SUPPLY CHAIN MANAGEMENT

FRITO LAYS
Mid Term Submission

Submitted by:
SNEHA KUJUR

Roll No. M (M)/10/1882

NATIONAL INSTITUE OF FASHION TECHNOLOGY,

CHENNAI

MASTER OF FASHION MANAGEMENT – II, FMS

DEPARTMENT
INTRODUCTION
The role of Supply Chain Management (SCM) is becoming more and more
important in today’s business world. From a purely operational approach
to SCM of the 1960s we have moved to a more integrated and strategic
approach. Hence, supply chain management is today considered as a
source of competence and innovation. In the modern business world,
companies are competing not only through their product range and
customer relations, but also through their supply chains.

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

fulfilling a customer request. Supply chains can differ in size, complexity
of relations between the members and distribution of physical presence.
In the following figure two different types of channel relations can be
seen: direct, where the SC consists of one supplier and one customer of an
organisation, and extended, where apart from the above, a supplier’s
supplier, a customer’s customer, etc. are included. In general, supply
chains are dynamic, and involve the flow of information, products and
funds between different stages, as shown in the following figure.

Direct Supply Chain

Organisatio
Supplier Customer
n

Extended Supply Chain

Supplier Supplie Organisati Custom Customer

’sSuppli ’sCustom
r on er
er er

Products

Information

Funds

Figure 1: Type of channel relations and flow across a supply chain

Supply chain management has the objective to have the right products
in the right quantities at the right time at minimal cost, a situation that
would guarantee optimal service levels for the customer and optimal
performance for the organizations as a whole and separately. So, SCM
involves the management of flows between and among members of the
supply chain in order to maximize total supply chain profitability, hence
maximize the total value generated throughout the SC.

ABOUT THE COMPANY

PepsiCo supply chain for manufacturing ‘Frito Lay’ potato chips are
through contract farming for potatoes in India. India is placed 3rd in the
list of major potato producing countries of the world. It produces around
25 million metric tons of potatoes that contribute to approximately 8 % of
the world’s total produce. This crop is grown in 1.5 million hectares of land
in India ranking 4th among the countries having maximum area cultivated
for potatoes.

Semi
Farm Consolidat Wholesale Retaile
Wholesal
er or r r
er

Figure 2: Supply Chain for Horticultural Produce in Traditional Channel in India

Overview of Potato Sector in India

Table 1: Potato Area and Production in India

STATE AREA PRODUCTION YIELD

('000 Ha) ('000 MT) (Tons/Ha)
UTTAR PRADESH 440 9822 22
WEST BENGAL 321 7107 22
BIHAR 318 5657 18
PUNJAB 73 1470 20
GUJARAT 43 978 23
MADHYA PRADESH 52 783 15
ASSAM 73 589 8
UTTARANCHAL 22 448 20
HARYANA 18 442 24
ORRISA 13 165 13
MAHARASTRA 17 163 9
HIMACHAL 14 152 11
PRADESH
MEGHALAYA 18 149 8
CHATISHGARH 13 130 10
JAMMU & KASHMIR 7 117 17
KARNATAKA 60 603 10
OTHERS 39 413 10

TOTAL 1542 29189 19

Source:www.nhb.gov.in

PepsiCo Potato Operations

Pepsi has three potato processing plants in India, located in Punjab (Sangrur),
West Bengal (Sankrail near Kolkata) and Ranjangaon near Pune in Maharashtra.
Potato sourced under contract farming accounts for roughly 55% to 58% of
PepsiCo’s total requirement. . Vendor is the person hired by the company
between farmers and company. Farmers can approach him directly in case of
any problem. He in turn communicates the issue to the company experts. The
vendor also ensures availability of seeds and other inputs at the farm level and is
involved in monitoring the crop along with the company agronomists.

1. Processing and Quality Requirements

Potatoes grown in India for traditional use have high sugar content and fewer
solids. Processing requires potatoes with low sugar content (0%) and high solids
(between 15 to 20%). This
section describes in detail steps taken to ensure quality at every stage in the
chain.

2. R&D Thrust Areas

The sugar content of potatoes is determined by the genotype and several pre-
and post-harvest
factors. Each genotype requires an ideal pre and post-harvest treatment to
maintain low sugar levels; any kind of stress results in sugar accumulations to
avoid browning of the finished product.

3. Farm Inputs
The company ensures availability of inputs to farmers working in the area. The
“vendor” in the region ensures that the farmers falling under his supervision
have all the required inputs at the right time.

4. Farm Production
For producing specific variety and for enhancing productivity PepsiCo is very
closely involved with its contract farmers for potato production. The company
has employed team of agricultural graduates, who work with the farmers to
provide technical input and to monitor the production with the farmers in their
specified area. One technical expert deals with approximately 100 farmers.

5. Harvesting and packaging

Care should be taken through the post harvest management process.
Traditionally, jute bags have been used for packaging potatoes. Instead of jute
bags, the company has propagated the use of plastic bags for packaging as it
ensures better storage.

6. Grading and Sorting

The potatoes are mechanically graded for size. Potatoes that are too small for
processing are separated. Also, there is visual inspection for damaged potatoes.
Test for sugar content is undertaken by frying a small sample from this lot.
Potatoes with high starch content will turn red on frying. Sample tests are also
undertaken for solid content. Potatoes that do not meet the requirements are
rejected.
7. Storage
Critical factors in successful storage include variety, methods of culture, harvest,
field curing, temperature and humidity control, storage and sprout inhibition.
Potatoes are stored at 12 degrees to control conversion of sugar to starch. At this
temperature potatoes can be stored up to 4 months. Further, potatoes are also
treated to limit sprouting.

8. Processing Center
Selected material is taken to the processing plant and is subjected to washing
and peeling. Peeled potatoes are subject to metal detection and inspection for
physical damages and discoloration. Following this, the potatoes are run through
rotating slicers, and are subjected to deep frying. The fried chips undergo optical
testing for color. At the last stage the chips are mixed with spices and packed.
SUPPLY CHAIN STRATEGY

Frito-Lay is the snack food division of Pepsico and the largest supplier of
potato and corn chips in the world, currently holding 60% of the market
share domestically, 40% globally, and selling its products in 120 countries.
Frito-Lay sells eight of the top 10 selling snack chips nation-wide, and as a
global player, Frito-Lay is succeeding against a multitude of competitors in
a fierce, yet slow-growth industry, selling approximately 4.5 billion
packages of snacks per year. In order to achieve this, the company has
learned how to masterfully create, innovate and manage all aspects of its
supply chain using high-tech IT systems that allow it greater control over
its production processes and distribution network.

Frito-Lay’s supplier network for potato chip production has fewer than 100
individual suppliers. Several years ago, Frito-Lay approached its potato
suppliers to seek those farmers willing to concentrate on cultivating a
limited number of potato varieties, with a focus on producing the most
appealing taste and quality potato chip for the consumer. Frito-Lay then
offered these farmers long-term contracts, which made it easier for the
farmers to get financing and for Frito-Lay to achieve more efficient,
profitable economies of scale in other areas of the value chain. It is
noteworthy to mention that steps like these that insure a stable supply of
raw material are important to a company who purchases 2.3 billion
pounds of potatoes and 775 million pounds of corn annually.

Furthermore, Frito-Lay tracks the logistical movement of products

throughout the supply chain, from acquiring the raw materials to final
delivery, by utilizing its 848 tractors, 2,251 trailers, and a fleet of
thousands of local computer-equipped delivery trucks. As this example
shows, Frito-Lay has gone to extensive lengths to incorporate information
technologies throughout its organization’s value chain, further
empowering its regional managers with access to vast amounts of
information on their databases that can be used to effectively guide them
in their distribution decisions.
 In the next step, Frito-Lay takes the raw materials of potatoes, corn,
and packaging materials to one of their 41 manufacturing plants in 26
states, including the world’s largest snack food plant in Frankfort, IN.
Together, these plants produce 30,000 packages of snacks per minute.
Because Frito-Lays operates at such economies of scale, their high volume
allows for the company to invest in the most efficient, low-cost equipment
available to the market, insuring that maximum value is added to the
product without relinquishing time or quality.

After this, Frito-Lay traditionally relied upon its in-house fleet of trucks
to transport products from its plants to its 1,900 warehouses or 200
distribution centres. However, as the company expanded, operations
managers realized that it was not economical to produce every product at
every plant, and thus began specializing at particular locations. On the
other hand, logistics became increasingly difficult and distances grew
longer, and thus, Frito-Lay learned to exploit the benefits of truck carrier
services, employing Menlo Logistics to handle route planning. Menlo was
able to reduce the carrier base by 50% and negotiate nation-wide
discounts with other carriers.

The last stop involved is the 400,000 stores across the nations that
carry Frito-Lay’s snack food products. The company utilizes their own
technological systems to show stores how reallocating shelf space, for
example, can produce larger profits. Retailers are also provided with Frito-
Lay’s “Profit-Vision Program”, which allows retailers to analyze their sales
and compare it to national performance statistics. At the same time, Frito-
Lay benefits from the program because it convinces retailers to allocate
more shelf-space to their products.

The supply chain execution process is the cornerstone of Frito-Lay’s

success. In managing its supply chain, Frito-Lay is able to correctly assess
demands across all of its products due to the availability of point-of-sale
data and an impeccable IT system, giving planners the ability to discern
consumer trends and appropriately prepare production plans.
Consequently, Frito-Lay’s managers can be proficient in determining
levels of inbound supplies, raw materials, the allocation of the company’s
production capacity, and logistical details for truck routing. The company’s
ability to target local demand patterns with effective promotion and
delivery systems results in continuously optimizing profit margins and
reducing inventory and unneeded costs.

In general, observations demonstrate that Frito-Lay strongly believes

that the value in their services for grocery stores and third-party
distribution centres stems from the company’s ability to utilize innovative
information technologies to efficiently and effectively deliver their
products to the appropriate markets with maximized demand and
minimized costs. First, the company tries to captivate its customers by
developing extensive databases that record who their customers are and
exactly what they want. Then, they focus on being the most reliable,
quality-driven suppliers who provide services through the retail channel by
means of collecting as much information along the way and utilizing it to
address their weaknesses and capitalize on their strengths. Frito-Lay,
despite only delivering potato and corn chips, relies on its ability to add
unparalleled value in its distribution channel. Its customers know that
when they do business with Frito-Lays, they aren’t simply buying a
product to shelve in their stores, but incorporating an advanced
information system with hopes of increasing sales and profits.

CONCLUSION
This study of the potato chip supply chain is a good example of how
international
quality requirements are met by small farmers. A very strong extension
network by the
company helps to monitor and maintain quality at every level. The
obvious advantage for the company is in getting an assured quantity and
quality for chip making to enable optimum capacity utilization of the plant.
Direct involvement with farmers enables good communication to ensure
availability of produce which meets the specific requirements for
processing and as well as quality norms for certification. In the absence of
a legal frame work, or even if there is a regulatory mechanism, trust
between both parties is important for success in contract farming.
REFERENCE
(www.hindubusinessline.com)

(www.rediff.com)

(www.economictimes.com)

(www.pepsiindia.co.in)