Suppliers in the Soft Drink

¶ … Suppliers in the Soft Drink Industry

The influence and impact of suppliers on the Carbonated Soft Drink (CSD) industry continues to be a source of conflict and competition with the CSD manufacturers. The supplier base consists of sugar processing production centers, syrup and flavoring products, packaging materials including plastic, glass, and aluminum bottles and cans, and packaging for distribution and resale.

The CSD manufacturers together account for 65% of all syrup and sugars in the U.S., in addition to having strategic plans in place to continually pursue vertical integration to attain higher levels of price elasticity (Baker, Bresnahan, 1984). Given the financial resources of CSD manufactures, suppliers are often at a disadvantage in this industry.

Porter's Five Forces Model Applied to CSD Ingredient Suppliers

Recently Dr. Porter re-evaluated and published a follow-on article in the Harvard Business Review detailing updates to the Five Forces Model (Porter, 2008), and in the article he states that supplier's ability to vertically integrate on their own impendent of buyers (in this case the CSD manufacturers) led to the development of higher levels of supply chain coordination and knowledge. As nearly every ingredient that is used in the production of carbonated soft drinks is a commodity (Baker, Bresnahan, 1984), CSR manufacturers are successfully using pricing and availability supply chain optimization software to gain competitive advantage (Leschen, Johnson, 1999), and the selection of second- and third-tier suppliers as well (Petroni, Braglia, 2000)

This automating of the query, quote and pricing process has further increased the vulnerability of suppliers of vertical integration by their buyers. The Federal Trade Commission (FTC) in fact has stepped in to protect syrup suppliers specifically as Pepsi and Coca-Cola both began purchasing smaller suppliers to expand their own supply chains while driving down the costs of syrups on the open market. The FTC ruled this had anti-trust implications and did not approve the purchase of additional syrup manufacturers by either company (Seltzman, Levy, & Hilke, 1999). The concern the FTC had in protecting these smaller syrup providers was that given the efficiencies and process improvements CSD manufacturers would put into place, an entire segment of suppliers would eventually be out of business. This same dynamic occurred with bottle and can suppliers, where the FTC also stepped in and forbid CSD manufacturers from purchasing additional businesses to become vertically integrated. Ultimately the FTC has said that the suppliers of ingredients to CPD manufacturers are in a commodity business, and therefore must be protected from becoming entirely replaced by vertical integration strategies on the part of their buyers. The gross margins and profitability on syrup specifically are low and as this is a process good, the impact of workflow design and re-engineering are critical. Suppliers are forming best practices teams to assist one another in becoming more cost-efficient and more capable of sustaining price points relative to the bargaining power of CSD manufacturers. The role of suppliers then in the CSD industry is one of being relatively weak relative to buyers, who are intent on creating more vertically integrated supply chains to attain higher economies of scale.