Swayam Siddhi College of Management and Research

Project Report

On

SUPPLY CHAIN OF PEPSI

Final Internal Report Submitted to the University of Mumbai

In partial fulfilment for the award of degree

Of

Master of Management Studies.

SUBMITTED BY

Mr Sagar Zajam

ROLL NO: 4059

PROJECT GUIDE:

Prof.Harshada Mulay.

Batch: 2015-16

1
 Certificate

This is to certify that Mr. Sagar Zajam. Student of First Year Master of

Management Studies (MMS/MBA) of SWAYAM SIDDHI COLLEGE OF

MANAGEMENT & RESEARCH has successfully completed the project work

titled SUPPLY CHAIN OF PEPSI.

In partial fulfilment for the degree of Master of Management Studies of

University of Mumbai.

Date: / / Roll No.

(Prof. Harshada Mulay) (Dr.N.Shrinivasan)

(Signature of the Project Guide) (Director)

(Signature of External Guide)

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 Declaration

I, Mr Sagar Zajam hereby declare that I have completed the project report
Supply Chain of Pepsi is the result of my own effort and it is based on
data collected and guidance of Project Guide Prof Harshada Mulay.

I have prepared this project during my final year MBA IV Semester. This
report is correct to my knowledge and so far has not been published anywhere
else.

(Sagar Zajam)

ROLL NO: -

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 Acknowledgment

I heartily wish to extend heartfelt appreciation and gratitude to numerous

Mentors, benefactors, and constituents who have collectively endowed the
Wherewithal, faith and encouragement for me to navigate and complete my
research paper journey.

To All Professor, my primary advisor and unflagging advocate, who mustered

devoted, continuing, innovative and adaptive mentorship to impel and shepherd
my checked efforts through diverse and abounding challenges, I extend my deep
and abiding respect and many, many thanks.

To Professor Harshada Mulay (Internal Guide), my supporting advisor, who

gently and patiently endured my academic tardiness, I offer commensurate
veneration.

And last but not least, I wish to thanks to all my friends and well-wishers who
are directly or indirectly linked with the success of my project

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 Index
SR NO. TITLE PAGE NO.
1. INTRODUCTION 6

2. LITERATURE 15
3 24
AN INTRODUCTION TO SUPPLY CHAIN &
SUPPLY CHAIN MANAGEMENT

4 34
BASIC COMPONENTS OF SUPPLY CHAIN
MANAGEMENT
5. 36
SCM FLOWS
6 A VIEW OF DIFFERENT FLOWS IN A SUPPLY 37
CHAIN

7. 38
THE IMPORTANCE OF SUPPLY CHAIN
DECISIONS
8. 39
DECISION PHASES IN A SUPPLY CHAIN
9. PROCESS VIEWS OF A SUPPLY CHAIN 43

10. 45
SUPPLY CHAIN MACRO PROCESSES IN A FIRM

11 47
CONCLUSION
12 BIBLIOGRAPHY:- 48

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 INTRODUCTION
The Haidiri Beverages Group was set up in 1979 and is Pepsi's sole selling
agent for District Rawalpindi and Islamabad. It is based in the CDA Industrial
Triangle, Kahuta Road, Islamabad. It manages the supply for several
wholesalers, retailers, restaurants, hotels and other such food outlets. In order to
achieve the projected sales targets effectively, the organization ensures a
comprehensive strategic alignment with the overall Pepsi Colas business
strategy. Haidiri Beverages primary functions are to conduct a systematic
manufacturing and supply of the product without any tactical flaws. Backed by
a powerful competitive strategy and empowered by some effective supply chain
strategies, the group has been managing an effective supply chain throughout
the region. It has set up a sophisticated manufacturing and storage plant in
Rawalpindi with multiple production units and huge production capacity.
Haidiri Beverages has different management departments dealing with
specialized Marketing, Human Resource, Information Technology and Supply
Chain Processes. In this section we conduct a brief analysis of the basic supply
chain management functions of Haidri beverages.

History of PepsiCo

PepsiCo is a world leader in convenient snacks, foods and beverages, with

revenues of more than $39 billion and over 185,000 employees. The company
consists of PepsiCo Americas Foods (PAF), PepsiCo Americas Beverages
(PAB) and PepsiCo International
(PI). PAF includes Frito-Lay North America, Quaker Foods North America and
all Latin America food and snack businesses, including Sabritas and Gamesa
businesses in Mexico. PAB includes PepsiCo Beverages North America and all
Latin American beverage businesses. PI includes all PepsiCo businesses in the
United Kingdom, Europe, Asia, Middle East and Africa. PepsiCo brands are
available in nearly 200 countries and generate sales at the retail level of more
than $98 billion. Some of PepsiCo's brand names are more than 100-years-old,

6
but the corporation is relatively young. PepsiCo was founded in 1965 through
the merger of Pepsi-Cola and Frito-Lay. Tropicana was acquired in 1998 and
PepsiCo merged with The Quaker Oats Company, including Gatorade, in 2001.
PepsiCo offers product choices to meet a broad variety of needs and preference
-- from fun-for-you items to product choices that contribute to healthier
lifestyles. PepsiCos mission is: To be the world's premier consumer Products
Company focused on convenient foods and beverages. We seek to produce
healthy financial rewards to investors as we provide opportunities for growth
and enrichment to our employees, our business partners and the communities in
which we operate. And in everything we do, we strive for honesty, fairness and
integrity. (www.pepsico.com)

PepsiCo Headquarters

PepsiCo World Headquarters is located in Purchase, New York. The seven-

building headquarters complex was designed by Edward Durrell Stone, one of
America's foremost architects.

Areas of Operation

Haidri Beverages is one among a number of PepsiCos franchisers all around the
country. Haidri Beverages, solely, have three branches in Pakistan located in
Islamabad/Rawalpindi, Gujranwala and Peshawar. All the franchises in Pakistan
have divided their area of distribution and the domain of each franchiser is
restricted to their area of operation. Not much of expansion is done since it
might violate the domain area of other franchisers. We will be dealing with the
area covered by Haidri Beverages Islamabad.

Haidri Beverages deals with distributors residing in Islamabad/Rawalpindi

district, with its boundaries starting from Dina, Mirpur till Attock district.

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 Business Cycle of Pepsi Haidri Beverages: The business cycle starts from
forecasting customer demand for each product of PepsiCo individually.
According to the demand forecasted by the sales and distribution department,
the annual plan is prepared for the running year which is then further divided
into quarterly, monthly, weekly and daily basis and production plan is created.
For the production, the company needs raw materials, these raw materials
include the following:

1. Pepsi Concentrate
2. Sugar
3. Carbonated Water
4. Glass Bottles
5. PET bottles
6. Plastic in Raw Form
7. Packaging material
8. Crates
9. Cans
10.Bottle caps
11. and many others
Much of the raw materials are acquired by local manufacturers. However, cans,
Pepsi concentrate, glass bottles etc. are purchased from manufactures that are:

1. Domestic but at distant location

2. Located in Foreign countries (New York, Dubai)
The purchased raw material is shifted immediately to store (in-house raw
material inventory) from where it is periodically issued to the production
department for processing in order to convert it into final product. As in
company policy, the finished product is immediately shifted to distributors and
is stored there. Only safety level finished product inventory is maintained by the
company so as to comply with laws enforced by Government to keep minimum
level safety inventory.
A Territory Development Manager of the company is designated for each
distributor for monitoring further sales to retailers and consumers. This is a

8
place where the exact demand and supply ratio is measured and targets are
defined. The distributor produces information of actual sales (supply) to the
customer which is an input to the company as demand forecast which completes
the business cycle of Haidri Beverages.

Organizational Workflow
The workflow of Pepsi Haidri Beverages starts from preparing the annual sales
and procurement strategy. This sales strategy is then divided into quarters,
months, weeks and days. On the basis on monthly sales, a target is defined for
each distributor and they are made aware of that target. The distributors
accomplishing this target get discounts and bonuses. Haidri Beverages doesnt
need to contact distributors or retailers themselves since they have a predefined
number of distributors and the network needs no expansion. Each distributor is
responsible for a specific area and the other distributors are not allowed to enter
in this domain.

According to the defined sales strategy, the production plan is prepared for the
year divided further into quarters, months, weeks and days. The daily or weekly
production plan is forwarded to production department. According to the
production plan, the production department makes a production schedule which
is done on daily basis. The production department makes a complete sketch of
products to be produced and the required raw materials and their quantity. These
raw materials are requisitioned from the inventory (store). The inventory control
department is divided into two areas: store management and warehouse
management. The store mainly contains the raw material which is required to
produce the product as well as all the other raw materials required for operations
management throughout the organization. The warehouse stores the finished
product only. The organization keeps only the safety inventory in its warehouse.
A daily shipment of product is done to the distributors in order to fulfil
consumer demand.

In order to fulfill the demand of production department, the Purchase

department needs to procure raw material frequently. The suppliers are already

9
chosen by the company and contracts are given to those suppliers only. The
company gives priority to local suppliers so as to complete its business cycle
efficiently and
Effectively.
Unfortunately, there are a number of items that are unavailable in local market
and it has to purchase these items from remote areas. These materials include
cans, Pepsi concentrate, sugar, nitrogen (liquid form), and others.

The purchased items are moved first to the store where the raw material is
issued to concerned department according to the requisition done. The finished
product is moved to warehouse where the shipment department is responsible
for loading product to vehicles for delivery to distributors. A small amount of
finished goods inventory is kept by the company as safety inventory.

The peak season when the demand is highest usually starts from May and
continues till September. During this period, the demand is fulfilled by making
longer shifts and utilizing the production equipment 24 hours a day.

The waste produced during manufacturing process is sold out to concerned

parties. The supply chain designed in this research will therefore follow the
Lean Supply Chain Management strategy.

The cash is collected by the finance department by hand. The company has not
opted for any credit or online credit-card sale as yet.

The manufacturing process is shown in the figure below:

10
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Current IT Infrastructure

The company has partially automated its four (4) major business processes:
1. Sales Process
2. Accounting and Finance
3. Human Resource
4. Store and warehouse management

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 The details of these modules and how they help in the business processes is
provided as under:
1. Sales or Shipment Module
The sales module encapsulates all information regarding distributor data
management, key accounts management, sale (cash inflow) and shipment
etc. The distributor information is captured with regards to the area it is
covering in the local market, the location of the distributor, name, contact
numbers, contact persons etc. Key accounts are those retailers to which
the company distributes the product directly. This happens in the case of
fountain fresh Pepsi products which are delivered to the customer using
the post-mix cylinders delivered by company owned vehicles. Such
customers include KFC, Pizza Hut, Savour Foods and others. Sales are
done on cash payments which are deposited in advance by the distributor.
The products are then shipped the distributor. Usually, the distributors
bring along their own vehicles to load the shipment. At the time of sale,
the data is saved in ERP sales module, the finance data (cash inflow) is
updated and a receipt is generated by the system called sales invoice.

The system keeps track of which distributor purchased what quantity and
the frequency of sales can also be captured. A daily sales report is
generated by the system which shows the distributor, units of product
purchased, date of purchase, the total amount and other key information.
The company defines a target sale for each distributor at the beginning of
month. This target is defined on the basis of previous sales history of the
distributor which is managed by the software. The reports generated by
the system also provide the user with the information of what percentage
of the target has been achieved by the distributor as yet. The distributor
can be judged on this basis if he will be able o achieve the set target or
not.

The ERP system not only keeps track of the primary sales done to the
distributor, it also captures the secondary sale data provided by Territory
Development Managers (TDMs), the personnel designated by the
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 company to monitor the distributor sales (at distributor end) and to keep a
check that a distributor does not enter the domain of another distributor.
The secondary sales data contains information regarding distributors sale
to retailers which is recorded in units per day and does not actually
contain information as to which retailer the product was sold.

2. Financial Accounting module

Financial accounting module has a basic and limited functionality. It has
two to three main entry forms regarding insertion/deletion of accounts
(chart of accounts) and transaction entry. Any transaction taking place in
the company will be recorded here. The invoices (payment or receipt) is
also created in the same form. The form contained a category field where
the category of receipt/transaction is defined. The categories can be cash
receipt, bank receipt, payment invoice, sale invoice etc. A notable point is
that the transaction is not made automatically when a sales transaction
takes place. This could be rightly so as the cash payment is received
directly from the distributor by the finance department, but it can create a
logical error since the transaction is not done in correspondence to the
sales transaction.

The reports generated the system include trial balance, balance sheet,
income statement and other basic financial statements.

3. Inventory Management
It is also a limited-functionality module which only records how much
items are produced today. This entry is done at the end of the day and still
there is confusion about what actually is inserted in the system since the
total manufactured amount is reduced at the end of the day due to sales
transaction and the corresponding batch numbers or lot numbers are not
recorded in sales module.

The system still supports the inventory control system since it contains
up-todate information regarding the finished product available in the

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 warehouse only and also the store data which contains information of raw
materials. The stock-in and stock-out is also updated whenever
requisition is made from the production department for the raw material
used for production.

4. Human Resource Management module

Human Resource Management module has proved to be very handy when

it comes to daily attendance and payroll calculations. The system
automatically generates a bar code when a new employee is added in the
HRM module. On the basis of this bar code, employee gets a printed
card. Whenever an employee comes in or goes out, he scans his card
against the bar-code reader placed at the entry gate of the company and
the time-in and timeout of instantly updated by the system. A monitory
report is also flashed on managers screen which is updated every 5
seconds. This shows a complete list of employees coming in and going
out. The system contains a descriptive employee record and employee
leaves are also managed by the system. It shows how much leaves of
which category (casual leave, paid leave, sick leave etc.) has been
acquired by each employee as yet.

The payroll of employees are calculated automatically including

overtimes, deductions (for late arrivals and extra leaves), bonuses,
allowances etc. and a pay slip is generated by the system.

In order to support the ERP system and network as a whole, the following
hardware configuration has been adopted by the MIS department:

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 Full LAN support, using domain server, switches, boosters and other network
equipment
Internet facility is provided to all users
1 oracle database server, 1 application server, Linux server (for network
management), and a print server
Requisition for a backup database server has already been placed
The network facilitates almost 50-60 users around the organization
The system, collectively, has proved to be very beneficial for the employees and
managers at Haidri Beverages and the employees seem to be satisfied over the
systems performance. Further enhancements are done at frequent basis in order
to facilitate the companys management and human resource to perform their
tasks in a much better way.

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 Literature

Article: How should we define SCM?

In the early years of SM it is considered to breaking down the walls but now the
concept is change it not breaking down the walls but rearranging the walls.
SCM helps to achieve CEO agenda. Professional organizations try to provide
knowledge of SCM.

This figure helps to understand the process of business

Business processes in a supply chain

Through this figure we get overview of business and understand how actually it
makes money. The purpose is to see the bigger picture and creating value to
enterprise and not stuck into conflicts and debates.

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Customer (the why)
Customers are those who take the initial step in order to get the product.
Company current and future strategies around which product to build, assets to
own, which market to enter or serve these all things depend on customer needs
and requirement.

Product (the what)

As the product become obsolete more innovation and creativity is required in
order to satisfy customer need. But to meet innovation, profitability requires
engineering. There is a gap between actual and desired and this gap will lead to
the profit leaks.

Product leaks

Profit leaks also provide the opportunity for product and process innovation.

Process (the how)

Seven core processes are design, source, make, move, store, sell and service.

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Management takes decision regarding to process. The decision based on three
groups i.e. strategic, tactical, execution.

People/Partner (the who)

Customer demanding better, faster and cheaper which increase the product
complexity and this leads to complexity in supply chain. Companies try to
achieve flexibility and responsiveness. Outsource some process or function to
the partners who have more competencies in specific area. Processes are shared
and collaborate and coordinate with partners. When environment is very
dynamic it is very difficult to go alone. Life cycles of products are shrinking
faster as compare to lifecycle of the assets used to produce the product this will
lead the organization where they have very little choice and they are less
adaptive to assets.

Article: Supply Chain Management

SCM is flow of information, funds and material from supplier to producer and
then to distributor and ultimately to consumer but it also includes after sale
service. SCM involves the coordination of material and information between
firms but inventory management coordinates with inventories at different
locations.

SCM is famous in recent years for a number of reasons. Action taken by one
person of the firm can influence others profitability in the chain. But nowadays
firms compete with other supply chain as a part of supply chain. So as a firm
successfully streamlines its operation, the next step for improvement is
coordination with their suppliers and customers.

In the Italian pasta industry, the demand of consumer was stable throughout the
year however because of trade promotions, volume discounts, long lead times
and end of quarter sales incentives the order seen at the manufacturers are
highly variable(Hammond 1994).So it lead that to a Bull Whip effect.

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 Some managers are more interested in integration but it is impossible to
implement a system oriented approach without information technology. Supply
chain should be viewed as an integrated system Forrester (1958); Forrester
(1961).Change in management theory and technology set the stage of supply
chain management. One of the reasons of change in mgmt theory means the
shift of power from manufacturers to retailers.

Information technology and retail power are the key catalysts in SC. E-business
is playing an important role and is facilitating the virtual supply chain

Supply Chain Process

Key components of supply chain management

According to the author, there are twelve key components of a supply chain
management system:

1. Location
2. Transportation and Logistics
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3. Inventory and forecasting
4. Marketing and channel restructuring
5. Sourcing and supplier management
6. Information and electronic mediated environments
7. Product design and new product introduction
8. Service and after sales support
9. Reverse logistics and green issues
10.Outsourcing and strategic alliances
11.Metrics and incentives
12.Global issues

Locationincludes both qualitative and quantitative facility location. This

includes models of facility location, geographic information systems
(GIS),country differences, taxes and duties, transportation costs associated with
certain locations, and government incentives (Hammond & Kelly
(1990)).Transportation and logistics includes all the issues which are related to
the flow of goods through the supply chain including transportation,
warehousing and material handling. Inventory and forecasting includes
traditional inventory and forecasting models. Marketing and restructuring
includes the basic thinking on the on SC structure (Fisher 1997) and it includes
the interfaces with marketing. Bull whip effect has received many attentions in
the research literature. But, increased in consumer demand through the EDI and
the internet can decrease the Bull whip effect. Other initiatives can also mitigate
the bullwhip effect. For example, changes in pricing and trade promotions
(Buzzell, Quelch, &Salmon (1990)) and channel initiatives, such as vendor
managed inventory (VMI), coordinated forecasting and replenishment (CFAR),
and continuous replenishment (Fites (1996), Verity (1996), Waller, Johnson, &
Davis (1999)), can significantly reduce demand variance.

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 Typical VMI implementation

Marketing focuses downstream in the supply chain, whereas sourcing and

supply management focuses on upstream to suppliers. Information and
electronic mediated environments focuses on application of IT to reduce
inventory (Woolley (1997) and the expanding area of e-commerce (Benjamin &
Wigand (1997) and Schonfeld (1998)).

The sale and after sale support addresses the critical problem of providing
service and service parts (Cohen and Lee (1990). Reverse logistics and green
issues are emerging dimensions of supply chain management (Marien (1998)).

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 Product recovery options

Outsourcing and strategic alliances sees the SC impact of outsourcing. With the
rapid growth in third party logistics providers, there is a large and expanding
group of technologies and services to be examined. These include fascinating
initiatives such as supplier hubs managed by third parties. Metrics and
incentives include organizational and economic issues. This category includes
both measurement within the supply chain (Meyer (1997)) and industry
benchmarking ((1994), (1997)).Final one is global issue when a company
operates in foreign multiple country. When a company operates in foreign
country then tax rate, duties and currency exchange rate and govt. issues matters
a lot.

Artificial Intelligence in Supply Chain Management - Theory and

Applications

Purpose:
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The purpose of this article is to promote the AI for improving human decision-
making processes in supply chain management and the organization
productivity in various business areas due to its ability for recognizing business
potential and pattern, using relevant information, and analyses data accurately.

Design/Methodology/Approach:
This paper covers the explanation of the AI based SCM system .Despite its
widespread acceptance as a decision making tool, AI has seen limited
application in supply chain management (SCM). To fully explain the potential
benefits of AI for SCM, this paper explores various sub-fields of AI that are
most suitable for solving practical problems relevant to SCM. This article
reviews the past record of success in AI applications to SCM and identifies the
most suitable areas of SCM in which to apply AI.

Findings /Objectives:
The main objectives of this article are to identify the sub-fields of AI that are
most suitable for SCM applications and their usefulness for improving SC
efficiency, analysing the existing literature dealing with the applications of AI
to SCM ,to develop a taxonomy for the existing AI literature and categories it
according to its SCM application areas, problem scope, and methodology, to
identify the potential SCM application areas that have not been explored and
discuss the future trends for AI in
SCM.
Review:
Hokey Min (2009) described about the role of artificial intelligence in supply
chain management system. AI use computers for reasoning, identifying business
pattern, use past experience for forecasting and making decision for present
problems. Hockey Min use existing literature for explaining AI and its
applications that are used in many fields. Although AI is used in many fields of
decision making but SCM is not fully used the benefits of AI. He categorized
the existing literature into three classes problem scope, methodology and the
implementation status. He described the role of AI in sub units of supply chain

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like Inventory control and planning, transportation network design, Purchasing
and supply management, Demand planning and forecasting, Orderpicking
problems, Customer relationship management and e-synchronized SCM. So it is
concluded that AI tools has great potential for solving many strategic issues
involving CRM, outsourcing relationships, strategic alliances among SC
partners, SC coordination, collaborative demand planning, and business-to-
business negotiations. Another finding is that an agent-based system has
emerged as one of the most popular AI tools for tackling various aspects of SC
problems. However AI has some limitations like AI does not have free will and
depends on the computer software which may be programmed incorrectly and
AI solutions may not be easy to implement.

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An Introduction to Supply
Chain&Supply Chain Management
Up till recently, companies did not think in terms of supply chains, but viewed
themselves and their trading partners as independent islands. Sellers at times
struggled to keep up with demand, while buyers purchased goods for which
they could pay, barter or obtain credit. Economic and competitive pressures
eventually forced companies to think in terms of supply chains for the
production and delivery of goods.
For this reason, the material or physical supply chain was born.

With the advancement of business processes, supply chain gained more and
more importance for each member of business community including
manufacturers, retailers, suppliers, suppliers suppliers and even consumer.
Strategies were developed in order to accelerate product sales and distribution.
With the expansion of sales from areas to cities and cities to countries, the need
arose for proper tracking of demand and supply as well as forecasting of
materials, supplies, sales and distribution schemas. After the emergence of
Information Technology and business globalization, the concept of integrated
supply chain management was revolutionized. Information technology consists
of the tools used to gain awareness of information, analyze this information, and
execute on it to increase the performance of the supply chain.

What Is a Supply Chain?

A supply chain consists of all parties involved, directly or indirectly, in fulfilling

a customer request. The supply chain includes not only the manufacturer and
suppliers, but also transporters, warehouses, retailers and even customers
themselves. Within each organization, such a manufacturer, the supply chain
includes all functions involved in receiving and fulfilling a customer request.

25
These functions include, but are not limited to, new product development,
marketing, operations, distribution, and finance and customer service.
Supply chain activities transform natural resources, raw materials and
components into a finished product that is delivered to the end customer. In
sophisticated supply chain systems, used products may re-enter the supply chain
at any point where residual value is recyclable. A typical supply chain begins
with ecological and biological regulation of natural resources, followed by the
human extraction of raw material and includes several production links, for
instance; component construction, assembly and merging before moving onto
several layers of storage facilities of ever decreasing size and ever more remote
geographical locations, and finally reaching the consumer.

Information, Funds, and Product flow in SCM

Consider a customer walking into a Wal-Mart store to purchase detergent. The

supply chain begins with the customer and his or her need for detergent. The
next stage of this supply chain is the Wal-Mart retail store that the customer
visits. Wal-Mart stocks its shelves using inventory that may have been supplied
from a finished-goods warehouse or a distributor using trucks supplied by a
third party. The distributor in turn is stocked by the manufacturer (say Proctor &
Gamble [P&G] in this case). The P&G manufacturing plant receives raw

26
material from a variety of suppliers, who may themselves have been supplied by
lower-tier suppliers. For example, packaging material may come from Tenneco
packaging, while Tenneco receives raw material to manufacture the packaging
from other supplier. This supply chain is illustrated as follows:-

Figure 10 Wal-Mart SCM Process

A supply chain is dynamic and involves the constant flow of information,

product and funds between different stages. In the above example, Wal-Mart
provides the product, as well as pricing and availability information, to the
customer. The customer transfers funds to Wal-Mart. Wal-Mart conveys point-
of-sales data as well as replenishment orders to the warehouse or distributor,
who transfers the replenishment order via trucks back to the store. Wal-Mart
transfers funds to the distributor after the replenishment. The distributor also
provides pricing information and sends delivery schedule to WalMart. Wal-Mart
may send back packaging material to be recycled. Similar information, material,
and fund flows take place across the entire supply chain.

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A typical supply chain may involve a variety of stages. These supply chain
stages include:

Customers
Retailers
Wholesaler/distributors
Manufacturers
Component/raw material suppliers
Each stage in a supply chain is connected through the flow of products,
information, and funds. These flows often occur in both directions and may be
managed by one of the stages or an intermediary. Each stage need not be present
in a supply chain. The appropriate design of supply chain depends on the
customers needs and the roles played by stages involved.

The Objective of a Supply Chain

The objective of every supply chain should be to maximize the overall value
generated. The value a supply chain generated is the difference between what
the final product is worth to the customer and the costs the supply chain incurs
in filling the customers request. For most commercial supply chains, value will
be strongly correlated with supply chain profitability (also known as supply
chain surplus), the difference between the revenue generated from the customer
and the overall cost across the supply chain. Supply chain profitability or
surplus is the total profit to be shared across all supply chain stages and
intermediaries. The higher the supply chain profitability, the more successful is
the supply chain. Supply chain success should be measured in terms of supply
chain profitability and not in terms of profits at an individual stage.

Many of the exchanges encountered in the supply chain will therefore be

between different companies who will seek to maximize their revenue within
their sphere of interest, but may have little or no knowledge or interest in the
remaining players in the supply chain. More recently, the loosely coupled, self-
organizing network of businesses that cooperates to provide product and service
offerings has been called the Extended Enterprise.

28
Supply Chain Management (SCM)

Supply Chain Management (SCM) is the management of a network of

interconnected businesses involved in the ultimate provision of product and
service packages required by end customers. Supply Chain Management spans
all movement and storage of raw materials, work-in-process inventory, and
finished goods from point-of-origin to pointof-consumption. In other words,
SCM is a cross-functional inter-enterprise system that uses information
technology to help support and manage links between some of a companys key
business processes and those of its suppliers, customers, and business partners.

Supply chain management has generated much interest in recent years for a
number of reasons. Many managers now realize that actions taken by one
member of the chain can influence the profitability of all others in the chain.
Firms are increasingly thinking in terms of competing as part of a supply chain
against other supply chains, rather than a single firm against other individual
firms. Also, as firms successfully streamline their operations, the next
opportunity for improvement is through better coordination with their suppliers
and customers. The cost of poor coordination can be really high. The figure
below illustrates an example of a supply chain network and how closely each
partner is linked to one another in order to fulfill the demand and supply
process:-

29
 An example of SCM Process

Goal of Supply Chain Management

Goal of SCM is to efficiently manage process bifurcating demand, controlling

inventory, enhancing the network of business relationships a company has with
customer, suppliers, distributors and others, and receiving feedback on the status
of every link in the supply chain. The goal of SCM is to create a fast, efficient,
and low cost network of business relationships, or supply chain, to get a
companys products from concept to market.
Supply Chain Management is one of the most important strategic aspects of any
business enterprise. Decisions must be made about how to coordinate the
production of goods and services, how and where to store inventory, whom to
buy materials from, and how to distribute them in the most cost-effective,
timely manner.

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The Bullwhip Effect

In the Italian pasta industry, consumer demand is quite steady throughout the
year. However, because of trade promotions, volume discounts, long lead times,
fully truckload discounts, and end-of-quarter sales incentives the orders seen at
the manufacturers are highly variable. In fact, the variability increases in
moving up the supply chain from consumer to grocery store to distribution
center to central warehouse to factory, a phenomenon that is often called
bullwhip effect.

Bullwhip Effect in Supply Chain

The costs of this variability are high inefficient use of production and
warehouse resources, high transportation costs, high inventory costs, to name a
few. Acer Inc. sacrificed $20 million in profits by paying $10 million for air
freight to keep up with surging demand, and then paying $10 million more later
when that inventory became obsolete. The bullwhip effect phenomenon has
been observed in many different industries and occurs whenever demand
uncertainties and variability become magnified at each link in the supply chain.
Its one of the most important causes of

31
 ineffici ency in a supply chain.

Order Qua
ntity

M anufactu
rer s Orders to Wholesa
lers

Supplier Orders to
Manufacturer

Retailers Orders to
Wholesa
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s ply chai
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Supply Chain Infrastructure

The supply chain involves both internal and external supply chain operations.
The suppliers and customers both are inter-linked to the manufacturing
organization. The internal supply chain involves sequential links of the
purchasing, production and distribution department. The purchases department
of a company is directly linked to the suppliers of that company to purchase
materials is raw, semi-finished or finished form. After these materials are
purchased, they are passed on to the production department to covert this
material into finished product. This finished product is forwarded to distribution

32
department for the distribution of finished goods to retailers and ultimately, to
the customers.

Supply Chain Process

Extended Supply Chain

The extended supply chain is a clever way of describing everyone who

contributes to a product. So if you make text books, then your extended supply
chain would include the factories where the books are printed and bound, but
also the company that sells you the paper, the mill where that supplier buys their
stock, and so on. It is important to keep track of what is happening in your
extended supply chain because with a supplier or a suppliers supplier could end
up having an impact on you (as the old saying goes, a chain is only a strong as
its weakest link). For example, a fire in a paper mill might cause the text book
manufacturers paper supplier to run out of inventory. If the text book company
knows what is happening in its extended supply chain it can find another paper
vendor.
Consider a typical manufacturer. The supply chain is made up of many
interrelated firms as shown in the figure below. There are part suppliers,
component suppliers and subassembly suppliers. Further up the chain are the
suppliers suppliers, finally reaching raw materials suppliers at the top of the
chain. Going downstream, back through the producing firm, the supply chain
continues through the warehousing and distribution channels, and then through
the retail channels, ending with the consumer.

33
 A Systematic diagram of extended supply chain

The supply chain encompasses all activities associated with the flow and
transformation of goods and services from the raw material stage (at one end of
the supply chain) through to the consumer (at the other end of the chain),
including all associated information flows.

34
 Basic Components of Supply Chain Management
The following are five basic components of SCM:-

1. Plan This is the strategic portion of SCM. You need a strategy for managing
all the resources that go toward meeting customer demand for your product or
service. A big piece of planning is developing a set of metrics to monitor the
supply chain so that it is efficient, costs less and delivers high quality and value
to customers.

2. Source Choose the suppliers that will deliver the goods and services you need
to create your product. Develop a set of pricing, delivery and payment processes
with suppliers and create metrics for monitoring and improving the
relationships. And put together processes for managing the inventory of goods
and services you receive from suppliers, including receiving shipments,
verifying them, transferring them to your manufacturing facilities and
authorizing supplier payments.

The Five Components of Supply Chain Process

3. Make This is the manufacturing step. Schedule the activities necessary for
production, testing, packaging and preparation for delivery. As the most metric
intensive portion of the supply chain, measure quality levels, production output
and worker productivity.

4. Deliver This is the part that many insiders refer to as logistics. Coordinate the
receipt of orders from customers, develop a network of warehouses, pick
35
 carriers to get products to customers and set up an invoicing system to receive
payments.

5. Return The problem part of the supply chain. Create a network for receiving
defective and excess products back from customers and supporting customers
who have problems with delivered products.

36
 SCM Flows

Supply chain management flows can be divided into three main flows:

1. The Product Flow

It includes the movement of goods from a supplier to a customer, as well as
any customer returns or service needs.

2. The Information Flow

It involves transmitting orders and updating the status of delivery.

3. The Finances Flow

It consists of credit terms, payment schedules, and consignment and title
ownership arrangements.

If the goal of SCM is to provide high product availability through efficient and
timely fulfilment of customer demand, then how is the goal accomplished?

37
A view of different flows in a supply chain
Obviously, you need effective flows of products from the point of origin to the
point of consumption. But theres more to it. Consider the diagram of the fresh
food supply chain. A two-way flow of information and data between the supply
chain participants creates visibility of demand and fast detection of problems.
Both are needed by supply chain managers to make good decisions regarding
what to buy, make, and move.

Other flows are also important. In their roles as suppliers, companies have a
vested interest in financial flows. As you can understand, suppliers want to get
paid for their products and services as soon as possible and with minimal hassle.
Sometimes, it is also necessary to move products back through the supply chain
for returns, repairs, recycling, or disposal.

The Importance of Supply Chain Decisions

There is a close connection between the design and management of supply chain
flows
(product, information, and funds) and the success of a supply chain. Wal-Mart,
Dell Computer, and Seven-Eleven Japan are examples of companies that have
built their success on superior design, planning, and operation of their supply
chain. In contrast, the failure of many e-businesses such as Webvan can be
attributed in weaknesses in their supply chain design and planning.

Wal-Mart has been a leader at using supply chain design, planning and operation
to achieve success. From its beginning, the company invested heavily in
transportation and information infrastructure to facilitate the effective flow of
goods and information. Wal-Mart designed its supply chain with clusters of
stores around distribution canters to facilitate frequent replenishment at its retail
stores in a cost-effective manner. Frequent replenishment allows stores to match
supply and demand more effectively than the competition. Wal-Mart has been a
leader in sharing information and collaborating with suppliers to bring down

38
costs and improve product availability. The results are impressive. In their
annual 2004

report, the company reported a net income of more than $9 billion on revenues
of about $250 billion. These are dramatic results for a company that reached
annual sales of only $1 billion in 1980. The growth in sales represents an annual
compounded growth rate of 26 percent.

Decision Phases in a Supply Chain

Successful supply chain management requires many decisions relating to the

flow of information, product, and funds. Each decision should be made to raise
the supply chain profitability. These decisions fall into three categories of
phases, depending on the frequency of each decision and the time frame during
which a decision phase has an impact. As a result, each category of decisions
must consider uncertainty over the decision horizon.

1. Supply Chain Strategy or Design

During this phase, given the marketing and pricing plans for a product, a
company decides how to structure the supply chain over the next several
years. It decides what the chains configuration will be, how resources
will be allocated, and what processes each stage will perform.

Strategic decisions made by companies include whether to outsource or

perform a supply chain function in-house the location and capacities of
production and warehousing facilities, the products to be manufactured or
stored at various locations, and the modes of transportation to be made
available along different shipping legs, and the type of information
system to be utilized.

A firm must ensure that the supply chain configuration supports its
strategic objectives and increases supply chain profitability during this

39
phase. For example, a companys decisions regarding its choice of supply
sources for components, contract manufacturers for manufacturing, and
the location and capacity of its warehouses , are all supply chain design
or strategic decisions. Supply chain design decisions are typically made
for long-term and are very expensive to alter on short notice.
Consequently, when companies made these decisions, they must take into
account the uncertainty in anticipated market conditions over the next
few years.

Decisions made during this phase include:

Strategic network optimization, including the number, location, and

size of warehouses, distribution centers and facilities
Strategic partnership with suppliers, distributors, and customers,
creating communication channels for critical information and
operational improvements such as cross docking, direct shipping, and
third-party logistics

Product design coordination, so that new and existing products can be

optimally integrated into the supply chain, load management

Information Technology infrastructure, to support supply chain

operations.
Where-to-make and what-to-make-or-buy decisions

40
 Aligning overall organizational strategy with supply strategy

Hierarchy of Supply Chain Decisions

2. Supply Chain Planning

For decisions made during this phase, the time frame considered is a
quarter to a year. Therefore, the supply chains configuration determined
in the strategic phase is fixed. This configuration establishes constraints
within which planning must be done. The goal of planning is to maximize
the supply chain profitability that can be generated over the planning
horizon given the constraints establishes during the strategic or design
phase. Companies start the planning phase with a forecast for the coming
year (or a comparable time frame) of demand in different markets.

Planning includes making decisions regarding which markets will be

supplied from which locations, the subcontracting of manufacturing, the
inventory policies to be followed, and the timing and size of marketing
and price promotions. Planning establishes parameters within which a
supply chain will function over a specified period of tie.
41
 In the planning phase, companies must include uncertainty in demand,
exchange rates, and competition over this time horizon in their decisions.
Given a shorter time frame and better forecasts than the design phase,
companies in the planning phase try to incorporate any flexibility built
into the supply chain in the design phase and exploit it to optimize
performance. As a result of the planning phase, companies define a set of
operating policies that govern short-term operations.

Decisions made during this phase include:

Sourcing contracts and other purchasing decisions.

Production decisions, including contracting, scheduling, and planning
process definition.

Inventory decisions, including quantity, location, and quality of

inventory.
Transportation strategy, including frequency, routes, and contracting.
Benchmarking of all operations against competitors and
implementation of best practices throughout the enterprise.

Milestone payments
Focus on customer demand.
3. Supply Chain Operations

The time horizon here is weekly or daily, and during this phase
companies make decisions regarding customer orders. At the operational
level, supply chain configuration is considered fixed, and planning
policies are already defined. The goal of supply chain operations is to
handle incoming customer orders in the best possible manner. During this
phase, firms allocate inventory or production to individual customer
orders, set a date that an order is to be filled, generate pick lists at a
warehouse, allocate an order to a particular shipping mode and shipment,
set delivery schedules of trucks, and place replenishment orders. Because
operational decisions are being made in the short term (minutes, hours, or

42
 days), there is a less uncertainty about demand information. given the
constraints established by the configuration and planning policies, the
goal during the operational phase is to exploit the reduction of
uncertainty and optimize performance.

Decisions made during this phase include:

Daily production and distribution planning, including all nodes in the

supply chain

Production scheduling for each manufacturing facility in the supply

chain (minute by minute).

Demand planning and forecasting, coordinating the demand forecast

of all customers and sharing the forecast with all suppliers

Sourcing planning, including current inventory and forecast demand,

in collaboration with all suppliers

Inbound operations, including transportation from suppliers and

receiving inventory

Production operations, including the consumption of materials and

flow of finished goods

Outbound operations, including all fulfillment activities and

transportation to customers

Order promising, accounting for all constraints in the supply chain,

including all suppliers, manufacturing facilities, distribution centers,
and other customers...

The design, planning, and operation of a supply chain have a strong impact on
overall profitability and success. It is fair that a large part of the success of a
firm can be attributed to their effective supply chain design, planning, and
operation.

43
 Process Views of a Supply Chain

A supply chain is a sequence of processes and flows that take place within and
between different stages and combine to fill a customer need for a product.
There are five different stages which are the participants of a supply chain, that
is, customer, retailer, distributor, manufacturer and supplier. There are two
different ways to view the processes performed in a supply chain.

1. Cycle View: The processes in a supply chain are divided into a series of cycles,
each performed at the interface between two successive stages of a supply
chain. Given the five stages of a supply chain, all supply chain processes can be
broken down into the following four process cycles:-
a. Customer order cycle
b. Replenishment cycle
c. Manufacturing cycle

44
d. Procurement cycle

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Each cycle occurs at the interface between two successive stages of the
supply chain. The five stages thus result in four supply chain process
cycles. For example, when customers shop online at Amazon, they are
part of the customer order cycle with the customer as the buyer and
Amazon as the supplier. In contrast, when Amazon orders books from a
distributor to replenish its inventory, it is part of the replenishment cycle
with Amazon as the buyer and the distributor as the supplier.

Within each cycle, the goal of the buyer is to ensure product availability
and to achieve economies of scale in ordering. The supplier attempts to
forecast customer orders and reduce the cost of receiving the order. The
supplier then works to fill the order on time and improve efficiency and
accuracy of the order fulfillment process. The buyer then works to reduce
the cost of the receiving process. Reverse flows are managed to reduce
cost and meet environmental objectives.

A cycle view of the supply chain clearly defines the processes involved
and owners of each process. This view is very useful when considering
operational decisions because it specifies the roles and responsibilities of
each member of the supply chain and the desired outcome for each
process.

2. Push/Pull View
45
 All processes in a supply chain fall into one of the two categories depending
upon the timing of their execution relative to end customer demand. With
pull processes, execution is initiated in response to a customer order. With
push processes, execution is initiated in anticipation of customer orders.
Therefore, at the time of execution of pull process, customer demand is
known with certainty, whereas at the time of execution of a push process,
demand is not known and must be forecasted. Pull processes may also be
referred to as reactive processes because they react to customer demand.
Push processes may also be referred to as speculative processes because they
respond to speculated (forecasted) rather than actual demand. The push/pull
view is very important when considering strategic decisions relating to
supply chain design.

Supply Chain Macro Processes in a Firm

All supply chain processes discussed in the two process views can be classified
into the following three macro processes:

1. Customer Relationship Management (CRM): All processes that focus on the

interface between the firm and its customers
2. Internal Supply Chain Management (ISCM): All processes that are internal
to the firm
3. Supplier Relationship Management (SRM): All processes that focus on the
interface between the firm and its suppliers
The three macro processes manage the flow of information, product, and funds
required to generate, receive, and fulfill a customer request.

46
CRM Macro Process
The CRM macro process aims to generate customer demand and facilitate the
placement and tracking of orders. It includes processes such as marketing,
pricing, sales, order management, and call center management. At an industrial
distributor, CRM processes include the preparation of catalogs and other
marketing materials, management of the Web site, and management of the call
center that takes order and provides services.

ISCM Macro process

The ISCM macro process aims to fulfill demand generated by the CRM process
in a timely manner and at lowest possible cost. ISCM processes include the
planning of internal production and storage capacity, preparation of demand and
supply plans, and fulfilment of actual orders.

SRM Macro Process

The SRM macro process aim to arrange and manage supply sources for various
goods and services. SRM processes include the evaluation and selection of
suppliers, negotiation of supply terms, and communication regarding new
products and orders with suppliers.

All three supply chain macro processes and their component processes are
shown in the figure below:

Supplier Company Customer

47
 SCM Macro Processes

For a supply chain to be successful, it is crucial that the three macro processes
are well integrated. The organizational structure of the firm has a strong
influence on the success or failure of the integration effort. In many firms,
marketing is in charge of the CRM macro process, manufacturing handles the
ISCM macro process, and purchasing oversees the SRM macro process with
very little communication among them. It is not unusual for marketing and
manufacturing to have two different forecasts when making their plans. This
lack of integration hurts the supply chains ability to match supply and demand
effectively, leading to dissatisfied customers and high costs. Firms should
structure a supply chain organization that mirrors the macro processes and
ensures good communication and coordination among the owners of processes
that interact with each other.

Conclusion
Supply chain management is an exploding field, both in research and in
practice. Major international consulting firms have developed large practices in
the supply chain field. Through better information engineering, supply chain
improvements have resulted in a reduced bullwhip effect, lower inventory
levels, reduced logistics costs, and streamlined payments. These improvements
appear to have helped macroeconomic benefits such as more stable economic
output and higher productivity growth. However, Firms who operate in global
environment and deal with multiple suppliers and customers, are required to
manage inventories in new and innovative ways, and are faced with possible
channel restructuring. The field promises to continue growing as the research
advances and as firms continue to apply knowledge in their global networks.
Finally, as the internet changes fundamental assumptions about business, firms
48
 operating in supply chains will be required to understand this new phenomenon
and respond accordingly.

As for Pepsi Haidri Beverages, in order to survive in the current economic

conditions as well as the increased competition in beverage industry with the
ever growing competitors like Coca Cola adopting new techniques of expanding
their supply chain and reaching their customers in a much more efficient
manner and producing beverages according to consumer demand, it is more
advisable to Pepsi Haidri Beverages to conduct the business in a strategic way
with technological support and efficient demand and supply network which
seems impossible without supply chain collaboration and information
technology support.

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