If you’re a US citizen, then it’s overwhelmingly likely that you’re a member of the 94% of households that buy products from food giant Frito-Lay. And if by any chance you’re part of the remaining 6%, then be aware - the company wants to get you doing business with it. Or as Michael Lindsey, Chief Transformation and Strategy Officer, puts it:
We want to get that to 100. So we have 6 points to go.
Frito-Lay is the snack food arm of PepsiCo, a $16 billion a year company that includes brands such as Lays, Doritos, Crackerjacks and Funyuns among others. There are 30 brands in total, of which six are billion dollar run rate businesses in their own right. Managing the production and supply of those products is a major endeavor, says Lindsey:
We run an end-to-end system that starts with the farm and the potatoes and the corn and runs all the way until the snacks you deliver into people's hands and onto the retail shelves….We start with the seeds that farmers use to plant potatoes for Lays. We manufacture ourselves. We actually run the fleet that that puts [product] around in the direct-to-the store business. We are actually the largest private fleet in all of America. We're larger than UPS, larger than FedEx. We actually run more trucks in North America than any of those fleets. We literally go every single store almost every day, so we do 500,000 store visits every week to about 315,000 customers. Most of them we go to more than once per week as 25,000 employees are going from store to store to store, putting products on shelves, taking orders, replenishing.
That's a massive scale operation, that's controlled really from end-to-end, the entire system. If you think about the complexity that introduces, it's a fairly intense and complex process.
That’s all very impressive, but there’s one problem - and it’s one that was only going to get bigger unless it was addressed:
The challenge is we built that system over decades, starting with Herman Lay who founded the company selling chips off the back of his van. This has largely been the model. We are very, very good at taking a few brands, big bags, and putting them on a retailer's shelf. The challenge is that the world's gotten a lot more complex in multiple dimensions.
Firstly consumers are looking for a much wider variety of snacks than they ever had in the past. It used to be the case that we could get away with those five or six major brands, four or five flavors each. Now we're up to 1200 different SKUs.[Stock Keeping Units]. We run 1200 different combinations of brands, products, seasonings, pack sizes across the United States. And we still have to deliver that with a system that was designed to carry 200 or 300 SKUs at a particular point.
So the challenge we got into is that consumers want more variety, and they want to buy [products] in a whole lot of different places that they never used to shop. We didn't used to have to deal with e-commerce, we didn't have to deal with click-and-collect or discounters like an Aldi. There's a whole variety of ways consumers want to buy that introduces complexity into our system. So we're having to manage now a system that was designed 50 or 60 years ago for a relatively simple world. And we're having to adapt that system, and all the inherent complexity that comes with that system, into a world of almost infinitely more complexity.
The sheer size of Fritolay’s customer footprint adds to the pressure, he adds:
With 94% household penetration, everybody's our consumer. Hopefully every single [person] has a Frito-lay product somewhere in the household…Then as the younger generation has gotten accustomed to immediate indulgence, of having any product they want delivered in one hour to their house, the expectation for what that means - exactly the product I want, when I want it, where I want it - has just gone through the roof. And then anything that we do that in any way doesn't give them exactly what they want, when they want it, where they want it, becomes dissatisfaction and starts to erode their household penetration.
Another problem for the firm was that although it knows there are literally millions and millions of customers out there buying its wares, it has had very little idea of who these people are and how they behave:
Historically we actually haven't had a good line of sight to our end consumer, who they were, what they were buying. We serve through our customers who are the retailers. The large retailers are our customers and they control the relationship with the end consumer. What we can't do based on that is make sure that we're providing exactly the right snack for the right consumer in the right store, because while we may know a lot in aggregate about the consumers in a particular region, we don't know anything individually about any one of them. We don't know when they're coming into the store. When they're shopping, when they leave one store, do they go down the street and go to Starbucks and pick up a snack there and if so, which one? Then from there, do they go online and buy a snack and if so which one?
What Fritolay needed was to develop “first party relationships” with its consumers in a way that it had never had to in the past, Lindsey explains:
We've always been able to, in aggregate, sell and rely on the fact that across 94% of households we will eventually get to you somehow. But if we want to get to that last bit of growth, that last bit of consumption, we have to make sure that we really deeply understand each individual consumer and do it frankly in a way that's even adding value to our retailers. They know who's in their store, but they don't know what's happening in the stores around them necessarily. They only see what's happening in their four walls.
By understanding how that consumer moves across different occasions, how they represent their time, whether they're a shopper or consumer or a mother, what role they are playing at any individual time and what do they want to consume at that time, we can add value to our retailers and hopefully then tailor our snacks over time to offer them exactly what they need. That's hard-to-pick-up insights on things like the growth of seaweed snacks, for instance. You see it happening in different parts of the country, but hopefully by getting to understand what consumers are buying avant garde snacks, who is buying, where and for what occasions, we can help lead the whole industry in that transformation.
But that wasn't going to happen unless Frito-lay transformed the way it operate. The traditional one-size-fits-all approach had to be replaced by a more granular micro-market view of demand which in turn needed to be linked back to the supply chain. Lindsey explains:
We operate a massively complex supply chain, the largest fleet in America. We have 30 factories all across the US. If you can't match that demand to the supply, you have a highly inefficient system. What a lot of people miss on digital transformations, is you end up focusing on just the demand side or the consumer understanding, or just the go-to-market understanding or just the supply chain understanding. If you don't get that end-to-end view across all of them, you end up missing the interconnections, which is where the real value is created. And that's what we try to focus on with our digital transformation.
One enabling technology in this is the use of sensors across the supply chain to provide data-driven insights:
You need to know what's on a shelf at any given time, what's in the distribution center that services that shelf, what's on the truck that's driving from a distribution center to the shelf, what's going to happen in the environment around it. We have the ability for instance in our stores right now to know, based on the local events that are happening around a particular store, based on prior history, based on weather, what are the sales going to be in the next 36 to 48 hours. That then triggers a replenishment order that then works its way back into the system to be able to replenish and refill that store the next time the truck comes through.
We've had that in process for a little while, but what we haven't able to do in the past is link that demand signal all the way back to the production signal. So instead of producing on demand based on the signals that we know are coming, because of the different bottlenecks in the supply chain and the fact that it was siloed data at each step of the process, we'd end up producing inventory and then sell that inventory back out. By putting sensors throughout the entire system and connecting all those silos, you can take that to store demand level, all the way down to the individual outlets, all 2 million outlets that we serve across the United States. You can aggregate that and create a production plan, down to the individual SKU, down to the bag level at the individual store. That's what we call precision at scale. That's the model we're building towards, but it does require sensors at every step.
This has wide-reaching implications that stretch back to the potato in the farmer’s soil, he adds:
We work our way all the way back to what type of potatoes do I need to grow? Because the potato that it is grown to put in a small bag of Lays is different from a potato that's grown to put in a big bag of Lays. The potato that you use for seasoning is different to the potato you use for organic or non-GMO Lays, so we have to be able to thread that demand signal all the way back to the farm in some cases.
If that sounds complex, it’s because it is. But Frito-lay’s digital transformation work has involved revising the way the corporate culture thinks about complexity, says Lindsey:
The human nature tendency is to say, ’I'm going to restrict the complexity. I'm going to try to manage my way through the complexity and try to simplify the world and I'll execute what I do extremely well’. Our cultural shift has been to embrace complexity, to say that the only way to get that extra bit of growth to go from 94 to 97% household penetration, is to say, ‘I'm going to go after every single micro-moment of demand, and I'm going to fulfill it perfectly at scale’. That's an immense technological and cultural challenge, to tell people, 'We're not going to try to simplify the world; we’re going to use technology to manage that complexity’.
Frito-lay uses Salesforce clouds to connect all the data and the information across the various channels to market. Lindsey explains:
Historically we've had e-commerce channels where we sell directly to small businesses. We've had key account channels where we sell to the large Walmarts, Krogers, our large company retail customers. We've had up-and- down-the-street channels where we'd sell to any individual bodega who happens to be in any city in the country. We put Salesforce against each of the three of those on three different platforms. What happens is as you put the same platform across each, you can start to connect information across, and you can say, 'Hey the B2B business that I'm selling to directly via e-commerce and is ordering this portfolio of products, is the same one that should be in that bodega down the street. The Walmart in the corner should be running that same promotion and the fact that it's running that promotion affects what I expect to see in terms of demand from the bodega e-commerce customer’.
Connecting across those breaks down the channel silos, at least from the front end forward. Connecting all the data that that generates back into the supply chain and making sure that all the data that Salesforce is managing about how our customers are buying and how the field is executing against that demand and connecting that seamlessly on the cloud back into the supply side of our business, you can get the real time visibility, that is fundamental to the whole transformation.
At the end of all this, for all the talk of complexity, there is an endearingly simple objective, he concludes:
We've defined our vision as being we want to provide more smiles to more consumers. And the only way to get somebody to smile is give them precisely the food they want, precisely where they want to buy it and precisely the pack, the price, the seasoning, the flavor, the substrate that they want for that occasion with that person at that time of day. And that's our vision of what we want to accomplish - to be able to give you that product tailored down to you the individual, exactly where you want to buy it, in a completely frictionless manner.