Nestle Tries for an All-for-One Global Strategy

Part Four Building and Managing Systems Nestle Tries for an All-for- One Global Strategy CASE STUDY N estle is the largest food and beverage company in the world.

Headquartered in Vevey, Switzerland, the company has annual revenues in excess of $70 billion and nearly 250,000 employees at 500 facilities in 200 countries. Best known for its chocolate, coffee (it invented instant coffee), and milk products, Nestle sells hundreds of thousands of other items, most of which are adapted to fit local markets and cultures.

Traditionally, this huge firm 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 had 80 different information technology units that ran 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.

However, Nestle’s management 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 Nestle from, for example, leveraging its worldwide buying power to obtain lower prices for its raw materials. Even though each factory used the same global suppliers, each negotiated its own deals and prices. Several years ago, Nestle embarked on a program to standardize and coordinate its information systems and business processes. The company initially installed SAP’s R/3 enterprise resource planning (ERP) software to integrate material, distribution, and accounting applications in the United States, Europe, and Canada.

Nestle then extended its enterprise systems strategy to all of its facilities to make them act as a single-minded e-business.

Once this project is completed, Nestle will able to use sales information from retailers on a global basis to measure the effectiveness of its promotional activities and reduce overstocking and spoilage caused by having products sit around too long on grocery shelves. Achieving global standardization of operational processes has been a complex task. None of Nestle’s products is considered a truly global brand, with perhaps the exception of Nescafe, of which 00 million cups are served around the world each year. But even Nescafe is rebranded, repackaged, and reformulated to create over 200 product versions for different regional preferences. This is just a small representation of the complexity that CEO Peter Brabeck wanted to address when he decided to bring a sense of order to the company’s business operations.

In 1995, Nestle facilities in 14 countries were running their businesses on SAP R/2, an older version of its ERP software. They all ran the software differently and used different schemes for formatting data and managing forms.

The system disparity resulted in increasing maintenance costs. Compiling financial reports to gain a company-wide view of performance became more laborious. Between 1994 and 1999, Nestle increased its spending on information systems from $575 million to $750 million.

Brabeck arrived in 1997, and while the technology budget was growing, he was actually decreasing the size of the company by selling off Nestle brands. The cost of tracking the sales chain, as a percentage of total sales, rose from 1. 2 percent in 1994 to 1. 6 percent in 1999.

By April 2000, Brabeck had had enough of a corporate philosophy that allowed for thousands of differently configured supply chains, multiple methods of forecasting demand, and innumerable practices for invoicing customers and collecting payments. The inconsistencies and inefficiencies across the enterprise were chipping away at Nestle’s profits.

Brabeck, chief financial officer Mario Corti, and the entire executive board launched a $2. 4 billion initiative to compel its market heads around the world to adopt a single set of business processes and systems for procurement, distribution, and sales management.

Chris Johnson, who was in charge of Nestle’s Taiwan market, was asked to lead the initiative that would come to be known as GLOBE (Global Business Excellence). Johnson was instructed to find a way to harmonize processes, standardize data, and standardize systems. All of Nestle’s worldwide business units were to use the same processes for making sales commitments, establishing factory production schedules, billing customers, compiling management reports, and reporting financial results.

The units Chapter 15 Managing Global Systems 25 would no longer be permitted to adhere to local customs for conducting business except in cases where the laws of a particular country required that they do so. Every Nestle facility would format and store data identically, using the same set of information systems. Johnson would have to oversee the confluence of divergent processes into a “single source of truth. ” Johnson would have three and a half years to deploy the GLOBE strategy at 70 percent of the company’s global markets. Such an undertaking was unusual for Nestle.

Large projects, such as the construction of a coffee factory, generally cost the company in the range of $30 million to $40 million. Putting up billions of dollars to fund a project was risky, but for Brabeck, the potential benefits were too important. He could significantly curb IT spending, which was growing dangerously. In addition, he could gain an advantage over competitors like Unilever and Kraft Foods in improving operational efficiency while continuing to grow with new markets and new products. Nestle would also be able to reduce its number of suppliers from 600,000 to 167,000, and save hundreds of millions of dollars in the process.

The savings would be reinvested in innovation, pleasing its largest customers like Wal-Mart and Tesco, and further strengthening Nestle’s position among the other global food suppliers. It would be the first global enterprise to conduct business as though it were operating in a single country. The goal was lofty, and previous attempts at cooperative standards had mixed results. Technology experts from headquarters had emphasized standards and best practices to the 14 countries that deployed SAP in the past. The pleas for a unified corporate culture were largely ignored.

On the other hand, market managers in Asia had come together to develop a common system for managing their supply chains using software from SSA Global.

The Business Excellence Common Application flourished in Indonesia, Malaysia, the Philippines, and Thailand, and even spread to South Africa. The American division of Nestle also standardized its practices using SAP software in a project known as BEST (Business Excellence through Systems Technology). However, it was the Asian effort that would serve as the model due to its success in crossing cultures and satisfying multiple market managers.

GLOBE, under the leadership of Johnson, launched on July 4, 2000. Johnson had support from Olivier Gouin, chief information officer for Nestle in France, and a panel of 12 senior executives with various backgrounds who had been chosen specifically for the project. Even before beginning the likely difficult task of convincing market managers worldwide to adopt a centralized culture, the GLOBE team had a more pressing challenge to confront: Was it actually possible to convert 70 percent of the business to a common set of best practices and systems by the December 2003 deadline? There were to be no shortcuts.

Everything had to be standardized on the new mySAP Internet-based software. Moreover, the deadline had already appeared in a company newsletter, so changing the date could have damaged confidence in the project. Johnson’s team studied the experiences of competitors, and received feedback from consultants at PricewaterhouseCoopers and deployment experts at SAP. Johnson and Gouin were not surprised to determine that the parameters of the project would have to be adjusted. GLOBE required a larger staff, more funding, and a larger window of time than the executive board had allotted.

The GLOBE team predicted that its staff would need to grow to a maximum of 3,500 workers. The team’s projections also gave rise to the $2. 4 billion budget. Gouin softened the blow of the cost by pointing out that the status quo, individual markets managing their own systems, projected to cost $3. 2 billion over five years.

In the end, considering the scope of the project, Johnson’s team also concluded that the schedule was too ambitious. The schedule was revised so that a “majority of the company’s key markets,” rather than 70 percent, would be GLOBE-enabled by the end of 2005, instead of 2003.

Instead of technology managers, Johnson tried to build his team from a diverse group of business managers who had experience in a variety of business sectors including manufacturing, finance, marketing, and human resources. He recruited from Nestle offices all over the world. He went after the best of the best—managers that were considered “untouchables” because they were too valuable in their current capacities to be let go for new projects. Johnson put his first team together in the fall of 2000.

By the following winter, the team had added 400 executives with diverse career backgrounds at Nestle covering 40 different countries. In February 2001, this core group began the critical process of compiling the GLOBE Best Practices Library. The 400 were knowledgeable in how the company actually conducted business. They would need to know the processes for everything from calculating product 626 Part Four Building and Managing Systems demand and managing the supply chain to generating an invoice and ordering office equipment. Many of these processes had never been documented and were simply passed down by word of mouth.

Johnson described the task as converting Nestle’s oral history into decoding “the DNA of how Nestle does business.

” The 400 executives documented the best ways of performing each process. Then, the GLOBE team brought in experts in each area to challenge the processes, find their weaknesses, and pare the list down to the best practice for each process. In this way, the Best Practices Library evolved into an online database of step-by-step guides for 1,000 processes, divided into 45 solution sets that focused on disciplines such as demand planning or financial reporting.

Some best practices, such as getting a product to market, were afforded a degree of flexibility to account for the wide variety of Nestle products and the breadth of markets in which they were sold. Other practices, such as financial reporting, were given no wiggle room. Salespeople were to enter orders with precision in a standard format and by a specific date every month.

Financial terms and recording dates were standardized across the enterprise. Johnson later described the accounting software as being “kind of like handcuffs in a way to make you do the right thing. It became apparent to Johnson that the greatest challenge of GLOBE might not be technical, but personal. Despite clear support for the project from the highest-ranking executives, including Brabeck, managers resisted the idea of giving up control over their business processes to participate in a centralized solution. They feared the loss of decision-making power.

Many thought that making back-office operations identical in so many different countries was impractical. They might agree to standardization, but only if it was their particular practices that were made the GLOBE standard.

The resistance was fortified by the fact that each country’s operations would have to spend its own money to pay for the project. In the fall of 2001, Johnson was on the defensive. He was given a full day of a three-day meeting to convince market managers that falling in step with GLOBE was in their best interest and in the best interest of the company.

The managers peppered him with questions that were intended to demonstrate how GLOBE would make their jobs more difficult and degrade the performance of their units. Johnson did the best he could to satisfy them, and then took a frank approach.

The project was going to proceed. If they did not get behind GLOBE, he would be fired, and Brabeck would select one of them to head the massive undertaking. The other managers were not interested in that outcome. Johnson did receive support that day from Jose Lopez, the head of the Malaysia and Singapore markets, which were being used to test GLOBE’s back-office systems.

It was too early to measure the benefits of the project, but Lopez expressed his belief in the premise and his willingness to cooperate. A year and a half later in the spring of 2003, the market heads had another opportunity to question Johnson.

While there were still plenty of questions, a number of them described the operational efficiencies they had achieved since implementing GLOBE standards. For example, their financial reports and demand forecasts were better and faster. By a third meeting in May 2005, 20 market heads were able to endorse the benefits of GLOBE.

In the interim, however, an unwelcome financial problem arose. GLOBE was not controlling information technology costs as expected. As a percentage of sales, costs were approaching 2 percent. Brabeck instituted a cap on information technology expenses at 1. percent. In order to meet the cap, Johnson and Gouin revised the schedule of the project again.

They set a goal of 80 percent of Nestle being on the GLOBE system by the end of 2006. The extended schedule allowed the GLOBE team to maintain Brabeck’s spending cap and protect the company’s profits. In the fall of 2005, the percentage of Nestle units running GLOBE reached 25 percent and costs were within the limit. To help the rollouts along, Johnson asked each country to name a GLOBE manager who would facilitate the adoption of the system.

These managers also provided value to each other by exchanging their experiences with the system and the solutions they employed for specific challenges.

Johnson also established a steering committee at company headquarters to schedule and manage the rollouts. The steering committee oversaw the reduction of company data centers from 100 to four, including the center in Vevey, which stored the GLOBE templates, Best Practices Library, and central functions. One of Brabeck’s biggest concerns was that the rollouts occur with no effect on customers.

A rollout could only be a true success if no one outside the company noticed it. The initial test markets found this daunting because they would have to fix bugs Chapter 15 Managing Global Systems 627 and confront unanticipated problems during the deployment.

Nestle also had to implement the new business processes concurrently with the new systems. There was no opportunity to perfect the processes. And, finally, the managers and their workers had no time to train on the new systems before they deployed them and began using them.

Despite these challenges, the test markets experienced few problems, and rollouts proceeded around the world. After the test markets, market managers had at least nine months to document their processes and perfect them until they conformed with the GLOBE templates. Along the way, Nestle did encounter some technical issues.

For example, Canadian market managers used special promotions liberally to attract business from local and regional grocery chains. The mySAP software was not designed to accommodate the extra data points generated by so many promotions.

Nestle worked with SAP to develop a “multiple angles approach” to allow for such a difference. The approach enabled Nestle to separate the storage of data by market. This way, a country like Canada could have the extra storage space in the central system that it needed for its promotion data.

By the end of 2005, Nestle had converted 30 percent of its business to GLOBE, and had the capacity for one major rollout every month. The 80 percent number by the end of 2006 was still looming, but the company had learned how to operate as a single unit on a global scale.

Johnson was not entirely satisfied with the results, citing delayed and flawed summary reports compromising the work of factory and country managers. He was also eager to see reports made available instantly on a 24/7 basis rather than having to wait for them to be completed overnight each day. To make sure that the data entering GLOBE’s streamlined data centers are accurate and complete, each country has a data manager. Johnson believes that the system will never achieve perfection as long as time constraints remain a factor.

However, Nestle is much closer to achieving its goal of standardizing all processes, data, and systems. The closer the company comes to developing the perfect system, the better the company can serve its customers. Sources: Tom Steinert-Threlkeld, “Nestle Pieces Together Its Global Supply Chain,” Baseline Magazine, January 20, 2006; “Nestle Group in 2005: Record Sales and Profits—Higher Dividend Proposed,” www. nestle. com, February 23, 2006; and The Associated Press, “Nestle Reports 14 Percent Rise in Sales,” MSNBC. com, April 25, 2006, accessed October 11, 2006.

CASE STUDY QUESTIONS 1. Analyze Nestle using the competitive forces and value chain models. What challenges did Nestle face? 2. What type of global business and systems strategy did Nestle adopt? Was this strategy appropriate for Nestle’s business model? 3. What management, organization, and technology challenges did Nestle have to deal with to standardize its business processes and systems? 4.

What strategies did Nestle management use to deal with these challenges? How successful were these strategies? Explain your answer.