PepsiCo, the food and beverage behemoth with $63 billion in annual revenues, is best known for their carbonated soft drinks. But consumers’ preferences have shifted toward more nutritious foods. Organic products, for example, were up 11 percent in 2015 while the overall food market is growing at 3 percent according to a report released by the Organic Trade Association. PepsiCo responded by leveraging its premier health & wellness brands such as Naked Juice and O.N.E. Coconut Water.
These products, however, have much more complex supply chains than PepsiCo’s carbonated beverage value chains. First, these products require ingredients from around the world; these are global rather than regional supply chains. Secondly, many of these require cold chains where products are refrigerated all the way to the store shelves. Finally, consumers interested in nutritious products also tend to want to buy from companies with sustainable supply chain practices.
Tim Rowell, a Senior Manager of Supply Chain Planning working in the chilled supply chain portion for PepsiCo’s global nutrition segment, spoke about how his company has adapted to these changes. Mr. Rowell spoke at the APICS2016 conference that took place early this week in Washington D.C. APICS is a professional association for supply chain management known for its research, education, and certification programs.
First of all, to address consumer’s sustainability preferences, PepsiCo has taken several actions: for the Naked Juice product line their packaging is made from other recycled bottles; the bottles are square, allowing the company to squeeze more freight into their shipments, which reduces their carbon footprint; their bottling facility and corporate offices are LEED certified; and this year they are in the midst of replacing current fleet vehicles with vehicles four times more fuel efficient and are also working to ship more freight by rail, additional actions that reduce their carbon footprint.
To address nutritional concerns, Mr. Rowell pointed out that in addition to using natural ingredients like juices and coconut water, “we use non-GMO ingredients everywhere that is possible” and these products are non-GMO Project certified. And for their organic products, which indicates products produced without the use of pesticides, they are USDA Organic certified.
The PepsiCo coconut water supply chain starts with growers in Indonesia and the Philippines, uses copackers in Asia and in the U.S., imports goods through ports in California and New York, provides first line storage in warehouses near the ports, and then redistributes the goods to other distribution centers across North America based on demand. Packaging material is sourced from Europe, Asia, and the Middle East.
A resilient supply chain starts with a network design and practices that help a company avoid events that will disrupt the supply chain. But the coconut supply chain is in a region of the world where typhoons are common. Disruptions are not totally avoidable; Mr. Rowell has seen two typhoons that caused disruptions in the three years he has been managing this supply chain, one of which knocked out one of their copackers for three months.
So in addition to avoidance, it is necessary to develop practices that allow PepsiCo to return to optimal performance as quickly as possible after an adverse event. In one of Mr. Rowell’s slides, he detailed the specific strategies from APICs Risk Management body of knowledge that were being used to help avoid and recover from supply chain disruptions. These included early warning signals, the use of buffers, an appropriate supply chain configuration, and protection of brand equity. “Much of this is common sense,” Mr. Rowell said, “but APICS does offer a good framework.”
From a network design perspective, they built in some capacity buffering by using three copackers in Southeast Asia, and additional copackers in the U.S. to be used if necessary. The copackers in Southeast Asia are far enough apart so that if a typhoon knocks one offline, the others are not likely to be in the zone of destruction.
The communication with copackers, the critical capacity bottleneck, requires active collaboration. This is PepsiCo’s core early warning mechanism. According to Mr. Rowell, early in the relationship with some of these copackers, “weeks could go by when they didn’t produce anything for us and we wouldn’t know it.”
PepsiCo had to improve the frequency and quality of the data exchanged. Now the copackers report weekly on how many cases of each SKU they have produced, whether they have enough raw material to continue scheduled production, and reason codes associated with any failures to produce what they committed to produce. “We have a contact person at each copacker tasked with alerting us in hours, rather than at the end of the month,” if a significant disruption occurs.
To support collaborative production scheduling, Pepsico needs to understand both the aggregate capacity of a packer, and line capacity. The company also needs to understand the copackers’ labor strategies, for example what the local holidays are and whether workers have weekends off.
To get this kind of collaboration, PepsiCo has to be a good partner. 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 to produce what is needed,” particularly if PepsiCo is willing to allow less production of some SKUs to secure capacity for the SKUs with unexpectedly strong demand.
The U.S. copackers are there to provide backup capacity, for which they have to pay a premium. They can be used to shave that lead time down if necessary. By eliminating the ocean transit, the U.S. copacker can “shave eight weeks of lead time.”
The inventory buffer is set to account for 20 weeks of inventory based on the supply chain lead times – 8 weeks of locked production, 2 weeks to hold and test the products, 8 weeks to transport the goods across the Ocean, and two weeks to redistribute the product once it reaches North America. But this is a balancing game. Buffers can’t be too large or the products lose freshness and risk expiration.
The company also engages in an inventory prebuild to support the peak summer season. This prebuild begins before the standard 20 weeks of lead time to account for the Typhoon season in Southeast Asia. There is a ramp down in production at the end of the peak season, but at times there is negotiation and compromise because “we can’t pull the rug out from under the copackers at the end of the season.”
In terms of protecting brand equity, the sustainability initiatives mentioned earlier in this article certainly contribute to their reputation with millennials. But PepsiCo is also Fair Trade Certified indicating they are fairly treating their partners in their extended supply chain. This helps to protect them against the kind of negative press that has hurt other food & beverage manufacturers.
In conclusion, while this was the most interesting presentation I saw at the APICS conference, in fairness all the presentations were good. I have never been to APICS before, but I was impressed by the depth of the presentations, APICS’ educational content, and their benchmarking services. I certainly hope intend to attend future APICS conferences.