South-Western - Management  
Truce in Sight for Coke, Bottlers
Topic Managing Service and Manufacturing Operations
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Key Words Distribution, warehouse deliveries, regional distribution centers, big-box retailers
News Story

Coca-cola has been in a feud with its bottlers over a new distribution method that franchise holders say threatens their exclusive franchises that they have held for decades.

The bottlers sued Coke in February after the company began shipping Powerade directly to Wal-Mart distribution centers. The warehouse deliveries bypassed a centuries-old franchise system under which bottlers sell directly to stores in their territories.

Coke has argued that the new method is necessary because of requirements of big-box retailers that buy in bulk and rely on regional distribution centers.

The bottlers and Coca-Cola are close to a compromise agreement that will likely involve a warehouse delivery system that cuts the bottlers in on the profits. The agreement is believed to be similar to the one that Coke uses to distribute bottled Dasani water to McDonald’s, which then delivers the product to its outlets using regional distribution centers.

The two sides agreed to try to work together last year to avoid a costly court fight and restore peace within the Coke distribution system. Coke and its bottlers are facing many business stressors of late, including conflict over product innovation and the escalating costs of materials like aluminum and corn syrup sweetener.

The plaintiffs in the suit allege that the warehouse distribution model violates a 1994 agreement between Coke and its bottlers over Powerade distribution. The bottlers believe that their method of direct store delivery allows for better service and increased brand loyalty because they can respond to local conditions and create personal relationships with retailers.

Coke believes that direct store delivery is more expensive and less effective because it can not easily support the growing assortment of niche products such as tea, coffees, and energy drinks that are driving sales in their industry.

Coke began its warehouse deliveries of Powerade to Wal-Mart to better compete with Gatorade, made by the Pepsi Company, which now controls more than 80% of that market. Coke believes that the new distribution method will double sales volume of Powerade at Wal-Mart.

Questions
1.

What are the advantages to the direct store delivery model and in what circumstances might this model be the best method of supply? Why is Coke attempting to change the way that they supply product to their customers?

2.

Why do big-box stores like Wal-Mart prefer to have warehouse deliveries over store deliveries as Coke has traditionally done? What inventory management issues are being utilized?

3.

What is a just-in-time inventory system? How does warehouse delivery support just-in-time inventory systems?

4.

Explain how a warehouse might use the Japanese system of kanban to indicate when to reorder inventory and to coordinate with their suppliers.

Source “Truce in Sight for Coke, Bottlers,” The Atlanta Journal-Constitution, Jan. 12, 2007, p. G1.
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