Frito-Lays Quality Controlled Potato Chips Case Study

Brendan O'Donohoe of Frito-Lay talks with EconTalk host Russ Roberts about how potato chips and other salty snacks get made, distributed, and marketed. The interview follows an hour-long tour of a local supermarket where O'Donohoe showed Roberts some of the ways that chips and snacks get displayed and marketed in a modern supermarket. The conversation is a window into a world that few of us experience or are even aware of--how modern producers and retailers make sure the shelves are stocked and their products get noticed.

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0:36Intro. [Recording date: July 27, 2011.] One of my favorite lines is from Walter Williams, and he and I discussed it when he was a guest here a few years ago. Walter likes to discuss his relationship with his grocery in the following way: "I don't tell them when I'm coming; I don't tell them what I'm going to buy or how much; but if they don't have it when I get there I fire them." Like Walter, I, too, marvel at how the shelves are always full. Of course, long-time listeners know about the power of emergent order, that there are always bagels at the bagel shop. No one is in charge of that. While there is something almost magical about the power of markets to provide the goods and services that we want at prices that make us pretty happy, there is stuff going on at the ground level that actually makes that happen. The other tie-in to this is that a lot people talk about a Hayekian world, an emergent-order world, where there is no planning. Well, there's a ton of planning. There's no planning from the top down, but there are islands of planning in this sea of emergent order. What we are going to talk about today is how that planning takes place to make sure the potato chips you want to buy are sitting in the grocery store, and what happens to the potato along the way. Brendan has been kind enough to spend some time with me this morning. We had talked about going to an actual processing plant; it's a little far away, we're not going to do that. But Brendan is going to give us some ideas about what goes on there. We just spent an hour and a bit at a local Safeway in Menlo Park, CA, and it was a fascinating hour of what goes on behind the scenes in the store, and I have to say I don't think I'll ever look at a grocery store again in the same way. We'll get to that maybe in the second half of the podcast. We're hiring right now, Russ, so if you need a job I'm happy to retrain you as a salesman. It would be great. I'm into chips. One of the reasons I'm into chips goes back to 1992, I think is the year, which is when Ross Perot challenged for the Presidency, and one of his really annoying themes was that it was better to make computer chips than potato chips. And around that time, Fast Company Magazine, business magazine that came out as an alternative to other business magazines, took a very different approach. In their first issue they had a photo essay on how the potato chip gets made, and the theme was how high-tech it has become in our minds. Making potato chips is people in hairnets peeling potatoes, slicing them up, dropping them in a fryer, putting them in a bad somehow, and selling them. What I want to start with is a little bit of the flavor of how a potato arrives at the plant and leaves in a bag. As you've told me, it arrives in a train, not on a truck. So, we have several plants throughout the country, and they are sort of put in strategic locations to serve around the country. We try and build the plants close to freight lines, so you can divert extensions of them off. So, you'll see a cart of kind of potatoes show up, and most of the potatoes that come in will get emptied through the bottom of the rail cart into a washing and processing facility. So, they'll go in and they'll be washed. Is the rail car covered? There's two kinds of rail cars. There's the sliding kind that the hobo jumps in. No, not that kind. And then there's the kind that is open at the top. It has a funnel. If you looked at it there would be a tarp covering or a kind of sealed lid, depending on the type of car. And in the bottom there would be a kind of valve that you could open up that would allow the potatoes to drain through the bottom. And they drain into a canal. A little canal of water that then processes them and spaces them efficiently. So, they get washed in a solution to make sure they are clean and that the water inflates them a little bit. Then they go in and get peeled. How do they get peeled? There's a large tumbler, and at one piece of the tumbler they are kind of spinning around and there's a slight blade in it, so it falls into that thing and it gets spun really quickly. Then it goes into a second peeler as a kind of quality control. How much potato is on the peel? 10-15%. So, it's good but it's not great. It takes away a certain amount of yield that you'll get in the chips on the other end. Do you guys work on making that better? Yes, all the time. We have scientists that come in all the time and look at the supply chain and reduce mass. There's kind of two ways you can do that. The first way is to invent a kind of potato chip that uses the peel; and some people are interested in that. The other way is to constantly reduce the amount that you cut off. So they experiment with different lines on the technology to see what does it taste like if we cut less off or more off? In Dallas they have a separate testing facility where they do these kind of things, but in our plant not a lot of testing gets done. Your plant's got the cutting edge. Literally.
6:32So, what do you do with the peel? In the Modesto plant, the peel will be recirculated to a bio-mass boiler. Our CEO has kind of stated that we are going to have zero carbon future by a certain point in the future. So, all of the kind of waste products--we want to figure out how to be environmentally sustainable by using them to fuel the other operations that go on in the plant. So that plant has both solar power capability and a bio-mass boiler that will be used to either power the local fleet that are around there; as they use that to extract the caloric energy from it; or power other aspects of the line. The alternative is to throw it away or sell it as feed. Which you can do. Do you know whether the desire to have a zero-carbon footprint is profitable, in that example? Frito-Lay has experimented with different places in our value chain that it can be profitable. It is most profitable at the plant level. We have a distribution center (DC) up in Rochester, NY--I know you spend some time there. Brandon has some acronyms that I will occasionally ask him to spell out. Disaggregate the jargon. At one of these distribution centers up in Rochester, it is kind of zero-footprint up there. All of the light is natural coming in, solar powered, wild grasses that are in and around the place--they are used to hold the land together around there so you don't have to do lawn mowing. Lawn mowers are actually not good for the environment. Reduce ticks. In economics, there's always something else. But the potato peeling, using that for fuel--is that financially profitable? Whenever you do these kind of experimentations with stuff, eventually you get to a point where the cost pays for itself. And we've gotten very close with Modesto. Modesto doesn't pay for itself alone. Augmented with the solar power and the tax advantages of having a solar power system that government credits, it does make that profitable.
9:00So, the potato is peeled. Now what? It's got a lot of friends. How does the machine know to throw it out of the tumbler? How does it know it's peeled? The blade is actually on a place where it can only get friction based on what the skin feels like. As soon as that happens and its radius is reduced far enough, it gets spat out through the other side. Kind of weird to watch: how is this working? It's calibrated to make it happen. One of the things we've talked about many times is: how many people are we talking about here and the productivity of the people involved? So far, there's not a lot of human effort. You have somebody opening the door for the railcar releasing the valve, having it feed in. But the rest is all automated. You have someone monitoring. To make sure it doesn't break down. The potato comes out of the peeler. It's going to get pushed through the slicer; to slice it up into the size it's going to have. How many slices? If you look at a bag of Lay's, there's kind of 8 or 9 slices you can get out of it. Out of one potato? Yes. They're so thin. I thought you'd get 30. The water weight gets shrunk--as it goes through the baking and frying process that water weight gets reduced. Time out. Simpler question. It's been peeled; it comes out of the tumbler. How big is it? Is it the size of a golf ball, a baseball, a grapefruit? About baseball sized. It's more oblong. It comes out, it gets sliced. After it gets sliced, it's going to go through the baking process. This is a bigger tumbler that it goes through. It gets dipped in the oil; it spends its time in the baking oven and moves simultaneously. How fast is it going at this point? I know the conveyor system gets up to between 45 and 60 miles an hour at the end of the chain, at the quality-control stage. At the beginning of the chain it's going a little bit slower, maybe 15-20 mph. It's moving fairly quickly while it's being baked. It emerges. Of course some of these potatoes get stuck together. Yes; that's why there's this big kind of tumbler about 30-40 feet in diameter that they then go in; now you have the slices of potato and they are still relatively floppy at this point in time. They have been cooked but they don't have the ability to retain the flavoring you are going to put on them. A sprayer will come on and put a very thin film of oil on the potato chip. Then you have your salt sprayer that will put on a tiny amount of salt. Then it goes to quality control. Where does the flavor come in? For a Lay's potato chip there's only three ingredients: the potato, salt, and oil. For a flavored one you'd have a secondary or tertiary sprayer that would happen after that so that the primary thing cooking happens simultaneously for that other kind of seasoning. And that's how you augment the line. So, there'd be 20 of these lines running simultaneously for all the different sales for, and when they know they need x bags of something they say we'll dedicate this line to Lay's Classic stuff, this line to Doritos, this line to Tostitos. They all have the same basic flow in the manufacturing chain, just slightly different depending on the seasoning and where it need to go. Some seasonings need to be applied earlier in the baking process, some later, to make it have the right texture and consistency. How do they get the seasoning on both sides? 'Cause it could be like a toll road, like a bridge--you only do the toll on one side. You could just flavor the top. Would my mouth know the difference? Yes, you'd definitely know the difference. When it goes through that tumbler, the tumbler has a sprayer on the inside that sprays out as well as on the other side that sprays in. So the flavoring, or the salt, is being applied while they are rotating around? While rotating in space. It looks almost like a washing machine that's been canted 90% to the right where the tumbler is kind of moving forward; and the tumbler has a kind of propeller on it, a blade that moves the things through. Are the chips flying around or are they pressed up against the sides? A little bit of both. They are not flying around like in an air vortex, but they are pretty close to the side and they are still turning. And they haven't been fully baked yet, so they are still floppy. They are not going to get broken. One of the things for our quality control procedures is we want everybody to have a full-sized chip when it comes out. I don't know if anybody else is enjoying this as much as I am but I think this is one of the coolest things in the world. Salt-cutting. Depending on the amount of salt--so if you are doing a lightly salted chip, before the salt gets added to it, they have a laser beam that would cut the salt crystals in half; that would then attach them to the potato chip after that. Low sodium is a priority for the American consumer, so in order to retain the flavorness of the chip, the way your tongue responds is to the surface area of the salt crystal. So they have a technology now that cuts the salt, applies the thing, similar tastes bud. So when you say it cuts the salt, you mean literally. Literally. Laser beam? How do they do that? Let me guess: You take each grain of salt, you hold it up, and when the laser cuts it they drop the two halves. No, how do they do that? That might be a little beyond my comprehension. Two questions. On the salt-cutting--that's a new phenomenon, obviously. Yes. 8-10 years. You didn't advertise that. We did advertise that. What did you say? They said: New, salted chips. Does it say low sodium or less sodium? It does. Today it does. It's a light blue bag. Then it's a separate one. Classic Lay's--we haven't advertised on the Classic Lay's. We've slowly reduced it over time but that one hasn't changed enough to really have truth in advertising on that, so the lightly salted stuff, I find it's very hard to distinguish between them. That's caused some problems, because some people, when they buy the lightly salted stuff they don't want to taste salt. They feel like it's not truth in advertising. But it is truth in advertising; we've just changed the managing. We probably need a new way of conveying that message to the consumer. And we're starting to do that.
16:49So, here's the most amazing part of the process to me--I'm always interested in quality control. You rarely get a chip that has a big clunk of mesquite flavor or is bare. I'm sure it happens--it goes through the line and doesn't get sprayed; and you don't want to examine them one at a time. That's too expensive. One of the other lessons that is clear about modern manufacturing is speed matters a lot. Speed's going to determine the volume of your plant, which will determine your output, which will determine your productivity, profits. You want to be able to process this stuff quickly. You are not going to stop; you want to move it along. How does the product in the bag have the quality uniformity? You also have a cooking issue--some chips get burned, some are a little bit raw. How do you keep that from happening? Periodically, we'll run investigations and studies of what piece of manufacturing is the bottleneck. Oftentimes when you do these studies you find there are better ways of doing stuff. At the time that this technology I'm going to talk about was created, that was the bottleneck of the whole manufacturing process. It is now no longer the bottleneck; it's one of the fastest parts of that chain. What happens is as the potatoes make their way out of that tumbler, where the temperature of the tumbler is hotter, that's where they get the kind of crispiness they get; and then they get funneled into a sifter; and they come out and get put onto a conveyor belt. That conveyor belt is moving between 45 and 60 miles an hour at that point. Fast. If you saw that you would note it. They're flying. You wouldn't want to reach in and grab. They then proceed to a photography station, where overhead there is a picture that gets taken of a section of the conveyor belt. It's all measured beforehand, so the machine and the photography equipment know every kind of piece of what the conveyor belt looks like. It then maps where the various chips are on there; and then they undergo a kind of quality control algorithm. So, they go through and say: Hey, this chip is within tolerances of what it should look like. So there's size, how cooked it is, and whether it's got the right amount of flavor on it. Texture. Shape. So if they are kind of overly curled on themselves. There are different tolerances for different kinds of things. You can change it; our manufacturing folks can go in there and say: Hey, we want to produce chips that look a little bit more like this; get rid of all the other ones. And that would just be a matter of sifting, because we produce enough chips that you can produce different textures that come out of there. Same thing with like a Tostito--to get the scoop shape it goes through a little press where it prints the thing and then it comes through. Now there's a gap in the conveyor belt. As the chip goes over that gap, it will literally jump the gap. Because it's moving 60 mph. It has enough speed and the wind resistance on the chip. As they see that coming, they think: Are we going to make it? But actually not all of them do. So, on the other side there is a grid of air pressure pumps--not on the other side, but in the gap--that will squirt air. So as they jump the gap you'll hear little noises going pssst, pssst. And what that jet is doing is pushing as they jump through the air the non-quality chip to fall into a collection bin so they can be put in the bio-mass boiler later. The ones that make it over the gap will proceed to a station where they are collected and actually go into the bags. So, a film is fed into it; so if you want to get a film of Doritos or whatever type of flavoring, you feed that film into the machine; that would come out, a specified quantity that is weighed the same every time; gently slides the chips into the bag; the bag gets vacuum sealed. We've got to stop here; got lost. Like Don Knotts, Andy Griffith show, says: Go on. Really, it's a puff of air? How does it know which chip to blow off the line? That technology is unbelievable. It's 60 miles an hour. Between the time the photograph is taken and the chip is recognized as unacceptable, the puff of air has to blow the right chip. How much time is there? The line itself is no more than 15 or 20 yards long at that point, so right coming out the picture gets taken of where the chips fall on the belt; then it looks at it and knows where they are, so all you have to do is if you have a great effectively it says: blow air on grid A4. So, A4 gets the little puff of air. It has to be timed correctly. Like shooting a machine gun through a spinning propeller. That technology works, too. Somebody had to think of that; doesn't seem like a trivial programming challenge. No, but when you look at the amount of people--so before the quality control was having people look at a 5-mile an hour moving line and literally hand-pick stuff off. They would pick off the things that didn't go according to a list of quality control stuff. There's a video we'll put up of Lucille Ball--classic. She falls behind. That's why it was the big bottleneck. Now it's no longer part of the bottleneck. When you get all those people who no longer have to do that kind of quality control you can reinvest them in other places throughout the organization. For example? You've told me that some of these savings in personnel free up money to go create jobs elsewhere in the organization. The military uses tooth-to-tail ratio to figure out how many headquarters personnel that you have versus field personnel, and I think organizations like PepsiCo look at that as well. But oftentimes not those literal people. Reinvesting in human capital. So the people that are tweaking the algorithms or looking at the bottlenecks that are no longer the quality control step but now the railcar step, we can dedicate a few folks to kind of looking at that. And that's a high value-add kind of thing, as well as hiring outside consultants to come in to get their opinion who are manufacturing specialists. Got to build the optical scanners.
24:11One of the things we talked about briefly before which I find so interesting is that these kind of improvements in technology, everyone just sort of assumes it's always good for a place to replace someone with a machine. But of course that's not true. It depends on the price of the machine and workers' salaries and benefits and compensation. So, in this particular case, there probably was a point in time where that technology might have been technologically viable but not economically, financially viable. Then there comes a point in time when it is financially viable. And one of the things that thinking about it when we talked about it before off the air made me realize is that the scalability of technology is so extraordinary. So, if I decide--that technology would never be worthwhile on a plant that was making 50 bags of chips a day; you'd just do it by hand. Goes back to Adam Smith's "the division of labor is limited by the extent of the market." In a small plant, the owner of the plant is slicing the potatoes, washing them, peeling them, baking them. When you get to a point where you are producing potato chips for the United States in a fairly limited number of facilities, any one facility is enormous. So you've got incredible economies of scale. So, that scanner, which isn't viable at a small operation becomes viable at a large operation; and then the savings get even bigger if you can expand the operation for whatever reason. As the scale grows. I think it's an incredibly important lesson for how technology cuts costs out of the process of production. Beautiful example. Make the conveyor belt twice as wide because you are making processing more chips; easy to make the scanner read twice as wide. But you couldn't have people plucking twice as wide because their arms aren't long enough. Have to have two lines, people have to stand in the middle; all kinds of unnoticed technological advantages to capital when you can do that. And I would say lowers the costs, eventually. Not always, not every time. But then you get to reinvest, so those people that were picking on that stuff--you mentioned "in this case"--then the bags of chips go into cases. Now that's a potential bottleneck for us; now we can devote more people that used to pick stuff off there to looking at how the bags are being loaded by the robotic arm and being loaded into the cases of stuff. So more of our people have moved to the next bottleneck. So as you look at the process over time, it starts to get better and better, where you can concentrate more of your resources, your human capital resources, on the potential problem and you don't have to think about the other parts of the supply chain. Alfred North Whitehead quote: That's great for us, when we don't have to think about it. We can really start thinking about the bottlenecks, the parts we haven't solved yet. Let's go back now to the process. So the bad chips get pushed down, they don't go into the bag; so when you open your bag of Lay's or Doritos you'll notice that there aren't any black ones or bald white ones; there's chips of a pretty similar size. They're all natural. People look at the chip in the end and say they did something to this because we've reduced all of the imperfections. Weird consumer behavior that comes out of this is that this is a synthetic product. Which it isn't. As I told my brother last night, said I'd already learned some incredible things about how potatoes come into the plant. He goes: You mean they use potatoes? Cheap shot. He was joking. Because it does seem to be a rather transformed product. Potato, oil, salt. I gave you the analogy of like Guinness Brewing. Back when Guinness was getting invented, it was actually a batch of burned beer. It didn't pass the quality control check at the time. They threw it out, but the enterprising doorman at the back of the brewery said: Hey, I can just sell this to some folks that can't afford normal beer. So, they went and then sold that to people and found out all of a sudden that there's a demand for this burned beer. Cheap at the time. Now Guinness commands a premium. We have competitors out there that sell burned chips to people. It's like what we would consider an ineffectual part of their supply chain, they've figured out how to say: Hey, we don't need a quality control check; there's a demand by people who want burned stuff. Sometimes that's an animal eating it as feed, sometimes a person who likes that flavored; sometimes being recycled as biomass fuel. So, you use the word "film" when you were describing the bagging process. So, you've got two things going on. You've got a chip that's ready to be put in a bag, and now you've got to make the bag. It has to be printed with all the right labeling, right size. How is the bag made? You said it's made out of--we call it film. It's not really a plastic. It's a plastic derivative, I guess you would say; you want to have certain properties that a normal bag isn't going to have. You want it to be air-sealable because that preserves freshness. And for us having a chip that tastes fresh is super important. That's why we use a special film. If you feel our bag it has a very particular feel because the vacuum seal preserves that piece. So that is the interior piece of the bag. Then on the exterior there's a printing adhesive that goes on; and then there's the actual really thin kind of shiny film that gets put on the outside, where all the images are of the Dorito or the Lay. So, so you'll see the high-finish, glossy kind of cover. Alternatively you can have your film have a kind of plastic window, so some bags have a window in them. It's much easier for a company to manufacture film without any window. For us, we want to show you what some of our products look like on the inside. Reassure that it's not crumbs. Some light has a particular effect on different types of things. So for corn products better to show that piece because they tend to not degrade as fast because light has an effect on the product as well. So for certain products we can put in the window without reducing quality; with other ones, you don't want to do that. You've seen the corn products, Tostitos for example, a window where you can see that the chips are what you are expecting. The way I would do it--not the right way--I would make a bag, open it, put the chips in, and seal it. That's not what happens. The bag actually gets made around the chips. That stops them from breaking. If our supply chain is working well you will have at most two people touching your bag of chips by the time it leaves the plant to the time it ends up in your store. And what are they doing? The first person, maybe if the robot arm isn't working perfectly they are actually lifting up the bags--and I showed you our technique for lifting that and putting it into a case. From that case it then makes it to our distribution center which then goes onto a truck which goes to a store. That case doesn't get opened by anyone other than our sales representative, who is trained how to open it and put it on a shelf in a way to make sure that breakage isn't occurring. That's why we have an army of folks and they are specialists in handling the product so it doesn't get broken. If we just left that to your local retailer they'd be just throwing bags up and breaking chips. They'd probably be a little less careful than you'd like, for your reputation.
33:08At that one of your plants, roughly how many potatoes go through there a year, how many bags of chips? Hundreds of millions of bags of chips come out of there--a hundred million cases. Each case can contain between--for a bigger bag, a family sized bag--four bags would fit in a case; up to single-value line, which is like the quarter sized, $.33-sized bags--those have about 50 in a case. So, it's billions of bags come off there a year, which is tens of billions of potatoes coming through there; and that's just one. The operations people are going to go crazy--they like exact numbers--so I'm going to stay a little bit vague. But the point I want to emphasize is that that world has changed, as have many manufacturing processes. The scope in the last 50 years. Fifty years ago a town had its own potato chip factory. And one of the reasons that was true is you couldn't really ship them very far. So, one of the great revolutions of snack food, one of the reasons this has happened throughout the whole manufacturing process in America, is that economies of scale have been unleashed. Used to be an egg processing plant was a farmer tossing feed out to his chickens and he went and looked to see if they laid any eggs the night before, whereas today one processing plant or two with only a handful of employees who really just make sure nothing breaks are processing a billion eggs. The pencil facility I've toured is making over a billion pencils a year. So you are producing a billion plus bags of potato chips, but that wasn't true 50 years ago. What changed? I have my own theory, might be wrong. So, what changed? What changed about the scalability of our plants and transportation? Yes. One, we talk about the lines that we have: they became significantly more efficient. So, as you went through, and we kind of had studies done on each aspect of the line, all of a sudden you could grow it in a scalable fashion; it could literally produce more. You come into problems with how quickly you can ship product to places without having it taste stale. All food is a perishable product, especially when you use natural ingredients. The film reduced the amount of staling that occurred. The nature of the bag. It used to be made out of paper. So, you'd buy a bag of chips or you might even have the store make you the bag of chips right there; and then a day later it's gone stale. So, the technology of the actual film to preserve freshness is significant. On top of that the film's kind of interesting because you can't really take it to altitude, so certain places we have to have plants. Like, the Rockies are places we can't transport to, because the bag will pop. The pressure changes. If you've ever traveled to altitude with snacks you'll see this happen. The bag kind of inflates. We figured out how to overcome those difficulties by keeping the right partial pressures inside of the bag, etc. But then you look at the technology of the shipping industry, the transportation industry: getting the right loads coded and the algorithms for how you cube out your loads--cube out means so you don't waste space in the vehicle. Information technology gap. Before, you'd set up your line; you'd send something out there, and you might have a load going out that was partially filled because of a non-optimal supply chain. Now you can know when I get x amount of potatoes into the thing, it's going to make sure that I cube out my load at this size; sending a load on a tractor-trailer that's fully cubed pays itself off to transport it from Killingly, CT to California for this very specific type of flavored chip. So, now I can expand a snack portfolio by having an economy of scale in the Northeast for manufacturing this one product that's going to go everywhere, while at the same time having local products that are produced everywhere, in all of those plants. Like, all of our plants kind of produce the same baseline level of stuff, but then you can shift around in space to meet demand. The other thing I've always thought was important is the vacuum sealing, because without that you've got a much bigger breakage problem. I assume one of the advantages of vacuum sealing is to protect the chip in transit. That was the primary reason; it had secondary effects, which is now you've preserved the freshness of the chips significantly longer. As long as the bag doesn't get opened. Now all of a sudden you can have a six-week code date on the chip to make it last. Now, actually, if you were to buy a bag of potato chips from myself or a competitor, you'd see that a lot of the competitor's bags have a longer code date on them. We consider it a competitive advantage to be able to have shorter code dates, to be able to say our chips are fresher. And we will take them voluntarily off the shelves if they are not within those code tolerances, about six weeks. That's a tribute to your supply chain efficiency, that you can supply folks quickly close to Just-in-Time. Roughly how long does it take from the potato entering the plant in that railroad car to being on the shelf in a grocery. We can do it, and we have done it, within 24 hours. We are going to run an event in a week at Safeway's which is called a fresh rush, and within 24 hours we will have a potato turned into a bag of chips on your shelf, hopefully somewhere by your check stands; and you can see a sign that says this bag of potato chips didn't exist 24 hours ago. Can a normal human being taste the difference between that and a 6-week old bag? Some can. If you are a sommelier and you've been trained in tasting, or a food scientist. I personally can't even tell the difference--you can bring back stale product and this is vaguely disgusting but I'll sample it or have some my folks sample it, and you can't even tell the difference most of the time. What do you do with it when you take it off the shelves after six weeks? There's a couple of things you can do. The first is donate to charity. We like to do that for good causes. The problem is sometimes unscrupulous folks will go back and resell that to places--certain markets that sell out-of-date products. If we end up sending it to places, we don't want it showing up elsewhere because then people will think we sold that. And we don't do that. The other thing you do is just give it to shelters. Depending on what our local provisions are and if we are allowed to do that, because this is a legal issue. Lastly you just destroy it, recycle it; send it back to the biomass.
40:58So, it's in the bag, and now we come to the store. We are about 45 minutes into this; I wish we had another two hours just to talk about the store. What Brendan allowed me to do in the store is to see, with a different set of eyes. Part of what you are trying to do in the store is based on research. A lot of it is based on research on how consumers behave and make purchases. I think the most obvious thing that's easy to explain is we all know there's a snack aisle, which I've learned in the business is called a gondola--pronounced gon-DOH-la, which is the pronunciation in the business even though that's not the way it's pronounced when you are riding in one. That snack aisle is where in my mind if I said where would I find your products, well, I know where that is. That's the snack aisle. When I throw a party, that's where I go. But it turns out there's a lot of other places that your products are found in the store. Talk about some of the other places, where they are, and what you are trying to achieve there. From our research, I've showed you a couple of things--I've showed you a heat map. We have model stores and test stores with thermal scanners where you can see where consumers are located in time. So, that gives us a competitive advantage. You are not the only producer who is doing that. In terms of the salty snack business, we are one of the few who do that. In terms of like Coke, would probably do something similar, probably invest in technology now. I think that Pepsi ones are better. No doubt about it! Even though I'm a diet Coke drinker. I'm sorry, Russ. Podcast over. In terms of that we've found in the past two years as the economy has changed, the heat map of what consumers are doing has changed accordingly. One thing I'll say is that only about 30% of a store's shoppers make it to the gondola, which means 70% of traffic flow throughout the store itself are not making it to our products. In my family, my wife's the primary shopper, but sometimes I'm the shopper, and I have to say that when I'm in a grocery store, because I actually enjoy it because I don't do it that often, I tend to go up and down every aisle. Sometimes I've got a shopping list because my wife has tasked me with picking up 17 things, and I'm not in a store often enough to know exactly where they are, so my strategy is I go up and down every aisle. That's called snaking. I'm a snaker. And sometimes I bring home things that aren't on the list, because I'm in the aisle with the hot sauce and I see a brand I haven't tried before and I get excited about it. But that's not most people, evidently. Right, you are an anomaly, very rare--like less than 15% of folks are doing that. Most people fall into one of two categories. There are significantly more categories; just to make it easy, we'll say there is a perimeter shopping, who is a quick trip shopper that's going in and getting what they need, making one circle around the outside. Produce, milk, eggs, Pampers. Then there is the person who has been given the list who has been shopping enough to know where the items are, so they kind of hub an spoke. They go to those three touch points and then get out of there as quickly as possible. Most males fall into your category. Not the snaking, but I've got the list, and get out. My wife does not do that; she explores, scavenges, and comes home. She optimizes. No, I don't think so. She's in the wild, trying to figure out--I'd say it differently. That's the way she goes through the produce section. She's going to see what looks attractive to her eye and that's what she's going to make for dinner. She's not one of these people that make their menu in advance, figure out what they need to buy, and they go do that. She likes to scavenge. We won't call her a scavenger. Hunter and gatherer. She's a value shopper. She figures out what is out there. Price sensitive about what she does. She might have in her mind she is going to get broccoli; it might be so expensive this week she switches. That price sensitivity stores have noticed this. So they tend to market most of their price sensitive deals, the reduced prices, coupon deals, to the perimeter of the store. So, when you look where shoppers like her tend to gravitate on that heat map, you'd see a big red ring around the perimeter of the store, looking and spending time evaluating deals. For us, we've noticed that too, so we want more of our deals to be on the perimeter as well. So, as you and I walked the store today, you could see some of the different tie-ins we are trying to merchandise similar products, communicating value to the consumer. I just want to say two of the things I'd noticed that I never pay attention to were, first of all, the tie-ins of disparate products. So, in my mind there might be a display of chips where I am going to see different pieces of your product line. But what you showed me was a lot of times you are tying in your product line with products of the groceries. Which I've never noticed. Your wife did, though. She might; you don't really care whether she notices. You just care whether it affects your behavior. We saw the bananas. The first thing we saw when we walked in the door was a huge display of bananas, at the front of the store. Never thought about that--why are bananas at the front of the store? And underneath them were chips--Sun Chips. I never noticed it, but when you pointed it out I wondered: What's the reason? Oftentimes when we do research with consumers, you are trying to parse the consumer into particular category or subcategory of what they are buying in the purchase. The person that tends to buy a banana is a healthier consumer. Now why are bananas prominently displayed there? Very perishable item, tend to go away, rot quickly. A good store will turn its inventory of bananas really quickly, and they'll put them in a prominent display place because consumers will go there to get that. People don't hold large inventories of bananas at their homes. You can't put them in the 'fridge; can't do anything with them. You can make banana bread. That has advantages because it draws people into the stores if they want fresh bananas. So merchandising our healthier product line beside that is kind of a natural tie-in. Sun Chips is a kind of product they've worked on making it healthier and having it with fiber. The consumer of bananas is more likely to consume a Sun Chip than a Dorito. So when we're trying to ask for space from the retailer asking for these tie-ins, we'll come up with a pricing strategy: If you buy a bunch of bananas, get a dollar off on Sun Chips; bundle that stuff together to see if we can get them to trial them and see if they like them. If they do, we'll get lucky and when they come off the primary location you saw, they'll go looking for that down in the gondola.
48:51That was another aspect of it that a lot of times you are putting stuff in prominent parts of the store that is eye candy, decoration, a signal to the brain--Chips!--so when you see it the third or fifth time; I didn't realize until I walked the store with you how many places there are throughout the store, other than the gondola, other than the snack aisle where you have opportunities to make an impulse buy. I have an impulse--most of us have an impulse. We want to create impressions. For us, we have a bigger sales force than we have a marketing force. One of the best ways for us to advertise is directly to the consumers in the store. So if you are coming in the store, I want to create impressions for you that look appealing and have a banner effect that kind of draw you and make you study the product and give you a choice whether you want them. The more impressions I give you around the store, the more likely you are to pick something up and see if you want to trial it. Two things about this that were interesting to me. One is, the Sun Chips were sitting in cardboard boxes that were designed to be appealing to the eye. They had a flat surface on the top but were open in the middle for you to take out the bags; the top served as the table for the bananas, which was kind of cool. You brought that into the store; it's not a display thing that Safeway has. Right, so we purchase and manufacture cardboard as well, and that's a prominent display vehicle. So these Temporary Merchandising Displays, or TMDs, that you'll see, we kind of customize to the individual stores to make sure they're getting the things they want their customers to buy. And then the real estate they wouldn't normally use--the most expensive real estate is the not-used real estate in the store. If you have a space in your store that's not being filled with something you can sell, that's the most expensive place. Most retailers evaluate on sales per square foot. So, if you have square footage of your store that you are not selling something out of. That's the most costly to them. You can drop over the other side of the curve, where your store looks too cluttered, and all of a sudden consumers are like: I don't want to walk down this aisle. Wal-Mart underwent a transition about a year or two ago where they had a clean store policy. They said no more putting in extra vehicles in the store because it's confusing our consumers; they are having difficulty walking down the aisle. So, they changed the whole behavior of the Walmart shopper after that. There are people in the industry who question whether they over-corrected or not. Huge issue. You want to get the optimal place. As a shopper, there's a beautiful feeling when you walk into an uncluttered store--and it's clearly a big transition from the 1950s, '60s, '70s where stores had aisles that were much narrower; the carts were smaller. A lot of changes; still true in a lot of urban environments where you walk into a store and it's a very different feeling from a suburban grocery store which has this expansive cornucopia feel to it. What we noticed--the endcaps, meaning the end of the aisles--it used to be there was a display on the endcap. Now there's an endcap on the endcap next to the thing there's a standing thing; there's a lot more customized, individual stuff going on there. Right. So, when you look at these endcaps, or any places we have planograms or schematics which we've done research on to figure out which are the shelves that move the fastest and if you merchandise different products on different levels of shelf, what will cause the whole fixture to turn the fastest. Your goal is to use every piece of that real estate to sell off; a lot of calories, intellectual calories, go into what consumers do when they look at these things. Equipment that looks at eye movement; when people are in these test stores, what do they look at, what are they thinking at the time. Often these test consumers will tell you something differently than their body language, meaning what they are looking at--they don't even know what they are looking at. Which always amazes me when we read the results of that kind of stuff. The other tie-in thing--never noticed it before. We have a ping pong table at home, love playing it with my kids. Order the ping-pong balls off the internet because I like a certain quality, hard to find; sometimes you can find them at sports stores or other places. But I noticed this past weekend, I'm out here in California right now, there were ping pong balls for sale in the grocery. And the way they were for sale is that--what's that thing called, a little thing hanging? A clip strip. Hanging off the shelving. I thought that was interesting, weird. Sometimes you find little things that help seal your potato chip bag after you've used them, bag clips. Technical term. You might see a certain sponge device. Impulse thing hanging there. But ping pong balls? We were looking at pretzels, an endcap of Frito Lay which was selling Rold Gold pretzels, and there was a Safeway employee stocking up these clip strips. I saw her replacing some of the ones that were gone; and I asked her who she worked for, for the ping-pong ball company or Safeway; and I thought it was weird they were selling them in a grocery store. Like a softball bat or a baseball glove. Sometimes there's a little recreational area where they are selling lawn furniture; but this was in the snack section. What was that about? Just to give some color: So, there's this endcap where they have pretzels, and then about a foot away from that is an endcap with beer. Sort of behind. So the natural tie-in for pretzels and beer is, people who eat pretzels and drink beer tend to be some college students; and one of the games they play is beer pong. So, some Safeway employee at some time had figured out if I merchandise, probably trial and error, some of this stuff close to the beer and pretzels, people will buy them to play beer pong. There's a series of plastic cups and everyone has their own variation of it; two people stand at either end of a table and throw a pingpong ball into a partially filled cup of beer; the person who gets the ball thrown into their cup has to consume the cup. So bacci balls would not be a natural tie-in culturally. It was an extraordinary experience to walk around the store with your eyes and see how product had been placed. All kinds of issues like tie-ins, height, the care you take in arranging the bags in a certain order; sometimes you want product at one height versus a different height. You also showed me how you are supposed to massage the bag. Why do you do that? We have a term called popping and lacing. When the bag comes out of the case it's just come off of the line, so it's been vacuum sealed and Russ was able to see how the bag gets a little compacted on that. That's great because when it comes out there is air at the top and bottom that protects the chips. But when you put it onto a shelf, you want it to look a little differently. So you slightly massage the bag to pop the bag and get the creases out of it. Then what you want to do is lace the bag so that they are overlaying each other, so as people come out they are buying in a particular order without having to feel they need to reach through the shelf to buy a fresher bag. Because there is no fresher bag. We've put the freshest bags where they are. We want to make it easier, just grab the top one. If I've laced that stuff up nicely--you've mentioned the word museum. We don't ever want a store to look like a museum. We want it to look like a viable place where people can shop. This makes a nice effect without making it museumish. People feel they can shop this. Help yourself. And when you shop something off a laced shelf, it still has a nice effect without destroying the museum. Unfortunately when you are in stores you'll often see carbonated soft drink museums that get put up; they've used the cases of product to make a picture of something. Consumers hate to buy from that. They love looking at the picture, but there also needs to be a secondary shoppable area for them because they don't want to destroy the museum. You can induce some awful behaviors in that way.
58:25Let's talk about how you and the retailer make sure the shelf is not empty. One of the most amazing things--obviously there's some regularity to demand; patterns; I assume people buy more chips for the weekend. Correct. In football season they buy more chips generally. Now that the strike is off, the lockout's over, the chip lines are running a little more heavily in Modesto. How does the information flow and how is it done in a way to minimize cost, because the last thing you want--the Walter Williams quote at the beginning of the show--is for somebody to look for a Lay's potato chip and not find one. The primary metric we use is space to sales. Do we have enough space in the store to support our sales. So, at one level, the retail level, we'll have a liaison called the key account manage [?] or national account manager or [?], and they will have a conversation with the retail buyer. And they will say: Hey, we need this much space to ensure that you guys don't run out of stock [OOS] on a regular basis, week to week. So, that's what creates the gondola, which is the base level of inventory in the store. And most of your inventory is on the shelf. There's some in the back. Did we see all of it? Yes. Not very much. So, one of the big things I've noticed during my time here. One of the reasons is there is not a lot of room back there. They don't want us to store stuff back there; plus, product doesn't sell out of the back room. Actually the opposite--it kind of disappears, shrinkage, theft, destruction. Given a dollar volume of store sales, we like to have only so much product in the back room. I would ideally have zero product in the back room, if I could deliver every day to stores. But stores have labor costs, too. I showed you the receiver in the store; they can't man a receiver accepting product in the store through the back door every single day. The bigger the store is, the more receiving hours they can have, the more windows; that means less backs up for me. The smaller the store, then I have to have more back stock in order to support the sales that are at the front. That's the baseline of any retail environment. Then there are store-level decision-makers that have to make decisions for peak volume times. I think one of the earlier podcasts on pizzas one the Super Bowl, biggest day of the year and no one runs out of pizza--well, we definitely can run out of product at that time. So, we have to use that cardboard stuff that you saw, our temporary merchandising displays, and show the store owner: Hey, you are going to sell based on historical data and whatever the projections are, this much product; your shelf only holds this much; we need to get a way to get more product in there, otherwise you are going to lose transactions. They are going to go someplace else. Like you mentioned with that quote at the beginning, if you don't have it, people tend to not come back. With the rise of chain level stores, that behavior happens less and less. You might leave your local Safeway but you'll go to another Safeway, so in the end Safeway kind of makes out. What's really not good for retailers is if they leave Safeway and don't come back to Safeway--they go to Wal-Mart. And you impose the cost on me of going to another store. If that happens more than once I'm going to learn things. We as consultants and sales people to the local store try and show them the data so they can make informed decisions. We definitely don't want to bring in more inventory than the store can sell, because the retailer doesn't eat the cost. We do. When any kind of chip goes stale, we take that out and give them credit for it. So, we're not incentivized to flood chips to them, or hide it. And their shelf space is extremely valuable. Last thing we want is running their inventory out of the front room. That's how we cope with demand, by trying to ask for incremental space on the floor for the products that are at significant out-of-stock risk. On Super Bowl summer, or the handful of July 4th, Labor Day, when there's a lot more barbecuing, chips, picnicking, etc., I assume--there are two things going on. One is, you are going to serve the customer from every location in that store. So, there's the chip aisle, but if the gondola runs dry, I'm going to be on those other endcaps; I'm going to be constantly--I don't want anything to look empty, which looks horrible. Which is another interesting thing, by the way. Not only does the store always have chips, but there are usually chips on display, in profusion; and every other product as well. But sometimes there can be a problem. Right. Those special days. And one other question: Who is making sure that the chips are on the shelf? It's your own Frito Lay person, which we talked about. You want to make sure your product looks good, is displayed the way you want it, and is protected and not beat up. But that person doesn't work there. He works 5-6 stores. What are they doing? What are they doing in general and what are they doing on those busy days? In general we do a lot of planning: Does our supply chain have the right capacity to be able to meet this demand? Generally it's in the purview of the sales person to sell for incremental space so that people above that sales person don't need to get involved. In terms of our kind of people, we run a Direct Store Delivery (DSD) system--we bring someone in, they sell the product; they do the work in the store; unless they are wearing a different uniform in the store you wouldn't distinguish them from someone merchandising the shelves. We also employ merchandisers that do nothing but merchandise stores, as well as detailers--people that do some level of merchandising. So we have a whole scale of people that come in and service the stuff. Some of our systems have five different people that are kind of making sure one store looks good and has what it needs to have. Now, the other way you can get product into a store is through the warehouse system, a store like Walmart, Safeway, Lucky's, you name it, Stop-and-Shop if you are in the Northeast. They have warehouses; they buy their product; and a company like Proctor and Gamble (P&G) will ship that company to their warehouse. They will then take that product from the warehouse or even from the back door of the store; it gets into the store, and then the store itself is responsible for merchandising. If they are getting low, the call the warehouse to bring them some more. Just in time. In a cost-cutting environment, where the store is trying to make its profit and loss (P&L), you cut your merchandising hours. So, we don't ever want to run into that issue. What do you mean, you cut your merchandising hours? You pay your people so many hours and the easiest way to make your number is to say: Fewer people work; they've got to do more. What are they going to do less of? Merchandising--what do you mean? They will look at places, run their own analyses, places in the store where product has an oversupply, and they just won't merchandise that area. So, if you were to snake up and down the aisles you might see some product that five people every month buy of, but it's a canned good so it can be preserved for six months; so I don't need to fill up that shelf with every single can. So, by merchandising, you mean people that keep stock to the brim. One of the things that jumped out at me through your eyes is not only are there always bags to be bought, but the display is flush with stuff. Right. So, that's a decision you've made because you think it looks good to the consumer, more appealing; costly to do this. There has to be a person to do that; and you've got more product sitting on the shelf not selling. For us, we are generally below our level of capacity in the store. I'm much more afraid of out-of-stocks than I am of unsaleables. Now, for other companies that have higher preserved stuff, they pay stocking fees to get the local store to merchandise their stuff; and the store is going to make decisions based on that. We don't ever want a store to make a decision not to merchandise our stuff, so we employ this army of folks. The thing we are most afraid of is missing a sale. You miss sales because they are mad at you. That's the lowest level we cope with demand.
1:08:01The secondary level is when the plant is producing stuff, we will run out of capacity in our distribution centers. This is where cases of product get customized for a store. We will back trailers into the parking lot and there will just be trailers and trailers of product; and we will staff up our warehousing folks that will come in and create these orders. So, we'll go on a 24-hour cycle at that moment in time. And the way we have product available is it's coming out of the plant; all the plant lines are on. At this point the bottleneck in our operation actually becomes how fast our warehouses can put stuff onto the shelf. We still, in peak times, without the ability to put cardboard into given retailers, are going to run out of product if they don't give us space to do that. The bottleneck of this whole supply chain becomes the decision-making of a local store retailer. Some stores get the issue. Now, we tend to be like the fifth and sixth for a display, highest revenue-producing item for profit, one and two for a retailer. So, people get this. We've shown them the data; they have their own independent data, they can corroborate; and they agree we put the stuff up. Some places tend to make decisions really close to end-hour [?], like at the holidays. So, all of a sudden at the last minute they say: Hey, we need you to bring in--a panic, we're going to run out of stock. Those people, you have to train them over time. We tell them we are going to prioritize this, this, and this customer; we're going to give them service because they've partnered with us. Obviously when you can't meet demand on these things, that creates an environment where competitors can come in. That's where you see different competitors showing up, because, in our opinion, stores made some bad decisions about what they should put up because they don't know their consumers. But then again, that's what my sales people's job is to do--to convince that guy the right thing for the store and then at the back end show him that he made the decision and had this consequence on making or losing money. If it's losing him money, it lost money for us; we don't want to do that. As I think you said: the worst thing that can happen, and it's a good thing--sort of your insurance policy--you may not, on Super Bowl Sunday have every single flavor, every variation, which has expanded dramatically over the last 20 years, but you are going to have lots of chips in the store, even on the worst day. Someone's going to maybe have to settle for an unridged chip when they wanted a ridged one or settle for a plan when they want a ruffle with garlic and onion. Our backup plan is the baseline flavors. We have five billion-dollar brands that we know we can never have out-of-stocks in; then there are flavors we can have incremental sales you get by expanding the flavor/texture portfolio. Those things we have to just make decisions on and say we're not going to spend the labor at peak times, because someone going out to a store for the Super Bowl is probably willing to buy a regular bag of chips. It's a party; if they are buying for other people we expect a little bit of grace from the consumer. But not very much is given. They get mad that this thing isn't out there. We actually ran into this effect over the Fourth of July holiday. We had made some decisions about what we were able to produce and put up there, and we noticed we had one particular flavor of Lay's Honey Barbecue that ended up going out of stock. You mean out of stock in the West? No, just in a couple of particular markets where we didn't know there was that kind of demand for that particular product. I don't know if there was some kind of guy who showed up from some other part of the country and said: We love this stuff. An outlier, we call it. Spike. We went and reviewed all of our schematics--the plans we use to merchandise stuff on the shelves. The visual layout of what goes where. It's a map. We looked at it and said: How do we make sure that doesn't happen again for that particular store. That's called precision merchandising, making a very customized map for one particular space. It was a learning experience. We don't ever want to be out of stock on anything. But given certain things, we'd rather be out of the Honey Barbecue Lay's than out of Lay's Classic. Because there's a lot more people who are going to be angry at you for that than the one or two people. Other people might settle for Honey Lay's or Barbecue Lay's.
1:12:46One of the things I sensed from you from our earlier conversations, before we sat down to record this, is there's incredible pressure within the organization for constant improvement. Frito Lay is by far the most successful salty snack vendor in the United States, maybe the world. You are doing great. But you conveyed to me that there is relentless pressure for improvement on pretty much every dimension. I think there is a myth that when you have good market share you kind of sit back. Is that true? What do you think the implications of that are for the consumer? Clearly has implications for you--the employee and the organization. How much of that comes down to the bottom line for the consumer as opposed to the bottom line for your company? Talk about the nature of the competitive pressure that you still feel and that is generated by your organization, and what do you think the implications are. You are not a veteran of the industry. I'm a veteran of the military, not the chip. You are relatively young. How long have you been in the business? Four or five years. You learned a lot, but you haven't seen the longer sweep of time that somebody who is 40 or 50 years old, who had seen the incredible revolution in this business. But you are getting it in your own little window. Talk about what's going on there. As a consumer we think of things in the marketplace we see--the tactile, visual of walking into a store. There you have the competitive pressures of fighting for space in the store. Why don't we just sit back and say we don't need to do anything? Well, there's a secondary marketplace, or really you'd call it a primary marketplace, of stock price. There's a consumer of stocks out there. Provider of capital. So, Pepsico is a publically traded company, and as such, there are people buying our stock, and they are trying to make decisions based on whether they should buy, sell, or hold. The reason they want to buy our stock is they expect its value to appreciate or produce dividends or whatever the reason is. But they definitely don't want it to fall in value. In order for us to increase our value we have to either sell more chips or cut more of our costs out of the system. Both of those things produce a pressure. I would stipulate that the competition in the marketplace is much more of an obstacle to us. That's not the pressure. The pressure comes from trying to grow our stock price from $68.07 to $70. And the way you do that is that kind of relentless mindset of improvement. How do I take and reinvest my resources in this organization to accomplish the tasks we need to accomplish, by stripping out non-value-added parts, by putting more people in our more difficult areas. All that supposedly rolls up to a better result for the buyer of the stock price. So, they don't need to know all the things that Pepsico is doing to optimize the steps or training people to become better sales folks. They just need to know: Are there more buyers of Pepsico stock out there today? This is Hayekian, right? The price communicates all this stuff that's out there. It's more complicated for us. All of a sudden an analyst says we need to grow our--Wall Street uses a pounds-based measure--so they evaluate how many pounds are on the floors of stores. If we don't grow that by a certain amount every year, or strip out costs, then our stock price will fall. So, that gets translated to a growth target, so all of our sub-CEOs of the various individual businesses, Frito-Lay, Quaker-Tropicana-GatorAid, the international businesses, they say you have to grow x percent. You are not allowed to call back and say that's unrealistic? You are always allowed to call back and say that you are probably not going to be working here very much longer. I say it flippantly, but it's a good thing. We are working here to achieve a target, and if you don't sign up to achieve a target, there is another place for you to go that is right for you. So, that target gets translated down to individual geographies. We know that the population and demography of the West is increasing slightly more quickly than the Northeast and the rustbelt. Therefore you guys are going to have to inherit a little bit more of the target. We might get an 8% growth target; the Midwest might get 4%, the Northeast, which is a much more competitive market gets 3%. We then have to figure out how to make that growth happen. Then there's a capital allocation process. Each Vice President of these things gets a certain amount of resources they can allocate for innovation. I can give you x, in the West, this amount to go achieve your target because you showed success in the past. Hey, Florida, you didn't do what you need to do; we're going to take away some resources. Racking budgets--putting racks into stores.
1:18:28Without going into specifics we saw some things today that you were not 100% happy with in the store: we could do that better, this is the ideal. Obviously, you can always improve that. It's the equivalent of waste, fraud, and abuse in government spending. On the ground, in any one store--you can block and tackle better. But adding the optical scanner--a quantum leap? A lot of the change is going to come that way. Step function changes. That's coming really from everywhere--from the supplier who comes to your CEO and says: I've got a new way for you to improve your quality; from people on the line in your factory saying I wonder if we could find a better way. There's all kinds of unspecified stuff going on. I'm going to call it serendipitous. It's not literally unplanned, but it's a little bit different from you saying: How am I going to sell 5% more? It could include, for example, today we saw a lot of creative use of cardboard. That wasn't there 25-30 years ago. Somebody in your organization or in the cardboard world had a lightbulb moment and so all this is really going on at once. You definitely don't want to stifle. What I've noticed having run this part of this organization is there are hundreds of lightbulbs that go on; and you can't stifle them. The best innovation comes from your front line, generally. The people that are experts in what they do, they are the ones that have the raw years and years of experience that know how to do something better. There's a saying in the military: Amateurs study tactics; professionals study logistics. I'd love to add: Entrepreneurs study problems and innovation. When you get those step-function changes, entrepreneurs can capitalize on changing the way you completely do things. How much of that comes from your, a suggestion from a sales person one the floor says: I think we could do this better? A lot of our incremental innovation happens that way. There's a better way to merchandise this shelf; there's a tactic, technique, or procedure that you can employ to make your thing better. The optical scanner is where we have a problem we don't know what the solution is; get a team of people on there and figure it out. And that thing was someone saying we could take a picture of this, someone who had studied supply chains over and over and over; we can take a picture, add an air pump to it; combine those two technologies in a way that didn't exist before. People who are really good at optical imaging or air pump stuff will never put those things together--well, they might. It's the guy that's looking at the thing over and over that's reading, that has enough randomness of information coming into his or her thought process will recombine that stuff in a new way. But sometimes that person's the last person to think of something in a new way. That person's totally focused on how do I get Lucille Ball to not fall behind. And I don't ever imagine. The Henry Ford quote: If I asked my consumers what they want, they'd say a better horse rather than a car. We're always trying to figure out. It's really hard to get an organization to say: How can you do this without a conveyor belt? As leaders--great leaders will come in. This has less to do with Frito-Lay and more to do with the military--when I was in the military, we were given problems that were just unsolvable given the resources we have at hand. So, hey, you need to go and hold this piece of territory north of Kirkuk, and by the way, you way, you have 60 guys to hold 300 square miles. Can't be done. Great. You still have to go do it. You don't get to say: I disagree. Phenomenal leaders, who kind of came in and said: Guess what, we are going to have to partner up with the local people; and then you have figure out how to do that; but that was a way, a vehicle, of going in and solving the problem. Or you want to take a census of the local population, who is there. Inventory, how many people come to the local watering hole; and then you get to know the locals because they have to get their water from someplace. Necessity is the mother of all invention. Great leadership can either stifle or enhance all the lightbulbs. Bird's eye view of where the good ideas are coming from; then that reinvention can take place. But it's hard to do. It's the hardest thing--I think of Clay Christiansen about this--innovator, solution, dilemma; how do you disrupt yourself while retaining your part of the marketplace. That was a phrase you used numerous times in our conversation in the store--using the phrase "disrupt" as a positive. To shake up. I want to do that. I will plan disruptions with my team and it drives them crazy, where I'll take away a team member today, just to see what they do. Figure out how to do more with less. You have to self-disrupt, with anything in life. That's how you get better.


Potato chips have been popular salty snacks for 150 years, and retail sales in the US are worth about $6 billion/year, representing 33 percent of the total sales of this market (Garayo and Moreira, 2002; Clark, 2003). In 2001 about 50 percent of the US potato crop was processed to produce 11 300 million kg of processed potatoes, of which 21.6 percent were made into chips. The worldwide trade over recent years indicates that about 7.4 × 107 kg of potato chips were exported, with a value of ∼$165 million annually (Economic Research Service, 2004).

Frying in hot oil at temperatures between 160° and 180°C is characterized by very high drying velocities, which are critical to improve not only the mechanical but also the structural properties of the potato chips (Baumann and Escher, 1995). Potato chips are thin slices whose moisture content decreases from around 80 percent to almost 2 percent when they are fried. However, the drying in oil inevitably leads to a considerable oil uptake of around 35 percent, most of which is located on the surface of the chip (there is almost no penetration during frying) and adheres to the surface at the end of frying. Therefore, a high proportion of oil penetrates into the food microstructure during the post-frying cooling stage (Ufheil and Escher, 1996; Aguilera and Gloria, 2000; Bouchon et al., 2003).

In the potato chip industry, the quality of each batch of potato tubers must be tested before processing, and of the various quality criteria the visual aspect, especially the color, is of great importance (Marique et al., 2005). Color of potato chips is the first quality parameter evaluated by consumers, and is critical in the acceptance of the product (Pedreschi et al., 2006). Consumers tend to associate color with flavor, safety, storage time, nutrition, and level of satisfaction, due to the fact that color correlates well with physical, chemical, and sensorial evaluations of food quality. The color of potato chips changes during frying, as the components of potatoes are restructured. Consequently, the surface color reflects not only the heterogeneous surface formed as a result of frying but also the non-homogeneous oil distribution. Visual aspects, such as surface color and appearance, can be studied using computer vision techniques in order to determine the potato chip.

Acrylamide, which is formed in potatoes during frying and is highly related to the color of potato chips, is suspected to have critical implications for human health, since it has recently been found to be a carcinogen in rats (Mottram and Wedzicha, 2002; Rosen and Hellenäs, 2002; Stadler et al., 2002; Pedreschi et al., 2005). Potato chip color is affected by the Maillard reaction, which depends on the content of reducing sugars, amino acids, or proteins at the surface. It is also affected by the frying temperature and time (Márquez and Añón, 1986). Generally, potato tubers that contain more than 2 percent of reducing sugars are discarded for frying, since they generate too dark a coloration. Research has demonstrated that 2.5–3 mg of reducing sugar per gram of potatoes should be the maximum value accepted for potato chip preparation (Lisinska and Leszczynski, 1989).

In European factories, some computer vision systems are used for the on-line evaluation of potato chips, allowing chips to be sorted according to defects such as black spots or blisters (Marique et al., 2005). Some researchers have been also working on a promising device that is able both to classify chips according to color and to predict acrylamide levels using neural networks (Marique et al., 2003, 2005), and some are currently evaluating devices based on this system with the expectation that it will be fully operational very soon. Apart from the neural network, there is another device based on statistical pattern recognition for color classification of potato chips (Marique et al., 2003; Pedreschi et al., 2004). Researchers in this topic are routinely providing classical visual evaluation against a standard chart, and have conducted a good amount of work to testify which criteria (overall appearance, heterogeneity, contrasted extremities, etc.) should be taken into account by the operator to evaluate the surface of potato chips. In this chapter, the application of computer vision to study the quality attributes of potato chips is summarized.

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