Category: Supply Chain

The Electric Company

It’s a goal of many in the beverage business, or any business for that matter: How does one harness the power of supply chain automation? And what’s more, do so in a way that doesn’t become a drag on the company’s bottom line?

After all, automation, at least upon first glance, sounds like a great idea. It can deliver unparalleled speed and accuracy to a supply chain operation. It can reduce warehouse headcounts and all the costs associated with that. It can even provide a solution for warehouses bursting at the seams with all of today’s SKUs.

But at the same time, there can be drawbacks. If, an AS/RS (automated storage and retrieval system) in a warehouse goes down, for instance, that can make for a very frustrating rest of the day for your warehouse manager. The entire beverage company’s distribution operation could grind to a halt and the resulting losses could be huge.

And then there are the upfront costs. In the beverage business, where sometimes margins can be as thin as pennies on the dollar, the cost of rolling out expensive automation to warehouses—and if the company is very big, it could be many warehouses indeed—could be downright prohibitive.

But one company says it has figured out a way to harness all the benefits of supply chain automation, and what’s more, do so on a grand scale, and in an affordable way. And it is largely because of the breakthrough system it has come up with, and its designers’ ability to think outside of the box, that we have chosen Pepsi Beverages Co. (PBC)—PepsiCo’s North America bottling arm, created out of the merger with its two anchor bottlers last year—as our 2011, and inaugural, Soft Drink Bottler of the Year.

“One of the things we’ve tried to do in the last couple of years is pursue this Journey of Excellence,” offers PBC CEO Eric Foss. “The Journey of Excellence to me is really all about being great executionally, becoming a world-class selling company, increasing customer service and therefore customer loyalty and then being great at the area of operational excellence. The Power of One is a great example of that, Gatorade to DSD is a great example where we flexed what had historically been a warehouse-delivered product into the more powerful direct-store-delivered selling system. And foodservice transformation is another good one, where we’ve taken what has largely been a direct-store-delivered business historically and figured out a way to get into the third party distributor community with that business.”
 
All Juiced Up
The story of Pepsi Beverages Co.’s foray into the world of advanced supply chain systems and processes actually begins with the American consumer. Have you taken a look at the American consumer these days? Some of them—by no means all—have put on a few pounds as of late. And the beverage market has stood up and taken notice! Look at the beverages on the store shelves today and the number of choices is a bit breathtaking. Aisle after aisle of new, healthful products, such as juices, ready-to-drink teas and flavored waters, now sit side by side with the old favorites, namely carbonated soft drinks.

But putting these newer drinks on the shelves does not come without its share of challenges. Consider PepsiCo’s recent decision to come out with an all-natural version of Sierra Mist. Because of the higher cost of producing this version, PepsiCo decided to manufacture it in a smaller number of its plants. But the product still needed to be available to consumers nationwide. This left its bottling arm with the challenge of coming up with a way to bottle and transport Sierra Mist Natural to all of the consumers across North America, but without incremental supply chain costs left eating up any increased profits from the new drink.

Explains Paul Hamilton, senior vice president, supply chain strategy, planning & logistics, PBC: “The challenge that we have is to understand our holistic network costs. So where it was less important to understand the cost of moving products across the network because I made it everywhere, this network optimization need is becoming ever more important to us to really understand the cost for us to put these new capabilities in, and then the cost to move it around and to try to optimize those 500 million transport miles, and the capital that we have to spend in those plants.”

One of the interesting things about distribution is that it is one of those processes that a business can get as much involved with as it so chooses. It can keep its involvement to the bare minimum—just putting cases on pallets, sending them out the door, and delivering them—or it can delve much deeper, analyzing each and every nook and cranny of the supply chain to uncover savings or more efficient processes. The latter is what Hamilton, and his partner in remaking PBC’s supply chain, Brian Spearman, senior vice president, North America Go To Market & Service, have been doing for the past four years.

Each of these men has more than 25 years of experience working in the Pepsi system and both have been aware of a number of challenging trends converging on the company’s supply chain. So they began the process of putting their heads together to come up with solutions.

The result has taken them on a journey of supply chain transformation well beyond the one they initially envisioned. It has forced each of them to think beyond his own direct area of responsibility—Hamilton’s being the first segment of the supply chain, up until the warehouse, and Spearman’s being from the warehouse to the store shelves. In fact, the two men realized that only by them and their teams sitting down together could they hope to come up with a holistic supply chain solution that would deliver PepsiCo’s future products, like Sierra Mist Natural, more cost-efficiently and profitably. “When you do this you have to make sure, somewhere in your supply chain that you’re looking to offset the incremental costs,” says Spearman. “And so initiatives like this are born.”

DSD2
Today’s supply chain environment for a large beverage manufacturer like PepsiCo could be compared with a perfect storm of pressures. On the one hand, Pepsi is facing the need to manufacture more expensive-to-produce beverages, such as Sierra Mist Natural. At the same time, commodity prices—the costs of packaging, fuel, etc.— have been rising steeply, putting added pressures on Pepsi’s bottom line. And thirdly, there is the growing power of larger retailers like Wal-Mart, Target, Safeway and CostCo. These big retailers have been vying with suppliers like Coke and Pepsi for more control of their own distribution, and as a result, their own store shelves. Many of them have their own private label products, and in these difficult economic times, want to offer these at the rock-bottom low prices that are important to their shoppers.

DSD2 envisions a network build-out of 15 automated, lights-out warehouses (the first of which, shown above, is already in operation in Tampa, Fla.), run by AS/RS (automated store and retrieval systems).

The result, many of these retailers want to control the last leg of their supply chain. The retailer would like to see Pepsi and Coke ship their drinks to the retailer’s warehouses (not directly to their stores) and they’ll take control from there. With more control, they can put their own store brands more front and center on the shelf, for instance, and then shave off some extra costs and pass those on to their increasingly budget-conscious shoppers.

For Pepsi, that means that one of the key weapons in its arsenal—its world-class DSD system—is coming under fire like never before. So it would be advantageous for the company to come up with a way to shore up its DSD, allowing the company to use this powerful reach onto its retail customers’ shelves for years and years to come. “So we had to come up with ways that added additional value beyond the core things that used to be associated with DSD,” says Hamilton.

The two think they have done just that by inventing what they have come to call: “DSD2.” “There’s a big misconception with DSD,” explains Spearman. “There are actually people who think that DSD hasn’t evolved—that direct store delivery has been the same for the past 20, 30, 40, 50 years. That couldn’t be further from the truth.”

DSD2, the two men say, knocks this misconception on its head.

How to sum up a breakthrough supply chain system in just a few sentences? DSD2 reaches into so many different aspects of PepsiCo’s supply chain—or will in the near future— that to describe it in just a sentence probably doesn’t do it justice. But here goes: a proprietary supply chain computer intelligence system that harnesses the power of automation to revolutionize the capabilities of Pepsi’s DSD system.

What PBC’s team is doing is rolling out a system that is actually semi-automatic in that it would make use of 15 automated warehouses spread across North America that are combined with 45 to 100 more traditional, non-automated satellite warehouses. By having the computer intelligence of the system direct the Pepsi salespersons in-store via handhelds, the network is able to have the automated warehouses immediately get to work producing most of the pallet layers of product. Then, those pallets are sent to the satellite warehouses where human workers “top them off” with the five or six additional cases that couldn’t be built in the automated locations. And the completed pallet is then sent off to the store.

What this does is increase the speed of the order replenishment: The automated warehouse immediately gets to work on the bulk part of the order as soon as the salesperson enters it into the system; and also spreads the cost-benefit of the automation across the entire Pepsi network.

The system’s use of automation is broken down as follows:

  • Fully automated storage and retrieval systems (AS/RS) would eventually be built in 15 PBC warehouses across the country. AS/RS actually will take up just one-quarter the space of a typical warehouse, allowing Pepsi to fit the systems into the smaller footprints they have available in many urban areas. They are built high—about 100 feet high, to be more exact—with up to 1 million cases of product stored inside. They are able to push out 120 truckloads of product a day. And all without the need for lighting or even very much in the way of air conditioning.
  • The second element of automation in DSD2 consists of high-speed layer-picking robots. This is where the holistic nature of the system kicks in: the interactions the Pepsi salesperson has in-store with the retailer plays a crucial role here—one that reaches far back into the warehouse—though it is all but invisible to the salesperson and the customer. The intelligent system PBC designed always has distribution efficiency at top of mind. So the salesperson’s handheld might prompt him or her to add one more case to the store’s order to round it off to a full layer—a full layer that can be picked up to 20 times faster by robots instead of human workers. “So by managing the order back when it’s taken,” says Hamilton, “I can make sure that it’s built at 5,000 cases an hour, 20 times faster than manual picking.”
  • The next element of automation is semi-automatic mixed layer picking. Anything that is not a single-case, same-package layer is sent to a system that is 10 times faster than normal, where humans pick-to-light the cases to a conveyor, and it is then assembled by robots.

Two results of PBC’s DSD2: The Weekender display, which comes mostly preassembled, requiring just a few cases to be pushed back, and the ergonomically friendly, and thus Pepsi employee friendly, Merchandiser Assist pallet, with product arranged by stop.

DSD2 also allows for orders to be built with PBC’s delivery team in mind. Instead of pallet-loads mixed here or there with no thinking behind it, now if the first store on the route orders Mountain Dew, it is easily accessible on the top layer of the pallet.

DSD2 also will help make good on PepsiCo’s Power of One promises the company said would result from the merger with its two anchor bottlers. By Power of One, Pepsi has been using its newfound control of its distribution to blend promotions between its food and beverage businesses. Explains Foss, “we’ve done a lot of things to become more effective relative to the purchase consumption and consumer consumption of our beverage and food products. For example, we recently ran a Moments to Save coupon drop, which is the first PepsiCo Power of One coupon drop. And we’ve got another one scheduled later this year.”

Jim Lynch, SVP, Supply Chain, PBC, says DSD2 “demonstrates a different way of thinking and provides us a competitive differentiation and unique value to our customers through customization.” Over time, he adds, “components can be repurposed and lifted and shifted across our businesses and geographies. The long-term potential is there for global implications. Kudos to Brian and Paul and their teams for leading this work and bringing it to life.”

Meeting that long-term potential is really about how well PBC continues to adapt to the evolving realities of the beverage marketplace.

“I think what’s really important for us today and going forward is that we let the marketplace set the agenda,” says Foss. “And as you do that, value continues to be top of mind. So we have to make sure that we have a streamlined supply chain, we’re capturing the ideal synergies, we’re really disciplined and focused on the cost and productivity initiatives while also being very sensitive to making sure our selling and service reputation at the point of sale doesn’t get compromised by any of that.”
 

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