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Pepsi's Next Generation of Purchasing

A data warehouse helps the beverage company improve commodity management, purchasing compliance, and customer service.
Ian Springsteel, CFO Magazine
December 1, 1997

Category Winner
Vendor Processing
When Pepsi-Cola North America started to re- design vendor processing five years ago, controller and vice president Peter Bridgman figured the toughest part would be designing and implementing the new system. Sure enough, Richard Maddi, group manager, supplier services, and his process redesign team put in many long days between 1992 and 1995 to achieve success. That heavy lifting not only created a world-class automated purchasing system, it also earned Pepsi-Cola a REACH Award in 1995 for purchasing redesign.

But the sequel to the redesign hasn't exactly been a day at the beach. For the past two years, Bridgman has pressed the redesign team and his national purchasing group to follow through on the promises of the new system-- namely, by using the new system's purchasing data warehouse to identify significant cost savings.

"Creating a data warehouse was in the plan from the start, because that is where the big cost reductions would come from eventually," says Bridgman. "But we had to keep pushing hard to make [those reductions] happen."

Keep pushing they did, and as a result Pepsi- Cola's data warehouse has been responsible for dramatic improvements in commodity management, purchasing compliance, and customer service-- producing three-year savings in excess of $100 million, reckons Bridgman. For those results, Pepsi-Cola won its second REACH Award, in the vendor processing category.

FIRST, CENTRALIZE
Pepsi's data warehousing initiative is best appreciated in context. Previously, Pepsi had taken a decentralized approach to procurement. Some 300,000 suppliers, most selected by location managers, were inundating the company with 1.5 million invoices a year. In turn, those invoices were handled by more than 200 full-time-equivalent employees, who managed purchases, matched invoices to POs, and issued checks on 26 different systems around the country. The labor-intensive process left little room for gathering, let alone analyzing, national purchasing data.

The solution to the paper chase was twofold. First, Pepsi began phasing out local agreements in lieu of national contracts. Today, 90 percent of its purchases are made through fewer than 1,000 suppliers. Second, it centralized and streamlined the purchasing process with its automated purchasing system (APS) and procurement card program.

To use the system, a purchaser calls up an online catalog, which is regularly updated. The purchaser points and clicks through a series of menus to find what he needs, 95 percent of which is now offered through the catalog. (Procurement cards are used for items costing less than $1,000 that are not offered in the catalog.) To buy an item, the purchaser clicks on it; the item is then automatically entered on a pro forma purchase order.

The purchase order is automatically connected to the prenegotiated contract for the item, which fills in the price, the contract number, and other data. The purchaser completes the order and sends it; an electronic or paper requisition is automatically sent to the vendor. When the item is received, the purchaser or an authorized receiving agent confirms receipt of the order online, prompting an automatic payment to the vendor 30 days later. The system automatically records the item on the purchaser's general ledger, fully coded for external reporting and tax purposes.

Today, fewer employees are needed to work the process. Transactions now take an estimated 15 minutes to complete; those with errors have declined from 10 percent to less than 1 percent. The number of invoices received annually has been chopped in half, to 800,000, and the process cost per invoice has fallen by more than 60 percent.

A COMPREHENSIVE VIEW
What to do with all that captured information? That's where the data warehouse comes in. The warehouse, comprising four Sybase Inc. relational databases on one server, gives users a comprehensive view of Pepsi's vendor processing. It currently holds two years' worth of data from four systems: the APS, a McCormack & Dodge Corp. accounts payable system, the procurement card system, and a travel-and-entertainment expense card management system. The data, which is accessed from PCs via a user-friendly interface, is updated nightly.

Pepsi's national supplier development group--a band of about 20 operations employees at the company's Somers, New York, headquarters--uses the warehouse to identify supplies and materials that would be cheaper if provided through a national or superregional contract.

"We've found the biggest savings in the peripheral items--office supplies, lubricants, uniforms, tires, you name it--that used to be purchased regionally or locally by picking up the Yellow Pages," says Bridgman. "Using the data warehouse, we've been able to identify important items, find national suppliers for them, and leverage those relationships to reduce costs."

Even greater economies from the warehouse have been generated by compliance reports on more than 50 national contracts in such purchasing categories as transport parts, marketing equipment (coolers and such), administration, and production. Thanks to the warehouse, Pepsi can monitor purchasing compliance at the user level, an ability that has boosted price and product compliance well over 90 percent. The warehouse also helps ensure 100 percent sales tax compliance, says Bridgman. All told, since going online in 1995, the warehouse has helped generate procurement savings in excess of $100 million.


"Now that we've got APS and the data warehouse, procurement has been so much simpler, so much cleaner," says Judy Priolo, Pepsi's director of other goods and services, supplier development. "We have concrete data points we can share with suppliers."

But Bridgman isn't content with the success of the new system, as no change-master should be. "We never let Rich [Maddi] say he's finished," he jokes. PepsiCo's other division, Frito Lay, will explore system synergies with Pepsi-Cola; the two already have joint procurement programs, says Priolo.

And within Pepsi-Cola, Bridgman intends to extend the vendor processing system into the inventory management area. "Eventually, we want to look to a more complete supply-chain management and vendor-managed inventory, with vendors sending us goods against forecasted needs," he says. "We also want to create a completely paperless travel-and-entertainment expense system to apply the same national vendor leverage for cost reductions in that area.

"There are always more opportunities."

For a snapshot on the best practices and key metrics data for vendor processing click here.

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