AQUINAS UNIVERSITY PROFESSIONAL SCHOOLS

Graduate School - Legaspi City

MBA252
Value Chain Management and Analysis
Summer 2008

A Reaction Paper
Supply Chain Management at Nestle’
Conrado M. Diaz Jr.

Submitted by:
Anthony Raymond S. Ochoa

Submitted to:
Prof. Avelino Belleza Ph.D.

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Summary

In the business of FMCG (Fast Moving Consumer Goods) there is a need to

innovate systems to tailor to the changing economic times. Nestles’ is no different
from any leading FMCG company that aims to improve the efficiency of its
Supply Chain and further increase the company’s margins. The company
continues to maintain more than 700 SKUs (Stock Keeping Units) in which every
single SKU runs through its own supply chain process or works in combination
with other SKU’s supply chain processes. Making this extensive flow work is the
challenge for Robert Vallender since February 2005, as head of the supply chain
management (SCM) division of Nestle’. Vallender’s concerns are concentrated in
improving the retail sector by basically aligning their operations in conjunction
with the value chain system of Nestle’. He pointed out the concern that supply
chain extends to the retail operations level. The attention to detail is essential; this
includes product positioning and stock availability on the retail level. The Global
Council of Supply Chain Management Professionals had a very direct and precise
definition that basically depicts a very ideal and efficient relationship with the
Internal and External customers. To completely assimilate all activities of supply
and demand management states and idea of involving “encompasses the planning
and management of all activities involved in sourcing and procurement,
conversion, and all logistics management activities. Importantly, it also includes
coordination and collaboration with channel partners, which can be suppliers,
providers, and customers. In essence, supply chain management integrates supply
and demand management within and across companies.”1
The SCM plans strategically target the linkages between procurement of raw
materials, improving production efficiency, outbound logistics and Sales and
marketing operations until it reaches the customer. Vallender mentioned 7 units of
his SCM division that will spear head his operations. These are the (1) Demand
and Supply planning, (2) Distribution Resource management, (3) Transport Unit,
(4) Customer Service unit, (5) Inter-market customer service, (6) Finance Unit, (7)
Master Data Unit.2 The Nestle’ SCM plan is to condense 39 warehouses to 4 major
warehouses. This is a major planning undertaking for outbound logistics activity.
Planning and strategy was the focus of 2005. Presently, the SCM plans are now
gearing to develop the transport and customer service system links that are
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SCM meaning given by Global Council on Supply Chain Management Professionals from the
article page D1 ‘ Supply Chain Management at Nestle’’ by Conrado M. Diaz Jr.
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Page D-2 Supply Chain Management at Nestle’ from by Conrado M. Diaz Jr.

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believed to improve cash flow and perk up the working capital according to
Vallender. In closing Vallender aims to utilized the resources of the company and
role them over yearly to increase its margins.

Critique

Conrado M. Diaz Jr. basically narrated specific SCM plans of Vallender

being the new SCM manager for Nestle’, the goal was mainly to improve Nestlé’s
Supply chain Management. The author gave a brief insight into the vast logistics
required for the operations. Given the responsibility to align and improve the SCM
for Nestle’ is a very analytical and tedious process, considering that more than 700
products are being produced and marketed by the company. The author gave
reference to the focus of Supply Chain as a very intricate network of links of
activities from farm to panty and a products journey into the supermarket shelves.
This is indeed a process that should be well designed to fit the growing FMCG
market. The initiative to raise the bar on quality service was very much
emphasized in Vallender’s direction of making sure that SCM goes beyond the
delivery of goods to the retail outlet. SCM extends up to proper product
positioning on the supermarket shelf.
The author was able to give focus on the capabilities of Vallender. Giving
the manager the freedom to capitalize on his tactical SCM plans. An overview of
the developmental plans and strategic changes Vallender aiming to achieve in
terms of outbound logistics. It was mentioned that Vallender and his team have
been focused on Planning and Strategy for 2005. Having stated that the author
gives much concern for the SCM to affirm his visions for his division. The author
describes Vallender’s next steps in implementation of his new SCM plans. As
asserted on the last statement of Vallender that clearly states “We intend to turn the
assets of the company over as many times per year as possible. In the way, we
improve on our bottom line.”3 Diaz has given due respect to Robert Vallender’s
all-encompassing international experience in supply chain management.
The article ends with an open ended foresight of expected operational
changes in Nestles’ Supply chain management. However, I believe that an
addendum should be added regarding Nestles’ SWOT plans to undertake on

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Page D-2 Robert Vallender statement - Supply Chain Management at Nestle’ by Conrado M.
Diaz Jr.

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competition activities that would show how Nestles’ matches with other FMCG
companies such as Universal Robina, Unilever Food Philippines and the like.

Meaning

Stock outs on the supermarket shelf have a cost factor that affects the sales
of supermarkets in the US markets. As mentioned in the article, Stock outs cost
about $7 to $12 billion of sales in the US supermarkets alone4. Considering the
enormous number of retailers and customers in the US compared to the
Philippines, it is not surprising that the sales opportunities lost are of this
magnitude. Diaz stated in the article that, ‘8.2 percent of the items being asked for
by the customers on a typical afternoon are out of stock and this number is nearly
doubled for items that are advertised.’5
The Retail is about Detail. And detail includes correct product positioning
and effective merchandising planograms. In the article, ‘it was estimated that 33
percent of out-of-stock items are, in fact, in the store but not in the correct
location’6 Having mentioned the statistical data Robert Vallender gave his own
analysis regarding the out of stock issue that reiterates the absence or lack of
attention to retail merchandising details. Vallender stated that ‘...in fact the product
is available in the back store or is placed on the wrong shelf’.7
The author gave comparisons to the US market to give stress the point that
benchmarking with the US retail market will give the readers a comparative picture
of the effects of stock outs in the industry. Retailers in the Philippines have always
looked for better and innovative ways to address the issues of retail, especially
issues of stock outs and product positioning. Vallender understands this issue and
goes on stating that “ SCM is evolution that businesses- from the lowly sari-sari
store to the multinationals need to adapt to become more efficient, productive, and
hence, profitable.”8 The author wants the readers to understand that was is
happening in other well developed countries such as the United States of America
are the same issues happening in the competitive Philippine retail market only of a
less degree considering that the process and factors involved within the supply
chain is very much similar.
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Paragraph 2, page D-2 Supply Chain Management at Nestle’ by Conrado M. Diaz Jr.
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Paragraph 2, page D-2 Supply Chain Management at Nestle’ by Conrado M. Diaz Jr.
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Paragraph 3, page D-2 Supply Chain Management at Nestle’ by Conrado M. Diaz Jr.
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Paragraph 4, page D-2 Supply Chain Management at Nestle’ by Conrado M. Diaz Jr.
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Paragraph 5, page D-2 Supply Chain Management at Nestle’ by Conrado M. Diaz Jr.

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 The theme regarding stock outs concludes with Vallender’s quote that
“Every link in this value chain is critical to the whole process.”9 Diaz further
continues to emphasize Vallender’s professional viewpoint on SCM. He states that
“SCM deals with a combination of art and science, providing the linkage toward
improving the way a company finds the raw components it needs to make a
product or service and deliver it to customers.”10 Diaz underscored Vallender’s
dedicated beliefs on solid SCM foundations that he has set off to accomplish. Diaz
also wanted to highlight Vallender’s talents and international experience on Supply
chain management.

Reaction

I like the article because I relates well with my experience in the retail
industry. This is a good article for all retail managers, SCM managers and retailers
in general to read. Supply chain management is still a relatively new concept here
in the local market as stated in the article but US companies have been cultivating
their operations to innovate change in the primary activities of the value chain
process. Here in the Philippines I believe supply chain management is not at yet
established as a separate division in all companies but similar operational
frameworks are products of systems management. Systems are created to monitor
the flow of the business and thus monitoring the effect on the margins.
I liked the article because of the pertinent data that was stated regarding
Stock out effects on the sales in the US market. Although, the worth of the losses
of $7 to $12 billion to stock outs are not at all surprising considering the scale of
the industry in the US. I am more surprise on the glitches that still prevail in the
US retail industry when it comes to the attention to detail in retail especially in
stock outs and product positioning issues. On the other hand, I admire the
dedication of Robert Vallender and his objectives of raising the bar on SCM at
Nestle’. His experience was very much reflected in his statements and especially
with the last statement regarding the bottom line. The increase in Margins of a
Nestle’ in the future would be best gauge of the effectiveness of his SCM system. I
was very much impressed on his plans to reduce 39 warehouses to only 4. This in
itself will change the bottom line considering the cost of maintenance and
operations of maintaining 39 warehouses compared to 4. Although, I do foresee
human resource issues in the changes. Personally, I feel that Vallender’s team has
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Paragraph 5, page D-2 Supply Chain Management at Nestle’ by Conrado M. Diaz Jr.
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Paragraph 6 page D-2 Supply Chain Management at Nestle’ by Conrado M. Diaz Jr.

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also calculated the effects of reducing warehouses. They may not have mentioned
that their aim is also to maximize the manpower involved in operations. They may
want to have a smaller but effect team to handle the primary activities of the Value
chain.

Application

I am a retail manager by profession, having had more than 15 years of

experience in the industry; I correlate with the material and with the sentiments of
Robert Vallender. Manufacturing, Sales and Retail are very dynamic and
challenging industries. The innovation in Supply Chain management removes
much burden for managers to resort to trial and error systems of management. The
challenge in supply chain management is to combine art and science as stated by
Robert Vallender in the article. Primary activities of the value chain starting form
inbound logistics to after sales services should be well calculated and have
creativity built into the process.
Monitoring the links of the value chain can be very tedious endeavor. A very
good example that is related to the article is issue of Stock outs shelves and proper
product positioning on the supermarket. This is commonly related to the use of
effective merchandising planograms in supermarkets and category analysis of
SKUs (Stock Keeping Units) in every department. A supermarket or any retail
outlet (mini markets or groceries and sari-sari stores included) that categorizes
products incorrectly and changes product positions every 2 or 3 months in my
opinion also create confusion for the customer. To examine this in detail, a regular
customer that is used to buy a certain brand of item is basically inclined habitually
to identify the location of the item in the same store that he/she is conveniently
located. Being in the operations in numerous retail stores in the Philippines and
abroad I can attest to the collective behavior of customers in the retail industry.
There are mixes of behaviors in the way people buy and usually there is hesitation
in the asking questions on the location of certain items. Some customers that I have
met usually tell me that they get use to the location of a fast moving item such as
coffee or sugar and they usually do not understand the prerogatives of the retail
outlet when they implement a new merchandising planogram or improved cross
merchandising structures. The data presented by the author regarding the US
supermarket Sales losses just because of stock outs. As a retail manager I know
this happens in supermarkets in the Philippines, Saudi Arabia and Papua New
Guinea. Although, in the supermarkets that I have been associated with there were
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no quantitative data done regarding the effects of stock outs and wrong product
positioning, the responsibility of monitoring availability are handed down to the
category managers and supervisors. However, sometime this is not even enough
because I myself in my own capacity as a retail manager still do spot checks or
system checks on my department managers and supervisors and I always find
glitches in details in availability on the shelves. I agree with Vallender’s statement
that ‘the store may be out of stock of a product, when it fact the product is
available in the store or is placed on the wrong shelf.’11 Incredible revelation but a
very common in retail outlets in the Philippines and in the other countries.
As a retail manager, I believe that an effective and efficient SCM is a
correlation between the manufacturer, retailer and the customer. A good supply
chain is a system that integrates Value to the chain. The margins that the retailer
losses because of improper implementation of merchandising plans and stock
monitoring systems that are directly apart of the supply chain link in services,
effects the manufacturers profits as well. The key word in Supply Value Chain
management is Value. Value for the hard work that the manufacturer produces.
Value for the retailers operations and Value for the customer’s money. When an
item is easy to locate, identify and available there is a smooth flow to the
satisfaction of the customer. There is also smooth flow in the cash flow of the
retailer and the manufacturer.

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Paragraph 4, page D-2 Supply chain management at Nestle’ by Conrado M. Diaz Jr.