7 th Conference BUSINESS LOGISTICS 2008

1. 7th ConferenceBUSINESS LOGISTICS 2008 Supply Chain Management as revenue generator:Customization and Differentiation Portoroz, September 2008 Jan van der OordPartner

2. Management summary Supply Chain Management can become a key revenue generator in the region: Customization and Differentiation Threat Opportunities Recommendation Closeness to the market • Develop and exploit existing customer intelligence Reduced traditional differentiation opportunity (Further) development ofDifferentiation and Customizationof the supply chain to - increase customer loyalty- Maintain/increase margins • Brand equity pull is no longer reliable • Product alternatives available at lower cost structures • Cost competition limited by increasing scale of competition Adapt to local demands • Build in customer specific service features and allow cost-to-serve Improve local distribution • Fill the current lack of (sufficient) professional distribution capability Source: A.T. Kearney

3. IT Infrastructure Finance &Accounting xxxx Brand equity pull is no longer reliable Brand manufacturers need to increase trade leverage supported and supply Chain capabilities A branded Category Future World Class BrandEquity BrandEquity “Supply ChainDominance” Innovation Trade Leverage Tradeleverage Level of Capability Performance Planning Industry Average ERP Facilitation Distribution Raw MaterialSourcing Manufacturing Laggard Beneficial Necessary Crucial Relative Contribution to Business Value

4. The retail industry concentration and private label growth leads to a dramatic re-allocation of the industry profit pool Brand equity pull no longer reliable Example United Kingdom Food retail industry1) Re-allocation industry profit pool 2006 ~10 years A- brands789 bn. US$ Retailer 2 Other brands 1,941 bn. US$ Wholesaler +20% • Private Labels • 1.466bn US$ Total2,255 bn. US$ 1 2 2 Brand Manu-facturer -20% Private labels 314bn US$ 1982 1990 2000 2010e 1) Estimated development of the brand structure within the food retail industry of mature markets based on analyses in scope countries Source: Datamonitor, AC Nielsen, A.T. Kearney

5. Product alternatives available at lower cost structures Brand manufacturers have to fight against a cost disadvantage of 32 %-points Cost gap overview for brand manufacterers in Consumer Goods 18 100 21 12 68 61 7 49 Gap -6 -12 -14 • R&D, S/M/A, Distribution • No R&D • No Sales force • Reduced Marketing and Advertising • Narrow distribution footprint • Limited SKUs • Cost of goods sold: • Spot purchases • Flexible formulations • Lean production • Cheaper packaging • Design values • Other Costs/Profit: • Reduced Mfgr Profit • Streamlined O/H A-Brand manufacturer Private Label manufacturer

6. Cost competition limited by increasing scale of competition Industry consolidation rapidly increases the competitive gap of regional companies with international giants Illustrative Top Line- and Bottom-Line Opportunities of the Acquisition RevenueSynergies Strongly Increased Annual Profit CostSynergies • Brand leverage and brand portfolio enhancement • Enhanced power against retailers1) • Market penetration of existing core markets (especially Russia, India and China) • Extent into new product categories, e.g. fruit flavored candy bars • … • Leverage sales, marketing & distribution infrastructure (Mars distributes in 180 countries) • Supply chain network optimization • Procurement synergies (e.g. packaging material) • Resource optimization (best practice sharing) + Profit + Additional (soft) synergies expected: New career opportunities for people 1) Companies highly dependent on relatively small space available near the cash register; deal will help to increase leverage against retailers Source: Company information, A.T. Kearney

7. 33,3% Even thegiantsfacethe same problems: B and C-brandbusinessprofitability will become marginal Example Reliable sales and potential losses of Nestlé‘s chocoloate business in Germany NestléChocolate (Germany) 310m sales ≡ 7.8% of the overall company sales (CS) in Germany (~ 4bn €) A-brands1) B-brands2) C-M.3) brand portfolio A-brands1) B-brands2) C-brands3) 55 mil. € (18%4)) 94 mil. € (30%4)) ~4 mil. € (~1%4)) 49 mil. € (16%4)) 66 mil. € (21%4)) ~4 mil. € (~1%4)) 38 mil. € (13%4)) Reliable sales 160 mil. € ≡ 4.0 of CS Potential losses in sales 142 mil. € ≡ 3.6% of CS Seriously threatened sales ~8 mil. € ≡ 0.2% of CS • Utilization of the clear distinguished positioning of "After Eight" and "KitKat" for maintaining the market pull • Additional investments into the improvement of the brand value and the customer benefit • Utilization of the uniqueness of "Choco Crossies" and "Smarties" for a distinguished positioning • Divestment of "Lion" because of a lack of differentiation within the competitive chocolate bars segment • Divestment of "Rolo" and "Nuts" because of a lack a lack of differentiation within the competitive chocolate bars segment • Utilization of the additional resources for investments into segments and products with a higher marginal utility 1) Sales >1% of total sales within the chocolate segment in Germany 2) Sales 0.1%-1% of total sales within the chocolate segment in Germany; 3)Sales <0.1% of total sales within the chocolate segment in Germany 4) % of Nestlé’s sales within the chocolate segment Source: Euromonitor; Desk Research

8. Increasing trade conditions is not sustainable, already now the link to retailer performance is low Contract structure client example 100% 12.9% 34.0% Only 15 %linked toactual salesperformance Tradespend often higher than advertising 22.0% 16.3% 14.8% Directly linked to growth Total contract None Not clearly defined Not challenging or low value Valuable, but no control on actual deployment Challenging andcontrolled Most trade spend not clearly linked to performance

9. Work with the retailer to get a clear picture of true profitability and factor into assortment decision Profit adjusted for trade funds and promotional pricing Shelf productivity Recognize importance of channel and shelf profitability Identify growth opportunities in core and niche market segments Are prepared and pro-active to adjust support of items and categories to achieve the partners’ objectives as well as your own Develop expertise to lead the right mix (and a varying mix) of marketing strategies and to provide fact-based inputs to retailer category planning processes Adjusted gross margin Average Inventory Category leaders: leverage position and develop category vision, fact-based and key account specific Category management analysis – File example What leading manufacturers do: Importance & delivery of shopping attributes Purchase frequency Category A Category B Att1  Importance Att3  Att2   Att5 Att4  Delivery A B C A B C AGPROI — Sales/ft2 retail matrix Y% High productivity, low sales rate AGPROI Target / average Low productivity, low sales rate Low productivity, high sales rate 0% Target / averageSales/Sq. Ft. ($/Sq. Ft.) 0

10. What should the rest do? Collaboration as strategy not very successful so far and does not provide better results Extent of achieving desired results High Low Low High Extent of collaboration Retailer Supplier Supply chain Product innovation Exclusive offerings Source: A.T. Kearney Supplier-Retailer Survey

11. Customization to avoid ‘substitution’ and ‘being sourced’… the opportunity for supply chain professionals Example FMCG % customized products in large European countries % customized product as part of total sales for FMCGs >20% >5% High promotion categories 30% Cross category coverage % volume >10-20% 15% 30% 50% >5-10% % SKUs % Expected annual customization growth Value creation ranking per customization types 37% 33% Decreasing value 23% -25% 20% FMCGs Average High growth Bundle packs Mixed cases Customized products Displays Retailers Source: retailers and FMCG interviews, A.T. Kearney desktop research

12. Biggest challenge: how to grow customization AND keep or increase profitability with our regional scale limitations Inefficiency implications for FMCG companies Traditional approach to customization Customization costs Uncontrolled trade spend Lack of scale due to fragmented responsibilities Higher costs due to limited/poor planning Supply chain Obsolescence/losses far above the other supply chain activities Manual executions and unnecessary transport costs Stretched supply chain organization • Product and single issue focus • No integrated approach, fragmented responsibility • Campaign driven, lack of integrated business planning • Reactive, driven by the retailers Marketing Lack of control of brand image and consistency Time spent by Marketing on technical development Limited access to some promotions for small geographical units Customer service Inability to respond effectively to increased in retailer demand for customized promotions/products Costly solutions to meet requirements for shelf-ready packaging (eg Tesco UK) Source: A.T. Kearney

13. Complete review of supply chain required: identify all main areas of change and improvement Supply Chain Assessment Segmentation • "One size fits all" is not good enough • Customer segmentation with no implications on supply chain • Same target of 98% hitrate for everything Overall Client score: 1.7 Current status Stage 1Functional optimization Segmentation1.3 Inventory Management • Investment of €150 mil. decided by local planners • No systematic inventory management • Decisions by local planners Stage 2Supply chain optimization InventoryManagement1.5 Planning1.4 Stage 3Value chain optimization Planning • Sales leaves demand plan to local production • Plans not interlinked • Monthly sales forecast inaccurate: rarely used in replenishment Source: A.T. Kearney

14. The new supply chain starts with defining the segments and their requirements Strategic Retailer Business Classification Illustrative “True Single Customer Brands” “True A-Brands” Premium (Brand / Uniqueness) Premium driven margin opportunity ‘Commodity” Brand “Private labels” “Base-Branded” Price Figther(Basic Need) Volume driven margin opportunity Multi-Retailer Indirect retailer control: sourcing leverage, category management, and format strength Retailer Specific Direct retailer control: format differentiation

15. Use of proven segmentation methods to simulate the impact on the supply chain …. Before not after! ABC-XYZ analysis Sales per SKU Segments Runner: large stable products Runner • Large, stable sales • To plan by machine "automatically" based on history • ~2,000 SKUs "Planner": large volatile products A "Planner" • Large, volatile sales • To plan by sales • ~500 SKUs Noiser • Small, sporadic sales • To plan on aggregated level by history • ~5,000 SKUs B C X Y Z 100% 200% 500% Noiser: small volatile products Volatility of demand [%] Source: A.T. Kearney

16. Keep scale, standardize and define customized service menu within a cost effective framework Menu 1 Menu 5 Menu 2 Menu 2 Menu 4 Menu 3 Menu 6 Menu 8 Menu 7 Menu 9

17. Developing the right customization capabilities involving all supply chain elements is key … integrated approach The new capability development are a key lever to get the buy-in of S&M and maintain cost competitiveness Source: A.T. Kearney

18. What is required … operational excellence in Sales & Operations Planning process to aligns all functions Snapshot of elements in the sales and operations plan Strategic Business plan / Marketing plan Top-down target from ABP/benchmarking plan APG? Demandplanning Rough production planning Net demand plan Campaign plan • Input • Sales forecast ("Planner") • Historic demand("Runner/Noiser") • Launches (by marketing) • Events (optional) • Input • Stock level • Orders • Runner/noiser assets Sales and operations plan Inventory plan New monthly process with 3 months horizon Procurement planningTrade Goods/ Raw • Input • Stock level • Orders Stable framework for operations Operative Order entry Availa-bility Order con-firmation Sche-duling Com-missio-ning Transport planning Dispatch Source: A.T. Kearney

19. What is required … New ideas beyond company borders, like pooling with other manufactures? Current SC Configuration Supply Chain Pooling configuration Manufacturers Manufacturers Retailers Retailers

20. To sell it in the company … large cost savings feasible helping to create your case for change! Estimated cumulated savings on cost of cost of customized products Objective Potential solutions Eliminate obsolescence Pack to order TBD Bring executions in logistics centres Rationalise transport costs Up to 2% Bring executions on production lines Automate the executions Up to 3% Supplychain Strategic sourcing and centralized organization Leverage the scale Up to 5% Consolidate the forecast information Planning consolidation process Up to 10% Reduce complexity of the offering Consolidated dynamic catalogue Up to 15% Sales/ Marketing Rationalize the demand Promotion effectiveness Up to 25% Source: A.T. Kearney