Type of Project
PepsiCo’s foundation started with both CEOs of Pepsi-cola Donald Kendall and Herman Lay of Frito-Lay coming together to form PepsiCo in 1965. Some popular brands consist of Gatorade, Pepsi, Dorito’s, Mountain Dew, and many more. PepsiCo supplies products to over 200 different countries and is a strong player in keeping a green environment wherever they operate.
In this report, our main focus shall remain on the selected company, Pepsi Co ltd. The limitations and all the facts and figures have been collected in a document, listing down the overall number of costs and other overheads that are incurred by the company. Thus, the main aim and objective of this report will remain to keep the focus on how well can the company PepsiCo strategize from the deduction of the present scenario.
Therefore, the analysis of the case study of PepsiCo would be to finally comment on the situation, come up with a new and effective strategy for the company that can alternatively be applied to run the company effectively and efficiently. However, it shall also keep in mind that the highlighted key metrics are also being satisfied in the application of a new strategy.
Ever since the ASU Sun Devil Football team began promoting Devilade, its sales have skyrocketed in the Southwest Region and are continuing to grow throughout the United States. The singular plant in El Paso, Texas supplied products to the entire country and utilizes a co-packer in Miami, Florida to assist during heavy demand times; however, it can no longer keep up with the exponential demand.
The objective of this case study is to find the optimal location and size for opening new plants to accommodate the new influx of demand. Some important factors considered during this case study are maintaining a 98% Case Fill Rate, reducing waste to below 10% of production costs, and keeping transportation costs less than 20% of production costs.
Our first calculation was to take into consideration the variations of demand across regions to determine our 2020 production plan. Using the provided demand plan for that year, we multiplied each forecasted demand in cases by 1.04 to account for 4% of safety stock.
This allowed our team to keep a constant supply of inventory for the weeks when plants needed an extra boost in cases to keep up with demand, especially when the plants shut down for a whole week at a time to accommodate for corporate holidays. After completing the production plan, we calculated the total bias between our forecasted production plan and the actual sales in 2020 over the same periods and wound up with a positive bias of 962,814 cases. Therefore, our plants produced more than what was sold and incurred dump costs which will be discussed later in this paper.
When it came to our production plan, we decided to use our biggest facility at maximum capacity. After the initial 4 weeks of start-up, we chose to have our large Arizona facility operate at a maximum capacity of 1,700,000 cases. This high production made it possible for us to keep up with the high demand in Arizona.
We also ended up having safety stock (excess product) from our Arizona plant so instead of dumping these products we chose to transport them to the supercenters in the Northwest, Southwest 1, and Southwest 2. This made it possible for us to stagger the openings of different plants so that they occurred at different times.
As for the 3 remaining supercenters, we chose to rely on the production of the already existing plant located in El Paso. This plant was in use for one week to give the Arizona plant a smaller demand workload in its first week.
The next plants that we opened up were in Indiana and Texas in week 5. We opened these plants because our Arizona plant was starting to struggle when it came to meeting demand. The Indiana plant was a medium-size plant that was successful at meeting demand from the very beginning. It provided products for the South Dakota supercenter. The Texas plant struggled the first 2 weeks because it encountered stockouts. Fortunately, the Texas plant managed to pull through as of the third week in supplying products to the Montana supercenter.
A few weeks later into production, we chose to open up the New York plant. This plant helped supply the Northeast supercenter on week 19. Throughout this production, there were several weeks where we had overstock. Therefore for several weeks we were meeting demand and ensuring there was safety stock for the downtime demand.
This helped us maintain a case fill rate of 98% or higher. Since this plant was so successful in giving aid to this supercenter we decided to include the Southeast supercenter as well. As for the Northwest and Southwest 2 Sparky Supercenters, they continued to rely on the Arizona plant for all 52 weeks. Luckily, supply from the plants was always in abundance. All of this is shown in the excel sheet below.
After running through 52 weeks (13 periods), we calculated our transportation costs according to the mileage cost, fixed truck cost, inner-city transportation cost ($150), and the number of trucks for each plant’s route to the Sparky Supercenters and to other plants. In addition, we included the transportation costs associated with dumping cases at the Co-Packer in Miami, Florida. For example, the total transportations costs were as follows for the medium-sized plant in Yonkers, New York.
Upon further analysis, our dump costs were a considerable amount especially for the plant in Yonkers, New York. Looking at the table below, the building and salary costs for this plant were $304,821,245 over a period of 34 weeks starting at week 19 and ending at week 52. We assumed that the workers were paid $1,400 in fringe per month for a total of 9 months (rounding up 8.5 months from 34 weeks).
In addition, all workers were paid for all 34 weeks including the 5 weeks of downtime. Salary workers were paid a fraction of their salary according to this formula: (yearly salary)(8.5/12) + (1400*9). Hourly workers were paid according to this formula: (hourly wage)(40)(34) + (1400*9). Referring back to the total cost to keep the plant running, the dump costs for the New York plant are less than 1% of the total cost, not including the additional production cost per case at $6.50. This trend holds true for every plant and fulfills our key metric of keeping the cost of waste to less than 10% of our production costs.
Moreover, given the transportation cost for this plant, its metric is less than 20% of production cost, not including the additional cost per case at $6.50. This key metric held true for every plant except for the large Arizona plant because of its high transportation costs during the first few periods as discussed later on in this paper.
There were several choices to make at the inception of this case study. The primary decision was to decide where the plants would be located. We eventually chose Arizona, Texas, Indiana, and New York. Originally, we chose North Carolina instead of New York. We were planning on using our North Carolina plant in unison with our Sparky Supercenter which was also in the same location.
Our idea was to save on transportation costs because both of these locations would be in such close proximity. We calculated the cost per mile multiplied by the number of miles and it was considerably low. However, we also intended for our North Carolina plant to help supply the supercenter in the Northeast. Once we calculated the transportation costs, we realized that it was extremely expensive.
This was because North Carolina was really far from Maine. We also began to realize that a plant located in North Carolina was not the most cost-efficient because of its lack of economic benefits. We then decided to change our plant location from North Carolina to New York.
Fortunately, New York yielded several benefits such as a low stated rate of 2% property tax, a 5% investment tax credit, and the lowering of property tax by 60% if new jobs are created. North Carolina, upon closer inspection, offered none of these benefits. Also most importantly, the transportation cost from New York to Maine was significantly lower due to the smaller distance between the two.
Also, another factor that we discussed frequently was that of the size of our plants. In the beginning stages of this project, we decided that our Arizona plant was going to be a medium size. This was due to the fact that the case study specifically mentions that Arizona was experiencing very high demand.
Additionally, the existing small plant in Texas could not keep up. We also wanted this particular plant to help supply the supercenter in Arizona. However, once our demand forecast was created, we noticed that around week 12 our numbers transformed into negative ones. In order to counter this lack of supply for very high demand, we chose to increase our plant from a medium to a large.
This change in size helped increase our ability to meet demand as well as improve our case fill rate. Furthermore, we realized that a larger facility meant a higher building cost but this was largely outweighed by the large facilities product output. It could now supply the supercenter in California as well. The Arizona plant was also the most optimal location in regards to California.
El Paso, Texas: Pre Existing plant
Phoenix, Arizona: Large Plant
The Arizona plant supplies most of the Southwest with products while assisting the El Paso plant with its high demand. The southwest has the lowest transportation costs based on region and is located 11 miles away from the Tempe Sparky Supercenter. We needed to build a large plant as this plant supplies to California and the Phoenix location.
The Arizona demand for 2020 is 51,880,066 cases, which is the largest demand out of all locations and regions which is why a large plant is needed in the Southwest. This plant will have 2 safety employees, 128 operators, 24 mechanics, 4 QA employees, 4 supervisors, 8 sanitation workers, 5 shipping/ receiving employees, and 6 managers totaling 181 total employees. The yearly cost to employ these people is $10,370,992. The cost to build this large plant in Arizona totals out to $610,370,992.
Arizona –> California
$4,500+ $10.52(328) = $ 7,949.508
Arizona –> Montana
$4,500+ $10.52(1214) = $ 17,271.28
Arizona –> South Dakota
$4,500+ $10.52(1405) = $19,280.6
Arizona –> North Carolina
$4,500+ $10.52(2237) = $28,033.24
Arizona –> Maine
$4,500+ $10.52(2791) = $ 33,861.32
Parker, Texas: Medium Plant
Our second new plant will be in Parker, Texas. Texas has several benefits in being home to our new medium facility. First, there is a sales tax exemption for manufacturing equipment. Second, the state of Texas will reduce our property tax by 60% if there is a minimum of 50 new jobs. This is extremely beneficial as we will be introducing 101 new jobs for the medium plant.
Lastly, there is a $5,000 grant for each job when we pay at least 150% of the minimum wage with included benefits. Texas is a strategic approach for PepsiCo due to its infrastructure and large job pool for good workers.
Texas also has low property taxes and connects with several freeways making it a key location when transporting goods to supercenters. Alongside the El Paso and Phoenix plant, the Parker facility will help meet demand in the southwest, which has the highest demand of Devilade at 83,415,695 cases.
Cecero, Indiana: Medium Plant
Our new Midwest facility is located in Cecero, Indiana. Indiana offers some of the same benefits as Texas does in addition to others. There is a manufacturing exemption from our sales tax as well as the 60% reduced property tax given 50 new jobs. The State of Indiana will also provide a refund grant of state income taxes on payroll wages in the year that payroll taxes are paid. Indiana will provide manufacturing for our Midwest Sparky Supercenter in South Dakota and help meet demand in our regions when needed.
Indiana offers us low transportation fees and is in a prime location to transport to the northwest along with the southeast. We are confident in our placement of this facility because our forecasted demand for the Midwest in 2020 was 28,722,218 cases of Devilade. Our medium plant will host 101 employees who would cater to producing forecasted demand. Our staff will include 2 safety employees, 64 operators, 12 mechanics, 4 QA, 4 supervisors alongside 4 sanitation workers, 5 employees in Shipping-Receiving and 6 managers.
Indiana –> South Dakota
$5,000 + $11.47(8648.38) = $43,241,900
Yonkers, New York Medium Plant
Our decision to place a medium plant in Yonkers, New York was due to the demand in Maine and North Carolina. The placement was calculated so that it would be the lowest transportation cost to both the Maine Supercenter and the North Carolina Supercenter. The location is centered in an industrialized area surrounded by freeways so there is an ease of access that can reduce transportation costs as well.
Although New York has a high property tax, the state will offer PepsiCo a 60% reduction in property tax if there is a minimum of 50 new jobs. New York will also provide an investment tax credit that equals 5% of the investment, excluding land. Since we’re building a medium plant, we’ll be contributing 101 new jobs to the New York market. The demand for both the southeast and northeast region is 20,811,096 cases of Devilade. Since the large Arizona facility was able to meet demand the first few weeks, the New York facility opened during Week 19 and was able to meet the case fill for both regions thereafter.
New York → Maine
$6,500 + $12.63 (353) = $10,958.39
New York → North Carolina
$6,500 + $12.63 (543) = $ 13,358.09
Given key metrics and constraints, our team chose 4 locations to house our new PepsiCo plants and produce the popular sports drink, Devilade. The process of choosing our locations was as follows:
We were able to determine our desired locations after creating our forecast, which illustrated the regions with high or low demand. These facilities include:
Once we had chosen our location, we created our production plan which included our forecasted demand plus 4% for safety stock. We were able to meet demand head-on due to the inclusion of the safety stock. Once we finished the production plan, we compared our demand to the 2020 actual sales table that was provided to find that our numbers were considerably similar. Comparably, we came out with a positive bias of 962,814. Moreover, we know our choice of building 4 new plants, 3 of which are medium and 1 large, is the best decision for PepsiCo given the spike in national demand for Devilade.