A Briefing Report On Implementing An Enterprise System At Nestlé

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Liverpool John Moores University

A Briefing Report on Implementing an Enterprise System at Nestlé Individual Report Submitted By: Tom Jacob

Course Name: Module Name: Module Code: Submission Date: Submitted to:

Master of Business Administration International Management BSNMIM001 November 2008 Shuaib Masters

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Executive Summary As any tool maker will tell you, it’s not the tool; it’s how you use it.... (An African Proverb)

Nestlé, the global market leader in Food & Beverage should make optimal use of the vast amounts of data & information it possess by making informed decisions which will help them to maintain their competitive edge. Facilitation of information & knowledge flow though out the company will equip Nestlé to reap benefits from its sheer magnitude of operations. Accruing an ES will enable Nestlé to do so. Key sensitising issues considered are as follows: • Current Data, Information & Knowledge Management • Core processes & Higher Level Information Needs • Feasibility of an Enterprise System • Methodologies in implementing an ERP System • Managing ES implementation • Managing Change An ES offers Nestlé an integrated system which will provide tailored information to all levels of management from a unified database. The system will provide the managers with real time data which can be used to implement inventory strategies like Just-In-Time (JIT) which reduces in-process inventory; there by reducing costs. Even though the initial investment in terms of capital and manpower is enormous, a properly implemented ES will be able to pay for itself. ERP System will standardise the procedures & practices throughout the company. As an ES is customer oriented, customer satisfaction will be greatly improved. ES will help Nestlé to automate production and distribution facilities. By effectively using an ERP System, HRD can become an essential component for achieving corporate objectives. As the system sets industry leading benchmarks & checks, Nestlé can expect better efficiency from its employees. The system can also assist Nestlé in cutting cost by monitoring their various accounting decisions and centralising their purchasing decisions. ES is a complex system which requires in depth understanding and careful analysis to implement. Any rush during implementation will cause nothing but disaster and bringing a huge lose for the company. Nestlé should plan ahead considering pitfalls like Methodology of implementation, switchover times and change management. The report recommends the use of a comprehensive change management strategy to be used alongside implementing the ES This report stresses the need for a change management strategy which complements the implementation of ES. This is of paramount importance as in many a case it is the people who fail the system. Resistance to change by employees will affect the success of an ERP System. To nullify this management should use training, counselling and communicating as tools to inform employees about the benefits of the new system for themselves and the company. To sum up, Nestlé should realise that the tool is not as important as the people who uses it. The mindset of the people will determine if the tool is used correctly or not. So let us start by changing the mind sets first.

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Contents Introduction........................................................................................ Data, Information & Knowledge Management.................................. Data Sources & Management........................................................ Information Sources & Management............................................ Knowledge Sources & Management.............................................. Core Processes & Higher Level Information Needs....................... Implementation of Enterprise System............................................... T.E.L.O.S. Analysis.......................................................................... Methodologies............................................................................... Managing Implementation................................................................. Managing Change............................................................................... Recommendations & Conclusion....................................................... Reference...........................................................................................

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Introduction Like water, this rising tide of data can be viewed as an abundant, vital and necessary resource. With enough preparation, we should be able to tap into that reservoir - and ride the wave - by utilizing new ways to channel raw data into meaningful information. That information, in turn, can then become the knowledge that leads to wisdom. (Les Albertha 1995)

Nestlé, the largest Food & Beverage Company in the world, have an estimated 8,500 brands, manufactures around 10,000 different products in nearly 500 factories in 83 countries and employs some 250,000 people. The company markets its products in 130 countries across the world, with annual revenue of more than £71 billion in 2007. This report, which gives recommendations on implementing an ES, analyse how an ERP system will improve their current processes & practices. It also looks at the issues that might occur while implementing an ES Current practices of gathering & managing Data, Information and Knowledge are discussed in the first part of this report. The core processes of the company are also discussed here. This section gives a clear picture of the existing systems which is essential to understand the higher level of information needed to maintain the competitive edge (Porter & Millar 1985) of the company The report then examines how best to implement an ERP System at Nestlé. This section gives an idea about how to check the feasibility of the whole project. A TELOS Analysis is recommended to study the practicability of the project. Recommendations are given on how to roll out the ERP System (Shakir & Viehland 2005). Also looked at are the methodologies which have to considered in the implementation of ES (Bernus, Nemes, & Schmidt 2003) The next part looks at how to manage the implementation of the ERP system, a challenge in itself (Harwood 2002). A bigger challenge to Nestlé, i.e. managing change, with special focus on Human Resources, is also discussed in detail. The final part of the report gives recommendations to the Nestlé Board of Directors on the implementation of the Enterprise System. There is also a concluding section which briefs the finding of this report in a nutshell.

Data, Information & Knowledge Management In the modern world the availability of data and, to an extent, information is never a problem. But, by itself, they are nothing more than tools. To be competitive, Nestlé should be able to monitor and use data & information efficiently. Knowledge is power (Bacon 1597)

Data Sources & Management: Nestlé have extensive details of their current products, employees, customers, suppliers and competitors. They also possess propriority data like patents. Although Nestlé uses database systems, which is a well versed approach for maintaining the data (Sandoe, Corbitt & Boykin 2001), like ‘Executive Information System’ and ‘Employee Self Service’ to store these data, they are often department specific, bespoke applications. This means that data is not effectively used by the company. This is the same data which, if used efficiently will give the company a competitive edge. E.g.: Ordering raw materials by anticipating markets conditions.

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Information Sources & Management: Large organization like Nestlé needs processed information which will help them in decision making process. A database administrator will be in charge of this. Different levels of management i.e. Strategic Level, Middle Level & Operational Level need different set of information from the same unified database. Higher the level, more tailored the information should be. Nestlé uses Transaction Process System, Decision Support System and Executive System to address the information needs of different management level. As a multinational company, Nestlé’s system should be able to integrate different languages, system platforms, legal contexts and even different core processes.

Knowledge Sources & Management: Knowledge comprises information and where you start to see patterns in those relations and begin to understand those patterns. Patterns give you predictability and repeatability. Knowledge management is rooted in concepts of organizational learning and memory (Turban et al 2002). Nestle facilitates knowledge sharing through its open communications (collaborative) culture. Strategic Business Units pass on tactic knowledge to the regional levels while analyzing the regional explicit knowledge. Extensive training is given to the employees who will serve in the retention of knowledge in the company.

Core Processes & Higher Level Information Needs In order to identify the core processes of Nestlé, the value chain model (Porter 1985) can be used. The model splits the business processes into two main categories; primary activities and support activities. Examples of primary activities are logistics, operations, sales, marketing and services (Laudon & Laudon 2007). Activities like infrastructure, technology and procurement are considered to be support processes. The planned ERP system will help Nestlé by improving the flow of information in both its typical and cross functional activities. E.g.: Research Department will be able to access marketing data to improve the product. ES can also be used to standardize the procedures across the departments & countries. E.g.: Nestlé will be able to standardise its training systems all round the globe. Thus, ES will add value at the core processes. With Nestlé, which has a portfolio of around 8500 brands, the ES will help to plan and predict the operational needs of the company by providing real time data about the core and support processes. E.g.: Productions Department will be able to increase output in case of an increase in demand in the market. ERP System can give detailed reports about product life cycles and products mixes to the strategic decision markers which can then be used to make informed decisions. E.g.: While conceiving a new product, Nestlé can make sure that no product over lapping occurs. ES will help Nestlé to improve its Human Recourse Management by automating production and distribution facilities. ES will also facilitate better productivity by evaluating employee performances. This will make sure that HRD contributes to the organization's bottom line. By effectively using an ERP System, HR can become an essential component for achieving corporate objectives (Boudreau & Ramstad 2007) ERP system can assist Nestlé’s cost cutting initiatives by monitoring their various accounting decisions. ES can also be used to centralise their procurement decisions which will help Nestlé to bring down the cost of raw materials by using ‘economics of scale’ (Kamel 2003).

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Implementation of an Enterprise System Before implementing an ES, we should look carefully at the requirements of Nestlé and match it with the features of the System. Features like user friendliness, customization, security, after sale support, compatibility, flexibility, and training required can have important consequences for the operational efficiency and long-term effectiveness of an Enterprise System (Gebauer & Lee 2008). We should also look at the feasibility of implementing such a system. Nestle should also do a comprehensive ‘risk analysis study’ before implementing an ES. The different stages of a successful implementation would include Pre-evaluation Screening, Project Planning, Team Training, Testing, ‘Go-Live’ and Evaluation. Given below is the T.E.L.O.S. Analysis which can be used to a feasibility study.

T.E (CBA).L.O.S. Analysis: 1) Technical Feasibility Nestlé should make sure that it has the necessary technology to make good use of an ES. As these systems are custom made, Nestlé should check if it can integrate all the all its functions in to the ES. It should see if the existing hardware should be changed or can be modified to the new system 2) Economic Feasibility Nestlé should ask questions like is ES cost-effective? Do the benefits outweigh costs? Cost Benefit Analysis is an important tool which checks the practicability of projects. Nestlé should use methods like ‘Net Present Value’, ‘Payback period’, and ‘Internal Rate of Return’ to do a CBA of implementing an ES. ‘Payback Period’ refers to the period of time required to recover the original investment. It can be used to compare similar projects; in our case different ERP Systems. We can calculate Payback Period by using a simple formula

Payback Period = Years x Original Investment / Total cash received ‘Net Present Value’ or NPV is a method for using the time value of money to assess the viability of long-term projects. It measures the cash flow in present value terms. NPV sees if an investment or project can add to the value of the company.

NPV=I0 + (I1/1+r) + (I2/(1+r)2+....(In/(1+r)n) I = Income n = Year r = Discounted Rate ‘Internal Rate of Return’ is the annual rate at which the project is estimated to pay back the investment. It is a metric used to decide if an investment should be made. It is shown as a percentage and is the true interest yield expected from an investment. The accuracy of CBA depends on the figures used. If similar project figures are not available Nestlé will struggle to work out the accuracy of CBA. Another problem is that CBA cannot measure the intangible benefits of the project. 3) Legal Feasibility As Nestlé is a global organization, it should be made sure that the new system doesn’t break any local regulations. E.g.: Different countries follow different accounting practices. Nestlé should also understand the ‘terms and conditions of sale’ of the new

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system so that it can manage the system accordingly. It should also negotiate for extended aftersales support. 4) Operations Feasibility The current operating procedures of Nestlé will be subject to change while implementing an ES. Decision making procedures will also be subject to change as the new ERP System will implement de-facto standards in Nestlé. It is also important that the new ES should support the process designs used by Nestlé (Harwood 2002).

5) Scheduling Feasibility Nestlé should prioritise when it comes to scheduling the ERP System. During the implementation of the ES, there will some departments which will ‘go-live’ early than others which might cause problems. This should be planned for and employees should be made aware of this. It can also go for the ‘Big Bang’ approach, which is a high risk strategy.

Methodologies: The switch over process is critical in the implementation of ES. If not managed properly, this might lead to the failure of the ES as the employee confidence in the new system will be go down. It will be necessary to run the legacy system in parallel with the ES for a while. Nestlé should plan in advance by giving training to the employees. It is also advisable to run a pilot test in one of the non-critical departments of the company

1) Big Bang Approach It is a high risk strategy where by the new ES is implemented throughout the company at one go. This strategy necessitates a dedicated team with enough skilled personal to handle the situation. According to Lientz & Rea (2004) it is advisable to closely monitor the core processes while implementing this strategy, as the ES changes the way these processes are handled, and management should be on standby to make decisions on any problems that may arise.

2) Modular Approach The new ES is phased-in to the company in this approach. They are often integrated division by division in to the company. Here the new ES will run alongside with the legacy systems for a period of time. This is a low risk strategy as the switch over happens gradually (O’Leary 2000).

3) Process Oriented Approach In this approach, the ES is integrated in to Nestlé process by process. All the functions which are used by a process are switched over at the same time. ‘Critical Success Factors’ are used to evaluate which processes are given priority (Lau, 2004). Nestle which has many cross functional processes can effectively implement the ES using process oriented approach.

Managing Implementation While implementing the ES, care should be taken to focus on people as well as the technical aspects. The ERP System will compel the employees of Nestlé to change their work culture by forcing them to collaborate with various departments, obtain new skill sets and take on new responsibilities (Shanks, Seddon, & Willcocks 2003). E.g.: New reporting procedures & protocols

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implemented by the ES. This will lead to insecurity, hesitation and fear in some employees which will reflect as ‘resistance to change’. It would be helpful to identify these changes early so that specific training can be given to employees. It is suggested by Davenport (2000) that it might be worth investing in a ‘Performance Support System’ which will give employees training as they need it. It is also noted that implementation of an ES is a never ending process. Eventualities like new versions of software and training of new employees will always happen. Due to this, Davenport suggests that a permanent team must be employed to manage the ERP System.

Managing Change Change management is one of the most crucial tasks Nestlé should engage in if it intends to successfully implement the ERP System. It is a continuing process required throughout ERP implementation. Change management include understanding the implementation objectives, identifying potential problems E.g.: employee readiness and developing strategies to counter it (Cameron & Green 2004). Employees should be made aware that for all the technical marvel of an ERP System, post- implementation business should be customer oriented. Nestlé should understand why its employees resist change. Normally the reasons are lack of understanding of the new system, lack of motivation and finally the lack of ability. Before implementing the change management, Nestlé should check its communication strategy; perform an impact analysis & a skills analysis. According to John Kotter (1996) the main stages of initiating change management are Understanding the business pressure, Using a skilled team as a ground breaker, Create a clear vision and strategy, Communicating this vision and strategy, Strengthen ES implementation plan, Formulate short term implementation aims, and finally use those short term aims as guidance and execute a new ERP approach.

Business Process Re-Engineering: BPR approach tries to use a "clean slate" perspective and determine how a company can best reconstruct their processes to improve their business. As Nestlé is undergoing a change management process, it might be good time to apply BPR which will help to reinvigorate the company

Recommendations & Conclusion Proper implementation of an ES will aid Nestlé to maintain & possibly increase its competitive-edge in our increasingly competitive world. But it should be understood that a failure will cost the company dear. ES is a complex system which necessitates a deep understanding and careful analysis to execute. ERP System will help the company to improve its information & knowledge management procedures and will make better use of the same. It will also guarantee that the present and future higher level information needs are taken care of. Nestlé is advised to do feasibility checks on the project. Nestlé can use a variety of implementation methodologies from which the Process Oriented Approach is recommended by the report. A successful implementation of an ERP System will depend on a complementing change management strategy. Change management is required to prepare the existing human resources and infrastructure to match ERP system requirements. It is imperative that Nestlé realise

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this and initiate a clear strategy from the very beginning. This might include training, counselling and communicating about the ES. Nestlé should realise that a perfect synergy of its people and systems should be the ultimate implementing goal of such a system, which in turn will facilitate better customer service.

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