Operations Management of Coca Cola: Applying the Model

Essay for Operations Management

SUMMARY

Coca Cola is one of the most valuable and well known retailers in the world. The secret to its success comes from its focus on its supply chain, which is made as efficient as possible through the use of ERP systems and integration up and down the chain. This boosts its financial efficiency and improves its customer service. Fizzup can potentially experience similar benefits to Coca Cola, but will need to use change management techniques, cost benefit analyses and significant training in order to realise said benefits.

INTRODUCTION

2.1 This report was prompted by the belief that Coca Cola is one of the most efficient and valuable companies and brands in the world, and hence Fizzup, as a small manufacturer and distributor of soft drinks, could benefit from Coca Cola’s expertise. The main reason for Coca Cola’s success appears to be its efficient distribution system, which allows the company to sell over 1.4 billion servings of its product every day. As such, this paper aims to examine the extent to which the factors which have caused Coca Cola’s distribution system to be so successful can be applied to Fizzup. In order to achieve this it is, of course, necessary to determine the factors that actually differentiate Coca Cola from its competitors. 

THE COCA-COLA SUPPLY CHAIN

The main part of Coca Cola’s operations which act to differentiate the company is its focus on logistical efficiency throughout the distribution section of its supply chain (Foley and Kontzer, 2004). With 1.4 billion servings of Coca Cola purchased every day around the world, including Diet Coke and other varieties, it is clear that this supply chain is extremely large and complex (Parker, 2007). As such, Foley and Kontzer (2004) claim that Coca Cola is unparalleled in its ability to efficiently manage the delivery of Coke to stores and retail outlets around the world. A key part of this is Coke’s drive to provide new capabilities to tis account managers, merchandisers and delivery drivers, through the use of a coherent SAP suite across the entire business. This not only provides Coca Cola with more information at an individual store level, but also helps eliminate inefficiencies and automate the distribution process from Coca Cola right through to the end retailer. Indeed, Coca Cola uses a single form of SAP throughout its entire manufacturing supply chain in all forty five countries, providing massive consistency benefits. However, all the company’s beverages are distributed through franchise agreements with 53 bottlers around the world, whom Coca Cola only supplies with post mix syrup and other ingredients (Thomas, 2004). Parker (2007) claims that as a result Coca Cola’s distribution network includes over 1,000 production plants and a delivery fleet which is five times larger than that of UPS. Whilst many of these bottlers also use SAP, their systems were previously not compatible with Coca Cola’s. As such, Coca Cola is now working on increasing the degree of integration and process commonality across all its distributors. Parker (2007) claims that a key aspect of this is that Coca Cola spent six months studying the various processes across all bottlers, finding that over 90 percent of the business processes of all bottlers are common across the entire distribution chain. As such, Coca Cola has begun upgrading to the latest version of SAP ERP in order to develop a services oriented architecture and hence boost the compatibility between the various systems across the distribution network. The main goal of this endeavour is to produce common processes across all bottlers, allowing information on purchasing, manufacturing, sales and distribution to pass quickly up and down the supply chain, thus maintaining Coca Cola’s logistical edge (Parker, 2007). In addition to this, Kant et al (2008) report that Coca Cola has implemented a specific vehicle routing software in order to maximise the efficiencies in the supply chain. As a result, over 10,000 trucks in the Coca Cola distribution fleet now have their routes automatically planned, saving the company $45 million each year and massively improving customer service.

COCA-COLA SYSTEMS MAP

I have elected to include the manufacturing, distribution and retail aspects of Coca Cola’s operations in my systems map. This is because the distribution chain can only truly be understood by also considering the systems which sit around it, and dictate its processes. Firstly, the raw ingredients arrive at the Coca Cola manufacturing facility where they go into the syrup manufacturing process. There is little additional detail here, as Coca Cola closely guards its recipe and the way in which it manufactures Coca Cola. From here, the syrup is packed and proceeds in one of two directions. Firstly it can be transported in bulk to kiosks and restaurants, where it is mixed with carbonated water to produce the final product and served to customers. Alternatively it can be transported in bulk to the bottlers, who will mix it with carbonated water and bottle or can it. From the bottlers, it is then distributed to supermarkets, other shops, and sports events, where it is sold in its bottled or canned form. In general, the physical flows within the system will almost all compromise the syrup and its diluted and carbonated form. Indeed, given that all the Coca Cola bottlers are franchised, Coca Cola only ever deals with the post mix syrup and the various ingredients which go to make it up. The bottlers then add in the bottles or cans as appropriate, and the carbonated water can be supplied by simply adding compressed carbon dioxide to water. As such, the production processes for these parts of the distribution chain have not been included, as they do not represent a core part of Coca Cola’s supply chain, rather they are up to individual bottlers and retailers to address. The informational flows generally comprise customer data moving back up the chain from the retailers. The retailers will inform the bottlers of their expected sales in the future, and the bottlers will inform Coca Cola of how much post mix syrup to produce. In addition, Coca Cola will inform the bottlers and retailers around any potential issues such as shortages or new varieties being launched.

INPUT-TRANSFORMATION-OUTPUT DIAGRAM

As has been discussed above, the primary input into the whole production process is the post mix syrup produced by Coca Cola. This is the only input that in fundamental to it actually being Coca Cola, as it is the input which carries the Coca Cola recipe and brand. The secondary input is the carbonated water, which is required to turn the post mix syrup from its concentrated and easy to transport form into diluted, drinkable Coca Cola. The tertiary input is the bottles and cans which are needed to served Coca Cola in its bottled or canned form, but which are not needed if it is served directly to customers from a siphon, as would happen in a restaurant or at a kiosk. Coca Cola’s distribution chain only provides two distinct outputs. The first of these is Coca Cola served directly in its diluted form in a glass or paper cup at a restaurant or from a kiosk. The second is bottled or canned Coca Cola, which is how Coca Cola would be sold in a supermarket or at a sports event.

POTENTIAL APPLICATIONS TO FIZZUP

PROPOSAL FOR IMPLEMENTING COCA-COLA PROCESSES

If Fizzup was to implement the Coca Cola processes in its distribution chain, the main concept it would need to consider would be change management. This is because the move from a disparate supply chain where all companies tend to look after their own concerns to one where all members communicate and cooperate is likely to require significant cultural and process changes. Therefore, it is important to consider the various aspects and tenets of change management, including the fact that everyone will react differently to change, and the fact that expectations will need to be managed and fears will need to be addressed (Kotter, 1990). As such, one of the best frameworks for managing this change would be Kotter’s (1990) change phase framework. This involves companies going through eight phases in order to drive change, right the way from establishing a sense of urgency and creating a clear vision, to anchoring the change in the hearts and minds of employees and managers throughout the distribution chain. In addition, Fizzup would need to analyse the decision using the cost benefit analysis concept to ensure that the costs of integrating systems and processes up and down the supply chain would be worthwhile (Boardman et al, 2000). This is reflected in the fact that Coca Cola spent six months analysing the processes in its distribution chain. Whilst Fizzup’s operation is much smaller than Coca Cola’s, the same principles should still apply, and the company should be careful to address and control the potential costs of implementation.

Fortunately, Boardman et al (2000) claim that the cost benefit analysis concept itself provides an excellent framework through which the costs can be controlled and the benefits assessed, thus helping Fizzup to carry out this analysis and ensure the implementation is successful. With regards to the potential benefits, the Coca Cola example gives an idea of the scale of potential cost savings. Even by applying a simple system for route planning to 10,000 of its vehicles, the company was able to save $45 million each year, a saving of around $4,500 per vehicle. Whilst Fizzup’s fleet is considerably smaller than Coca Cola’s, a saving on this scale would still be extremely valuable in improving the efficiency of the company and the supply chain. In addition, as discussed in the Coca Cola example, integrating systems up and down the supply chain not only provides significant financial benefits, in terms of cost savings, but it also provides significant customer service benefits, as the distribution chain can be more responsive to the demands of retailers and their changing customer preferences. Whilst this benefit can be hard to quantify, given that the competition for sales space in the drinks industry is very large, particularly when many pubs and restaurants will only take drinks from one manufacturer, the customer service benefits could be invaluable. In addition, greater integration up and down the chain will facilitate information flows.

EVALUATION AND CONTROL OF NEW SYSTEM

Evaluation and control should be fairly straightforward, as the majority of modern ERP systems come with built in evaluation procedures, including the ability to view how the system is being used and by whom (O’Leary, 2000). As such, the main issue will not be implementing procedures to evaluate the use of the system; rather it will be attempting to control the use of the system, to ensure that it is being used in the most effective manner and that it is providing benefits to the entire supply chain. One of the most productive methods of controlling the performance of the system could be to hold regular meetings amongst the various stakeholder groups operating in the supply chain. This would allow the various participants in the supply chain to voice their concerns and suggestions for improvement. In addition, it is also important to train the users and managers who will be responsible for the system around how best to use the system. This is because without sufficient training managers will be unable to exert control over their users, and the users will not be able to operate the system to its full capacity. Therefore, initial training sessions on how the use the system, and any new functionality introduced from previous ERP systems which may have existed beforehand, should be provided to ensure that everyone is familiar with the system and there will be no issues in operation.

CONCLUSIONS

OPERATIONS WHICH DIFFERENTIATE COCA-COLA

The main operations which differentiate Coca Cola from its competitors are its use of ERP systems to help it focus on efficiency and communication throughout its supply chain. This enables the company to provide as much of its product as is needed to customers on a timely basis, with minimum cost.

COCA-COLA SYSTEMS MAP

Coca Cola’s distribution system proceeds through two main channels: post mix syrup is either distributed directly to retailers, or it is sent to bottlers who process and bottle or can it and then distributed it on to retailers in a different form.

INPUT-TRANSFORMATION-OUTPUT DIAGRAM

Coca Cola has a very simple distribution system, with the only inputs being the post mix syrup, carbonated water and bottles/cans and the only outputs being Coca Cola in bottles/cans or Coca Cola ready to serve.

PROPOSAL FOR IMPLEMENTING COCA-COLA PROCESSES

Implementing Coca Cola’s processes would be a major change affecting the entire distribution chain. As such, change management techniques should be used and cost benefit analyses should be run. However, the potential financial and customer service benefits could be massive and very significant.

EVALUATION AND CONTROL OF NEW SYSTEM

Evaluation of the new ERP system should be fairly straightforward, due to the ability to produce reports on usage and other statistics. However, controlling the new system will require significant training, as well as regular communication between the various parties in the distribution chain.

REFERENCES

1. Boardman, A. E. Greenberg, D. H. Vining, A. R. and Weimer, D. L. (2000) Cost-Benefit Analysis: Concepts and Practice: 2nd Edition. Prentice Hall.
2. Datamonitor (2008) Coca-Cola Company, The. Datamonitor Company Profiles. 15th September 2008.
3. Foley, J. and Kontzer, T. (2004) Coca-Cola Plans To Refresh Supply Chain. InformationWeek; Issue 976, p. 22.
4. Kant, G. Jacks, M. and Aantjes, C. (2008) Coca-Cola Enterprises Optimizes Vehicle Routes for Efficient Product Delivery. Interfaces; Vol. 38, Issue 1, p. 40-50.
5. Kotter, J. P. (1995) Force For Change: How Leadership Differs from Management. Free Press.
6. O'Leary, D. E. (2000) Enterprise Resource Planning Systems: Systems, Life Cycle, Electronic Commerce, and Risk. Cambridge University Press.
7. Parker, K. (2007) ERP and SOA at The Coca Cola Company. Manufacturing Business Technology; Vol. 25, Issue 5, p. 2.
8. Slack, N. Chambers, S. and Johnson, R. (2006) Operations Management: 5th Edition. Financial Times / Prentice Hall.
9. Thomas, D. (2004) Coca-Cola and SAP collaborate on managing supply chain networks. Computer Weekly; p. 27.

APPENDIX ONE: COCA COLA Coca Cola is one of the largest manufacturers of non-alcoholic beverage syrups in the world. The company now owns or licenses over 450 brands, however its primary brand is still Coca Cola. The company employs over 90,500 people, and in its last financial year it increased its revenues by almost 20%, to reach $28.8 billion (Datamonitor, 2008).

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