Integrated Risk Management Strategy

Current Status

Enterprise

RISK
MANAGEMENT
VII JORNADA ANUAL DE RIESGOS
Madrid – 25 January 2007

Finance & Control

Marc Schaedeli / Head of Risk Management
 Group Risk Services

Integrated Risk Management Strategy

Why do we have an integrated approach to

risk management?

• It brings direct benefits to the business

Experience and feedback within Nestlé shows
– a high level of satisfaction with the immediate benefits
– a growing demand
• It has the potential to provide competitive advantage
• It is an impending legal requirement in Switzerland

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Integrated Risk Management Strategy

The Growing Influence of Enterprise Risk Management (ERM)
A majority of companies are choosing ERM…

Have rejected

9%
Preparing/ Clear benefits from an 'integrated' approach to ERM
Developing/
Implementing 'Advanced ERM' companies experience significantly
35% 56% greater benefits than those still adopting an ad-hoc
Positively approach. Improved benefits have been seen in each of
disposed the following areas:
• Better-informed decisions
• Greater management consensus
…and ERM is seen as an increasingly • Increased management accountability
important responsibility • Smoother governance practices
• Ability to meet strategic goals
Board 29% 36% 35%
• Better communication to the board

CEO 39% 29% 32% • Reduced earnings volatility

• Increased profitability
CFO 46% 38% 16% • Use of risk as competitive tool
• Accurate risk-adjusted pricing
Internal 50% 30% 19%
Audit
Degree of Importance
Very high Significant Somewhat or less
3
Source: The Conference Board 'From Risk Management To Risk Strategy' (Results from survey of 271 executives) Finance & Control
 Group Risk Services

Integrated Risk Management Strategy

Current Application of the ERM Process
The process is mainly applied in the following areas*:
ERM Process 8. Monitoring • Annual top-down risk assessments of Zones and Globally
(ongoing)
Managed Businesses
7. Action • Global Business Strategies (GBS)
1. Goals &
(ongoing)
Objectives
• M&A and divestiture projects
• Major capital spending and restructuring projects
6. Decision Nestlé ...and in other areas upon request
Risk & Opportunity *as defined by the Executive Board (Nov. 2002/Aug. 2006)

(R&O) Assessment It is a structured approach to:

2. Brain-
storming • Identify risks to objectives and opportunities to exploit for
5. Reporting (Team)
(Moderator)
competitive advantage
• Quantify impact and likelihood of occurrence
4. Evaluation 3. Description • Prioritise actions to mitigate/avoid risks
(Team) (Moderator)
and exploit/enhance opportunities
• Support decision-making in the management process
Output • Ultimately optimise allocation of resources
A •
It is applied in a practical way:
B • • Simple, flexible self-assessment process
• • •• • Multi-functional team, typically in a workshop environment
Increasing Likelihood

C
• Risks owned by line management
D • •
• Challenges existing mindset
E • •• • Requires no additional resources
F • • • • • Integrated into project/business management
exceptional significant moderate negligible negligible moderate significant catastrophic • Risk Management Advisors facilitate and are responsible
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Increasing Opportunity Increasing Risk for methodology Finance & Control
 Group Risk Services

Integrated Risk Management Strategy

Overview of ERM Activity
Application of ERM process since December 2004

ERM at Zones / Globally Managed Businesses level:

Value driver 2006, Z-AMS Target 2006
Markets:
Z-AMS (Brazil, Chile, Legal/IP:
Ecuador, Mexico, Russia, Nespresso
Central America, Cuba)
Z-AOA (India) Engineering:
Z-EUR (Germany) New factory projects
in Russia (Nestlé
Business: Waters, NPPE)
PowerBar, CPW,
Nestlé Waters, R&D/PTC:
Nespresso, NITR All PTC/R&D
except St. Louis and Vittel
Innovation & Renovation Projects:
Coffee, Confectionery, Culinary, Supply Chain:
Ice Cream, Nutrition, NPPC RATES project with
further embedment in
Quality, Purchasing,
ERM at Alcon: Industrial Performance,
General Management, Engineering, Regulatory
Number of Assessments
Europe, LACAR, Spain,
≥3 1
France, UK, Nordic, Belgium,
Germany, Italy and Tax, 2 0 M&A:
Treasury, R&D, HR Ice-Cream

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Integrated Risk Management Strategy

Foundation to Support an Integrated Approach

Input Output
(work in progress)

Top-Level R&O Assessments

(mandatory, Zone & Globally Managed Business)

Bottom-up R&O Assessments Consistent assessment of R&O

(on management request, ad-hoc)
Single repository Consolidated profile
for R&O information Group-level perspective
Nestlé Audit Group Findings
(NAG guidelines, R&O classification) Raise major Group-level R&O

Compliance Framework

R&O Management Information Repository (ARM)

Secure and wed-based, providing transparency and real-time updates
Collectively address all Facilitates sharing of knowledge and avoids duplication of efforts Regular reports
sources of main R&O
Documented Best Practices and Guidelines to EBM
to Nestlé S.A.
R&O Assessment Best Practice
Strategic, Operational, Reporting,
Financial, Compliance R&O Management Terminology / Classification
ARM User Guidelines

‘R&O Champions' in selected markets

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Integrated Risk Management Strategy

Where is the ERM process applied at Nestlé…? Status – December 2006

• Mandatory annual Zone/Globally Managed Business (GMB) assessment

(major R&O impacting on targets)
– Workshop involving direct reports, timing: October / November
– Support provided by Group Risk Management (FC-GRS)
– Outcome challenged and validated by Head of Zones / GMB
• ‘Ad-hoc’ assessments (on request):
– Provide support for business, project ‘ad-hoc’ assessments
Furthermore we have agreed to work hand-in-hand with:
• Group Control:
– To improve R&O management within strategy setting
– To embed simple process within Strategic Planning (GBS) to identify major strategic R&O
– Pilot studies already performed
• GMB (Nestlé Nutrition):
– Embed R&O Management within Top Nestlé Nutrition I&R projects, operational R&O
• R&D/PTC:
– Build upon ‘ad-hoc’ R&O assessment already performed in Coffee, Confectionery, Culinary, Ice
Cream, NPPC to develop common I&R project R&O catalog
– Embed R&O Management within Top I&R projects (all product categories)

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Integrated Risk Management Strategy

Nespresso risk characteristics

- Single production center - Prototype lines

- Maximum capacity utilization - Single distributor
- Single key suppliers

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Integrated Risk Management Strategy

ERM Process

8. Monitoring
(ongoing)

7. Action
(ongoing) 1. Goals &
Objectives

6. Decision Nestlé
Risk & Opportunity
(R&O) Assessment
2. Brain-
storming
5. Reporting (Team)
(Moderator)

4. Evaluation 3. Description
(Team) (Moderator)

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Integrated Risk Management Strategy

Step 1: Goals & Objectives

Scope of the assessment defined:

Production Centre operation 1. Goals &
Objectives

Supplier Production Center Distributor

Logistics
Construction
Key Supplier Transfer
3PL
Operation (former PESA)
Other Suppliers Supply Delivery

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Integrated Risk Management Strategy

Steps 2-3: Brainstorming and Description

Team: Simple, flexible and multifunctional
Supported by Group Risk Services, Nestec

Factory External
Logistics Threats
Operation
External Exposure

Operational Health & Safety 2. Brain-

Environmental Impact storming
Production
Supply Chain
IT & Systems
Raw & Pack Mat Finance & Controlling
Delivery to 3PL
Engineering 3. Description
Quality
HR
Management

Natural Hazards
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Integrated Risk Management Strategy

Steps 4-5: Evaluation and Reporting

All areas covered

120 risk scenarios evaluated
Impact/Likelihood assessed

Tolerable risk level defined

F Almost E Unlikely D Fairly L C Probab B Highly A Almost

5278 5328 5284

5288 5307 5311 5313 5275 5280 5297

Probability / Frequency

5. Reporting 5310 5317 5312 5325 5292 5302 5320 5336 5333 5277 5291

5287 5309 5334 5335 5330 5281 5283 5286 5314 5273 5290 5304

5326 5327 5338

5315 5318 5323 5276 5305 5332 5279 5289 5295 5300 5274 5282 5293 5294 5272 5285 5298 5303

4. Evaluation 5301 5324 5329 5339 5296

5321

5340
5299

5322
5306

5331
5316

5337
5308

5319

|
-4 Exceptional -3 Significant -2 Moderate -1 Negligible | 1 Negligible 2 Moderate 3 Significant 4 Catastrophic

Impact
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Integrated Risk Management Strategy

Step 6: Decision

“fire”: A scenario clearly above our risk appetite!

6. Decision

-70% of Nestlé’s large property losses

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Integrated Risk Management Strategy

Steps 7&8: Improvement and Monitoring

7. Improvement
Who, what, by when…

Measures
• Clear rules and training
8. Monitoring
• Procedures (hot work permit)
• Audits
• Roasters safety checks
• Smoke detection system installed
• Sprinkler system in place
• …
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Integrated Risk Management Strategy

Our BCM strategy

• Ensure the safety of our staff

• Maximise the defence of Nestlé Nespresso S.A reputation

and brand image

• Minimise impact of business interruption events on our

consumers (the Gap)

• Limit/prevent impact beyond our company’s boundaries

• Demonstrate effective and efficient governance to the

media, markets and stakeholders

• Protect Nestlé Nespresso S.A assets

• Meet insurance, legal and regulatory requirements

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Integrated Risk Management Strategy

Thank you for your attention
Thank you very much
And enjoy 5 minutes of pleasure…

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