GLOBAL SUPPLY CHAIN MANAGEMENT topic nestle – supply chain strategy

In 2006, Jenny Craig and Uncle Toby were added to the Nestlé portfolioand 2007 saw Novartis Medical Nutrition, Gerber and Henniez join the company Nestle is the leading food manufacturin

NATIONAL ECONOMICS UNIVERSITYSCHOOL OF ADVANCED EDUCATION PROGRAMS

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GLOBAL SUPPLY CHAIN MANAGEMENTTopic: Nestle – Supply Chain & Strategy

Class: Advanced International Business 61B

Tran Huong GiangNguyen Thuy DuongVu Minh HuyenDang Thu Trang

4.4.1 Supply chain management 244.4.3 Inventory Management 254.4.4 Sustainability in Nestle Operations 25

TABLE OF FIGUR

Figure 2 1 SAS demand-driven planning categories 7

Figure 2 2 Supply chain disclosure for Cereals (corn and wheat) 9

Figure 2 3 SAP Business One Modules 12

Figure 2 4 Nestle social media overview 13

Figure 2 5 Nestle distribution channel 14YFigure 3 1 Porter’s generic strategies 17

I INTRODUCTION OF NESTLE1.1 History

1866-1905

In 1866, the Anglo-Swiss Condensed Milk Company opened the first condensed milk factory in Europe Separately, in 1867 Henri Nestlé developed a breakthrough infant food to tackle high mortality rates because of infants’ intolerance of breastfeeding

In 1905, Nestle was established as a result of the merger between the Swiss Milk Company Farine Lactée Henri Nestlé

Anglo-1906-1938

Following the World War I outbreak and the rocketing demand for condensed

milk yet plummeting supplies, Nestlé turned to the U.S and Australia for new establishments of factories This change was highly fruitful considering the double-increase in production by the end of the war

In the 1920s, Nestlé purchased Peter-Cailler-Kohler, the oldest chocolate

company in Switzerland The following decade witnessed the success of Nestle with the arrival of the malt chocolate drink Milo in Australia Soon after, in 1938, the firstmass-market instant coffee, was launched after the Brazilian government’s call for Nestlé to deal with the excessively produced coffee

1938-1944

Nestlé felt the effects of World War II immediately Profits dropped from $20million in 1938 to $6 million in 1939 Factories were established in developing countries, particularly Latin America Ironically, the war helped with the

introduction of the Company’s newest product, Nescafe, which was a staple drink of the US military Nestlé’s production and sales rose in the wartime economy

1944-1975

The end of World War II was the beginning of a dynamic phase for Nestlé.Growth accelerated and companies were acquired In 1947 came the mergerwith Maggi seasonings and soups Crosse & Blackwell followed in 1960, as didFindus (1963), Libby’s (1971) and Stouffer’s (1973) Diversification came with a

shareholding in L’Oréal in 1974

1975-1995

The year 1977 saw the boycott against Nestlé due to the company’s

‘aggressive’ marketing of its breast milk substitutes The boycott led to the WorldHealth Assembly adopting the International Code of Marketing of Breast-milk

Substitutes, which Nestlé signed on to in 1984, bringing an end to the boycott

Nestlé made its second venture outside the food industry by acquiring Alcon Laboratories Inc

1996-2002

The first half of the 1990s proved to be favorable for Nestlé: trade barriers crumbled and world markets developed into more or less integrated trading areas Since 1996, there have been acquisitions including San Pellegrino (1997), Spillers Pet foods (1998) and Ralston Purina (2002) There were two major acquisitions in North America, both in 2002: in July, Nestlé merged its U.S ice cream business intoDreyer’s, and in August, a USD 2.6bn acquisition was announced of Chef America, Inc

2003 +

The year 2003 started well with the acquisition of Mövenpick Ice Cream, enhancing Nestlé’s position as one of the world market leaders in this product category In 2006, Jenny Craig and Uncle Toby were added to the Nestlé portfolioand 2007 saw Novartis Medical Nutrition, Gerber and Henniez join the company

Nestle is the leading food manufacturing company in the world, with itspresence being felt all over the globe and its products sitting comfortably at thedining table of almost every homestead around the world

Figure 1 1 History of Nestle

1.2 Business scale

In 2021, Nestle was the world’s largest, most diversified food and beverages company This company has a unique global footprint and sells its products in 186 countries worldwide Nestle is the employer of 276,000 workers and has established 354 factories in 70 nations

In total, the company reached sales of CHF 87.1 billion in the year 2021 The majority of its sales were contributed by the American market, with CHF 39.1 billion, accounting for 45% of Nestle’s sales The figures for Europe, Middle East and North Africa were lower CHF 25.8 billion (30%) and Asia, Oceania and sub-Saharan Africa: CHF 22.2 billion (25%)

1.3 Main competitors

According to Food Engineering (2021), the most notable change is at the top, where PepsiCo claimed the No 1 ranking from Nestlé PepsiCo saw its food revenueincrease from about $67.2 billion in 2019 to about $70.4 billion Nestlé saw its food revenue decline from $76.8 billion in 2019 to $67.7 billion in 2020 Other notable competitors include Pladis Ltd., a global biscuit, chocolate and confectionery company Mars is a famous food industry and is the topmost producer of confectionery products, while the production of Danone focuses on the production and sale of healthy and delicious food that is custom-made for the requirements of people of all ages (Clara et al., 2018)

Table 1 1 Top 10 Food & Beverage Companies in 2021

Source: Food Engineering (2021)

RankCompanyCurrency TotalFood Total Sales Food Sales

1.4 Vision and mission

Nestlé pursues the mission of being the world’s leading nutrition, health andwellness company Its mission of “Good Food, Good Life” is to provide consumerswith the best tasting, most nutritious choices in a wide range of food and beveragecategories and eating occasions, from morning to night

Nestle follows the vision to be a leading, competitive, Nutrition, Health and Wellness Company delivering improved shareholder value by being a preferred corporate citizen, preferred employer, preferred supplier selling preferred products

1.5 Business segment

Nutrition has been the cornerstone of Nestle Company since its inception in the year 1867 Therefore, most products and services provided by the company revolve around nutritional needs The company strives at providing quality products and services which will help in promoting the better and healthy well-being of its consumers Nestle has gained a world reputation for its consistency in providing quality and safe products

Nestle provides a diversified range of products with over 2,000 brands, whichcan be classified into 12 categories: (1) Baby food; (2) Bottled water; (3) Cereals; (4) Chocolate and Confectionery; (5) Coffee; (6) Culinary, chilled & frozen food; (7) Dairy; (8) Drinks; (9) Food service; (10) Healthcare nutrition; (11) Ice cream; (12) Pet care (Nestle, 2021) Nestle’s portfolio covers almost every food and beverage category This enables the company to serve customers of all age brackets thereby increasing the opportunities for return and spread the risks of investments

According to Nils-Gerrit (2021), the primary product segment of Nestle was chocolate, which generated 5,716 million CHF, about five times as much as the figure for biscuits Meanwhile, the sugar confectionery sales were only 651 million CHF

Figure 1.1 Sales of Nestlé’s confectionery sector worldwide

2010-2021, by segmentSource: Nils-Gerrit (2021)

II.DESCRIPTION OF NESTLE’S GLOBAL SUPPLY CHAIN 2.1 Planning

2.1.1 Overview of Nestle planning

Helen Armstrong (2013) reported that in 2001, Peter Brabeck, then CEO of Nestlé, recognized that as the company was getting bigger and bigger its size may become a liability The global organization needed a local component, which gave rise to the Nestlé GLOBE Centers, one each to cover Europe, the Americas and the Asia, Oceania and Africa They were set up to accelerate performance by

harmonizing business processes, standardizing and managing data The GLOBE Centers would also standardize the IT systems, taking advantage of Nestlé’s worldwide scale whilst retaining the ability to act locally This is to ensure that a single set of processes, in manufacture and administration, is implemented with a common method of formatting and storing data In other words, Nestle’s businesses in over 200 countries can operate with a single set of information systems as well as the same manner from the phases of demand planning, procurement to distribution and sales

The three baseline edicts for project GLOBE were: harmonize processes,

standardized data, and standardize systems This included how sales commitments were made, factory production schedules established, bills to customers created, management reports pulled together, and financial results reported Gone would be

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local customs, except where legal requirements and exceptional circumstances mandated an alternative manner of, say, finding a way to pay the suppliers of perishable products like dairy or produce in a week rather than 30 days.

The adaptation of the GLOBE program into Nestle’s global supply chain management connects all Nestle departments around the world and makes company information accessible to all its employees thereby allowing communication flow between people in the company

2.1.2 Demand planning

The demand planning is made in tandem with the monthly sales review meeting The monthly breakdown then moves to weekly schedule of production and dispatch planning For the supply planning the primary objective is material

requirement planning for all direct materials Nestle also maintains close contact with inter market subsidiaries to ensure lead time communication for imported semi-finished bulks

According to Andreas Gartner (2011), Nestlé adopted state-of-the-art statistical forecasting and predictive analytics to improve demand planning efficiency and accuracy by signing a contract with SAS SAS demand-driven planning as a high-performance forecasting solution complement well the Nestlé Demand Planning solution which is based on SAP APO (Advanced Planning and Optimization)

In SAS demand-driven planning codes are created for the segmentation of

the product portfolio Products are segmented into four categories depending on

the volume of the product and volatility of demand: (1) Horses (large volumes, low volatility); (2) Mules (small volumes, also low volatility); (3) Jack Rabbits (low volume but jumping around); and (4) Mad Bulls (large volumes and very volatile) This segmentation provides Demand Planners with easy terminology with which to communicate and to challenge numbers presented from sales and see the gaps earlier

Figure 2 1 SAS demand-driven planning categories

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The animal represents the behavior Demand Planners need to adopt: a Horse can be trained and is an animal one can rely on, but it is also an animal with a high monetaryvolume Therefore, Demand Planners should rely more on statistical forecasts and not loose time planning them manually, but naturally keep an eye on them The Mad Bulls retain then the strongest attention as they generate significant volume and value for the company, but are intrinsically difficult to predict, one needs to invest time for these products Some of these Mad Bulls can be made predictable If one can achieve to explain the volatility in the history by variables like historical and future price discounts.Others remain unpredictable, and thus therefore need higher safety stocks to cover a larger level of uncertainty.

The firm uses two types of forecasting techniques- judgmentally (subjectively, organically) and statistically (Exponential Smoothing Models (ESM) and Auto Regressive Integrated Moving Average (ARIMA) also known as the Box-Jenkins framework) As often, neither approach fits all products, therefore it is key when to privilege one approach to the other The segmentation strategy in the four quadrants described above is the answer to this (Alliston Ackerman, 2012)

2.1.3 Supplier planning

The supplier selection process for suppliers who provide raw and packaging materials, promotional items or other indirect materials that are in contact with food products is governed by the general instruction GI-31.104-3 Vendor Approval Process, with the use of the Vendor Approval Compass and for all other suppliers bythe 7 Step Strategic Sourcing Process Pre-qualification of vendors will be

undertaken to create a supplier shortlist This ensures that there is an early understanding of a potential supplier’s capability, readiness and commitment to comply with Nestlé’s requirements Only the short-listed suppliers will be invited to participate in the quotation process or request for proposal

After having provided their proposals, the short-listed suppliers will be analyzed against a pre-determined set of evaluation criteria to determine if they meet all requirements in relation to the goods or services that Nestlé requires The evaluation criteria will contain, at a minimum:

• Specification• Price Conditions• Service Conditions• Food / Packaging Safety and Quality• Technical, R&D and Innovation Capabilities• Responsible Sourcing

• Financial Stability

Potential suppliers will be chosen based on an objective analysis against the evaluation criteria All relevant information regarding a supplier’s proposal and any risks associated with the supplier or the delivery of materials will be shared betweenProcurement and the Business to ensure that informed decisions are made that take account of all important details.

Supplier development will be undertaken to improve or expand our suppliers’ capabilities which is necessary for Nestlé to continuously meet competitive challenges It will be performed based on the specific and mostappropriate supplier strategy

Nestle will ensure that our strategic suppliers recognize Nestlé as the firstchoice for their innovations and that our Procurement people are continuously scouting the supply environment for new opportunities

Nestle will ensure that our suppliers’ capabilities and capacities are matchedto Nestlé’s long-term needs

To achieve this, Nestle will proactively engage our suppliers together with allrelevant Nestlé functions Good supplier development ensures that all parties benefitfrom agreed and aligned goals with a relationship built on trust

2.2.1 Raw material sourcing

Nestles sources directly from more than 626.000 farmers to purchase agricultural raw materials, principally milk, coffee, cocoa, cereals, vegetables, fruit, herbs, sugar and spices, either through trade channels or directly from farmers Theyuse a wide variety of different suppliers worldwide all of whom must comply with Nestlé quality standards Located in hubs in Switzerland, Panama and Malaysia, the division provides a range of services, including the management of procurement for specific raw materials, packaging, indirect materials and other services The hubs also support markets by managing local spending

2.2.2 Supplier selection

The Nestlé Supplier Code establishes non-negotiable minimum standards They ask their suppliers, their employees, agents and subcontractors to respect and adhere to at all times when conducting business The Nestlé Supplier Code helps to

implement the commitment To ensure both responsible sourcing and supplierrelationships that deliver a competitive advantage.

In compliance with Nestlé’s Corporate Business Principles, Nestlé selects suppliers based on the following criteria: Ability to offer a competitive value proposition; reputation, financial situation and record with Nestlé; ownership, management structure and competence; innovation, service level and transparency: already approved or subject to formal approval prior to first delivery: minimum corporate social responsibility standards: ability and willingness to work with their preferred tools: processes and solution providers Sustainable business practices

Potential suppliers will be chosen based on an objective analysis against the evaluation criteria All relevant information regarding a supplier’s proposal and any risks associated with the supplier or the delivery of materials will be shared betweenProcurement and the Business to ensure that informed decisions are made that take account of all important details

2.2.3 Supplier relationship management

Nestle partners with suppliers all over the world to offer their products and brands in more than 187 countries Their suppliers are an integral part of the value chain, Nestle believes that strong relationships with them are critical to business success The procurement department takes orders or plans from Demand & Supply Planning department and make sure all raw materials, packaging materials, and finished goods reach the company in the right quality, quantity, time, and at the lowest cost to company possible The department has two major teams working namely Direct Materials Procurement and Services & Indirect Materials

Procurement Direct Material Procurement oversees purchasing all imported and local raw materials Their main task is to work closely with suppliers to ensure thereis adequate lead time to prepare and dispatch raw & packaging materials in due time, to ensure their timely arrival when needed The Indirect Material Procurement deals specifically with inputs of any nature that is not part of the core/direct

production process

Nestle also promotes its supply chain transparency by publicly showing thelists of suppliers for the company One example can be seen in the case of cereals

Figure 2 2 Supply chain disclosure for Cereals (corn and wheat)

Nestle products can be packaged given their nature The company packages its products into sustainable materials depending on the size and quantity of the product In this case, the logistics of the Nestle products may refer to packaging in different quantities to promote customer satisfaction whereas supply majors on the distribution of such packaged products to places where they are needed (Sengupta, 2017)

Nestle warehouses are meant for products that await distribution either in a short period or a long period Significantly, large organizations such as Nestle hardlystore items in warehouses for a long period since that would pose a risk or either breakage or damage of the goods while they stay in the warehouse Given that Nestledeals in food products and beverages, it would not store items in the warehouse for arelatively long time

Nestle Company distributes its products from various points of production topoints of consumption (Sengupta, 2017) For some products, the production processbegins from the firms before they are taken to the factories or manufacturing plants

After the manufacturing plant, the consumer goods are taken to the warehouse where the manager ought to monitor how they are sourced out of the facility to the appropriate target market A target market is a specific market in which the

customers of a particular product are located or expected to show up for the purposes of trade

Nestle focuses on distributing its products to restaurants, supermarkets, smallbusiness owners, and other retailers Availability of such goods to the

businessperson enables them to reach clients who buy the products and give feedback According to Marion, effective logistics management attempts to deliver services and products to customers at an appropriate time (2013) Moreover, effective logistics management involves adequate response to the customers’ feedback to further customer satisfaction For Nestle, some customers make whereasother customers purchase the goods as they arrive in the market The company has an obligation to satisfy both their needs regardless of the different approaches that they use to access the market and receive the goods

2.3.2 Reverse logistics

Nestle has managed return avoidance by reducing waste to 3.1% and increasing reuse or recovery to 4.2% (Nestle, 2011) Nestle encourages customers to return products for recycling purposes Reverse logistics for Nestle is mainly used for customer service reasons and the return flow This means Nestlé has collected and co-processed the equivalent amount of plastic as contained in the products sold and prevented the further flow of plastic into landfills By the end of 2020, an estimated 40 tons of plastic waste have been collected, sorted and recycled or incinerated Once the plastic waste is collected, it will be sorted, weighed and thereafter the recyclable plastic will be processed to produce other plastic products of Nestle, while the non-recyclable plastic waste will be incinerated to release energy via an environmentally friendly process Nestle’s plastics waste management initiative will also create income generating opportunities throughout the value chain, for instance the local residents and the youth will benefit from the collection, sorting, weighing and transportation services

2.4 Operations

2.4.1 Supply chain management

Nestle strives to build a lean supply chain where emphasis is on wastage reduction Its subsidiaries can structure or develop their own supply chain within the company wide policy and guidelines and in accordance with the needs of the

location’s business model, local business practices, market dynamics and business cycles

The current management structure at Nestle tends to revolve around GLOBE, an initiative whose aim is to standardize the operations of all Nestle business units allover the world This entails the assurance that management of procurement, sales

and distribution, factory operations, and administrative functions are being handledthrough a single system.

In addition, a single information system was put in use across all its units byeliminating the different enterprise planning systems and replacing them with a single web-based mySAP.com software (Steinert-threlkeld, 2006) Due to its broad network and product lines, fewer levels of information flow, and a flat and broad span of control that encourages horizontal communication and accountability have been favored Under this management structure, a uniform process in the

manufacturing of Nestle products and a uniform mode of formatting and storing data have been in place in all of Nestlé’s 200 units spread across all the continents of the world

2.4.2 Quality management

Superior quality is a competitive advantage and a joint effort by all parties inthe value chain is needed Suppliers are therefore considered an important link in this chain

To achieve Nestlé’s objective of offering consumers high-quality nutritional products, Nestle expects suppliers to guarantee the quality of the material/goods they supply or the service they provide Whenever possible, Nestlé’s goal is to be able to rely on their suppliers’ competence and ability to implement jointly defined

Lean manufacturing focuses on reducing the waste of resources used in the production process Therefore, the goal of Lean is to optimize the use of space, equipment, human resources, materials and time At Nestlé, this approach is calledNestlé Continuous Excellence (NCE)

To reduce unwanted lead times and reduce defect rates, the company adopted“just in time” (JIT) manufacturing as an overall strategy JIT focuses on continuous improvement of the manufacturing process, including streamlining the process and making efficient use of time resources The JIT concept only allows the firm to prepare enough materials for each weekend to prepare the input material for the following production cycle in terms of raw materials inventory control To minimizedelivery delays, Nestlé built a new storage area adjacent to the completed product warehouse Furthermore, after being released from the warehouse, the finished pallets must be positioned in the proper location before being loaded onto the truck

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