Introduction of Supply chain of Nestle MilkPak

Submitted To; Sir Sohail Majeed Submitted By; Nida Shamim

1492

Samreen Siddiqui

208

Waqas Bin Syed

1453

Fauzan Ali

10770

Raheel Rafiq

1957

Sohail Rashid

109

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LETTER OF ACKNOWLEDGEMENT DECEMBER 25, 2012

Dear Reader, All praises and thanks be to Allah, the Lord of Al-Alamin (mankind, jinn and all that exists), who give us strength to complete this report. This report could not have been completed without the guidance of the people who are strongly affiliated with the field of Supply Chain Management. We are thankful to Iqra University for providing us the opportunity to develop this report. The tribute and great appreciation, however is reserved for Mr. Sohail Majeed, Report Advisor, Business Administration Department, who cared and provided all necessary information to complete this report and diligence resulted in an excellence support for us. Sincerely,

Nida Shamim Samreen Siddiqui Waqas Bin Syed Raheel Rafiq Fauzan Ali Sohail Rashid

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TABLE OF CONTENTS S.no

Index

Page #

1

INTRODUCTION OF SC OF MILK

5

2

DAIRY INDUSTRY CHALLENGES

5-6

3

INTRODUCTION OF NESTLE PAK.LTD

6

4

SUPPLY CHAIN OF NESTLE MILKPAK

7

5

SUPPLY CHAIN VISION

7

6

SUPPLY CHAIN MISSION

7

7

NESTLE MILK COLLECTION

8

7-A

MANAGEMENT OF MILK COLLECTION

8-9

8

MANUFACTURING OF NESTLE MILKPAK

9-10

9

WAREHOUSE OF NESTLE IN KARACHI

10

9-A

LAYOUT OF WAREHOUSE

10

9-B

INVENTORY MANAGEMENT IN WAREHOUSE

10-11

10

DISTRIBUTION

11-12

2

10-A DISTRIBUTION PROCESS

12-13

10-B DISTRIBUTOR’S CUSTOMERS

13

10-C DISTRIBUTORS IN KARACHI

13

10-D DISTRIBUTION CHANNELS

10-E DISTRIBUTION SALES TARGET

11

RECOMMENDATIONS

12

CONCLUSION

13-14

14

15-16

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Plagiarism checked from http://www.dustball.com/cs/plagiarism.checker/ Words counted from http://easycalculation.com/word-count.php Interviews conducted from 

Ms Maria Karim (Supply Chain Manager, Nestle Pakistan)



Mr Saleem Iqbal (NSM, Unique Sales and Marketing-Distributor, Nestle)



Mr Minhaj Ikram (Branch Manager, Burque Distributions)



Mr Khurram (Warehouse Incharge, Nestle Pakistan)

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Introduction of Supply chain of Milk Milk is the most perishable and fast moving customer good. The very first and initial requirement or feed for any human being is milk. Milk is complete diet as it contains every nutrient except iron. Fortunately Pakistan is the fourth largest producer of milk in the entire world and its annual production is surprisingly 45 billion litres which is very high. But unfortunately only 27 billion litre of milk is available for human consumption. Therefore most of the milk is lost and Pakistan cannot fulfil its demand. Despites of these facts and figures Diary Industry is playing a very crucial role in the Pakistan economy and contributing 14% to the country’s overall GDP. More than 20% of the entire population of Pakistan is involved in this sector directly or indirectly. If we talk about the Dairy Supply chain management of Pakistan, we can divide it in to two categories one is formal and 2nd one is informal sector. The share of formal sector is 4% whereas the rest of 96% of share is taken by the informal sector. In the formal sector Nestle is the market leader in Pakistan and contributing 60% of market share as per fact and figure of 2008. In formal sector, milk is collected by different milk collection centre. Then it is taken in to the processing plant where milk is stored in cooling towers. In the processing plant, milk is processed and packed and then it is distributed to the retailer and finally milk is reached to the ultimate consumer. In formal sector we can divide it in to two sectors. In first category farm milk is collected by gawalas (milkmen) who sell the milk directly to the consumers or the milk collectors. In second case, farm milk is collected by different milk collectors who sell their milk to the retailers and these retailers provide it to end consumers. Dairy Industry Challenges in Supply Chain This business is unregulated and there is no as such involvement of government therefore the middlemen often take advantage of poor farmers and charge low prices for their milk and usually delay their payments. Large contractors often blackmail small producers and processors. Most of the farmers are uneducated and they are unaware of modern technology and equipment. And again there is no as such Government involvement to train the farmers in modern dairy practices so the famers are lacking in this area. Average Animal of Pakistani breed gives only 1300 to 2400 kg of milk per annum as compared to yield 6000 kg/animal/year in the modern world. As the farmers are not educated in their practices so due to wrong milking methods most of the cow and buffalo have expose to mastitis. Farmers have not sufficient idea of using different types of feed available in the market so they have no precaution to save their animals from diseases. Farmers are not taking the facility of any veterinary doctors which leads to decrease in the milk yield and animal is less productive for longer period of time. Milk productivity is seasonal and it is going to be the most important issue that milk producers are facing in this industry. In summer season, animals do not find enough food because grass and herbs dry out quickly. Due to higher temperature the digestive system of

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animal is weak and farmers yield less quantity of milk. Milk production falls in June and increases in December. The significant difference between the two seasons is really a concern for the dairy sector of Pakistan. The foremost problem dairy industry is facing is the adulteration means adding water, fats and other harmful substance to the milk that makes the milk unhealthy and less hygienic. This problem is difficult to control and requires serious consideration from both public and private sectors. Transportation, storage and processing make this product more costly. Day by day electricity is a problem in the country therefore majority of the milkmen use ice to keep the temperature of milk low but this method is not optimal and quality of milk is affected. If we talk about the facts and figures as per World Bank reports 15%of the milk is lost at the stage of farm due to mishandling and wrong milking practices. While 5% gets wasted during the transportation stage. The buying capacity for small scale farmers is very low they do not afford high cost of feed for their animals and they are lacking advantage of economies of scale. They do not access to formal market channels and are often exploited by the middlemen who offer low prices for their milk and they enjoy the huge profit margin for their own customer. Introduction of Nestle Pakistan Ltd. Nestle Pak works as a subsidiary of Nestle S.A. Nestle Pak started working in Karachi since 1988 under a joint venture with Milk Pak Ltd. With its headquarter in Lahore, Nestle Pak. has four production facilities. Two of its factories are in the heart of Punjab province; Sheikhupura and Kabirwala which are multi-purpose factories, one in Islamabad and the other in Karachi, Sindh which produces bottled water. Nestle Pak is the biggest milk collector in Pakistan. Currently, it collects milk from 190,000 farmers over 145,000 square kilo meters in Punjab and Sindh. With its 8000 brands world-wide, Nestle is the leading brand in beverages and food industry. It has a separate department for supply chain management which was founded in 2001. The objective behind the creation of separate department of supply chain management is to ensure the smooth running operations from the supply of raw materials from farms or other sources to the supply of finished products into the markets.

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Supply Chain Process of Nestle MILK PAK Pakistan

Nestle Pakistan has a wide range of products from nutrition to beverages, as so we chose MILK PAK to explain the supply chain of Nestle Pakistan. Milk is collected from more than 2000 village milk centres and 500-600 sub centres and then milk is transported to 25 main centres. In both stages the temperature of the milk is kept at 4C to keep the quality of milk up to standard. After whole process of milk collection, it is transported to the Sheikhupura and Kabirwala factories. In the processing stage milk is passed through different stages i.e standardization, pasteurization UHT treatment and packaging. After processing, milk is then reached to the factory warehouse which is near the premises of the factory. Finally milk is transported to the south, north and central regions. Then finally distributors of MILPAK carry it and transport it to the super marts and retail shops so that it’s available to the end consumers. Supply Chain of Nestle MILKPAK guarantees environmental friendly practices and for this they are continuously making their contributions in the society for keeping the environment safe and secure. Their ultimate objective is to make sure that the green supply chain is in practice while keeping their benefits, profits and business activities intact. Supply Chain Vision Nestle’s ambition is to achieve high level of customer satisfaction through low cost, highly efficient operations driven by value creation and continuous improvement Supply Chain Mission  

Optimize and consolidate resources and processes for a low-cost but efficient. Develop and manage simplified and effective supply network to achieve a high level of service.

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

Create a continuous improvement culture driven by performance measures and reward.

Nestle Milk Collection Nestle has the biggest milk collection network in the country which is collected from both cows and buffaloes. Nestle has a very wide and vast network of village milk centre (VMCs), sub centres which is widely spread in the country approximately more than 2000 VMCs and 500-600 sub centres. Milk contains low sodium, high fat and solid not fat (SNF) and very low in bacterial count. If the milk is not up to these standard that milk is rejected. As we know that milk is a perishable commodity in this connection to ensure milk as per quality standards different chillers are installed at the collection centres which will save the milk from bacteria development. Management of Milk Collection Nestle has 24 regions and each region collects milk from 60-70 milk collection sub centres and VMCs. Each region is headed by regional milk collection manager (RMCM) who is responsible to coordinate all the activities within its region. Territory in-charge (TIs) maintains the steady supply line with the suppliers and farmers and collects milk from 10 collection sub centres and he has some target of milk collection which he has to achieve. Volume of milk collection is calculated by national milk collection managers (NMCM). These territory volumes of milk collection are further divided in to sub centre that has to be monitored on daily bases. TIs are also responsible to ensure the best quality and hygienic practices, quality testing and record keeping at the sub centres. Each sub centre has assigned time so that truck collects the milk and delivers to the chillers of main collection centres. Each milk truck has capacity of maximum 8 to 10 tons. Milk is pumped from the chillers to the truck holding area which is a very efficient method. From the main distribution centre near mid night through large insulated tankers of minimum capacity 20 to 25 tons shipped to factory. The insulated tankers and mid night time helps in

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maintaining the milk temperature below 4°C during the journey. At the factory all the milk testing are once again repeated; if any of the test is not positive then milk is returned to the collection centres. Manufacturing of Nestle Milk Pak: As Milk is reached to the factory it is stored in large tanks called Silo for 36 hours. The capacity of Silos is as follows:   

5 Silos of100 tons each. 2 Silos of 10 tons each. 1 Silo of 70 tons.

At the factory all the milk testing are once again repeated if any of the test is not positive then milk is returned to the collection centres. The Processing of milk consists of four steps which are as follows: Standardization:

As milk is collected from buffaloes and cows so the fat content in milk varies in every season. Therefore milk must be standardized to adjust the fat and SNF (Solid Not Fat) of milk as per legal standards. Milk is given a temperature of 72C for 15 seconds to kill the bacteria. So by standardization, shelf life of this perishable commodity is increased and milk is standardized as per requirement. De-creaming:

In this process different dirt particle, SNF and cream is removed from the standardized milk. Milk is processed at a temperature of 60C for 60,000rpm (revolutions per minute) in de creamer. Cream is collected and it is sent to the butter section for further processing and dirt particles are removed and milk is ready for further process. Pasteurization:

It is the most crucial step of milk processing and in this process milk is heated at a temperature of 92C for 5 seconds to destroy the harmful bacteria and extend the shelf life of the milk so that milk can be put in the shelves in unrefrigerated condition. Pasteurized milk is still perishable and will lose its value therefore it must be stored in cold environment by the suppliers and customers. Packaging

It is the last step of milk processing now the pasteurized milk is packed automatically in different sizes.

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Factory Warehouse of Nestle The finished tetra pack is sent to the factory ware house which is 4 km away from the processing plant. Factory ware house is located near the plant to reduce the transportation cost. At Factory warehouse temperature is controlled to ensure the condition of the milk is fresh when it reaches the consumers. Milk is a very perishable item; therefore it requires very effective storage conditions at warehouses to preserve milk in its real condition. For this Nestle milkpak warehouses contains very suitable temperature that should not increase from 38C in order to keep preserved milk in its fresh condition. Warehouse of Nestle in Karachi A warehouse is a commercial building used for storage of inventories. Nestle products have been stored in different warehouse as the product move from upstream to downstream by manufactures, importers, exporters, distributers, and by wholesalers. Manufactures usually have large warehouse in industrial area near the processing plant where not only finished goods but also raw materials are been stored. Importers and exporters usually have warehouse near ports where they can easily access to products they often have cranes and forklifts but distributers usually have different warehouse all over the city so they can easily reach to the market similarly wholesalers have nearby they retail outlet. Location of Warehouse

Nestle’s warehouse in Karachi is situated at Korangi Industrial area near Brookes round about. This warehouse is not much populated. There was a supervisor, one assistant, 4 pickers, 2 loaders and 2 gates. It takes three days to arrive the goods in the warehouse from the manufacturing plant. Lay out of the warehouse

This warehouse has no shelving or racking system instead the goods are kept on pallets. Information tags are placed on every carton as well as on the top of the pallets. The warehouse’s height is about 17 feet. The building is divided into two sections; one for carrying heavy weights products and the other for carrying lighter ones. There are two gates; one for receiving the goods and the other for distribution. In this way, receiving and dispatching of goods can be done at the same time which is a time saver. There is a room used as check post to ensure the safety and security along with keeping track of what goes in and out of the warehouse. The whole warehouse was divided into individual lanes; the lanes were designed in such a way that it creates a “U shaped” flow of goods which makes easier for the pickers to carry the goods to the trolleys using safe lifting and reduces the time and motion wastage.

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Inventory Management in the warehouse

The inventory is managed by software called SAP (System Applications and Products). Another method for managing the inventory is “Manual Counts” that is done by the “inventory clerk” on daily basis, who is specially hired for this purpose. The counted stocks are recorded on a whiteboard that’s placed inside the warehouse. It contains not just the information about the name and no. of products but also in which lane they are and in what volume they are in. The whiteboard information is updated every time a picker picks the order and also when the goods are loaded on a truck for delivery. For further verification, Barcodes are also placed to scan the cartons of the products every time they enter or exit the warehouse. Every batch of goods has a batch code like this

2 043 1382 1 Z Which tells the following information:     

The year in which that product was Manufactured The day of the year in which it was Packed A plant code in which it was Manufactured The no. of times a good goes through the machine A machine code

How the goods are picked in the warehouse?

There are five pickers in the warehouse. The supervisor assigns 4 of them to pick products by a list. The list contains information about the product batch number, quantity, lane number and the pallet number. Two of them pick the goods, the third one gives instruction and the fourth person rechecks it. The FIFO method is adopted in the warehouse because Nestle is a FMCG company and most of its goods are perishable and have limited time span. So what first goes into the warehouse should be dispatched first. How the goods are ordered?

The goods are ordered on the basis of LIFO method. Orders are received from distributors across the country. LIFO is used because it takes transportation cost, time to record and place an order along with the delivery process. As for Nestle MilkPak, it has an expiry of 6months,

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so it needs to be delivered first. How goods are delivered from the warehouse?

There is a gate in the warehouse from where the goods are delivered, once the picker picks up the goods, the process of delivery from warehouse begins. The supervisor of the warehouse rechecks the goods are picked in the right quantity, packed in the right way and loaded in the right truck. Distribution: Distribution is the process of moving a product from its manufacturing source to its customers. Nestle’s distribution is divided into three geographical zones:

North Zone

Central Zone

South Zone

Islamabad

Lahore

Karachi

Peshawar

Faisalabad

Hyderabad

Jehlum

Gujranwala

Quetta

Multan

Distribution process The distributors have sales force to collect orders. There are two methods for distribution of goods:

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Ordering Booking

Spot Selling

(Where sales force first books orders from the shops or retailers and then delivers the goods)

(Where sales force is given a van full of Nestle goods to sell)

Nestle Milkpak goes for indirect channel of distribution, that means there is a chain of intermediaries through which a product moves through additional steps as it moves from manufacturing business via distributors to wholesalers and then to retail stores or super marts. The distribution strategy of Nestle MilkPak is intensive as it is covering wide market. There are regional headquarters of the company in all big cities of Pakistan. In this report we have covered distribution channel of Nestle MilkPak in Karachi. In order to reach remote areas the company is linked with the main distributor and sub-distributors. The company is directly linked with the main distributors; they provide the products inventory to the main distributor that is further dispatched to retailers and sub- distributors. The targets differ from area to area and set on the basis of history of the area sale and also from the monthly forecasting. Customers of Distributors The orders are taken from the following customers

Modern Trade / Key accounts (Super marts like Imtiaz, Hyperstar etc)

General Trade (General Stores of the area)

Institutions (Chaye Walas, Hotels, Motels, Ice cream parlors, Universities etc)

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Distributers in Karachi:

The company has transactional partnership (3rd party) with five big supply companies, for diverse range of products. S.No

Name of distributors

Products

1

Burque corporation

Dry products

2

Galaxy corporation

UHT milk, juices

3

Galaxy corporation (Separate)

Yogurt

4

Mehran motors

Mineral water

5

Unique Sales and Marketing

Nestle’s Imported products

Distribution Channels: Nestle employs different distributors for different areas. Distributors employ their own sales force and vans, which deliver Milk Pak to the doorstep of the retailers. Every distributer has three territories per area. In the “A” territory, the distributor’s vans visit the outlets every alternate day. In the “B” territory, the vans visit the retailers at least twice a week, while in the “C” territory; the vans visit once a week. Distributors’ sales target: It is interesting to note that the distributors are given sales targets, which are then communicated by the distributors to their sales team. The targets are usually like 15% annual growth in sales. The distributors achieve this by selling more units to the existing clientele (outlets in their region). In some cases the clients themselves ask for more stock. In other cases they have to be persuaded to buy more. The norm usually is that if a retail client asks for 12 pack the distributor’s sales team sells him 15. The reason is to leave no space available for the competitors.

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Recommendations

1. Nestle Pakistan can establish their own dairy farms near their factory.

Benefits a. Transportation cost that incurs from the collection centres to the factories will be minimized. b. Less dependency upon local farmers. c. These dairy farms will act as Crisis Management point in dynamic conditions as we have recently faced in the form of worst floods in all over Pakistan. d. More employment opportunities for local people around that region. e. As milk is collected twice a day so there will be less repetition of work; if Nestle establishes its own dairy farm near its factory.

2. Nestle can also establish a few of their own retail outlets or franchises in major cities of Pakistan to fill the demand and supply gap more efficiently just like Millac (Pvt) Ltd. Benefits a. These outlets will save the repute of the company from stock outs in peak seasons like Ramazan, Eids, & Moharram. b. These retail outlets will align with Nestle’s production planning with the demand of customers. c. There will be less occurrence of bullwhip effect. d. These outlets will serve as a competitive advantage for Nestle in their marketing strategy. e. Nestle will also be less dependent on other retailers.

3. Nestle should introduce vertical shelf system in the warehouse.

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Benefits a. As Nestle’s warehouse has a ceiling of 17 feet, it should use the ample space above the lower shelves. b. This system will allow the storage of goods in segregation.

4. Nestle should install Voice Picking technology in warehouses. Benefits a. Although it’s a bit expensive, but use of this technology will benefit Nestle in future as it reduces the time and human error and increases efficiency. Conclusion In the end, we would like to conclude that Nestle Pakistan is the leader in FMCG industry. Nestle keeps track of its goods by maintaining its supply chain all over the country. From Nestlé’s manufacturing system to its Distribution channels, everything is properly managed. They have a strong relationship not only with their customers but also with their suppliers, distributors and retailers. They maintain a proper Corporate Social Responsibility by training their local farmers about milking and feeding of their animals. In 2004, Nestle proposed a system of small loans for farmers who wanted to make improvements to their farms, such as building cowsheds. They drew up the sample specifications for a model farm to be presented to the banks disbursing the loans. The Service even helps farmers fill out applications for loans. In short, Nestle takes care of its inside and outside customers. The manufacturing plant of Nestle is the strength and serves as a competitive advantage for Nestle because of its perfect system. The hygiene, safety and security control is done under Nestle MilkPak’s manufacturing plant. We learnt a lot about Nestle’s Supply Chain; from the manufacturing department to distribution, everything is done perfectly.

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