Barilla SpA: Recommendations to Reduce Demand Variability and to Improve Overall Supply Chain Performance

Report Submitted By: Aditya Talwar Gaganjit Sandhu Gautham Puliyanda

IEE 598 Spring 2003 Submitted on :05/01/2003

Executive Summary
Barilla SpA, an Italian pasta manufacturer, is experiencing amplified levels of inefficiencies and rising costs due to variability in demand from its distributors. In order to bring things back in order and to improve margins, Giorgio Magialli, the Director of Logistics at Barilla wants to implement a Just-In-Time Distribution (JITD) system that was proposed by his predecessor Brando Vitali. This system is entirely different from the existing setup and is being opposed by both the distributors and Barilla’s Sales and Marketing Department. 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. We believe that by following our recommendations, Barilla will succeed in influencing its distributors and Sales personnel to work together and implement the JITD program. This will not only result in better performance in terms of time and money but also promote trust and good relations among all the partners in the supply chain.

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. Brando Vitali, Barilla’s ex-Director of Logistics, had proposed a Just-In-Time Distribution (JITD) system to counter this demand variation. This 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 supplychain 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. Giorgio Magialli, Barilla’s current Director of Logistics, is trying to implement this idea since two years but has not made much progress. Our objective in this report is to study the problems and come up with recommendations to resolve them.

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: • Promotions: Barilla’s sales strategy relied heavily on the use of promotions, in the form of price, transportation and volume discounts. They divided the year into 10 to 12 canvass or promotional periods, during which different products were offered at discounts. These price discounts ranged from 1.4% to 10%. Barilla’s volume discounts consisted of carton discounts offered by sales representatives and the transportation discounts consisted of free shipping to the distributors. • 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. • Bad forecasting by Distributors: The distributors did not have forecasting systems or sophisticated analytical tools for determining order quantities and this resulted in bad forecasts.

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: • Production Costs: These costs increased drastically as the demand variation increased. This was because pasta production was a very delicate process and the drying of different types of pasta required precise levels of temperature and humidity that could not be changed fast enough to produce different types of pasta in demand. As Barilla struggled to cope up with the fluctuating demand, the production costs rose as changeover was costly and lead times as well as backorders increased. • 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: • Untraditional and Revolutionary idea: The JITD system proposed something very new and unheard of. It entailed disclosure of sales data by the distributors to Barilla who would then forecast for the entire supply chain and provide products in the right quantity and at the right time to meet demand. The distributors had reservations to this idea, as they did not want to share their sales data and did not believe that this system would work. • 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. • Fear of Disintermediation: The distributors felt that if they allowed Barilla to control the order process, they would be of no use in the supply chain and would eventually be disintermediated (removed). The reasons for internal opposition in Barilla are: • 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.

Aggregate Demand: As Barilla is going to decide order quantities for all distributors, it can aggregate the demand and thus ensure better forecasts and reduced costs. This is due to the fact that even if some of the distributors demand more than what was forecasted, the slack in demand from others would offset this increase.

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.

New Compensation System: The Sales department should be informed that they would still be rewarded for good performance, except that in this case it was the performance of the entire company as a whole and not just they individually. The new system would award a percentage of Barilla’s profits to the employees as a bonus. They should be shown that the reduction in costs due to the JITD system would ensure greater margins for Barilla that would then be passed on to the employees.

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. Instead of sending the Logistics personnel to talk to the distributors, Barilla should send the Upper Management. This would make the distributors feel important and would help in convincing them better. Barilla should make compromises in its business in order to help its distributors. Barilla should work to improve the distributors business better thus increasing goodwill with 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. • Inefficiency of the Distributors: Barilla could prove the inefficiency of the distributors by showing them the mismatch between the inventory held and the actual demand in the current system. For example in week 31 in 1989, the inventory held at the Cortese DC was 1000 quintals while the actual demand was 310 quintals. This mismatch was taking a heavy toll in terms of costs. • 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. Other Recommendations: We have some other recommendations that we believe will help to reduce demand uncertainty and eventually improve overall supply chain performance. They are: • 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.

CPFR: Barilla could use a CPFR (Collaborative Planning Forecasting and Replenishment) strategy where manufacturers, distributors and retailers work together to plan, forecast and replenish products. This strategy would increase the fill-rates while reducing the inventories. This is due to the fact that for the same level of fill-rate, a CPFR strategy would require lesser inventory due to better forecasting.

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.

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