Supply Chain Management of Coca-Cola

Executive Summary

Coca-Cola is a well established international brand with its products marketed in over 200 countries around the world.  

It has however over the years been met with many criticisms and allegations of practices not deemed to be sustainable in its supply chain.  Allegations of over usage of water in India, resulting in massive water depletion has plagued their franchise distributors in the country, also using the Coca-Cola brand name, and has caused many to resent their operations. Many in India were also reported to be using the drink as pesticides for their crops, impacting their operations there with allegations of high toxin levels in the drink.

In 2013, Oxfam revealed that Coca-Cola was purchasing their supplies of sugars from companies involved in land grab scandals in Brazil and Thailand. The case was publicized widely by the media that Coca-Cola announced they are going to take serious steps to filter suppliers that engages in land grabbing.

There were also several instances of child labor practices being used by their suppliers, namely in El Salvador and in the Philippines, in 2004 and 2012 respectively. There were also cases of major suppliers of oranges treating their African migrant employees very poorly.

It is suggested that Coca-Cola should move their operations in affected areas in India as soon as possible. There should also be more transparency in the names of the companies involved in their supply chain. The company should also employ more auditors to audit their growing number of suppliers so that there will be lesser cases of dealing with unsustainable companies.

Coca-Cola should also be more serious in dealing with allegations of child labors and poor treatment of migrants by making the process of selecting companies in their supply chains more strict

It is observed however, that it will still take quite some time for Coca-Cola to be a truly sustainable company with sustainable supply chain in light of many cases highlighted and those not highlighted.

Introduction

An increasingly challenging aspect for companies to meet nowadays is for them to be more sustainable and not just for their organization but also throughout their supply chain. In an age where information spread faster and easier, bad practices in sustainability can easily influence customer decisions especially if there are clear violations of rights such as abuses. Companies will have to be more transparent about their suppliers so that the public are able to know their practices and can put their trust them.

            Many food and beverage companies now annually publish their supply chain companies to the public after years of preferring to keep it disclosed, revealed by international rights group, Oxfam in 2013, after having done studies on 10 of the world’s largest which includes Coca-Cola.

            Coca-Cola is the world’s largest beverage company serving over 200 countries with 500 brands of sparkling and still water. The organization is headquartered in Atlanta, Georgia and has a record of 1.9 billion bottles served in one day. Let us look at some of the company’s strategies.

            The figure above (will upload later) shows Coca-Cola’s Supplier Segmentation Matrix and how the company classifies their suppliers along with what characteristics are included under each category. Companies classified under different headings will have different priorities and staff being assigned to handle them.

Under supply risk, there are 12 factors to be considered while potential to add value, has 13 factors, Coca-Cola will rate the suppliers based on each of the factors, and then based on the relative importance of each factors, develop two scores for each supplier that are used to position the supplier on the matrix.  A business objective is defined for each of the suppliers falling into the four categories, along with the expected results of achieving these objectives, for example, a long-term growth for both parties. With this, Coca-Cola will specify the level of engagement, the amount of resources needed, the depth of involvement, and how the relationship should be measured.

            Coca-Cola employs a strategy of omnipresent, in enhancing its revenues, which links well with a very large market and having a brand-focused strategy. Coke employs a variety of supply chains in order to sell its products, and the company sells through markets, restaurants, vending machine, bars, convenience stores and others. All this to make its products always readily available to the customers while each has a different supply chain characteristic that the company will have to deal with.

            The organization has invested billions over the years to acquire its independent bottlers, resulting in it having a bigger advantage over its rival, Pepsi Cola. (3) Compared to the latter, Coca-Cola has been noted to have a better supply chain, especially outside the US, where Coke makes 70% of its profits. Coca-Cola has a franchising business model, where it operates by producing only concentrates, beverage bases and syrups, and sells it to bottlers in other countries. These bottlers will prepare the finalized drinks by mixing it with filtered water and sweeteners, and then carbonating it. The final bottled product will then be sent to retailers, or they could be sent straight to the end customers.

Below is Porter’s 5 Forces Model (Vrontis and Sharp, 2003)

           

Referring to the figure above (will upload figure), it can be seen that Coca-Cola is a very strong player in the beverage industry and thus has a very big influence on other companies along their supply chain.           

Coke uses a Demand Driven Supply Network (DDSN) which employs a pull strategy. Eid Steinike, vice president and CIO of the company explained their strategy as thus:

“One critical benefit is to ensure that we can minimize out-of-stocks. Imagine that we direct our Facebook fans to a local outlet with a targeted promotion and the product isn’t available. We’ve lost a sale and had a negative impact on relationships with our consumers. The inventory at the back of a store is pretty visible, but we lose track at the shelf point and the cooler point. We’re experimenting with some interesting methods to fill that gap, such as radio-frequency identification and electronic tagging of our products.”

            Although Coca-Cola is a global company, its products do not need to travel too far to reach the end customers. This is because the company has a policy of making it a local business, and they would not prefer to ship their products for more than a few hundred miles. This customer driven supply chain is used in all of its markets and requires a good understanding of the customers’ requirements. In order to make sure that this runs smoothly, the company launched the world’s largest six sigma supply chain operation. They work closely with their bottlers and is continuously building a common lean six sigma program around the world.

Through segmenting its supply chain, they are able to meet customer demands better. Their supply chains would need to be modified depending on the attributes of both products and clients ().

            They have upgraded their ERP system in in March 2014, by choosing Rutherford and Associates and Microsoft to come up with a new solution, which was known as North Star. This is to ensure that they are always at a competitive edge, by increasing their accuracy and becoming more efficient with their ordering process (). Personnel can accurately access real-time sales and inventory numbers while generating invoices.

Issues

Coca-Cola has faced many criticisms alleging it of having a questionable sustainability policy. Indeed many companies seem to face internal and external challenges in setting up a good example of a truly sustainable company. Challenges include insufficient dedication to sustainable development (MDGs Report, 2010), lack of top management commitment and resources (Maignan et al, 2002; Min and Galle, 2001), inadequate expertise, strong emphasis on efficiency and governance of supply relationships rather than environmental and social sustainability (Maignan et al, 2002) and reactive and fire fighting culture, which refers to people very resistant to changes (Preuss, 2001).

 In 2013, Oxfam published a report detailing Coca-Cola’s relationship with companies that are involved in land grab scandals in the latter’s home countries. Supplier companies where Coke purchases its supply of sugars were reported to received their supply of sugar canes from disputed lands, said to be taken from the indigenous people without their consent. 

The report mentioned companies Brunge in Brazil, and Tate & Lyle Sugars as the companies involved. Oxfam rated the company as having a low 3/10 mark in their balance scorecard for Coke under the category of land sustainability.

Coca-Cola has responded by severing ties with the suppliers involved and had announced that they will commit and abide by the policy of “Free, Prior and Informed Consent” (FPIC). They have also stated that they will implement a set of Supplier Guiding Principles that will guide them to choose the proper suppliers in the future.

In May 2014, one of Coca-Cola’s bottling companies, Coca-Cola HBC unveiled that they had signed an agreement Sedex, a global expert on collaboration for responsible sourcing, to share and manage data within its supply chain, and to ensure that there is an increase in transparency in every level. ()

However, there are still concerns that Coke might not be doing enough, as they have hundreds of sugar suppliers in countries all over the world, and it can be challenging to monitor every one of these companies.

There are other issues such as allegations of high toxins in the contents of the popular drink that is distributed in India. The allegations, which first surfaced in 2003, is currently still floating around, with local newspapers still reporting that many farmers were using Coke as pesticide for their crops. Although now the allegations did not have a significant impact, as compared to when the story first surfaced (), the better thing to do is to have this charge cleared and customer confidence returned.

Another issue in sustainability is the fact that the drinking company uses too much water in preparing the beverage, to the detriment of local populations. There was a lot of opposition to this practice after many instances of water shortages in the area around bottling plants in the country, particularly in the cities of Lucknow and Varanasi in India which have witnessed scenes of demonstrations for many years up until last year, especially from the poor every time there was an incident of water supplies running low. There were also many complaints of water being polluted.

The company has also been repeatedly revealed to having suppliers which employs child labor illegally. In 2004, it was revealed that Coca-Cola was purchasing sugarcanes from farms in El Salvador that were employing children as young as 8 years old and were given various tasks, many even harder than those done by adults (). In 2012, CNN reported that Coca-Cola was buying sugars from companies in Northern Mindanao in the Philippines, that was found to also be employing child labor.

In 2012, The Ecologist news agency reported that an Italian supplier of oranges for their Fanta brand was employing migrant workers from various countries in Africa and did not give them proper accommodation and salary. Their condition was described as was than refugees in camps.

These revelations has negatively impacted the company’s image and in order to bring change to the supply chain parties which they already have leverage on, Coca-Cola should take concrete steps in order to solve this.

Solutions     

                                                      

One of the ways to address the water pollution and shortages problem plaguing cities in India is to shift their operations elsewhere.  Continuing their operations there would only further worsen the problem and only serve to negatively impact their image. Upmanu Lall of Colombia University, in addressing the plant in the city of Varanasi, suggests that technology can be used to solve this, such as using soil moisture sensors that will allow farmers to know if they are watering their crops excessively.

However, a 2009 study by the University of California shows that the groundwater depletion in the area of Northwestern India from 2002 to 2008 was equivalent to the net loss of triple the capacity of Lake Mead, the largest manmade reservoir in the United State. () In light of this, the Coca-Cola bottling company should consider shifting the plant to areas that has a lesser population so as not to affect the residents.

The company should also be as strict about other sustainability issues as they are when they revealed their policy of FPIC in addressing the land grab issues. They should also filter suppliers that do not comply with rules regarding child labor and environmental destruction and companies franchises which have been reported to use different amount of ingredients in India.

Coca-Cola admitted in the Ecologist article, that there were too many companies involved in their supply chain that they could not audit every one that is involved. This means that the issue of transparency is very serious. They should reveal the names of the companies to more external auditors so that they could have more assistance in carrying out this duty.

Although Coca-Cola itself has a very strict policy against child labor as published in their website and press releases (), they should be equally concerned about their suppliers practices and be strict in finding out. By continuing to support these companies, especially by a very profitable company like Coca-Cola, it will only encourage these activities to continue further. The fact that children are doing adult jobs with salary as low as $3 a day shows that this is not something excusable such as claiming that the children would not mind(CNN, 2012).

As a responsible company, Coca-Cola should be more transparent by disclosing the parties involved in their supply chain and their activities. Revelations of unsustainable practices by either suppliers or distributors may likely occur again in the near future, and thus it should be in the interest of the company to continuously gain customers’ trust and portray themselves as environmental friendly.

Conclusions

Sustainable supply chain is very important as companies would want to operate in the long term and the livelihood of stakeholders, current and future, are at stake. Coca-Cola being multinational company which is very well established could have a big leverage in setting up a good example and influencing others in the supply chain to conform as well. Criticisms and reports of unsustainable practices will only appear again as time comes, but the changes made internally by the company especially the recent land scandal grab revelation should be a good step forward.

However, seeing that there are famous scandals and issues publicized almost every year involving unsustainable practices, it might take some time for the company to truly be able to pride themselves with a sustainable supply chain.

References

1) Gattorna, John (2003 ) Gower Handbook of Supply Chain Management. Hants: Gower Publishing Ltd

2) Gattorna, John (1998) Strategic Supply Chain Alignment: Best Practice in Supply Chain Management. Hants: Gower Publishing Ltd

3) Gong, Yenming (2013) Global Operations Strategy: Fundamentals and Practice, London: Sprienger

4)http://www.mckinsey.com/insights/business_technology/driving_the_top_line_with_technology_an_interview_with_the_cio_of_coca-cola

5) http://scw-mag.com/index.php/sections/distribution/143-the-coca-cola-company

6) http://www.beverageworld.com/articles/full/16357/coke-and-bottlers-develop-erp-solution

7) http://www.sedexglobal.com/coca-cola-hbc-sedex-responsible-supply-chain-2/

8) http://www.theguardian.com/sustainable-business/pepsi-coke-sugar-land-grabs-conflicts-oxfam

9) http://www.forbes.com/2008/01/15/coke-india-pesticides-markets-equity_rd_0115markets24.html

10) http://www.industryweek.com/global-economy/indian-authorities-threaten-demolish-coca-cola-plant

11) http://www.readcube.com/articles/10.1038/nature08238

12) http://www.naturalnews.com/019174_coca-cola_child_labor.html#

13) http://edition.cnn.com/2012/05/01/world/asia/philippines-child-labo

14) http://www.coca-cola.co.uk/faq/community/policies-on-employee-workers-rights-child-labour-descrimination.html

15) http://www.supplymanagement.com/news/2013/oxfam-slates-firms-secrecy-over-supply-chains

16)http://www.theecologist.org/News/news_analysis/1257263/coca_cola_challenged_over_orange_harvest_linked_to_exploitation_and_squalor.html