Case study:
Managing Inventory at Frito-Lay
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.
Corn 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 shifts. Packaged finished products move from production to the distribution chain in less than 1.4 days.
Questions:
How does the mix of Frito-Lay inventory differ from those of a machine or cabinet shop (a process-focused facility)?
In your opinion, why does inventory flow so quickly through a Frito-Lay plant?
Explain FOUR (4) types of inventory available in Frito-Lay.
Discuss FOUR (4) importance of forecasting for operation management functional area of an organization.
Frito-Lay store in North Georgia stocks chips in its warehouse and sells it through an adjoining outlets. The store keeps several types of chip in stock, however its biggest seller is Super Ring Chip. The store wants to determine the optimal order and total inventory cost. Given the annual demand of 10, 000 boxes of Super Ring Chip, an annual carrying cost of $0.75/ pounds and ordering cost of $150. The Frito-Lay store would also like to know the number of orders that will be made annually and the time between orders. Given the store is open every day except Sunday and new year.
The optimal order quantity per order.
The minimum total annual inventory costs.
he optimal number of orders per year.
The optimal time between orders (in working days).