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Global Procurement Areas of Reportable Productivity

Levers impacting Directs:​

  • Value Engineering: Projects that result in tangible cost reductions through ingredient and/or packaging optimization.  Impacts Raw Material​
  • Conversion: Costs associated with converting or processing. Non-market & exchange-basis freight costs​
  • Finished Goods/FG Co-Pack: Costs associated with third party to manufactures and packages foods, beverages or other products for their clients

Commodity Productivity​

    Value Engineering​

    • Driven by formula / recipe change that leads to less quantity or lower cost materials (ingredient or packaging optimization).​
    • All savings are net of inflation (i.e., supply reengineering) & identifiable incremental costs that relate to the initiative and have been aligned with operations.​

    Commodity Compressible​

    • Reduction in raw materials procurement landed costs​
    • Reduction in conversion cost​
    • Optimization of inward freight cost​
    • Commodity compressible productivity is adjusted for compressible inflation​

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    FG/Co-Pack

    • FG Purchases of 3rd Party brands
    • 3rd Party Brand Concentrate
    • Commodity costs associated with Co-Packaging under the full case cost model (PEP does not own the material inventory) and the tolling method (PEP owns the material inventory) is included in net commodities. 

Directs: YOY Productivity Metric

YoY Savings Amount and as a Percentage of Conversion Spend

YoY Directs productivity is driven by the:

  • Reduction in conversion cost rates YoY and/or
  • Reduction in input costs through Value Engineering initiatives

Includes TCO and must be validated by Business Finance 

Productivity Savings amount is calculated as:

YoY change in cost per unit X number of units purchased in Current Year

Examples: 

  • Conversion: Change in YoY PET Conversion rate cost per bottles X number of bottles in current year
  • Value Engineering: Change in YoY input material cost per unit X number of unites produced in current year

Productivity Savings percentage is calculated as:

Productivity Savings / Prior Year Calculated Conversion Spend

Prior Year Calculated Conversion Spend = Current Year Conversion Spend + Current Year Conversion Cost Savings

Note: YoY is reported using PY Translational Forex (i.e., PY constant currency rates issued by Corporate FP&A during Planning cycle)

Directs Productivity Levers: Volume & Pricing Initiatives

Description, Treatment and Examples

Net Commodity Inflation Overview

Net Commodity Inflation Equation

Identifying Components of Net Commodity Inflation


Net Commodity Inflation: Calculation

NCI Example

Directs Overview – Value Engineering vs. Conversion

DIRECTS PRODUCTIVITY VS INDIRECTS PRODUCTIVITY: DELINEATING THE DIFFERENCE 

DIRECTS PRODUCTIVITY VS INDIRECTS PRODUCTIVITY: DELINEATING THE DIFFERENCE

TCO: Total Cost of Ownership

Productivity is Net of Compressible Costs Required to Deliver YoY Rate (Conversion) or Material (VE) Reduction

 

    Total Cost of Ownership (TCO)

    • TCO is the guiding principle of GP's Direct materials reported Productivity 

    GP Directs Materials Productivity Initiatives

    • Are net of compressible cost inflation and reflects realistic, full project values (e.g. not adjusted for profitability)
    • Exclude cost avoidance savings
    • May include costs & productivity that are outside of GP's spend base

    Value Engineering (VE)

    • VE captures projects that result in tangible cost reduction through ingredient or packaging optimization (including bottle self-manufacturing)
    • Savings are net of all identifiable incremental costs that relate to the initiative and have been aligned with operations (e.g. incremental depreciation, one-off commodity write-offs, contract exit penalties, plant write-offs  directly linked to project, etc.)

 

GP Framework to Report Transactional FX

Transactional FX Impact on Raw Commodity and Conversion Cost

 

Transactional FX Impact on Conversion Cost is not equal to Conversion Inflation

Forex and Volume Leverage Guidance

Translational FX (Constant Currency): All productivity should be reported in constant currency using PY Actuals at a Category level consistent with PepsiCo Productivity scorecards

Directs: YoY Productivity Value Engineering Examples

YoY Productivity from Light-weighting and Reformulation

Value Engineering Calculation Illustration #1

Example of Bottle/Preform Light-Weighting

Value Engineering Calculation Illustration #2

Example of Reformulation