Production Sourcing Optimization at Pepsi

Consumer Goods Technology (CTG) published a case study on the Pepsi Bottling Group (PBG) (now part of PepsiCo).

In the case, they discuss how Pepsi used a network optimization approach to production sourcing.  That is, they wanted to optimize what product is made when and where.  They wanted to do this considering the full supply chain.

The savings reported were significant.  The article quotes:

  • An increased number of cases available to sell due to reduced warehouse out of stocks
  • Reduction in raw material and supplies inventory from $201 million to $195 million
  • A 2 percentage point decline in the growth of transport miles even as PBG revenue grew
  • Increase in the return on invested capital

This example reminds us that an important part of network design is about deciding what products should be made in which locations.

Value of Network Design: Supply Chain Transformation at The Home Depot

Network design can play a key role in transforming a supply chain.  Dan Gilmore of SupplyChainDigest wrote a nice article on the transformation of The Home Depot’s supply chain.

In the article, Mr. Gilmore reported on the aggressive transformation of The Home Depot’s supply chain from one where the suppliers mostly delivered directly to the stores to one where product flowed through distribution centers first.  The Home Depot had to use network design software to determine the best number and locations of these distribution centers.  The article did not mention the transportation savings, but mentioned that the strategy could help free up $1 billion in inventory.

The transformation of the supply chain was so important that it was mentioned in the letter to shareholders in the 2009 Annual Report.

Example of Network Design Savings: MillerCoors Merger

In the summer of 2008, Miller and Coors merged US operations to become MillerCoors.

When two firms merge, they can often find savings by combining their supply chains.  This means sharing suppliers, plants, and distribution centers.

MillerCoors reported on their supply chain savings in their quarterly earnings announcements.

For example, in a May 2010 letter, they announced that they were on track for $750 million in synergies (with network design an important part of this).  Specifically around network design, they mentioned:

“Supply chain integration continues to proceed on schedule. The brewery optimization project is nearing completion, as product moves are more than 90 percent complete.”

By the November 2010 letter, they mentioned:

“In the third quarter, MillerCoors successfully completed initial product transitions within its national brewery network. The company will continue to focus on further network optimization through peak/non-peak season sourcing changes, as well as opportunities for increased efficiencies. “

By the November letter, it is interesting that they mentioned that they would continue to their network optimization work to look at different strategies for different times of the year.