Chapter 12, Problem 1.7VC

Question

Frito-Lay has flourished since its origin—the 1931 purchase of a small San Antonio firm for $100 that included a recipe, 19 retail accounts, and a hand-operated potato ricer. The multi-billion- dollar company, headquartered in Dallas, now has 41 products—15 with sales of over $100 million per year and 7 at over $1 billion in sales. Production takes place in 36 product-focused plants in the U.S. and Canada, with 48,000 employees.

Inventory is a major investment and an expensive asset in most firms. Holding costs often exceed 25% of product value, but in Frito-Lay’s prepared food industry, holding cost can be much higher because the raw materials are perishable. In the food industry, inventory spoils. So poor inventory management is not only expensive but can also yield an unsatisfactory product that in the extreme can also ruin market acceptance.

Major ingredients at Frito-Lay are corn meal, corn, potatoes, oil, and seasoning. Using potato chips to illustrate rapid inventory flow: potatoes are moved via truck from farm, to regional plants for processing, to warehouse, to the retail store. This happens in a matter of hours—not days or weeks. This keeps freshness high and holding costs low.

Frequent deliveries of the main ingredients at the Florida plant, for example, take several forms:

Potatoes are delivered in 10 truckloads per day, with 150,000 lbs consumed in one shift: the entire potato storage area will only hold 7½ hours' worth of potatoes.

► Oil inventory arrives by rail car, which lasts only 4½ days.

► Com meal arrives from various farms in the Midwest, and inventory typically averages 4 days' production.

► Seasoning inventory averages 7 days.

► Packaging inventory averages 8 to 10 days.

Frito-Lay’s product-focused facility represents a major capital investment. That investment must achieve high utilization to be efficient. The capital cost must be spread over a substantial volume to drive down total cost of the snack foods produced. This demand for high utilization requires reliable equipment and tight schedules. Reliable machinery requires an inventory of critical components: this is known as MRO, or maintenance, repair, and operating supplies. MRO inventory of motors, switches, gears, bearings, and other critical specialized components can be costly but is necessary.

Frito-Lay’s non-MRO inventory moves rapidly. Raw material quickly becomes work-in-process, moving through the system and out the door as a bag of chips in about 1 $\frac{1}{2}$ shifts. Packaged finished products move from production to the distribution chain in less than 1.4 days.

7. Why doesn’t Frito-Lay make all its 41 products at each of its plants?