OVER THE TOP

AT PEPSICOR i g h t p r a c t i c e s f o r g r o w t h a n d s t r a t e g i c f l e x i b i l i t y

A publication of Deloitte Consulting

©2002 Deloitte Consulting. All rights reserved.

This is the first in a series of Deloitte Consulting

publications researched and produced exclusively

for PepsiCo – offering thoughts and insights on

the strategic issues you’re facing.

You may not agree with all our observations, but

we hope you’ll accept them in the spirit in which

they are offered.

Our single-minded goal is to be of value.

C o n t e n t s

PREFACE 3

TURNING VISION INTO VALUE 4

The power of integration

PRODUCT INNOVATION 6

The right route to the right products. Right now.

SALES PRODUCTIVITY 18

More than revenue per salesperson

FROM SUPPLY CHAIN MANAGEMENT 30

TO SUPPLY CHAIN IMPACT

GETTING TO RIGHT PRACTICES 36

Beyond best practices

PARTNERING TO GET IT DONE 44

P r e f a c e

T H E C H A L L E N G E SA H E A D

Profitable growth through turbulent

times is tough for any business. And

in the cutthroat world of consumer

business, the stakes are even higher.

Which raises some interesting questions

for PepsiCo.

Like how will PepsiCo deliver on its

Top Line to 10 commitments in the

most challenging economic environ-

ment to come along in decades? Like

how will PepsiCo create breakthroughs

in top-line growth your shareholders

will applaud?

Will hard-fought incremental gains –

some might call it “business as usual” –

get the job done? Probably not.

Over the Top shares Deloitte Consulting’s

best current thinking about new

approaches PepsiCo can use to achieve

its strategic vision of profitable growth.

Borrowing from the experiences of

scores of consumer businesses – as well

as winning strategies in other industries

– this publication presents our view of

how best practices can be translated into

right practices for PepsiCo.

Our focus in this edition is on product

innovation, sales productivity and supply

chain optimization.

•2• •3•

Wi l l h a rd - f o u g h t i n c r e m e n t a lg a i n s – s o m e m i g h t c a l l i t“ b u s i n e s s a s u s u a l ” – g e t t h ej o b d o n e ? P r o b a b l y n o t .

T U R N I N G V I S I O N I N T O VA L U E

T h e p o w e r o f i n t e g r a t i o n

Integration is one of those words that

can make people cringe. One of those

fuzzy words with many interpretations

and meanings. But when it comes to

breakthroughs in top-line perform-

ance, successful integration may very

well be the tipping point for success

at PepsiCo.

It is obvious that excellence in product

innovation, sales productivity and

supply chain optimization is essential

for PepsiCo’s success. But more than

excellence is called for. Sustained and

profitable growth can come only from

the intelligent integration of these three

competencies through a robust strategic

infrastructure.

Implementing a growth strategy in

this climate will require PepsiCo to go

far beyond single-silo initiatives like

supply chain visibility, continuous

improvement, direct store delivery,

partner relationship management or

purchase-to-pay. These programs can

deliver returns – but not break-

throughs. Breakthroughs will come

only from integrating these silos of

performance improvement.

But how does PepsiCo translate one of

the consulting industry’s most overused

words – integration – into a foundation

for sustainable, flexible growth?

The winning path forward for PepsiCo

is to focus on right practices – best prac-

tices from other businesses that have

been critically examined for fit with

each other, that fit with PepsiCo’s

unique needs, and that provide a foun-

dation for continuous improvement.

Right practices are great ideas and

great lessons – often learned at great

cost – that PepsiCo can adapt and apply

for sustainable growth.

The intelligent integration of the prod-

uct innovation, sales productivity and

supply chain management can build a

growth engine that will guarantee the

kind of strategic flexibility PepsiCo

needs to turn on a dime. To zig when

competitors zag. To navigate the obsta-

cles future markets will bring – from

grocery stores to convenience stores to

mCommerce and beyond.

•4• •5•

F O C U S O N R I G H T P R A C T I C E S

Righ t p r a c t i c e s a r e g r e a t i d e a s andg r e a t l e s s o n s t ha t P e p s iC o c an adap tand a p p l y f o r s u s t a i nab l e g r ow th .

P R O D U C T I N N O VAT I O N

T h e r i g h t r o u t e t o t h e r i g h t p r o d u c t s . R i g h t n o w.

Product innovation fuels growth

engines. Take Sony, for example, where

product innovation has been the com-

pany’s lifeblood.

Every decade since inventing the

transistor radio in the 1950s, Sony

has had a hand in almost every con-

sumer electronics first – Trinitron

color TVs, video cassette recorders,

Walkman personal stereos, portable

CD players, camcorders, digital cam-

eras, Playstation, DVDs, and flat

panel displays – to name only a few.

Elsewhere, product innovation has

started whole companies – companies

like Microsoft, AOL, Starbucks and

Southwest Airlines. And combined

with effective marketing, product inno-

vation has revived even clinically dead

companies like Harley-Davidson.

These successes didn’t come from

product improvement, product line

extensions, product cost reductions or

product repackaging. They came from

product innovation – new-to-the-world

products, new-to-the-company prod-

ucts, or at least new processes or formu-

lations that lead to new products.

Baked Lays, Aquafina, Tropicana Pure

Premium. Product innovations.

•6• •7•

Over the past 10 years most packaged

food and beverage companies have been

able to increase earnings despite slow

market growth. They have raised

prices, cut costs, simplified promotions

and focused primarily on product line

extensions rather than new products.

In other words, the low hanging fruit

has been picked.

It’s time to get out that old B-school

chart and go after opportunities in the

“strategic” quadrant.

Innovation can be in product, or it can

be in PepsiCo’s hallmark area – break-

through manufacturing platform

innovations like PepsiCo delivered in

the 1990s. Baked Lays, for example,

was a completely new product built on

an innovative manufacturing plat-

form. And it attracted completely

new consumers to drive incremental

volume. The cold processing manu-

facturing platform designed for

Tropicana Pure Premium extended

across the product line and launched a

slew of product extensions.

Innovation, whether in the area of

products or platforms, is a winning

strategy for PepsiCo.

It can deliver more than twice the

annual sales of product extensions.

B A C K T O B A S I C S : O P T I O N S F O R I N N O VAT I O N

Impa

ctH

igh

Low

Difficulty HardEasy

The B-School Chart

Low-Hanging

FruitStrategic

Warm upsWaste of

Time

Innovative products and platforms in

the packaged food industry take an

average of 15 months to get to market,

compared with less than 10 months for

product extensions. They also cost

twice as much to launch – and have half

the success rate.

So it is not mere coincidence that

PepsiCo has followed the 80/20 rule in

its product introduction strategies. It

simply makes economic sense given the

traditional outcomes.

But what if PepsiCo could change the

“traditional outcomes”? What if

PepsiCo could raise the success rate,

lower the cost to launch and reduce

the time to market? Could the hit list

be 60/40?

Not only could it be, it must be. And the

real question isn’t how to develop lots

of innovations to change the game.

The real question is how to develop lots

of the right ones.

•8• •9•

H I G H - I M PA C T I N N O VAT I O N I S H A R D T O D O

Recent PepsiCo North American Product Introductions

PRODUCT LINE EXTENSIONS PRODUCT INNOVATIONS

Pepsi Twist Tropicana Low Acid Orange JuiceMountain Dew Code Red Tostitos ScoopsDole Single-Serve Juices Cheetos Mystery Colorz SnacksLay’s Bistro Tropicana SmoothiesFour Cheese Doritos Sierra MistRuffles Snack KitsFritos Flavor TwistsCracker Jack’s Nothing but NutsRuffles Flavor RushCheetos Xs and OsBaja Picante DoritosSonic Sour Cream DoritosLarger Tropicana Pure Premium

Being unclear about what product

innovation is – or isn’t – can have dire

consequences. Just ask Campbell Soup,

the world’s largest soup maker with

more than 70% of the share in the US.

In 1897 a young Campbell chemist,

John Dorrance, invented condensed

soup, dramatically reducing Campbell’s

distribution costs and providing its

growth engine. More than 100 years

later, nearly 70% of Campbell’s soup

products are still condensed.

There have been scores of new varieties,

several iterations of packaging and

many changes in marketing campaigns,

but Campbell still is condensed soup.

And over the past decade, these con-

densed products have led to condensed

revenues and profits – as well as a con-

densed tenure for the company’s most

recent CEO.

W H AT P R O D U C T I N N O VAT I O N I S N O T

A constant flow of good ideas is the

lifeblood of any innovation process.

But ideas from where? From whom?

Well, who were they asking for ideas at

Campbell’s? Certainly not competitors.

Or ingredient and packaging suppliers.

Or industry analysts. Apparently they

were asking themselves.

Which doesn’t mean asking your own

organization for product innovation is

necessarily a bad idea. In fact, phar-

maceutical companies have even

invented an automated process for

doing just that.

In the past, pharmaceutical innovation

involved studying diseases to under-

stand biochemical processes, and then

looking for the right theoretical combi-

nation of compounds that might

interfere with or alter those processes.

The task was laborious, since each

compound had to be invented and

physically tested in series against the

disease to see if it worked.

Now pharmaceutical companies have

automated a process that makes hun-

dreds of variations of the compounds

they already have and rapidly tests them

in parallel to see if any of them will

have potential.

So what does this have to do with

PepsiCo? Is there some adaptation of

this pharmaceutical best practice that

could be a right practice for PepsiCo?

Imagine if PepsiCo looked across a

category of snack foods, like chips for

example, and chose the six most popular

ingredients and product features among

all PepsiCo chip products. And then

asked the product team to come up with

as many products as possible with those

elements. What would happen?

Certainly, lots of new product ideas.

And if PepsiCo included competitive

products in the analysis of the most

popular ingredients and features, you

might get lots of right products. Could

this be a right practice for PepsiCo?

More typical in consumer-oriented

industries is an idea-generating process

that includes tapping many groups out-

side of the company. Consumers, com-

petitors, suppliers, retailers and indus-

try analysts are most often the targets.

Almost every company uses some form

of focus groups or consumer advisory

panels. Many have a structured process

for competitive intelligence gathering.

Wal-Mart, for example, has nearly

institutionalized competitive plagia-

rism. Each week, Wal-Mart regional

managers walk the aisles of competi-

tors’ stores and report back on a whole

raft of items from new displays to price

changes to employee floor coverage.

Indeed, gathering data for product

innovation from consumers, competi-

tors, suppliers, retailers and analysts

has become commonplace in most

companies. In fact, more than 80% of

the product ideas generated in the con-

sumer package goods industry come

from external sources.

But few companies have developed

effective processes for analyzing and

interpreting the data collected. And

internal biases—technical, financial,

cultural, or historical—are often the

lenses through which companies distort

market intelligence. Effective interpre-

tation of the data can translate lots of

ideas into the right ideas—and vastly

improve the rate of success for product

innovations. Misinterpretations can

lead to disasters.

New Coke. At least 200,000 consumer

interviews and $4 million dollars of

research. To be sure – not a fire-aim-

ready approach. It was calculated to

aim straight at the Pepsi Challenge, but

it still blew up in their faces. While it’s

a best practice to hold consumer focus

groups to test new products, a right

practice would include making it clear

that if consumers like the new product,

the old one will be discontinued.

•10• •11•

I N S I D E - O U T A P P R O A C H E S O U T S I D E - I N A P P R O A C H E S

PepsiCo lore probably includes many

stories about New Coke. And most of

them likely still make you smile.

Especially knowing that the Pepsi

Challenge success goaded Coca-Cola into

such a colossal blunder. But they won’t

make that mistake again. And now the

all-important teen market—the market

segment PepsiCo owns – is square in

Coca-Cola’s sites. Mountain Dew, SoBe

and the big Kahuna: Gatorade.

Remember J. Crew’s first mail order

catalogs in 1982? They used the same

font, the same paragraph format, and

the same layout as Lands’ End. J. Crew

even listed the item numbers and

prices in the exact same locations.

Pretty crafty. J. Crew let Lands’ End

spend all the money and take all the

risk to develop the upscale mail order

market, then they just moved in and

said, “me, too.” It took Lands’ End

nearly 10 years to regain the position

they once owned.

To do that, Lands’ End had to innovate

in almost every aspect of its business—

its call centers, suppliers, delivery

mechanisms, and advertising were all

targets for relentless innovation.

Today, Lands’ End is one of the most

sought-after best practices case studies.

And it again owns the upscale mail

order market. Thanks, in part, to

J.Crew’s sideswipe.

Coca-Cola has the savvy to take a side-

swipe at PepsiCo. Product innovation

can help PepsiCo avoid playing Lands’

End to Coca-Cola’s J. Crew.

Product innovation is hard enough, but

innovative products that also make

money require intricate – often collab-

orative – product development.

In the mid-1990s, a GE product team

was tasked with developing an entirely

new washing machine, something GE

had not produced in more than 30

years. Tom Tiller, the laundry product

manager, not only talked with con-

sumers, retailers and suppliers through-

out the product development process,

he also understood the competitor’s

products in great detail. He bought

competitors’ products and took them

apart on the factory floor – and then

asked two GE repair technicians to be

ongoing members of the product team.

As a result, the final product used many

parts that were regularly stocked on the

technician’s truck and placed vital mov-

ing parts in accessible places for repair.

Not surprisingly, warranty costs plum-

meted and consumer satisfaction rose.

Right practices for product develop-

ment include collaboration from every

constituency, even if they ordinarily

sit in a functional silo whose mission

is “unrelated” to the innovation

process. Right practices develop the

right products with the right support

infrastructure.

•12• •13•

S I D E S W I P E S C O L L A B O R AT I O N M AY B E K E Y

In the consumer packaged goods

industry, most organizational struc-

tures promote silo thinking in which

locations, divisions, brands or func-

tions attempt to maximize their own

accomplishments and rewards. There

is a disconnect between supply and

demand activities.

Are organizational structures aligned

for optimal product innovation at

PepsiCo? How often do demand-side

functions, like sales and marketing,

routinely collaborate with supply-side

functions like manufacturing and pur-

chasing? Is the collaboration disci-

plined and intentional? Or is it random

and undependable?

A corporate culture that embraces dis-

ciplined, intentional collaboration can

change the economics of product inno-

vation. It can shorten the product

development cycle, reduce the launch

costs and raise the probability of success.

It can also get PepsiCo to 60/40.

But PepsiCo does all of this anyway,

right? As PepsiCo’s senior managers,

you already focus on demand and supply

activities as a matter of doing business

every day . . . and you have launched

several initiatives for collaboration.

Frito Lay’s Starfleet teams already share

best practices across the company’s

functions and divisions. These pro-

grams and initiatives were all critical in

achieving PepsiCo’s position as the sec-

ond largest provider of packaged food

products to grocery stores, weren’t they?

If PepsiCo is focused on all of these

things, then you’re probably not really

as focused as you should be. If every-

thing is important, then nothing is.

PepsiCo is most assuredly tool-rich and

skill-heavy. But how does PepsiCo’s

senior management team drive those

formidable assets toward the next level

of success in product innovation?

If product innovation is the fuel for

PepsiCo’s growth engine, then some

choices have to be made. One impor-

tant choice involves cajoling your

brand organizations into acting like

the integrated teams needed to pro-

duce innovations – with metrics that

beat all the odds.

Most consumers regularly buy more

than one of PepsiCo’s products; devel-

oping them inside brand silos can miss

the power of this behavior. Consumers

often drink a Pepsi while eating

Doritos, and down a glass of Tropicana

with their Fruit and Oatmeal Cereal

Bars, but how much time do these

brand managers spend with each

other? Is this where the next innova-

tions will come?

Pepsi has been trying to crack this

problem for years – and probably does

it better than most. But that doesn’t

make a solution any less important.

Senior management attention can indeed

make collaboration happen. And it does

not involve a memo to All Department

Heads or a Product Innovation Kick Off

with lots of balloons, videos and impas-

sioned speeches. Rather, this kind of

initiative needs attention that stands up

to “the calendar test.”

•14• •15•

B R E A K T H R O U G H S T R U C T U R E S F O R

P R O D U C T I N N O VAT I O N

O V E R T H E T O P

Starting in the late 1980s, every time

GE’s Jack Welch wanted to improve

something in the business, he asked

the key people in each business unit

working in that area to meet with him

in Fairfield once each quarter. His

riveted attention for two hours every

quarter was enough to shape up func-

tions like purchasing and service, and

focus multidisciplinary initiatives like

Six Sigma and e-business. In classic

Welch style, many of the participants

survived only one Jack encounter – and

that’s how his attention was multiplied

manifold throughout GE’s many het-

erogeneous businesses.

If PepsiCo made that commitment to

focus some of its calendar on driving

teams to the next level of product

innovation, how would you know if it

is working?

At least one, if not all, of the things on

the next page will happen.

In working with consumer packaged

goods clients at Deloitte Consulting,

we have seen all of these behaviors and

more. It always comes down to people.

And change. And whether we are

engaged to help with product strategy,

the process of new product develop-

ment or product information manage-

ment, we are really our clients’ agents

for change.

•16• •17•

T H E C A L E N D A R T E S THow the calendar test drives innovation

• The best people in your organization will try to get on

the product innovation teams.

• The teams will quickly have membership from sales,

direct service delivery, marketing, manufacturing, sup-

pliers, and ex-officio or proxy membership from retailers

and consumers.

• Large numbers of ideas will emerge, and many of them

will be very “out-of-the-box.”

• Some of the ideas will have cross-brand nicknames like

“Gatorchips” or “Cap’N Cheetos.”

• Every team member will have a clear understanding of

the measurements for success.

• Collaborations on design, development and delivery

will begin to emerge with suppliers and retailers play-

ing key roles.

• The head of whatever function previously had full reign

over product development will be in your office to com-

plain that the new process is out of control.

• The heads of the other functions who were not very

involved before but are now, will be in your office to

complain that they can’t make their numbers because

too many of their people are distracted by these product

innovation teams.

S A L E S P R O D U C T I V I T Y

M o r e t h a n r e v e n u e p e r s a l e s p e r s o n

With all due respect to the value of

marketing, it is PepsiCo’s salespeople

who have daily impact on key metrics

like customer satisfaction, brand loyalty,

distribution efficiency, consumer

recognition and market position.

Salespeople meet with grocers, conven-

ience store chains, vending companies

and restaurants every day. They know

exactly when and where Coca-Cola put

in its first mCommerce-enabled vend-

ing machines – and they know what

Japanese consumers sip while down-

loading new ring tones for their

mobile phones.

So if PepsiCo thinks of salespeople

simply as a conduit to revenue, you

are missing their real value in the

growth engine.

Lots of companies talk about sales pro-

ductivity – and often they mean equip-

ping sales people with devices or soft-

ware or training that will shorten the

sales cycle, raise the close rate or

improve reporting.

Less often do companies talk about the

larger productivity gains possible from

capturing sales intelligence directly

from consumer and customer interac-

tions and integrating it into critical

activities like brand and category mar-

keting, product innovation and supply

chain management.

Sales intelligence is critical in the

development of lots of product innova-

tions and even more important in the

delivery of the right ones.

When PepsiCo developed Aquafina,

the decision to deliver a six-pack of

16.9-ounce bottles was probably the

result of competitive information and

consumer focus groups. But was it also

the result of input from the sales teams

who had to negotiate the slotting fees

for the shelf space?

•18• •19•

I f P e p s i C o t h i n k s o f s a l e s p e o p l es i m p l y a s a c o n d u i t t o r e v e n u e ,y o u ’ r e m i s s i n g t h e i r r e a l v a l u e i nt h e g r o w t h e n g i n e .

Very often, marketing teams are

rewarded for increasing profitability

and for the number of successful product

launches, with sales usually rewarded

for revenue or volume targets.

Aligning these functional areas would

result in more pairs of eyes looking

across the whole landscape for syner-

gies, waste or those golden moments

when the light dawns that promotion-

al spending on Baked Lays could be

reduced and sales increased by sharing

promotions with PepsiOne.

Sales and marketing cultures, whether

they are in PepsiCo or Microsoft, have

distinct characteristics that often clash.

At MCI in the early 1980s, the two

functions sparred constantly.

The MCI marketing teams were

famous for their Rolex watches, Gucci

shoes and expensive business school

diplomas. The sales guys were from

South Jersey, Philadelphia and down-

town Washington, D.C. If they had

degrees, they were from Howard,

Temple and Rider. There were no sales

guys on marketing’s product teams.

And sometimes, new products about to

be launched by marketing were sabo-

taged by sales and never even made it

to the market.

•20• •21•

S A L E S P E O P L E D E V E L O P I N G P R O D U C T S ?

Integrating PepsiCo’s salespeople into

product teams is even more important

now as traditional channels – primarily

grocery stores – are seeing only 3%

growth. Non traditional channels like

supercenters, club stores, vending

machines, and food service outlets

(schools, hospitals, elder care facilities)

are growing near the 7% range. Can

PepsiCo sell grocery store products to

these channels? You already are. But

each also has unique opportunities for

innovative products – and PepsiCo’s sales

teams probably know what they are.

In the mid-80s, Benetton implemented

a sales reporting system that allowed

headquarters to poll Benetton cash regis-

ters all over the world several times a day

and compare sales to inventories locally,

regionally and worldwide. Not only did

this allow Benetton to manage inventory

much more efficiently, this front-line

input gave their designers clues about

color and style trends that were emerg-

ing in their stores in real time.

Benetton realized that the sales informa-

tion so incredibly valuable for inventory

management was also critical to product

innovation in the fast-paced teenage

fashion market segment. Company lore

includes the story that the “United

Colors of Benetton” marketing cam-

paign came from a product designer’s

lamentation that she could make no

sense of the sales data on the debut of a

new sweater line. France, Italy, the UK

and the United States all sold out of the

sweater on its first day of stocking; but

each country sold out of a different color.

P R O D U C T I N N O VAT I O N F R O M T H E S E L L I N G F L O O R

This functional clash also has negative

outcomes in the consumer packaged

goods industry. For example, in the

2001 Trade Promotion Industry Study

(Cannondale Associates), total cus-

tomer dollars spent as a percentage of

the consumer packaged goods market-

ing budget has jumped from 53% in

1997 to 61% in 2001. Consumer-ori-

ented spending (consumer promotion

and advertising/media) percentages

have actually dropped from 47% to

just over 39% while trade promotions

have skyrocketed from 44% to 51%. It

looks like they may not be working

together as well as they need to.

Functional differences are healthy for

companies – but all need to be part of

product innovation to make that

process as effective as PepsiCo needs it

to be.

At Deloitte, we understand sales pro-

ductivity and trade promotions. We

have helped consumer packaged goods

companies like Nestle, Borden, S.C.

Johnson and McCormick to make the

most of their dollars spent here. But

more importantly, we also know prod-

uct innovation and the critical impor-

tance of a multi-functional approach.

•22•

At PepsiCo, inclusion must extend to

another group that appears key for

product innovation: the Route Sales

Representative (RSR).

Remember the earlier story about GE

service technicians participating on the

laundry product team? A loose analogy

exists between RSRs and GE service

technicians – which suggests an adap-

tation of this best practice as a right

practice for PepsiCo.

It is the RSR who is most familiar with

the actual configuration of the shelf

space, its vagaries and pitfalls. She

knows whether a product is easy or

difficult to load and unload from the

truck, move to the shelf or end cap

location, unpack and display. She

knows how long it takes, whether she

can fit them easily onto the shelf or if

they have to be squeezed, how many

packages get damaged, and what com-

petitive displays look like.

If, for example, a new product is

extremely fragile and needs more air in

the packaging, she will be able to help

the team define the outer limits of a

“big” bag, the opportunity costs of the

space it will take on the truck and on

the shelves, and many other details that

could be of great value in predicting

the product’s success.

The RSR also has many occasions to

speak with consumers. How many

times have you been in a grocery store

where the shelves were being stocked

by a supplier and asked where the

product you wanted was or why its size

or flavor changed, or why your favorite

variety was discontinued? Your prod-

uct teams probably never hear those

consumers’ comments.

•23•

E M P O W E R I N G T H E R E A L F R O N T L I N E

It was precisely this idea – the daily

one-on-one interaction with consumers

– that led GE to yet another experi-

ment with its service technicians.

In the early ’90s, GE installed dumb

terminals in the service technicians’

trucks. More than 2,000 mobile

“parts warehouses” were now

equipped with recording and tracking

capabilities for inventory manage-

ment, job tracking, invoicing and

information delivery, like directions

and schedule changes. The program

went through several iterations – the

hardware was changed out several

times until they got a unit that would

withstand the machine oil, grease and

coffee on the technicians’ hands – but

they eventually reaped enormous pro-

ductivity benefits. Benefits not just

from more efficient job completion,

but also from inventory management

and use and care statistics.

Using these devices, technicians were

able to order unusual parts not stocked

on their trucks that matched the next

day’s schedule and have them delivered,

that night, right to their trucks in their

home driveways.

Eventually, it occurred to the product

and sales teams that the repairmen

could also log information about com-

petitive appliances the consumer had,

whether they needed to be replaced

and if any accessories were needed.

Just think, a glimpse into competitive

information, use and wear data, and a

captive audience to whom they could

sell replacement knobs, drip pans and

ice cube trays. Two thousand pairs of

eyes and ears in American kitchens and

laundry rooms each day. The teams

were excited.

They missed a few things, however.

The repairmen did not want to stop and

talk to the consumer, because they got

measured and paid by the repair job.

They were not trained to look around,

ask questions and make sales presenta-

tions. Their trucks had little extra

room for accessories. And they were

already having a very difficult time

mastering the basics of the technology

they had been given.

This was a great idea that didn’t fit for

GE. But that abandoned practice may

be a right practice for PepsiCo. Here

the Route Sales Representative teams

aren’t technicians with grease on their

hands, and coffee stains and jelly

doughnut crumbs on their shirts.

They are technology-ready and can be

trained to look at the shelf spaces and

products of competitors to notice how

fast items are selling, what the displays

look like, what the prices are, as well as

similar information for their own prod-

uct lines. They could have direct and

immediate input into the product

teams that, like Benetton, would come

right from the daily interaction with

consumers at the point of sale.

•24• •25•

A N O T H E R R I G H T P R A C T I C E ?

At Frito Lay, PepsiCo is considering a

front-line initiative involving handheld

devices.

The goals of the project appear similar

to those set up for the GE technicians –

inventory management, just-in-time

stock replenishment and information

delivery on items like end cap assembly,

company news and product training.

These are bound to increase productivi-

ty and improve employee and customer

satisfaction.

But shouldn’t PepsiCo consider using

this investment to help nudge that

80/20 innovation ratio toward 60/40

right from grocery store aisles?

The handheld device project at Frito Lay,

even if completely isolated from product

innovation at PepsiCo would still be

critical in a flexible growth strategy.

Assume for a moment that no innova-

tions are developed and the product

teams set about turning out countless

product line extensions. PepsiCo will

still face the challenge of managing

many more SKUs within the con-

straints of its current delivery system.

Many more SKUs in the same truck

space delivered and stocked by the

same number of drivers into the same

shelf space.

•26• •27•

F R O N T- L I N E T E C H N O L O G I E S F O R M O R E

T H A N S A L E S P R O D U C T I V I T Y A H e a d f u l o n H a n d h e l d s . . .

What can PepsiCo do with handhelds?

• field and operations decision support

• real time prompts and alerts

• competitive intelligence

• inventory and resource deployment

• ordering and inventory visibility

• pay collection automation

• on demand reporting

But wireless solutions are not just devices:

How bleeding edge are these technologies?

• the blood’s already been shed

• today’s generation is solid — portable and periodically synching

• rapidly moving to:

- always-on

- higher bandwidth

- feature-rich devices

- increased security

Wireless Layer

WirelessApplicationsDevelopers

InfrastructureProviders

NetworkConnectivityServiceProviders

OperatingSystems

Handset and TerminalDevices

Middleware

Wireless Network Wireless Devices

Let’s suppose for a moment that some-

thing like “Gatorchips” really does

happen. How would PepsiCo’s sales

teams get that product into 7-Eleven?

This retailer has different buyers for

snacks and drinks and each owns sepa-

rate territories in its stores. Would you

somehow align your sales teams with

the customer’s expectations? If you do,

your efforts at collaborative product

innovation may unravel.

By the way, is the customer’s expecta-

tion the rationale for brand sales?

They do have you in a box, don’t they?

Complaining all the time that they

have to deal with so many PepsiCo

brand salesmen all the while they

require that you deal with each of

their separate product buyers. Seems

like a pretty good way for retailers to

keep themselves from being

“upleveled” by suppliers.

Not only does it keep Frito Lay from

upleveling at Wal-Mart, for example,

it may keep PepsiCo from achieving

the next level of product innovation.

Pepsi and Frito Lay or Tropicana and

Quaker won’t become the packaged

food equivalents of Microsoft Office if

sales at retailers like Wal-Mart contin-

ue to be managed with teams of brand

salespeople.

Best practices certainly include meeting

customers’ expectations, but right prac-

tices effectively blend customer expecta-

tions with breakthrough initiatives.

•28• •29•

C O L L A B O R AT I V E P R O D U C T I N N O VAT I O N

& I N T E G R AT E D S E L L I N G

Remote monitoring of restocking

needs, product staged at the warehouse

ready for the additional runs that may

be required and optimized truck routes

are all possible antidotes to the growth-

in-SKU headache. And the delivery

mechanism for this medicine looks like

a handheld device.

FedEx, Hertz, the United States Post

Office and many other businesses have

considerable experience equipping

their front lines with information

technology and using the information

collected in creative ways.

The exact problems they attempted to

solve may differ from those PepsiCo is

facing, but they have already spent the

time, the money and the concentrated

brainpower on solving them.

Somewhere in there are the seeds of a

handful of right practices for PepsiCo.

T h e d e l i v e r y m e c h a n i s m f o r t h e s eb e n e f i t s a t P e p s i C o l o o k s l i k e ah a n d h e l d d e v i c e .

F R O M S U P P LY C H A I N M A N A G E M E N T T O

S U P P LY C H A I N IMPACT

Supply chain management is such a

pervasive topic in today’s business

landscape, it is easy to believe that it

somehow always existed. Yet its earliest

appearances emerged less than 20 years

ago. In those days, the automotive,

retail and high-tech industries were

starting to talk about supplier rational-

ization – or reducing the number of

their suppliers from thousands to hun-

dreds and even fewer. JC Penney went

from more than 30,000 suppliers to

just 2,000 in this period – supported

by the magic of newly developed

Electronic Data Interchange technology.

And information technology continued

to enable supply chain management for

the next two decades.

After supplier rationalization, compa-

nies began to push the risk of inventory

management upstream to suppliers –

and technologies that optimized plan-

ning, modeling and in-bound logistics

emerged. This spurred demand forecast-

ing, increased supply chain visibility

and velocity, and, more recently, collab-

orative design and development. All

enabled with eRooms, electronic docu-

ment management and electronic design

tools. Competitive advantage began to

rapidly shift from product innovation to

the management of suppliers.

In companies as diverse as Harley-

Davidson, Bose, Motorola, Xerox, Ford

and Black & Decker, inventory turns

increased from an average of 6 to more

than 50 per year and the cost of materi-

als purchased dropped between 15%

and 35%.

And some of these companies and the

industries they represent have leaped

from traditional product development

processes to new processes where sup-

pliers collaborate on products while the

design is still a concept. Bose, Honda

and others now house key suppliers on

their premises to work with their engi-

neers during the conceptual stages of

product development.

Automobile companies have had

astonishing results with collaborative

product development. Caliper manu-

facturers now collaborate with brake,

wheel and drive train manufacturers to

deliver whole wheel assemblies to

Ford, Toyota and Honda. These

assemblies are also manufactured and

delivered to plants just as assembly

line workers need them.

•30• •31•

O n e s t u d y s u g g e s t s t h a t w h i l et r a d i t i o n a l c o m p a n i e s h a v e t h e i rs u p p l i e r s i n v o l v e d i n p r o d u c td e s i g n 1 5 % o r l e s s o f t h e t i m e ,w o r l d c l a s s c o m p a n i e s h a v e t h i si n v o l v e m e n t 9 0 - 1 0 0 % o f t h e t i m e .

Quaker’s Production Advice process is

a push in the collaborative direction.

These teams help ensure that production

and delivery issues are addressed well

before they can hurt sales of a promising

new product. Quaker has also enrolled

several key customers in its collaborative

demand forecasting process called

Continuous Replenishment Planning.

On the collaboration scale, these are

just first steps, but they indicate seri-

ous groundwork for moving forward

with collaborative forms of product

innovation.

Are these right practices for the rest of

PepsiCo?

Competitive advantage seems to have

returned to its product innovation

roots, but now innovation more often

comes from supplier collaboration than

internal design teams.

Does that mean that PepsiCo’s potato

and salt suppliers should team up to pro-

vide already-salted potatoes for chips?

Not really. But having key potato sup-

pliers hang around manufacturing

plants and product teams may very well

lead to additional ideas for product or

platform innovations. But it might be

even more beneficial to hang out your-

selves with your customers. After all,

you are their supply chain.

AT&T, IBM, Oracle, SAP and many of

the Big 5 have placed key people on

customer sites, usually to provide prod-

uct training, project management and

specialized skill resources. They often

also scope out new opportunities for the

sales teams. And new products get con-

ceptualized, prototyped and tested.

And some meet commercial success.

The professionals leading PepsiCo’s sup-

ply chain initiatives are wrestling with

key strategic and operational challenges

that are now coming from customers, not

suppliers. From grocery industry con-

solidation to multi-channel selling, cus-

tomer loyalty programs and more, the

pressure is on. Consider the insights and

innovations that PepsiCo’s supply chain

experts could generate by virtually

walking in your customer’s shoes to

make their supply chains more effective.

Well, maybe more like dancing in your

customer’s shoes. They say that Ginger

Rogers did everything Fred Astaire did,

she just did it backwards and in high

heels. What she did was harder and less

visible to the audience, much like what

we are suggesting here. But Ginger

won an Oscar and Fred didn’t.

We’re not great dancers at Deloitte,

but we know supply chains and we

know retailers. In fact, we serve 36 of

the Fortune 50 retailers and 7 of the

top 10 grocers.

•32• •33•

E M E R G I N G C O L L A B O R AT I V E P R O D U C T I N N O VAT I O N

AT Q U A K E R ?

S A LT Y P O TAT O E S ?

In the evolution of supply chain man-

agement, CPFR is the latest new thing.

Collaborative Planning, Forecasting

and Replenishment. It also sounds like

the next big budget request from the

supply chain guys in PepsiCo’s IT

department. If Marketing had named

this product, they would have called it

the “Promotional Cost Optimizer.”

Sales would have called it the “Top Line

Generator.” But, the IT people got to

it first so we have an acronym that

sounds like an emergency room device.

But don’t let the name fool you. CPFR

is a supply chain tool delivering

increased sales for whole categories of

products as well as for brands of

Nabisco at Wegmans. It’s pretty simple

– if it’s out of stock, consumers can’t

buy it. And promotions don’t work on

products consumers can’t buy.

In-stock rates at Wal-Mart are 97% for

suppliers using CPFR versus 95% for

suppliers using older forms of collabo-

rative processes (like Vendor Managed

Inventory) and 84% for non-collabora-

tive suppliers. Wal-Mart fill rates show

even more dramatic gains with CPFR.

Nearly 25% of Quaker’s products are

well-suited to warehouse delivery –

delivery that is dependent upon its cus-

tomers’ point-of-sale data. What if

CPFR could improve lost Quaker sales

by just 1%?

Like many other initiatives that deliver

dramatic results, CPFR requires change

in the roles and performance measures

of people. Nabisco’s account manager

for Wegmans fought CPFR tooth and

nail. He was sure it would hurt his

relationship with his biggest account.

It took Nabisco senior management to

assuage the fear and trigger the account

manager’s best motivator: greed.

If PepsiCo’s customers shared promo-

tion schedules, POS and inventory data

and more accurate forecasts (especially

for promoted SKUs) with PepsiCo, you

could sell more and reduce promotional

costs. You might also be able to develop

more targeted products, launch them

more cheaply and more accurately

forecast their reception. That’s supply

chain impact.

•34• •35•

C P F R — S U P P LY C H A I N M A N A G E M E N T

O R S A L E S P R O D U C T I V I T Y ?

G E T T I N G T O R I G H T P R A C T I C E S

B e y o n d b e s t p r a c t i c e s

There are many examples of best prac-

tices here for PepsiCo to examine and

consider. And many may translate into

right practices – best practices that fit

PepsiCo.

But what is the evolution from best

practice to right practice?

When best practices began to emerge

as a hot topic in business, many industry

analysts and practitioners alike called it

a fancy word for “plagiarism.” But just

copying the other guy’s work really

never did pay off.

All the same, casting a broad net for

best practices is good business. It pro-

vides real potential to capitalize on

other players’ great ideas and avoid

their mistakes. But to be truly effec-

tive, PepsiCo will need a structured

assessment process to sift through those

practices and find candidates for right

practices.

Right practice candidates fit with

PepsiCo’s business objectives, culture

and reality. They also fit together with

other initiatives, strategies and prac-

tices. And they provide a foundation

for building future strengths and sus-

taining differentiation.

This process of shifting through best

practices begins with of the following

six questions.

Some of the examples used here come

from companies that are or were con-

sidered world-class. It would be easy to

assume that whatever a world-class

company does must be a best practice.

But even world-class companies make

mistakes – and sometimes they are real

doozies. It is always prudent to examine

the actual results of another company’s

best practice.

Did it really achieve its objectives, and

were the results sustainable? And can

one really pin the practice to the results

or did another factor creep in and just

make it look like the new practice was

a winner?

•36• •37•

I S I T R E A L LY B E S T ?

Q u e s t i o n 1

AOL made a compelling case in the

early 1990s for buying market share as

a best practice. For almost 10 years,

AOL measured itself (and convinced

market analysts and its shareholders to

do the same) in terms of the number of

subscribers gained. The company

spent hundreds of millions of dollars

grabbing up market share in a huge,

emerging market where they were also

defining the rules. There was an enor-

mous payoff for their efforts. Most of

us don’t even remember the rest of the

original pack of competitors –

CompuServe, Genie, Prodigy, The

Source, Dialcomm.

Apparently many of the later 1990s

start-ups didn’t remember those com-

petitors either. For many dotcom

start-ups, “eyeballs,” “traffic” and

“stickiness” became the metrics by

which they lived. But in the small,

high-value, highly competitive niche

markets in which they operated, those

metrics also killed them.

There are many cases where a best prac-

tice for one company in its market with

its specific characteristics becomes a

worst practice elsewhere. And this

leads us to the question of fit.

Southwest Airlines is one of the few

airline companies performing well in

what can only be described as a dismal

travel market. But how would no

food, only one type of plane, no seat

assignments, and flight attendants in

shorts and sneakers with whistles

around their necks go over with

Concorde passengers? These

Southwest best practices would not fit

with Concorde’s business objectives, its

culture or its market reality.

Many companies think cultural fit cri-

teria are less important than the others.

They believe if the business objectives

are aligned and the market reality is

shared, then they can handle the cul-

tural differences.

Cultural fit is decidedly the most

important of the three aspects dis-

cussed here. The other two criteria can

be adapted – at least some of the time.

But cultural differences are often deal

killers. More than half of mergers and

acquisitions are testament. Best prac-

tices don’t become the right ones with-

out cultural fit.

•38• •39•

B U T B E S T F O R W H O M ? D O E S I T F I T ?

Q u e s t i o n 2 Q u e s t i o n 3

In the world of right practices, the old

saying “the whole is greater than the

sum of its parts” needs to be trans-

formed into “the sum of the parts can

still leave big holes.” Right practices

don’t live in silos – not in functional

silos or even in process silos like supply

chain management or customer rela-

tionship management.

Right practices for PepsiCo must be

integrated with the company’s other

initiatives, strategies and practices.

And if they are not, well, they aren’t

right. The last thing you need is anoth-

er initiative or strategy or practice that

someone throws a few resources at and

reports on at the next staff meeting.

Very often the best lessons are learned

from mistakes. When they are other

companies’ mistakes — or worst prac-

tices — they can have real value without

the cost. Ford’s recent fall from number

one in auto industry value generation to

near the bottom may be a great example

of a public relations worst practice:

fight with your leading and oldest sup-

plier in public. This sounds like supply

chain mismanagement.

Worst practices are a treasure trove of

bad ideas and good ideas gone wrong

that can be easily avoided. Where do

we find worst practices? Just think of

these recent business practices (and

remember the seriousness with which

they were uttered):

•40• •41•

D O E S I T F I T T O G E T H E R ? W H AT A B O U T “ W O R S T P R A C T I C E S ” ?

B Y G O N E B U S I N E S S

B U Z Z W O R D S

Vertical integration

Cost centers

Market share at any cost

Segments of one

Dotted line reporting

Cost-based pricing

We’ll make it up on volume

Mega mergers

Technology push

Functional discipline

Value-added commodities

Economies of scope

Q u e s t i o n 5Q u e s t i o n 4

Finally, a structured assessment of best

practices for right candidates is not com-

plete until one more question is asked.

Does this practice provide a foundation

for building a future strength – one

that will provide sustainable differenti-

ation? A good way to begin answering

that question is to understand current

strengths and each one’s place in the

PepsiCo growth engine.

Certainly PepsiCo has significant

strengths in the areas of product inno-

vation, sales productivity and supply

chain management. Product innova-

tion – the market-driven PepsiCo

strength – should be the key driver for

Over the Top growth. The other two

strengths – both cost-driven – provide

vital flexibility to the larger PepsiCo

growth strategy.

It would be easy to say that if a best

practice does not touch one of these, it

is assuredly not a right practice for

PepsiCo. Of course, that would not be

true. PepsiCo has incorporated best

practices in several other areas – most

notably in diversity – that have had

far-reaching positive results for the

company. And diversity certainly

builds a strong foundation for future

strength. It could be argued that it is a

key driver for product innovation – and

it can’t be a bad idea to have senior

managers who are also representative

of key market segments.

PepsiCo’s diversity initiative repre-

sents one of those difficult-to-measure

ideals on which foundations are built,

and strengths and success emerge.

They are usually ideals of character or

culture – like experimentation, risk-

taking, constructive criticism or intel-

lectual curiosity.

So, for a best practice to become a right

practice for PepsiCo, it has to fit with

the foundation initiatives – a future

strength area of PepsiCo. Or fit with the

strengths PepsiCo would like to have.

•42• •43•

I S I T A F O U N D AT I O N F O R T H E F U T U R E ?

Q u e s t i o n 6

PA RT N E R I N G T O G E T I T D O N E

Assessment of best practices to deter-

mine right practice candidates is just

the first step in the process that will

help PepsiCo discover and exploit right

practices. The process could look

something like this:

And so far, we have been talking only

about the first part: assessment.

We have ideas to support you in assess-

ment and in the other two areas as well.

For example, we would like to help you

take Frito Lay’s Starfleet organization to

the next level. We can help explore

ways to efficiently gather a continuous

flow of best practice ideas, assess their

adaptability for all of PepsiCo and

apply them in an integrated way –

meaning multi-functional and cross-

process – for the greatest impact.

How else can we contribute? Well,

there is not much our company can do

to help you actually do innovation.

Where we can contribute most is in

helping you create the organizational

and technology alignment necessary to

share knowledge effectively across the

new multidisciplinary innovation

teams your company will need to

achieve breakthrough success.

Whether it’s pushing the envelope on

specifications for front-line technology,

helping you dance in your customer’s

shoes or squeezing more value for

PepsiCo out of supply chain technolo-

gies, know this: We stand ready to

assist you – to add value and ideas that

will help you meet your goal of profitable

top line growth.

•44• •45•

Assess Adapt Apply

Assess Adapt Apply

• Is it really best?• But best for whom?• Does it fit?• Does it fit together?• What about “worst” practices?• Is it a foundation for the future?

T E A M D E L O I T T EC O N S U LT I N G

PepsiCo demands the attention of a

deep and experienced team at Deloitte

Consulting. A team with breadth and

depth in product innovation, sales

productivity and supply chain man-

agement. Team members include:

Pat Conroy

Deloitte Consulting

127 Public Square

Suite 2500

Cleveland, OH 44114-1303

Tel: (216) 830-6602

Fax: (216) 589-3939

Email: paconroy@dc.com

Jim Kilpatrick

Deloitte Consulting

North York City Center

5140 Yonge Street

Suite 1700

North York, M2N6L7

Toronto

Tel: (416) 874-3231

Fax: (416) 874-3200

Email: jimkilpatrick@dc.com

John Manrodt

Deloitte Consulting

6363 N. State Highway

Suite 800

Irving, TX 75038

Tel: (469) 417-3255

Fax: (469) 417-3250

Email: jmanrodt@dc.com

•46•