Frito-Lay, Inc.: The Backhaul Decision Case Study
What is the main decision confronting Frito-Lay? What happens if they do nothing?
What possible and feasible options are available to Frito-Lay?
If you were Ed Kugler, what would be your recommend to the senior management?
What are the risks and benefits of your recommendation?
FRITO-LAYS Case Analysis
This case is a classic example of a company in the clasp of a continuous drive for reducing the costs that they incur through various means possible. Being in a cutthroat competitive age for all type of retail business it becomes very important for the companies to reduce their cost in every way possible which often leads to adoption of various types of effective practices that not only reduce the cost of operations but also leads to a complete overhaul of the costing system and in some very lucky cases actually ends up being an area of revenue for future purposes.
This case tries to look into a similar problem that is being faced by the Frito Lays Company. In the midst of a continuous drive for cutting cost the manager of the company has recently come up with new and novel idea to cut costs by increasing an area of revenue. Having one of the biggest fleets of delivery trucks the company’s trucks run at an average of about 69 million miles per year and, along with the various third-party vendor that the company uses in some select routes, is one of the most efficient and extensive transport or logistics system across the retail companies. However, it was soon brought to notice that almost half of this travel time or approx. 35 million km were actually used by trucks and vehicles which came back completely empty and thus added no value to the delivery system that the company boasts. Thus, it has been proposed that the company tie up with third-party retailers to share this extra capacity that they have to these company who are in need of transportation facilities and thus earn a bit of revenue from this side. The problem that they are facing is whether to agree to it or continue in the way that they were already doing
This decision solely lies in the efforts of increasing the efficiency of the company. Although there is a huge potential for this step which if acted on may result in significant cost reductions in the company there might also be a possibility that the company management decide to not go ahead with it in the lights of the complete rehaul of the logistics system that will be needed in order to make the above idea into possibility. It will also be needed to be completely divested to the PDMS in order to make sure that there is not too much load in the head office and the person in charge of the route is in total control of it However the lack of taking any action will not only result in a complete loss of a huge source of possible revenues but will also reduce the efficiency that the trucks use by a huge margin. Mainly the fraction of trucks that plow on the routes that take overnight would be running empty for more than 1 day which would have otherwise resulted in a much more lucrative route with heavy demand. Though there might be a lot of problems that would plague the company during the process of implementation of the said mechanism, the inability to act on this possible opportunity will also result in a loss of revenue potentials
The best possible options that even Ed Kruger should recommend to the senior management is to chalk out route which results in the booking of the vehicles for a whole day even overnight in some cases. Tie up with the retail companies and branches that remain or are located in the destination positions of those routes and agree to share the fleet of trucks that recently plow them to be allowed to bring back their deliveries to the point of origin at a subsidized cost. The reason for the subsidized cost is to score a level above the companies who specifically excel in doing third-party logistics for other companies. Also in the present scenario, any amount of money that may come from these routes are profits . Once the brand value of Frito-Lays as a responsible and trustworthy logistics partner is strongly cemented in the industry, the company can go forward to bring their rates back to the industry average and as the estimates show they create revenue in the upwards of 10 million dollars through these routes.
Ed Kruger should persuade the management to take all possible steps starting from the necessary government approvals to the make sure that there are no glitches while the procedure of acquiring no partners and creating its name as a logistics partner.
Though the benefits for the above-mentioned procedure and partnership are plenty some of which ranges from a possible diversification of business to a completely new source of revenue; however it does not come without any risk. The complete divestment in the hands of the PDMS may result in the break down of the erstwhile central administrative procedure of the company and may result in in the loss as well as increase complaints and problems from clients from various regions specifically due to the inefficiency of any PDM.
Though the company already pays an industry average of about 35000 dollars to the truck drivers already, this new source of revenues, as well as the waiting time of the drivers in order to collect and upload the new materials, may result in a demand for an increase in salaries and mitigate or diminish much of the profits. Also, there is a high chance that this might not be able to establish themselves in the presence of many other third-party logistics partners. Although the risk associated is less as there is no more capital investment being made in order to achieve this new functionality that does not mean that a failure in such portions will not result in the reduction in morals of the company.
In summary, every step and decision taken by any company is fraught with risks and only after careful planning and analysis should be taken and implemented. Though this initiative does pose a much lesser tendency of risk until it should be implemented in a phased approach with strict guidance from the management levels
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