Nestlé Operational Strategy

Company Background
Nestlé is the world's largest food and Beverage Company and
employs over a quarter of a million workers. It is in the secondary
sector at the centre of the supply chain that starts with producers
of agricultural products in the primary sector and ends with
distribution and retailing in the tertiary sector. Like all companies
it has a duty to provide returns to its shareholders in the form of
dividends. Nestlé balances this against the need for growth whilst
continuously improving and being true to its principles of
sustainability. Nestlé UK is a private limited company (Ltd),
wholly owned by Nestlé SA. However, Nestlé UK has its own
directors and can make many of its own decisions; this is because
Nestlé strives to be as decentralised as possible - local decisions
are made locally.
Nestlé produces over 100 brands, including many household
names such as Nescafe, KitKat and Nesquik. Other brands are
also well known, but you might not have realized that they were
Nestlé products - such as Golden Grahams, Buitoni, Friskies and
Perrier. In 2002 Nestlé had a sales turnover of over £38.3 billion
on which it made a net profit of over £3.2 billion. The majority of
this profit (63 was re-invested in the business whilst the
remainder was paid out to shareholders in dividends. Its attitude
to growth is that it, too, should be sustainable, and this usually
means organic growth. However, its water business - known as
Nestlé Waters since 2002 - has grown both organically and by
acquisition. Nestlé acquired Vittel in 1969, Perrier in 1992 and
San Pellegrino in 1998. Today, Nestlé Waters is established in
130 countries and is the world's leading bottled water business.

Nestlé Company had started off from a single man's idea, and
developed into a giant corporation. In 1866 Henri Nestlé, a
pharmacist, developed a milk food formula for infants who were
unable to tolerate their mother milk (Nestle.com). His product
became a success, and it created a demand throughout Europe.
As Nestlé’s popularity grew more businesses wanted to merge
and become partners with Henri Nestlé's business. From 1866 to
1947 the Nestlé Company had gone through several name
changes. In 1905, Anglo-Swiss Condensed Milk Co. and Farine
Lactee Henri Nestlé merged, and the company’s name became
Nestlé & Anglo-Swiss Condensed Milk Co. The name was then
changed to Nestlé & Anglo-Swiss Holding Co. Ltd, on November

Page 1
Nestlé Operational Strategy

27, 1936.). Along the way Nestlé’s company remain successful,

which allowed them expand to new region and territories
throughout the world, making them the world’s biggest food and
beverage company. Nestlé’s headquarters are located in Vevey,
Switzerland, but the Nestlé Company has factories or operation in
almost ever country in the world. Since the Nestlé case was
published in 1998, it stated that Nestlé had employed 230,000
people worldwide, with $71.7 billion in sales .Now moving forward
to 2003, Nestlé has increased the amount of employees to
253,000 people, with $88 billion in sales.

NESTLE EXISTING OPERATIONAL STRATEGY

The existing operating strategy of Nestle had been divided into 5
parts
1.Manufacturing strategy
2.Logistics strategy and distribution strategy
3.Warehousing strategy
4.Sales strategy
5. Corporate strategy

Manufacturing strategy

The Sheikhupura plant of Nestle is very highly automated. Many

of Nestles products are manufactured in this plant. The juices are
mass-produced to the demand here. The demand it generated by
forecast that gets its input from sales and marketing. The
forecast is generated by their ERP system called the Globe, which
is a form of SAP. As Pakistan has a hot climate especially in the
June, July and August months, a seasonal trend is seen is the
demand for juices.
Juices are made from concentrates. Some ingredients are
imported and others are locally acquired. The ERP is a quite state
of the art. It plans for forty-five days cycle.

The orders are manually dispatched, as the local supply chain

partners don’t have SAP. EDI link is also not present as most of
these vendors are not that well established. So once the ERP

Page 2
Nestlé Operational Strategy

generates production plan the operational buyer does the

ordering from the Factory.

The standard push strategy is employed after manufacturing with

quite some inventory levels. Quality is considered to be the top
priority and is considered as a performance measurement. Other
performance indicators are down time, safety, orders lost and
defects. There are always programmes being initiated for
improvements in the Sheikhupura factory.

The in charge of production in General manager production, who

is based in Head office at Lahore. Reporting to him is the Plant
manager who is in charge of the manufacturing activities of the
plant.

Manufacturing department is also a party to new product

development. There is a special team that consists of marketing,
product development and manufacturing that decides on new
products and their development. They assess the demand of the
new products through surveys and information sharing within
group companies. Another very important element in the new
product development is the competition and their recent
development.

Logistics and Distribution Strategy

The products from the production lines are shipped to the

warehouses where they are stored during the incubation period.
The products are then shipped to the customers as per request.
Hundred and fifty trucks are dispatched nation wide from these
warehouses to the customers. The customers are the distributors,
which in turn supply the products to the retailers/consumers
nationwide. Warehousing is looked after by the Group Distribution
Operations Manager who reports to the Supply Chain Manager for
the transportation of the product. Nestle has contracts with a
number of service providers. The company strategy for logistics is
quite simple. It’s outsourced all logistics activities. Nestle does
not own any trucks for the transportation of the products. They

Page 3
Nestlé Operational Strategy

have outsourced logistics to four major transporters who provide

trucks on a daily basis.

The Group Transport Manager who reports directly to the Supply

Chain Manager heads the transportation department. The
standard truckloads and loading patterns for all products are
defined by Nestle and strictly followed all transporters.

It is also made clear that all transit losses are charged to the
transporters unless provided a valid reason for them. The
responsibility of the supply chain is the delivery of the product to
the distributor. The company is not responsible for the delivery of
the product from the distributor to the retailer. This comes under
the Distribution Department and is the job of the Outsourced
distribution centers.
The distribution strategy of nestle is standard Distribution
strategy for virtually all multinational FMCG in Pakistan. They
outsource their distribution to a single distributor in an area. This
business is responsible of keeping enough stock to support the
area for a weak. As deliveries from warehouse come after one
week, so the vender-withheld inventory is in play, which is quite
good for the FMCG Company, as they don’t give credit. They
charge it to the distributor on delivery.
It is the job of the distributor to supply all products to the retailers
in the area.

The distributor and the Area manager together do the retail

mapping. They find new retail outlets and also assess the
availability of products at the existing retail outlets. The
distributors are given a certain share of sales of the stock they
purchase from the Company. Traditionally this percentage is
some where between five and ten percent.

All expenses of distribution like transport, manpower required

and stock maintenance in the warehouse is the responsibility of
the distributor. Nestle has a very well defined distribution
strategy. The man in charge of distribution is National Sales
Manager (NSM). The country is divided into three zones a zone
manager is responsible for distribution in each zone. They are
reply to the NSM directly. The three distribution zones are;

• North

Page 4
Nestlé Operational Strategy

• Central
• South

The over all distribution strategy is quite satisfactory. It goes to

Nestlé’s credit that all their distributors are quite happy with
them. They manage their relations with them very well.

Warehousing strategy

All activities related to Material Handling for Finished Goods to

the point of sale assets are covered under Warehousing
Operations in one set-up. As in all operations the same procedure
is followed in all company Warehouses.
Nestle has five warehouses in Pakistan. These warehouses are
located at strategic positions that help nestle with its storage and
logistics operation. The warehouse management system being
used is SAP (system application product for data processing). It
not only properly utilizes the warehousing capabilities but also
helps coordinate with other Operations. The company
warehouses can be divided into two broader categories:
1. Internal (adjacent to factories)
2. External (outside locations)

Standard Operating Procedure

Material Handling under Warehousing Operations covers these
areas.
• Inbound Operations
• Outbound Operations
• Stock Management

This SOP is applicable to all the below-mentioned warehouses:

1. Inventory Management
2. Internal Stock Movement
3. Pick-Face Replenishment

Sales strategy

Compared to the other players in the beverages market Nestle

places immense importance on the companies sales force. They
are a focus of heavy investments and training plans. The
management is of the belief that if the sales force performance is
extraordinary it will reflect directly on the sales of the company.

Page 5
Nestlé Operational Strategy

This is what pushes them to spend so heavily on the training of

representative before they ever enter the Sales field. This
practice is not practiced by any of the other multinational FMCG
Company in Pakistan.

They have segregated sales in a number of parts. Water sales are

now being promoted with water coolers free of cost. The people
getting free water coolers however have to make a promise of a
minimum purchase of water from Nestle. Retail sales come under
the regional sales managers. Sales to companies like McDonald
are handled separately from head office in Lahore.
The sales promotions are quite rapid they plan them effectively
as well. For example in the winter months when the consumption
of juices drops they offer retailers incentives on purchase. In a
country like Pakistan your local shopkeeper has a lot of influence
on your daily purchase. That does reflect on their sales figures as
well.

The sales management structure is lead by the National manager

sales. Reporting to him are Zone managers of the three zones
north, south and Central. Then area sales executives are
designated to their particular area and are reporting to their zone
managers. They are also responsible for the area sales and
managing supervisors and sales force to their maximum
potential.

Corporate Strategy

Corporate strategy is the mother of all strategies. It is from which

all strategies originate and in which they sum up to form the
organizations over all business strategy. In the resent years a
shifting trend has been seen from traditional business strategy
towards a greener and more clients’ oriented strategy. Nestles
operational strategy is a client-oriented strategy which means a
strategy that is both beneficial for the business and the general
population of the business area and clients in particular.

Business ethics have been developed by many companies to stop

exploitation and set targets for cleaner environmental friendly
processes and products.
Nestle came to Pakistan when it started a collaboration with
Milkpak group. Milkpak then was the strongest dairy product

Page 6
Nestlé Operational Strategy

company in Pakistan. It was owned by Syed Baber Ali foundation

already the market leader in the Packaging industry and the
representative of Tetra Pak in Pakistan. Syed Baber Ali brought
Nestle to Pakistan and established the initial set-up for their
Company. He still owns about 29% of their share while another
local investor Chawala Group owns 20%. Nestle remained purely
diary product till 1994.

Nestle corporate strategy like most Multi Nationals in Pakistan is

quite mature. They have a state of the art ERP SAP that helps in
all operations from ordering of raw material to production,
forecast, Warehousing, Logistics and Sales. It’s a very well
integrated software that keeps the management well aware of all
progresses and plays a vital part in their over all business
strategy.
The clients that nestle targets are upper middle class. With the
economic development this particular class is growing in number
and that also reflects in their revenues. The current strategy of
nestle as I see it is to produce unique products in accordance to
changing consumer preferences. The products produced will be
of superior quality commanding premium prices, which will be in
accordance to company’s superior image.

This strategy is to be achieved with the help of Nestle strong

marketing abilities and strong cooperation from channels, which
will help distribute the superior quality product to match the
needs of the consumer.
Nestle follows an international divisional structure, in which a
separate division is created to which all of its’ foreign subsidiaries
report. This structure enables geographic interests and product
interests to be represented at the same level.
However, it’s more difficult to coordinate information between
domestic product division and international division.

The management style is supportive and participative whereby

managers are more approachable and provide constant
consulting with subordinates encouraging their suggestions and
carefully considering their ideas when making decision. Managers
of Nestle also set challenging goals, expecting subordinates to
perform at their highest level also convey a high degree of
confidence in subordinates. The long-term goal for Nestle is to
gain a long-term profitability and a well-built corporate image. For

Page 7
Nestlé Operational Strategy

this purpose they implement a proper training and compensation

program.

Conclusion
Nestle started off from being a food processing company. Its
strategy as a company has changed since the past few years.
Nestle rests its strategy implementation on four pillars;
Innovation/Renovation, Operational Efficiency, Communication
and Sales & Distribution. This is done for a sustainable growth
rate, which is 22%. According to this targeted growth rate Nestle
has achieved 60% of its sales target for 2006 in the first quarter.
Nestlé’s target is to become a 14 Billion company by 2014. This
will enable it to become the largest multinational of Pakistan.

Page 8
Nestlé Operational Strategy

ARTICLES- Key Points:

Putting Strategy to Work
By: Melissa Raffoni, Orit Gadiesh, and James L. Gilbert

In "Three Keys to Effective Execution," Melissa Raffoni points out

that even the most visionary, creative strategy is useless if it isn't
well executed. Think simplicity, clarity, focus--and review your
progress relentlessly.

Orit Gadiesh and James L. Gilbert stress the power of an

overarching, well-communicated strategy that allows a company
to maintain its focus, encourages workers to innovate and take

Page 9
Nestlé Operational Strategy

risks, and creates products and services that meet subtle shifts in
customers' needs.

Integrating Strategy Planning and Operational

Execution: A Six-Stage System
By Robert S. Kaplan, David P. Norton

This powerful six-stage model incorporates the Balanced

Scorecard, theme-based strategy maps, and the five Strategy-
Focused Organization principles and practices. But it now also
includes the most effective strategy development, planning, and
management tools developed by leading experts. Collectively,
these tools help companies not only plan and execute, but also
monitor, learn, test, and adapt their strategic assumptions and
practices to achieve sustainable success.

Strategy as a Wicked Problem

By John C. Camillus

“Wicked” problems can’t be solved, but they can be tamed.

Increasingly, these are the problems strategists face—and for
which they are ill equipped.

Many corporations have replaced the annual top-down planning

ritual, based on macroeconomic forecasts, with more
sophisticated processes. They crunch vast amounts of consumer
data, hold planning sessions frequently, and use techniques such
as competency modeling and real-options analysis to develop
strategy. This type of approach is an improvement because it is
customer-and capability-focused and enables companies to
modify their strategies quickly, but it still misses the mark a lot of
the time.

Companies tend to ignore one complication along the way: They

can’t develop models of the increasingly complex environment in
which they operate. As a result, contemporary strategic-planning
processes don’t help enterprises cope with the big problems they
face. Several CEOs admit that they are confronted

with issues that cannot be resolved merely by gathering

additional data, defining issues more clearly, or breaking them

Page 10
Nestlé Operational Strategy

down into small problems. Their planning techniques don’t

generate fresh ideas, and implementing the solutions those
processes come up with is fraught with political peril. That’s
because many strategy issues aren’t just tough or persistent—
they’re “wicked.”

Wickedness isn’t a degree of difficulty. Wicked issues are

different because traditional processes can’t resolve them. A
wicked problem has innumerable causes, is tough to describe,
and doesn’t have a right answer. Environmental degradation,
terrorism, and poverty—these are classic examples of wicked
problems. They’re the opposite of hard but ordinary problems,
which people can solve in a finite time period by applying
standard techniques.

Policy makers, in particular, have put this powerful concept to

good use, but it has been largely missing from strategy
discussions. Although many of the problems companies face are
intractable, they have been slow to acknowledge the wickedness
of strategy issues. There are several ways to define a wicked
problem, but it has some or all of 10 characteristics. Not all
problems are wicked; confusion, discord, and lack of progress are
telltale signs that an issue might be wicked. Conclusively, when
five characteristics are present in a strategy-related issue,
executives agree they have a wicked problem on their hands.

Strategic management research chiefly concerns explaining

organisational performance: understanding the firm's context,
processes, resources, and the choices that constitute a firm's
long-term position. Research in Operations Management
encompasses ways to make goods and services that fit quality
and cost criteria: to make processes efficient and effective.

Strategy Creates Sustainable Advantage

By Motley Fool Staff

The key to investing is not assessing how much an industry is

going to affect society, or how much it will grow, but rather
determining the competitive advantage of any given company
and, above all, the durability of that advantage. The products or
services that have wide, sustainable moats around them are the
ones that deliver rewards to investors."

Page 11
Nestlé Operational Strategy

How does one identify companies with powerful, sustainable

competitive advantages? Look for companies with sensible,
consistent, well-defined strategies, because strategy is the root of
competitive advantage for most companies.

"Only strategy can create sustainable advantage. And strategy

must start with a different value proposition. A strategy
delineates a territory in which a company seeks to be unique.
Strategy 101 is about choices: You can't be all things to all
people."

"Many [companies] have abandoned strategy almost completely.

Executives won't say that, of course. ... Typically, their 'strategy'
is to produce the highest-quality products at the lowest cost or to
consolidate their industry. They're just trying to improve on best
practices. That's not a strategy."

"There's a fundamental distinction between strategy and

operational effectiveness. Strategy is about making choices,
trade-offs; it's about deliberately choosing to be different.
Operational effectiveness is about things that you really shouldn't
have to make choices on; it's about what's good for everybody
and about what every business should be doing. Lately, leaders
have tended to dwell on operational effectiveness."

"If all you're trying to do is essentially the same thing as your

rivals, then it's unlikely that you'll be very successful. It's
incredibly arrogant for a company to believe that it can deliver
the same sort of product that its rivals do and actually do better
for very long. That's especially true today, when the flow of
information and capital is incredibly fast. It's extremely
dangerous to bet on the incompetence of your competitors -- and
that's what you're doing when you're competing on operational
effectiveness."

"In great companies, strategy becomes a cause. That's because a

strategy is about being different. So if you have a really great
strategy, people are fired up."

When you're analyzing a company as a potential investment, you

can apply Porter's thinking by asking a few key questions: What is
this company's strategy? Is it sensible and distinct? Does it -- or

Page 12
Nestlé Operational Strategy

will it -- lead to superior profitability? And, most importantly: Is it

defensible?

Product Positioning Strategies

By John Bradley Jackson

Positioning is what the customer believes about your product's

value, features, and benefits; it is a comparison to the other
available alternatives offered by the competition. These beliefs
tend to based on customer experiences and evidence, rather
than awareness created by advertising or promotion.

Marketers manage product positioning by focusing their

marketing activities on a positioning strategy. Pricing, promotion,
channels of distribution, and advertising all are geared to
maximize the chosen positioning strategy.

Generally, there are six basic strategies for product positioning:

1. By attribute or benefit- This is the most frequently used

positioning strategy. For a light beer, it might be that it tastes
great or that it is less filling. For toothpaste, it might be the mint
taste or tartar control.

2. By use or application- The users of Apple computers can design

and use graphics more easily than with Windows or UNIX. Apple
positions its computers based on how the computer will be used.

3. By user- Facebook is a social networking site used exclusively

by college students. Facebook is too cool for MySpace and serves
a smaller, more sophisticated cohort. Only college students may
participate with their campus e-mail IDs.

4. By product or service class- Margarine competes as an

alternative to butter. Margarine is positioned as a lower cost and
healthier alternative to butter, while butter provides better taste
and wholesome ingredients.

5. By competitor- BMW and Mercedes often compare themselves

to each other segmenting the market to just the crème de la
crème of the automobile market. Ford and Chevy need not apply.

Page 13
Nestlé Operational Strategy

6. By price or quality- Tiffany and Costco both sell diamonds.

Tiffany wants us to believe that their diamonds are of the highest
quality, while Costco tells us that diamonds are diamonds and
that only a chump will pay Tiffany prices.

Positioning is what the customer believes and not what the

provider wants them to believe. Positioning can change due the
counter measures taken at the competition. Managing your
product positioning requires that you know your customer and
that you understand your competition; generally, this is the job of
market research not just what the entrepreneur thinks is true.

Page 14