Coca Cola Supply Chain Case Study
There are two things Boeing and Airbus have in common, utilization of lean manufacturing systems and strategic sourcing concept. However, the overall implementation of strategic sourcing is a bit different between the two companies.
1.1 Boeing wants to encourage more flight frequency and direct route using a smaller capacity aircraft. Then they decide to outsource many things such as the design, testing and production of key components to key industrial partners and try to reduce the number of components that go to assembly. The ultimate goal is to finish the final production process within 3 days.
1.2 Airbus takes a bit different marketing approach. They want to utilize high capacity airplane to help airlines drive the operating cost down. They decide to selectively outsource the production of parts and keep the design and production of key components in-house.
2. Fashion Supply Chain
Supply Chain of fashion industry involves a time-based competition. Many customers have the unique product needs, but a competition is very fierce because of the low barriers to entry. Many new players try to offer specialized products to customers all the time. This section features the supply chain case studies of H&M, Benetton, Zara, Adidas, Louis Vuitton and Marks & Spencer (M&S).
2.1 H&M aims to be the price leader in the fashion market. In order to materialize its vision, H&M tries to eliminate the middlemen in various stages of the supply chain and consolidate the buying volumes. Product design is also the central part of its strategy. They don't try to follow the high fashion designs, but try to adopt the street trends which are easier to produce.
They don't invest in production facilities at all because they utilize a network of nearly 700 suppliers located in Asia and Europe. Also, they don't own any stores because they choose to rent the space. In order to control its supply chain, they use a central warehouse in Germany to receive and ship products to local distribution centers in different countries.
At the end of the day, they can bring products to market within 2-3 weeks.
2.2 Benetton, in contrast, chooses to have a full control of its production, but allow its licensees to operate the stores so they can focus on production and quality control. The reason is that they would like to create the worldwide brand awareness.
For fast moving products, they use the production facilities in Europe. Asian suppliers will perform the production of standardized products.
2.3 Zara is very famous for its time-based strategy. In order to launch a new product within 15 days, Zara uses a small lot production. A new product will be tested in pilot stores. If product sales good, a larger batch will be ordered. Otherwise, remaining products will be removed from the shelves and sold as mark-down in other stores. This creates the perception among consumers that Zara's products are unique and you have to take it while stock lasts.
Vertical integration contributes to the success of Zara, they own the majority of its production facilities and stores (this is the reason why Quick Response can be effectively implemented). Its automated distribution centers are strategically located in the center of populations so products are delivered to stores quickly.
Zara also works with Air France, KLM Cargo and Emirates Air in order that they can coordinate directly with the airlines to make the outbound shipments to its stores and bring back some raw materials and semi-finished materials with return legs.
2.4 Adidas copes with changing customers' demand by adopting Mass Customization strategy. The whole idea is to develop, market and deliver the product variety that most customers will find what they want.
The first step towards mass customization is to strategically offer the product choices. Too few variations will disappoint a customer, but too many variations will simply postpone a buying decision.
After that, Adidas asks the same key suppliers to produce custom components in order to achieve the economy of scale.
In order to compensate a long waiting time, Adidas uses air freight or courier service. The reason why they can do this is that customized products are sold directly to customers so they have the highest profit margin to compensate the higher transportation cost.
2.5 Louis Vuitton is one of the largest luxury brands in the world. In the past, they supplied products to department stores. In order to create the best buying experience and control counterfeiting products, they establish their own stores in high-end shopping malls. Having own stores means they can have a better understanding of buyer behavior so they can adapt most rapidly.
2.6 Marks & Spencer (M&S) is one of the biggest fashion retailers in the UK. Other than fashion items, they also sell and home products.
The primary focus of M&S is always a cost reduction. For example, they ask each supplier to develop samples for all ranges of fashion items so they can decide which items they will order from whom. The delay in the development of samples, testing, sample approval and final decision making causes a very long time-to-market. As a result, they're able to respond to the rapid change in the fashion industry. However, they change some of the sourcing process as below,
- Close its production facilities in the UK and use suppliers in Asia or Eastern Europe
- Instead of asking suppliers to produce the items exclusively for them, now they allow suppliers to produce items for other retailers too. Then, suppliers don't have to provide a dedicated production facility which results in no investment cost. Using common raw materials also helps to reduce cost drastically
- Assess the capability of each supplier and reduce the number of suppliers
- Ask low-cost producers to make standard items and ask capable suppliers to make innovative products
- Reduce the number of SKUs and pay much attention to 500 best-selling items
Supply chain strategy of the fashion retailing industry is summarized as below,
3. FMCG Supply Chain
FMCG industry is typically the products sold to customers at a low cost and will be completely consumed within 1 year. The nature of this industry is a shorter product life cycle, low-profit margin, high competition and demand fluctuation. This section will present the case studies of P&G, Unilever, Coca-Cola and L'Oreal respectively.
3.1 P&G: forecasting and new product introduction have always been the issues for many FMCG companies, P&G is no exception. To cope with this, P&G conducts a merchandise testing at the pilot stores to determine the customer's response to a new product before the launch. The result is that the forecast accuracy is improved because a demand planner has an additional source data to make a better decision. Moreover, products can be shipped to stores in-time, then lost sales are minimal.
3.2 Unilever also feels that the competition in FMCG industry has significantly increased. They have to launch the new products on a regular basis, but the forecasting of the new product is difficult. So they create a better classification of new products (base, relaunch, repack, new) using a regression model to identify potential forecast errors for each type of new product.
3.3 Coca-Cola doesn't really have many stock keeping units when compared with other companies in the same industry. However, products go to over 2.4 million delivery points through over 430 distribution centers. Managing transportation at this scale is the absolute challenge.
In order to streamline the delivery, Coca-Cola implemented a vehicle routing software. The reason is that is the software vendor has a very good relationship with Coca-Cola's legacy ERP software vendor. Moreover, the vendor has a solid connection with the university who can help to develop the algorithm that fits in with the business' needs. The result is that transportation planners at each distribution center can use the new tool to reduce traveling time/distance on a daily basis.
To expand its global footprint, Coca-Cola creates a global supply chain through a franchising model. They only produce key raw materials such as beverage bases and syrups. Then these raw materials will be sold to 300 bottling partners throughout the world. Then, in each the final products by adding water, sweeteners and carbonate. Then finished products will be sold via the retailing partners. From its inception as a local company in Atlanta, Coca-Cola has now become one of the biggest multinational companies in the world, thanks to the franchising model.
3.4 L'Oreal is one of the world's best cosmetics brand with 41 factories across the countries. To speed up the revenue growth in major markets, they acquire other brands as below,
- Maybelline New York for expansion in the US
- Yue-Sai for expansion in Asia
- for expansion in China
They also establish the R&D facilities in Chicago and Shanghai so they can understand and develop products that customers love.
4. Automotive Supply Chain
Lean manufacturing concept has been implemented widely in the automotive industry so the case studies about lean manufacturing are very readily available. Due to the increasing competition in the automobile industry, car manufacturers have to launch a new model to the market more frequently. This section will show you how BMW manages a long-term planning, how Ford applies the lean concept to the new product development, how Hyundai manages the production planning/control and how Volkswagen Group uses modular design to cut cost.
4.1 BMW uses a 12-year planning horizon and divides it into an annual period. After that, they will make an annual sales forecast for the whole planning horizon. After the demand is obtained, they divide sales into 8 markets and then select the appropriate production sites for each market, considering overall capacity constraints and total cost. As you may notice, this kind of long-range planning has to be done strategically.
4.2 calls its product development system as "work streams" which include the body development, engine development, prototyping and launch process. The cross-functional team are the experts and their roles are to identify key processes, people, the technology necessary for the development of new prototypes.
Each work stream team is responsible to develop a timeline of each process. Detailed plan is usually presented on A3 sized paper. They clearly identify current issues they are faced with supporting data, drawings and pictures. On a weekly basis, they organize a big group meeting of all work stream team to discuss the coordination issues.
4.3 Hyundai deploys a centralized planning system covering both production and sales activities across the facilities and functional areas. They develop a 6-month master production plan and a weekly and a daily production schedule for each month in advance. During a short-term planning (less than one month), they pay much attention to the coordination between purchasing, production and sales. Providing a long-term planning data its stabilize the production of its parts makers a lot.
4.4 Volkswagen Group has the goal to offer safe but attractive cars consists of a broad range of product categories such as,
- Sporty cars such as Audi and Lamborghini
- Value cars such as Volkswagen, Skoda Auto, Bentley and Bugatti
However, each brand designs and operates independently. In order to reduce overall costs, Volkswagen outsources many components from suppliers in India. Later, they adopt the "modular" concept such as,
- Transverse component of small cars
- Longitudinal component of medium-sized cars
- Rear component for rear-engine city cars
This enables them to drive the economy of scale much better.
5. Electronics Supply Chain
The life cycle of technology products is getting shorter and shorter every day. Unlike FMCG, the launch of a new product in the hi-tech industry requires the investment in research and development quite extensively. Then, a poor planning will result in a massive loss. This section will cover JIT and outsourcing by Apple Inc, Supply Chain Risk Management by Cisco System, Technology Roadmap by Intel, Supply Chain Network Model by HP, Mass Customization by Dell, Quality Management by Sam Sung and global supply chain strategy at Whirlpool Corporation and Haier.
5.1 Apple Inc: Steve Jobs invited the Tim Cook to help to improve Apple's Supply Chain in 1998. Jobs told Cook that he visited many manufacturing companies in Japan and he would like Cook to implement the JIT system for Apple. Jobs believed that Apple's supply chain was too complex then both of them reduced the number of product availability and created 4 products segment, reduced on-hand inventory and moved the assembling activities to Asia so they could focus on developing the breathtaking products that people wanted to buy.
5.2 Cisco Systems would like to be the brand of customer choice so they implement a very comprehensive supply chain risk management program by applying basic risk mitigation strategies, establishing appropriate metrics, monitoring potential supply chain disruptions on 24/7 basis and activate an incident management team when the level of disruption is significant.
5.3 Intel's new product development is done by the process called Technology Roadmap. Basically, it's the shared expectations among Intel, its customers and suppliers for the future product lineup.
The first step to prepare the roadmap is to identify the expectations among semiconductor companies and suppliers. Then they identify key technological requirements needed to fulfill the expectations. The final step is to propose the plan to a final meeting to discuss the feasibility of the project. Some concerning parties such as downstream firms may try to alter some aspects of the roadmap. Technology Roadmap allows Intel to share its vision to its ecosystem and to utilize new technology from its suppliers.
5.4 HP's case study is pretty unique. They face a basic question, where to produce, localize and distribute products. Its simple supply chain network model is presented below,
For this example, only 3 possible locations result in 5 different ways to design the supply chain. In reality, HP has more production facilities than the example above. So there are so many scenarios to work with. How should HP decide which kind of supply chain network configuration they should take to reduce costs and increase service to customers? The answer is that they use the multi-echelon inventory model to solve the problem.
5.5 Dell is one of the classic supply chain case studies of all time. Many industries try to imitate Dell's success. The key ingredients of Dell's supply chain are the partnership with suppliers, part modularity, vendor managed inventory program, demand management and mass customization. Also, you can find the simplified process map of Dell's order-to-cash process as below,
5.6 Sam Sung has proven to be the force to be reckoned with in the hi-tech industry. The secret behind its supply chain success is the use of the Six Sigma approach. They studied how General Electric (GE), DuPont and Honeywell implemented six sigma. After that, they have created their own implementation methodology called DMAEV (define, measure, analyze, enable, verify). They use the global level KPI to ensure that each player in the same supply chain is measured the same way. Also, they utilize the SCOR Model as the standard process. Any process changes will be reflected through an advance planning system (APS).
5.7 Whirlpool Corporation foresees that appliances such as washing machine are the standardized products. So it's essential to enter the global market so production process can be standardized and economy of scale can be achieved. In order to implement this strategy, Whirlpool acquires a majority share in an Indian company and create 4 joint ventures in China. This kind of investment enables Whirlpools to understand the local buying behaviors through the experiences of local JV partners more rapidly. Moreover, they don't have to build a brand new supply chain everywhere they go because they can utilize the existing infrastructure that JV partners already have.
5.8 Haier is one of the world leading appliance manufacturers from China. Due to the level of competition in the home market, they believe they have to expand to a foreign market to increase the revenue. Their “Go Global” strategy is to focus on the most difficult market, namely, the United States, Europe or Japan. The reasons are that
- They want to force to learn more about technology in more sophisticated markets
- People who used to live in the developing countries will recognize Haier's brand. When they move back home, they will spread the words in the local market
6. General Chain
The last industry covered here is the general merchandise retailing industry. The critical success factor of this industry is to understand the drivers of consumer demand. Four case studies will be presented, namely, 7-11, Tesco, Walmart, Amazon, Zappos, Carrefour and Ikea.
6.1 7/11 is another popular case study in supply chain management. The integration of information technology between stores and its distribution centers play the important role. Since the size of 7/11 store is pretty small, it's crucial that a store manager knows what kind of products should be displayed on shelves to maximize the revenue. This is achieved through the monitoring of sales data every morning. Sales data the company to create the right product mix and the new products on a regular basis.
7/11 also uses something called combined delivery system aka cross-docking. The products are categorized by the temperature (frozen, chilled, room temperature and warm foods). Each truck route to multiple stores during the off-peak time to avoid the traffic congestion and reduce the problems with loading/unloading stores.
6.2 Tesco is one of the prominent retail stores in Europe. Since the UK is relatively small when compared with the United States, centralized control of distribution operations and warehouse makes it easier to manage. They use the bigger trucks (with special compartments for multi-temperature products) and make a less frequent delivery to reduce transportation cost. Definitely, they use a computerized system and electronic data interchange to connect the stores and the central processing system.
6.3 Wal-Mart's "Everyday Low Prices" is the strategy mentioned in many textbooks. The idea is to try not to make the promotions that make the demand plunges and surges aka effect.
Wal-Mart has less than 100 distribution centers in total and each one serves a particular market. To make a decision about the new DC location, Walmart uses 2 main factors, namely, the demand in the proposed DC area and the outbound logistics cost from DC to stores. Cost of inbound logistics is not taken into account.
There are 3 types of the replenishment process in Wal-Mart supply chain network as below,
Wal-Mart has one of the largest private fleets in the United States. The delivery is made 50% common carriers and 50% the private fleet. Private fleet is used to perform the backhauls (picks up cargoes from vendors to replenish DCs + sends returned products to vendors). - (less than one working day drive) is also done by the private fleet. For long-hauls, the common carriers will be used.
There are 2 main information systems deployed by Wal-Mart. "Retail Link" is the communication system developed in-house to store data, share data and help with the shipment routing assignments.
Another system is called "Inforem" for the automation of a replenishment process. was originally developed by IBM and has been modified extensively by Wal-Mart. uses various factors such as POS data, current stock level and so on to suggest the order quantity many times a week.
Level of collaboration between Wal-Mart and vendors different from one vendor to the other. Some vendors can participate in the VMI program but the level of information sharing is also different. VMI program at Wal-Mart is not 100% on a consignment basis.
6.4 Amazon has a very grand business strategy to "offer customers low prices, convenience, and a wide selection of merchandise". Due to the lack of actual storefront, the locations of warehouse facilities are strategically important to the company. Amazon makes a facility location decision based on the distance to demand areas and tax implications.
With 170 million items of physical products in the virtual stores, the back end of order processing and fulfillment is a bit complicated. Anyway, a simplified version of the order-to-cash process is illustrated as below,
Upon receipt of the orders, Amazon assigns the orders to an appropriate DC with the lowest outbound logistics cost.
In the Amazon's warehouse, there are 5 types of storage areas. Library Prime Storage is the area dedicated to book/magazine. Case Flow Prime Storage is for the products with a broken case and high demand. Pallet Prime Storage is for the products with a full case and high demand. Random Storage is for the smaller items with a moderate demand and Reserve Storage will be used for the low demand/irregular shaped products.
Amazon uses the propitiatory warehouse management system to make the decision and order picking decision.
After the orders are picked and packed, Amazon ships the orders using common carriers so they can obtain the economy of scale. Orders will arrive at UPS facility near a delivery point and UPS will perform the last mile delivery to customers.
known to use Sales and Operations Planning (S&OP) to handle the sales forecast. Anyway, this must be an S&OP process at product family/category level.
6.5 Zappos: to compete with other online retailers, Zappos pays much attention to the way they provide the services to customers. Instead of focusing on the call center productivity, Zappos encourages its staff to spend time on the phone with customers as long as they can so they can fully understand the customer's requirements. They also upgrade the delivery from 3 days to 1 day delivery in order to exceed customer expectation.
6.6 Carrefour sees the expansion opportunities in China then they establish the first hypermarket in Beijing. The most interesting point about Carrefour is the location strategy. Instead of using mathematical models, they use a simple process as below,
- Pick the location at the intersection (Carrefour in French means crossroad) so they can ensure that they can get high traffic area
- Choose the location within 8-kilometer radius from the major bus ride
- Ask the independent investigators to collect data about purchasing potential and buying behavior of local people at potential store locations
6.7 Ikea also have their own stores for different reasons. Their unique selling points are products with good design at lower prices. To drive cost down, Ikea shifts some of their activities to customers or self-service operating model. For example, they make it easier for customers to locate products during the shopping, pick the products, checkout, bringing products back home and install the furniture. This helps Ikea to reduce operating cost a lot.
Recommended Article: What is Logistics and Supply Chain Management?
Although The Coca-Cola Company’s drink offerings grew from sparkling to sports drinks, waters, juices and more, the choices in its fountains were limited. With the need to offer a greater number of beverage choices from a fountain dispenser, Coca-Cola was challenged to reinvent the fountain business.
Engineers and scientists at Coca-Cola realized that micro-dosing technology (typically used to measure precise amounts of medication) might be able to dispense “recipes” of different beverages to increase the amount of choices in a single machine. Thus, Coca-Cola Freestyle was born.
“Coca-Cola Freestyle changes the fountain model from eight choices in a standard fountain to more than 100,” explains Richard Gross, Group director of Enterprise Business Solutions, Product Supply Systems, Coca-Cola Refreshments. “Coca-Cola Freestyle also provides valuable data collection to customers. On a daily basis, each dispenser can gather data related to machine performance, micro-dose cartridge usage and beverage consumption.”
While the technology for the dispensing machine is unique and ground-breaking, what is revealing is how the data is now being leveraged, particularly for rapid replenishment. Coca-Cola Freestyle fountains are connected to the Coca-Cola network and are constantly reporting sales data – by brand, location, and day part.
In the era of Big Data, the machine is also providing game-changing insights. “By innovatively using the data in our SAP Supply Network Collaboration (SNC) module we can react for the first time in a pure demand driven Supply Chain ecosystem to keep the brand cartridges in stock,” adds Gross.
In order to ensure replenishment occurs reliably and efficiently, The Coca-Cola Freestyle Replenishment System captures detailed data on every pour, plus data on the remaining quantities in each of the cartridges. Consumption data for each machine is received into SAP’s enhanced SNC module where it is consolidated by outlet and combined with past historical consumption history, future forecasted demand, and any promotional uplift forecasts for the specific time period to calculate a replenishment order.
The system also determines and plans shipments to outlets for full micro-dose cartridge case quantities, so in the event a full case cannot be built, the SNC module will forecast future demand and fill the case.
The enhanced SNC technology completes the Supply Chain ecosystem for Coca-Cola Freestyle. By dispenser, consumption data by micro-dosed component is automatically received and then utilized to drive automated order replenishment as well as production planning and scheduling of materials and logistics.
Beyond Basic Visibility
Coca-Cola Refreshments is working to complete a connected supply chain ecosystem for Coca-Cola Freestyle through automated rapid replenishment of the dispensers. By processing the data received each night, the company can calculate and create replenishment orders for any machine that requires it, then automatically process the orders and send them to the distribution center for shipping to the outlets.
“This ‘ideal’ Supply Chain ecosystem creates a win for our consumers, our customers and our company... This system will also help to facilitate the continued roll-out of Coca-Cola Freestyle in the years to come,” concludes Gross.
In 2009, the first Coca-Cola Freestyle dispensers were introduced providing more than 100 brands from a single machine.
Company at a Glance
The Coca-Cola Company markets and sells the drink concentrate to bottlers throughout the world and to Coca-Cola Refreshments. Coca-Cola Refreshments is the largest bottler in the world. In October 2010, The Coca-Cola Company purchased Coca-Cola Enterprises and formed Coca-Cola Refreshments.
Currently, there are more than 9,000 Coca-Cola Freestyle dispensers in use across the United States, with tests being conducted in Canada, Great Britain and Japan.
Words of Wisdom
“For innovation to succeed it takes vision to challenge an organization to do great things. It takes strong leadership to drive and support the innovation design and development process, and it takes a talented team of individuals that can execute and bring to the innovation to life.”
— Richard Gross, Group Director Product Supply Systems Process & Solutions, Coca-Cola Refreshments