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1. Draw a flow diagram for Barilla dry products sold through distributors. Your
diagram will have four major sections: Barilla production, Barilla Finished Goods
Inventory, Distribution Centers, and grocers. Indicate the flows of both physical
goods and information. At appropriate places on your diagram, collect any relevant
statistics mentioned in the case, for example on inventories, lead-times, etc.
Please refer to the following page (page 2 of this document) for the process flow
diagram for Barilla dry products sold through distributors.
2. What are the problems and difficulties facing the supply chain? What is their
The supply chain of pasta and pasta-related products in Italy was facing significant
problems, including excessive inventory levels, high levels of stock-outs, extreme
reliance on promotional activities, inefficient logistics operations and poor
communication and cooperation between the supply chain participants. The
industry had not leveraged technology to improve communication amongst its
members, tracking of inventory or demand forecasting. These problems resulted in
higher inventory carrying costs, as supply chain members sought to reduce the
frequency and magnitude of stock-outs. Furthermore, industry suppliers competed
fiercely on price, resulting in extreme peaks in demand during promotional periods.
The core cause of these problems was unpredictable demand, which resulted in
higher inventory levels and carrying costs, in addition to making logistics operations
more difficult. Because there was limited demand visibility within the supply chain,
any significant fluctuation in demand potentially resulted in stock-outs. Poor
communication and cooperation amongst the supply chain participants also
contributed to the limited visibility of demand within the supply chain. Because the
supply chain participants were not actively sharing information with other members
of the supply chain, the participants were unable to react quickly to peaks in
demand. As a result, higher levels of safety stock were maintained by all parties in
the supply chain to avoid potential stock-outs. Barilla suffered from this demand
variability to an even greater extent than the grocery stores or distributors due to
its position in the supply chain and the associated bull-whip effect.
An additional cause of the high inventory levels was the manufacturing process.
Barilla carried approximately 800 SKUs of dry products, and many of these products
were produced in precise conditions (temperature and humidity) to ensure the
quality of the product. The manufacturing process used by Barilla focused on
producing large quantities of individual products since adjusting the manufacturing
conditions to suite a new product was a time-consuming process. As a result, Barilla
could not react quickly to changes or peaks in demand as its manufacturing process
faced long lead times. This inability to produce a balanced combination of pasta
products was illustrated by the fact that the Barilla¡¯s plants were specialized by the
type of pasta produced in the plant. This manufacturing system can be contrasted
against ¡°Heijunka¡± which provides for a balanced production schedule. Because
Barilla¡¯s manufacturing operations could not switch quickly between products,
Barilla was forced to maintain overall higher inventory. The long set up times and
lack of manufacturing flexibility resulted in higher cycle times to produce the
product.
The core problem facing Barilla is the high degree of demand variance that it
experiences by product and throughout the year. The main causes of the demand
variance are limited visibility downstream, and reliance on promotions to push
product downstream.
By adopting the JITD program each step in the supply chain is able to extract
benefits that result in reduced costs, improved customer service and can increase
and stabilize revenue. After Barilla¡¯s JITD program is up and running a company
can expect to fulfill a higher percentage of its orders from stock thus reducing its
stock out rate and increasing its revenue. In addition, a company can expect to
reduce its inventory that it carries throughout its system. In particular, a company
can reduce the amount of safety stock that it carries throughout the year to adjust
to demand/delivery fluctuations. Barilla also expects to extract benefits from being
able to better plan and organize its production functions around actual product
performance. This should also allow Barilla to reduce its costs associated with set-
up costs. Barilla is also able to maintain flatter prices throughout the year by
reducing its promotions. This should allow Barilla to better estimate its revenue
stream and should avoid the wide fluctuations associated with the promotion
activity. Lastly, by having Barilla¡¯s customers integrate more closely into Barilla¡¯s
supply chain, Barilla has effectively raised its customer¡¯s potential costs associated
with changing suppliers and raised the bar that competitors must clear to gain a
foothold in Barilla¡¯s business.
The customer has to be convinced that if the upstream site or Barilla has access to
demand and inventory information at the downstream site, overall costs would
decrease because Barilla is in the best position to create the demand forecast for
the entire chain. For JITD to work, stable prices (i.e. no promotions or discounts)
and a break in order batches (resulting in more frequent visits possibly with
composite distribution of fresh and dry products) must exist. In convincing
customers to join, I would first present my ideas that support JITD with graphical
examples and lessons similar to the Beer Game. For example, Barilla could do a PV
calculation of the reduced costs over a period of time due to lower inventory and
reduced lost sales and compare it to the ¡°savings¡± achieved with promotions and
discounts, two elements that are not consistent of JITD.
The next step would be to provide ¡°real proof¡± that the JITD concept works.
Although we considered a pilot with smaller independent shops, we realized that
this may not convince the larger supermarket chains that JITD will reduce overall
costs. Rather, we chose to try to convince supermarket chain customers to try the
JITD concept on a select number of products. Barilla would provide the technology,
training and ¡°extra¡± work on the customer end. Over several months, these firms
would not participate in the promotions of those particular products. Although firms
may be hesitant to accept this, Barilla could offer to promise other compensation if
those ¡°savings¡± from the promotions were not recovered by the reduced
inventory carrying costs and lost sales of those particular products (money-back
guarantee).
JungleBooks.com
Decentralized Analysis:
Soft Cover I
(Q, R) Analysis
c = $2.00
i = 0.2
h = ic = $0.4/ unit-yr
L = 2 weeks
Therefore, Q* = [2(25)(52)(50)/0.4]1/2
= 570
= 2(25) + 1.73(5)(2)1/2
= 50 + 12.23
¡Ö 62
Cost Analysis
For all DCs, total annual cost = 6($233) = $1,398 per title.
Soft Cover II
(Q, R) Analysis
c = $2.50
i = 0.2
h = ic = $0.5/ unit-yr
L = 3 weeks
s = $50.00
Therefore, Q* = [2(50)(52)(50)/0.5]1/2
= 721
= 3(50) + 1.83(50)(3)1/2
= 150 + 158.48
¡Ö 308
Cost Analysis
For all DCs, total annual cost = 6($440) = $2,640 per title.
Hard Cover I
(Q, R) Analysis
c = $10.00
i = 0.2
h = ic = $2.00/ unit-yr
L = 3 weeks
Weekly demand is normal with mean 100 and variance 202 = 400
s = $50.00
Therefore, Q* = [2(100)(52)(50)/2.00]1/2
= 510
= 3(100) + 1.915(20)(3)1/2
= 300 + 66.16
¡Ö 366
Cost Analysis
For all DCs, total annual cost = 6($1152) = $6,912 per title.
Hard Cover II
(Q, R) Analysis
c = $10.00
i = 0.2
h = ic = $2.00/ unit-yr
L = 2 weeks
s = $50.00
Therefore, Q* = [2(10)(52)(50)/2.00]1/2
= 161
Cs = $11.00 - $4.00 = $7.00
= 20 + 23.76
¡Ö 44
Cost Analysis
For all DCs, total annual cost = 6($369.50) = $2,217 per title.
2. Now consider a centralized analysis (their current system), using the same
service level derived for the decentralized system. Estimate the optional
parameters for a (Q,R) inventory policy for each of the 4 SKU types detailed in the
case for a centralized DC. Estimate the total annual inventory holding plus ordering
costs for each of the 4 item types for the centralized DC.
Centralized Analysis:
Soft Cover I
(Q, R) Analysis
Centralized demand is normally distributed with mean 6(25) = 150 and variance
6(52) = 150 = 12.252
Therefore, Q* = [2(150)(52)(50)/0.4]1/2
= 1,396
R* = L¦Ë + ZSL¦ÒL1/2
= 2(150) + 1.73(12.25(2)1/2
= 300 + 30
= 330
Cost Analysis
Soft Cover II
(Q, R) Analysis
Centralized demand is normally distributed with mean 6(50) = 300 and variance
6(502) = 15000 = 122.472
Therefore, Q* = [2(300)(52)(50)/0.5]1/2
= 1,766
R* = L¦Ë + ZSL¦ÒL1/2
= 3(300) + 1.83(122.47(3)1/2
= 900 + 388
= 1,288
Cost Analysis
Hard Cover I
(Q, R) Analysis
Centralized demand is normally distributed with mean 6(100) = 600 and variance
6(202) = 2400 = 48.992
Therefore, Q* = [2(600)(52)(50)/2]1/2
= 1,249
R* = L¦Ë + ZSL¦ÒL1/2
= 3(600) + 1.91(148.99(3)1/2
= 1800 + 162
= 1,962
Cost Analysis
Hard Cover II
(Q, R) Analysis
Therefore, Q* = [2(60)(52)(50)/2]1/2
= 395
R* = L¦Ë + ZSL¦ÒL1/2
= 2(60) + 1.40(29.39(2)1/2
= 120 + 58
= 178
Cost Analysis
INV = Q*/2 +SS = 395/2 + 58 = 256
Soft Cover I
Soft Cover II
Hard Cover I
Number of titles = 10,000
Hard Cover II
My decision is to implement the Just-in-Time Delivery system. JITD will resolve the
increasing operational inefficiencies and cost penalties that have resulted from large
week-to-week variations in Barilla’s distributors order patterns. In order to reduce
the Bullwhip effect being experienced by Barilla, their supply chain would have to
be Centralized. This solution allows Barilla to see end customer demand and
eliminate costs involved with inventory, manufacturing, and transportation. JITD
would allow Barilla to work directly with its distributors and create a flexible
manufacturing process. By following the suggestions made in the plan of action,
Barilla will succeed in influencing its distributors and Sales personnel to work
together and implement the JITD program, which will produce better performance in
terms of time and money but will also promote trust and good relations among all
the associates in the supply chain.
The main problem addressed in this case is how to effectively implement the JITD
system suggested by Giorgio Magialli, the Director of Logistics. Barilla has a very
complex distribution network. Barilla has been experiencing large amounts of
variability in demand which are resulting in operational inefficiencies and increased
manufacturing, inventory and distribution costs. The proposed JITD system requires
the distributors to share their sales data with Barilla, who would then forecast and
deliver appropriate amounts of products to the distributors at the right time in order
to effectively meet demand. The system is received with resisitance from
unconvinced and leery distributors as well as internally with the sales reps who fear,
among other things, reduction in responsibilities.
In this case, a successful decision would result in the reduction of the Bullwhip
effect, which Barilla is experiencing. It would also reduce the variable demand that
is causing inefficiencies and increasing costs. The decision should bring positive
results to the entire supply chain and ensure that all concerns brought up both
internally and externally are met.
The first thing that needs to be done to effectively implement JITD is to convince
and inform the internal sales force and the distributors of the benefits of JITD.
Change is good for a company and necessary to grow. However, in order to do this,
the distributors and the sales and marketing people at Barilla will have to be
convinced that this proposal will do more good to them than bad. Sales and
marketing would need to be convinced that their roles would not diminish, just
change. They are influential in forecasting since they spent most of their time
helping distributors place orders and examine competitors' information. The supply
chain at Barilla would need to be centralized in order to reduce the Bullwhip effect
being experienced. If Barilla gains control over the inventory throughout their
supply chain, the JITD will work and operate successfully. For distributors, the JITD
system will eliminate the fixed costs in ordering. This will be done through an
effective centralized system throughout the supply chain. For Barilla, they can
improve their production scheduling and reduce the labor and transportation costs.
By teaming up, Barilla and their distributors can successfully build a comprehensive
forecasting model. This model will take into account the perishable inventory
system, threshold inventory levels, and demand fluctuation factors. It will capture
the high points in the demand by combining the demand throughout the supply
chain. In order to convince the internal staff and sales force, Barilla should run pilot
program which would run 6 months. Another option is running a simulation of the
whole exercise. This will demonstrate to the staff and sales the benefits of sharing
the sales data. Upper management should be involved and they should ensure that
the sales managers are involved in order to incorporate their needs and obstacles
involved in implement the JITD in the field. Additional responsibilities for market
development should be given to the sales force and the compensation system
should be overhauled to incorporate the new system by assigning target sales
revenue through market development and territory management programs. SKU
reduction needs to happen. Barilla needs to track the fastest selling pasta SKU's, so
that they can reduce the amount of SKU's they offer. These lesser SKU’s will be
more efficient by offering a particular set of product lines to each region to reduce
the complexity in the supply chain. The cost results from the pilot program and
simulation exercises should be dispersed to the distributors. This will enable them to
understand the cost cutting and better inventory management practices the JITD
system can offer. After seeing these they should be ready to adopt the JITD
implementation by approaching the first phase. Trust needs to be built in order for
the JITD to be successful. This is a major issue between Barilla and its distributors.
To convince its distributors that Barilla is worth trusting and that they are making
the right decision, Barilla should have a transparent policy and should not hide any
of its plans from the distributors. Instead of sending the Logistics personnel to talk
to the distributors, Barilla should send the upper management. This would generate
favor among the distributors and they would feel important. Consistent operational
meetings with Barilla's upper management and open communication will be
required. Confidence and trust can be achieved with the distributors through long-
term strategic partnership development.
-Magialli needs to look at JITD not as a logistics problem but as a company –wide
effort. The senior managers need to be involved to show the whole company the
importance of the proposal. They need to educate the staff first specially sales and
marketing organizations, put some specific strategies for relationship of the these
organizations with DCs. The whole company need to believe in the proposal and
trust it with the top managers involvement.
-Barilla need to run experimental projects for the proposal with its 18 depots ,
establish a sophisticated IT system with them to exchange information because
they need to show the results to internal organizations and also distribution centers.
-Magialli needs to ask senior managers to be involved into the case and keep on
negotiations with the DCs and try to educate them and make them more familiar
with the proposal and show them that they have already run the system with their
depots and exchange the information with them. They need to gain the DCs trust ,
show them the benefits of the new system for both parties and also the end
customers.
-Magialli need to establish a closer relationship with the end customers to make the
customer service better and get a good feedback from them. They can establish this
relationship with small groceries and in distribution of fresh products.
Key Assumptions
In spite of the fact that the pasta market is flat the demand fluctuation has mad a
lot of problems for Barilla in forecasting the demands and reducing the changeover
costs, inventory costs and increasing sales.
The JITD is considered as a good proposal to forecast the demand swings but the
implementation of this proposal is difficult of the traditional environment, cultural
issues, intertie , lack of communication and internal strategies.
The internal resistance make the situation harder for Migialli in the implementation
process. He is facing a big resistance by the sales and marketing organizations. The
issue is considered as a logistics problem and Migialli and his assistant make the
most effort.
The external resistance makes the situation worse for Migialli and makes him
disappointed .After tow years negotiations with the distribution centers there is still
a little improvement. Most of the centers are reluctant and are not even interested
in sharing the information with Barilla to help them forecast the demands.
Statement of Issues
The first and main issue for Barilla in 1980s the was the effects of fluctuating
demand. As it is shown in Exhibit 12 orders for Barilla dry products often swung
widely week to week. Such fluctuating demand put a huge pressure on Barilla’s
manufacturing and logistics operations and forced Barilla to have a big stock for the
items which seemed to have more demands which was expensive.
such extreme demand also caused distributors to have more out of stock peaks
which had a bad effect on sales and customer service.
The second issue was implementation of the Brando Vitali’s alternative approach for
order fulfillment. He believed that by the way that they were operating it was
impossible for them to anticipate the demand swings. He believed that they should
look at the distributors’ shipment data and send only what is needed at the stores,
no more, no less. They could reduce their distribution costs, inventory levels and
manufacturing costs. He called this approach Just-In-Time Distribution. Vitali’s
proposal met with two sroblems which were derived from the second issue
(implementation).
The first problem was the opposition of Barilla’s sales and marketing organizations.
They had a range of concerns. They thought the sales level would flatten, they are
not ready to handle such complicated relationship with distributors, it is risky and
they can not adjust shipments sufficiently to changes to selling patterns or
promotions, they increase the risk of having their customers Stock out of their
products. I was not clear for them that the costs would be reduced, because in
1980s it was a new approach and the business environment of Italy was traditional
and it was not cleared enough for them. I think this issue was the main issue for
Vitali in the implementation process because when a company wants to start a new
approach in any field first it should be cleared and justified internally and all the
departments and staff needed to trust it then they could do their best to implement
it externally, as a matter of fact it is not just a matter of logistics and it is an issue
for the whole company so they have to know it
The second issue in implementation process was the resistance of the distributors.
They had also some concerns. They weren’t Interested in talking about it. They
thought they could managed their inventory better than the manufacturer , they
were not Interested to share their internal information with the manufacturer. Some
of them thought that they lose the power of
managing and controlling their inventory and orders and the manufacturer get the
power and push their orders to them. I think the main reasons for the distributors
resistance were :
2- Barilla’s internal resistance is conveyed to distributors so they can not clear it for
them efficiently
3- The distributors are not cleared enough about Barilla’s manufacturing problems
and its effects on them and the advantages of the new approach on their inventory
costs and sales.
Criteria
In this case a good decision would result in implementation of the new approach on
inventory system which Vendor-Managed Inventory (VIM) which would lead to
anticipation of demand change. This will help Barilla to reduce distribution costs,
inventory levels and manufacturing costs and also help the distributors to reduce
their inventory charges, reduce the risk of being out of Stock when the demand
fluctuate and increase their sales and customer services.
Therefore the first criterion is to figure out the main reasons of demand swings to be
able to manage them as much as possible.
A second criterion is to make the new approach clear enough for internal
organizations and staff to be able to create harmony and a trust to the new
approach in the whole company.
A third criterion is to talk with distributors and make the new approach clear as
much as possible for them and catch their trust and make them believe that they
can save a lot in their inventory charges and have more sales by new approach and
it is not just for the Barilla’s benefit. This will lead to implementation of the new
approach and resolving the manufacturing problems for Barilla and ordering and
inventory problems for Barilla and distributors and they can save in inventory and
manufacturing charges and also control and anticipate the demands swings.
Analysis
For two years Maggiali had tried to implement Vitali’s proposal (Just – in Time
Distribution) but he has still had a little progress .
Vitalis’s reason for implementing his proposal and Maggiali support to it is because
of demand fluctuation and swings for Barilla’s dry products. They are trying to
forecast demands and provide as much as the distributors need and not more. They
think they can resolve their manufacturing problems in case there is a high demand
for any product , reduce their inventory levels and also their distribution and
manufacturing costs. They also believe that the distributors can also reduce their
inventory levels and save money in it and also reduce the risk of being out of stock
when there is a high demand for any product , increase their sales and also have a
better customer service.
It seemed that Barilla’s customers were simply unwilling to give up their authority in
ordering and controlling their inventory.
Some were even reluctant to provide the detailed sales data upon which Barilla
could make delivery decisions and improve its demand forecasts. There is also
internal resistance from Barilla’s own sales and marketing organizations , they do
not believe in the proposal and see the concept infeasible and dangerous. They
think they are not ready to have the necessary relationship with distributors and it
is sophisticated for them now.
From 1989 to 1990 Barilla’s growth was 3.22% , it seems that the demand
fluctuation (Exhibit 12) has not a specific pattern. The demand swings and
distributors’ order pattern can have several reasons. One of the main reasons can
be the Barilla’s strategies in marketing, manufacturing and distribution. Poor
communication and customer service between distributors and retailers can be
another reason for this ordering pattern. Distribution centers are not equipped with
computer forecasting system , they just review their inventory levels in their
systems and order those products which are below the specified recorder level .The
retailers also are not equipped with bar code system and they use the traditional
system for checking their inventory and ordering the products. In this scenario the
distributors place an order when they receive and order so they have to builtexcess
capacity to hold goods which they guess may have more demands.
On the other side Barilla’s marketing strategies for increasing their sales, encourage
the distributors to buy some items more than they need and buy some in smaller
amounts. These marketing strategies which are called trade promotions are used to
push products into the grocery distribution network ,Barilla has 10 -12 “Canvass”
periods for their promotional programs. These are:
Volume discounts and Promotional activities: It makes the DCs to order more than
what they need to reduce their costs, it affects Barilla’s and DC’s inventory levels
and demand pattern.
Lack of min/max volume constraints : means that DCs can order any product as
much as they need and it may make the Barilla’s stock empty what if they receive
more demands from other DCs?
Product proliferation: Barilla has 800 dry-product SKUs, but 100-150 of them are
mostly distributed by DCs, as the products have a huge variety so if they receive an
order for a product which has not a high demand they have to produce it what if
they receive a big order for a high demand product at the same time, this variety
affect demands fluctuation.
Long Lead Times: Average lead time from placing an order by DCs to receiving it is
10 to 14 days, it means if Barilla receive two or three or more orders at the same
time the lead time for the second or third order would be 30 to 42 days which is so
long for a product such Pasta which customers consume it daily or weekly, definitely
it affects demand swings and customer service.
These incentives and promotions force excess inventory somewhere in the chain or
with the customer even though there is no extra demand for pasta. As a matter of
fact this order pattern gives Barilla a high manufacturing changeover costs they are
forced to carry extra inventory which is very expensive or break the “best”
production sequence. In order to Keep changeover costs low and product quality
high, Barilla follows a carefully chosen production sequence that minimizes the
incremental changes in kiln temperature and humidity between pasta shapes. It
also forces the DCs to maintain extra capacity for inventory (long term) or obtain
extra capacity at a premium (short term).This pattern has extra transportation
charges for Barilla and DCs because they are forced to maintain extra trucks for
long term or obtain trucking capacity at a premium for a short term period. When
the retailers see such swings in demand an feel the risk of not to receive any
specific product on time they may be froced to maintain
extra inventory that is expensive also they are limited in stock worth period of the
products. This pattern at the end will affect
customer service and Barilla and DCs may lose some of their customers because of
poor service.
JITD that can be a part of VMI inventory systems is a great proposal for the Barilla to
forecast the demand fluctuation and at the same time reduce its manufacturing
change over cost, inventory costs , transportation costs , improve service and
increase sales.
the supplier generates replenishment orders for the customer based on this demand
information. The process is guided by mutually agreed upon objectives for the
customer's inventory levels, fill rates, and transaction costs.
The goal of VMI is to align business objectives and streamline supply chain
operations for both suppliers and their customers. The business value is a direct
result of increased information flow:
Improved Service
Increased Sales
The basic Vendor Managed Inventory (VMI) process can be described in terms of the
following steps: data communications, calculations, monitoring and reporting. This
can be done by a third party inventory company or by the supplier. Maggiali is
tryingto implement this system in Barilla and in communication with DCs. There is
internal resistance because other organizations in the company are not cleared
enough about the advantages of this system. The sales and marketing departments
think the sales levels would flatten, actually they think the DCs won’t buy product if
they are not there selling it. They think they run the risk of not being able to adjust
their shipments sufficiently quickly to changes. Thy think the DCs are not ready for
this relationship. They think if space freed up in DCs warehouses they will push the
competitors products. They think it increase the risk of having the customers stock
out of their products.
As a matter of fact the system has not been elaborated by the managers because
they consider it just a logistics issue. This issue is not just a logistics issue so the
entire company so everybody need to believe it. The managers need to focus on the
proposal to educate all the staff about the advantages of the approach because
Barilla need a mutual trust between all the organizations inthe company. For Barilla
as a supplier, VMI results in increased profitability due to:
Increased sales
They have not experienced the advantages of this system practically so they fear
that Barilla may not fulfill its job perfectly and their space been freed up and it
affects their sales and their relationship with the retailers. As DCs are using the
traditional inventory control and order pattern so they do not have the necessary
sophisticated computer system to establish this important relationship with Barilla
so they think they will be pushed by Barilla’s products and cannot select what ever
they need. Barilla needs to educate the DCs and show them the positive effects of
the new approach to gain their trust. Barilla needs to show them experimentally the
advantages of this system for them and for the whole supply chain because they
think Barilla is implementing This proposal just to reduce their costs and push their
products and get the authority to manage the demands. As stated before it is not
just a logistics problem and needs the whole company and especially managers
attention. Barilla need to pay attention to its internal strategies , its relationship
with DCs, cultural issues, inertia and DCs concerns.Barilla need to show DCs that for
them VMI results in increased profitability due to:
As the one of the DCs concerns is decision making Barilla can consider going to an
agreement with a third party inventory control company. This partnership can help
Barilla to make the proposal clear internally and externally and show both sides that
VMI can Provide for both parties
A closer, more effective working relationship - both parties work together to sell
more to and/or better serve end customers
They can also make decisions about channels activities such as type of info being
transferred, size of firm, knowledge of competitors, operational capabilities,
geographical density and type of decisions to be made.
Magialli arrange a meeting with the top managers and explain them the problems
that he is facing for the implementation of the new approach and ask their
involvement to educate the staff about the proposal to gain the whole company
trust in the Proposal.
Magialli hire some experts in VMI or go into an agreement with a third party
inventory control to run some classes for the staff to make them familiar with the
advantages of the new proposal for Barilla , DCs and retailers.
Magialli arrange a meeting with all the organizations staff, depots and some top
managers and specify a date to start the implementation of the new proposal
internally and with Barilla’s depots and ask them to do their best and offer some
incentives.
Magialli go into an agreement with an IT company to establish a good IT system
intenally and between internal DCs and depots.
Magialli arrange some meetings with some senior mangers and DCs to explian the
proposal in details and make them familiar with the advantages of the proposal for
both parties and end user and offer them to send their staff to the classes about the
proposal in Barillia. They show them the results of their system with the depots and
do their best to sign an agreement with them to implement the new proposal.
Magialli arrange a conference with some retailers to make them familiar with the
new system and explain them that their feedback has the high importance for them
and make them familiar with barcode system to establish a better information
system with DCs and supplier (Barilla)
Executive Summary
In this report we have studied the reasons for this opposition by various quarters
and have suggested recommendations, which will allay this lack of support. We
consider that in order to condense the Bullwhip effect being experienced by Barilla,
their supply chain would have to be Centralized. We have given our rationale for the
JITD system to work and have suggested recommendations to resolve all existing
issues. We think that a centralized supply chain with Barilla controlling the orders
will result in better margins for all the partners.
Introduction
Barilla SpA, an Italy based company, is the world’s largest Pasta manufacturer. It
has a 35% market share in Italy and a 22% market share in Europe. In addition to
the family of pastas (macaroni, spaghetti, fusilli, etc.) it also manufactures bread,
cookies, biscuits, rusks, sauces, breadsticks, etc. Barilla has a very complex
distribution network consisting of Grand Distributors (owned by large Supermarket
chains), Organized Distributors (independent third party distributors) in addition to
its own depots. Due to such a complex and multi-echelon network, Barilla has been
experiencing large amounts of variability in demand which are resulting in
operational inefficiency and increased manufacturing, inventory and distribution
costs.
Problem Description
We will attempt to first list all the problems that are faced by Barilla and the
distributors so that we can better understand them in order to make
recommendations that will eliminate them. The main problem in this case is the
fluctuating demand. Once this is brought under control, many other problems will be
solved. Some of the causes of this fluctuating demand are:
• Large number of SKU’s: Barilla’s dry products (the focus of the JITD proposal)
were offered in 800 different packaged stock keeping units (SKUs). Most of the
popular products were offered in as many as 8 different packaging options. These
large numbers led to greater complexity.
• Gaming Behavior: The distributors were used to having full control of their
orders to Barilla and indulged in gaming by ordering different quantities in different
periods. This led to variation in demand.
• Absence of Maximum or Minimum order quantities: Barilla does not require its
distributors to order any minimum quantities every time it places an order. This
causes the distributors to order fewer quantities more often and increases
variability and Barilla’s production costs. Also, there are no maximum order
quantities during promotional periods, thereby allowing distributors to order large
quantities at low prices and thus creating a false demand.
• Long Lead Times: Barilla supplied its distributors between 8 and 14 days after
it received their orders, the average lead-time being 10 days. This was slightly long
and a lot could change in the supply chain during this period, causing rise in
variability.
This fluctuating demand had many adverse implications for Barilla. Some of them
are:
• Scheduling Difficulties: It was difficult for Barilla to schedule its resources and
facilities like Labor, Machinery and Trucks due to demand variations. They would
tend to overuse the resources when the demand was high and on periods of low
demand the resources would be scantily used. This was resulting in increased costs
of Labor and maintenance.
• Transportation Costs: As a result of uneven demand, Barilla had to transport
more products to its distributors in periods of high demand in lesser time than when
compared to periods of low demand. The greater number of trucks, etc that it
required in periods of high demand increased its Transportation costs.
• Cash Flow: The cash flow to Barilla was very uneven due to fluctuations as
well as promotions.
All these factors prompted Vitali to propose the JITD system. But this led to great
uproar and opposition among the distributors and even Barilla’s own Sales and
Marketing Department. The perceived causes of this opposition among the
distributors are:
• Loss of Control: The distributors felt that by allowing Barilla to access their
sales data and order for them, they would be giving control of their business to
Barilla who would push their products and cut their own costs. The distributors were
scared that they would lose their capacity to game if they could not place orders at
will.
• Lack of Trust: There were major trust issues that needed to be resolved
between the distributors and Barilla. The distributors did not trust Barilla enough to
let them in their own business and reveal proprietary data. This was because the
distributors typically handled products from around 200 different suppliers and they
felt that by disclosing their sales data to Barilla, their relations with other suppliers
would be adversely affected.
• Job Cuts: The Sales personnel feared that if Barilla would forecast and place
orders for the distributors, they would not be required anymore to persuade the
distributors to buy products and would be laid off.
• Compensation System: The Sales force feared that they would lose control
over their compensation methods. Presently, they were compensated on the
quantity of stock that they sold to the distributors but with the JITD system in effect
they would lose this opportunity to make more money, as they would not be
responsible for selling products to the distributors.
• Lack of Belief: Moreover the Sales department did not believe that the JITD
system would work. They felt that it was too complex a relationship to work and that
the distributors would not buy if incentives were not offered to them.
In order to make the JITD system work, Magialli had to convince first his own Sales
force and then the external distributors.
Recommendations
After listing out the problems and studying them in detail, we have come up with
our recommendations to reduce uncertainty in demand. We think that the best way
to do this will be to implement the JITD proposal. In order to do this, the distributors
as well as Barilla’s Sales and Marketing will have to be convinced that this proposal
will do more good to them than bad. The distributors will have to be offered
collaboration incentives to join the bandwagon. Our recommendations are geared
towards assuaging their doubts and worries and getting them on board. In addition
to this we have some other recommendations to improve the supply chain
performance, which are listed in the end of the report.
Firstly, we try and answer the why’s and how’s of the process in order to convince
the skeptics.
“Why should JITD work?”: We think that the JITD system will work because of the
following reasons:
• Centralization: As Barilla will have control on the inventory through the entire
supply chain, it will be its responsibility to ensure global optimization and benefits
for everyone. Centralization will ensure that each stage in the chain has actual
customer data making forecasting more accurate. In this case as it is very difficult
to get the actual point-of-sales data from the many retailers due to their sheer
number and geographical difficulties, the forecasting will have to be done based on
the sales data of the distributors.
• Collaborative Planning: Barilla and the distributors can work as a team and
plan on different issues to smoothen out the creases in the supply chain.
• Demand Management: Barilla should not only forecast demand but also
should try to shape and influence it. This can be done using market surveys to
determine the needs and expectations of the consumers and designing products to
satisfy them. Forecasting would become much easier and reliable if the demand can
be managed.
• Forecasting Techniques: Barilla being a big company has access to the latest
and most sophisticated forecasting techniques. It should use these methods to
ensure accurate forecasts thereby reducing uncertainty.
Overcoming Internal Resistance: Before, Magialli can try and convince the
distributors, he has to convince everyone at Barilla that the JITD system will be a
success. If everyone within the company is convinced and they provide a single
front to the distributors, Barilla has a better chance of convincing the distributors.
Some of the steps that Barilla will have to take in this regard are:
• Convince and use the Upper Level Management: Magialli’s task will be to first
convince the Upper management that the JITD plan will work. If they are convinced
of its feasibility, they will offer full support in trying to convince the Sales
department. It will make a lot of difference if the Upper management talk to the
Sales people than if just their Logistics peers talk to them.
• Involve the Sales Department in all stages: To make the Sales people feel
important and wanted, Barilla should involve them in all stages of the JITD proposal.
They should be made to feel that they would have lots to do even after the system
comes into effect.
• No Job Cuts: The Sales personnel should be assured that they would not be
losing their jobs due to the JITD system coming into effect. They should be shown
that even if they will not be doing the work that they were up to this point, they will
still have lots of work to do even with the system in effect. Barilla should explain to
them that they (the Sales force) would be needed to share the extra responsibility
that the Logistics department will have to take as a result of planning for all the
distributors. Also, the sales people will still be needed to maintain close
relationships with the distributors, to solve any problems the distributors have and
also to work with the retailers to ensure complete satisfaction of Barilla’s customers.
They would also be needed to work in the stores as usual to set up in-store
promotions, discuss strategy and monitor demand for Barilla’s products to help the
company forecast better.
• Trial run of the JITD system: This recommendation is common with the next
section and has been explained in detail there.
Convincing Barilla’s Distributors: The distributors are not ready to implement the
JTID proposal due to reasons discussed above in the Problem Description section.
Barilla will have to convince them that the plan will work and not only benefit Barilla
but also the distributors participating in it. Some recommendations to convince the
distributors are:
• Show them the money: This, as always, is the foremost issue on any business
enterprises’ mind. If an enterprise can be convinced that it will make more money, it
will be ready to change its current practices. The distributors should be shown that
the costs of the system would reduce so much that everyone in the supply chain
would save considerable sums of money.
• Address Trust Issues: This is a major issue between Barilla and its distributors
and to solve this Barilla should work out some confidence building measures which
would prove to the distributors that Barilla was worth trusting and that they were
making the right decision. Some of the steps that could be taken to increase trust
are:
- Barilla should have a transparent policy and should not hide any of its plans
from the distributors. This is to ensure that the distributors are not wary of what
Barilla might be planning and how it would affect them.
- Barilla should initiate joint decision-making and planning with its distributors
to show them that it cared for each one of them and wanted them to be involved in
the process.
- Barilla should learn and understand the rights and limits of its distributors so
that it does not force them to do things that they are not capable of.
• Trial Run of the JITD system: This is Barilla’s best chance to convince the
skeptics of the system. Barilla should try and implement the system using its 18
depots that supply to the small independent stores as well as some of the
supermarkets. This system could be implemented from 6 months to a year
depending on the time available to Barilla. If this system were a success, i.e. Barilla
and the depots experienced reduction in demand variability and costs, the critics
would be effectively silenced.
• Problems in the Traditional method: Barilla could show its distributors that
following the traditional supply chain methods that were in use currently would lead
to greater costs and lead times for the distributors if Barilla had to reduce variability
and its own costs. The distributors would have to pay additional fixed order costs,
would have to operate under minimum and maximum order quantities and would
have longer lead times to cope up with as Barilla tried to work with the increased
demand fluctuation.
• Penalty clause: Barilla could sign an agreement with its distributors that if
they would be a part of the JITD program and would lose money as a result, Barilla
would be penalized and would have to pay the difference in costs to the distributors.
This would show the distributors that Barilla meant business and was very confident
of the success of the JITD system.
• Partnership Issues: Barilla should convince its distributors that it is the only
party in their supply chain that can be the leader and thus they should rally with
Barilla. This is because of Barilla’s sheer size as well as its capability and market
share. It will be much easier for Barilla to collect the sales data of all the distributors
and forecast the demand than vice versa. Also Barilla would have more chance of
accessing competitors’ information as also the ability to co-ordinate various supply
chain partners.
• JITD in Exports: Barilla has a 22% market share in Europe and this share is
expected to rise as the growth in the export market increases by 20-25% each year.
Barilla could try and implement the JITD system with its distributors, both current
and future, outside Italy. This could act as a test run to be shown to the distributors
in Italy. In addition to this Barilla would ensure that its distributors outside Italy
would already be accustomed to this idea so that there would be no opposition
offered later. If implemented and successful, this idea would result in savings for
Barilla in its export supply chain.
• Reduce SKUs: Currently, Barilla’s dry products are offered in 800 different
SKUs. This large amount leads to a lot of complexity in the order process,
distribution as well as inventory and thus increases costs and variability. Some of its
famous products are offered in up to 8 different packaging options. Barilla should
reduce the number of SKUs to around 500 for better control. For example the 0.5kg
packets could be phased out in favor of the 1kg packets.
• Actual Point-of-Sales Data: As of now, the JITD system proposes to use the
sales data from the distributors as actual customer demand is difficult to obtain
from the retailers due to their sheer number. Barilla could eventually invest in
technology and provide each of its retailers with computers to have access to point-
of-sales data. This would make the supply chain truly centralized and would further
reduce variability. However this would require a huge investment form Barilla.
• Streamlined Distribution System: Barilla could try and make its distribution
system leaner. Instead of moving its products through so many levels, it would
make more sense to move it through limited levels. It could try and open its own
warehouses near centers of demand and could ship directly to its retailers to reduce
variability and complexity in the supply chain.
• ECR: Another initiative that could be used by Barilla to reduce the variability
in demand is an ECR (Efficient Customer Response) strategy. This idea involves
sharing point of sales data between various links in the supply chain ensuring better
replenishment, product introductions and promotions.
Conclusions
Barilla can look forward to a much more efficient and profitable future as a result of
implementing these recommendations. Their demand would become more steady
and easier to produce and transport. Their operating costs will reduce and these
savings would result in better margins. The cycle times would decrease and the
cash flow would become even.
The JITD system would result in more cooperation between the distributors and
Barilla. This would increase trust and encourage collaboration in diverse fields such
and Product Planning or Facility Location. A leaner Barilla would be more agile and
competitive which could result in capturing more market share both within and
outside Italy. More savings for Barilla could translate in growth and diversification in
newer areas of business.
The future can only get better for Barilla, in more ways than one.
Executive Summary
I have reviewed the reasons for opposition and have made recommendations to
gain support for the new JITD system.
Statement of Issues
Promotions: Barilla's sales strategy relies on the use of trade promotions. They
divided the year into 10 to 12 canvass periods, during which various products were
offered at a discount. Incentives for sales reps were based on targets for each
canvass period. Barilla offered volume discounts to its distributors for orders placed
in full truck loads, and sales reps offered discounts for multi-truck load orders.
Sales Representative: Barilla rewarded its sales reps based on amount of product
sold. Therefore, they would push product during the promotional period but were
not able to sell as much during a non-promotional period.
Lack of Forecasting: Although nearly all of the distributors had computer supported
ordering systems, few had sophisticated forecasting systems for determining order
quantities.
Lack of Order Control: Barilla does not require its distributors to place minimum
orders, or have a maximum order amount in place during its promotional periods.
This was because of the pasta specific temperature and humidity requirements for
drying. This process could not be changed fast enough to accommodate the
fluctuating demand for different types of pasta which would create increased costs,
and back orders.
Loss of Control: With the JITD system distributor would disclose sales data to Barilla,
who would then forecast and provide products in the right quantity at the right time
to meet demand. The distributors felt that giving Barilla this control meant that
they would be losing control of their business,Barilla would push their products to
cut their costs. The distributors wanted to keep placing orders at will.
Lack of Trust: Distributors did not trust Barilla with their sales data. They were used
to dealing with approximately 200 suppliers and felt that by disclosing sales data,
their relations with other suppliers would be affected.
Job Loss: Sales personnel voiced fears that the JITD system would diminish their
responsibilities, making them unnecessary.
Loss of Bonus System: Presently, the sales team was rewarded based on quantity
sold. They would lose this opportunity with the new JITD system as they would no
longer be responsible for selling products.
Lack of Belief: Overall, the sales department did not believe the JITD would work.
The felt that the new system was inflexible, and pushed competitors product.
Recommendations:
Centralization: The JITD system will work if Barilla becomes more centralized.
Having more control of their inventory ensures that customer data will be given at
each stage in the supply chain, making forecasting more accurate. Forecasting will
be done based on the sales data of the distributors.
A centralized system will cut down costs. Distributors will not have fixed ordering
costs, which decreases production and distribution costs for Barilla.
Internal Resistance:
Running a simulation to educate sales staff the benefits of the JITD system.
Management should work with sales managers to address concerns and to critique
the new system. Keeping the sales department involved at all stages is critical to
also show that they will still be needed andhave responsibilities after the new
system is in place. There will be no job cuts, just job changes. The Sales Team will
be needed to help with the new work load Logistics will take on as a result of
planning for the distributors. The will play a critical role in maintaining relationships
with distributors, as well as, still be needed to do in store set up, and monitor
demand to help forecast.
Bonus Packages: Although sales employees will lose their promotional bonuses, a
new system should be put in place. Barilla will be reducing costs and saving money,
so a percentage of profits would be passed along to its employees.
Trial: A 6 month trial of the JITD system at Barilla's depots. It would be smaller
scale and dealing with fresh product, but should it be successful it will convince the
critics.
Distributor Resistance:
Savings: Distributors need to be shown that the JITD system does not just benefit
Barilla but that the cost reduction is pastalong to everyone in the supply chain.
Distributor will need to be shown that by controlling the fluctuations that means
potentially ending stock outs, which means they will be serving their supermarkets
better.
Distributors should also be shown and explained the results of the simulation.
Trust: Barilla should have an open policy with its distributors, and include them in
decision making and planning when it comes to distribution.
Conclusion
Barilla should move to the JITD system. By doing so it they will be a more efficient
and profitable company. Their demand will be more steady, easier to manufacture,
and transport.
The JITD system would encourage co-operation between Barilla and its distributors
which would create a better relationship and future potential.
Aditya Talwar
Gaganjit Sandhu
Gautham Puliyanda
Submitted on :05/01/2003
Executive Summary
In this report we have studied the reasons for this opposition by various quarters
and have suggested recommendations, which will allay this lack of support. We
consider that in order to condense the Bullwhip effect being experienced by Barilla,
their supply chain would have to be Centralized. We have given our rationale for the
JITD system to work and have suggested recommendations to resolve all existing
issues. We think that a centralized supply chain with Barilla controlling the orders
will result in better margins for all the partners.
Barilla SpA, an Italy based company, is the world’s largest Pasta manufacturer. It
has a 35% market share in Italy and a 22% market share in Europe. In addition to
the family of pastas (macaroni, spaghetti, fusilli, etc.) it also manufactures bread,
cookies, biscuits, rusks, sauces, breadsticks, etc. Barilla has a very complex
distribution network consisting of Grand Distributors (owned by large Supermarket
chains), Organized Distributors (independent third party distributors) in addition to
its own depots. Due to such a complex and multi-echelon network, Barilla has been
experiencing large amounts of variability in demand which are resulting in
operational inefficiency and increased manufacturing, inventory and distribution
costs.
We will attempt to first list all the problems that are faced by Barilla and the
distributors so that we can better understand them in order to make
recommendations that will eliminate them. The main problem in this case is the
fluctuating demand. Once this is brought under control, many other problems will be
solved. Some of the causes of this fluctuating demand are:
• Sales Representatives: The compensation system for the sales reps was
flawed in the sense that they were rewarded based on the amount of the products
that they sold to the distributors. This was causing problems as the sales reps would
try and push more products during the promotional period to get a bonus and were
not able to sell as much during non-promotional periods. This led to wide variation
in demand and made forecasting very difficult.
• Large number of SKU’s: Barilla’s dry products (the focus of the JITD proposal)
were offered in 800 different packaged stock keeping units (SKUs). Most of the
popular products were offered in as many as 8 different packaging options. These
large numbers led to greater complexity.
• Gaming Behavior: The distributors were used to having full control of their
orders to Barilla and indulged in gaming by ordering different quantities in different
periods. This led to variation in demand.
• Absence of Maximum or Minimum order quantities: Barilla does not require its
distributors to order any minimum quantities every time it places an order. This
causes the distributors to order fewer quantities more often and increases
variability and Barilla’s production costs. Also, there are no maximum order
quantities during promotional periods, thereby allowing distributors to order large
quantities at low prices and thus creating a false demand.
• Long Lead Times: Barilla supplied its distributors between 8 and 14 days after
it received their orders, the average lead-time being 10 days. This was slightly long
and a lot could change in the supply chain during this period, causing rise in
variability.
This fluctuating demand had many adverse implications for Barilla. Some of them
are:
• Scheduling Difficulties: It was difficult for Barilla to schedule its resources and
facilities like Labor, Machinery and Trucks due to demand variations. They would
tend to overuse the resources when the demand was high and on periods of low
demand the resources would be scantily used. This was resulting in increased costs
of Labor and maintenance.
• Cash Flow: The cash flow to Barilla was very uneven due to fluctuations as
well as promotions.
All these factors prompted Vitali to propose the JITD system. But this led to great
uproar and opposition among the distributors and even Barilla’s own Sales and
Marketing Department. The perceived causes of this opposition among the
distributors are:
• Loss of Control: The distributors felt that by allowing Barilla to access their
sales data and order for them, they would be giving control of their business to
Barilla who would push their products and cut their own costs. The distributors were
scared that they would lose their capacity to game if they could not place orders at
will.
• Lack of Trust: There were major trust issues that needed to be resolved
between the distributors and Barilla. The distributors did not trust Barilla enough to
let them in their own business and reveal proprietary data. This was because the
distributors typically handled products from around 200 different suppliers and they
felt that by disclosing their sales data to Barilla, their relations with other suppliers
would be adversely affected.
• Job Cuts: The Sales personnel feared that if Barilla would forecast and place
orders for the distributors, they would not be required anymore to persuade the
distributors to buy products and would be laid off.
• Compensation System: The Sales force feared that they would lose control
over their compensation methods. Presently, they were compensated on the
quantity of stock that they sold to the distributors but with the JITD system in effect
they would lose this opportunity to make more money, as they would not be
responsible for selling products to the distributors.
• Lack of Belief: Moreover the Sales department did not believe that the JITD
system would work. They felt that it was too complex a relationship to work and that
the distributors would not buy if incentives were not offered to them.
In order to make the JITD system work, Magialli had to convince first his own Sales
force and then the external distributors.
Recommendations
After listing out the problems and studying them in detail, we have come up with
our recommendations to reduce uncertainty in demand. We think that the best way
to do this will be to implement the JITD proposal. In order to do this, the distributors
as well as Barilla’s Sales and Marketing will have to be convinced that this proposal
will do more good to them than bad. The distributors will have to be offered
collaboration incentives to join the bandwagon. Our recommendations are geared
towards assuaging their doubts and worries and getting them on board. In addition
to this we have some other recommendations to improve the supply chain
performance, which are listed in the end of the report.
Firstly, we try and answer the why’s and how’s of the process in order to convince
the skeptics.
“Why should JITD work?”: We think that the JITD system will work because of the
following reasons:
• Centralization: As Barilla will have control on the inventory through the entire
supply chain, it will be its responsibility to ensure global optimization and benefits
for everyone. Centralization will ensure that each stage in the chain has actual
customer data making forecasting more accurate. In this case as it is very difficult
to get the actual point-of-sales data from the many retailers due to their sheer
number and geographical difficulties, the forecasting will have to be done based on
the sales data of the distributors.
• Elimination of excess costs: A centralized system will eliminate needless
costs throughout the supply chain. For the distributors, it will mean no more fixed
ordering costs as Barilla can plan its production schedule better. For Barilla it will
result in cheaper production and distribution costs.
“How will JITD work?”: The JITD system will work using the following innovative
techniques:
• Collaborative Planning: Barilla and the distributors can work as a team and
plan on different issues to smoothen out the creases in the supply chain.
• Demand Management: Barilla should not only forecast demand but also
should try to shape and influence it. This can be done using market surveys to
determine the needs and expectations of the consumers and designing products to
satisfy them. Forecasting would become much easier and reliable if the demand can
be managed.
• Forecasting Techniques: Barilla being a big company has access to the latest
and most sophisticated forecasting techniques. It should use these methods to
ensure accurate forecasts thereby reducing uncertainty.
Overcoming Internal Resistance: Before, Magialli can try and convince the
distributors, he has to convince everyone at Barilla that the JITD system will be a
success. If everyone within the company is convinced and they provide a single
front to the distributors, Barilla has a better chance of convincing the distributors.
Some of the steps that Barilla will have to take in this regard are:
• Convince and use the Upper Level Management: Magialli’s task will be to first
convince the Upper management that the JITD plan will work. If they are convinced
of its feasibility, they will offer full support in trying to convince the Sales
department. It will make a lot of difference if the Upper management talk to the
Sales people than if just their Logistics peers talk to them.
• Involve the Sales Department in all stages: To make the Sales people feel
important and wanted, Barilla should involve them in all stages of the JITD proposal.
They should be made to feel that they would have lots to do even after the system
comes into effect.
• No Job Cuts: The Sales personnel should be assured that they would not be
losing their jobs due to the JITD system coming into effect. They should be shown
that even if they will not be doing the work that they were up to this point, they will
still have lots of work to do even with the system in effect. Barilla should explain to
them that they (the Sales force) would be needed to share the extra responsibility
that the Logistics department will have to take as a result of planning for all the
distributors. Also, the sales people will still be needed to maintain close
relationships with the distributors, to solve any problems the distributors have and
also to work with the retailers to ensure complete satisfaction of Barilla’s customers.
They would also be needed to work in the stores as usual to set up in-store
promotions, discuss strategy and monitor demand for Barilla’s products to help the
company forecast better.
• Trial run of the JITD system: This recommendation is common with the next
section and has been explained in detail there.
Convincing Barilla’s Distributors: The distributors are not ready to implement the
JTID proposal due to reasons discussed above in the Problem Description section.
Barilla will have to convince them that the plan will work and not only benefit Barilla
but also the distributors participating in it. Some recommendations to convince the
distributors are:
• Show them the money: This, as always, is the foremost issue on any business
enterprises’ mind. If an enterprise can be convinced that it will make more money, it
will be ready to change its current practices. The distributors should be shown that
the costs of the system would reduce so much that everyone in the supply chain
would save considerable sums of money.
• Address Trust Issues: This is a major issue between Barilla and its distributors
and to solve this Barilla should work out some confidence building measures which
would prove to the distributors that Barilla was worth trusting and that they were
making the right decision. Some of the steps that could be taken to increase trust
are:
- Barilla should have a transparent policy and should not hide any of its plans
from the distributors. This is to ensure that the distributors are not wary of what
Barilla might be planning and how it would affect them.
- Barilla should learn and understand the rights and limits of its distributors so
that it does not force them to do things that they are not capable of.
• Trial Run of the JITD system: This is Barilla’s best chance to convince the
skeptics of the system. Barilla should try and implement the system using its 18
depots that supply to the small independent stores as well as some of the
supermarkets. This system could be implemented from 6 months to a year
depending on the time available to Barilla. If this system were a success, i.e. Barilla
and the depots experienced reduction in demand variability and costs, the critics
would be effectively silenced.
• Problems in the Traditional method: Barilla could show its distributors that
following the traditional supply chain methods that were in use currently would lead
to greater costs and lead times for the distributors if Barilla had to reduce variability
and its own costs. The distributors would have to pay additional fixed order costs,
would have to operate under minimum and maximum order quantities and would
have longer lead times to cope up with as Barilla tried to work with the increased
demand fluctuation.
• Penalty clause: Barilla could sign an agreement with its distributors that if
they would be a part of the JITD program and would lose money as a result, Barilla
would be penalized and would have to pay the difference in costs to the distributors.
This would show the distributors that Barilla meant business and was very confident
of the success of the JITD system.
• Partnership Issues: Barilla should convince its distributors that it is the only
party in their supply chain that can be the leader and thus they should rally with
Barilla. This is because of Barilla’s sheer size as well as its capability and market
share. It will be much easier for Barilla to collect the sales data of all the distributors
and forecast the demand than vice versa. Also Barilla would have more chance of
accessing competitors’ information as also the ability to co-ordinate various supply
chain partners.
• JITD in Exports: Barilla has a 22% market share in Europe and this share is
expected to rise as the growth in the export market increases by 20-25% each year.
Barilla could try and implement the JITD system with its distributors, both current
and future, outside Italy. This could act as a test run to be shown to the distributors
in Italy. In addition to this Barilla would ensure that its distributors outside Italy
would already be accustomed to this idea so that there would be no opposition
offered later. If implemented and successful, this idea would result in savings for
Barilla in its export supply chain.
• Reduce SKUs: Currently, Barilla’s dry products are offered in 800 different
SKUs. This large amount leads to a lot of complexity in the order process,
distribution as well as inventory and thus increases costs and variability. Some of its
famous products are offered in up to 8 different packaging options. Barilla should
reduce the number of SKUs to around 500 for better control. For example the 0.5kg
packets could be phased out in favor of the 1kg packets.
• Actual Point-of-Sales Data: As of now, the JITD system proposes to use the
sales data from the distributors as actual customer demand is difficult to obtain
from the retailers due to their sheer number. Barilla could eventually invest in
technology and provide each of its retailers with computers to have access to point-
of-sales data. This would make the supply chain truly centralized and would further
reduce variability. However this would require a huge investment form Barilla.
• Streamlined Distribution System: Barilla could try and make its distribution
system leaner. Instead of moving its products through so many levels, it would
make more sense to move it through limited levels. It could try and open its own
warehouses near centers of demand and could ship directly to its retailers to reduce
variability and complexity in the supply chain.
• ECR: Another initiative that could be used by Barilla to reduce the variability
in demand is an ECR (Efficient Customer Response) strategy. This idea involves
sharing point of sales data between various links in the supply chain ensuring better
replenishment, product introductions and promotions.
Conclusions
Barilla can look forward to a much more efficient and profitable future as a result of
implementing these recommendations. Their demand would become more steady
and easier to produce and transport. Their operating costs will reduce and these
savings would result in better margins. The cycle times would decrease and the
cash flow would become even.
The JITD system would result in more cooperation between the distributors and
Barilla. This would increase trust and encourage collaboration in diverse fields such
and Product Planning or Facility Location. A leaner Barilla would be more agile and
competitive which could result in capturing more market share both within and
outside Italy. More savings for Barilla could translate in growth and diversification in
newer areas of business.
The future can only get better for Barilla, in more ways than one.
INTRODUCTION
Barilla SpA (Barilla), is an Italian manufacturer that sells pasta to retailers largely
through third-party distributors. Barilla has been experiencing widely fluctuating
demand patterns from these distributors. Such unpredictable patterns are
problematic because a specific sequence of pasta production is used that minimizes
the incremental changes in kiln temperature in order to keep the changeover costs
low and the product quality high. This process makes manufacturing unfortunately
unresponsive to changes in anticipated demand.
PROBLEMS
Barilla has been experiencing significant problems in its implementation of the JITD
model. Preventing Barilla from effectively implementing a JITD system are: 1)
internal opposition from its sales staff; 2) lack distributor buy-in stemming from a
fear of loss of power; 3) an inability to collected needed information; and 4) the
traditional Italian trade promotions system.
EVALUATION CRITERIA
The main decision to be made by Barilla is not whether Barilla should apply the JITD
model, but whether it can be applied. The benefits of introducing a successful
system are numerous to an industry where both manufacturers are suffering from
thinning margins. To Barilla a successful JITD would result in a decrease in
distribution, inventory and manufacturing costs. To the distributors it would result in
decreased inventory costs and a reduction in stockouts. This decision that Barilla
faces is how such JITD would be implemented. In evaluating the solutions to the
JITD’s major problems we will use four main evaluation criteria:
1.) Cost Savings to Barilla – The reduction inventory and transportation costs
incurred by Barilla.
3.) Service Level – As defined as the percent of retailer orders filled from
distributors’ inventory.
LOSS OF POWER
INFORMATION:
In order for Barilla to use a JITD it requires that each distributor provide data on
what Barilla products it has shipped out of its warehouse to retailers during the
previous day, as well as the current stock level for each Barilla SKU. This information
can then be used by Barilla to make its own replenishment decisions based on its
forecast. Hitherto distributors have been very reluctant to share this information
citing their lack of confidence that Barilla can create better estimates. There are
three alternative solutions addressing this problem:
Firstly, buy information for Distributors. One of the larger Distributors has already
offered to sell the information. It is likely that many other Distributors would
similarly part with this information for the right price. Unfortunately such an
exercise would create a dangerous precedent that could be difficult to reverse in the
long run. Though it might be useful to purchase such information until the JITD
method catches on it could create an expectation for such payments to continue in
the long run.
Secondly, gather information from point of sale. Another information source which
JITD forecasts could be generated from is data from retail outlets. This is an
interesting proposal as retail outlets already take inventory on a daily basis.
However, it is unlikely that such a system can be implemented in the near future
due to the lack of relationship between Barilla and the retailers and the fact that
many retailers do not have the necessary computer equipment to properly monitor
and communicate this information to Barilla efficiently.
DISCOUNTS/PROMOTIONS
Well established in the Italian grocery industry, promotions and volume discount
cause significant fluctuations in demand for Barilla. The promotion system
encourages distributors to deplete inventory and buy during the appropriate canvas
period, or to make purchases by the multiple truckload to receive further sales
representative induced discounts. There are two alternative solutions addressing
this problem:
Firstly, keep prices fixed/ constant. Instead of constantly adjusting prices through
promotions, Barilla instead could decrease all prices equally to all distributors by
incorporating the savings that result from the elimination of trade promotions and
the increased efficiencies resulting from the JITD system. Such a strategy would be
unfair for the larger distributors who buy more and are accustomed to greater
discounts, and such a strategy would also not be aligned with Italy’s trade
promotion culture and may result in significant pushback from Distributors.
Secondly, negotiate volume discounts and push canvas discounts. Barilla can still
keep its canvas discount system by building it into their forecasting model. Thus
allowing Distributors discounts during the appropriate canvas period, but by not
allowing them to stock up inventory to maximize these discounts (as only the
amount recommended by the forecast is discounted). Furthermore, volume
discounts can still be offered in the form of refunds. Instead of giving discounts for
each order, the amount purchased over a monthly period can be used to calculate
the size of discount the distributor receives. Thus larger purchasers still receive
their expected discounts.
INTERNAL PUSHBACK
Within the current system, the sales representatives are playing important roles,
and many fear that their responsibilities in managing inventory and setting up
promotion would be reduced if JITD system is implemented. The lack of buy-in
especially be the sales team can be a huge problem as they are the ones would are
in constant communication with the Distributors. Negative perceptions of the
salespeople will reflect poorly on Barilla’s ability to implement a JITD, and may
result in poor Distributor buy-in. Barilla could require that each sales person be
trained to monitor the JITD system, and give commissions to those salespeople who
convince their distributors to buy-in to the program. In so doing, the sales
representative will still play an important role in the new system, and therefore
encourages them to participate and support the JITD system.
Conclusion:
The JITD system has the potential to substantial reduce costs if it is implemented
correctly. In order to do so Barilla should begin implementing JITD within its own
Depots and expand with pilot projects with the Distributors. The aforementioned
analysis discussed a variety of methods bywhich to make such implementation
more viable than it was in the past. However, such a list is in no way conclusive.
Ideas such as reducing the number of SKUs and rearranging distribution channels
should also be explored in the long term as they can also result in substantial cost
savings.
The Just-in-Time Distribution was created to solve many difficulties that Barilla and
their customers were facing. Barilla increasingly felt the effects of fluctuating
demand. Orders for Barilla dry products often swung widely from week to week.
With this demand variability, it strained Barilla’s manufacturing and logistics
operations. Even though JITD was created to solve the problems they were having,
many stakeholders did not agree with the program. Some manufacturing and
logistics personnel would rather ask distributors or retailers to carry additional
inventory to reduce the fluctuation in distributors’ orders even though with their
current inventory levels, many distributors’ service levels to the retailers were
unacceptable. Others felt that the distributors and retailers were already carrying
too much inventory. Customers were not helping also. They were simply unwilling to
give up their authority to place orders as they pleased. But what was more
disconcerting was the internal resistance from Barilla’s own sales and marketing
organizations, which saw the concept as infeasible and dangerous.
Barilla and their customers are now realizing that they do not have enough room in
their stores and warehouses to carry the very large inventories manufacturers
would like them to. It is not easy to increase shelf space in retail outlets and
manufacturers are constantly introducing new products and wanting retailers to
display each product on the fronts of their shelves. Distributors feel similar pressure,
both to increase inventory of items they already stocked and to add items they
currently did not carry to their product offerings. Both manufacturers and retailers
are suffering from thinning margins.
The JITD proposes to rather than send product to the distributors according to their
internal planning processes, they should look at all of the distributors’ shipment
data and send only what is needed at the stores. They will send no more and no less
of what is needed. With the way they are currently operating, it is nearly impossible
to anticipate demand swings, so they end up having to hold a lot of inventory and
do a lot of scrambling in their manufacturing and distribution operations to meet
distributors demand. Also the distributors don’t seem to do a good job serving their
retailers because the DOs (“Distribuzione Organizzata” Organized Distributor) have
experienced many stockouts in the last year. With the JITD, the director of logistics,
Brando Vitali, believes they could improve operations for Barilla and their customers
if they were responsible for determining the quantities and delivery schedules.
There are many disputes about integrating this proposal. There is internal resistance
from Barilla’s own sales and marketing organizations. A number of sales
representatives felt that their responsibilities would be diminished if the JITD were
put in place. There were a range of concerns that were expressed from the bottom
to the top of the sales organization. Some concerns were, “We run the risk of not
being able to adjust our shipments sufficiently quickly to changes in selling patterns
or increased promotions,” or “we increase the risk of having our customers stock
out of our product if we have disruption in our process.”
To counter the concerns, the director of logistics said, “I think JITD should be
considered a selling tool, rather than a treat to sales. We’re offering the customer
an additional service at no extra cost. The program will improve Barilla’s visibility
with the trade and make distributors more dependent on us—it should improve the
relationship between Barilla and the distributors rather than harm them.”
Another problem was that distributors did not like the program. The manager of one
of Barilla’s largest distributors said, “Managing stock is my job. I don’t need you to
see my warehouse or my figures. I could improve my inventory and service levels
myself if you would deliver my orders more quickly…” Another distributor said,
“What makes you think that you could manage my inventories any better than I
can?” Distributors felt Barilla was asking for too much control over their own
facilities.
If I were a customer of Barilla, I would just be concerned with getting all the
products I need in a fast time and in good quality. If they could do that, then I would
be happy. If I were an investor in the Barilla company, my perspectives would
probably not change regarding JITD. I feel that the program will help the company
enormously. It will create more revenues for the company, reduce working capital,
and it will provide better service to the customers. If they provide better service,
customers will return and they could also get new customers. I feel it would be a
great investment.
Maggiali can increase the overall likelihood or percentages that JITD would be
adopted by convincing their distributors, sales and marketing organizations that the
program will work better than anything they have tried before. It would bring higher
revenue because it will reduce working capital, and it will provide a better service to
their customers at no extra cost. To do this, he can come up with an agreement with
the distributors to use the program for a certain amount of time as a trial to see if
the program will deliver a positive result. This will let the employees have an idea of
how the JITD will work and what is expected of them. If the results are negative they
can go back to whatever method works best for them.
If the proposal was based upon the environment in today’s world, I would not go
forward with the Just-in-Time Distribution. It would not be feasible or effective in our
time today. In the 1990’s, nearly all of Barilla’s distributors had computer-supported
ordering systems, but few had sophisticated forecasting systems or analytical tools
for determining order quantities so the JITD would help them a lot with their orders.
Also Barilla’s GD (“Grande Distribuzione” large distributor) sales force usually sent
their orders via fax which is rarely ever used in our time today. The JITD would not
work today because we have so many new upgraded technological machines that
are used to communicate so much easier and faster than in the 1990’s. We have
new technology that already holds all the information needed. The JITD would end
up putting more work on Barilla and their distributors and would cause inefficiency.
The JITD would cause them to lose profitability because they would be wasting their
time in gathering, collecting, and interpreting the data and information given to
Barilla from the distributors. Now we use technology programs to help with
inventory management and make everything more effective and efficient.
Barilla has a very complex distribution network including independent third party
distributors and due to such a multi-echlon network, Barilla has been experiencing
large amounts of variability in demand which are resulting in operational
inefficiency and increased manufacturing, inventory and distribution costs.
The proposed JITD system required the distributors to share their sales data with
Barilla, who would then forecast and deliver appropriate amounts of products to the
distributors at the right time in order to effectively meet demand. This was a radical
change from the current and more traditional supply-chain setup where the
distributors were not sharing any data and could place orders at will. Vitali's
proposal came under severe criticism from not only the distributors but also Barilla's
own Sales and Marketing department for an array of reasons.
Main reasons for fluctuating demand:
Promotions: The use of promotions in the form of price, transportation, and volume
discounts was the main strategy to sell more products to the distriutors.
Sales Reps: The compensation system in place at Barilla for Sales reps, made them
to push more products into the pipeline during promotional periods and not able to
sell sufficient quantities during non promotional periods created wide variation in
demand patterns.
SKU's: The huge range of SkU's in each product line led to greater complexity
Gaming bevavior and wrong forecasting practices: The distributors were having full
control of their orders to Barilla and used gaming during stock outs periods. The
distributors did not use any sophisticated forecasting models or systems to
calculate the order quantities without any threshold minimum order quantities but
rather just followed a replenishment ordering.
Long lead times: Barilla was dealing with perishable items and the lead times of
between 8 and 14 days after it received their orders, the average lead-time being
10 days was high given the nature of products and continuously changing ordering
patterns.
The production costs was rising heavily due to frequent changeover for offering
wide range of SKU's, and backorders. It also led to production scheduling difficulties
and high labor & transportation costs to satisfy the high ordering during promotional
periods. Finally the cash flows were also uneven.
The pasta industry distributors were not yet prepared for such an sophisticated
information sharing process. The distributors were not ready to share their sales
data to Barilla and were not aware of the benefits of supply chain collaboration
through collaborative forecasting and planning. The distributors were sacred of the
negative implications of sharing the sales data thinking of the loss of control over
ordering process would make them loose competitive advantage over Barilla
through adjustin their order quantities through their own forecasting & planning for
attaining the profit margins, and Barilla would push their products and cut down
their costs. They also felt that, they would loose the opportunity to gain advantage
during the promotional periods and they cannot place orders at will. Since the
distributors were working with nearly 200 suppliers, they did not have the trust
comfort level by disclosing the sales data to Barilla, and their relations with other
suppliers could be affected, if they were aware of sharing the proprietary data with
Barilla.
Besides, the distributors, the internal Barilla's sales force were also reluctant to
these JITD implementation, as they were sacred of losing
their jobs, if the ordering process was automated and the Barilla would not need
them for going to the field and putting their efforts to convince their distributors to
order more quantities and get sales incentives.
Recommendations:
The first approach to effectively implement JITD is to convince and educate the
internal sales force and the distributors of the benefits of Collaborative Planning
Forecasting and Replenishment (CPFR). In order to condense the Bullwhip effect
being experienced by Barilla, their supply chain would have to be centralized.
The JITD will work, only if Barilla gains control over the inventory throughout their
supply chain. Since the pasta industry in Italy is not yet geared towards tracking the
point of sales data through scanners and barcodes, hence each stage has to
collaboratively make ordering forecasts based on the end customer sales data. The
JITD system will eliminate the fixed costs in ordering for distributors through an
effective centralized system through out the supply chain and for Barilla, they can
improve their production scheduling and reduce the labor and transportation costs.
Barilla and their Distributors can effectively team up and build a comprehensive
forecasting model, which will take into account the perishable inventory system
model, threshold inventory levels, demand fluctuation factors to capture the spikes
in the demand by aggregating the demand throughout the supply chain.
Demand Planning:
Customer surveys can help Barilla and Distributors to understand the needs of their
customers and help them to effectively manage and control the demand patterns.
Methodology:
To convince the internal staff and sales force, Barilla can run a 6-8 month pilot
program or educate them by running a simulation of the whole exercise to show the
benefits of sharing the sales data. The upper management should involve the sales
managers in incorporating their needs and complications involved in executing the
JITD in the field. The sales force should be given additional responsibilities for
market development through adopting "Go-to-market" strategy in the event the
whole ordering process is automated through the JITD system implementation.
The compensation system can be revamped into a new level and could still be in
place by assigning target sales revenue through above mentioned market
development and territory management programs.
The pilot programs and simulation exercise cost results should be circulated to the
distributors to enable them to understand the cost cutting and better inventory
management practices the JITD system can offer, so that the distributors initially
become ready to adopt the JITD implementation in a phase manner.
Confidence and trust building with distributors can be achieved through long term
strategic partnership development and having constant operational meetings with
Barilla's upper management instead of letting the sales force giving their inputs to
the effective application of JITD. Policies governing the profit margin sharing can be
formalized as part of building the supply chain collaboration strategies.
Since Barilla has more than 22% market share outside Italy in Europe, and it
becomes easy to implement JITD in Europe locations where there is significant
usage of barcodes and scanners systems to capture the POS data in place. The
success story of these European locations can convince Italian distributors of the
benefits of JITD. Barilla should conduct a study to track the most fast selling pasta
SKU's, region wise, so that they can reduce the amount of SKU's they offer and
streamline to offer a particular set of product line segmented across each region to
reduce the complexity in the supply chain.
The huge # of intermediaries of distributors and selling agents is also one of the
hindrances for existing inefficiencies, hence Barilla should consider reducing the #
of levels in the logistics network.
The Efficient Customer Response (ECR) initiative can be a useful tool for Barilla for
sharing the POS data all along the supply chain and understand the customer
buying preferences and accordingly adjust the # of SKU's to offer in each pasta
product line and plan for new product introductions.
Continuous Replenishment:
Brando Vitali's has proposed a Just-in-Time Distribution (JITD) model, which is a
continuous replenishment strategy under which the responsibility for
determining shipment
INTRODUCTION
Barilla SpA (Barilla), is an Italian manufacturer that sells pasta to retailers largely
through third-party distributors. Barilla has been experiencing widely fluctuating
demand patterns from these distributors. Such unpredictable patterns are
problematic because a specific sequence of pasta production is used that minimizes
the incremental changes in kiln temperature in order to keep the changeover costs
low and the product quality high. This process makes manufacturing unfortunately
unresponsive to changes in anticipated demand.
Barilla has been experiencing significant problems in its implementation of the JITD
model. Preventing Barilla from effectively implementing a JITD system are: 1)
internal opposition from its sales staff; 2) lack distributor buy-in stemming from a
fear of loss of power; 3) an inability to collected needed information; and 4) the
traditional Italian trade promotions system.
EVALUATION CRITERIA
The main decision to be made by Barilla is not whether Barilla should apply the JITD
model, but whether it can be applied. The benefits of introducing a successful
system are numerous to an industry where both manufacturers are suffering from
thinning margins. To Barilla a successful JITD would result in a decrease in
distribution, inventory and manufacturing costs. To the distributors it would result in
decreased inventory costs and a reduction in stockouts. This decision that Barilla
faces is how such JITD would be implemented. In evaluating the solutions to the
JITD’s major problems we will use four main evaluation criteria:
1.) Cost Savings to Barilla – The reduction inventory and transportation costs
incurred by Barilla.
3.) Service Level – As defined as the percent of retailer orders filled from
distributors’ inventory.
LOSS OF POWER
INFORMATION:
In order for Barilla to use a JITD it requires that each distributor provide data on
what Barilla products it has shipped out of its warehouse to retailers during the
previous day, as well as the current stock level for each Barilla SKU. This information
can then be used by Barilla to make its own replenishment decisions based on its
forecast. Hitherto distributors have been very reluctant to share this information
citing their lack of confidence that Barilla can create better estimates. There are
three alternative solutions addressing this problem:
Firstly, buy information for Distributors. One of the larger Distributors has already
offered to sell the information. It is likely that many other Distributors would
similarly part with this information for the right price. Unfortunately such an
exercise would create a dangerous precedent that could be difficult to reverse in the
long run. Though it might be useful to purchase such information until the JITD
method catches on it could create an expectation for such payments to continue in
the long run.
Secondly, gather information from point of sale. Another information source which
JITD forecasts could be generated from is data from retail outlets. This is an
interesting proposal as retail outlets already take inventory on a daily basis.
However, it is unlikely that such a system can be implemented in the near future
due to the lack of relationship between Barilla and the retailers and the fact that
many retailers do not have the necessary computer equipment to properly monitor
and communicate this information to Barilla efficiently.
DISCOUNTS/PROMOTIONS
Well established in the Italian grocery industry, promotions and volume discount
cause significant fluctuations in demand for Barilla. The promotion system
encourages distributors to deplete inventory and buy during the appropriate canvas
period, or to make purchases by the multiple truckload to receive further sales
representative induced discounts. There are two alternative solutions addressing
this problem:
Firstly, keep prices fixed/ constant. Instead of constantly adjusting prices through
promotions, Barilla instead could decrease all prices equally to all distributors by
incorporating the savings that result from the elimination of trade promotions and
the increased efficiencies resulting from the JITD system. Such a strategy would be
unfair for the larger distributors who buy more and are accustomed to greater
discounts, and such a strategy would also not be aligned with Italy’s trade
promotion culture and may result in significant pushback from Distributors.
Secondly, negotiate volume discounts and push canvas discounts. Barilla can still
keep its canvas discount system by building it into their forecasting model. Thus
allowing Distributors discounts during the appropriate canvas period, but by not
allowing them to stock up inventory to maximize these discounts (as only the
amount recommended by the forecast is discounted). Furthermore, volume
discounts can still be offered in the form of refunds. Instead of giving discounts for
each order, the amount purchased over a monthly period can be used to calculate
the size of discount the distributor receives. Thus larger purchasers still receive
their expected discounts.
INTERNAL PUSHBACK
Within the current system, the sales representatives are playing important roles,
and many fear that their responsibilities in managing inventory and setting up
promotion would be reduced if JITD system is implemented. The lack of buy-in
especially be the sales team can be a huge problem as they are the ones would are
in constant communication with the Distributors. Negative perceptions of the
salespeople will reflect poorly on Barilla’s ability to implement a JITD, and may
result in poor Distributor buy-in. Barilla could require that each sales person be
trained to monitor the JITD system, and give commissions to those salespeople who
convince their distributors to buy-in to the program. In so doing, the sales
representative will still play an important role in the new system, and therefore
encourages them to participate and support the JITD system.
Conclusion:
The JITD system has the potential to substantial reduce costs if it is implemented
correctly. In order to do so Barilla should begin implementing JITD within its own
Depots and expand with pilot projects with the Distributors. The aforementioned
analysis discussed a variety of methods bywhich to make such implementation
more viable than it was in the past. However, such a list is in no way conclusive.
Ideas such as reducing the number of SKUs and rearranging distribution channels
should also be explored in the long term as they can also result in substantial cost
savings.
The Just-in-Time Distribution was created to solve many difficulties that Barilla and
their customers were facing. Barilla increasingly felt the effects of fluctuating
demand. Orders for Barilla dry products often swung widely from week to week.
With this demand variability, it strained Barilla’s manufacturing and logistics
operations. Even though JITD was created to solve the problems they were having,
many stakeholders did not agree with the program. Some manufacturing and
logistics personnel would rather ask distributors or retailers to carry additional
inventory to reduce the fluctuation in distributors’ orders even though with their
current inventory levels, many distributors’ service levels to the retailers were
unacceptable. Others felt that the distributors and retailers were already carrying
too much inventory. Customers were not helping also. They were simply unwilling to
give up their authority to place orders as they pleased. But what was more
disconcerting was the internal resistance from Barilla’s own sales and marketing
organizations, which saw the concept as infeasible and dangerous.
Barilla and their customers are now realizing that they do not have enough room in
their stores and warehouses to carry the very large inventories manufacturers
would like them to. It is not easy to increase shelf space in retail outlets and
manufacturers are constantly introducing new products and wanting retailers to
display each product on the fronts of their shelves. Distributors feel similar pressure,
both to increase inventory of items they already stocked and to add items they
currently did not carry to their product offerings. Both manufacturers and retailers
are suffering from thinning margins.
The JITD proposes to rather than send product to the distributors according to their
internal planning processes, they should look at all of the distributors’ shipment
data and send only what is needed at the stores. They will send no more and no less
of what is needed. With the way they are currently operating, it is nearly impossible
to anticipate demand swings, so they end up having to hold a lot of inventory and
do a lot of scrambling in their manufacturing and distribution operations to meet
distributors demand. Also the distributors don’t seem to do a good job serving their
retailers because the DOs (“Distribuzione Organizzata” Organized Distributor) have
experienced many stockouts in the last year. With the JITD, the director of logistics,
Brando Vitali, believes they could improve operations for Barilla and their customers
if they were responsible for determining the quantities and delivery schedules.
There are many disputes about integrating this proposal. There is internal resistance
from Barilla’s own sales and marketing organizations. A number of sales
representatives felt that their responsibilities would be diminished if the JITD were
put in place. There were a range of concerns that were expressed from the bottom
to the top of the sales organization. Some concerns were, “We run the risk of not
being able to adjust our shipments sufficiently quickly to changes in selling patterns
or increased promotions,” or “we increase the risk of having our customers stock
out of our product if we have disruption in our process.”
To counter the concerns, the director of logistics said, “I think JITD should be
considered a selling tool, rather than a treat to sales. We’re offering the customer
an additional service at no extra cost. The program will improve Barilla’s visibility
with the trade and make distributors more dependent on us—it should improve the
relationship between Barilla and the distributors rather than harm them.”
Another problem was that distributors did not like the program. The manager of one
of Barilla’s largest distributors said, “Managing stock is my job. I don’t need you to
see my warehouse or my figures. I could improve my inventory and service levels
myself if you would deliver my orders more quickly…” Another distributor said,
“What makes you think that you could manage my inventories any better than I
can?” Distributors felt Barilla was asking for too much control over their own
facilities.
If I were a customer of Barilla, I would just be concerned with getting all the
products I need in a fast time and in good quality. If they could do that, then I would
be happy. If I were an investor in the Barilla company, my perspectives would
probably not change regarding JITD. I feel that the program will help the company
enormously. It will create more revenues for the company, reduce working capital,
and it will provide better service to the customers. If they provide better service,
customers will return and they could also get new customers. I feel it would be a
great investment.
Maggiali can increase the overall likelihood or percentages that JITD would be
adopted by convincing their distributors, sales and marketing organizations that the
program will work better than anything they have tried before. It would bring higher
revenue because it will reduce working capital, and it will provide a better service to
their customers at no extra cost. To do this, he can come up with an agreement with
the distributors to use the program for a certain amount of time as a trial to see if
the program will deliver a positive result. This will let the employees have an idea of
how the JITD will work and what is expected of them. If the results are negative they
can go back to whatever method works best for them.
The idea is good, but they can not only send what the end users need. They also
need to have safety stock on every item in their distribution centers. They also have
to make sure their production line has the capacity and reliability to produce and
deliver the product when the distributors need it. They need to have better
communication between manufacturers and distributors. Barilla increasingly feels
the effects of fluctuating demand and this demand hurts their manufacturing and
logistics operations. This program will help them improve operations for themselves
and their customers. They would be able to ship products only as it is needed,
rather than building up large stocks in their facilities. Without the demand swings,
they will be able to work more efficiently and effectively and get their products
where they need to be in a faster cycle time. If the program works well, they would
be able to target new customers like restaurant chains. They could also go overseas
to sell their products in international chains.
If the proposal was based upon the environment in today’s world, I would not go
forward with the Just-in-Time Distribution. It would not be feasible or effective in our
time today. In the 1990’s, nearly all of Barilla’s distributors had computer-supported
ordering systems, but few had sophisticated forecasting systems or analytical tools
for determining order quantities so the JITD would help them a lot with their orders.
Also Barilla’s GD (“Grande Distribuzione” large distributor) sales force usually sent
their orders via fax which is rarely ever used in our time today. The JITD would not
work today because we have so many new upgraded technological machines that
are used to communicate so much easier and faster than in the 1990’s. We have
new technology that already holds all the information needed. The JITD would end
up putting more work on Barilla and their distributors and would cause inefficiency.
The JITD would cause them to lose profitability because they would be wasting their
time in gathering, collecting, and interpreting the data and information given to
Barilla from the distributors. Now we use technology programs to help with
inventory management and make everything more effective and efficient.
GOOGLE SEARCH:
Allows students to analyze how a company can effectively implement a
continuous replenishment system both to reduce channel costs (in this case,
inventory and transportation costs incurred by Barilla as well as inventory
costs incurred by the distributors) and to improve service levels (defined in
this case as the percent of retailers' orders filled from distributors'
inventory).
Barilla SpA, an Italian manufacturer that sells to its retailers largely through third-party
distributors, experienced widely fluctuating demand patterns from its distributors during
the late 1980s. This case describes a proposal to address the problem by implementing
a continuous replenishment program, under which the responsibility for determining
shipment quantities to the distributors would shift from the distributors to Barilla.
Describes support and resistance within Barilla’s different functional areas and within
the distributors Barilla approached with the proposal.