Supply Chain Management: Principles, Logistics, Location Models and Factors

This report discusses the principles of supply chain management and the role of logistics in achieving supply chain goals. It also covers location models and factors affecting location selection, using Nestle's supply chain as a case study.

SUPPLY CHAIN MANAGEMENT
1

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................3
QUESTIONS...................................................................................................................................3
1. Summary of key ideas.............................................................................................................3
2. Supply chain management principles and its role in supporting competitiveness..................4
3. The role and contribution of logistics in the achievement of supply chain goals and
objectives.....................................................................................................................................6
4. Location models and factors affecting location selection........................................................7
5. Contemporary issues related to international logistics and transport......................................9
CONCLUSION..............................................................................................................................10
REFERENCES..............................................................................................................................11
2

INTRODUCTION
Supply chain management (SCM) is defined as the process of managing and organising all
resources, people and activities for ensuring the continuous flow of goods or services to
customers (Langley and et.al., 2020). It regulates various stages involved from acquisition of raw
materials to final delivery of products so that cost, time and resource wastage can be controlled.
Nestle is world’s largest beverage and food service providers which operates all over the world.
Organisation’s SCM has made it possible for it to render more than 2000 brands in almost every
country of the world. This report will discuss the case study of Nestle to understand the
principles of supply chain and contribution of logistics in it. It will also discuss various logistic
related issues and locations models so that uninterrupted supply chain can be ensured.
QUESTIONS
1. Summary of key ideas
The case study of Nestle has highlighted the following key concepts which plays
significant role in the success of organisation by providing competitive advantages.
Supply chain: It is the defined as the set of various activities involved in supplying product or
services from raw material to finished form to end user or customers. Supply chain may vary
from country to country depending upon multiple factors such as availability of raw material,
technology, external environment as well as processing method or relation between different
supplying phases.
Logistics: Another concept discussed in case study is logistic which involves process to manage
resource acquisition, storage as well as final delivery of products by using transportation
network. Like Nestle has different types of suppliers which ensure that its coffee products are
smoothly delivered to different parts of world (Lambert, 2017). Organisation uses good
packaging, pest control as well as good transport services to assure safe logistics.
Supply- demand: The prices of product is affected by various factors however organisations
such as Nestle are always willing to pay even higher prices for meeting the quality standards for
their products. In addition to this the gap between supply and demand has great impact on
deciding price so organisations always develop strategy to ensure adequate supply so that they
can get fair prices.
3

Trading methods: For ensuring the continuous supply all over the world Nestle also employ
variety of supply methods such as direct trading or export (Jia, Gong and Brown, 2019). The
method chosen depends upon different factors such as cost, supplier or raw material availability
as well as pricing.
2. Supply chain management principles and its role in supporting competitiveness
SCM establish coordination between technology, resources, people as well as customers so
that organisations can render high value to customers. The management of logistics as well as
price adjustment and supplier relationship greatly affect the success and profitability of the firms.
Some of the key principles of SCM are as follows:
Collaboration: Nestle supply chain ensure that it has good communication and collaboration
with its customers and other stakeholders. Coffee beans are agricultural products and are green
beans which need great processing and actions before final product. Thus Nestle ensure at every
stage that it has direct relation with farmers as well as processors so that good quality products
can be prepared (Kozma, Varga and Hegedüs, 2019). It not only makes brand faithful and
competitive but also makes business cost effective.
Flexibility: It is one of the key principle of supply chain. Unavoidable circumstances can
anytime affect the availability of raw material. Coffee being the agricultural product greatly
depends upon climate conditions. In most of the parts of world Nestle has chosen to follow only
direct buying from the farmers so that it can give fair prices to them and they are encouraged to
regularly supply coffee. However, in regions where direct buying is not possible organisation has
chosen other flexible means such as export or warehouses to facilitate the smooth supply. The
flexibility in supply chain help Nestle to have smooth network.
Specific customer needs: For greater advantage organisation must respond to unique needs of its
customers. The same customization is provided by Nestle to its worldwide and diverse customers
so that they can enjoy and easily access the global needs. For this purpose, organisation always
innovate creativity in network. For instance, use of technology in distribution and storage has
made services highly effective in terms of cost.
Forecast and prediction: For continuous supply organisation must have accurate resource
allocation and consistent forecasting in its demand and supply so that it can plan and act
accordingly. For instance, key resource for Nestle are coffee beans and thus climate changes or
4

natural disasters can have adverse impact on its production and supply (Nayak, 2020). Thus
organisation regularly analyse the availability of raw materials and uses every measure to ensure
that quality products are accessible to its customers at every instant.
Product differentiation and segmentation: Another important principle of supply chain
management is that for long term sustainable growth there must be proper segmentation of
products and services as well as logistic channels. Nestle have good relationships with farmers
who provide direct supply and in countries where it is not possible organisation uses alternative
approaches to regulate the supply. Along with this Nestle products are also available in different
flavour and packaging options so that their inventory can be managed more effectively as well as
they can meet the requirements of different types of customers.
In addition to these principles Nestle also follow certain principles for barrier free
logistics. These principles are:
Right quality and quantity: Nestle has supplier from different parts of Asia, Africa as well as
America. Thus depending upon the agricultural production in these countries quality of green
coffee beans may vary. However, in response to standard brand perception organisation regulate
that supplies from every part is processed uniformly so that customers can get same taste of
Nestle brand at every place. Being vulnerable to quality issues with time Nestle also take all
safety and necessary measures to ensure that coffee is highly safe and meet all health and safety
legislations. The product is stored in safe conditions so that it is not contaminated in any way
(Copacino, 2019).
Right cost and Right place: High quality services and logistics can be delivered only when there
is an accurate forecast of supply and demand. In order to meet the competitive challenges, Nestle
must also ensure that it is able to timely deliver the products to its customers. There may be
several logistic issues but they may be managed with effective cost and time management, good
and green packaging techniques so that high quality logistic services can result in gaining
customer satisfaction.
Supply chain and logistics can act as key players in delivering the competitive advantage.
The coffee beans are mainly produced in Africa, Asia and some regions of America which often
requires a lot of processing methods before reaching to customers (Yazdani and et.al., 2017).
Despite having such complexities in supply chain Nestle has successfully managed to become as
well as retain the position of leading food and beverage service provider. This success is greatly
5

contributed by effective logistic system of organisation which ensure that organisation is able to
successfully deliver the products which meet the expectations of customers (Min, Zacharia and
Smith, 2019). Good logistic services allow organisation to have flexibility in distribution and
storage of products in accordance with customer demand so that satisfactory services can be
delivered and strong market position can be developed.
3. The role and contribution of logistics in the achievement of supply chain goals and objectives
Logistics is that element of supply chain that ensures the managing of resources, storing of goods
& services and within this is also includes delivering of the goods and services to the distributor,
retailer or customers. The main aim of the logistics is to deliver the goods at the competitive
price. This is one of the vital element of the supply chain management. The supply chain
management works with the aim of managing the raw materials along with storing and delivering
the goods in effective manner. (Sweeney, Grant and Mangan, 2018). Nestle is one of the big firm
that has been satisfying its customers from over the years. The logistics element of the supply
chain management has been performed by the company in efficient manner and this results in
achieving the main goals of the supply chain management. As a result, the final goal of the
company has also been achieved. In order to understand this with clearance. Here are the ways
under which Nestle performs the logistics:
Warehouse management- This function of logistics involves designing of the warehouses so, the
goods can easily place there. Along with this, it also includes deciding the quantity of the goods
that has to be placed. Nestle performs this function of logistics by keeping their products in
warehouses. And the management of the goods has been done in efficient manner. The company
makes sure that, the goods that are place are not expired and provides an assurance of the timely
availability of the products.
Formation of packages- The goods has been packed in the different packages. For example:
Nestle uses bottles, jars and small packets for packaging. (Patil and Rane, 2021). The goods has
been packed in different quantity. This are done in order to transfer the goods towards the
distributors and the consumers.
Transporting- This involves selecting the vehicles that has to be used in the transportation of the
goods towards the distributors and consumers. The company performs this step by listing the
routes where the goods has to be sold. Along with this, the time period under which the goods
6

are transported to the particular place has also been mentioned. This step ensures the availability
of the goods towards the consumers.
Working with the customs- The logistics is just not limited to storing and transporting the goods.
Along with this, it also includes performing various customs. For example: Nestle is an
international brand that sells its products at the international market. The logistics element of
supply chain ensures the smooth selling of products at the international level as well. All the
customs that are needed to perform are the part of logistics. (Kotzab and et.al., 2018). All the
functions of logistics takes towards the achievement of the goal that is set under the supply
chain. Each and every step is performed in order to manage the goods and ensures the
availability of goods. Thus, logistics plays an important role in achieving the main aim of the
supply chain.
4. Location models and factors affecting location selection
While selecting locations for facilities or warehouse several factors are taken into
consideration by Nestle. Being a global distributor Nestle used to ensure supply all over the
world. Thus fuel costs and transportation challenges due to climate play a great role in affecting
supply chain. Thus while setting up locations organisation must check the availability of the raw
materials or the coffee beans (Ray and Duraipandian, 2020). Like if the region or location has
production of beans then it becomes more convenient as well as cost effective for Nestle to store
them and thus more robust supply can be assured. If warehouses are closer to farmers and other
consumers, then it will mitigate the fuel price challenges and organisation may enjoy more
efficiency and flexibility. Location planning approaches are influenced by variety of factors such
as raw material availability, climate, culture suitability to products and organisational working
and market proximity.
Transportation cost for supplying products from location to end consumer is also an
important factor to be consider. In addition to this some additional factors such as taxation rates,
environmental regulations, utilities, quality of life, social perception as well as energy sources
available at the region or site, competition level as well as traffic patterns are considered (Dani,
2021). Nestle also emphasis on labour cost and availability at the desired location so that skilled
workforce to manufacture and prepare fine coffee beans are easily available. Climate conditions
7

of the region can influence the continuous supply of the raw material and thus it is also an
important factor which determines the selection criteria of location or region.
There are several models which can be used for determining the suitability of location
alternatives. Some of the most common approaches used by Nestle are as follows:
Centre of Gravity model: Another method used which can be used by organisations to select the
location is gravity method. This approach enables to choose the organisation which can minimise
either shipping cost or travel time. As in current situation due to climate changes and pandemic
restrictions when Nestle is already facing difficulty in shipping methods it can seek other
alternatives by using this model so that travelling time can be reduced and its customers can
receive adequate supply on time (Kherchi, Fellague and Haddou, 2019). In this model a visual
map with coordinate system is used which render average values. Thus with this method
geographical coordinate of locations can be selected by Nestle.
Cost profit analysis model: This mathematical and graphical approach involves three phases. In
the first phases organisation first determine the variable and fix costs associated with the location
alternative. Then for each location total cost lines are drawn on the same lines so that the location
alternative which have maximum and minimum cost for desired output level can be identified
and selected. For minimising the transportation cost Nestle can compare its various choices of
location on this aspect.
Transportation model: This model works with purpose of choosing the optimum way for
distribution of products from warehouses or factories to multiple locations. On taking the cost,
storage, quality and labour considerations Nestle must balance between transportation cost as
well as prices paid to suppliers so that they remain motivated to grow coffee beans. This model
shows the supply and demand cost between various factories and warehouses so that
organisation can choose that which location and pathway it must choose for cost benefits
(Kalaitzi, Jesus and Campelos, 2019).
The purchasing methods used by organisation also vary greatly. Like on some locations
Nestle used to have direct purchase from farmers but in countries like UK organisation choose
dealership approach over direct buying. However, in countries like Philippines Nestle give
priority to only direct buying at its buying centres which are located in coffee growing locations.
8

5. Contemporary issues related to international logistics and transport
Covid 19 pandemic affected all firms and the way in which global supplies were made.
The social distancing and lockdown restrictions greatly affected the transportation and logistics
at international level. The first and foremost issue faced by international transport is sea and air
freight limitation. Due to pandemic still many countries are having lockdown and travel
restrictions and thus affecting entire freight industry. However, with falling Covid cases as
relaxation has started transport industry is facing excess loan or pressure. Thus there is constant
shortage of shipping containers and timely delivery (Jia, Gong and Brown, 2019). This has
created difficulties for Nestle as well because for several months the operations were shut close
and now container issues in international market has created panic for every supplier.
Even in road transport also organisation is facing difficulty with high fuel prices. With
sudden increased demand after pandemic and other international factors the prices of fuel are
extremely high which makes the transportation cost difficult to manage. Another issue in
international transport is time delay and excess restrictions. The conflicts between two
economies and Covid security check-ups have caused the difficulty and delay for Nestle to
ensure the timely supply of its goods. The transportation drivers and other logistic personnel are
regularly succumbed for safety and security purpose which not only increases cost but also delay
the supply.
After 2020 the economies have shown sluggish pattern and significant number of small
suppliers particularly low wages labours were forced to return to their native places. Thus Nestle
is also facing issue that there are not sufficient number of workers available for logistics and
transportation work. Even if there are workers they are not trained properly and have skill gap.
One of the most important factor which has made transportation industry highly vulnerable to
delay is climate change (Nayak, 2020). Though Nestle and other companies are making efforts
for reducing their carbon footprint by working in collaboration with shipping industry but the
climatic impacts have uncontrolled impact on hindering barrier free transport. The sudden
climate changes such as cyclones or tides, heavy rainfalls or fires often restricts the pathway for
delivery and thus supplies are delayed for several days.
The climate changes are prime concerns for agricultural industry from which the major
raw material of Nestle is obtained. Thus any kind of climate consequences has direct impact on
logistic. Recently the manufacturing industries of China were closed and this affected the supply
9

chain of several industries who were dependent on them. However, Nestle has suppliers in
various countries and does not rely on any single manufacture so the transportation has mainly
influenced by only shipping container crisis and availability. Increasing tax and import or custom
duties also enhances the cost of transportation as well as logistic services. The higher logistic
cost and assurance of product quality on long term storage or transport delay are also the major
concerns faced by international transport (Langley and et.al., 2020). All these issues affect the
continuous supply of goods.
Thus it is recommended that one of the best logistic strategy for Nestle is that it must
build new warehouses near target markets or farmers so that rising fuel costs and shipping
challenges can be dealt effectively.
CONCLUSION
It can be concluded from the above case study evaluation that for achieving competitive
advantages in terms of cost and quality contemporary organisations must strengthen their supply
networks. Though various logistics issues and factors may affect purchase and supply but
organisation must develop suitable strategies to overcome those issues. It is also suggested that
analysis of location models and related factors can help companies to assess the effectiveness of
their supplier location and can enhance the profitability of firms.
10

REFERENCES
Books and Journals
Copacino, W.C., 2019. Supply chain management: The basics and beyond. Routledge.
Dani, S., 2021. Food Supply Chain Management and Logistics: Understanding the Challenges of
Production, Operation and Sustainability in the Food Industry. Kogan Page
Publishers.
Jia, F., Gong, Y. and Brown, S., 2019. Multi-tier sustainable supply chain management: The role
of supply chain leadership. International Journal of Production Economics. 217.
pp.44-63.
Kalaitzi, D., Jesus, V. and Campelos, I., 2019. Determinants of blockchain adoption and
perceived benefits in food supply chains.
Kherchi, I., Fellague, M. and Haddou, S.A., 2019. How Nestle Applied Shared Value Creation In
Agriculture Sector Achieving Sustainable Agriculture And Making More Profit
«Nestle Model». Management & Economics Research Journal. 1(3). pp.12-26.
Kotzab, and et.al., 2018. Key competences of logistics and SCM professionals–the lifelong
learning perspective. Supply Chain Management: An International Journal.
Kozma, D., Varga, P. and Hegedüs, C., 2019, March. Supply chain management and logistics
4.0-A study on arrowhead framework integration. In 2019 8th International
Conference on Industrial Technology and Management (ICITM) (pp. 12-16). IEEE.
Lambert, D.M., 2017. The supply chain management and logistics controversy. In Handbook of
logistics and supply-chain management. Emerald Group Publishing Limited.
Langley, C.J. and et.al., 2020. Supply chain management: a logistics perspective. Cengage
Learning.
Min, S., Zacharia, Z.G. and Smith, C.D., 2019. Defining supply chain management: in the past,
present, and future. Journal of Business Logistics. 40(1). pp.44-55.
Nayak, R. ed., 2020. Supply Chain Management and Logistics in the Global Fashion Sector: The
Sustainability Challenge. Routledge.
Patil, M.A.L. and Rane, B.V., 2021. Analyzing the Importance of Logistics in Supply Chain
Management. PalArch's Journal of Archaeology of Egypt/Egyptology. 18(7). pp.2196-
2202.
Ray, P. and Duraipandian, R., 2020. Exploring the interdependencies of Critical Impact Factors
that effect the food supply chain, supported with case studies and multi variable
analysis. Solid State Technology. 63(2).
Sweeney, E., Grant, D.B. and Mangan, D.J., 2018. Strategic adoption of logistics and supply
chain management. International Journal of Operations & Production Management.
Yazdani, M., and et.al., 2017. A group decision making support system in logistics and supply
chain management. Expert systems with Applications. 88. pp.376-392.
11