Pepsi Bottling Group Achieves Optimization Success
The Pepsi Bottling Group (PBG, www.pbg.com) generates nearly $14 billion in annual sales as the world's largest manufacturer, seller and distributor of Pepsi-Cola beverages. In 2005, PBG recognized that increased complexity in the bottling landscape and the competitive nature of the bottling industry required a new approach to production sourcing. Both the supply chain network and changing consumer preferences drove this complexity. PBG's North American network consists of 57 plants producing more than 1,200 stock keeping units distributed to 360 warehouses.
Meanwhile, consumer preference shifted from cans to bottles, from carbonated soft drinks to non-carbonated drinks and toward shrink film packages. PBG produced these newly preferred products in limited locations. The end-result was that more than half of PBG's bottle lines operated at capacity and peak demand outstripped instantaneous production capacity. PBG leadership decided to take a network-based approach to production sourcing that would deliver minimized system-wide costs, better customer service and competitive advantage.
Selecting a Strategy
PBG's Supply Chain Strategy group sought out an intern from MIT's Leaders for Manufacturing program (web.mit.edu)to join a project team and explore how to re-conceive sourcing. The project team was charged to review past attempts in order to optimize production sourcing and the current process used to determine sourcing.
The results of the teams' analysis were distributed to business unit directors as a recommended sourcing plan, and it was at their discretion whether or not they would implement the suggested sourcing decisions.
The team drew upon these lessons and created a project plan to roll out an optimized network-based production sourcing solution in stages. The team selected ILOG LogicNet Plus XE (www.ilog.com)to model PBG's complex network and optimize the production sourcing. The selected solution combines the optimization technology of ILOG CPLEX with a graphical user interface and allows users to determine where products should be produced in order to reduce overall supply chain costs while satisfying all business constraints. This is achieved by considering the trade-offs between production, warehousing and transportation costs as well as detailed service objectives.
"To transform Pepsi Bottling Group's supply chain and its production sourcing processes, the company tapped into a solution that would take Pepsi Bottling Group from a static sourcing strategy to a real-time one in order to keep up with consumer demands and trends," says Paul Hamilton, vice president Global Supply Chain, Logistics and Strategy, PBG. "ILOG supply chain applications provided us the means to implement a 21st century supply chain by optimizing inventory, reducing costs and increasing sales."
Delivering Success
PBG sought to create a process that would improve its response to an ever-evolving marketplace aligned with the supply chain strategy of achieving competitive advantage through well-managed continuous improvement. With the help of the new solution this goal has been achieved while delivering specific benefits:
- The creation of regular meetings that bring together the supply chain strategy, transport, finance, sales and manufacturing functions to discuss system sourcing strategies including pre-build strategies
- Realignment of PBG's business units and the field supply planners to focus on system goals
- The inclusion of optimized sourcing models into the annual infrastructure review process evaluating various trade-offs and risk-related questions
- 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
Finally, this approach has graduated from a project into a business process that enables PBG to stay competitive.