip is a subsidiary division and it has been selling its products in more than 100 countries. As determined by Raj (2013), Frito-Lay was traditionally manufacturing their food products at their plants and as it began expanded; the company noticed a more economical strategy. The strategy is to concentrate more on the agricultural aspects with the aim to collaborate with local potato farmers. Firstly, its regional potato suppliers were approached and they decided to conduct selections of potential farmers. Being in the contract agreements with Frito-Lay, the offer has helped these farmers to receive some financing. These particular farmers selected by their passions and eagerness to harvest the best quality and tastiest potato chip in the business. In this regard, Frito-Lay has taken an in-depth control down to the early supplier. And because of its reputation, insuring steady quality based on raw resources has to be the focus. As a matter of fact, for a company that annually purchases nearly 2 billion pounds of potatoes, it could be understood that their economy of scale has to be efficiently supplied in exchange for demands. PepsiCo has recently launched Sustainable Farming Initiative (SFI), incorporated in 2012 as an innovative sustainable program. With agricultural suppliers from developing and emerging market countries, this SFI program is comprehensively conducted to guide them towards social and environmental friendly. Generally, SFI focuses on farming enhancement, providing operational training foundations for farmers and to demonstrate farming in a proper way. As a case example, PepsiCo has collaboratively participated with China Ministry of Agriculture to operate eight demonstration farms. The idea is to improve China's yields, crops and to raise local farmers' income. Through the technique of crop management and with the support of technological fertilization and irrigation, Chinese farmers have harvested 3 times advancement compared to national average (PepsiCo, n.d.). As a representative within the society, the concern towards environmental awareness is a dispute, assuming that it has not been taken as a caution by the society. However, according to Mangan (2012), the generation nowadays has started to change dramatically, whereby a 'green' issue is emphasized everywhere. Apparently, consumers are more aware of the impacts from purchasing goods nowadays. As to this, the worriment can be seen that people are concerned into healthy, 'environmental friendly' lifestyles. And as a soft drink company, it is hard to alter in this direction. Hence, being actively involved into Corporate Social Responsibility (CSR) is a positive way to impress.
  11. 11. CONCLUSION This report indicates that Coca-Cola and PepsiCo are individually conducting their supply chain management. The identification of each company integration model is asymmetrical. Eventually, Coca-Cola's vertically integrated model could be identified from the intense acquisition of regional bottlers and its new investment on The PlantBottle, which both are seen to functions in different departments. Furthermore, based on the cases mentioned, Coca-Cola had established CCE as the largest distributor that is settled to be on top of the supply chain network. The evidence that CCE is strategically distributed their products to several retailers, and one of them is Booker. Regarding its competitive strategies, Coca-Cola is perceived to be growing towards vertical integration, intended to monopolize the market. On the other hand, although PepsiCo assumingly copy a certain sector from Coca-Cola by forming main bottling centre, their internal management are not parallel to each other. From the research, it has been mentioned that PepsiCo is evaluated to broaden the market by providing their diversity of the products. There are fragmented branded food & beverage products, varying from soft drinks (Pepsi, 7Ups, Mountain Dew), mineral water (Aquafina), snacks (Frito-Lays, Quaker, Cheetos, Ruffles), and recently juice (Naked Juice), have all been the subsidiaries under PepsiCo. Unlike Coca-Cola, this pattern of diversified acquisitions is clearly detected that PepsiCo is integrated horizontally. It could also be signified that PepsiCo is more open towards collaborations. Despite of managing their logistics and warehouse in-house, PepsiCo has outsourced this area by its partnership with 3PL. Therefore, it is concluded that PepsiCo is intended to focus exclusively on its food & beverage goods, while its ambition is to provide variety of them. The scope of their products is the fundamental indication to support this statement. Similarly, both of the companies have been committed to be involved in CSR (Corporate Social Responsibility). Although it is hard to pinpoint whether or not it is for commercial and advertisement purposes, CSR in this matter has benefited both society and environment directly. Coca-Cola has conducted sustainability management through the implementation of recycling and The PlantBottle for the sake of greener environment. Correspondingly, PepsiCo's foundation that is dedicated to train farmers is issued to be an active CSR towards the society. Beyond their generosity, this concept is understood by them as challenges to the extent to develop their strategic core competencies.
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