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

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.

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 personally 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.

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

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

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

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 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 recognized 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

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.

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.

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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