Pepsiamericas: Building an Information Savvy Company

MIT Sloan School of Management

MIT Sloan School Working Paper 4934-11

PepsiAmericas: Building an Information Savvy Company

Cynthia M. Beath and Jeanne W. Ross

This paper also can be downloaded without charge from the Social Science Research Network Electronic Paper Collection: http://ssrn.com/abstract=1979792

Electronic copy available at: http://ssrn.com/abstract=1979792

CENTER FOR Massachusetts INFORMATION Institute of SYSTEMS Technology RESEARCH

Sloan School Cambridge of Management Massachusetts

PepsiAmericas: Building an Information Savvy Company

Cynthia M. Beath and Jeanne W. Ross

February 2010

CISR WP No. 378

© 2010 Massachusetts Institute of Technology. All rights reserved. Research Article: a completed research article drawing on one or more CISR research projects that presents management frameworks, findings and recommendations. Research Summary: a summary of a research project with preliminary findings. Research Briefings: a collection of short executive summaries of key findings from research projects. Case Study: an in-depth description of a firm’s approach to an IT management issue (intended for MBA and executive education). Technical Research Report: a traditional academically rigorous research paper with detailed methodology, analysis, findings and references.

CISR Working Paper No. 378

Title: PepsiAmericas: Building an Information Savvy Company Authors: Cynthia M. Beath and Jeanne W. Ross Date: February 2010 Abstract: In 2009 PepsiAmericas was learning how to leverage an information backbone designed to provide information to the firm’s decision makers at all levels of the organization. The firm had built this information backbone—and the business capability to use it effectively— over an 8-year period beginning in 2001. This case describes how business and IT leaders worked together to create an information savvy organization. It describes the stream of IT investments, organizational changes, and metrics that helped PepsiAmericas evolve from a regional business that shipped truckloads of Pepsi and Mountain Dew to an enterprise that delivered hundreds of SKUs as needed to powerful national retailers. PepsiAmericas’ IT-enabled capabilities helped the firm respond to drastic market changes and enhance business competitiveness. The question PepsiAmericas management faced going forward was how to leverage its information-based business capabilities in a global market. 17 Pages

Massachusetts Institute of Technology Sloan School of Management

Center for Information Systems Research

PepsiAmericas: Building an Information Savvy Company

In 2009, PepsiAmericas (PAS), the world’s sec- The systems and technology changes were ac- ond largest manufacturer, seller, and distributor companied by major process changes: of Pepsi beverages, faced the pressures of a If you want to be around—and we want global economic downturn. The recession, how- to—you have to learn how to adapt and ever, was a less potent threat than two important change... We’re going through the adap- long-term challenges: (1) a declining U.S. mar- tation stage right now in a very, very big ket for carbonated soft drinks; and (2) increas- way… We basically have to reengineer ingly powerful retail customers. our systems from a go to market per- Recognizing these challenges, PepsiAmericas’ spective, from plants, to how we ware- management team was transforming the bus- house, to how we produce, to how we iness to address these challenges. In 2001, sell, to how we deliver. —Ken Keiser PepsiAmericas’ business results had depended PepsiAmericas was learning how to use technology on the individual efforts of the firm’s truck not only to automate processes but also to inform drivers. By 2009, PepsiAmericas relied on strong decision making. The company began building central oversight of the price-volume dynamic technology and data management capabilities— and nation-wide retailer relationships. To make and learning how to apply them—in 2001: this shift, PepsiAmericas had converted from a relatively low-tech firm to one that was highly We’ve been doing change for nine years. dependent on information and technology: It’s been constant change. —Ken Johnsen SVP and CIO Ten years ago, if our IT systems blew up, we could still run our business with The journey had not been easy, but the results manual backup processes. Today, we were noteworthy. can’t. All of these processes are so integrated that, literally, we could not oper- Company Background ate without them. —Ken Keiser The soft-drink bottling industry experienced sig- President and COO nificant consolidation starting in the seventies and stretching to the early 21st century. The

This case study was prepared by Cynthia M. Beath of the University of Texas, Austin and Jeanne W. Ross of the MIT Sloan Center for Information Systems Research. This case was written for the purposes of class discussion, rather than to illustrate either effective or ineffective handling of a managerial situation. The authors would like to acknowledge and thank the executives at PepsiAmericas for their participation in the case study. © 2010 MIT Sloan Center for Information Systems Research. All rights reserved to the authors.

number of franchises declined from a high of PepsiAmericas’ global operations were the re- around 400 to fewer than 100 in 2009. Re- sponsibility of President and Chief Operating flecting this consolidation trend, in 2000, Officer Ken Keiser. The heads of worldwide PepsiAmericas, which itself had been created in supply chain, information technology, human mergers of existing Pepsi Cola bottlers, merged resources, international operations, and U.S. with the Whitman Corporation, which owned a operations all reported to Keiser. Keiser, in turn, bottler serving 10 states in the USA and four reported to Chairman of the Board and Chief countries in Central Europe. The new combined Executive Officer Robert Pohlad, as did EVP entity served 17 states in the USA, four coun- and CFO Alexander Ware. (See Figure 2 for a tries in Central Europe, and several countries in partial organization chart.) the Caribbean. Addressing a Changing Market As of 2009, PepsiCo had a 44% ownership share of PepsiAmericas. As most soft drink manu- When PepsiAmericas was formed, the firm facturers do for their bottlers, PepsiCo created served its customers through conventional route new products, managed the brands, and developed sales. In this model, truck drivers were salesper- national marketing campaigns. PepsiAmericas sons who estimated each day’s requirements and managed manufacturing, logistics, and retailer loaded product at a distribution center. The relationships.1 driver/salesperson then called on customers, writing and filling orders and stocking shelves By 2009, PepsiAmericas operated in 19 U.S. with the products from the truck. Conventional (mostly Midwestern) states (69% of sales), route sales had long met the needs of the soft Central and Eastern Europe (26% of sales), and drink industry: the Caribbean (5%). (Figure 1 provides details on operations.) With 2008 net sales of almost $5 Our industry was built on big mega billion, PepsiAmericas accounted for nearly brands. Pepsi and Mountain Dew were 20% of PepsiCo's total US beverage sales.2 90% of the business. Marketing and ad- Despite economic and competitive challenges, vertising were very basic. Network TV was the major medium, reaching 90% of house- PepsiAmericas’ revenues grew 10% while oper- holds, so it was effective in getting prod- ating income grew 9%. uct and promotion news to the consumer. Bottling industry competition was based on The can package made up 70% of the brand awareness, pricing and promotions, retail volume. Cans were very efficient to pro- space management, customer service, and prod- duce, transport, warehouse and deliver. uct innovations. PepsiAmericas’ principal com- —Ken Keiser petitor was Coca Cola Enterprises (CCE), Coca- President and COO Cola’s largest franchise bottler, but the firm also By the time PepsiAmericas was formed in 1999, competed with national and regional bottlers of the conventional route sales approach was be- other beverages. From 2002–2008, PepsiAmericas’ coming impractical. The company’s product line common stock significantly outperformed that quickly grew to include water, energy drinks, of its primary Coca-Cola bottler rival as well as juices, ready-to-drink coffees, teas, and a variety that of the Pepsi Bottling Group, PepsiCo’s of other drinks. largest franchise bottler; it also outperformed the S&P “Bottling Group Index” and the S&P Packaging was also more diverse. Water was MidCap 400. mostly sold in plastic bottles, which were bulk- ier than cans and a truck could carry only 1,000

1 PepsiAmericas also had franchise agreements with some cases of water compared to 2,400 cases of other beverage firms. canned soda. President and COO Ken Keiser 2 The largest Pepsi bottler, Pepsi Bottling Group, accounted estimated that the number of SKUs had grown for around 55% of PepsiCo’s US beverage sales. The from around 35 to 40 in the early nineties to remaining 25% of PepsiCo’s US beverage sales were divided among almost a hundred small bottling companies. nearly 400 15 years later. Truck drivers could no Beath and Ross Page 2 CISR Working Paper No. 378

longer estimate the optimal mix of product that common systems and technology platform needed to be loaded on a truck for the day’s sales. across its 13 regions: And the challenges were growing. Even as sales We had at least four different suites of of bottled water were rising, consumers were back office, selling, and supply chain voicing concerns about the ecological effects of systems across the combined company. the proliferation of plastic water bottles. Execu- None of them could support the move to tives at PepsiAmericas noted that constant inno- pre-sell, so we had to build that. We vation would become a trademark of the leveraged our PeopleSoft ERP to the bottling industry: extent we could, and we used a combi- nation of custom and best of breed Consumers want and demand variety in package solutions for the call center, the flavor and package offerings of our selling, delivery, and order management products. The ability to react to these type systems. That was a three-and-a- changes quickly and without disruption to half year initiative. —Ken Johnsen the supply chain and the entire organi- SVP and CIO zation is critical to our success. —Rich Frey The new platform provided both salespeople VP, Sales Operations and drivers with handheld devices. The handheld captured order data that could then be used Reflecting its history of mergers, PepsiAmericas to plan the truckloads, and to plan and execute was organized into 13 regional divisions respon- the picking and loading of trucks. PepsiAmericas’ sible for production, distribution, and sales. drivers had been using handheld devices for Leaders within the regions designed their sys- some time, but their prior equipment couldn’t do tems and processes as they saw fit, and the much more than print an invoice. mission of PepsiAmericas’ centralized IT group was to address their individual needs. However, The implementation of the handheld was chal- the regional structure was not efficient for lenging. IT managers were unable to find any manufacturing an increasingly diverse product handheld devices on the market in 2001 that could line, nor was it effective in meeting the demands meet the firm’s expanded needs. Instead the IT of increasingly powerful national retailers. In unit developed a handheld device for pre-sell: 2001, PepsiAmericas management initiated a All the components had problems. The series of IT-enabled business changes to address handheld ran out of battery, the wire to changing market demands. the handheld was not ruggedized, so it would break, and then it went to a Next Gen: Defining a Common Platform Motorola cell phone where the con- The first business change initiative, called “Next nection to that would break. So we were Gen,” involved redesigning the sales and constantly fixing it. But that was the only distribution process. Next Gen replaced the choice we had. There was no integrated conventional route sales process with a pre-sell device back in 2001. —John Kreul process that involved taking orders from re- VP, Applications and Customer Service tailers prior to loading the truck. Because of these technology issues, business Pre-sell divided what had been the truck driver’s leaders tended to think of Next Gen as “the responsibilities among three specialists: a sales handheld project,” but the technology problems representative who worked with customers to represented the tip of the iceberg. In addition to place orders; a driver who picked up the ordered introducing the handheld device, Next Gen goods at a distribution center and delivered implemented new processes; redesigned roles; them to stores; and a merchandiser who stocked and built a call center to take customer orders shelves and built product displays. To enable and provide customer service. Senior managers these new roles, PepsiAmericas introduced a

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later acknowledged that they had underesti- Customer Alignment: mated the impact of the change: Centralizing to Meet Customer Needs We didn’t realize how much work it Over time, senior leaders came to believe that would create from an IT and a business the firm needed to reorganize to accommodate process standpoint, how much change the firm’s national customers: was associated with the innovation. We were organized around ourselves ver- —Rich Frey sus around our customers and the way we VP, Sales Operations should be going to market. —Mike Durkin Because PepsiAmericas was formed from merg- EVP, U.S. Operations ers of small businesses, the company had a strong The power of national retailers was growing and entrepreneurial culture. Thus, despite the poten- the inconsistencies in PepsiAmericas’ business tial for pre-sell to eliminate the guesswork about processes and duplication of effort from region what products to load onto a truck, management to region limited the company’s ability to serve was reluctant to dictate a change that would those retailers consistently: diminish the autonomy of the regional heads. Eventually, management agreed to the single We would have multiple people calling call center, but regional leaders retained a great customers who said, “You know what? I deal of discretion on how to implement Next want one call. I want one person to come Gen systems and processes: to my headquarters, not to the division offices or the store.” The retailers had We had a lot of deviation between the di- started to consolidate, but we hadn’t visions on when they would send the adapted. —Ken Johnsen orders, when their cutoffs would be, how SVP and CIO their processes would work. —John Kreul VP, Applications and Customer Service PepsiAmericas’ Customer Alignment initiative reorganized the firm around centralized func- When Next Gen was completed, PepsiAmericas tions. Regional sales and distribution structures had a common technology platform. This plat- were abandoned in favor of an organization form enabled the rapid integration of an inde- based on customer segmentation. One segment pendent bottler, Central Investment Corporation, addressed the needs of large customers who which the company acquired in 2005. However, mandated shipments to company warehouses. A deviations in local processes limited both effi- second segment served the needs of large cus- ciency gains and the ability to meet customer tomers accepting direct store delivery (DSD), needs. Most of PepsiAmericas’ managers con- while a third segment focused on smaller DSD sidered Next Gen’s success to be mixed and the customers. A fourth segment focused on the experience to be painful: unique needs of foodservice customers, such as But Next Gen was still a great thing for restaurants and facilities with vending machines. our company, because there was no way Customer Alignment triggered very little IT we could have kept up with the increasing work. For the most part, the people in the newly number of SKUs or the demands of the centralized functions had been using, and con- customers. We had to do it. It’s just that tinued to use, the technology platform devel- our process maturity was growing and oped for Next Gen. However, Customer Align- the technology maturity was growing at ment drove considerable process centralization. the same time, so we were all kind of Eleven hundred account sales managers went to going through it together. —John Kreul large and small format stores to take pre-sell orders. Another 225 call center workers captured orders for 60,000 small customers. This process rationalization improved control and en- hanced decision making data:

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With Customer Alignment, we really want didn’t know what we didn’t know, right? more of a command and control environ- Then we said, “Holy Cow, thank God we ment. Decisions are made at the top and did what we did!” And that led to a whole they’re executed locally. Before, you could set of projects that we’ve embarked on. have two customers one block apart and —Mike Durkin their pricing might be different, depending EVP, U.S. Operations on who interacted with that customer. Customer Alignment means more stand- Building an IT-Business Partnership ardized pricing, more standardized activ- The Next Gen initiative convinced senior execu- ities with the customers. —Tim Gorman tives that they needed to drive value from tech- SVP and Controller nology initiatives. They agreed that the diffi- Pricing was a particularly important process for culties associated with implementing Next Gen PepsiAmericas because of its impact on the firm’s had stemmed, in part, from a misunderstanding bottom line. While PepsiAmericas attempted to of the capabilities and limitations of IT: closely manage both volume and price, the bot- I have emphasized that IT initiatives are tom line impact of a 1% increase in prices equally about people, process, and tech- equaled the impact of a 3% change in volume. nology. But if anything goes wrong, it In redesigning the firm around customers, usually looks like a technology problem. PepsiAmericas empowered account sales man- —Ken Johnsen agers to address the needs of their most powerful SVP and CIO customers. One executive recounted a meeting At one point during Next Gen, IT managers with Wal-Mart and representatives from other fielded complaints that the new handhelds were PepsiCo companies. Wal-Mart proposed a pro- making pricing mistakes. Subsequent analysis motion offering a discount on a basket of revealed that the equipment was fine, but new PepsiCo products. prices were often submitted after the scheduled We were the only one at the table that time for downloading prices onto the handhelds. said. “Yeah, we like that idea and we're Early on, when PepsiAmericas was managed as in.” Everybody else said, “That's interest- 13 distinct regions, the IT unit had served as an ing but I'm going to have to go back and order taker from the 13 regional heads. As tech- check.” At PepsiAmericas, the person at nology provided a common platform for stand- that meeting owned that account; he had ardized business processes, IT began to take on full accountability. And he oversaw all of more of a leadership role. Between 2001 and large format accounts, so he understood 2004, CIO Johnsen had initiated a number of how this program was going to fit within management changes to enhance the leadership the context of all his other customers.” capabilities of the IT unit. (See Figure 3 for a —Alex Ware timeline of the firm’s major business initiatives EVP and CFO and related IT capabilities.) By 2007, Customer Alignment had created Johnsen’s first initiative created an IT gover- savings of US$15–17 million through increased nance board that included the CEO Robert sales and distribution efficiencies. More impor- Pohlad, the COO Ken Keiser, and most mem- tantly, by aggregating data and realigning respon- bers of the senior executive team. Members of sibilities, PepsiAmericas had begun to expose the the board regularly attended meetings, but, in opportunities that improved data could create deference to the firm’s entrepreneurial culture, for the business. were reluctant to centralize decision rights. [Customer Alignment] opened our eyes, Thus, they shied away from allocating IT funds particularly on the data management side, based on enterprise priorities. As a result, until to how many opportunities there were. We

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around 2006, IT projects mostly supported func- or ex-warehouse people or ex-ASMs that tional and tactical business goals. wanted to learn something new, how to do change management. So they come into When management defined the Customer Align- the PMO and they go deploy all these new ment initiative, senior executives started to rec- solutions. —John Kreul ognize the need to establish IT investment prior- VP, Applications and Customer Service ities. Eventually, Ken Keiser assigned a subset of his world-wide leadership team to a council Gradually, the more disciplined project life- that made decisions on project prioritization: cycle, the increased role of senior executives in IT governance, and the involvement of business Every request for IT resources—and sponsors and execution teams led to a stronger there could be hundreds of them—goes IT-business partnership: through this council. —Ken Keiser President and COO Our partnership with IT has probably been the biggest change for us as an Projects were evaluated based on their internal organization. We truly are partnering in a rate of return (IRR), and expected cost cuts were proactive, not reactive, way. There is an baked into the next year’s expense budget. But IT representative at my staff meetings, and the council was particularly guided by the firm’s our people go to the IT staff meetings, to strategic priorities: make sure that we’re in sync and working Revenue management, pricing projects together… I think we recognize that as are going to be the highest priority. business leads, we are dependent on this Margin improvement is going to be the collaboration. IT is not just this support next highest priority project for us. Cus- department off to the side. They have to be tomer requirements, customer flexibility, part of our strategy as we move forward. and customer wants and needs will be —Rich Frey the next priority. Volume would be the VP, Sales Operations next priority... So we take all the projects Rich Frey’s IT partner, John Kreul, noted that and assign these different value drivers the partnership was a two-way street: to the projects. Then from that grouping we can go back and say, all right now, We’re partners. And we work very well how do we deploy our limited resources together. I think you need that type of against these projects to get them done. partnership for success. So, they’re work- —Alex Ware ing on the processes and we’re working EVP and CFO on the technologies, but we flip back and forth. I mean, we’re constantly recom- Another IT management change was the forma- mending process changes, and if the tech- tion of a project management organization nology is not working the way it needs to (PMO). The PMO helped to implement a more work, they’re constantly collaborating disciplined project management and systems on that. —John Kreul development methodology. To support the new methodology, PepsiAmericas assigned executive Competitive Edge: Building IT business sponsors to each project. These spon- Infrastructure for Business Agility sors took high-level responsibility for implemen- In 2006 PepsiAmericas’ IT unit worked with an tation and business benefits. In addition, busi- outside consulting firm to develop an IT strategy. ness leads were paired with IT leads to manage They identified eight critical future business ca- projects on a day to day basis. For major pabilities: customer and partner connectivity; ac- projects, PepsiAmericas created execution teams: curate planning and forecasting; metrics driven [Execution teams] are all people that came execution; workforce mobilization; flexible dis- out of the business. None of them have IT tribution; selling/revenue management; and asset backgrounds. They are all ex-dispatchers

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management. These capabilities aligned with the stored, any application that needed the customer firm’s stated strategic planks (See Figure 4): data would interface directly with the CDR Once we defined the future business ca- rather than its own customer records. This pabilities, we looked at our IT systems. allowed data sharing across applications, which They were all already on a common reduced data redundancy and increased data platform, but we needed to better central- integrity (see Figures 7 and 8). The CDR also ize our data... And we needed to build a allowed PepsiAmericas to rapidly develop their mobile platform where we could plug in eCommerce capability and to interact with ex- different devices, a handheld or a cell ternal customers. It also reduced development phone or something else [to capture and time, because developers were writing to stan- access operating data]. —Irina Raff dard data interfaces rather than creating new VP, Architecture and Infrastructure data sources or linking multiple existing data sources: The Competitive Edge initiative developed the IT infrastructure needed to support PepsiAmericas’ We got our [new] pre-sell application up critical business capabilities. Competitive Edge in months, and that was a year project had two major components: (a) an information before. If it’s a CDR enabled applica- backbone; and (b) a mobile platform. tion, I think the time to deliver is cut in half. —John Kreul Information Backbone VP, Applications and Customer Service The Customer Alignment initiative improved The CDR permanently stored master data, like performance through reorganization and busi- customer records. Transaction data, like orders ness process standardization. However, the new and invoices, were stored in the CDR only until processes exposed inconsistencies in data defi- they were processed. Long-term they were nitions. For example, there were idiosyncrasies stored in the DW, where all the transactions in customer naming conventions that made it associated with a single customer (for example) impossible to roll up data from the individual could be matched for purposes of reporting, regions and provide consolidated data for a analysis, or history: national chain: In the data warehouse, we’re building a Customer Alignment threw the rug back 360-degree view of our business. So for and all the dirt was there. And so now each customer, now you’ll be able to see we’re sweeping it up. —Tim Gorman what was ordered, what was delivered, SVP and Controller what was forecasted, what was paid, what were the CDAs [customer develop- PepsiAmericas wanted accessible data for both ment agreements], the special discounts, operational decision making and business analy- what was accrued, what’s going to be sis. Based on these business needs, the IT unit paid, what types of displays and ads created two important data assets (see Figure 5): from the syndicated data, the demo- 1. A central data repository (CDR), that is, a graphics of the customer’s market, fore- set of master files and transaction files from casts of sales, and demand forecasts. By which core applications could obtain or store centralizing that, you can start analyzing, data; and well, are we giving the right price to our 2. A data warehouse (DW), which extracted and customers for us? —Irina Raff organized historical—and some external— The IT unit designed the CDR and DW based data for subsequent analysis (see Figure 6). on its strategy work. The idea was to create data The CDR served as a gateway to shared trans- that would be used across the enterprise, rather action data, isolating data from existing and new than ask individual business leaders what data applications. Thus, once a customer record was they wanted. The IT unit formatted the data to meet PepsiAmericas-specific enterprise data needs: Beath and Ross Page 7 CISR Working Paper No. 378

The format defines how we want to use through Enterprise Data Management. He fo- that data throughout our enterprise. cused on workflow, to ensure that data was in That way, we become vendor-independ- the right place at the right time and that it was ent, which was very important in our entered and maintained by the right person: concepts. So it’s not the PeopleSoft With Customer Alignment, we changed design, it’s what we think is the best way the organization, but the information to design our data stores. That took a doesn’t necessarily track with the new long time to figure out. —John Kreul organization. We need to redesign the VP, Applications and Customer Service information so that it actually flows the Following initial design of core master and way the organization is set up, so that if transaction data and selection of tools to access we set up a new customer, they go into the data, the information backbone was intro- the correct customer group, the correct duced to business users to stimulate thinking market area, and they’re under the sales about how to use the new data: person that they’re supposed to be under. —Tim Gorman We built a showcase that I took on a SVP and Controller marketing tour, to different functional staff meetings. To do that, we needed to Tim Gorman established a cross-functional gov- anticipate the information that no one was ernance council to oversee data standardization receiving, but would like to have, and a and to be the permanent owner of the data dic- few business people helped us with that. tionary. People rotated into the council from the From our strategy work, we knew they functions, so that many people would have the were starved for the right information. experience of making decisions about data: When we knocked on some doors to get The governance council decides, do we help developing our showcase, we said, move data attributes directly into the “We’re really close to finishing, and this CDR and then feed them to all the appli- is what we think we can offer you. What cations so that you know it’s consistent do you think? Let’s build something jointly within all the applications, or not? These to see.” Their responses were like, “Wow! should be the critical data attributes that How far along are you? When can I get we’re really going to maintain, define, it? My team can help!” —Irina Raff measure, and ensure that they’re accurate. VP, Architecture and Infrastructure —Tim Gorman IT was able to build the core of the CDR and Gorman’s team was not only looking at data, DW capability with $2.5 million in seed fund- they were also looking at the processes that ing. Going forward, the IT unit would build out created and maintained the data. They were also the information backbone on an as-needed basis. identifying data owners who defined their data For example, in 2008, neither merchandising and determine how it should be captured and nor field service were connected to the CDR. processed. The team started with pricing data. Both were old systems that would connect when The process of cleaning the pricing data revealed they were eventually replaced. instances where a deal was not entered or was Business Leadership of Value Extraction entered twice. This kind of error caused prices from the CDR to default to full wholesale: Competitive Edge, an IT-owned project, led to Before, the number of cases a week that two initiatives focused on driving value from went out at full wholesale was in the the information backbone. Both initiatives were 70,000 range. After putting in this proc- headed by business leaders in Finance. Tim ess, we’re now down to around 11,000 Gorman, SVP and Controller, was responsible cases a week. —Tim Gorman for driving value from the central data repository

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Sandy Mathias was responsible for the Enterprise them to take orders for our large format Reporting and Analytics project. This project and retail accounts. —John Kreul leveraged the data warehouse and took advan- VP, Applications and Customer Service tage of a new business intelligence tool from IT managers could not find a reputable software Cognos. Its goal was to encourage a more ana- vendor able to meet the firm’s needs, so lytical approach to the business: PepsiAmericas did much of the work in-house: …getting away from the analysis hap- To be tied to a vendor that has 20 em- pening in a small group of brainiac peo- ployees and is on the verge of going ple, to everybody knowing what they are under at any given time is not a good doing, being smart enough to look at idea. So we made a strategic decision to what’s happening and having some ideas bring mobile custom development in- about what’s wrong or what needs to be house. Mobile is so important to our busi- fixed. —Sandy Mathias ness that we’ve invested. —John Kreul VP, U.S. Finance The decision to bring the handheld in-house Sandy Mathias emphasized that this was not just meant that PepsiAmericas’ IT unit needed a data management or business intelligence en- strong technology capabilities at a time when deavor, it was a major change management effort: many cost-conscious firms were outsourcing IT. For these initiatives to affect the entire PepsiAmericas expected to drive benefits from organization or big pieces of it, you need its technology expertise by reusing technology, to have a serious change management data, and business process components: element to the project team. And that We upgraded the handhelds in such a involves communication and education way that we can reuse parts for invent- and training, and training after the fact. tory handhelds, for merchandising, for —Sandy Mathias replacing our delivery handhelds. Build- Senior executives felt that change management ing it so that you can reuse it takes related to business intelligence would be well longer, but then once you build it, you worth the effort. As reliable data and metrics can leverage it quickly. —Irina Raff became available, executives envisioned a more VP, Architecture and Infrastructure informed workforce responding quickly to valu- Reuse was expected to reduce the cost of able information: developing and maintaining IT systems, while In our low growth domestic business, to enhancing business agility. The IT unit intro- me the perfect state would be where we duced a new “design” stage (between plan and would have performance measures such build) into the system development life cycle. that a person could look at their score During this stage, IT architects had an oppor- card at the end of every day and see how tunity to identify opportunities for reuse or to they've done. That would be nirvana for recognize opportunities to create new—or alter me. —Alex Ware existing—reusable components. EVP and CFO Customer Optimization3: Reaping the Benefits Mobile Platform The Competitive Edge initiative had provided a To build a foundation for mobile applications, technology foundation for a more informed and PepsiAmericas focused on handheld devices: responsive business. But management found that it took time and experience to learn how to We use handhelds in three processes, apply the capabilities provided by the infor- and we have a thousand people that use mation backbone and mobile platform. Initiated

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in 2007, Customer Optimization3 (CO3)3 was a data, and retail price points. The suggested order series of projects focused on driving business was automatically downloaded to the handheld. value from the business capabilities the com- Although account sales managers could override pany had been building. In particular, CO3 the suggested order during a sales call, they intended to use data to improve the performance were unlikely to do so: of cross-functional processes linking sales and sup- 3 One of our more experienced Account ply chain activities. CO had three components. Sales Managers said, “You know, I was really skeptical at first and then I just Demand Planning kept finding that the handheld was doing In PepsiAmericas’ traditional regional model, a better job than I was generating an demand planning had been based on field-based accurate order.” —Rich Frey forecasts of demand for each SKU. Following VP, Sales Operations Customer Alignment, PepsiAmericas decided to centralize demand planning. CO3 used sophisti- Using cell-phone technology, the handheld imme- cated algorithms to calculate demand, drawing diately transferred final orders to the warehouse. on historical sales and expected retail prices. While demand planning reduced out of stocks in Management anticipated that centralized de- the warehouses, Power Pre-sell and the sug- mand planning would increase the accuracy of gested order it generated reduced out of stocks sales forecasts and improve warehouse inven- in the stores. By mid-2009, out of stocks in tory management: stores had decreased from 14% to 3.7%. These So we’ve gone from 40–50% accuracy improvements were realized while back room on a one-week-out basis to now we’re at inventory in stores dropped 52%. 71% accuracy two weeks out. We have that deployed across the whole company. Perfect Pallet And we are definitely seeing drops in Traditionally, PepsiAmericas had hundreds of out-of-stock percentages at the ware- loaders using load sheets to pick products, put house, which had been 3–5%. We are at them on a pallet, and load the trucks. For Direct 2.48% and our target was to get ware- Store Delivery (DSD) customers, drivers were house out-of-stocks down to 2.5%. responsible for the accuracy of the loads, but the —John Kreul loads were checked at the gate each morning as VP, Applications and Customer Service the trucks departed. At large warehouse loca- tions, checking out 100+ trucks in the morning With demand planning, PepsiAmericas could could take hours. To eliminate the bottleneck, avoid under-producing (leading to out of stocks) the initial CO3 plan would have inserted quality without over-producing (leading to excess assurance staff to check pallets and verify accu- inventory). racy at the point of the pick. However, this plan Power Pre-sell would increase headcount by about 200 people. Expanding on the capability provided by the IT leaders became convinced that technology Next Gen handheld device, Power Pre-sell intro- support could eliminate the need for additional duced a new handheld device for the firm’s 1100 quality assurance staff. The Perfect Pallet ini- frontline selling people. A statistical forecasting tiative called for a standard warehouse layout algorithm was used to produce a “suggested with loaders wearing “Voicepick” headsets that order,” that took into account current inventory, prompted them as they made their way through two years of sales history, seasonality, external the warehouse. With the help of voice recog- nition technology, the Voicepick automatically 3 CO3 stood for “Customer Optimization to the 3rd power identified any out of stock items and adjusted – Planning + Selling + Delivery.” CO3 was a program the customer invoice. This process also trig- intended to reduce out-of-stocks, increase productivity, gered replenishment of the SKU. and improve customer service.

Beath and Ross Page 10 CISR Working Paper No. 378

By ensuring accuracy at the time of pick, up only one quarter of the total consumer popu- PepsiAmericas avoided additional QA head- lation the firm served world-wide (see Figure 10): count, while also eliminating the gate checks, These economies, while just emerging, thus saving drivers’ time. Random audits en- are bringing unbelievable growth. The sured that Voicepick processes were working. GDPs are growing 6%, 7%, 8%, so con- PepsiAmericas’ target was for the invoice to be sumers are getting more income and 100% correct at delivery 99.8% of the time: more money to spend on beverages. In terms of invoice accuracy, let’s say — Ken Keiser that we were in the low 90s. That’s President and COO probably generous. We are now 99.81% The structure of the European business reflected accurate. We can measure it, and we can the series of acquisitions that had characterized do picker productivity, we can tell each PepsiAmericas’ expansion. Poland, Slovakia, picker how many cases per hour they’re Czech Republic, and Hungary became part of doing, how many of their pallets have PepsiAmericas with the Whitman merger in been QC’d, how many of their QC pallets 2000. A single management team led those four were accurate. And now we’re putting countries and some functions were centralized. scorecards within the warehouses. Subsequently, PepsiAmericas acquired Romania —John Kreul and the Ukraine, each of which had a separate VP, Applications and Customer Service management team. All three CO3 initiatives used PepsiAmericas’ IT CEE was the most profitable segment of capabilities to continuously improve the firm’s PepsiAmericas’ business. Labor and other costs business processes. Business executives noted were lower there. In addition, the dollar had been that effective use of IT involved ongoing experi- comparatively weak, and the CEE product mix ments and assessment: yielded higher margins. While PepsiAmericas There’s this notion of, “Hey, let’s get it wanted to reuse some of the IT and business out and get 80% of what we need.” We process capabilities it had developed in the might think we know what the next 10% United States (e.g., the Central Data Repository), should be, but we’d be guessing about it was clear that the structure and architecture of that. I might think it’s one thing and you the CEE was different from the States. In fact, might think it’s something different. So the businesses in the CEE were different from let’s get it out and use it, and then we’ll one another. have a better understanding of what we need…. We need a sustained effort. We PepsiAmericas’ strategy for IT in Europe have to keep making enhancements. reflected the fact that the CEE businesses were That’s a core part of moving this thing focused on revenue growth while the U.S. busi- forward. —Jay Hulbert ness was focused on securing efficiencies: EVP, Worldwide Supply Chain The IT strategy for the European businesses, including Ukraine and Romania, Pursuing Business Growth is to get them all on a common SAP While PepsiAmericas was attempting to opti- backbone. And when I say backbone, it’s mize business process efficiencies in the U.S., primarily accounting, inventory manage- the firm’s goals in Central and Eastern Europe ment, HR, and finance. And then we’ll focused on business growth. The economies of use a best of breed approach for things their CEE countries were growing (See Figure like demand planning, selling, delivery, 9) and per capita consumption of beverages was those types of things. Ideally those “best increasing. Moreover, the CEE populations of breed” solutions would be the same were large—PepsiAmericas’ US market made across all of our geographies, but to the

Beath and Ross Page 11 CISR Working Paper No. 378

extent that it isn’t beneficial, the solutions Bottling Group (PBG) and PepsiAmericas could vary. —Ken Johnsen (PAS).4 In announcing the merger, PepsiCo SVP and CIO Chairman and Chief Executive Officer Indra Johnsen noted that the reasons for establishing Nooyi said: centralized and standard services were different PepsiCo has had a constructive part- for CEE than for the United States: nership with PBG and PAS over the past Shared services might be to fill a 10 years. While the existing model has capability void, not necessarily a cost served the system very well, it is clear play; in fact, it may increase your costs that the changing dynamics of the North because the labor is so cheap there, American liquid refreshment beverage especially in the really developing coun- business demand that we create a more tries. You create shared services not flexible, efficient and competitive system because it’s going to be cheaper, but that can drive growth across the full because you can’t do it otherwise. These range of PepsiCo beverage brands… back-office capabilities aren’t a “nice to The fully integrated beverage business have,” you have to have them because of will enable us to bring innovative prod- Sarbanes-Oxley. —Ken Johnsen ucts and packages to market faster, streamline our manufacturing and distri- Management recognized that over time the bution systems and react more quickly to European business could overtake the U.S. changes in the marketplace... Ultimately, business: it will put us in a much better position to When you have U.S. growing revenue at compete and to grow both now and in 2% or 3% and international growing at the years ahead. three times that, eventually international PepsiAmericas Chairman and Chief Executive could overtake the U.S. And then if we Officer Robert C. Pohlad said: expand into other areas of the world, well, Over the past nine years, PepsiAmericas one day we won’t be PepsiAmericas. Our and each of our employees have helped name will be something different. build a remarkable organization. The —Ken Keiser success we have achieved is reflected in President and COO the agreement reached with PepsiCo. Given the opportunity, PepsiAmericas wanted to get IT right in its CEE business. Management was busy trying to determine what that meant.

Epilogue 4 This epilogue on the PepsiAmericas acquisition is based In August, 2009, PepsiCo announced that it on material at: http://investors.pepsiamericas.com/release would acquire its two largest bottlers, The Pepsi detail.cfm?ReleaseID=400925

Beath and Ross Page 12 CISR Working Paper No. 378

Figure 1 PepsiAmericas’ Operations 2009

Central and United States Eastern Europe Caribbean Total

Population (millions) 50 151 8 209

Per Capita Consumption 1,555 672 866 –

Percent of Total Company Net Sales 2008 69 26 5 100

Employees 12,200 7,600 1,000 20,800

Production Facilities 17 13 3 33

Distribution Facilities 127 45 5 177

Figure 2 PepsiAmericas Partial Organization Chart

Robert Pohlad CEO and Chairman of the Board

Alex Ware Ken Keiser EVP and CFO President and COO

Mike Durkin Jay Hulbert Ken Johnsen Jim Rogers Tim Gorman Sandy Mathias EVP, U.S. EVP, Worldwide SVP and EVP, International SVP and Controller VP, U.S. Finance Operations Supply Chain CIO Operations

Rich Frey John Kreul Irina Raff VP, Sales VP, Applications and VP, Architecture and Operations Customer Service Infrastructure

Beath and Ross Page 13 CISR Working Paper No. 378

Figure 3 Timeline of PepsiAmericas Business and IT Initiatives

Year Business Initiative IT Capability Initiated

2000 Merger of PepsiAmericas & Whitman 2001 NextGen: Common platform and move to Project Governance—Functional IT Steering pre-sell Committee 2002 2003 • Succession Management • Program Management Office 2004 • System Development Lifecycle (SDLC) • Project Execution Team 2005 • Acquisition of independent bottler - Central Investment Corporation (CIC) • NextGen Platform Completed • Customer Alignment 2006 • Competitive Edge: Information Hub, Data Enterprise Data Management Warehouse, Reporting & Analytics, eCommerce, Mobile Platform • Acquisition of Pepsi bottler in Romania 2007 • CO3 • Business Relationship Management (BRM) • Acquisition of Sandora juice company in Ukraine • Quality Assurance 2008 Global Growth Program (GGP) Project Governance—Global Steering Group 2009 PepsiCo Transaction

Figure 4 Business and IT Strategy 2006 to 2009

Customer-centric, PAS Deliver & expand Consistent & Win in growth cost-effective & a portfolio of superior LRB Strategic channels aligned supply dynamic brands execution Planks chain

Critical Metrics Customer Accurate Flexible Selling & Future Selling Driven Workforce Asset & Partner Planning & Distribution Revenue Capability Execution Mobilization Mgmt. Business Connectivity Forecasting Network Mgmt. Model Capabilities

Enterprise Enterprise Required IT Information Reporting & eCommerce Mobile Data Backbone Analytics Enablers Platform Mgmt.

Continuity of Operations / Disaster Recovery Business Architecture: Business and Technical Agreement Foundation Systems Architecture: Logical System Description Technical Standards: Technology Delivery

Beath and Ross Page 14 CISR Working Paper No. 378

Figure 5 Information Backbone

PeopleSoft ERP

Pricing System

Human Resource Master Data System Delivery Master Data Sales System Deals, Pricing Invoices

People Master Data Central Data Pre-Sell Repository Order System Orders Enterprise Data Reporting Master Data Warehouse

Call Center Orders

PCNA*

Order Warehouse Management Demand Management System Planning and Routing (VoicePick) *PepsiCo North America

Figure 6 Contents of the Data Warehouse

Building a 360 Degree View of Our Business

Forecast

CDAs Orders

Ads Invoices

Displays Payments

Demographics National Price Hours Worked

Retail Invoice Product Training Price Price Picked

Deal Ad price Delivered # Accidents Price

Order Orders Products Wholesale Price Taken Merchandized

Competition Invoices Created Price

Enterprise Data Management Is a Key Enabler for This

Beath and Ross Page 15 CISR Working Paper No. 378

Figure 7 Information Architecture before 2006

Legend Functional Integration Supplier/3rd Party Service CSAB Disjointed Finished Providers Raw Material Consumer Corporate Communication Goods Suppliers Research Suppliers Companies

Enterprise

Large Format Non-DSD Sales

Large Planning Distribution Field Service

Format Invoicing & AR DSD

Small Format DSD Finance/HR On Premise Marketing Order Mgmt. Order Manufacturing Merchandising Analysis & & Analysis Rptg.

Corporate Bottler Customers PCNA Network Consumers Consumers

Corporate Consumer One Sync/ Consumers Consumers Research Transora Companies

Figure 8 Information Architecture after 2008

Legend

Organized Communication Supplier/3rd Party Service CSAB Finished Providers Raw Material Consumer Corporate Goods Suppliers Research Suppliers Companies

Enterprise

Large Format Non-DSD Market &

Sales Competitor

Large Planning Intelligence Distribution Field Service

Format & Invoicing AR DSD Information Backbone Small Format DSD

On Premise Marketing Finance/HR Order Mgmt. Order Manufacturing Merchandising Analysis & Rptg.

Corporate Bottler Customers PCNA Network Consumers Consumers

Corporate Consumer One Sync/ Consumers Consumers Research Transora Companies

Beath and Ross Page 16 CISR Working Paper No. 378

Figure 9 Growing Economies with Growing Beverage Categories

GDP Growth Rate (Est. 2007) 12%

10.3% 10% 8.8% 8.0% 8% 7.3% 6.9% 6.5% 5.9% 6.0% 6.1% 6% 5.7%

2.2% 2.1% 2%

0% US Hungary Czech Romania Moldova Bulgaria Poland Ukraine Estonia Lithuania Slovakia Latvia Republic

Figure 10 Population in PepsiAmericas’ Markets

United States Central and Caribbean Eastern Europe

50 151 8 million population million population million population

Beath and Ross Page 17 CISR Working Paper No. 378 About the MIT Sloan Center for Information Systems Research

MIT SLOAN CISR MISSION CISR RESEARCH PATRONS MIT CISR was founded in 1974 and has a strong track The Boston Consulting Group, Inc. record of practice-based research on the management of Diamond Management & Technology Consultants information technology. MIT CISR’s mission is to Gartner perform practical empirical research on how firms IBM Corp. generate business value from IT. MIT CISR dissem- Microsoft Corporation inates this research via electronic research briefings, Tata Consultancy Services Limited working papers, research workshops and executive education. Our research portfolio includes but is not limited to the following topics: CISR SPONSORS IT Governance AECOM Mohegan Sun Enterprise Architecture Aetna, Inc. NASA IT-Related Risk Management Allstate Insurance Company Nomura Research Institute, IT Portfolios and IT Savvy ANZ Banking Group (Australia) Ltd. Operating Model Australian Government, DIAC Origin Energy IT Management Oversight Banco Bradesco S.A. (Brazil) Parsons Brinckerhoff Business Models Banco Itaú S.A. (Brazil) PepsiAmericas, Inc. IT-Enabled Change Bank of America PepsiCo International Biogen Idec Pfizer, Inc. IT Innovation Blue Cross Blue Shield PNC Global Investment Business Agility of Massachusetts Servicing The IT Engagement Models BP Procter & Gamble Co. Campbell Soup Company Raytheon Company In July of 2008, Jeanne W. Ross succeeded Peter Weill Canadian Imperial Bank of Renault (France) as the director of CISR. Peter Weill became chairman Commerce Sears Holdings of CISR, with a focus on globalizing MIT CISR re- CareFirst BlueCross BlueShield Management Corp. search and delivery. Drs. George Westerman, Stephanie Caterpillar, Inc. Standard & Poor’s L. Woerner, and Anne Quaadgras are full time CISR Celanese State Street Corporation research scientists. MIT CISR is co-located with MIT Chevron Corporation Sunoco, Inc. Sloan’s Center for Digital Business and Center for CHRISTUS Health TD Bank Collective Intelligence to facilitate collaboration between Chubb & Son Telstra Corp. (Australia) faculty and researchers. Commonwealth Bank of Australia Tetra Pak (Sweden) MIT CISR is funded by Research Patrons and Sponsors Credit Suisse (Switzerland) Time Warner Cable and we gratefully acknowledge the support and con- CVS Pharmacy, Inc. Trinity Health tributions of its current Research Patrons and Sponsors. Det Norske Veritas (Norway) Unibanco S.A. (Brazil) Direct Energy VF Corporation Embraer – Empresa Brasileira de Wal-Mart, Inc. CONTACT INFORMATION Aeronautica S.A. (Brazil) WellPoint, Inc.

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