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Lining Up Converts

By Mel Duvall Print this article Print

The choice of a new generation is rife with options. Will Pepsi prove itself to be up to the challenge?

Lining Up Converts">

Lining Up Converts

Do Diligence, a technology strategy consulting firm in Rockport, Mass., a year ago helped revamp questionnaires PepsiCo created to assess the state of systems in 700 of its offices worldwide. PepsiCo wanted a measure of several items, including information systems security, disaster recovery, software development methods and the overall effectiveness of its information technology management.

Soon after, PepsiCo created its optimization plan.

One plank of that campaign is to merge at least some distribution centers so that various PepsiCo products can be delivered on the same trucks. The company hasn't talked in detail about those plans, but financial analysts expect Pepsi to continue to add certain Quaker products, such as rice cakes, cereal bars and toaster pastries, to Frito-Lay's 16,300-route distribution network this year and next.

But first up is to finally get all the divisions on one enterprise software platform: Oracle. Software for managing human resources is first, then finance and inventory.

For the Oracle conversion, all the divisions will be required to adopt the implementation strategy Quaker had been using to install SAP software, says Karen Alber, vice president of integration at PepsiCo.

Alber was vice president of integration at Chicago-based Quaker and oversaw at least the beginning of a three-year project to standardize on SAP R/3 software there. Key to Quaker's method, she says, is to create a project management team comprised of people not only from the technology department but all affected business areas. Most important, the effort must be led by the business side, not the technology group.

"It's a massive task being undertaken," Alber says. "Massive, but doable."

Unfortunately for Quaker, the Oracle mandate meant killing its SAP implementation when it was 35% to 40% done, according to Alber. Quaker had managed to put in SAP's e-procurement application at 26 sites, for 1,400 users. Industry analysts figure that stopping the SAP project flushes away anywhere from $40 million to $100 million.

While it waits for the conversion to Oracle software to begin, Quaker once again uses a mishmash of homegrown applications that it had been trying to escape by moving to SAP.

Separately, Frito-Lay has spent $60 million since 1999 to reorganize its supply chain to, for example, ensure full and efficient truckloads with on-board computers that track the location, arrival time and load of its tractor trailers. Frito-Lay says it has gained $200 million in productivity and grown margins by nearly 3% from streamlining its supply chain.

Pepsi executives won't reveal the overall cost of, or savings projected from, the companywide optimization plan. But Nooyi told Wall Street analysts that Frito-Lay's stripping out of waste in its supply chain will save $800 million in the next three years.

Her implication: Just wait until the whole company works efficiently.

PepsiCo is regarded as a strong marketer, not, ultimately, a tech-savvy company.

The two people overseeing Pepsi's current efforts to "optimize" its systems—Nooyi and Shauna King, president of the Business Solutions Group—both come from finance.

King is known as a tough executive who can rankle other managers. In the Wall Street meeting, Nooyi called King "a bull" who will push through hard changes. "She'll make sure everything gets delivered right, absolutely. No question about it," Nooyi said, laughing along with others in the room.

Shared technology services should save money and improve efficiencies, and, in turn, help business units hit their financial goals. But it didn't always work that way at PepsiCo, says one of the former technology managers.

At one point, the manager had cut costs at a business unit by 17% to 20%, but then the Business Solutions Group raised the charge-back prices for services it provided to that unit. The manager protested.

"'We're not paying more,' I said, and they said, 'We'll cut your services back.'" Eventually, the manager lost the fight. "It was a very difficult time."

Charlie Feld, chief information officer at Frito-Lay from 1981 to 1992, created Frito-Lay's revered handheld computer system. He says part of the problem with shared services anywhere, not just at PepsiCo, is the split allegiance of business-unit managers.

"It's hard to tell a manager he has to operate within a certain budget," Feld says, "and then have a central I.T. group come in and tell him that he has to buy into a new technology initiative."

The Business Solutions Group has succeeded in installing some common systems to replace divisional ones. For example, a central procurement system manages the purchase of diverse materials such as office supplies, the ingredients for making chips, and raw materials such as glass, plastic bottles and aluminum cans.

A customer billing system generates reports showing a PepsiCo-wide view of customers. The system is built on mainframe software from Elevon in San Francisco (previously known as Walker Interactive). The reports show sales histories for, say, a particular 7-Eleven store or Winn-Dixie supermarket. Data from the different business units has been cleansed so that terms such as "price," "promotion" and "customer" are defined the same way by Frito-Lay, Pepsi and the other businesses, says a former CIO.

There is a central help desk. Employees with computer problems at Tropicana, Quaker, Pepsi or Frito-Lay call a main help line run by the shared services group. If the glitch can't be fixed over the phone, the group contacts local technology staff at the business unit to walk over to the employee's desk and figure it out.

While that work is a start, senior managers are reluctant to push too hard from the top. CEO Reinemund is careful to emphasize that he will not take apart PepsiCo's autonomous business-unit structure.

"This is not about slamming businesses together," he said during a recent earnings call. "We want to add . . . a touch of collaboration that will allow us to strengthen the overall performance of our PepsiCo businesses."

At an analyst meeting a week later, he put it another way. At PepsiCo, he said, "We have big brands and big businesses. You can't run that in a centralized fashion. You have to do it the way we have grown up doing it. That's part of our culture."

This is not the about-face on business-unit independence that's necessary for real change, says Jeanne Ross, a principal research scientist at the Massachusetts Institute of Technology's Sloan School of Management in Cambridge, Mass.

The "touch of collaboration" Reinemund talked about isn't definitive. The CEO can't walk a tightrope, avoiding choosing sides between central control or business unit control. "As long as the corporate management is saying autonomous business units are measured on business-unit successes, the I.T. people associated with that business unit will do what the business unit wants and needs for it to measure up," Ross says. "The good ideal of sharing and working with a central I.T. department will always fall to second place."

"That's the problem," adds one of the former executives. "They've got one foot on the gas and one on the brake."

By contrast, Colgate-Palmolive, the $9.5 billion consumer products giant, got tough when it decided to standardize globally on SAP enterprise software. It is tempting to leave business units alone when targets are being met, says Ed Toben, Colgate's chief information officer, but making the gutsier choice to rearrange operations ultimately delivers the greatest benefits.

It took nine years, but Colgate has installed SAP in 53 countries and eliminated 75 data centers. Direct savings have been more than $225 million, but more important, the integration has helped steadily improve gross profit margins, from 48 cents on each dollar of sales in 1994 to 55 cents in the most recent quarter.

If PepsiCo could achieve a similar seven cents increase in gross margins, it could add $1.7 billion to its gross profits, each year.

This article was originally published on 2003-05-01
Contributing Editor
Mel Duvall is a veteran business and technology journalist, having written for a variety of daily newspapers and magazines for 17 years. Most recently he was the Business Commerce Editor for Interactive Week, and previously served as a senior business writer for The Financial Post.

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