PepsiCo’s Practical Application of

Supply Chain Resilience Strategies

and Inventory Optimization

Tim Rowell, CPIM

PepsiCo, Supply Chain Sr. Manager
Agenda

 Overview / Background
 Supply Chain Resilience
 Inventory Deep Dive
 Case Studies

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OVERVIEW / BACKGROUND

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 PepsiCo Overview
PepsiCo is a global food and beverage powerhouse.
Our broad range of delicious products offers consumers convenient, nutritious and
affordable options in nearly every country around the world

Global Global Global

Beverages Snacks Nutrition

Performance Brands Scale People

More than 22 >200 More than

$63 billion billion-dollar countries 250,000
revenue brands & territories employees
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PepsiCo Overview

Good For You

Better For You

Fun For you

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Specialized Supply Chain
 Global Nutrition Segment
 Good for You Products
 Chilled Supply Chain

As PepsiCo proactively adapts to emerging market trends for healthy &

nutritious beverages, our supply chain becomes more global and complex

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Case Study - International Supply
 Natural, Functional Beverage

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PepsiCo Coconut Water Supply Chain

Southeast Asia

• Copackers in Southeast Asia • Warehouses near East/West ports

• Packaging Materials from Germany, • Redistributed to regional DCs
Pakistan, Serbia, Singapore • Backup US Copackers

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Supply Chain Starts Here

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SUPPLY CHAIN RESILIENCE

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 Supply Chain Resilience Concepts
Presented at 2013 APICS International Conference (Orlando)
 Michigan State PHD, Steven Melnyk

Supply Chain Resilience – The ability of a supply chain to anticipate, create plans to avoid
or mitigate, and/or to recover from disruptions to supply chain functionality
APICS Dictionary, 14th Edition, ©2013
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Supply Chain Resilience Strategies

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Application to Coconut Water Supply Chain
Several strategies for SC Resilience: a) early warning, b) buffers, c) supply
chain configuration d) brand equity…etc.
Relevant strategies applied to managing our coconut water supply chain

a) Early Warning
1) The earlier you are aware of the disruption, the sooner you can start working on the recovery
2) Improve frequency of communications and data quality

b) Buffers – 3 kinds of buffers

1) Stock Buffers
- Pre-build prior to high risk SE Asia supply timeframe and prior to peak seasonal demand in US
- Optimize inventory targets to balance fill rate and expiration risk
2) Capacity Buffers
- SE Asia: how much more can we get above the contractual commitments when needed
- US copack: how much can we get from US copackers when needed
3) Lead Time Buffers
- SE Asia – flexibility to change short term schedule; dual sourcing where possible (500ml Pure)
- US copackers – stage long lead time materials for quicker response when SE Asia supply
disrupted (or demand spikes)

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 Understand and Address Seasonal Risks
Seasonal Inventory DOH Targets

Supply & Demand Seasonality

Low Sales Moderate Sales Peak Sales Moderate Sales Low Sales
Demand Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

Supply Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct

Typhoons Moderate Risk Low Risk Moderate Risk Peak Risk

Chinese Holy
Holidays Holidays Ramadan
NY Week

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 Decompose Lead Times and Optimize
Example Supply Scenario and Lead Times (weeks)

Production Lock Hold Transit, Customs, Port Dist FG lead time from SE Asia is
8 2 8 2
20 weeks
Notified of
Supply
Disruption
2nd SE Asia copacker *
Order More from Production Lock Hold Transit, Customs, Port Dist
SE Asia Copack 8 2 8 2
improves reliability**, but
#1 or #2 same 20 week lead time

Schedule US Line Time, Ingredients Hold Dist Arrives 8 Weeks US contingency lead time is
Contingency
Supply
8 2 2 Sooner vs SE 8 weeks (less if line time &
Asia
ingredients available)

* Dual SE Asia sourcing currently applies only to 500ml Pure. For others, scheduler will increase plan at
Copack #1 in subsequent months after disruption has subsided.

** It is important to quantify (and optimize) both average (m) and standard deviation (s) of supply (lead time and quantity).
For example, transit and port clearance times continually change; monitor and update as needed.

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Brand Equity and Reputational Resilience
 Certification

 Supply – stable, on shelf, fresh

 Promotion – new channels, drive awareness

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INVENTORY DEEP DIVE

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Inventory Policy is Part of SC Resilience
– Our work on applying these Supply Chain Resilience strategies within PepsiCo’s
global supply chain is leading to groundbreaking research, particularly in the
area of inventory buffers.
– International supply has long lead times and high variability. Inventory required
to meet customer service targets begins to introduce risk of expiration,
especially with organic products with shorter shelf lifes.
– We have derived formulas in conjunction with industry experts and academia
(and validated with historical data) to predict both the percentage of stockouts
as well as the percentage of expired product, and implemented the solution that
strikes the optimal balance.
– In doing so for the coconut water business, we found opportunities to reapply
this to other emerging product categories with supply challenges such as
probiotic beverages. These probiotic beverages have the unique challenge of
very short shelf life compared to other items in the portfolio of premium juice
beverages.
– Adapting the formulas for the product-specific characteristics of probiotic
beverages (supply & demand variability, lead time and shelf life) allowed us to
find the optimal balance for that product group as well and implement the
results to improve our supply
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The Sawtooth
Inventory vs Time

Place order and the reorder quantity (ROQ) arrives one lead time later.
Safety stock buffers against uncertainty of supply and demand.
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Widely Documented: Correlate Inventory
Level with Percent Backorders/Cuts
Inventory vs Time

 backorders/cuts ( ) across all replenishment cycles

throughout the year given variable demand and supply
divide by annual demand to get percent backorders/cuts
fill rate % = 1 – percent backordered/cut
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Emerging Area of Research: Correlate
Inventory Level with Percentage Expired
Inventory vs Time

Expected inventory
(safety stock) prior
to receiving next
replenishment

Expected amount of
each production lot
leftover at the end
of its shelf life

 amount leftover at the end of the

replenishment cycles ( ) throughout the year
divide by annual demand to get percent expired
* “Shelf Life” in this context is viewed from internal perspective and has subtracted the “remaining shelf life” guaranteed to external customers upon receipt. It is otherwise known as “Warehouse Life”.

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Consider the Boundary Cases
Scenarios of expected inventory at the end of product shelf life assuming
no demand or supply variability
100% expired 50% expired 0% expired
0% backordered/cut 0% backordered/cut 0% backordered/cut

ROQ
½ ROQ
Zero

0% expired 0% expired
50% backordered/cut 100% backordered/cut

-½ ROQ ROQ

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Illustration of the Symmetric Relationship

-ROQ -½ROQ Zero ½ROQ ROQ

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Layer in Variability

-ROQ -½ROQ Zero ½ROQ ROQ

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 Definition of Terms
Safety Stock (SS) = Expected inventory position when reorder arrives
Lead Time (LT) = Time it takes from the point an order is placed until it arrives and is available to sell to customers. Lead Time Demand
(LTD) is the demand during lead time
Lock = Time required by manufacturer that production schedule be locked and no more changes accepted
Make = Time allotted for manufacturer to produce the scheduled quantity and product to clear incubation (if required)
Dist = Time it takes to distribute product from manufacturer to demand points
ROQt = Run cycle (or time between replenishments); the timeframe that the reorder quantity (ROQ) is expected to cover
Shelf Life* = Total internal shelf life from the time produced until the last date it can be sold to customer (consumer shelf life minus time
guaranteed to customers upon receipt).
eRSL* = Expected inventory remaining at the end of the internal shelf life

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 Method Derivation
Arranging Terms Procedure
X* = Lock + Make + Shelf Life – ROQt • Specify eRSL*
Y* = SS + LTD – eRSL* • Calculate SS
Where: LTD = Lock + Make + Dist • Calculate mean (m) and standard deviation (s) of LTD
Y* = Lock + Make + Dist + SS – eRSL* • Based on m, s, q (ROQ) and SS: calculate % backorders/cuts (A)
- Iterate with conventional formula: SS=ks, k=f[L(z)=Aq/s]
Algebraic Reduction
- Or calculate explicitly per Zipkin: A=(s/q)[F1(zr)-F1(zr+q)]
Set X* = Y*
• Calculate m* and s* of demand over X*
Lock + Make + Shelf Life – ROQt = Lock + Make + Dist + SS – eRSL*
• Based on m*, s*, q and eRSL*: calculate % backorders/cuts*
Lock + Make + Shelf Life – ROQt = Lock + Make + Dist + SS – eRSL*
• Determine estimated percentage of expired inventory based on
Shelf Life – ROQt = Dist + SS – eRSL* symmetric relationship with percentage backorders/cuts
SS = Shelf Life – ROQt - Dist + eRSL* (see calculation mechanics on next slide)

* “Shelf Life” in this context is viewed from internal perspective and has subtracted the “remaining shelf life” guaranteed to external customers upon receipt. It is otherwise known as “Warehouse Life”.

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 Calculation Mechanics
Start at midpoint (MP), where eRSL=0
• Calculate SSMP
• Calculate % backorders/cuts at SSMP given m, s, q
• Calculate % backorders/cuts at eRSLMP given m*, s*, q

Ascending
• Calculate % backorders/cuts at SSMP+2 given m, s, q
• Calculate % backorders/cuts at eRSLMP+2 given m*, s*, q
• Set % expired at = eRSLMP-2 = % backorders/cuts at eRSLMP+2
• Calculate % backorders/cuts at SSMP+4 given m, s, q
• Calculate % backorders/cuts at eRSLMP+4 given m*, s*, q
• Set % expired at = eRSLMP-4 = % backorders/cuts at eRSLMP+4
• Continue for MP+6, MP+6, etc (or increments other than 2)
Descending
• Calculate % backorders/cuts at SSMP-2 given m, s, q
• Calculate % backorders/cuts at eRSLMP-2 given m*, s*, q
• Set % expired at = eRSLMP+2 = % backorders/cuts at eRSLMP-2
• Calculate % backorders/cuts at SSMP-4 given m, s, q
• Calculate % backorders/cuts at eRSLMP-4 given m*, s*, q
• Set % expired at = eRSLMP+4 = % backorders/cuts at eRSLMP-4
• Continue for MP-6, MP-8, etc (or increments other than 2)

eRSL SS q Avg Cycle Target Avg Wkly Cuts % Cuts % Expired

(wks) (wks) (wks) Stock Inv Demand s m m* s* for SS for SS* %
-10 -2 4 2 0 10,000 37,500 200,000 240,000 41,458 49.7% 81.4% 0.0%
-8 0 4 2 2 10,000 37,500 200,000 240,000 41,458 31.1% 67.1% 0.1%
-6 2 4 2 4 10,000 37,500 200,000 240,000 41,458 16.5% 49.8% 0.4%
-4 4 4 2 6 10,000 37,500 200,000 240,000 41,458 7.3% 32.6% 1.3%
-2 6 4 2 8 10,000 37,500 200,000 240,000 41,458 2.7% 18.5% 3.8%
Midpoint 0 8 4 2 10 10,000 37,500 200,000 240,000 41,458 0.8% 9.0% 9.0%
2 10 4 2 12 10,000 37,500 200,000 240,000 41,458 0.2% 3.8% 18.5%
4 12 4 2 14 10,000 37,500 200,000 240,000 41,458 0.0% 1.3% 32.6%
6 14 4 2 16 10,000 37,500 200,000 240,000 41,458 0.0% 0.4% 49.8%
8 16 4 2 18 10,000 37,500 200,000 240,000 41,458 0.0% 0.1% 67.1%
10 18 4 2 20 10,000 37,500 200,000 240,000 41,458 0.0% 0.0% 81.4%

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Model Correlates Well with Historical Data
SL=40d, Low/Med s SL=40d, Med/High s

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 Deriving Formulas from Scratch
S = the order up to quantity in a periodic review system Let z = (x-m’)/s’ → x = zs’ + m’ where m’ = m(p+w)
p = production lead time (order to produce) k = (S-m’)/s’ → S = ks’ + m’ where s’ = s (p + w)
w = warehouse life k

f(x) = pdf for weekly demand x E (cases expiring) = න s’(k-z)h(z)dz

x ~ N (m, s)
g(x) = pdf for demand x over period p+w ‒ ∞ k
x ~ N (m(p+w), s (p + w))
h(x) = pdf for standard normal distribution = s (p + w) න (k-z)h(z)dz

For any given S 2

‒ ∞
S 𝑒 −½𝑧
Where: h(z) = (standard normal dist: m=0, s=1)
2
E (cases expiring) = න 𝑠 − 𝑥 𝑔(𝑥)𝑑𝑥
Solve with Numerical Integration
‒ ∞

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 Other References
1. Opher Baron, Managing Perishable Inventory, Rotman
School of Management, University of Toronto, Toronto,
Ontario, Canada. Wiley Encyclopedia of Operations Research
and Management Science, edited by James J. Cochran,
Copyright © 2010 John Wiley & Sons, Inc.
2. Karaesmen, I. Z., Scheller-Wolf, A., and Deniz, B. Managing
Perishable and Aging Inventories: Review and Future
Research Directions. In Kempf, K. G., Keskinocak, P., and
Uzsoy, R., editors, Planning Production and Inventories in the
Extended Enterprise, volume 151 of International Series in
Operations Research & Management Science, chapter 15,
pages 393-436. Springer US, Boston, MA. 2011.
3. Nahmias, S. Perishable Inventory Systems, volume 160 of
International Series in Operations Research & Management
Science. Springer US, Boston, MA. 2011.
9. Lian Z, Liu L. A discrete-time model for perishable inventory
4. Baron O, Berman O, Perry D. Stochastic (τ, S) models for
systems. Ann Oper Res 1999;87:103–116.
managing inventory of perishable items. Working paper.
Rotman School of Management, University of Toronto; 2008. 10. Weiss H. Optimal ordering policies for continuous review
perishable inventory models. Oper Res 1980;28:365–374.
5. Brown GW, Lu JY, Wolfson RJ. Dynamic modeling of
inventories subject to obsolescence. Manag Sci 11. Graves S. The application of queuing theory to continuous
1964;11(1):51–63. perishable inventory system. Manag Sci 1982;28:400–406.
6. Nahmias S, Pierskalla W. Optimal ordering policies for a 12. Nahmias S, Perry D, Stadje W. Actuarial valuation of perishable
product that perishes in two periods subject to stochastic inventory systems. Probab Eng Infor Sci 2004;18:219–232.
demand. Nav Res Logist Q 1973;20:207–229. 13. Nahmias S. Perishable inventory theory: a review. Oper Res
7. Broadheim E, Derman C, Prastacos GP. On the evaluation 1982;30(4):680–708.
of a class of inventory policies for perishable products such as 14. Prastacos GP. Allocation of a perishable product inventory. Oper
blood. Manag Sci 1975;22:1320–1325. Res 1981;29:95–107

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CASE STUDIES

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Case Study: Coconut Water
Long lead time, long shelf life products

**
9 month shelf life* 6 month shelf life*

* “Shelf Life” in this context is viewed from internal perspective and has subtracted the “remaining shelf life” guaranteed to external customers upon receipt. It is otherwise known as “Warehouse Life”.
** Target inventory includes Safety Stock + Avg Cycle Stock + In Transit

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Case Study: Coconut Water
Long lead time, long shelf life products

Zoomed In View

**
9 month shelf life* 6 month shelf life*

* “Shelf Life” in this context is viewed from internal perspective and has subtracted the “remaining shelf life” guaranteed to external customers upon receipt. It is otherwise known as “Warehouse Life”.
** Target inventory includes Safety Stock + Avg Cycle Stock + In Transit

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Case Study: Naked Juice Smoothies
Short lead time, short shelf life products

**

40 day shelf life* 20 day shelf life*

* “Shelf Life” in this context is viewed from internal perspective and has subtracted the “remaining shelf life” guaranteed to external customers upon receipt. It is otherwise known as “Warehouse Life”.
** Target inventory includes Safety Stock + Avg Cycle Stock + In Transit

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Rules of Thumb
For Example: Max Stock Policy = ½ Shelf Life*
For the 4 examples studied, this policy will result in less than 10% expired ( , )
Coconut Water Smoothies

** **

* “Shelf Life” in this context is viewed from internal perspective and has subtracted the “remaining shelf life” guaranteed to external customers upon receipt. It is otherwise known as “Warehouse Life”.
** Target inventory includes Safety Stock + Avg Cycle Stock + In Transit

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For More Info on Inventory Optimization

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2011 Inventory Optimization excerpt 1

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2011 Inventory Optimization excerpt 2

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 Today’s presenter
Fun facts and APICS highlights
1991 Bachelors of Science in Mechanical Engineering, University of Florida
1991 Started at Westinghouse in Nuclear Safety Analysis
1997 MBA (MSIA), Carnegie Mellon Graduate School of Industrial Administration
1997 Started at Tropicana, a division of Seagram's
1999 PepsiCo acquired Tropicana
1999 Began work on Tropicana inventory model with Dr. Sridhar Bashyam (Frito Lay US)
2000 Consulted with Dr. Steven Nahmias on periodic review and continuous review formulas
2000 Established inventory model based on Fill Rate for Tropicana business
2000 PepsiCo acquired Quaker/Gatorade
2001 QTG synergy
2003 APICS: became Certified in Production and Inventory Management (CPIM)
2003 Presented at APICS International Conference: Tropicana Inventory Planning Methodology
2005 Began work on Project OneUp including Multi-Echelon Inventory Optimization for QTG

Tim Rowell 2006

2007
Applied Dr. Paul Zipkin (Duke/Fuqua) models for Continuous Review and Periodic Review
PepsiCo acquired Naked Juice
- Supply Chain Sr. Manager 2008
2009
Mark Entsminger documented/circulated derivation for quantity-based supply variability
PepsiCo implemented Project OneUp Release 4
- 19 years at PepsiCo/Tropicana 2009 PepsiCo reacquired PBG
2010 LSS inventory optimization for ingredients (chilled supply chain)
- APICS CPIM since 2003 2011 Presented at APICS International Conference: Essential Inventory Truths
2012 PepsiCo acquired 100% of ONE
Contact Info: 2013 APICS International Conference: Michigan State PHD Steven Melnyk presented on SC Resilience
2013 Implemented APICS/MS Supply Chain Resilience strategies for coconut water
1001 13th Avenue East 2014 PepsiCo NAB APICS Pilot
Bradenton, FL 34208 2015 Performed deep dive optimization and segmentation of Naked Juice business
941-742-3676 2015 Developed model to correlate % backorders/cuts and % expired as function of target inventory
tim.rowell@pepsico.com 2016
2016
Vetted model with academia and industry, including Terra Technology / E2open
PepsiCo Inventory Optimization organization alignment
linkedin.com/pub/tim-rowell/0/281/275 2016 Presented at APICS International Conference: Practical Application of SC Resilience Strategies
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Luke 10:27 #APICS2016
THANK YOU

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