IEM 5763

SUPPLY CHAIN STRATEGY

CASE STUDY #3 – SPRING 2010

DUE: TUESDAY, FEBRUARY 16 2010 16:00

“Barilla SpA”
By:
1: Kedar Bobhate
2: Rohit Harikrishnan
3: Kaustubh Ranade
Ans 1:

Barilla’s supply chain is facing significant problems, including excessive inventory levels, stock-outs,
excessive reliance on promotional activities, inefficient logistics operations and poor communication and
cooperation between the supply chain participants. The inefficiencies in Barilla’s distribution system are
driven by significant fluctuations in demand and the inability to forecast accurately. The reasons for
increase in variability in Barilla’s supply chain are illustrated below:

1. Long Lead Times:

It takes around 8 to 14 days for the receipt of goods at the distributers end from the date the order
was placed and the average lead time being 10 days. This long lead time adds to variability and
reduced service levels.

2. Lack of Centralized data:

Barilla does not maintain a centralized database for its order processing, thus the Bullwhip effect
comes into play thereby causing the retailers and distributors to maintain higher inventory thus
adding to variability.

3. Sales Promotions:

Sporadic sales promotion campaigns such as volume discounts leads to inflated demand which in
turn leads to forecasting errors thus causing variability in the supply chain.

4. Lack of an Order quantity range:

There is neither a Minimum nor a Maximum order quantity specified; thus demand fluctuations
are hard to predict and thus there is a very high co-efficient of variation in the demand patterns.

5. Large number of SKUs:

There are around 800 different SKUs for dry products. Maintaining inventory for such a large
array of products certainly adds to variability.

6. Improper Forecasting:

Distributers do not use scientific forecasting techniques to track demand patterns accurately. This
leads to reduced traceability of variation in demand.

7. Sales Representatives:

Incentives provided to sales representatives for different SKUs are inconsistent, so they end up
pushing those SKUs which earns them more incentives.

8. Batch Ordering:

Retailers indulge in batch ordering. A large order one week is followed by no orders for the next
couple of weeks. Such sporadic ordering leads to variability.
Ans 2:

In order to cope up with the aforementioned drivers of variability, Barilla will need to take some
proactive steps. Some of which are punctuated below:

1. Everyday Low Price policy:

Rather than canvassing periodic promotional campaigns, Barilla must concentrate on maintaining
a constant low but competitive pricing the year round, in order to negate variability in demand
triggered by excessive buying during promotional periods.
2. Implement JITD/EDI:
Barilla needs to implement JITD and EDI so that real time information is readily available to
each member of the supply chain and demand can be easily followed upon. Thus Bullwhip effect
can be eliminated. The company should also conduct training seminars in order to convince
retailers and distributers about the need for JITD/EDI.
3. Establish a fixed Order Quantity range:

Barilla should contemplate implementing a Minimum and Maximum order quantity in order to
reduce variation in demand.

4. Incentive Policy:

Barilla should try and do away with its selective multi-product incentive policy and should come
up with a new enhanced incentive policy which would not bias the sales rep towards a particular
SKU.

5. Reduce number of SKUs:

As mentioned in the case, Barilla sells similar products in different packages in different regions,
which adds to the number of SKUs. The company should try and reduce the number of SKUs
from 800 at the moment by adopting common packaging styles for similar products sold in
different regions.

6. VMI:
In addition to its JITD proposal, Barilla should implement VMI at DOs and GDs. After an ABC
analysis of its products, the company should settle on the level of inventory to be maintained for
each product. After implementation of JITD and EDI, the company can track the dispatches and
decide on the quantities to be shipped to each DO and GD, which will avoid the time wasted
while order is received from the distributers.

Ans 3:

A well organized, real time transfer of demand data across the supply chain is the need of the hour for
Barilla Spa. The impact of transferring demand data vertically across the entire chain is as follows:
 • Centralized demand data reduces variability to a large extent.

• Real time sales and demand data can reduce the Bullwhip effect drastically.

• Service levels will improve since customer needs will be easily understood. It will help avoid
stock out situations at distributer and retailer level, which are caused by panic ordering and non
fulfillment of such orders, which in turn will improve the service level.

• Inventory levels will reduce across the supply chain as everyone in the supply chain will be
assured about the timely receipts of the products.

• Accuracy of forecasting will improve, as the forecasts will be based on actual customer demand
rather than on received orders and speculation.

• Visibility and Traceability in the supply chain will improve.

• All stages in the supply chain will be aware of the inventory positions of the upstream and
downstream partners. Any order receipt will trigger a swift response throughout the chain
resulting in reduced delivery lead times.

• As the forecasts will improve, the manufacturing units will be able to optimize their schedules
which will balance the demand patterns as well as the specific manufacturing environment
required for each product.

Ans 4:

The goal of VMI is to align all business objectives and streamline the operation of the supply chain for
both suppliers and their customers. In VMI, the manufacturer manages the inventory of its product at the
retailer outlet. Thus the manufacturer does not rely on orders placed by the retailer, thus avoiding the
bullwhip effect entirely.

VMI results in increased profitability due to:

• Reduced inventory.
• Reduced administrative costs.
• Fewer stock-outs.
• Increased sales.

Implementation of VMI at Barilla SpA:

As explained in brief in question 2, implementing a VMI strategy can be a shot in the arm for Barilla
SpA. The major delay in demand information to Barilla’s CDC is initiated at DOs and GDs. Even though
these centers receive demand information daily, the forward order to CDC is placed only once a week
thus creating a batch ordering effect. After implementation of VMI, Barilla will have real-time demand
data enabling it to schedule dispatches effectively from CDCs. This will reduce the delivery lead times for
the distributers. The necessity to keep excess inventory to counter these delays will be erased, causing
overall inventory in the supply chain to drop. Also the distributers will be confident of the supplies from
Barilla and will be able to give realistic commitments to retailers. Thus implementation of VMI will not
only reduce inventory holding costs but the service levels will also increase. The information will be
updated rapidly through EDI instead of media like Fax, Email and Phone which do not provide real time
information. But first the company will have to convince its distributers that this system will benefit them
as effectively and will reduce their costs as well, as their involvement in this project is the key to
successful implementation of VMI.

Ans 5:

A typical supply chain has various stages like Raw Material Suppliers, Manufacturer, and distribution
channels like Outbound Logistics, Warehouses, Retailers and finally the Customer. Each entity has its
own objectives for optimizing its operations.
• The RM supplier wishes to gain stable volumes with little variety, flexible delivery times and
demand in large batches.
• Manufacturers want accurate forecasts of future demand for better scheduling, less variety for
higher productivity.
• Distribution sources desire minimal transportation costs, least possible inventory and rapid
replenishment.
• Customers crave items to be always in stock with a variety of options to choose from and of
course, low prices.
It can be easily inferred that the above goals are conflicting. In the past, to achieve some of the prominent
goals like manufacturing and transportation efficiency, matters such as high variety, lowest possible
inventory were sacrificed. But in recent years, as organizations have become more customer oriented
these trade-offs are no longer permissible. But these changes are also accompanied by advances in
manufacturing and information technology. Use of these technologies can have an enormous impact on
the overall efficiency of the supply chain. These can be summarized as follows:
• The advances in manufacturing technology such as ‘Flexible Manufacturing Systems’ has
reduced the necessity of large production quantities to justify the change over costs. Also the
availability of demand information instantly provides manufacturers with as much lead time as
possible. The downstream members can quote lead times accurately and need not keep extra safety
stocks in anticipation of manufacturing problems.
• Materials Managers have a broader view of orders and forecasts through distribution control
system. Thus they can combine many shipments to make use of full truck load cost efficiencies which
reduces the transportation costs. Also, advanced mathematical methods like network optimization can
be used for balancing the inventory levels and the transportation costs.
• The trade-off between higher variety and lower manufacturing costs can be addressed by using
advance manufacturing techniques enabling quick changeovers. Also another way to overcome this
conflict is to use delayed differentiation. In this concept, the product is in its generic form to the last
possible stage of supply chain. This asks for an integrated information system throughout the chain
which can be achieved through EDI.
• Transshipping has emerged as a new tactic implemented by organizations to maintain the service
levels without increasing the costs. The product is shipped directly to customer household from
 warehouse on receipt of order from the retailer. For this strategy to be effective, the availability of
warehouse inventory data to the retailer is must. As a next step in use of information technology,
Product Customization by end customer through the internet has been used by some organizations
e.g. Dell Computers. At present this approach is limited to a select few products but has a high
potential for expansion.
It is evident from above explanation that information technology holds the key towards resolving the
conflicts between various stages of supply chain. It is a step towards global optimization from the entire
supply chains perspective.