Consumer Packaged Goods

Case Analysis: Frito-Lay

Frito-Lay, a subsidiary of PepsiCo, is the largest snack-food maker in the world. The company owns some of the best-known, bestselling snack-food brands in the world, including Cheetos, Cracker Jack, Doritos, Fritos, Lay’s, Munchos, Rold Gold, Ruffles, and Tostitos. Frito Lay holds a 60% share of the U.S salt-snack foods market and a 40% share of the global market, and sells products in more than 120 countries. A global player, Frito-Lay succeeds in the face of literally hundreds of competitors (other major national brands, specialty, niche players in specific geographic areas) in its markets. The company has learned how to masterfully create and manage all manner of variations in its products, sizing, and packaging, not to mention scores of languages.

Strategy

At the strategy level, Frito-Lay’s fundamental issues revolve around what it is going to do to maintain and build its already successful global business. Obviously, it already has several different brands of snack foods, but it will constantly be considering if it should add more. Should the company develop new varieties say, new flavors of its old standbys, such as Fritos or Doritos? Should it retire marginally performing brands to make room for introducing new ones? Are there any brands that would add strategically to the existing portfolio if they were to be acquired? Frito-Lay will consider many more factors. It will ask sales managers to indicate what markets the company should pay particular attention to, either because they are performing very well or because they are not performing as well as expected. It will assess whether any of the brands are particularly strong in regional U.S. markets, say the South or Midwest and strive to learn why. It will seek to use that knowledge to increase sales in other regions and other markets around the world. It will constantly ask brand managers if there are movies, sports, or music tie-ins that would boost sales, particularly in hard-to-dominate markets.

Supply Chain Execution

In managing its supply chain, Frito-Lay must be able to correctly assess demand across all of its products. Point-of-sale data must be readily available to planners, so they can discern selling trends and can plan production accordingly. The company must take full advantage of bulk purchasing but without building up excess inventories of ingredients or finished products. Manufacturing and distribution networks must work together to correctly match fulfillment with demand. Spoilage must be factored into replenishment cycles, as must be the cost implications of making a product in one factory and shipping it from that one location, compared with producing in another factory and shipping from there. There are other questions to resolve and continually to monitor. When is direct store delivery meaningful, as opposed to shipping to warehouses? How are resource contentions dealt with in factories, in trucks, in suppliers’ capabilities? Are Frito-Lay’s cash-to-cash cycles for each product fully compressed, ensuring that the company is achieving the highest degree of working capital efficiency possible? Are orders of Cheetos, Doritos, and so forth, properly consolidated into delivery trucks to ensure the lowest cost in transportation? Answering the above questions is a daily ritual and a differentiating religion at Frito-Lay.

Domain Processes & Decision Structures

This layer simply asks two questions. First, Are we easy to do business with internally? Second, Are we easy to do business with externally? From purchase requisition to shipments, from invoices to receipts and returns, from store assortments to electronic fund transfers, from adjustments to exchange, from brand promotion to managing the retail theater, from budget revisions to product launches, innumerable processes occur in the transformation of a spud to a crispy dinner bud. For Frito-Lay, perhaps the two most important business drivers are customer loyalty and ensuring the right mix of products to maximize the customer share of wallet in the snack-food category. From the customers’ perspective, Frito-Lay must ensure that it has timely business processes that monitor and report in near real-time any changes in customer buying patterns and preferences, and link these changes directly to the supply chain for adjustments. This means that core processes must be fully integrated upward and downward to pass along and act upon vital business information without bottlenecks or disruptions. Key event and alert notification systems must be integrated into day-to-day management activities to signal changes in the business environment. Good domain processes must support orchestrated responses from all affected organizational functions faster than the competition. So ask of your own organization: Who are the people who touch the product, either physically or through accessing information about it, or both? What are the underlying steps in each transaction? Are they all smoothly aligned? Are they handled with a minimum number of touches? Are they conducted without delay and informational distance from the customer and from the constituents within the company itself?

IT Infrastructure

To support the complex real-time and near real-time information needs of the organization, management for Frito-Lay’s IT infrastructure must constantly monitor and evaluate how well its IT systems are supporting Frito-Lay’s ecosystem. Critical choices must be made and revisited around hardware platforms, software applications, network topologies, and industry standards. In short, every aspect associated with modern IT must be aligned with the unique business needs of the global Frito-Lay organization. Frito-Lay’s need to capture and process huge amounts of market, sales, and production data places particular importance on decisions around considerations such as database structures, security, and scalability. It is also critical that the company be able to interoperate not only across its own far-flung operations, but with those of its suppliers and distributors. Its supplier network encompasses potato farmers, corn suppliers, seasonings manufacturers, packaging material providers, transporters that include rail, trucking, and air freight, and third-party logistics to move in and out of forty-five plants. In this ecosystem, everyone should be connected. Upper management has to constantly address and facilitate the movement of information, so that data flows to whoever needs it, where and when they need it. Meeting these challenges is the very essence of the IT infrastructure. To effectively compete in its global markets, Frito-Lay must decide what to promote in each market, how to plan and achieve its growth objectives, and how to reenergize or kill products that are not meeting expectations. The company must also be meticulous in managing supply issues, such as freshness and inventory levels. Frito-Lay operates in a high-volume, low-price sector; it is a complex distribution business with inventory and stock management issues that durable products companies don’t face not the least of which is shelf life. And while buyers manifest some degree of preference, the marketplace is characterized by low customer loyalty: if a bag of chips from one brand is not on the shelf, consumers will buy the next most similar item.

Recognizing the facts of life of competing in the snack-food business, Frito-Lay pays close attention to its constantly changing business landscape. Consider the questions that stare the company in its face every day:

How do we sense changes in buyer demand?
What are the geographies where we are losing market share to our competitors?
How can we get new products to market quickly?
How can we replenish depleted stock in a timely manner without overstocking?
How do we monitor and rapidly respond to competitors’ moves in the market at a local level?

Not unexpectedly, Frito-Lay has organized some of the world’s most sophisticated information systems, and has incorporated data-gathering processes and advanced technologies into its daily practices. Literally, the company knows the location of every package of product that leaves its manufacturing facilities and when that package is sold. Route salespersons and managers continuously gather information with handheld wireless devices on competitive product prices, aging, shelf-space allotments, and promotions and tie-ins. This information is fed continuously into real-time decision-support systems to authorize on-the-spot price and stocking changes as well as to update production schedules and supply chain activities. Local, regional, and national trends in customer buying behaviors are closely monitored and factored into these business decisions. Frito-Lay is an outstanding example of a company providing very simple products snack foods in a highly sophisticated manner, driving returns that are well above average and sustaining its dominant position in the market. The role of Frito-Lay’s information systems in its business success cannot be overstated. In many ways, Frito-Lay is its information system. Its products are secondary, for the company moves information first and products later.