“We live in a world where supply chains, not companies, compete for market dominance. But companies often have diverging incentives and interests from their supply chain partners, so when they independently strive to optimize their individual objectives, the expected result can be compromised. ” Hau Lee, 3 A’s of Supply Chain Excellence
It has happened. The jaws of death—the loss of market share and profitability—drove the transformation. On February 25th, 2010, Coca-Cola announced the acquisition of Coca-Cola Enterprises (CCE) for approximately 12 billion. CCE is the largest North American bottler.
In the carbonated beverage category, we now see the competition between supply chains. Hau Lee’s prediction has come true.
A Look Back at History
With the creation of Coca-Cola Enterprises in 1986, Coca-Cola was the darling of Wall Street. The company divested assets to improve Return on Assets (ROA) and financial fundamentals. As a student of the Wharton School, this supply chain transformation was one of my first case studies. I remember the professor droning on and on about Coca-Cola’s brilliance. However, what was not obvious then; and, is all too obvious now, is that when a company sheds assets, it must allow provisions to continuously design and retool it’s supply chain to drive market performance. The more extensive the supply chain and the more third-party nodes, the greater the challenge and the more critical the ownership. Form must follow function. Alignment and strategy are essential. For me, the Coca-Cola case study is a clear sign of this importance.
Rethink the Basics?
In the United States, Coca-Cola learned this the hard way. Battered by retail feedback (five years of falling Cannondale scores (third-party surveys of retail perception of the supply chain)), declining market share and rising costs, Coca-Cola declared enough. It announced the re-purchase of the bottler. There were three fundamental supply chain issues underlying the defeat:
- Goal Alignment:In the formation of CCE, the bottling operations were incented on volume. It sounded like a good idea then. Who could argue with pay based upon more volume on the shelf? However, when carbonated beverage consumption changed due to consumer health and wellness preferences, the Coca-Cola Company wanted to power growth in new products. Suddenly, there was a problem. The established incentives drove a volume-based response from CCE of more black and red: established high volume Coca-Cola products. There were no incentives to align and compensate supply chain parties for the lumpier, lower volume demand patterns accompanying new product introductions. As a result, the company was not able to achieve the right balance between efficiency and innovation.
- Flexibility to Morph Outside-in: When the Coca-Cola bottling system was defined, Wal-Mart was more regional As Wal-Mart gained power and established national presence, the regional bottling system became a liability. Wal-Mart wanted a more efficient and responsive supply chain: one voice to the customer with flawless execution. The Coca-Cola regional system riddled with goal alignment issues could not meet the needs of its largest customer.
- Technology Evolution and Adaptation: Over the past five years, it has been interesting for me to watch the work of Coca-Cola and PepsiCo on the use of market sensing and downstream data technologies. While PepsiCo aggressively built sales overlay systems across the bottlers and pushed for the adoption of new technologies to sense demand, Coca-Cola continued to focus inside-out with a myopic focus on supply. The capability gap between the two companies on the use of downstream data to sense and shape demand over the past five years widened creating a competitive advantage for PepsiCo. The design of the PepsiCo supply chain system encouraged technology adoption outside-in while the design of the Coca-Cola supply chain system pushed from the inside-out.
For me, this list is only the tip of the iceberg. There is much that I will leave unsaid because of client confidentiality. However, this case study for me is a clear testimonial to Hau Lee’s prediction. As supply chains morph from enterprise-centric strategies where companies own and operate all nodes to a reliance on third-party trading relationships, supply chain strategy becomes even more important. In this case, the Coca-Cola supply chain design failed to enable the redefinition of incentives, customer relationships and the timely adoption of technology with market changes.
For many reading the coverage of the acquisition of Coca-Cola Enterprises by Coca-Cola will seem like business as usual. Yes, PepsiCo bought back part of their bottling system first; but the relationship was not as contentious, and the gaps not as large.
For me, this announcement is a wake-up call that the design of supply chain networks is even more important. While we may shed assets, we must carefully craft strategies to ensure alignment, adaptation, and evolution.
What does it say to you? Let us know.