Pepsi is a multinationalcompany who operates within three primary industry segments: beverages, snack

foods, and restaurants.The primary products sold in the beverage segment include Pepsi, Diet Pepsi, TUP, and Mountain Dew. Frito-Lays represents the domestic snack food business, while PepsiCo's restaurant segment consists primarily of Taco Bell,Pizza Hut, and KFC. Pepsi also engages in several joint ventures around the world, each within one of the three industry segments.

Because Pepsi is such a large manufacturer and distributor, they spend millions of dollars each year on salaries trying to keep track of orders, payments, and receipts for each of their three lines of business.

Todd Rovelstad, a managerin FinancialServices at Pepsi's Phoenix plant, has discovered a way to reduce the time required to log orders, payments, and receipts. His idea is simple, yet innovative. Todd uses barcodes to sort paperwork. Just as bar codes are used in a grocery store to identify each item and its price,

Todd can use bar codes to identify where orders are sent to and from, the product that is being referred to, and the amount of the

product to be bought, sold, or shipped, This idea has several positive attributes. First, the Pepsi employees will be able to do their logging up to four times faster than they are able to under the current system. Today, receipts for payment are left stacked until a processor can get to them. This also allows employees to concentrate more on other ways

in which the company can save money. Second, the accuracy rate under the barcode system is 99.990/o.

While keying in codes is relatively accurate also, Pepsi has been experiencing problems because their

workers are putting in too much overtime and fatigue has increased the error rate.

Todd did not stop at bar codes for processing accounts receivables. He also saw the usefulness of bar

codes for mail. The post office now sorts mail electronically by bar codes for those letters that have them.

Pepsi can use coded envelopes to speed up the return time when its customers pay for shipments. These

funds can then be deposited into PepsiCo's account much soonerthan they currently can be. Even though

interest is earned on only one to two additional days, when considering the size of Pepsi, this will

translates into big savings.

Pepsi wants to determine just how much these new programs will save the company. To determine the

amount, they have disclosed the following information concerning the operating rycle. Pepsi's average

payment period is 29 days. Theiraverage age of inventory is 42 days. And the average collection period is

39 days.

Pepsi feels that with the new system in place, it can speed up the average collection period by 12 days.

This figure reflects the fact that the employees will not only receive the payments earlier, but more

importantly, they will be able to start processing the receipts much soonerthan they are currently able to

do. The average age of the inventory and average payment period are assumed to remain unchanged,

Pepsi currently spends $28,000,000 per year on its operating rycle investments. Funds used for financing

the operating rycle cost 12olo perannum. Todd feels the additionalannualcost of $50,000 will be sufficient

to payforthe added hardware necessaryto use barcodes. This expense does nottake into consideration

the additionalsalary expenses that will be avoided due to a reduction in overtime costs.

Questions

1. Calculate Pepsi's current operating cycle, cash conversion cycle, and need forshort-term financing of the cash conversion cycle (i.e. What is Pepsi's negotiated financing need?).

2. Calculate the operating rycle, cash conversion cycle, and need forshort-termfinancing of the cash conversion cycle if Pepsi decides to implement the use of bar codes.

3. If the bar codes are used in the future, what will be the annual savings stemming specifically from

the cash conversion rycle financing reduction?

4. Considering the annualcosts associated with implementing the barcode system, should Pepsi change their logging systems?

5. Assume the cost of implementing the barcode system exceeds the savings in reduction of short-term financing needs. Should Pepsi decide not to change systems? Discuss.

6. Define the cash conversion rycle and explain why it is so important. Do you think cash conversion cycles should be different for different industries (HINT- consider a manufacturer versus a retailer).