Case Presentation Barilla SpA

Introduction
Company & Industry background Worlds largest pasta producer in 1990 Pasta Share - 35% in Italy and 22% in Europe Channels of Distribution Products divided in 2 categories Fresh and Dry Fresh Products had 21 day Shelf Lives Dry Products had Long ( 18 to 24 Months) or Medium(10 to 12 weeks) Shelf Lives Retail Outlets Small independent shops and Supermarkets (Chain and Independent)

The Issue
During the late 1980s, Barilla suffered increasing operational inefficiencies and cost penalties that resulted from large week-to-week variations in its distributors order patterns

Distribution Procedure
Original flow of goods and information
PLANT CDCs Barilla run depots GDs DOs

Chain supermarkets

Independent supermarkets

Signora Maria Shops

Customers

Customers

Customers
*CDC = Central Distribution Centre GD = Grand Distributors DO = Organized Distributors

Sales and Marketing

Advertising Heavy, Brand Positioned as the Highest Quality Trade promotions Frequent Canvass period, 10 to 12 in a year, typical duration of 4 to 5 weeks Distributor could buy as much product as desired to meet present and future needs at the offered discount Volume Discounts also given Sales representatives used more at DOs than GDs Merchandise Barilla Products Set up In-Store Promotion Take note of competitors prices, stockouts, new product launches Work out ordering strategies for the retailer etc

 Demand Fluctuations Just in Time Distribution

Variability in Demand
Reasons
Transportation discounts Volume discount Promotional activity No minimum or maximum order quantities Product proliferation Long order lead times Lack of forecasting systems or sophisticated analytical tools at Distributers end

Exhibit 12: Demand Fluctuations

Variability in Demand
Methods employed to counter variability
Holding buffer FGs to meet Distributor requirements Asking Distributors/Retailers to carry additional inventory

Impact
Strained Manufacturing and Logistics operations* Poor Product delivery management Thinning retailer/distributor margins Increased Inventory Holding costs Impossible to anticipate Demand swings Changing customers due to lack of storage space

Bullwhip effect
Amplified Variation in demand as one moves up the Supply Chain (away from the customer)
order
Factory

order
Distributor Wholesaler

order
Retailer

Order Variation

The Causes of Bullwhip Effect

Demand Forecast Long lead times Order Batching Price fluctuation (Promotional sales) Inflated orders in high estimated demand scenarios

Counteracting the Bullwhip Effect

Reduce Uncertainty
- POS - Sharing Information - Centralizing demand information

Reduce Variability
Year round or Everyday low pricing

Reduce Lead Times

- Information lead times: EDI - Order lead times: Cross Docking

Strategic Partnerships
Quick Response Continuous Replenishment Advanced Continuous Replenishment Vendor managed Inventory (VMI)

Just-In-Time Distribution (JITD)

Vendor-Managed Inventory Concept Treats end-customer as the Input Aims at managing the Input filter that Produces the Orders Decision-making authority for determining shipments in hands of Barilla SpA Barilla would monitor the flow of its products through the distributors warehouse, and then decide what to ship to the distributor and when to ship it Distributor provides Data on the shipment and current stock levels for each Barilla SKU
Sell-through Info one step behind POS Data

Expected Benefits of JITD

Manufacturer
Reduced manufacturing costs Better Relationship with Distributors
Increased supply chain visibility Increase Distributors dependence on Barilla

Improvement in manufacturing planning using objective data Reduced inventory levels

Distributors
Improved fill rates to Retail stores Additional service without any extra cost Reduced Inventory Holding costs

JITD - Internal Resistance

Sales Representatives feared reduction in responsibilities Flattened sales levels Risk of Inability to adjust shipments quickly to stock-outs Lack of infrastructure to handle JITD Increased competitor shelf space at distributor Inability to run Trade promotions Unsure about the cost benefits

JITD External Resistance

Unconvinced Distributors Not willing to share warehouse data Perceived power transfer to Barilla Lack of faith in Barillas inventory management

Possible methods to counter Resistance

Demonstrate that JITD benefits the distributors
Run experiment at one or more of the distributor sites

Maggiali needs to look at JITD not as a logistics program, but as a company-wide effort
Get Top management closely involved

Experiments at Dry-product depots

Barilla spa ran first JITD experiment at its Florence depot During the very first month of the program Inventory dropped from 10.1 days to 3.6 days Service level to retail stores increased from 98.9% to 99.8% Depots staff was not comfortable working with such low inventory levels Inventory levels finally allowed to increase to 5 days One of the arguments against JITD was that it will lead to waste empty spaces in the ware houses

Experiments at Dry-product depots

In Florence case Barilla growing at rapid rate in the region Plans to expand warehouse Existing warehouse able to accommodate the increased requirement Substantial investment on expansion was avoided JITD next tried at Milan Depot Similar performance improvement as Florence These experiments established the credibility of JITD system

Implementation at D. O. Cortese
The decision to implement JITD in Marchese DC of Cortese involved Barilla: Director of Logistics, Executive vice president of sales and Manager in charge of JITD implementation Cortese: Nine managers including Managing director, new services manager, logistics manager and logistics, purchasing, marketing and sales personnel from Corteses Marchese DC Consultant Claudio Ferrozzi was roped in Neutral party trusted by both the groups

Implementation at D. O. Cortese
For six months, Barilla team analyzed daily shipment data of the DC Created the data base of DCs historical demand pattern Simulated shipments with JITD in place The implementation yielded phenomenal results Prior to JITD Stock out rate : 2 to 5% ( Occasionally as high as 10 to 13%) After JITD Negligible stock out rate of less than.25%(Never exceeded 1%) Average inventory level also dropped

Adaptation to different distributors

With new confidence they approached other customers Customers apprehensive about JITD repeating the same success as Cortese for them as they had varied systems Barillas team developed capacity to translate customers standards into internal standards

Adaptation to different distributors

Developed a protocol which could be used to communicate with all customers Each SKU identified with three different product codes
Barillas code Customers code EAN (European article numbering system) barcode Most common barcode standard in Europe

Advantages of the coding system

Information can be received through any code Reduce impact of internal changes in product or code on clients system

Communication with consumers

Customer each day sent following information to Barilla via EDI:1. 2. 3. 4. 5. 6. Customer code number to identify itself Inventory for each SKU carried by DC Previous days sell through-All shipments of Barilla products out of DC to consumers on the previous day Stock outs on previous day for every Barilla SKU carried by DC An advance order for any promotions that the customer planned to run in the future Preferred delivery carton size

Lessons learnt
One needs to prove credibility of any new performance initiative for others to buy his/her idea Best place to experiment with an idea is within the organization To succeed in a new initiative, involvement of top management is imperative
Barrilla could finally succeed in implementing JITD with Cortese. Whole of top management from both sides was involved in the decision making. Which never happened earlier Sometimes roping a consultant helps

Market is ever growing. If performance measures seem to create spare time/capacity instead of chucking them, look out for ways to increase the market.(Like in Florence depot warehouse case)

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