Case study project

With over $63 billion dollars in net revenue and more than 260,000 employees globally, PepsiCo is one of the largest food and beverage companies in the world. The company’s food and beverages are consumed nearly 1 billion times each day in more than 200 countries and territories around the world. PepsiCo is made up of three global businesses – beverages, snacks, and nutrition which all include products that that good for you, better for you, or fun for you. There are twenty-two brands in PepsiCo’s portfolio including Pepsi, Quaker Oats, Tropicana, Lay’s and Gatorade that generate more than $1 billion each in retail sales every year and thirty brands that generate between a quarter and $1 billion dollars in annual retail sales.

PepsiCo also has a focus on Performance with Purpose or PwP. PwP is PepsiCo’s vision to deliver top-tier financial performance by improving products that are sold, operating responsibly to protect our planet, and empowering people around the world. The three focuses of Performance with Purpose are “Products,” “Planet,” and “People.” Each focus area has a series of goals associated with it that PepsiCo is looking to achieve by 2025. Since PepsiCo launched PwP, there have been many successes including reducing water use per unit of production by 25.8% since 2006.

Objective:

Using provided data and supply chain knowledge, determine the best strategy for facility placement and production in order to meet demand while yielding lowest costs and highest profits. After a strategy is built and implemented, the key metrics listed below should be met.

Key Metrics:

For this case study, we expect you to maintain the following metrics:

· Case Fill Rate: Percentage of customer cases on order which is fulfilled by inventory in PepsiCo warehouses. This is a measure of inventory’s ability to meet demand. Goal is to keep fill rate above 98% each period in order to maintain good standing with the distributor.

· Inventory Disposal Costs – Incremental expense attributed to disposal of product that exceeds warehouse capacity.  If warehouse capacity is exceeded, the oldest product in the warehouse must be dumped to reduce inventory to the capacity level.  Disposal costs will consist of transport costs to Dump facility, the cost of the goods dumped, and a handling fee of $10/case at the dump. Goal is to keep waste (cases disposed of) under 10% of total production. 

· Transportation Costs – Cost to transport goods from point A to point B. Goal is to keep transportation costs less than 20% of production costs.

Supply Chain Principles:

Customer Supply Chain Definition: Direct point of contact for PepsiCo’s customers/distributors who actively partner with all areas of supply chain (including transportation, warehousing, and demand planning) to ensure flawless order fulfillment and delivery

Application Questions: Are customer orders being fulfilled in full? Are customers receiving best quality product?

Demand Planning – Execute PepsiCo network forecast based on market trends and previous year sales. Demand planners interact with sales and supply planning teams to ensure innovation launch and promotional execution.

Application Questions: How does demand planning’s forecast impact production? How is past sales data considered when creating a forecast?

Supply Planning – Manage national supply by determining how to best fulfill requirements created from Demand Planning forecasts. Supply planners are looking at inventory across the PepsiCo network to ensure they have enough product at each location to fulfill customer demand while also considering a safety stock. Safety stock is based on the variability we see in demand, production, and transportation. Supply planners work closely with suppliers, co-packers, demand planners, warehousing, and transportation teams.

Application Questions: Are safety stock levels being maintained? Is there enough product within each region to fulfill customer orders?

Old Age – Product at the warehouse that has met or exceeded Warehouse shelf life is now considered expired product and must be disposed of. PepsiCo DCs utilize a FIFO inventory strategy to minimize disposal costs as much as possible, however depending on sales and forecast, product could still expire in the warehouse. Warehouse shelf life differs from consumer shelf life. Consumer shelf life is the “best by” date on the package which is the date in which the product can safely be consumed by.

Application Questions: Are there customer orders older product can ship against? Are there outlets for the product that has exceeded warehouse shelf life?

Transportation – Support timely delivery of finished goods to customers and satellite locations at the lowest and most efficient cost.

Application Questions: Are customer orders being delivered in a timely manner? Are we shipping product while also keeping costs down?

Warehousing/Logistics – Manage inventory, improve productivity, execute shipments. This function interacts with supply planning, transportation, and customer supply chain

Application Questions: Is warehouse space being fully utilized?

Co-packer – Outsourced producer of an item that is typically hired when company owned locations do not have necessary capacity or space to produce and store inventory. Typically, the use of a co-packer comes with a premium cost.

Application Questions: Have production and warehousing capacities been exceeded at facilities built by PepsiCo? Are you below fill rate metrics?

Devilade Promotion Information:

In 2019, the ASU Sun Devil Football team began selling Gatorade’s small product, Devilade, at all games. As the Sun Devils continued to win games and promote the drink, more and more consumers started buying the drink at local Sparky Supercenter stores around ASU. Sales started to spike in the southwest region, but as the Sun Devils’ success continued, PepsiCo also started to see an increase in demand across the country. In early January after the Sun Devils won the Rose Bowl, sales reached an all-time high and are expected to continue to grow as the Sales Team continue to promote the product nationally. PepsiCo’s current production sites can no longer keep up with the increase in demand across the network. Your group will be responsible for determining the best strategy for placement of PepsiCo facilities and ensuring that they have capacity to meet demand.

Demand/Supply Information:

Demand Planning - PepsiCo demand planners have seen Devilade sales exceed the locked forecast consistently over the last three months. In order to better understand customer behavior and plans for the rest of 2019, the Demand Planning team has met with Customer Supply Chain and the PepsiCo Sparky Supercenter sales team to align on an ongoing 2019 forecast. Considerations that the Demand Planning team has made when adjusting the forecast include insights from the Sales Team, who work closely with the buying team at Sparky Supercenter. These considerations include detailed information on increased foot traffic in stores and consumer sales, increases in safety stock at both the customer warehouse and store levels, any upcoming promotions on the product, and seasonality trends. The Sales Team and Demand Planners agree on lifts over 2019 sales in 2020.

2018 Demand Plan by region will be included in the appendix.

Supply Planning – PepsiCo Supply Planners depend on an accurate demand forecast in order to properly plan production and manage inventory across all PepsiCo warehouses. The Supply Planners have been struggling to keep up with demand at PepsiCo warehouses due to Sparky Supercenter’s heavy pulls over forecast across the nation and as a result, safety stock levels have been depleted and Sparky Supercenter’s orders have not been filled in full. The Supply Planners have met with Demand Planning to discuss the changes in the 2018 forecast and will now start to plan for the increased production to meet customer demand.

The Supply Planning team will work with both the Warehousing and Transportation teams so they can also plan for the increase in warehouse space and trucks. The Supply Planning team has the autonomy to move inventory around the country from warehouse to warehouse to meet demand while also minimizing expired product. All product that is moved internally between warehouses is subject to a handling fee of $10 per pallet, but product can be received in the same week. Minimum production runs and safety stock levels are also factored into supply/production plans.

Your team will be responsible for coming up with a production plan based on the provided demand plan and for keeping track of inventory at each new facility every week. You should also consider a safety stock when building your production plan.

Warehousing/Logistics Information

PepsiCo ships Devilade to one customer, Sparky Supercenter, who owns 6 regional warehouses across the country.

There is one existing PepsiCo production site located in El Paso, TX. This is a small facility that could no longer keep up with rising demand across the country. The building is one year old.

New PepsiCo facilities must be built to accommodate the increase in production, storage, and deliveries into the 6 Sparky Supercenter warehouses. Your team will have 3 options when considering how many facilities to build. The chart below indicates the costs associated with building each new facility, production rates, production capacity, and warehouse capacity.

Your group will be responsible for deciding how many new facilities to build, what size each new facility should be, and where the new facilities should be built. Assume production and inventory turns occur daily.

The warehouse shelf life on Devilade is four weeks. The consumer shelf life is also 4 weeks. The cost per case to the consumer is $21.00; there are 6 bottles per case.

New Facility Constraints:

· All facilities that are built will need to operate at least 5 days a week and must be staffed for at least two 8-hour shifts year-round.

· Facilities may open at any point during the year, but must follow a start-up schedule.

· Week 1: Operate at 25% of minimum production

· Week 2: Operate at 50% of minimum production

· Week 3: Operate at 75% of minimum production

· Week 4: Operate at 100% of minimum production

· All facilities will have mandatory 7 day downtimes throughout the year to accommodate corporate holidays:

· P6W2

· P7W3

· P9W1

· P12W3

· P13W4

· Consider start-up schedules as plants come out of downtime.

A basic one-line plant assumes that there are 2 safety employees, 32 operators, 6 mechanics, 4 QA employees, 4 Supervisors, 4 Sanitation workers, 5 employees in Shipping-Receiving, and 6 managers for a total of 63 employees. A medium plant will have 2 safety employees, 64 operators, 12 mechanics, 4 QA employees, 4 Supervisors, 4 Sanitation workers, 5 employees in Shipping-Receiving, and 6 managers. A large plant will have 2 safety employees, 128 operators, 24 mechanics, 4 QA employees, 4 supervisors, 8 sanitation workers, 5 employees in Shipping-Receiving, and 6 managers.

a. Small plant (1 Line) = 63 employees

b. Medium plant (2 Lines) =101 employees

c. Large plant (4 Lines) =181 employees

The starting salaries for each position are listed below but may vary depending on the location of the facility. All employees receive fringe of $1400 per month.

· Sanitation:  $19.80/hour

· Operator / Shipping Receiving:  $21.20/hour

· QA Technicians: 23.80/hour

· Mechanic:  $29.80/hour

· Safety Supervisor: $85,000/year

· Operations Supervisors / Shipping Receiving Supervisors:  $79,000/year

· Managers: $90,000/year

Co-Pack/Dump:

PepsiCo has one Co-Pack facility located in Miami, Florida that can be utilized to produce and/or store additional product if production and warehouse capacity is reached at all other facilities. Use of this facility does come at a premium cost. If the co-pack facility is utilized for production, those cases produced must also be stored at the facility. If the co-pack facility is utilized for either for production or for storage, the facility must be used for at least 3 periods.

This location also serves as a dump location for expired product. Any inventory that exceeds warehouse capacity each week is obsolete and needs to be shipped to a dump location if it is not feasible to ship to another warehouse within the PepsiCo network. Transportation costs must also be considered when product is dumped.

Dump costs are indicated below:

When deciding where to build new facilities, PepsiCo executives must consider multiple factors:

· Property taxes – Tax based on the value of property including land, building and equipment

· Tax Credits – State governments that provide a tax credit on the qualified investment in equipment

· Income Tax – Tax based on income generated by net profit

For purposes of this modeling, assume the following:

1. All states, except for KS, NY, PA, MD and Iowa annually charge property tax equal to 2% of the depreciated cost of the equipment.

1. Assume a Sales tax rate 7.5% -for all states on all property excluding land. Assume that the States of TX, MD, IN, AK and TN exempt manufacturing equipment from Sales tax.

1. States will charge 2% tax annually on the market value of land and buildings. Assume that original cost equal market value when computing the tax.

1. NY and TN will provide an investment tax credit equal to 5% of the cost of the investment excluding land in the new plant. This will be a reduction to the income taxes in the year the plant becomes operational.

1. Assume income tax State rate of 8%

1. Assume a federal income tax rate of 21%

1. Texas will offer a $5,000 grant for each new job where the pay is at least 150% of the minimum wage and it includes benefits.

1. The States of GA, KS, AR, TN, NY, PA, FL, TX, MD, IN and MO will reduce the property taxes by 60% if there is a minimum of 50 new jobs.

1. IN will provide as a grant – the refund of state income taxes on payroll wages in the year the payroll taxes are paid.

Transportation:

PepsiCo’s private fleet own all trucks which travel nationwide to delivery finished goods to customers and transport excess inventory to other facilities within PepsiCo’s network. The transportation team depends on the planning teams to understand how much product is shipping. The warehouse and transportation teams work closely to determine where product is going and when loads will be ready to ship. All transportation costs are determined by the ship-from location. When looking at transportation costs your team must consider the flat truck rate plus cost per mile from the PepsiCo facility to its final destination based on the mileage according to Google Maps. If you are shipping within the same city, assume a flat $150 transportation fee in addition to the price per truck.