Sanchez played all 90 minutes in United's thrilling 3-2 win over Crystal Palace on Monday evening but was once again ineffective.
"Alexis was poor tonight, there's no doubt about that," said Neville on Sky Sports' Monday Night Football. "He was trying to play one-twos from 40 yards from goal. He is no good from there.
"For me, I see Alexis Sanchez as being at his best in the left channel, attacking defenders, committing them, playing one-two combination. He has to try and get in those positions for Manchester United."
Neville added: "I just don't think he is at his best there [in a deeper midfield role]."
"He has tried him everywhere else and it hasn't really worked," said Neville. "What I think he has to do is get him out of the centre of midfield."