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Barilla SpA (A)

Company Overview

Barilla SpA is a large, vertically integrated, family owned pasta company based
in Italy. It maintains a leadership position among a field of thousands of Italian
competitors producing and distributing brand-name pasta. Its operations are
divided among 3 production divisions and two distribution channels, based on
product shelf life. Distribution was further divided between two central
distribution centers (CDCs), based on geography.

Customers were divided into three primary segments: Small retail shops; Large
independent supermarkets; and Large supermarket chains. Distribution to
small retail shops was direct from the CDCs. Distribution to the supermarkets
went through intermediate distribution centers, either owned by the chain, or
operated by a third party representing multiple independent supermarkets.
Fresh product was distributed through a network of brokers.

Inventory levels in the supply chain, managed via periodic-review inventory


systems, were high, with larger levels of safety stock held for dry pasta (which
had longer shelf-lives) than for fresh pasta. The CDCs carried approximately a
1-month supply in inventory, and supermarket distributors maintained a 2-
week supply, yet stockouts still occurred frequently. These high inventory
levels were in part a result of heat control issues in the production process
making it difficult to respond quickly to shortages, so increased safety stock
was the preferred response to demand variability.

Distribution Problems

The pasta supply chain suffered from classic bullwhip-effect problems: high
inventory levels stored at each level of the supply chain; stockouts at the
distributor level; demand variability magnification up the chain, and
exacerbated by frequent promotions, Full Truck Load (FTL) and other volume
incentives; and a lack of information on which to forecast demand.

Increasing product variability exacerbated all of these problems. Barilla


maintained over 800 SKUs of dry pasta alone.

To combat these problems, the Director of Logistics desired to implement a Just


In Time Distribution (JITD) system utilizing a vendor-controlled inventory
scheme. However this proposal faced severe opposition both internally and
among customers.

Internal opposition originated both from job security fear as well as more
legitimate concerns, such as the culture of promotions and fear of competitor
encroachment into distributor warehouse space following a reduction of Barilla
inventories. Outside opposition was most vocal from distributors' buyers, who
were most directly threatened by the JITD system.

Availability of demand information, even at the store levels, also presented


difficulties in implementing a system that would be completely dependent upon
using this information to forecast.

Recommendations & Implementation Plan

Decrease in Total Inventory

A JITD program would help to reduce inventory held at the distributors since it
builds inventories at the central warehouses and then deliver only the
quantities required by the end-users through more frequent checks of the
distributors' inventory. Thus, the JITD approach will save the entire supply
chain money in reduced inventory costs and will result in high service levels.
But finding the right foothold on which to mount a successful pilot program is
the key challenge for Barilla.

A JITD system would have the following features:

1. Elimination of promotions to reduce demand variability caused by batch


ordering
2. Everyday low pricing, to remain competitive
3. More frequent deliveries with mixed-orders per FTL
4. Demand forecast information made available
5. Vendor-managed inventory at the store and distributor levels

Improved Fill Rate & Decreased Distribution Cost

Since the inventory data and delivery patterns would be controlled by Barilla, it
would be easier for their central factory and CDCs to schedule their production
and deliveries to meet the customer demands. For the distributors, the
increase in flexibility and reaction speed leads to lower inventory levels
improving the fill and stockout rates. It will also help to improve scheduling of
production and reducing lead-time, which will minimize the fluctuations seen
currently. The delivery load will be balanced.

Improved Customer Relations

Reduced inventory costs, higher service levels, improved fill-rate and


decreased distribution costs would all lead to improved customer relations.

Increased Shelf Space for Distributors

The improved delivery schedules will lead to a decrease in inventory enticing


the distributors to take on more of Barilla's competitors' products. This is an
opportunity for the sales representatives to sell the distributors on taking on
more of Barilla's products to improve the selection they currently offer.

Improved discount policy

Instead of giving discounts for large order volumes, Barilla would give discount
for stable long-term orders (EDLPP). By doing so Barilla could have many
reliable long-term orders to meet market demands, and considerably reduce
the variability in the supply chain.

New roles for sales representatives

The role of sales representatives should be defined as JITD customer


relationship and development managers. Not only would they be selling Barilla
products, but they would also be providing services that improve customers'
delivery program. The representatives can participate in the JITD program as
the communication bridge between the company and the distributors helping
to implement the JITD program.

A system would be installed in the representatives' portable computer by which


more information at the distributor warehouse level could be collected. By
doing so, the sales representatives will still play a vital role in the new system,
while reducing the distributors' work in implementing the JITD program, leading
to greater participation.

Target Market

It is our recommendation that Barilla focus the implementation of the JITD


program on the delivery of dry pasta to small retail shops. The Italian
government supports the small shops rather than the larger supermarkets and
therefore Barilla may benefit in future dealings with the government. Small
shops have shown to have better growth rates than supermarkets, and this is
the segment in which Barilla does not have a significant market share.

Small retail shops constantly struggle with providing product variety to its
customers within the limited shelf space they operate by. This market would
be the most willing of all segments to accept smaller order quantities to reduce
the inventory they have on hand. This reduction would allow them to add
greater variety of products.

The small retail shops are currently served by Barilla's own regional distribution
centers so there is a greater level of control within this supply chain. Sharing
of information becomes easier which is paramount to the JITD program.

Analysis and Justification

At the center of our recommendation is the implementation of the JITD.


Showing the cost savings of the JITD can solve all the distractions of the sale
representatives, distributors, and retail outlets. The JITD would require all
parties, including Barilla, to move to a continuous review policy from the
current periodic review policy in inventory replenishment. Keeping demand,
standard deviation of demand, inventory carrying cost, and order cost
constant, Barilla can make adjustments that would allow for an optimum order
quantity, reorder point, safety stock, and average inventory based on the
required service level of its customers. Moving to the optimal quantities will
reduce the physical inventory required at the retailers and distributors because
of the steady stream of inventory that is moving in the pipeline.

Moving to a continuous review policy means smaller shipment lots. To


minimize the potential increase in order and transportation costs, Barilla should
include joint replenishment of its various SKUs when considering order
quantities. The smaller average inventory that will be required by the new
policy will allow the distributors and retailers to add the full complement of
Barilla products. This would require no additional shelf space. While this may
have been a costly proposition in the periodic review policy, the continuous
review policy allows the constant flow of products that are selling. Therefore,
items that are not selling will only take up the current shelf space and no
additional inventory of that good will be taking up unnecessary space.

In the long term, it is recommended that Barilla move to a single distribution


system for both fresh and dry pasta to increase the cost effectiveness of joint
replenishment. This however cannot be done until the supply chain can reduce
the delivery time to a level that suits both products.

Conclusion

Barilla became a market leader by taking a simple product like pasta and
selling it very differently than the rest of the industry. The product was put in
sealed boxes and marketed as a higher end product. In doing this, the
company was able to produce a greater profit margin than its competitors. The
JITD program gives Barilla an opportunity to do something very similar. By
moving to a distribution system that greatly reduces the variability, Barilla can
greatly reduce the "Bullwhip" effect that plagues the industry.