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The main purpose of this report is to conduct a study of cloud computing, its different concepts, the benefits and costs associated with it and how it can fit in to or improve Nestle Lanka’s existing IT infrastructure.
The scope of this report includes an introduction to the company and the industry, its mission, corporate structure, business process, business strategy and relationships with external parties. This is followed by an analysis of the organization’s IT infrastructure and the issues and challenges facing the management of IT. Then cloud computing is explained, and the benefits and costs related to it are discussed. After which, the solutions that can be recommended to be adopted are discussed. Relevant conclusions are then made based on these findings.
The methods used in gathering information for this report include both primary (interviews) and secondary research (online journals, newspapers, magazines and publications).
From the analysis it was revealed that Nestle Lanka has already adopted a part of cloud computing through the storage of its SAP related data at the Globe Data Center in Sydney. However, it also showed that certain non-core applications are carried outside of SAP which requires the data to be stored locally and brings with it other costs as well.
Another interesting finding was the fact that Nestle Lanka did not possess any internet related infrastructure as they do not have a local website.
The recommendations that were made based on these findings were to adopt Software as a Service model to find out similar applications for the processes which were done out of SAP. If this was not possible, the recommendation was to adopt the Platform as a Service model which would result in Nestle developing the application online and it being hosted by the vendor. The reasoning behind this was to lower that infrastructure costs on servers and maintenance.
In addition, a recommendation was made to use the Platform as a Service model to create a local website for the company as it will require no capital investments. Further, this will enable the company to get closer to the consumer and provide greater satisfaction and carry out promotional activities without any cost.
Nestlé came to Sri Lanka over 100 years ago with the introduction of milk and infant foods to the local market. Over the years, the globally renowned multinational has extended its commitment to Sri Lanka at every opportunity, stressing the Nestlé corporate proposition Good Food, Good Life.
Nestlé Lanka’s corporate head office is situated in Colombo, whilst manufacturing takes place at a state-of-the-art facility in Kurunegala. The Company employs over 1000 people directly and estimates its indirect employment generation to be in the region of 40,000.
Almost 90 per cent of the Nestlé products retailed in Sri Lanka are processed locally. Through the quality product range of brands such as MILO, NESTOMALT, MAGGI, CERELAC, NAN, LACTOGEN and NESCAFE, the Company has built trust and emotional bonds with consumers of all ages and from all walks of life. Many of the Nestlé brands have become household names and for the most part are the market leaders. Furthermore, Nestlé Lanka endeavours to play a role in promoting healthy lifestyles by incorporating a nutrition and wellness dimension into the majority of products.
Fulfilling its social and environmental responsibilities to the country, Nestlé Lanka is an integral part of the national community. The virtues of care and nurturing inherited from the parent company remain at the heart of the way it does business.
Of particular pride is the Company’s contribution to the sustainability of the dairy industry and the rural economy since its early years. Today, as the largest private sector buyer of fresh milk and coconuts, Nestlé Lanka spends approximately LKR 1.5 billion each year, impacting the lives of farmer families island-wide.
Nestlé Lanka went public in 1983 with around 9% of the shareholding now held locally. Currently market capitalisation is about LKR 37 billion (Colombo Stock Exchange, May 2011). Over the past few years the share has been amongst the market’s top performers with an exceptional dividend cover. Committed to best practices, Nestlé Lanka strives to maintain the highest standards of ethical and social conduct throughout the organisation and to create long-term sustainable value for all stakeholders.
1.2 Industry Background
Nestle operates in the Food and Beverage industry which is growing at around 12% annually. It competes with both local and other multinational companies in the market. With the government targeting a GNP per capita of $4000 by 2014, demand will rise and competition for market share will be more intense. (Leading Edge, May 2011)
The Annual Report for 2010 states that ‘Our mission of “Good Food, Good Life” is to enhance the lives of Sri Lankan consumers with great tasting and nutritious products at affordable prices.’
1.4 Corporate Structure
Company Secretary/Legal Officer
VP – Human Resources
Head of Nestle Nutrition
Head of Nestle Professional
AVP – National Sales
AVP – Food (Marketing)
AVP – Beverages (Marketing)
AVP – Dairy (Marketing)
Production Manager 1
Production Manager 2
New Product Development Manager
Payroll ManagerThe above diagram depicts the organization hierarchy.
1.5 Business Process
The main functions in the organization are Marketing, Supply Chain, Production and Sales. They are supported by the Finance, Human Resources, Information Systems and Legal functions.
The marketing department works closely with supply chain (planning) to identify the correct demand which is then planned to be produced and the raw materials and packing materials purchased based on the requirements. As per the agreed plans, production produces the required stocks to meet the demand forecasted and that is distributed by the customer service and distribution function. The sales function ensures that the products are received where required and provides the required trade promotions to ensure that the product is selling. Marketing conducts its own brand promotions to create awareness of the products and ensure the effort made by the sales team is supported. Further, the New Product Development function performs a vital of introducing new products or developing existing products in coordination with Marketing and Supply Chain.
1.6 Business Strategy
Nestle Lankais dedicated to guarantee consumer satisfaction by marketing the highest quality food products that meet the diverse and changing need of consumers, utilizing Nestlé’s acknowledged worldwide technology & experience. To our shareholders, we ensure a fair return on their investment.
1.7 Relationship with external parties
Nestle has strong relationships with external parties such as the Sri Lanka Customs, Inland Revenue, Port Authority, freight forwarding companies, logistic companies, national authorities (for issuing licenses for imported products) and other service providers such as for telecommunication.
The corporate (group) website is www.nestle.com.
2.0 IT infrastructure: issues and challenges
2.1 Organization’s IT infrastructure
Figure 5-10 ‘The IT Infrastructure Ecosystem’ (Laudon and Laudon, 2010) is used to discuss the infrastructure as follows.
Computer Hardware Platforms – all machines provided by Hewlett Packard (HP).
Operating System Platforms – all machines use Microsoft Windows platform.
Enterprise System Applications – SAP for all core activities in Marketing, Supply Chain, Finance, Sales and Production and non-core activities are mentioned below (section 2.2) in detail.
Networking/ Telecommunications – networking hardware provided by IBM and Cisco, internet access is provided through British Telecom (BT) and telephone services are provided by four local operators (Dialog Axiata, Mobitel, Suntel and LankaBell).
Consultants and System Integrators – this is carried out in-house from our data center located in Sydney, Australia.
Data Management and Storage – all SAP related data are stored in IBM servers at our data center in Sydney; whilst the non-SAP system data are stored locally in SQL severs.
Internet Platforms – there exists no internet related infrastructure at Nestle Lanka as there is no localized website.
2.2 Issues and Challenges faced in the management of IT infrastructure
With reference to the interview with the IT manager (refer appendix 7.1) the following provides a discussion of the issues and challenges facing the management of IT infrastructure.
Due to Nestle being a large multinational, standardization of IT infrastructure is a requirement across all markets (countries). It is no different in Sri Lanka, where the infrastructure is much advanced than you would find in any other local company. This policy brings about many advantages and limitations.
First, since all markets have to have the same infrastructure irrespective of its size, it will be more modern and up-to-date with the latest technology in place. This will mean enhance security measures for the company, which is vital to remain competitive in this fast-paced food and beverage industry.
However, the advanced infrastructure does not come cheap as contracts are negotiated globally in dollar terms but when converted to rupees it is much higher whereas the infrastructure available in the market is although not of the same standard, will meet our local requirements and be less expensive. Hence, managing costs increases in line with this standardization policy is a challenge for the company.
Training or user education is another problem the IT function faces when maintaining and upgrading this current infrastructure. Although, system and security updates take place through the data center in Sydney, the users don’t comply with the changes until the last moment or wait until a problem arises to find out about the change.
Further, the company has adopted applications outside of SAP for certain functions. They are for payroll, milk procurement, and gathering secondary sales data (from distributor point to end-customer). The data from these systems are stored locally in Lankaand along with server cost the company incurs yearly maintenance expenditure and licensing fees.
3.0 Cloud Computing: its business benefits and costs
3.1 Benefits of cloud computing
As Mell and Grance (2011) defines, ‘cloud computing is a model for enabling ubiquitous, convenient, on-demand network access to a shared pool of configurable computing resources (e.g., networks, servers, storage, applications, and services) that can be rapidly provisioned and released with minimal management effort or service provider interaction’.
There are three main service models in relation to cloud computing as mentioned by Mell and Grance (2011). They are:
Cloud Software as a Service (SaaS)
Cloud Infrastructure as a Service (IaaS)
Cloud Platform as a Service (PaaS)
The first model is one that distributes applications hosted by a service provider over a network such as the Internet. Cloud computing based concepts such as SaaS remove the need for organizations to individually maintain a large amount of local servers, instead they would all be utilizing a shared resource. Further, Hayes (2008) shows that SaaS allows users to access the application regardless of time and location, giving them greater flexibility in carrying out their tasks. Saaksjarvi et. al. (2005) also shows that another one of the key benefits of SaaS is that version management is more convenient to the customer, since the vendor would be implementing upgrades on a regular basis. Other benefits cited by Saaksjarvi et. al. (2005) includes the notion that it enables the customer to get access to so called “best-of-breed” applications that might otherwise have been too costly for them to purchase.
The next model (IaaS) is where a service provider ‘outsources the equipment used to support operations, including storage, hardware, servers and networking components. The service provider owns the equipment and is responsible for housing, running and maintaining it. The client typically pays on a per-use basis’ (SearchCloudComputing.com, May 2011).
The final service model is one where hardware, storage and network capacity can be rented over the Internet. The model permits the client ‘to rent virtualized servers and associated services for running existing applications or developing and testing new ones’ (SearchCloudComputing.com, May 2011).
3.2 Risks of cloud computing
Despite such an array of benefits, and as with any other such model, SaaS also comes along with a range of risks to both the client and the vendor. On the client’s side, one of the primary concerns is on privacy and security. Hayes (2008) outlines how allowing a third party control over your files could potentially create a chaotic legal issue, especially in regard to what rights the vendor will have to the data on an occasion where the organization violates the contract.
Hayes (2008) discusses a scenario in which a government agency serves a subpoena or a search warrant to the vendor. Had the organization had control of its data, it may have contested the order in court. But it is doubtful whether the vendor would go to court on the organization’s behalf, and instead they might simply hand over the data over to the authorities. As such, according to this scenario, a company could have its data released to other parties without even being informed of it. Whether or not such a scenario is likely to materialize, its possibility should not be ignored and it would be advisable for IT managers to delve into such grey areas with the vendor prior to reaching an agreement.
Another key concern mentioned by Saaksjarvi et. al. (2005) is that SaaS offers little in the way of customizing the software to suit the organization’s specific needs. Customization of the software to suit the intricate business processes of the organization is essential if it hopes to achieve a competitive advantage. However, Jacobs (2005) points out that providing a relevant level of customization, although difficult, is certainly not impossible and in addition it would be advantageous to the vendor to go this extra mile since they can ‘lock-in’ clients.
Hoch et. al. (2001) voices the adverse effect from the limitations in the organization’s internal networks. Bandwidth of the network will have to be increased to accommodate the constant connectivity demanded by the SaaS model. Any issue with the network can adversely affect the performance of the applications, and hinder dependent organizational tasks. Such a major concern should be meticulously examined and addressed by the organization so that they can ensure the availability of required infrastructure before adopting the SaaS model.
Apart from the technical difficulties of SaaS, there could be adverse organizational effects as well in the form of employee resistance as they are very familiar with what they have now and to re-train them, will require tactful change management.
3.3 Costs involved in cloud computing
When implementing cloud computing there will be limited capital expenditure on IT infrastructure. Servers required to store and run the applications will be provided by the vendor. However, the customer should have the adequate network and software (such as web browsers) capabilities to meet the application’s requirement. The customer can save on the existing server, maintenance and licensing costs.
The customer will be charged on a subscription basis based on the number hours/days/months used depending on the service level agreement signed by both parties.
Due to the existence of our Globe Data Center located in Sydney, the option of adopting the Infrastructure as a Service (IaaS) model is not practical as we possess our own private cloud.
However, what can be recommended is to adopt cloud computing for the non-core applications that was identified in section 2.1 of this report. The reason that we cannot adopt SaaS for the existing ERP systems which covers our core processes is that Nestle requires that all regions have the same system, process and basically talk the same language.
The non-SAP applications that have been developed as they cannot be customized in SAP to meet local requirements, for example the payroll system has to take into account the unique local employment law requirements. The milk procurement system had to be designed in a way to facilitate information gathering from all Nestle milk chilling centers across the island and as a result could not be done by SAP. Gathering secondary sales data also involves having SAP at all the distributor locations which would have been too costly.
For the above mentioned applications it is possible to search for online versions that support cloud computing such as through SalesForce.com or NETSUITE. If no such applications exist then, we can look at developing a similar application using the Platform as a Service (PaaS) model using platforms such as Microsoft Azure and Google’s App Engine. The obvious benefit here would be saving hardware costs as well as maintenance costs in the long run but Nestle will have to spend on the development costs in the short-term.
From the IT infrastructure model analyzed in section 2.1 it is evident that Nestle Lankadoes not possess any internet related infrastructure as there is no local website. Having its own website, will allow Nestle to get much closer to its customers and be in its self a promotional medium. Conventionally having an internet related platform would mean cost incurred on servers as well as software licensing fees. But, through the use of PaaS service model, Nestle Lankacan build its own website without incurring any capital expenditure and meet is vision of guaranteeing consumer satisfaction. For example, Kia Motors in North America launched its own website using the Microsoft Azure platform (Microsoft.com, May 2011).
The findings of this report reveal that there are non-core applications that are being used along with SAP. These applications cost the company in terms of server, maintenance and license fees. This can be reduced or avoided in the long-term if the company adopts cloud computing in the form of either software as a service or platform as a service.
Further, it was found that the company doesn’t have any internet related infrastructure as it does not have a website. A less costly and capital intensive way of creating such a website would be to adopt the platform as a service model. The creation of a website will enable the company to get closer to its consumers and better engage them. It could also be a free source of promotion for the company’s many brands.
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