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T. A.

PAI MANAGEMENT INSTITUTE

Barilla SpA Case Analysis


DTMT Assignment

Satrajit Chakraborty
PGP: 2 Sec: 2 Roll No: 08247
Case Facts

• Barilla SPA - World’s largest pasta producer


• 35% market share in Italy and a 22% market share in Europe
• 2 Product Categories – 75% Dry and 25% Fresh
• Dry Products have longer shelf life than Fresh Products
• Vertically Integrated – Plants to Distribution Warehousing
• Distribution System

The distributors such as GD(grand distributor


distributor), DO(organized distributor) and BD (i.e.
Barilla-run
run Depots) receives orders from the supermarkets and shops, and places orders
to Barilla CDCs(Central
(Central Distribution Centres) who then forward production orders to the
factory. A distributor’s warehouse typically held 2 wee
weeks
ks supply of Barilla products in its
inventory. At each level in the supply chain, inventory was reviewed periodically and
orders placed with the preceding channel. Lack of customer demand information resulted
in buffer stocks at each level, resulting in hhigher levels of inventory
ory to meet the desired
cycle service level.

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Issues Faced

• Extreme demand fluctuations


• Pressures to manufacturing in terms of production lead-time and perish ability of product
• High Inventory Carrying Cost vs. stock outs resulting in backorders
• Unacceptable Cycle Service Levels (CSL) – inadequate product availability
• Distributors’ inability to carry large number of SKUs

Demand variability exist because long order lead times, lack of information and forecasting
ability at the distributors’ end, price and volume discounts and other promotional activities
leading to forward buying during discounting period resulting in seasonality in demands and
large number of SKUs making demand forecasting complex.

This resulted in carrying high finished goods inventory at the factory and also safety inventory at
the distributors’ end. Effects were strained manufacturing and logistics operations, trimming
retailer/distributor margins, high inventory holding cost adversely affecting profitability.

But, even then average weekly stock outs were as high as 5.5% or more, resulting in low order
fulfilment rate, accumulation of backorders, poor customer service level.

The result is high inventory pile up or stock-outs, a classic case of Bull Whip Effect or demand
amplification as one move up the supply chain.

Countering the BWE – Decision Taken

• Reduce Uncertainty and Lead Times – through information centralization


• Decision to go for Vendor Managed Inventory – JITD (Just-In-Time Distribution)
• Basis was to focus on customer demand rather than distributor orders
• Distributor to provide data on the shipment and current stock levels for each Barilla SKU
• Decision-making authority will be primarily with Barilla

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Benefits expected out of JITD

• Better demand forecasting using sophisticated tools


• Resulting in better production planning and distribution
• Reduced Inventory Levels and higher profits across the whole supply chain
• Better order fulfilment with reduced stock-outs and backorders
• Making the demand system pull-based from the existing push-based
• Information centralization leading to mitigation of BWE
• Elimination of fixed ordering cost of the distributors

Implementation issues faced

• Increase Distributor’s dependence on Barilla – shift in power towards Barilla


• Thus distributors unwilling to share warehouse data
• Distributor to push competitor products with increased shelf space
• SKU complexity leading to difficulty in proper forecasting
• Inability to run Trade promotions
• Sales and Marketing feared loss of responsibilities

Why JITD should be implemented?

Forecasted Predicted
Week Orders Sales Inventory Orders (3 Inventory
Weeks MA) Level
1 210 260 1150
2 100 320 920
3 290 270 830
4 340 360 700 283 229
5 480 250 925 317 372
6 470 310 1090 293 289
7 310 345 1050 307 267
8 505 390 1175 302 217
9 325 310 1200 348 344
10 700 395 890 348 259
11 285 260 900 365 411
12 850 475 1270 322 152
13 170 300 1120 377 382

4
14 900 200 1020 345 451
15 300 340 700 325 291
16 180 220 650 280 366
17 780 320 1100 253 239
18 95 325 880 293 274
19 420 290 1000 288 304
20 80 340 740 312 277
21 160 285 610 318 339
22 190 250 550 305 361
23 510 360 700 292 237
24 180 355 510 298 249
25 120 295 370 322 332
26 300 290 380 337 352
27 290 325 320 313 294
28 650 320 630 303 289
29 180 310 500 312 307
30 75 315 400 318 309
31 50 310 210 315 311
32 595 175 620 312 442
33 350 320 640 267 252
34 170 265 550 268 309
35 110 190 490 253 369
36 310 340 470 258 224
37 890 300 1080 265 271
38 815 400 1490 277 182
39 210 450 1240 347 202
40 300 400 1150 383 289
41 280 360 1080 417 362
42 360 300 1120 403 409
43 400 215 1310 353 444
44 150 265 1190 292 332
45 300 300 1190 260 266
46 120 305 1000 260 261
47 380 280 1100 290 316
48 20 350 770 295 251
49 400 265 900 312 352
50 250 260 900 298 344
51 290 180 1000 292 417
52 0 275 700 235 266
Mean 331 306 855 309 307
SD 230 62 299 39 69

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CV 0.69 0.20 0.35 0.13 0.22

1600
ANALYSIS
1400

1200

1000
QUINTALS

800

600

400

200

0
1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31 33 35 37 39 41 43 45 47 49 51

WEEKS

Orders Sales Inventory Forecasted Orders Forecasted Inventory

By using simple 3 weeks moving average forecasting, it can be observed that the forecasted
orders and forecasted inventory at Cortese Northeast DC has drastically reduced. Also from the
table, it can be seen that the Coefficient of Variation (CV) has reduced from 0.69 to 0.13 for
orders and from 0.35 to 0.22 for inventory by using this simple demand forecasting. Using
more sophisticated techniques like exponential smoothing etcetera, it can be further reduced.
Customer demand information flow and accurate forecasting can greatly reduce the BWE in
supply chain.

Also the SKU complexity can be addressed by 80:20 rule i.e. 20% of the SKUs to be focused for
JITD implementation based on their demand. (highest demand items focus)

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How to implement?

• Sell the idea as a collaborative method of working – both the parties are equal partners
• Arranging pilot runs at one or two distributor sites
• Clearly specify the cost-benefit analysis for each distributor
• Explain the importance of marketing efforts in the new JITD model.
• Get top management support in evaluating and implementation of JITD