Operation Management Project Operation Management at Nestle Juices Submitted by: Rizwan Ahmed Babar Azhar Rizwan Younas Imran Younas
SummaryIn this project we will analyze the operation management at the Nestle Juice factory. Nestle isthe worlds leading nutrition, health and wellness company today and was founded in 1866 byHenri Nestlé. It has employed around 250,000people and has factories or operations in almostevery country in the world.Since its inception Nestle has provided quality products to its customer by providing productand packaging innovation. Nestle juices is Pakistan’s number one and fastest growing foodcompany. The company is trying to differentiate themselves from the rest of the competition inPakistan by adopting latest product development techniques and processes.In this detailed project we have covered the topics related to product development andprocesses that juice production goes through. Quality management is inspected thoroughly andsupply chain management at Nestle is studied.First of all we have gone through industry analysis, which include Porters five force analysis andPEST analysis. Then we have completed company analysis and also given the brief introductionof company in this section. The section of company analysis include vision statement of Nestle,High quality standards of Nestle, vision statement of Nestle Juices, Mission of Nestle, Companymain objectives, its structure, Juice manufacturing factories, SBU’s within Nestle, Brands inNestle, Its current Earnings and other financial stats and in the end SWOT analysis.Then we have examined product design phases at Nestle. Process phases are examined andvalue chain was examined in detail. Quality management at Nestle follows the process phases,followed by supply chain management at Nestle. In the end we have given recommendations.
INDUSTRY ANALYSISPORTER’S FIVE FORCES ANALYSISMichael Potters five forces framework can be used to determinewhether the industry isattractive enough to sustain a small or medium sizeenterprise. The five forces of Entry, Rivalry,Substitutes, Buyers andSuppliers jointly determine the intensity of competition and profitpotentialfor a small and medium size firm in a given industry or market sector. The focus at thisstage is at theindustry level because industry dynamics and profits of necessity dictateprofits ofother firms that enter the industry.Threat of New EntrantsThe threat of new entrance means, when any company that is notoperating in that productcategoryor the company that start it new venture see a opportunity in this field likejuices, andbased on that they decided to enter in this market. So the current companythat is operating inthe market has a Low threat for the new entrance.Nestle isbig organization being it competitoris not an easy task. There is some barrier for the new entrance like Economies of Scale, ProductDifferentiation, Capital Requirements, Switching Costs, and Access to Distribution Channels,Cost Disadvantages, Independent of Scale, and Government Policy.Bargaining Power of SuppliersThe company needs raw material, labors, component and other supplies. This requirementleads to buyers-suppliers relationships between industryand the suppliers. Suppliers, ifpowerful can exert an influence on theproducing industry, such as selling raw materials at highprice to capture some of the industry profits. The bargaining power is low because Nestledoesn’t rely on any supplier.They produce their own raw material.Eventhey have no reliance onthe distributors.They have their own factory trucksto supply the material and have their owndistribution network.Bargaining Power of BuyersBuyer power is the most important factor of porter’s fiver forces model,because buyer are theconsumers of the product. For nestle it’s a majorimpact factor because the competition isintense & competitors have thesame products that may differs in quality but are providing thesame needs. For thatparticular reason we can say that Nestle have high bargaining powerfrombuyers.
Threats from SubstitutesSubstitute products refer to products in other industries. To the economist,a threat ofsubstitutes exists when a product demand is affected by the pricechange of a substituteproduct. A close substituteproducts constrains the ability of firms in an industry to raiseprices.Nestle have a major threat from it substitute products from othercompetitor due towhich there product can lost the market share, there aremany competitors so the threat fromsubstitutes product are high.Competitive RivalryThe big factors determining the strength of rivalry is how actively andaggressively are rivalsemploying the various weapons of competition in jockeying for a stronger market position andseeking bigger sales. Many local companies have entered market and there is also great threatfrom establishedcompanies. Nestle also face lot of HIGHcompetitor rivalry.ConclusionWe can conclude from above observation that whether the company is MNC or local itwill facethe tough competition from its competitors because competitiveedge is the most volatile thingin business world now-a-days.Companies’ arereactive & they react to the change. We canconclude that the FMCG industryis unfavorable for the new entrant to enter in the market.However existingfirms can control these five forces & attain the edge over their competitorsasnestle is following a sound strategy.
PESTLE ANALYSISPESTLE analysis is a powerful tool tovisualize yourexternalsurroundings, which enables you tounderstand the external factors such asPolitical, Economic, Social, technological, Legal &environmental affecting your business. So for understanding Nestlé’s position in the market &to visualize the Nestlé’s position among its competitor Pestle analysis is the best technique tounderstand the external forces.Political & Legal ForcesFMCG’s have to pay heavy taxation, changesin any taxation system can badly affectNestle’sproductivity &sales (profits). Nestle company also follow law related to employees likegovernment announce minimum salaries of an employRs. 6000.Foreign trade regulation doesnot affect the overall policy and theworking of the Nestle because they operate nationally notinternationally. The government stability also plays a great role for any industry. InPakistangovernment face lot of difficulty from the side of terrorism and alsoits activity that badly effectenvironment of the country which is totally veryupset.Economic ForcesNow in Pakistan inflation rate is almost 22.3%, so if any increase ininflation rate then increase inprices of Nestle products which eventuallyaffects the Nestle Pakistan Economy growth rateaccelerate is 7% and plus which eventually affectthe Nestle productivity & sales.Social Forces & CulturalToday people are more health conscious so Nestle products byidentifying this need of thepeople they are also producing health consciousproducts with more elements of pure & quality,which create the market forNestle & trend of its products in the market About theenvironmental concerns of Nestle products are the symbol of good health & nutrition nomatter which product is under consideration.Technological forcesNestle focusing concentric and conglomerate diversification because inpresent era it is notpossible for any organization to exist in market for longrun by providing just one product.Product innovation is becoming more necessary for the organizationbecause of globalizationpeople are becoming aware about the changesbeing taken place around them so in order tacklethe situation nestle isfocusing on product innovation. Now by the help of technology Nestlemaintain the efficient scale of production which normally called economies of scale. NestlehasR&D department and Nestle total spending on R&D 70 millions.
COMPANY ANALYSISNestlé is the worlds leading food and beverage company, with sales of about CHF 83 billion. Ithas 230,000 employees world-wide and operates 520 factories in 82 countries. Its products areavailable universally, including such remote markets as North Korea, and they are sold under anumber of brands such as Nestlé, Nescafe, Nestea, Maggie, Buitoni, Perrier and Friskies.Company belongs to more than 200,000 shareholders, today; Nestlé is about twice the size ofits nearest competitor in the food and beverage sector. The company is in business for over 130years.“VISION”Nestlé aim is to meet the various needs of the consumer every day by marketing and sellingfood of a consistently high quality.The confidences that consumers have in our brands is a result of our company’s many years ofknowledge in marketing, research and development, as well as continuity - consumers relate tothis and feel they can trust our products.High quality and collaborationOur objectives are to deliver the very best quality in everything we do, from primary produce,to choice of suppliers and transport, to recipes and packaging materials.Vision Statement of Nestle JUICESThe strategic priorities of Nestle Juices are focused on delivering shareholder value through theachievement of sustainable, capital efficient and profitable long term growth. Improvements inprofitability will be achieved while respecting quality and safety standards at all times. NestleJUICES envisions to grow in the shortest possible time into the number one BeverageCompanyin Pakistan with the unique ability to meet the needs of consumers of every age group throughdevelopment of a large variety of beverage categories of the highest quality.CORPORATE “MISSION”Nestlé’s brands and products are the focus of continual innovation and renovation so that theymeet and exceed our consumers expectations. We seek to ensure that our products areavailable whenever, wherever and however our consumers want them.
OBJECTIVESNestlé’s purpose is to offer safe, tasty, convenient and nutritious foods to improve health andwell-being of consumers of all ages all over the world. To meet the needs and desires of today’sand tomorrow’s consumers, Nestlé is strongly committed to Research and Development (R&D)to improve existing products and develop new foods with specific health benefits.Company StructureNestle head office in Pakistan is in Lahore. It also has its registered office in Lahore.Nestle has divided the whole Pakistan in to three Zones. Northern Zone Central Zone Southern ZoneNestle has 8 regional offices in all over Pakistan. These offices work under their respective zonaloffices.FactoriesNestle has two factories in Pakistan for the production of juice items. One near Sheikhupura near Lahore (29Kilometer on Lahore Sheikhupura road) Second in Kabirwala near Multan (Khanewalraod, Distt. Kabirwala)ZonesZone of Food and beverages are shown belowZone Targeted AresFood And Beverage Europe EuropeAMS Food and BeveargeAmercia United States of America, Canada, Latin America and CaribbeanAOA Food and Bevearge Asia, Oceania and Africa Asia, Oceania, Africa and Middle EastStrategic Business Units (SBUs) and MarketingBelow are some SBUs of NestleStrategic Generating Demand UnitBusiness Excellence Generating DemandDairy SBUCoffee & Beverages SBUChocolate, Confectionery & Biscuits SBUIce Cream SBUFood (Culinary and Frozen food) SBUPet Care SBU
EARNINGSFor 2011 the Nestlé Group reported sales of CHF 83.6 billion and 7.5% organic growth on top ofgood growth in recent years. The organic growth was composed of 3.9% real internal growthand pricing of 3.6%. Foreign exchange had a negative impact of 13.4% and divestitures, net ofacquisitions, a further 4.2%, mainly Alcon. Excluding the impact of the sale of Alcon, sales weredown by 4.8%. Following are the highlights The Groups trading operating profit was CHF 12.5 billion. The margin increased 60 basis points (90 basis points in constant currencies) to 15.0%. Nestlé Continuous Excellence in all areas of the company continued to create significant savings ahead of target, helping to partially offset major input cost pressures. Higher input costs increased the cost of goods sold by 190 basis points. Total marketing costs were down 100 basis points, mainly the result of leveraging our sales and marketing structures. Consumer facing marketing remained at almost the same level after two years of double-digit increases, which allowed us to further build our market positions in most categories. Administrative costs were down 80 basis points. Net profit was CHF 9.5 billion, up 8.1% on a continuing basis.Sales by activity breakdown: 27% from drinks, 26% from dairy and food products, 18% fromready-prepared dishes and ready-cooked dishes, 12% from chocolate, 11% from pet products,6% from pharmaceutical products.Sales by geographic area breakdown: 32% from Europe, 31% from Americas (26% from US),16% from Asia, 21% from rest of the world.Full year sales and operating profit margin overview
MARKETINGNestle hold strong reputation for high quality brands. In major markets, trade marketers arefrequently rated highly in customer surveys on professionalism and service. They dont believein one brand fits all and that’s their marketing strategy. They have a strong, diversified globalportfolio – well focused and defined – offers a brand for all key consumer and market sectors.STRATEGIES ADOPTED BY NESTLEBusiness principleNestlé is committed to the following Business Principles in all countries, taking into accountlocal legislation, cultural and religious practices: Nestlés business objective is to manufacture and market the Companys products in such a way as to create value that can be sustained over the long term for shareholders, employees, consumers, and business partners. Nestlé does not favor short-term profit at the expense of successful long-term business development. Nestlé recognizes that its consumers have a sincere and legitimate interest in the behavior, beliefs and actions of the Company behind brands in which they place their trust and that without its consumers the Company would not exist. Nestlé believes that, as a general rule, legislation is the most effective safeguard of responsible conduct, although in certain areas, additional guidance to staff in the form of voluntary business principles is beneficial in order to ensure that the highest standards are met throughout the organization. As a global food manufacturer and marketer, Nestlé takes into consideration local needs, cultural differences and consumer preferences as well as attitudes concerning the use of ingredients derived from genetically modified crops.
Global commitmentNestlé firmly supports the principles of the United Nations Global Compact and is committed toreflecting these in its business principles and practices.Search for trust:A basic reason company has grown to be the worlds largest food company is that consumershave learned to trust its brands. Additionally company introduced the Nestlé Seal of Guaranteeand emphasized corporate logo. This Seal of Guarantee is a visible sign of company’s corporateresponsibility for the safety and quality of every product, which leads to maintain consumerconfidence and trust in this corporationNestle company’s Success is built on quality:Quality is the cornerstone of company’s success. Every day, millions of people all over the worldshow their confidence in company by choosing Nestlé products. This confidence is based on ourquality image and a reputation for high standards that has been built up over many years.Every product on the shelf, every service and every customer contact helps to shape this image.A Nestlé brand name on a product is a promise to the customer that it is safe to consume, thatit complies with all regulations and that it meets high standards of quality.The customer comes first:Trade customers expect excellent service, correct information and timely delivery. Consumersconsider taste, appearance and price when they make their choice. Company’s task is tounderstand what customers want and respond to their expectations rapidly and effectively.All customers expect good quality at a reasonable price.Customers are central to company’sbusiness and company always respects their needs and preferences.Nestlés Position on Technology:From its inception more than 130 years ago, Nestlé has built its business on successfullyapplying scientific breakthroughs and technological innovations while taking full responsibilityfor the quality and the safety of its products. Nestlé supports a responsible application of genetechnology for food production based on sound scientific research.Consumer information and labeling:Consumers’ confidence in the food they are buying is supported by having access toinformation. Nestlés Consumer Services are well equipped to provide this access and thus arethe first source of information, including the use of ingredients, derived from geneticallymodified crops, in Nestlé products.
SWOT ANALYSIS“STRENGTH”Below are areas where the strength of Nestle Lies It’s a company that does not depend on personalities. Leaders in Dairy Products. Long term experience. Innovative products. Designative packaging. Innovative planning and ideas. Wide variety of brands.“WEAKNESSES”Below are the areas where, Nestle is weak Supply Chain Exports“OPPORTUNITIES”Below are the opportunities available for Nestle High credibility Ability to secure more credit. Available means for expansion. Improving trends Industry leadership. Consumer preference. Fewer competitors. Dedicated workforce Untapped rural market.“THREATS”Some threats to Nestle are Highly competitive market (multinational companies are very organized and financially strong). Increasing prices of raw materials. Competitors like Opler, Shezan, Coca Cola breverages, Halla, Askari, Pure water, Nurpur dairies, and Prime yogurt.
PRODUCT DESIGN AND PROCESS DESIGNCore CompetencyCore competency is defined as “one thing that a company can do better that its competitor”.For Nestle, the core competency lies in its quality and brand name.Product DevelopmentIt includes phase of Planning, concept development, system level designs, design details, testingand refinement and production ramp up.Planning PhaseIn this phase, product type is selected based on Nestle’s corporate strategy and marketdemand. Nestle has introduced many product for specialized market and as they believe thatone product cannot serve all the customers. They believe in quality product and wellbeing ofcustomers. They believe in building trust of customer.Market Demand AnalysisIn this stage Nestle, research the market and develop alternate product categories. Conceptaredeveloped related to design and features of product.Product IngredientsIn this process Nestle defines the product architecture and composition of product. Whatwould be the ingredients and what would be its nutrition value is decided in this phase.Design DetailIn this phase Nestle define the complete composition of product, its packaging and thenutrition value it will provide to customer.Testing and refinementPrototype is developed and tested in market by promotional activities like distributing productfree of cost. Mostly Lahore is selected as test city and product is launched in Lahore and itsresponse is checked and feedback from customer is evaluated.Product LaunchAfter all the testing and making necessary adjustments to taste and nutrition value, product islaunched.
VALUE CHAIN AND PROCESSESIt is defined as chain of value creating activities.Micheal porter identified a set of interrelatedgeneric activities common to vide range of firms. The resulting model is known as value chainand is depicted below Inbound Operation Outbound Marketing Service Logistics Logistics & SalesInbound LogisticsMajor raw materials of Nestle orange juices are different pulps of orange which they importfrom Germany and France. Nestle company get their other raw material from local market inPakistan. Nestle juices raw material include ingredients such as fresh fruit, nectar of mango,apple, and pineapple, orange.Nestle imported all machinery and formulas, which is advantage of Nestle company.OperationProduction ProcessProcess is any part of an organization that takes inputs and transforms them into output ofgreater value. Fruit Juice production procedures involved in fruit drinks manufacturing dependson type of juice unit is going to make. For purpose of this- feasibility, Nestle propose 4% tokenjuice drink of citrus fruit (Orange), Mango and pineapple.The type of process that Nestle uses is make-to-stock as it produces standardized products. Theprocess is multistage as few stages are similar for all juices and few are different.Process TypeThe process for Nestle Juices is continuous flow process as juice, which is liquid, flows throughthe production process.Push or Pull strategyNestle follows push strategy as they make product, which are standardized and then push themin to market.
Fruit Juice- Production Process flowProduction of fruit juice is standardized process and initial processes for all fruits will be similar,as will be the last stage of juice pasteurization section and packaging, although differences inhandling juice composition arise in certain cases due to the nature of the fruit and percentageof vitamin involved. Basically preparation of juices involves the following steps: Boiling of Fruit Storage in Tank Ingredients mixing Juice Preparation Juice storage Tank Filling and Packaging Cooling and storageBelow is the flow chart and brief description of the various processes involved in fruit juiceproduction are outlinedFruit Juice Production ProcessFruits boiled in the boiler and shifted to the plate heat exchanger. Then it is stored in thestorage tank. Then supplied to the mixing tank in the desired quantity while in mixing tanks; anyadditives to the mixture is made at this stage before it is pumped to syrup storage tank.Blended juiced is then pumped through pasteurizer; where it is heated to 90 C to inactivateenzymes and living organism. After pasteurization the juice passes through final filtration,before lauding it into juice tank. Juice from the tank is ready for packaging.Packaging and LabelingThe juice is the packed in the quantities demanded by the market. Consumer packs as like200ml and 1000ml tetra pack and then labeled as Nestle Juices. Then the final product is storedin cool dry store.
Process Flow Chart: Raw Material Reject NO YES Storage Production Boiler Juices Mixing Plate Heat Tank Exchanger Storage and Shipping Preservatives Juices Mixing Tank Syrup Storage Tank Pasteurizers Juice Storage Bulk Bottled/ Tank Transport Packaged/ Labeled Finished Product in cold storage Retailer Wholesaler Transport
Outbound LogisticsIn Nestle Company the activities that include in outbound logistics are, They establish their saleand distributive offices in big cities like Karachi, Lahore, Islamabad, Faisalabad, Gujranwala etc.and also hire suitable distributors on agreed profit margins. Who buy product from Nestleoffice of the cities and try to distribute to each retailers and shop keeper in the cities and ruralareas.ServicesCompany established the customer center in each office in a major city and also given toll freenumber as a help line number. This means that if customer feels any problem then they cancontact through their help line.Marketing and SaleNestle company launch their sale promotion scheme after six months. Their last sale promotionwas for retail shop that put nestle juices billboard on their shop or sale reception table. Theycould win attractive prizes in this promotional activity. By this operation they can save all theadvertisement expenses which they have to pay to the retailer or owner of the shop.Nestle Company use advertisement channels when company has to launch new brand. Socompany prefers to use Geo, ARY one world, PTV Home, 1 vision and newspaper. They contractwith the advertisement channels for 1 to 2 months repeat 2 or 3 times a day.They hire suitable distributors in a country at agreed profit margins who bought juices in bulkform from the distributive channels and then sell to the retailer who finally sale to the endconsumers.Nestle company has efficient market management who’s main objectives for marketing theirproduct are. Strong customer relationship Identify need of customer like new taste new, fruit items Maintain market leadership by maintaining the pure quality Provide juices which are fit for human body Stop brand selling and don’t reduce quality Quality is Nestlé’s guarantee
Process AnalysisCycle timeIn a repetitive process the average time between the completions of successive units is calledcyclic time. For Nestle 90 min is batch preparation time. 60 min is the process time and 75 minpacking time. (Batch of 15000 Liters).Bottleneck The limiting factor or the constraint in the process is called bottleneck. In Nestle juices Batchmaking is the bottle neck. What should be the size of batch?Another bottleneck is mixing plant.It takes the largest amount of time.EfficiencyIt is the ratio of actual output of a process relative to some standard input. Packing machine at100 % efficiency produces 7000 packs in 1 hour. At Nestle the packing machine efficiency is95%.Run timeIt is the time required to produce a batch of parts. This is calculated by multiplying the timerequired to produce each unit by the batch size.If the machine produces 7000 packs in 60 mins,then it takes 0.514 sec to produce one pack. So the batch will be completed in 3855 secs, ifpacked on two similar machines. This will make in total 15000 packs.Setup timeIt is the time required to prepare a machine to make a particular item. For Nestle Juices, 3.5hrs.is the setup time. (Sum of CIP and sterilization processes)Operation timeIt is the sum of the setup time and run time for a batch of parts that are run on a machine. ForNestle it is 210 + 75 = 285 minThrough put timeIt includes the time that the unit spends actually being worked on together with the time spentwaiting in a queue. For Nestle Juices it is 90 mins (Batch making time) + 60 mins( process time)+ 75 mins (filling time) = 225 mins
QUALITY MANAGEMENTQuality assurance (QA) refers to the planned and systematic activities implemented in a qualitysystem so that quality requirements for a product or service will be fulfilled. It is the systematicmeasurement, comparison with a standard, monitoring of processes and an associatedfeedback loop that confers error prevention. This can be contrasted with quality control, whichis focused on process outputs.Two principles included in QA are: "Fit for purpose", the product should be suitable for theintended purpose; and "Right first time", mistakes should be eliminated. QA includesmanagement of the quality of raw materials, assemblies, products and components, servicesrelated to production, and management, production and inspection processes.Following the similar functional steps the Nestle Pakistan has a great focus on the quality of itsproducts. To ensure the consistency of its Juice and to get it free from any foreigncontamination HACCP is applied at the plant. HACCP is a system which comes under the foodsafety programme and in this system such points or process steps in the system are determinedwhich can lead to the deterioration of the product quality. Once these steps are finalized thenthe controls are applied on these steps. Similarly controls are applied from End to end productprocess i.e. form receipt of raw materials to the finished goods. All the Raw materials arechecked before being given to production and their conformance with the agreed specificationswith suppliers are verified. Similarly the function of QC is also to check in line parameters ofproduct manufacturing process. In juice plant the sugar percentage and brix is checked andafter that taste testing is also done by a panel of people which is certified by the company.Similarly this QA function also gets involved in the start of the project to do the design HACCPof the equipment so that the equipment being procured is well worth and is not prone to any ofthe potential problems regarding food safety. Fig: PROCESS APPROACH TO MANAGEMENT FOR QUALITY & PRODUCTIVITY
SUPPLY CHAIN MANAGEMENTNestlé Pakistans supply chain makes sure that Nestlé products are available, no matter whereyou are in Pakistan. We integrate processes from the farm to markets, and ensure products aredelivered to you at the right time, the right cost and in the right quantities. In the first quarterof 2006 alone, we delivered an astonishing 136 million kg of Nestlé products in Pakistan. Supplychain was established as a separate department in 2001. Since then, weve achieved a numberof milestones, including a cold-chain in 2002, centralized demand and supply planning in 2003,and implementation of GLOBE in 2005.Our mission is to: Optimize and consolidate resources and processes for a low- cost but efficient execution Develop and manage simplified and effective supply network to achieve a high level of service Create a continuous improvement culture driven by performance measures and rewardNestle has own fleet of trucks and through them they distribute to retailers and wholesalers.But their own fleets of truck, they have also faced problems, because their expertise are not indistribution.
RECOMMENDATIONSAccording to the analysis we did nestle only have few problem otherwisecompany is doing theirbest in the industry so far. They have attained thehighest market share for their brands. Theonly problem they can face is from limited Distribution Channel and the bottleneck of mixer.Nestlé’s problem can be eliminated by strategically thinking &implementing some strategieswhich can be effective in terms of both profit& growth. Solutions to the problems which havebeen discussed before is that, theyshould go joint ventures with their distributors cut shorttheir own tensions &make others to their job as Pepsi co. have Riaz bottlers for theirdistributionwhich eventually gave them an edge. So if they go forward integration thentheymight be able to have more market share & demand for the product canbe increased & moremarket can be taped. They can increase throughput of the mixer by having an added mixingplant.