Supply Chain Management Of Pepsi Cola Pakistan

Demand Forecasting Importance Demand forecasts form the basis of all supply chain planning at Haidiri Beverages. Forecasts of future demand are essential for making accurate supply chain decisions and ensuring the company’s success. Examples of such decisions include how much of the product to make, how much to inventory, how much to replenish and how much to order. Ease of Forecasting Beverages are a push product. Forecasting is not easy in the beverage industry as there are possible serious fluctuations in demand due to seasonal changes in winter and summer, which can not be easily predicted before hand or controlled. Therefore, accurate forecasting can be difficult at times, and there is a margin for error. However, having multiple product lines and daily planning procedures do decrease variability at Haidiri. Risk of error is decreased by high responsiveness. Forecasting Methods At Haideri Beverages, a combination of three forecasting methods is used. These methods are used for local demand only. In the case of exports to countries such as Afghanistan, no forecasting is done as orders are taken by Haidiri one year in advance. Forecasting is done in collaboration with PepsiCo International. Time-Series Method: Historical demand data can be effectively used to forecast future demand. Haidiri Beverages takes into account the previous two years historical data to forecast its future demand. On this basis, a demand forecast for the coming year is made. Haidiri carries out demand forecasting for local demand. Qualitative Method: Using historical data and market intelligence as a guide, Haidiri’s management practices their own judgment to determine the demand forecast. Haidiri’s management forms a panel for achieving this purpose that comprises of the CEO, GM marketing, the department managers (sales, shipping, quality control, marketing etc) and specially hired supply chain analysts. A yearly demand plan is forecasted in this way which is then further divided into monthly, weekly and daily plans accordingly. Causal Method: Causal forecasting assumes that the demand forecast is highly correlated with certain factors in the environment such as the state of the economy, interest rates, and product pricing that can cause a change in the demand. An example is how by introducing a product variant, such as Pepsi Twist, can influence demand for the original product that is Pepsi. Promotional activities by PepsiCo International planned for the year is another example. Haidiri Beverages plans its demand forecast in collaboration with PepsiCo international, knowing that increased promotional activity leads to higher demand.

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Forecasting in Practice Haidiri regularly updates its forecasts as and when needed. It keeps in regular touch with PepsiCo International headquarters, integrates demand planning and forecasting throughout the supply chain, and keeps an eye on market trends, seasonal variations and competitors’ strategies. This ensures that the forecast reflects the current reality and reduces risk. The updated forecast is essential for the company to carry out supply chain planning and decisions. Haidri Beverages, operating without an updated forecast is unlikely to meet the needs of its customers and its own organizational objectives.

Aggregate Planning Objective The objective of aggregate planning is to satisfy demand in a way that maximizes the supply chain profitability of a firm, which is in this case Haidiri Beverages. Planning Horizon The planning horizon for Haidiri Beverages is one year that is twelve months which is further divided into quarters, months and weeks respectively. Aggregate Planning Strategy Time flexibility from workforce or capacity strategy-using utilization as the lever The aggregate planning strategy used by Haidri beverages is the time-flexible strategy, as it is most suited to the beverage industry. Capacity: The plant at Haidri Beverages normally works at 12 hours a day machine capacity, but this capacity can be taken up to 24 hours a day when required, as in peak times of demand. This excess machine capacity can be utilized when needed. In order to synchronize production with demand, Haidri keeps a stable workforce by using the existing workforce and varying the number of hours worked over time. Such flexible schedules help achieve synchronization. No external workers are hired; instead, existing workers’ shifts are increased and they are paid over time. Inventory: At Haidri, production is synchronized with demand and high levels of inventory are avoided. The company maintains a month’s safety inventory as a tradeoff between the costs of having too much inventory and the costs of losing sales due to not having enough inventory. In order to save on carrying and storage costs, Haidri aims to keep lower levels of inventory, using excess machine capacity and worker overtime to adjust to demand variations as in line with this strategy. Stockouts: The costs are distributed over the workforce and stockouts are avoided. Planning Constraints Haidri has to comply to national labor laws and laws governing working time and rest time (no more than fifty hours a week) as outlined in the Constitution of Pakistan and the Factories Act 2

1934. This is to ensure the basic rights of the workers. The company cannot exceed existing fixed capacity in production decisions with respect to: •

Production (180,000 litres converted to 250 ML crates per day).

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Storage: Raw and packing (80,000 Sq Ft)

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Storage: Finished goods (120,000 Sq Ft)

The company needs to comply to the capital available and has to maintain a minimum safety inventory level at all times to avoid stockouts.

Transportation Network Haidiri Beverage’s supply chain strategy is closely linked to the appropriate use of transportation. In a typical market, quick response enables supply chains to meet the customer demands for ever-shorter lead times, and to synchronize the supply to meet the peaks and troughs of demand. The major focus is to determine the processes that are to be integrated in the supply chain network with their corresponding suppliers, distribution centers and the associated transport links between them. Modes of Transportation Land: Truck offers advantage of door to door shipment, a shorter delivery time and no transfer between pick up and delivery. Haidiri beverage uses the TL (truck load) approach. This approach provides paves the way for economies of scale and is able to meet service requirements while minimizing both trucks idle and empty travel time. Truck loads are more suited to Haidiri beverages because of the use of warehouses and larger shipments therefore making it cheap. Raw materials from the suppliers are brought using trucks; finished products are transported to distributors and then retailers using trucks as well. Haidri beverages have its own fleet of small and large trucks and vehicles for carrying goods and raw material, while the distributors also use their own vehicles. Water: This mode forms only a very small part of the total transport network. It is used for shipping of empty cans from Dubai to Port Qasim in Karachi, from where it is brought by land to the plant in Rawalpindi. Air: It is again a very small part of the entire transport network. This mode is used to fly in concentrate form New York to Lahore, from where it is transported by land to a storage facility in Hatter and collected from there by Haidiri Beverages’ own trucks. The shipping department is in charge for storage and subsequent displacement of the product orders. The inventory capacity is being utilized and maintained in coordination with the production department and is based on the term production estimates. Design Options for a Transportation Network Shipment via central DC with inventory storage using milk-runs: This is the main mode used for transporting goods to consumers who are far away. Products are transferred to the distribution

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center in a particular region and are stored there. Smaller trucks then carry these products to the local retailers as per demand in smaller vehicles using milk runs. This method is cost effective because it saves on high transport cost that would have been involved in transporting to each retailer directly form the supplier, and also prevents stockouts because inventory is maintained closer to the retail outlets. Retailer Retailer Retailer Retailer

Haidiri Beverages D.C Figure 7 (Shipping via Central DC)

Retailer Retailer

Direct Shipping: This method is used for transporting products to key account holders such as KFC and Pizza Hut. Haidri transports to them directly. Diagram in Appendix. Direct Shipping with Milk-Runs: This method is used for transporting post mix cylinders to retailers within the Islamabad/Rawalpindi region for fountain fresh Pepsi. The shipment is made in milk runs.

Sourcing Decisions in Supply Chain For Haidiri Beverages, outsourcing results in the supply chain function being performed by a third party. It is in fact one of the most important factors facing the firm. Raw material for production and packaging is being outsourced through contracts. Inbound and outbound transportation of products from the manufacturing place to the distribution center and then to the final customer is also being outsourced to a third party. The basic considerations of Haidiri in this regard are: • • • • •

pointing out sources of supply and negotiate with suppliers sourcing of raw material from local and foreign suppliers deciding terms and conditions with supplier coordinating activities and documentation with suppliers Cost comparisons and quality assurance.

Haidiri makes the decision from where to outsource by inviting bids for tenders in the local newspapers. The tender works as a general offer to all the interested parties whether they are related to the provision of raw material or distribution vehicles. Sourcing process of the company includes the selection of supplier, design of supplier contracts, product design collaboration, procurement of material and services and evaluation of supplier performance in case of raw material procurement. Supplier Scoring and Assessment 4

Figure 1 (Supplier Scoring and Assessment)

When comparing suppliers, Haidiri does not only focus on the quoted price but also other dimensions that may affect the total cost of the supplier. The following factors other than quoted price are being considered: replenishment lead time, supply flexibility, supply quality, pricing terms, exchange rates, duties and supplier viability. For Haidiri the supplier scoring and assessment is based on the feature that the supplier performance, in terms of replenishment lead time and on time performance, distinguish them amongst their competitors. Soon after the tender notice for the procurement of raw materials is advertised, the suppliers are asked to send sample of the products. For example, for the manufacture of Pepsi, concentrate and sugar are demanded of high quality which is the forte of the company. These samples are tested in the total quality laboratories. If the samples match with the standard set then the sales department selects that particular supplier. Pepsi being an ISO-9001 certified company cannot sell low quality products, therefore it has strict standards set for the purchase of raw materials from suppliers. Raw material Procurement For the manufacturing of Pepsi products, Haidiri procures raw materials like packaging materials, bottles, cans, sugar and concentrate etc. from both local and foreign suppliers. The materials used in the manufacture of beverages are primarily being procured from various parts of the country. Plastic bottles are mostly obtained from APCO plant, which is located right next to Haidiri’s factory. Cans are imported ready-made and printed from Dubai in two parts-the case and the lid. Sugar is purchased from several different suppliers chosen from a list already selected by PepsiCo International. The concentrate is obtained directly from PepsiCo International. The management usually advertises in the newspaper to invite tenders for the supply of these raw materials. The basic components of raw material are: concentrate, CO2, sugar and gas. Negotiations with Suppliers Procurement Managers at Haidiri perform technical evaluation of the suppliers including the analysis of their historical financial record, lead time and infrastructure before selection. In some cases, after selection of the supplier, Haidiri enters into negotiations to set the terms of the contracts. Haidiri’s supply contract with the supplier specifies parameters governing the buyersupplier relationship. But in addition to this contract, further negotiations with the supplier are opted for establishing a significant impact on the behavior and performance of all stages in the supply chain. Haidiri enjoys a bargaining edge in the negotiation process and dictates the terms rather than to follow them. Selection Criteria of Distributors

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Selection of distributors is a critical step, because the majority of supply to the retailers is handled by the distributors. Efficient and well-placed distributors are essential for ensuring product availability, which is the main target of the company. For this purpose, applicant distributors must have: 20-25 vehicles (depends upon area supplied), have 20,000 cases of empty bottles, and deposit Rs.1,000,000 as security. Distributors who meet these criteria are then considered as potentials and then selected after negotiations on cost and other factors. In case of Haidiri’s distributors the company allocates a fixed quota to its distributors and does not show flexibility of buying back. Revenue sharing contract exists between the distributor and Haidiri. Product Categorization by Value and Criticality Pepsi’s strategic item is its drink formula. It is considered to be a base line for the company’s business all over the world. The critical item is the gas component that is CO2; the company must ensure the availability of this item with less comparative accumulated cost. Cans and bottles come into the category of general items, the company tries to ensure maximum efficiency while buying these items. The use, type and specifications of bottles differ with different products. General items have more specific use as compared to bulk items. Sugar may rightly be placed under the category of bulk items. Haidiri procures sugar for its use in the production process. Maximum efficiency has been ensured while buying sugar and its related products in bulk. Bulk items are used invariably in all products of Pepsi with slightly variations of proportion.

Criti cality

High

Figure 2 Product Categorization by value & Criticality

Low

Critica l Item s Ensure availability Gas CO2 Genera l Item s Ensure low c ost Cans and bottle s Low

Strategic Item s Ensure long te rm re lationship Drink Formula Bulk P urcha se Item s Ensure low c ost Sugar

Value/Cost

High 26

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Pricing and Revenue Management Being a franchise of PepsiCo International, Haidiri beverages cannot vary the price of its drinks in the retail market in order to regulate revenue and profit; it has to follow the pricing set and determined by PepsiCo international. However, all the revenue management policy guide lines are provided from PepsiCo International. For an effective revenue management, pricing is an important lever to increase supply chain profit by better matching supply and demand. As per Pepsi’s policy, Haidiri uses differential pricing based on customer segment, time of use, and product or capacity availability. In order to increase supply chain profits and total margin earned from these assets, managers use all available levers, including price. This is a primary role of revenue management. Revenue Management for Seasonal Demand Seasonal peaks of demand are common every year. In Pepsi the seasonal demand varies as it increases considerably in summer than in winters. Off-peak discounting can shift demand from peak to non-peak periods. This is exactly what Pepsi does as it reduces its prices on litre bottles

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and comes up with new saving schemes just to attract customers. Pepsi charges higher price during peak periods and a lower price during off-peak periods. Pricing and Revenue Management for Multiple Customer Segments These are different segments which Pepsi has allocated and targets multiple customers from these segments such as children, teenagers and adults. The product range is available in tin, glass bottles, plastic liter bottles and fountain fresh. Tin is relatively expensive than glass bottles and caters to a different segment. To use revenue management successfully when serving multiple customer segments, Haidiri follows these tactics effectively by basing price on the values assigned by each segment. They also use different prices for each segment for example a Pepsi can costs Rs 30 and at the same time Pepsi bottle costs only Rs 12, so Pepsi uses different prices for each segment. To gain the edge Pepsi forecasts at the segment level as well to help keep Pepsi competitive in their pricing and revenue management Pricing and Revenue management for Bulk and Spot Customers Haidiri’s has key accounts like Savor foods, KFC, Pizza Hut etc., and pricing is adjusted in order to facilitate these customers. They are offered discounted prices because they are potential long term customers and they always purchase in bulk. Not only that, they serve as an important means of promotion. By offering lower prices to such large scale customers, the company ultimately benefits. At the same time the distributors also reach out to the retailers who usually buy at the spot in small quantities. Using In Practice Managers do gather accurate and complete data relating to products, offered prices, competition and most important customer behavior. For Pepsi it’s equally important to quantify the expected benefits from revenue management. Historical data and a good model of customer preferences are being used to estimate the benefits. Pepsi differentiates between the customers who truly need the supply chain asset during peak period and those who will benefit from moving their order to the off-peak period. This approach increases profits for the firm while also satisfying the customers creating a double impact. Revenue management tactics have brought in huge profits to the company.

Conclusion Pepsi has come a long way and is one of the largest companies in the world. Here in Pakistan, Pepsi has captured the market like a storm and has maintained its market share; mainly because of its supply chain effectiveness. The well informed and widespread supply chain has kept Pepsi on its feet. The competitive and supply chain strategy (responsive) achieve strategic fit and there is excellent coordination and integration amongst all the supply chain components. It is indeed the supply chain of the new generation.

Recommendations •

Pepsi is currently purchasing plastic and glass bottles and shells of cans from outside firms. They are dependent on those firms and sometimes they don’t get the required orders on time and hence have to bear with the consequences of shortage at times in the 7

market in peak seasons. Our recommendation is that if they make their own bottling plants here they won’t have to depend on other suppliers and hence would be self sufficient to carry out their activities as per their requirement. This will reduce their wastage costs and increase their efficiency in the supply chain. It will also cut down on their import costs and save extra storage costs. •

Import costs for Pepsi’s packaging raw material are way too much and this does affect the supply chain directly. Bringing in the just in time system (JIT) would save up storage costs to millions of rupees and increase profits and supply chain efficiency.

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Pepsi is using the network option of distributor storage with carrier delivery to the retailers if they use the direct store delivery (DSD) model this will eliminate the warehousing step and in turn get a high turnover. It will free up the warehouse space for retailers, and they would be able to get a better handle on their product sales and inventories.

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By incorporating wireless technology, Pepsi’s account sales managers can take orders onsite, which are then remotely uploaded to a central order and routing system at headquarters via wireless connectivity. The result is that delivery trucks can be stocked more efficiently and accurately for the day’s routes. Drivers will have the capability to track inventory, record deliveries and wirelessly print invoices.

Action Plan •

In Pakistan, ALUCAN Pvt. Ltd, is the largest aluminum can manufacturer. It is based in Karachi. In order to avoid disruptions in the supply chain and reduce inventory costs, Haidri can order cans from this local manufacturer and can supplement importing them from Dubai.

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Annexes Product Life Cycle (PLC) can be divided into several stages characterized by the revenue generated by the product.

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National Labor Law Profile The Constitution of Pakistan contains a range of provisions with regards to labour rights found in Part II: Fundamental Rights and Principles of Policy. • Article 11 of the Constitution prohibits all forms of slavery, forced labour and child labour; • Article 17 provides for a fundamental right to exercise the freedom of association and the right to form unions; • Article 18 proscribes the right of its citizens to enter upon any lawful profession or occupation and to conduct any lawful trade or business; • Article 25 lays down the right to equality before the law and prohibition of discrimination on the grounds of sex alone; • Article 37(e) makes provision for securing just and humane conditions of work, ensuring that children and women are not employed in vocations unsuited to their age or sex, and for maternity benefits for women in employment. Labour Legislation Pakistans labour laws trace their origination to legislation inherited from India at the time of partition of the Indo-Pak subcontinent. The laws have evolved through a continuous process of trial to meet the socio-economic conditions, state of industrial development, population and labour force explosion, growth of trade unions, level of literacy, Government’s commitment to development and social welfare. To meet the above named objectives, the government of the Islamic Republic of Pakistan has introduced a number of labour policies, since its independence to mirror the shifts in governance from martial law to democratic governance. Under the Constitution labour is regarded as a ‘concurrent subject’, which means that it is the responsibility of both the Federal and Provincial Governments. However, for the sake of uniformity, laws are enacted by the Federal Government, stipulating that Provincial Governments may make rules and regulations of their own according to the conditions prevailing in or for the specific requirements of the Provinces. The total labour force of Pakistan is comprised of approximately 37.15 million people, with 47% within the agriculture sector, 10.50% in the manufacturing & mining sector and remaining 42.50% in various other professions.

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Working Time and Rest Time * Working hours Under the Factories Act, 1934 no adult employee, defined as a worker who has completed his or her 18th year of age, can be required or permitted to work in any establishment in excess of nine hours a day and 48 hours a week. Similarly, no young person, under the age of 18, can be required or permitted to work in excess of seven hours a day and 42 hours a week. The Factories Act, which governs the conditions of work of industrial labour, applies to factories, employing ten or more workers. The Provincial Governments are further empowered to extend the provisions of the Act, to even five workers. Where the factory is a seasonal one, an adult worker shall work no more than fifty hours in any week and no more than ten hours in any day. A seasonal factory, per section 4 of the Factories Act is that which is exclusively engaged in one or more of the following manufacturing processes, namely, cotton ginning, cotton or cotton jute pressing, the manufacture of coffee, indigo, rubber, sugar or tea. However, if such adult worker in a factory is engaged in work, which for technical reasons must be continuous throughout the day, the adult worker may work no more than fifty-six hours in any week. Section 8 of the West Pakistan Shops and Establishments Ordinance, 1969 likewise, restricts weekly work hours at 48 hours. The Shops and Establishments Ordinance regulates persons employed in shops and commercial establishments, who are neither covered by the Factories Act nor by the Mines Act. The Ordinance is exclusive in the whole of Pakistan except for the Federally Administered Tribal Areas. Section 22-B of the Mines Act, 1923 also fixes weekly hours of work for workers at 48 hours or 8 hours each day, with the limitation of spread-over 12 hours and interval for rest for one hour every six hours. Section 22-C further limits the spread-over to 8 hours for work done below ground level. In factories, the periods and hours of work for all classes of workers in each shift must be notified and posted in a prominent place in the principal language in the industrial or commercial establishment. The law further provides that no worker shall be required to work continuously for more than six hours, unless he or she has had an interval for rest or meals of at least one hour. During Ramadan (fasting month), special reduced working hours are observed in manufacturing, commercial and service organizations. * Paid Leave As provided in the Factories Act, 1934, every worker who has completed a period of twelve months continuous service in a factory shall be allowed, during the subsequent period of twelve months, holidays for a period of fourteen consecutive days. If a worker fails in any one such period of twelve months to take the whole of the holidays allowed to him or her, any holidays not taken by him or her shall be added to the holidays allotted to him or her in the succeeding period of twelve months. A worker shall be deemed to have completed a period of twelve months continuous service

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in a factory notwithstanding any interruption in service during those twelve months brought about by sickness, accident or authorized leave not exceeding ninety days in the aggregate for all three, or by a lock-out, or by a strike which is not an illegal strike, or by intermittent periods of involuntary unemployment not exceeding thirty days in the aggregate; and authorized leave shall be deemed not to include any weekly holiday allowed under section 35 which occurs at beginning or end of an interruption brought about by the leave.

Company Profile

Basic Information Company Name: Business Type: Product/Service:

ALUCAN PVT LTD Manufacturer Aluminium Collapsible Tubes, Aluminium Rigid Cans, Aluminium Cartridges, Plastic Rigid Cans, Pet Bottles

Trade & Market

Main Markets:

North America Eastern Europe Southeast Asia Africa Mid East Eastern Asia Western Europe

Total Annual Sales US$2.5 Million - US$5 Million Volume: Export Percentage: 61% - 70% Total Annual Purchase US$2.5 Million - US$5 Million Volume:

Factory Information Factory Size (Sq.meters): Factory Location: QA/QC: Number of Production Lines:

10,000-30,000 square meters Export Processing Zone, karachi In House Above 10

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Figures:

Retailer Retailer Retailer Retailer

Haidri Beverages

Retailer Retailer Figure (a) Direct Shipment with milk-runs

Retailer Retailer Retailer

Haidri Beverages

Retailer

Figure (b) Direct Shipping

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References •

Chopra, Meindl (2006) Supply Chain Management: Strategy, Planning and Operation

Bibliography • • • • • • • • •

www.pepsico.com http://www.pepsico.com/PEP_Citizenship/sustainability/performeco/community/index.cf m www.deviantart.com The News Online Haidri Beverages Management http://www.geocities.com/prpakistan_yellow_pages_of_isb/beverage_mfrs_&_mfrs.htm http://www.ilo.org/public/english/dialogue/ifpdial/info/national/pak.htm http://www.supplychaintoday.com/reflections.htm http://www.madehow.com/Volume-5/Aluminum.html

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Table of Contents Demand Forecasting.............................................................................................................................................1 Transportation Network........................................................................................................................................3 Pricing and Revenue Management.......................................................................................................................6 Recommendations.................................................................................................................................................7 Company Profile.................................................................................................................................................13

Table of Figures 16

FIGURE 1 (SUPPLIER SCORING AND ASSESSMENT)......................................................................................5 FIGURE 2 PRODUCT CATEGORIZATION BY VALUE &

CRITICALITY..................................................6

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