There’s nothing better to cool off on a hot summer day than eat a scoop of ice cream. However, this simple pleasure of life is under threat.
Nestle, one of the world’s largest ice cream manufacturers, faces a serious challenge in Italy. Given the fragmented nature of the retail sector in Italy , Nestle must manage a network of several warehouses, over 150 trucks, and 100,000 Nestle owned freezers at its retailers. Among several other things, Nestle must ensure that the temperature of its ice cream is maintained at various stages of its supply chain: during production, transportation, and at the retailer. Even small increases in temperature can result in the crystallization of the product, transforming the creamy texture that everyone loves to one that is grainy . When this happens, Nestle must identify that a temperature fluctuation occurred and replace the ice cream immediately. Failure to do this, could result in a consumer purchasing damaged ice cream. Frequent short-circuiting and consumers leaving freezer doors open contribute to temperature shocks occurring regularly.
Nestle plans to install RFID temperature sensors across its cold chain, starting from their production facilities to the freezers at their retailers . These sensors will alert technicians if the temperature were to fall below a threshold, enabling them to resolve the problem before any damage occurs to the ice cream. The move is favorable for both consumers, who are provided with a quality product, and retailers, who don’t have to have to pay expensive premiums for product insurance. Nestle estimates that retailers can also save 5-10% on its electricity consumption by optimizing freezer temperatures .
Managing over 100,000 retailers is a daunting task for Nestle. Complex route plans have to be created to ensure that each freezer has ample supply. Emergency deliveries have to be made to accommodate an unexpected spike in demand.
Globally, Nestle has made a push for investing more in digitization of its supply chain. One such area is the installation of devices on the shelf that monitor stock levels by detecting pressure, weight, depth, and various imaging technology . The data that’s collected from these devices will be sent to a central server, alerting the Nestle salesperson that a particular store has low stock. This approach has significant benefits and is particularly important for the ice cream segment for the following reasons:
- Ad-hoc ordering process: Many large retailers have still not developed a systematic process for reordering products. McKinsey reports that, “the department manager [often] basically orders products based on last week’s sales, without ever checking the current stock levels in the store.” 
- High shelf-space cost: The cost of frozen shelf space is the highest among retail departments due to the limited refrigerated space available. Further, Nestle provides retailers with a freezer free of cost.
- Expensive stockouts: Stockouts are extremely expensive for both the retailer and the manufacturer, results in customer frustration, and may eventually cause a loss of customer patronage . Research suggests that 8.3%  of products are out of stock (OOS) at the average retailer.
The smart shelf has the potential to eliminate the requirement for retailers needing to place orders, a process which already required improvement. Instead of salespeople reminding retailers to place orders due to OOS, Nestle should develop predictive models which forecast when replenishment is required based on stock levels and lead times. Salespeople will receive computer-generated orders without any intervention required from the retailer. Eventually, Nestle can create a model where production schedules are created in real-time based on both warehouse and retailer stock levels. This Just In Time model would optimize SKU availability and reduce the requirement to hold inventory for Nestle and its retailers. This will have a domino effect on Nestle’s entire supply chain, which includes Nestle’s own procurement of raw materials.
Through this initiative, Nestle will also gather significant data that can be used to understand consumer behavior. Translating this data into actionable insights through the use of advanced analytics will help Nestle improve its operations significantly. For example, movement of inventory can help Nestle derive insight into whether a new product will be successful, how the physical positioning of various SKUs in their freezer will impact its sales, or whether a new consumer promotion is delivering the required ROI.
The success of this project depends on several factors. Given the fragmented nature of the Italian ice cream market (with over 100,000 outlets), it’s not clear whether installing devices is feasible from a cost perspective. Further, in order to truly take advantage of this opportunity, Nestle will have to leverage the large amount of data coming in from its connected freezers and derive insight, a challenge that the retail industry is already facing .
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