Kazakhstan Institute of Management, Economics and Strategic Research Bang College of Business (BCB) OM5202 Operations Management Fall

Semester 2011

Final Project Operations management at Nestle

Instructor: Dr. Ha Jin Hwang Prepared by: Irina Novokshenova ID 20090542 Fatina Ashirova ID 20090005 Kamilla Gizatulina ID 20090948

Table of Contents

List of Figures/Tables List of Abbreviations . Executive summary. 1. Introduction... 2. Companys background 2.1 History of Nestle.... 2.2 Current situation of Nestle in Kazakhstani market. 2.3 Major Nestle products. 2.4 Major Competitors... ... 2.5 Market share... 2.6 Problems issue/recommendations... 3. Major OM tools using in Nestle: data collection and analysis 3.1 Location strategy... 3.2 Quality management.. 3.3 Cause-and-effect diagram.. 3.4 Supply Chain Management 3.5 Inventory management process . 3.6 Product Life Cycle. 3.7 Action of Plan Conclusion Recommendations Suggestions . References

3 4 5 6 7 7 9 10 10 11 11

12 15 21 21 23 27 28 29 29 30 31

List of Tables Table 1 Table 2 Table 3 Table 4 Table 5 Inventory investment.. Weeks of supply.. Number of inventory days... Types of packaging materials used by Nestle. Plan of Action. 22 22 23 26 28

List of Figures Figure 1 Figure 2 Figure 3 Figure 4 Figure 5 Figure 6 Figure 7 Figure 8 Figure 9 Dominant market competitors Market share of Nestle Sales volume of the Nestle.. Location strategy Quality process Management process... Continuous Improvement Cause-and-effect diagram... Product Life Cycle.. 10 11 12 11 16 17 20 27 28

List of Abbreviations

COGS CPFR FEFO FG GMI HACCP IBM ISO JIT KPIs LLP MRO MRQ NQMS OM PoA PLC SCM SNS VMI WIP

Cost of Goods Sold Collaborative, Planning, Forecasting and Replenishment First expiry first out Finished Goods Genetically Modified Ingredients Hazard analysis and critical control points International Business Machine International Organization for Standardization Just - in -Time Key Performance Indicators Limited Liability Partnership Maintenance/repair/operating supply Management Review of Quality Nestle Quality Management System Operations Management Plan of Action Product Life Cycle Supply-Chain Management Supply Network Solutions Vendor-Managed Inventory Work-in-Progress

Executive summary Nestle is the world's leading food company which in recent years has focused on becoming a nutrition, health and wellness company. This is the idea of supporting people to lead healthier lives through better products and nutrition.

Unfortunately, Nestle hasnt got any manufacturing process in the territory of Kazakhstan. The Nestle Food Kazakhstan is the operational company of the world leader is Nestle. Nestle Food Kazakhstan LLP was created since 1997. In Kazakhstani market Nestle Food LLP has a dominant position in childhood nutrition. For example, according to statistics, 36% is childhood nutrition in the Kazakhstani market. Apart from childhood nutrition, Nestle Food Kazakhstan has another competitive product such as the bouillon cubes Maggi. There are three major competitors in the Kazakhstani market are Maggi (Nestle), Gallina Blanca (Alimeticos) Knorr (Unilever).

1. Introduction This is the Final Group Project dedicated to the confectionary, food and beverage products of Nestle including its key statistics performance on the Kazakhstani market.

The aim of our project is to implement knowledge obtained during the course of operations management on an example of Nestle Company which is world's leading Nutrition, Health and Wellness Company. The mission of which is "Good Food, Good Life" is to provide consumers with the best tasting, most nutritious choices in a wide range of food and beverage categories and eating occasions, from morning to night. The current paper starts with an introduction about Nestle followed first of all, by history of the Company; Secondly, its key major products and main competitors as in Kazahstani market as well as abroad; and finally, the last session will be highlighted of the key OM tools applied in the Company. Also we are going to cover its main issue problems and simultaneously, we will give a recommendations. In order to identify the operations management problems, the current paper will cover the main aspects of operations process of the Nestles products. The information presented in the work will based on the OM lecture materials. It will be highlighted the key OM strategic decisions, basically, location selection, product quality, supply-chain management and inventory. To identify the key problems related to the operation strategy, the mentioned above 10 OM decisions will help to answer the follow questions: whats the companys operations strategy position in product life cycle; does the Company build a production process in order to meet customer needs through identifying the process strategy; how the company managing the supply-chain for different products; how the company managing the good inventory management in order to achieve a low-cost strategy; whats the long-run efficiency of Nestle operation and etc

Answering to these questions will define the key problems faced by Nestle in operation management. The short background and key performance, using of key OM tools of the Nestle is presented below.

2. Companys background 2.1 History of Nestle

Nestle began in Switzerland in the mid 1860s when founder Henri Nestle created one of the first baby formulas. Henri realized the need for a healthy and economical product to serve as an alternative for mothers who could not breastfeed their babies. Mothers who were unable to breastfeed often lost their infants to malnutrition. Henris product was a carefully formulated mixture of cows milk, flour and sugar. Nestls first product was called Farine Lacte (cornflour gruel in French) Henri Nestle. The product was first used on a premature baby who could not tolerate his mothers milk or other alternative products of that time. Doctors gave up on treating the infant. Miraculously the baby tolerated Henris new formula and it provided the nourishment that saved his life. Within a few years the first Nestl product was marketed in Europe. In 1874 the Nestle Company was purchased by Jules Monnerat. Nestl developed its own condensed milk to contend with its competitor, the Anglo-Swiss Condensed Milk Company. The Anglo-Swiss Condensed Milk Company made products like cheese and instant formulas. The two companies merged in 1905, the year after Nestl added chocolate to its line of foods. The newly formed Nestle and Anglo-Swiss Milk Company had factories in the United States, Britain, Spain and Germany. Soon the company was full-scale manufacturing in Australia with warehouses in Singapore, Hong Kong and Bombay. Most production still took place in Europe. The start of World War I made it difficult for Nestl to buy raw ingredients and distribute products. Fresh milk was scarce in Europe, and factories had to sell milk for the public need instead of using it as an ingredient in foods. Nestl purchased several factories in the U.S. to keep up with the increasing demand for condensed milk and dairy products via government contracts. The Companys production doubled by the end of the war. When fresh milk became available again after the war, Nestle suffered and slipped into debt. The price of ingredients was increasing, the economy has slowed and exchange rates deteriorated because of the war. An expert banker helped Nestle find ways to reduce its debt. By the 1920s Nestle was creating new chocolate and powdered beverage products. Adding to the product line once again, Nestl developed Nescafe in the 1930s and Nestea followed. Nescafe, a soluble powder, revolutionized coffee drinking and became an instant hit. With the onset of the Second World War, profits plummeted. Switzerland was neutral in the war and became increasingly isolated in Europe. Many of Nestles executive officers were transferred to offices in the U.S. Because of distribution problems in Europe and Asia, Nestle opened factories in developing countries in Latin America. Production increased dramatically after America entered the war. Nescafe became a main beverage for the American servicemen in Europe and Asia. Total sales increased by $125 million from 1938 to 1945. Nestle continued to prosper, merging with Alimentana S.A., a company that manufactured soups and seasonings, in 1947. In the coming years, Nestl acquired Crosse & Blackwell, Findus frozen foods, Libbys fruit juices, and Stouffers frozen foods. Nescafe instant coffee sales quadrupled from 1960 to 1974, and the new technology of freeze-drying allowed the company to create a new kind of instant coffee, which they named Tasters Choice.

Expanding its product line outside of the food market, Nestl became a major stockholder in LOreal cosmetics in 1974. Soon after the company suffered with increasing oil prices and the slowing growth in industrialized countries. Foreign exchange rates decreased, in turn reducing the value of sterling, the pound, dollar and franc. Prices of coffee beans and cocoa rose radically, presenting further problems for Nestl. The company decided to venture into the pharmaceutical industry by acquiring Alcon Laboratories, Inc. While trying to deal with unstable economic conditions and exploring its new ventures, Nestl faced the crisis of an international boycott. Many organized groups began boycotting all of Nestles products because they disapproved of Nestle marketing its baby formula in developing countries. Problems like illiteracy and poverty caused some mothers to use less formula than recommended. In a watered down formula, vital nutrients are lessoned. Contaminated water presented another problem, since the formulas had to be mixed with water. The organizations argued that the misuse of formula resulted in the malnutrition or death of many infants in developing countries. According to Nestle the World Health Organization never made statements tying infant death or malnutrition with baby formulas. The company didnt deny the superiority of breastfeeding and agreed that substituting breast milk for other substances could be very dangerous. Nestl explained that breastfeeding and non-breastfeeding mothers in developing countries often gave their babies whole cows milk, tea, cornstarch, rice water or a mix of flour and water. These alternatives were very unhealthy and a nutritional baby formula was a better choice. Nestl says that it has never discouraged breastfeeding when it was possible. Nestl agreed to follow the International Code in developing countries in 1984, and the boycott was suspended. It resumed several years later when the organizations believed Nestl was sending free or low cost baby formulas to developing countries. Nestl said it only sent formula to countries that allow donations for orphans, multiple births, and babies with no access to breast milk. The company has stopped all public advertising for formula in developing countries for almost 20 years. The boycott continues to some extent to this day without satisfactory resolution. By the 1980s Nestle had a new Chief Executive Officer. The company focused on improving its financial situation and continuing to expand. In the one of the largest takeovers at that time, Nestle bought Carnation for $3 billion and parted with any unprofitable businesses. International trade barriers diminished in the 1990s, opening trade with parts of Europe and China. In the 1990s Nestle acquired San Pellegrino, and Spillers Petfoods of the UK. With the acquisition of Ralston Purina in 2002, the Nestle-owned pet care businesses joined to form the industry leader Nestl Purina PetCare. Today, Nestle is the world's largest Food and Beverages Company, and a global leader in health, nutrition and wellness.

2.2 Current situation of Nestle in Kazakhstani market "Nestle Food Kazakhstan" LLP is an operating company of the world giant NESTLE, local region of Central Asia and Caucasus. NESTLE is operating in Kazakhstan since 1997 as a representative and as an operating company since 2004.

One of the main factors influenced the decision to create LLP "Nestle Food Kazakhstan" is a dynamic economic development of the Central Asian region. At present time, "Nestle Food Kazakhstan" LLP has an extensive distribution network throughout Kazakhstan. The company plans to expand its business in Kazakhstan due to increased sales and increased range of products. The main activities of NESTLE is the production and sale of food products, such as: chocolate, confectionery, baby food, coffee and beverages, cooking, mineral water, animal feed, etc. According to the operation results for 2010 the company sales in Eurasia region grew by 15% comparing to the previous year results. In 2010 "Nestle" continued to surprise customers with new products. Company carried on an effective marketing support for its brands, allowing the company to strengthen its leading position in many categories of the Kazakhstan food and beverages market. As an expert in nutrition and healthy lifestyles, the company offers customers quality products with extra nutritional value. For example the last year, "Nestle" introduced on Eurasia market(including Kazakhstan) innovative coffee NESCAFE Green Blend, which combines green and roasted not fried beans. One cup of NESCAFE Green Blend contains as much antioxidants as a cup of green tea, with benefit that it is digesting by human body two times better than normal one. By launching the new products, "Nestle" strengthens its position in the segment of freeze dried instant coffee, and confirms the title of leader on the Kazakhstan market of instant coffee with a share of over 50%. Despite strong competition in the chocolate market in Kazakhstan, the company "Nestle" managed to hold its share of over 20% * and increase their share in the segment of chocolate bars through launching several new products. Variety of chocolate bars was greatly extended from Lyon bars of white chocolate NESQUIK, and the trademark "RUSSIAN" "generous soul" presented a novelty - Chocolate "Milk It." Last year, "Nestle" continued to please novelties Maggie housewives who are willing to use these products. The company introduced on the market Maggi "Sea taste", Maggie "Appetite" and a few new recipes to Maggie. The launch of new products strengthened market position of culinary products in Kazakhstan. Currenlty Maggi brand market share is 45%. Young consumers are also under Nestle focus group. "Nestle" is a leader in the Kazakhstan market of baby food with large market share - almost 40% . In 2010 the company introduced new hypoallergenic oatmeal NESTLE, nutritious purees GERBER meat and cheese. Also Nestle has upgraded and expanded its range of products under the brand name NAN, offering customers milk for children with age 1 and 1.5 year old. Nestle has extensive experience in the production of baby food and it is constantly investing in research and development. The company "Nestle" is producing an wide range of products for babies. The food is made from natural ingredients to provide all necessary needs for healthy children growth. 2.3 Major Nestle Products

Nestle has some 6,000 brands, with a wide range of products across a number of markets, including coffee ( Nescafe, Nespresso, etc.), bottled water (Buxton, Perrier, etc.), milkshakes and other beverages (Nesquik, Milo, Carnation, etc.), chocolate (Milky Bar, After Eight, and many others), ice cream (Hagen-Dazs, Skinny Cow, etc.), breakfast cereals (Cheerios, Golden Nuggets, Shreddies, etc.), infant foods (now including Gerber products), performance and healthcare nutrition (Nesvita, PowerBar, etc.), seasonings, soups and sauces (Maggi, Buitoni, etc.), frozen and refrigerated foods (Findus, Lean Cuisine, etc.), confectionery (Rowntree products, Caramac, Wonka products, etc.), and pet food (Winalot, Felix). 2.4 Major Competitors To be successful in today's very competitive business world, it is important for businesses to be aware of what their competitors are doing and to find a way to compete by matching or improving on the competitors' product or service. By this way a lot of companies in confectionery, food and beverage industry are changes and looking for a new ways, strategy and policy in order to take a dominant position in the market. And of course, Nestle is not an exception. Being a multinational company it has competitors in a global and in a local market as well as. The major competitors of Nestle are Heinz, Groupe Danone, Kraft Foods Inc., Unileve NV, HLL and others. For example, baby food and Instant coffee are categories where brand loyalties are very strong and Nestle is the market leader. On other hand, HLL company is a significant competitor to Nestle in the baby foods market. While for instance, Nestl and Danone are third market in the growth which produces milk for babies and toddlers generating 60 percent of its sales in Asia. The Figure 1 below illustrates three producers dominate the chocolate market. Cadbury with around 28% while Mars and Nestl each have around 24%. Sales of milk chocolate (96%) predominate, with plain and white chocolate accounting for about 2% each.
Figure 1. Dominant market Competitors

Source: http://www.thetimes100.co.uk/downloads/nestle/nestle_8_full.pdf

2.5 Market share Nestle achieved a significant 25% share in the chocolate/confectionery market. The company has recently expanded its dairy products portfolio including milk, curd and butter. The Figure 2 illustrates the market share of the Nestle and its

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major competitors. As shown in the Graph, the Nestle has a dominant position in confectionery, food and beverage industry over Kraft and Unilever.
Figure 2. Market share of Nestle

In order to determine the Companys Sales volume the initial information have been taken from the annual financial report from follow link: http://www.nestle.com/Media/Reports/Pages/Report-2009.aspx. The Figure 3 illustrates that the Companys position is quite stable. The products of the Nestle is successfully recognized all over the world. For example in 2009 the Growth Sales has been increased by 1.95% in comparison with 2010.
Figure 3. Sales volume of the Nestle from 2005 - 2010 Sales 120000 100000 80000 60000 40000 20000 0

in mio

2005

2006

2007 Year

2008

2009

2010

2.6 Problems issue/recommendations Our current paper consists of the follow format. We highlighted the main OM tools such as Location strategy, Quality process, SCM and Inventory. The appropriate problems and recommendations are included already at the end of each sections. The separate section for problems issue and recommendation will not be covered. Also based on our materials lecture we used ss method investigation we used Cause-and-effect diagram (fishbone) which will be represented below. 3. Operations management tools: Analysis and data collection 3.1 Location strategy Nestle had 500 factories in 76 countries and sold its products in a staggering 193 nations-almost every country in the world. Similarly, only 3 percent of its- 210,000 employees were located in Switzerland. Nestle was the worlds biggest maker of infant formula, powdered milk, chocolates, instant coffee, soups, and mineral waters. The Figure 4 illustrates that it was number two in ice cream, breakfast cereals, and pet food. In 2010, roughly 36 percent of its food sales were made in Europe, 42,2 percent in the America, and 21,8 percent in Africa and Asia.
Figure 4. Location Strategy

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Nestle is a decentralized organization. Responsibility for operating decisions is pushed down to local units, which typically enjoy a high degree of autonomy with regard to decisions involving pricing, distribution, marketing, human resources, and so on. At the same time, the company is organized into seven worldwide strategic business units (SBUs) that have responsibility for high-level strategic decisions and business development. In recent years, two-thirds of Nestls growth has come from acquisitions, so this is a critical function. Running in parallel to this structure is a regional organization that divides the world into five major geographical zones, such as Europe, North America and Asia. Factors that affect location decisions The large Western European and North American markets were mature. In several countries, population growth had stagnated and in some, there had been a small decline in food consumption. The retail environment in many Western nations had become increasingly challenging and the balance of power was shifting away from the large-scale manufacturers of branded foods and beverages, and toward nationwide supermarket and discount chains. Increasingly, retailers found themselves in the unfamiliar position of playing off against each other manufacturers of branded foods, thus bargaining down prices. Particularly in Europe, this trend was enhanced by the successful introduction of privatelabel brands by several of Europes leading supermarket chains. The results included increased price competition in several key segments of the food and beverage market, such as cereals, coffee and soft drinks. At Nestl, one response has been to look toward emerging markets in Eastern Europe, Asia and Latin America for growth possibilities. The logic is simple and obvious a combination of economic and population growth, when coupled with the widespread adoption of market-oriented economic policies by the governments of many developing nations, makes for attractive business opportunities. Many of these countries are still relatively poor, but their economies are growing rapidly. For example, if current economic growth forecasts occur, by 2012, there will be 700 million people in China and India that have income levels approaching those of Spain in the mid-1990s. As income levels rise, it is increasingly likely that consumers in these nations will start to substitute branded food products for basic foodstuffs, creating a large market opportunity for companies such as Nestl. In general, the companys strategy had been to enter emerging markets early before competitors and build a substantial position by selling basic food items that appeal to the local population base, such as infant formula, condensed

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milk, noodles and tofu. By narrowing its initial market focus to just a handful of strategic brands, Nestl claims it can simplify life, reduce risk, and concentrate its marketing resources and managerial effort on a limited number of key niches. The goal is to build a commanding market position in each of these niches. Knowing that innovation and quality were key determinants, Nestle transferred these distinctive competencies to foreign markets. That is why, the company needs to be flexible and able to adapt rapidly to local demand and cultural differences. It can build up a powerful position by selling food items that appeal to the local population base. Doing business in different countries means different ethical standards, different business expectations, and different cultural norms. Nestle can earn greater return from its distinctive competencies, i.e. unique strengths that allow a company to achieve superior efficiency, quality, innovation and customer responsiveness. Furthermore, Nestl can take advantage of location economies. Location economies arise from performing a value creation activity in the optimal location for that activity, anywhere in the world. The optimal location for a value creating activity lowers the costs of value creation therefore helping the company achieve a low-cost position. Moreover, it enables Nestle to differentiate its products offerings and charge a premium price. Consequently, by dispersing value creation activities to optimal locations, Nestle should have a competitive advantage over a company that places all its value creation activities in a single location. Another reason why it makes sense for Nestle to focus its growth on emerging markets, is that the company is able to move down the experience curve. The experience curve is a systematic decrease in production costs that occur over the life of a product. Learning effects and economies of scale underlie the experience curve and a company that moves down the experience curve will have a cost advantage over its competitor and is therefore consistent with the business-level strategy of cost leadership. Nevertheless, Nestle must evaluate basic entry decisions before entering an emergent market. The company has to make a choice among different foreign markets on the basis of their long-run profit potential. Nestle has to balance the benefits, costs, and risks associated with doing business in that country. The timing of entry to a foreign market is also important, as a company could realize first-mover advantages and establish a strong brand name. Environmental problem Historically, Nestle has relatively narrow range of products, with food and beverage occupying their main business focus. In the early 1970s, Nestle began exploring the possibilities of diversifying its product base. The most common motivation for diversification includes growth, profitability and risk reduction. In the case of Nestle, growth and profitability are the main drivers of diversification strategy. Nestles approach for increasing growth are geographic expansion, innovation and renovation and channel growth (Nestle, 2008). Nestle's geographic presence is one of its competitive advantages. However, competitive nature of Nestle as global leader in food production leads to the inadequacies of the Nestles environmental strategy. In many case, conflicts have arisen as result of trying to satisfy both maximization profits and environmental responsibility. Driving this competitive force is the ability of Nestle to maximize profits while at the same time addressing both societal and environmental concerns to establish acceptance and public

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position. Pressure to meet environmental regulations and operational compliance has forced Nestle to develop a systematic process to gauge environmental performance (NEMS), however, the NEMS is more of a superficial outline to company goals than an actively implemented strategy. Nestle operations also inherently lead to an incomplete environmental management strategy. Nestle claims great achievement with the adoption of the ISO 14001 international standard for environmental performance in many of their factories, however, of a total of 509 facilities worldwide a mere 46 of these are certified. In general, the certification process (including EPIs, auditing, and facility surveys) is inefficient and inaccurate for such a number of reporting facilities. The margin of error is much larger when considering that individual factories are manually reporting measurements of performance based on facility inputs and outputs (i.e. waste, water generation, greenhouse gases, energy consumption, etc.) The accurate consolidation of all this environmental performance data is skeptical. In addition, many of the controversies over Nestl food products have involved the promotion of infant formulas in developing countries and the companys use of GMO ingredients in products. Nestle violated the World Health Organizations Code of Marketing Breast-milk Substitutes with their promotion of inappropriate distribution of powder infant formulas to women in developing countries. Nestl supplied information to women that promoted artificial feeding and did not educate them on the benefits of natural breastfeeding as the optimal form of infant nutrition. Nestl also distributed free samples of infant formula long enough to support the infants until the mother was notable to lactate. Without money to buy milk, inadequate sterilization methods, and lack of clean water, many newborn babies in these developing countries suffered from severe malnutrition. Recommendations Nestle provides a variety of food products that we use in our everyday lives. Therefore, it important to assess how the company could improve its environmental strategy to benefit consumers and simultaneously maintain a competitive advantage. One of our recommendations regarding Nestls current advertising policies is that the company use marketing to promote responsible environmental practices or products they may have or may develop in the future. Therefore, we recommend that Nestl develop and advertise greenness by using non-GMO ingredients, using organic ingredients, and using recycled packaging. In addition to a revised marketing program, it would be in the best corporate interest of Nestl to establish an environmental eco-labeling program to identify and promote environmental responsibility. The Current developments in consumer behavior and lifestyle that may threaten Nestls efforts to be green is the increasing demand for single servings and more convenient food products that require more packaging (Nestle, Ltd. 2008). Unfortunately for the environment, Nestls mission is to provide consumers with the products they want in a highly competitive market. This change in consumer demand will require Nestl to look more closely at their corporate strategy if they wish to make their corporate environmental strategy consistent with their corporate strategy. 3.2 Quality Management

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Nestle Quality Management System structure The future and the success of Nestle depend on the level of trust that consumers and customers have in brands and in company. Trust is a factor of competitiveness. Today, with more choice than ever, it is not so much competition between competitors, but competition for the trust of the consumer. Consumer trust is based on safe, high Quality products preferred by the consumers. The Nestle Quality Management System (NQMS) is one of the cornerstones that maintains and continuously builds trust, on the basis of four key elements: Implementation of a process-based Quality Management System in which all Value Chain functions are responsible for achieving Quality objectives; A Quality System structure based upon centrally established requirements, Product-Specific Quality Standards and local management; Achievement of Compliance through flawless execution, factual and transparent communication and verification by independent audits; Implementation of Continuous Improvement Programmers to achieve Consumer Trust and preference through excellence and competitiveness. The Nestle Quality Management System covers the Food Safety and Regulatory Compliance systems as well as all other systems needed to ensure Quality Compliance and performance across the Value Chain.

The Nestle Quality Management System includes: 1. The Global Quality Standards consists of: The Quality Policy; The Management process, including the Management System framework and the mandatory requirements

applicable to all Quality-related activities and product categories; The mandatory principles and responsibilities for Quality-related activities of functions by process.

2. Product-Specific Quality Standards which cover all product and process standards, policies, specifications, instructions, methods and tools specific for a product category. 3. An Operating Quality Manual for all Units*, based upon the Nestle Quality Management System framework, the global mandatory requirements and the mandatory principles by function. The manual includes or refers to ProductSpecific Quality Standards and local Regulatory requirements. It also contains detailed descriptions of the processes in Figure 5 below.
Figure 5. Quality Process

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Management by process is a key principle of the Nestle Quality Management System. It provides a framework for attaining and maintaining Compliance, measuring performance and continuously improving the effectiveness of the Quality Management System across the Value Chain processes to achieve consumer satisfaction. Each process has an owner responsible for defining, implementing, monitoring and improving it, in line with the Continuous Improvement principle. Processes are classified in three main categories: The Management process describing the global mandatory elements necessary for an effective Management of Quality in all processes which represents in Figure 6 below; Value chain processes linked to customer and consumer satisfaction and for which activities affecting Quality as well as the related mandatory requirements are identified; Support processes to provide assistance and expertise to the Management process and Value Chain processes.

Figure 6. Management process

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Management Process 1. Planning

The Management Process covers the planning of global mandatory requirements for: Food Safety Compliance, as described in the Food Safety System Guideline, including Prerequisite Programs, HACCP, Quality Monitoring Scheme, Product Traceability, Recall and Crisis Management, Release System, Instrument Calibration, Traceability, Laboratory and Test Methods; Regulatory Compliance, as described in the Food Safety System guideline and in the Regulatory Compliance Principles; Quality-related Compliance for products and services, including Quality Monitoring Scheme, Sensory Evaluation, Release and Status Control System, Shelf-life Management, Keeping Quality tests, and any other Quality procedure referred to in Value Chain processes and described in Technical Instructions. 2. Documentation

The Quality System documentation required by the Nestle Quality Management System includes the following: The Quality Policy; The Quality Objectives;

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The Operating Quality Manual; The global requirements and Product-Specific Category Standards; Quality records

The Nestle Quality Management System requirements provide the framework for the Operating Quality Manual that is established in each Unit and includes: The scope; The Quality Policy cascaded at local level; A map and description of all processes and their interactions; All documents established for the Quality System, or reference to them, including procedures and instructions, relevant Product-Specific Category Standards, specifications, instructions, methods and tools, documents needed to satisfy Regulatory requirements and any other customer requirement. 3. Management Responsibilities

There are four strategic areas of responsibility for Quality assigned at the Centre and in each Unit: System design, including the definition of the Quality Strategy and objectives, and management of Quality related procedures, instructions and tools; Quality mastership that covers all activities necessary to achieve Compliance with instructions and standards, to drive Continuous Improvement and to ensure transparent communication; Quality auditing and verification to assess that the Quality System is in place, is efficient and is obtaining expected results; People and know-how, including the development and maintenance of competences and Quality awareness, and commitment to Quality. 4. Resource Management

Each function at the Centre and in each Unit makes the necessary human and financial resources available for implementing the Quality strategy, achieving the objectives and driving improvement across all processes. With regard to competence, awareness and training, each function defines and documents the skills and competence requirements necessary for all of their personnel, including those in roles affecting Quality across the Value Chain. 5. Compliance

Compliance of products must be verified and demonstrated through monitoring plans designed on the basis of various inputs, such as regulatory or internal requirements and the variability of materials, products and manufacturing processes. 6. Auditing

On the basis of the outcome of previous audits, centrally managed audits are planned and periodically conducted in each Unit in order to:

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Verify the compliance with the Nestle Quality Management System requirements; Provide relevant recommendations in case of deviation; Identify opportunities for Continuous Improvement once compliance audits are completed, factories must achieve certification of their Food Safety System against ISO 22000:2005 by accredited bodies.

These audits are coordinated and managed by a Central Audit Group, and conducted by Nestle dedicated resources and third party auditors to ensure objectivity and impartiality. 7. The Management Review of Quality

The Management Review of Quality (MRQ) is a periodic review, conducted at least once a year, of Quality performance data from all processes across the Value Chain and all levels of the organization, including data from external business partners. The Management at the Centre and in each Unit is responsible for reviewing the performance data, identifying relevant actions, setting targets and communicating conclusions. The following areas must be reviewed: 8. Follow-up and recommendations from previous MRQs; Performance and Compliance results, KPIs, audit reports and results of corrective/preventive actions; Resources allocation; Internal and external issues.

Management non-conformities and corrective actions

All non-conformities and failures have to be dealt with and must trigger root cause analysis, corrective actions and action plans. Each Unit has a procedure to ensure that: Non-conformities are reviewed through analysis of monitoring results and performance indicators of the process; 9. Root causes for non-conformities are identified; Proper corrective actions are defined and implemented to rectify non-conformities; A tracking system is in place to verify effectiveness and efficiency of the corrective actions.

Preventive actions

Appropriate actions are taken to eliminate causes for potential non-conformities related to each process, and to prevent occurrences that might negatively impact consumer satisfaction, preference and trust. 10. Continuous Improvement Continuous Improvement is a mindset that involves all employees across all functions of the Value Chain. Continuous Improvement is an element of all of Nestle activities which allows to achieve and maintain consumer trust and preference and to reach company goal of Zero defect and No Waste through excellence and competitiveness. The Continuous Improvement process includes:

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Identifying areas for improvement by evaluating Quality-related data, the results of verification activities and the occurrence and resolution of issues;

Defining and selecting the improvement targets; Developing and implementing strategies to meet the targets; Verifying that targets are achieved and formalizing successful changes.

The Figure 7 below illustrates the Continuous Improvement activities are applied to every process and activity, and are supported by various programmers such as 5-S, small group activities and task forces.
Figure 7. Continuous Improvement

3.3 Cause-and-effect diagram A tool for identifying quality and inspection points is the cause-and-effect diagram, also known as an Ishikawa diagram or a fish-bone chart. Cause-and-effect diagram shows us the causes of complaints on Nestle products. There are six categories of elements in a system: suppliers, workers, machines, environment, processes and materials. Suppliers problems relates to delivery process. Worker problems relates to people organizing and participating in production process. Within machine element the main causes are issues related to equipment: poor maintenance, poor calibration, type of equipment and age (use of equipment with exceeding equipment lifetime). Material causes in this case mean the material which used in production and problems related to this: materials out of specification, problem with package quality and material compatibility. Process problems concerns: poor quality control, poor product design and poor process follow up. Environment problems are related to proper storage of product: poor temperature and ventilation control. All together leads to poor satisfaction and complaints from customer on Nestle products. The fishbone diagram of the Nestle is represented in Figure 8 below. Figure 8. Cause-and-effect diagram

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Suppliers
late deliveries defects out of spec material

training

Workers
ability supervision
motivation

Poor maintenance

Machines

calibration type age out of specification

temperature ventilation

poor quality control

poor product design

Customer dissatisfactio n on Nestle products

package quality material compatibility

poor process follow up

Environment

Processes

Materials

3.4 Supply Chain Management Nestle is giant food and pharmaceuticals company that operates virtually all over the world. Best known for its chocolate, coffee (it invented instant coffee), and milk products, Nestl sells thousands of other items, most of which are adapted to fit local markets and cultures. For example, the Company, currently makes ice-cream in Dubai, soups and cereals in Saudi Arabia, yogurt and bouillon in Egypt, chocolate in Turkey, and ketchup and instant noodles in Syria. For the present, Nestle can survive in these markets by using local materials and focusing on local demand. The Syrian factory, for example, relies on products that use tomatoes, a major local agricultural product. Syria also produces wheat, which is the main ingredient in instant noodles. Even if trade barriers dont come down soon, Nestle has indicated it will remain committed to the region. By using local inputs and focusing on local consumer needs, it has earned a good rate of return in the region, even though the individual markets are small. Traditionally this huge firm has allowed each local organization to conduct business as it saw fit, taking into account the local conditions and business cultures. To support this decentralized strategy, it has had 80 different information technology units that run nearly 900 IBM AS/400 midrange computers, 15 mainframes, and 200 UNIX systems, enabling observers to describe its infrastructure as a veritable Tower of Babel. Interestingly, despite its size, the company has had no corporate computer center. However, Nestle's management has found that allowing these local differences created inefficiencies and extra costs that could prevent the company from competing effectively in electronic commerce. The lack of standard business processes prevented Nestl from, for example, leveraging its worldwide buying power to obtain lower prices for its raw materials. Even though each factory uses the same global suppliers, each negotiated its own deals and prices. In addition, every division and every factory had assigned different names to the same product, so that the company could not even check on the situation. Keeping control of its thousands of supply chains, scores of methods of predicting demand, and its uncountable variety of ways of invoicing customers and collecting payments was becoming ever more difficult and eating into the company's bottom line.

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In addition, Nestle is affected by Bullwhip effect. Bullwhip effects are created when supply chain members process the demand input from their immediate downstream member in producing their own forecasts. Demand input from the immediate downstream member, of course, results from that member's forecasting, with input from its own downstream member. One remedy to the repetitive processing of consumption data in a supply chain is to make demand data at a downstream site available to the upstream site. Several years ago, Nestl embarked on a program to standardize and coordinate its information systems and business processes. The company installed SAP's R/3 enterprise resource planning (ERP) software to integrate material, distribution, and accounting applications in the United States, Europe, and Canada. In addition, Nestle installed SNS (Supply Network Solutions) in Middle East. SNS is a leading provider of superior supply chain services including distribution center design, system integration and implementation, training, support, solution development and supply chain consulting. SNS provides its services to companies operating in various industries such as third party logistics, distribution, wholesale, retail and freight forwarding. SNS cutting-edge services are delivered by a professional team of supply chain specialists with a highly customer-oriented culture. Use of electronic data interchange will undoubtedly facilitate information transmission and sharing among chain members. However, even if the multiple organizations in a supply chain use the same source demand data to perform forecast updates, the differences in forecasting methods and buying practices can still lead to unnecessary fluctuations in the order data placed with the upstream site. Recommendations In order to achieve effective management in supply chain Nestle need use following opportunities:

1. Vendor-Managed Inventory (VMI), use of local supplier to maintain inventory for manufacturer or retailer. 2. Collaborative, Planning, Forecasting, and Replenishment (CPFR), members of supply chain must share planning,
forecasting, and inventory information.

3. Implementing RFID based inventory management system in order to avoid overproduction, and unnecessary
inventory Inventory researchers have long recognized that multi-echelon inventory systems can operate better when inventory and demand information from downstream sites is available upstream. In that way, we recommend Nestle try to get demand information about the downstream site by bypassing it. For example, Apple has a "consumer direct" program, i.e., it sells directly to consumers without going through the reseller and distribution channel. A benefit of the program is that it allows Apple to see the demand patterns for its products. Finally, long resupply lead times can aggravate the bullwhip effect. Improvements in operational efficiency can help reduce the highly variable demand due to multiple forecast updates. Hence, just-in-time replenishment is an effective way to mitigate the effect. According to our textbook, we calculated the weeks of supply at Nestle as follow:

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Weeks of supply = Inventory Investment / (Annual COGS/52 weeks) Table 1. Inventory Investment
in mio 2006 Inventory COGS 8 029 40 713 2007 9 272 45 037 2008 9 342 47 339 2009 7 734 45 208 2010 7 925 45 849

While Inventory of Nestle consists of raw materials, work in progress and finished goods.
Table 2. Weeks of supply
in mio 2006 Raw materials (RM), Work in progress (WIP) Finished Goods (FG) Inventory Weeks of supply 3102 4682 8 029 10,3 weeks 2007 3590 4559 9 272 10,7 weeks 2008 3708 5634 9 342 10,3 weeks 2009 3175 5682 7 734 8,9 weeks 2010 3243 4682 7 925 9,0 weeks

3.5 Inventory Management process As we learnt from our Operations Management course, the Companies maintain 4 types of Inventories (J.Heinzer Operations management, 2010): raw material inventory work-in-process inventory maintenance/repair/operating supply (MRO) inventory finished goods inventory

In case of Nestle, there is a separate department in the factory which is responsible for purchasing the materials and managers its supply. There is a centralized system of mater is also a stores officer which also looks after the materials management. For controlling inventory the Nestle uses Continuous Review system. They have the whole computerized system. How much stock is in the store room how much stock has been further put into warehouse and how much stock has been drawn from the stores? In this way they keep continuous control over their inventory. The stores officer not only maintains records but also makes visits at the warehouses to see the actual situation of materials. The officer can review the inventory at any time. Operations manager and the auditing people also check the inventory and its records so that the risks of loss or manipulation may be minimized. In order to identify whats the inventory process of the Nestle, lets determine the number of inventory days that means how many days it take to hold inventory in warehouse. Based on the Table 1 from SCM section it will help to determine how many days the Company holds its inventory in warehouse and convert inventory into cash.

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In order to analyze the number days in inventory, it was taken Cost of Goods Sold (COGS) and Inventory for the last 5 years (from 2006 - 2010) in order to make more clear analysis from Annual reports retrieved from the follow link:
(http://www.nestle.com/Media/Reports/Pages/Report-2009.aspx). Table 3. Number of Inventory days
2006 Number of Inventory Days Inventory turnover (times) 72 days 5,07 2007 75 days 4,86 2008 72 days 5,07 2009 62 days 5,85 2010 63 days 5,79

Based on the formulas below it was calculated the days in Inventory:

Inventory turnover = COGS / Inventory Days in Inventory = 365 days / Inventory turnover

The Table 3 above illustrates that it takes 72 days in 2006 and 2008, 75 days and 62, 53 days in 2009 and 2010 respectively, the Company holding its Inventory in warehouse. In other words, which means it took Nestle average 62 and 63 days in 2009 and 2010 respectively to covert its inventories into cash. Inventories consist primarily of raw materials and packaging (which includes ingredients and supplies) and finished goods. The difference in inventory days can be explained by the nature of products it sells. Raw materials The key raw materials purchased by Nestle are: milk, coffee, and cocoa as well as fruit, vegetables, cereals, potatoes are partly sourced directly from farmers. Sugar, oil, meat, spices and other ingredients are sourced only through the trade. Nestle is in principle not directly involved in primary production of raw materials and other food ingredients. The Company uses locally available raw materials and purchases them either directly from producers or through existing trade channels. Raw materials have to meet clearly established quality criteria and are checked for possible contaminants including environmental contaminants. Nestle applies the following principles when sourcing raw materials:

all raw materials must meet both legal and internal quality criteria, including limits on possible environmental
contaminants; whenever possible, preference is given to raw materials that are produced by environmentally sound farming methods (e.g. integrated crop management);

farmers are encouraged to apply sustainable farming methods and, where appropriate, are provided with
assistance in crop production and dairy farming. Such assistance includes the provision of recommendations for the conservation of natural resources (soil, water, air, energy and etc) and techniques for reducing environmental impact. There are two challenges face the company in its sourcing of raw materials. The first one is how to fulfill the increased global need for food while resources of land and water are limited. The second challenge is to meet the changing concerns

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of the consumer. As consumers become more well-off they become increasingly interested in social responsibility and personal value issues, for example: fair trade, animal welfare, labour issues, environmental issues. The difficulty for Nestle in addressing these challenges is that these issues are located in the upstream supply chain and are thus out of the company's direct control, except to a limited degree when purchasing from farmers. The solution is to enhance mainstream agricultural production towards sustainability with the focus on food quality and safety aspects. Packaging Manufacturing comprises all unit operations necessary to transform perishable raw materials into finished products, with the aim to make them safe and convenient for the consumers. The manufacturing activities of the Company: respect natural resources by efficient use of raw materials and energy minimize waste generation and emissions ensure environmentally safe disposal of all waste which cannot be recycled

Packaging serves a major role in our daily lives. It protects food products from spoilage and ensures safety from manufacture through storage, distribution and consumption. Nestle has the following general requirements for the packaging of the materials delivered: The material must be packed in suitable, clean and sound containers with no loose or detachable closures or other potential foreign matter hazards. The packaging must conform to the relevant legal requirements for materials in contact with food. All packaging materials used for the storage of foodstuffs must be free from taint must not contaminate the materials that they contain. Each packaging unit must be permanently and legibly identified as agreed with Nestle. The minimum requirements from a quality and food safety perspective include: material description or trade name, batch or lot number, producer (and distributor if applicable), production or expiry date. Specific storage or handling conditions must be indicated. Nestle have following objectives regarding packaging: Result in the lowest possible weight and volume of packages whilst still maintaining pack integrity; Take into account new packaging materials and processes that reduce the impact on the environment of unnecessary transportation; Avoid the use of substances that can adversely impact the environment during packaging production and disposal; Decrease packaging waste at all stages in the supply chain, including package manufacturing, utilization and disposal; Increase the use of recycled materials wherever possible, and increase compatibility of packages with existing waste management

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Packaging is of course essential for both Nestle and for the consumer. It ensures the safety and quality of products from manufacture though to storage, distribution and consumption. Nestle utilizes a number of packaging materials to ensure that products are delivered to our customers and consumers in the same way they left the factory. Those material types are as detailed in Table 4 below.
Table 4. Types of Packaging Materials Used by Nestle
Packaging Type Coated Paper Wood Flexible laminates Wax coated paper Wooden sticks Composite flexible materials printed and laminated to form bags Description Typical Use Sugar confection wrappers Ice cream sticks, pallets Confectionery bags and wrappers. Powdered sauce and soup mixes Noodle meal wrappers Paper Labels Paper labels Labels for cans bottles and cartons

Plastics containers

Polypropylene, polystyrene.

Yoghurt containers thin plastic confectionery trays, Ice Cream tubs Frozen Pizza, frozen meal Condensed milk tins, milk powders Sauce bottles and coffee Coffee substitute beverages

Carton board Metal Glass Composite Can

Folding Cartons Steel containers Clear glass containers Containers with paper walls and metallic ends

Source: http://www.nestle.co.nz/AboutUs/SHE/OurFootprint/Documents/NestleNPCActionPlan20052008.pdf

Finished Goods Placement of Finished Goods Inventory The fundamental decision is where to stock an inventory of finished goods (FG) there can be two alternatives: Forward Placement Backward Placement

Forward Placement The forward placement finished goods are stored closer to customer. Nestle uses forward placement as they use to keep the stock of finished goods in their regional offices and distribution centers. From the distribution centers the goods are further sent to the retailers. Backward Placement In backward placement FG are stored at the manufacturing plant where they keep goods stocked. So in this way they use backward placement also. So for inventory placement Nestle uses a mix of forward placement and backward placement in order to provide goods to the market on time. Transportation and delivery The vendor must ensure that shipping and handling will not cause damages to the material. The vendor must follow the first expiry-first out (FEFO) principle. The vendor must ship the minimum number possible of batches of the same

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material per shipment. A formal agreement is mandatory between Nestle and transport companies. Subcontracted transport companies cannot be used without prior Nestle authorization. The carrier selected for the delivery of the materials must be suitable for food use; it must be clean in order to prevent possible contamination, and must protect against deterioration. Tankers used must be designated for food use only. Tanker cleaning locations can be subject to assessment where required. Distribution of the Nestle is the management of the flow of materials from manufacturer to customer and from warehouse to retailers involving the storage and transportation of goods. Problem issues Nestle is planning to increase production by expanding the number of lines operating in the facility in the next few years. They are looking to improve the efficiency of their existing warehouse both in terms of space utilization and efficiency. The proposed layout must be robust, able to meet future needs without additional equipment or re-design. Long-term goals are to reduce the amount of ingredients inventory in stock and to reduce dependence on outside warehouses. The design will improve the efficiency of the material moves and provide separate space for the different type of storages. The continuing recommendations will change the process and reduce the number of moves. Recommendations Some recommendations about inventory reduction can be a good communication between departments purchasing and material control to work just-in-time (JIT). Reduce lead and testing time, some materials do not need too much time to be release and reducing the days of weight-up area to one day can reduce the inventory changing the purchase to less quantities more frequently (weekly). 3.6 Product Life Cycle Business theory suggests that products follow a life-cycle, going through phases of development as follows: The conception of an idea/product Research and development Introduction to the market

A period of growth then follows as consumers become increasingly aware of the product and, if successful, it becomes profitable. Eventually, the growth of sales will level off - this is the mature phase and is usually the result of increased competition. The theory predicts that sales will gradually decline as the market becomes saturated and consumer tastes change. However, it would be wrong to assume that after the uphill struggles of the development and growth phases, life becomes easier on the level. It is a considerable challenge to the marketers to prolong the profitable mature phase for as long as possible, using a range of extension strategies. Nestle product life cycle (PLC) is represented in the Figure 9 below. Figure 9. Product Life Cycle

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A major drawback with the product life cycle theory is that it cannot be used as a predictor. Firms may be able to identify some of the stages of development from historical sales data, but they cannot know their exact position on the cycle, nor in which direction they might be heading. In addition, some products seem to enjoy very long maturity, if not immortality, with no signs of decline. Extending the product life span is the goal of many firms, but achieving this requires careful coordination of corporate and marketing objectives and strategies. 3.7 Action of Plan The Table 5below illustrates the Nestle Plan of Action (PoA).
Table 5. Action of Plan Target Improve packaging Action Plan To develop and implement procedures to define the process and approvals required for all packaging decision to update and deliver internal training on the packaging policy using the most efficient and appropriate packaging materials Improve Human Resource (HR) policy Maintain Nestles No Waste at work program at all manufacturing sites and distribution centers Improve Environmental Management Achieve effective management in supply chain To overview offering of competitive compensation package and social benefits with Nestles commitment to high standard To implement a waste information management system, particularly, packaging, environmental and waste minimization project To develop and advertise greenness by using non-GMO ingredients, using organic ingredients, establish an environmental program to promote environmental responsibility To use of local supplier to maintain inventory for manufacturer or retailer.

To improve interaction between members of supply chain.

To devise strategies that lead to smaller batches or more frequent resupply

Conclusion Nestle is the largest food and beverage company in the world. It is also well on its way to becoming world leader in nutrition, health and wellness. Nestle continued to make good progress in a period characterized by political and

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economic instability, natural disasters and rising raw material prices. For 2011 year, company expects organic growth at the top end of the 5% to 6% range. Nestle ambition is to achieve a high level of customer satisfaction through low cost, highly efficient operations driven by value creation and continuous improvement. However, Nestle also has some major problems. Fist, geographic expansion of Nestle as global leader in food production leads to the inadequacies of the Nestles environmental strategy. Second, keeping control of its thousands of supply chains and scores of methods of predicting demand leads to ineffective management in supply chain. Last, looking to improve the efficiency of existing warehouses Nestle need reduce the amount of inventory. Thus, based on the materials covered in our Final Paper we would like to sum up our recommendations and suggestions as follow: Recommendations Regarding Nestles current advertising policies is that the company use marketing to promote responsible environmental practices or products they may have or may develop in the future. Therefore, Nestle should develop and advertise greenness by using non-GMO ingredients, using organic ingredients, and using recycled packaging; In addition to a revised marketing program, it would be in the best corporate interest of Nestle to establish an environmental eco-labeling program to identify and promote environmental responsibility. The Current developments in consumer behavior and lifestyle that may threaten Nestls efforts to be green is the increasing demand for single servings and more convenient food products that require more packaging. Unfortunately for the environment, Nestles mission is to provide consumers with the products they want in a highly competitive market. This change in consumer demand will require Nestle to look more closely at their corporate strategy if they wish to make their corporate environmental strategy consistent with their corporate strategy; Inventory researchers have long recognized that multi-echelon inventory systems can operate better when inventory and demand information from downstream sites is available upstream. In that way, The Nestle should try to get demand information about the downstream site by bypassing it. For example, Apple has a "consumer direct" program, i.e., it sells directly to consumers without going through the reseller and distribution channel. A benefit of the program is that it allows Apple to see the demand patterns for its products; In addition, long resupply lead times can aggravate the bullwhip effect. Improvements in operational efficiency can help reduce the highly variable demand due to multiple forecast updates. Hence, just-in-time replenishment is an effective way to mitigate the effect.

And finally, some recommendations about inventory reduction can be a good communication between departments
purchasing and material control to work just-in-time (JIT). Reduce lead and testing time, some materials do not need too much time to be release and reducing the days of weight-up area to one day can reduce the inventory changing the purchase to less quantities more frequently (weekly).

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Suggestions Our Group members would like to make the follow suggestions in order to improve Companys operations: Nestle in their milk products should concentrate on all age groups (by showing its benefits) instead of concentrating just on child growth; Nestle should try to create strong brand loyalty among customers; Nestle should keep in mind the competing environment while designing their strategies; The Company should concentrate on customer retention The Company should improve their customer services Bonus packages and increment in salaries for a selective level of work and efficiency should be awarded to attract the employees concern; Skilled workers of the company should join the security department to enhance the system Inventory should be maintained.

References Heizer, J., & Render, B. Principles of Operations Management, 8th edition Slack, N., Chambers, S., & Johnston, R. Operations Management, third edition www.nestle.com

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http://www.wfin.kz/node/2786 (statistics in the Kazakhstani market) http://www.kursiv.kz/1195202287-nestle-prodala-bolshe-maggi.html?menu_view_select=/arhiv/svoi-biznesarhiv/ (statistics in the Kazakhstani market)

http://www.nestle.com/Media/Reports/Pages/Report-2009.aspx (Annual reports)

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