Question

Case Study 2 (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 multibillion-dollar company, headquartered in Dallas, now has 41 products—15 with sales of over $100 million per year and seven 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 costs 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 cornmeal, corn, potatoes, oil, and seasoning. Using potato chips to illustrate rapid inventory flow: potatoes are moved via truck from the farm to regional plants for processing, to the 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.
- Cornmeal arrives from various farms in the Midwest, and inventory typically averages four days' production.
- Seasoning inventory averages seven 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 the 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 like a bag of chips in about 112 shifts. Packaged finished products move from production to the distribution chain in less than 1.4 days.

Discussion Questions

1. How does the mix of Frito-Lay's inventory differ from those at a machine or cabinet shop (a process-focused facility)?

Answer 1

The inventory mix of Frito-Lay, consisting of perishable items, emphasizes rapid turnover and high freshness, differing from a process-focused facility like a machine shop, which offers a longer shelf life for its non-perishable inventory and less stringent turnover requirements.

Step-by-step explanation:

Comparison of Inventory Mix Between Frito-Lay and Process-Focused Facilities

The mix of Frito-Lay's inventory, which includes perishable raw materials like potatoes and corn, differs substantially from that of a process-focused facility such as a machine or cabinet shop. Frito-Lay maintains a rapid inventory flow to ensure product freshness, which requires managing inventories in such a way that raw materials quickly transform into finished goods and are moved out for distribution within very short time frames. Conversely, a process-focused facility like a machine shop, which deals with non-perishable items such as metal, might have comparatively longer inventory holding times. These facilities can maintain larger inventories of raw materials because they do not face the same spoilage risks as Frito-Lay's perishable goods.

In a process-focused facility, the inventory of raw materials and finished products can have a longer shelf life. The inventory does not go through as rapid a transformation from raw material to finished product as in Frito-Lay's operation which is highly streamlined to maintain freshness. Additionally, MRO (maintenance, repair, and operating supplies) inventories are a critical component for both types of facilities, although for different reasons. For Frito-Lay, the MRO inventory ensures continuous operation of production lines for perishable goods, while for a machine shop, it ensures the ongoing capability to manufacture products.