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Case Studies in Finance |
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Pepsi is a multinational company who operates within three primary industry segments: beverages, snack foods, and restaurants. The primary products sold in the beverage segment include Pepsi, Diet Pepsi, 7UP, and Mountain Dew. Frito-Lay represents the domestic snack food business, while PepsiCo's restaurant segment consists primarily of Taco Bell, Pizza Hut, and KFC. Pepsi also engages in several joint ventures around the world, each within one of the three industry segments.
Because Pepsi is such a large manufacturer and distributor, they spend millions of dollars each year on salaries trying to keep track of orders, payments, and receipts for each of their three lines of business.
Todd Rovelstad, a manager in Financial Services at Pepsi's Phoenix plant, has discovered a way to reduce the time required to log orders, payments, and receipts. His idea is simple, yet innovative. Todd uses bar codes to sort paperwork.
Just as bar codes are used in a grocery store to identify each item and its price, Todd can use bar codes to identify where orders are sent to and from, the product that is being referred to, and the amount of the product to be bought, sold, or shipped.
This idea has several positive attributes. First, the Pepsi employees will be able to do their logging up to four times faster than they are able to under the current system. Today, receipts for payment are left stacked until a processor can get to them. This also allows employees to concentrate more on other ways in which the company can save money. Second, the accuracy rate under the bar code system is 99.99%. While keying in codes is relatively accurate also, Pepsi has been experiencing problems because their workers are putting in too much over time and fatigue has increased the error rate.
Todd did not stop at bar codes for processing accounts receivables. He also saw the usefulness of bar codes for mail. The post office now sorts mail electronically by bar codes for those letters that have them. Pepsi can use coded envelopes to speed up the return time when its customers pay for shipments. These funds can then be deposited into PepsiCo's account much sooner than they currently can be. Even though interest is earned on only one to two additional days, when considering the size of Pepsi, this will translates into big savings.
Pepsi wants to determine just how much these new programs will save the company. To determine the amount, they have disclosed the following information concerning the operating cycle. Pepsi's average payment period is 29 days. Their average age of inventory is 42 days. And the average collection period is 39 days.
Pepsi feels that with the new system in place, it can speed up the average collection period by 12 days. This figure reflects the fact that the employees will not only receive the payments earlier, but more importantly, they will be able to start processing the receipts much sooner than they are currently able to do. The average age of the inventory and average payment period are assumed to remain unchanged.
Pepsi currently spends $28,000,000 per year on its operating cycle investments. Funds used for financing the operating cycle cost 12% per annum. Todd feels the additional annual cost of $50,000 will be sufficient to pay for the added hardware necessary to use bar codes. This expense does not take into consideration the additional salary expenses that will be avoided due to a reduction in overtime costs.
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