Barilla Spa Research

BARILLA SpA (A), (C) and (D)

1. Draw a flow diagram for Barilla dry products sold through distributors. Your diagram will have four major sections: Barilla production, Barilla Finished Goods Inventory, Distribution Centers, and grocers. Indicate the flows of both physical goods and information. At appropriate places on your diagram, collect any relevant statistics mentioned in the case, for example on inventories, lead-times, etc.

Please refer to the following page (page 2 of this document) for the process flow diagram for Barilla dry products sold through distributors.

INSERT PROCESS FLOW DIAGRAM

2.

What are the problems and difficulties facing the supply chain? What is their impact? Diagnose their underlying causes.

The supply chain of pasta and pasta-related products in Italy was facing significant problems, including excessive inventory levels, high levels of stock-outs, extreme reliance on promotional activities, inefficient logistics operations and poor communication and cooperation between the supply chain participants. The industry had not leveraged technology to improve communication amongst its members, tracking of inventory or demand forecasting. These problems resulted in higher inventory carrying costs, as supply chain members sought to reduce the frequency and magnitude of stock-outs. Furthermore, industry suppliers competed fiercely on price, resulting in extreme peaks in demand during promotional periods.

The core cause of these problems was unpredictable demand, which resulted in higher inventory levels and carrying costs, in addition to making logistics operations more difficult. Because there was limited demand visibility within the supply chain, any significant fluctuation in demand potentially resulted in stock-outs. Poor communication and cooperation amongst the supply chain participants also contributed to the limited visibility of demand within the supply chain. Because the supply chain participants were not actively sharing information with other members of the supply chain, the participants were unable to react quickly to peaks in demand. As a result, higher levels of safety stock were maintained by all parties in

the supply chain to avoid potential stock-outs. Barilla suffered from this demand variability to an even greater extent than the grocery stores or distributors due to its position in the supply chain and the associated bull-whip effect.

In addition to poor communication, the extensive use of promotions and discounts also contributed to the variability of demand. The grocery and pasta business in Italy had a long history of using promotions and discount pricing to move products. The central distributors expected frequent trade promotions and stocked up on inventory during the promotional periods to benefit from the favorable pricing. As a result of promotions, the demand for Barilla¡¯s products would swing significantly from week to week and was not stable throughout the year. Demand peaked when promotions were offered and dropped significantly when the promotions expired. As a result, higher inventory levels were maintained both by Barilla and the distributors as the distributors purchased sufficient pasta to meet both current and future needs.

An additional cause of the high inventory levels was the manufacturing process. Barilla carried approximately 800 SKUs of dry products, and many of these products were produced in precise conditions (temperature and humidity) to ensure the quality of the product. The manufacturing process used by Barilla focused on producing large quantities of individual products since adjusting the manufacturing conditions to suite a new product was a time-consuming process. As a result, Barilla could not react quickly to changes or peaks in demand as its manufacturing process faced long lead times. This inability to produce a balanced combination of pasta products was illustrated by the fact that the Barilla¡¯s plants were specialized by the type of pasta produced in the plant. This manufacturing system can be contrasted against ¡°Heijunka¡± which provides for a balanced production schedule. Because Barilla¡¯s manufacturing operations could not switch quickly between products, Barilla was forced to maintain overall higher inventory. The long set up times and lack of manufacturing flexibility resulted in higher cycle times to produce the product.

3.

How does the JITD program hope to correct these problems?

The core problem facing Barilla is the high degree of demand variance that it experiences by product and throughout the year. The main causes of the demand variance are limited visibility downstream, and reliance on promotions to push product downstream.

In order to increase visibility downstream, Barilla has developed a program that pulls relevant shipping information from their downstream partners. This allows Barilla to optimize production and transportation decisions given the information.

Barilla¡¯s Just-In-Time-Distribution program (JITD) effectively looks at the daily shipping decisions made by distributors and warehouses, combines that information with each distributor¡¯s stock position by SKU and plans future production and replenishment decisions for each distributor.

In order to reduce Barilla¡¯s reliance on promotions to push product downstream, Barilla plans to reduce the frequency and magnitude of its promotions. Barilla will demonstrate to its customers that the gains (reduced inventory carrying cost, reduced stock outs, reduced damages etc¡) experienced by distributors/warehouses using the JITD program outweigh any changes in the average per unit price that a distributor pays. Due to the benefits that Barilla extracts from the JITD program, Barilla may be able to reduce the average price of their product or offer an incentive to adopt the JITD program.

By adopting the JITD program each step in the supply chain is able to extract benefits that result in reduced costs, improved customer service and can increase and stabilize revenue. After Barilla¡¯s JITD program is up and running a company can expect to fulfill a higher percentage of its orders from stock thus reducing its stock out rate and increasing its revenue. In addition, a company can expect to reduce its inventory that it carries throughout its system. In particular, a company can reduce the amount of safety stock that it carries throughout the year to adjust to demand/delivery fluctuations. Barilla also expects to extract benefits from being able to better plan and organize its production functions around actual product performance. This should also allow Barilla to reduce its costs associated with setup costs. Barilla is also able to maintain flatter prices throughout the year by reducing its promotions. This should allow Barilla to better estimate its revenue stream and should avoid the wide fluctuations associated with the promotion activity. Lastly, by having Barilla¡¯s customers integrate more closely into Barilla¡¯s supply chain, Barilla has effectively raised its customer¡¯s potential costs associated with changing suppliers and raised the bar that competitors must clear to gain a foothold in Barilla¡¯s business.

However, we need to remember that application of the JITD program to Barilla¡¯s distribution network has several drawbacks (perceived and real) that might slow the expansion/implementation of the program. For example, based on previous trials we believe that the JITD must be implemented in one large event as opposed to a piecemeal approach, which might be preferred by Barilla¡¯s customers. In addition, the JITD program requires a substantial investment in resources to adopt the technology that allows warehouses and distributors to communicate with Barilla each night. One of the necessary components for a successful JITD program is the elimination or severe curtailing of the promotions that seem to be associated with the grocery-industry. This culture shift will require considerable effort to effect the positive change that will allow a JITD program to succeed. In addition, the advocates that need to be selling this program to Barilla¡¯s customers are unhappy with the program because they believe (correctly) that after implementing this type

of program they earn less money. One of the final and most important hurdles for Barilla to handle is the requirement of the free flow of information from the distributor to Barilla. This is the most essential part of the program and represents a major departure from current practices.

4. As one of Barilla¡¯s customers, what would your response be to JITD? If you were Barilla¡¯s management, how would you convince this customer to implement JITD?

As a retailer, my initial reaction would be why should I share my sales data upstream to a supplier who also supplies its products to my competitors? Also, I would ask why Barilla believes that it can create better demand forecasts than myself, who is closest to the customer. As a distributor, I would be irritated at the implication that stockoutsare a result of my ability (or in this case, inability) to forecast well. Also, I would suspect that Barilla was just trying to reduce its own inventory costs by pushing its products into my warehouses.

JITD is a hard sell because partial implementation (piecemeal approach ¨C only a few firms) is difficult due to the potential negative consequences in the short run (because non-JITD firms can exploit the no promotion constraints of JITD) and the benefits being somewhat longer term in nature. Also, elements of the JITD program are contrary to the existing mentality of Italian pasta distributors and retailers, especially in terms of promotions, discounts, order-placing, and inventory. Barilla also needs to convince non-technology-savvy individuals (retailers and distributors) to adopt this program while also reassuring distributors that it is not the intent of Barilla to bypass them in the supply chain. Barilla needs to establish trust between itself and the retailer/distributor. It needs to prove that the implementation of JITD will lessen the current problems facing the supply chain that have resulted in high costs of carrying inventory and lost sales, which are shared by all members (Barilla, distributor, and retailer) of the supply chain.

The customer has to be convinced that if the upstream site or Barilla has access to demand and inventory information at the downstream site, overall costs would decrease because Barilla is in the best position to create the demand forecast for the entire chain. For JITD to work, stable prices (i.e. no promotions or discounts) and a break in order batches (resulting in more frequent visits possibly with composite distribution of fresh and dry products) must exist. In convincing customers to join, I would first present my ideas that support JITD with graphical examples and lessons similar to the Beer Game. For example, Barilla could do a PV calculation of the reduced costs over a period of time due to lower inventory and reduced lost sales and compare it to the ¡°savings¡± achieved with promotions and discounts, two elements that are not consistent of JITD.

The next step would be to provide ¡°real proof¡± that the JITD concept works. Although we considered a pilot with smaller independent shops, we realized that this may not convince the larger supermarket chains that JITD will reduce overall costs. Rather, we chose to try to convince supermarket chain customers to try the JITD concept on a select number of products. Barilla would provide the technology, training and ¡°extra¡± work on the customer end. Over several months, these firms would not participate in the promotions of those particular products. Although firms may be hesitant to accept this, Barilla could offer to promise other compensation if those ¡°savings¡± from the promotions were not recovered by the reduced inventory carrying costs and lost sales of those particular products (money-back guarantee).

Barilla could offer additional incentives, such as a general discount, to convince retailers to share information but this discount would have to be spread across the entire year or in such a manner not to cause additional variability.

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1. First consider a decentralized analysis. Estimate the optional parameters for a (Q,R) inventory policy for each of the 4 SKU types detailed in the case for each proposed DC. Estimate the total annual inventory holding plus ordering costs for each of the 4 item types for each DC.

Decentralized Analysis:

Soft Cover I

(Q, R) Analysis

c = $2.00 i = 0.2 h = ic = $0.4/ unit-yr L = 2 weeks Weekly demand is normal with mean 25 and and variance 52 = 25

s = $50.00

Therefore, Q*

= [2(25)(52)(50)/0.4]1/2 = 570

Cs = $6.00 - $2.00 = $4.00 Ce = h(Q/¦Ë) = .4[570/(25)(52)] = 0.18

Hence, SL* = 4/4.18 = 0.958

Z0.958 = 1.73 from the normal distribution table.

Hence, R*

= L¦Ë + ZSL¦ÒL1/2 = 2(25) + 1.73(5)(2)1/2 = 50 + 12.23 ¡Ö 62

Cost Analysis

INV = Q*/2 +SS = 570/2 + 12.23 = 297 Annual Inventory cost = 297($.4) = $119 Annual ordering cost = (25)(52)(50)/570 = $114

Total annual cost per DC = $119 + $114 = $233

For all DCs, total annual cost = 6($233) = $1,398 per title.

Soft Cover II

(Q, R) Analysis

c = $2.50 i = 0.2 h = ic = $0.5/ unit-yr L = 3 weeks Weekly demand is normal with mean 50 and variance 502 = 2,500 s = $50.00

Therefore, Q*

= [2(50)(52)(50)/0.5]1/2 = 721

Cs = $6.00 - $2.00 = $4.00 Ce = h(Q/¦Ë) = .5[721/(50)(52)] = 0.14

Hence, SL* = 4/4.14 = 0.966

Z0.966 = 1.83 from the normal distribution table.

Hence, R*

= L¦Ë + ZSL¦ÒL1/2 = 3(50) + 1.83(50)(3)1/2 = 150 + 158.48 ¡Ö 308

Cost Analysis

INV = Q*/2 +SS = 721/2 + 158.48= 519

Annual Inventory cost = 519($.5) = $260 Annual ordering cost = (50)(52)(50)/721 = $180

Total annual cost per DC = $260 + $180 = $440

For all DCs, total annual cost = 6($440) = $2,640 per title.

Hard Cover I

(Q, R) Analysis

c = $10.00 i = 0.2 h = ic = $2.00/ unit-yr L = 3 weeks Weekly demand is normal with mean 100 and variance 202 = 400 s = $50.00

Therefore, Q*

= [2(100)(52)(50)/2.00]1/2 = 510

Cs = $11.00 - $4.00 = $7.00 Ce = h(Q/¦Ë) = 2[510/(100)(52)] = $0.20

Hence, SL* = 7/7.20 = 0.972

Z0.972 = 1.915 from the normal distribution table.

Hence, R*

= L¦Ë + ZSL¦ÒL1/2 = 3(100) + 1.915(20)(3)1/2 = 300 + 66.16 ¡Ö 366

Cost Analysis

INV = Q*/2 +SS = 510/2 + 66.16= 321 Annual Inventory cost = 321($2.00) = $642 Annual ordering cost = (100)(52)(50)/510 = $510

Total annual cost per DC = $642 + $510 = $1152

For all DCs, total annual cost = 6($1152) = $6,912 per title.

Hard Cover II

(Q, R) Analysis

c = $10.00 i = 0.2 h = ic = $2.00/ unit-yr L = 2 weeks Weekly demand is normal with mean 10 and variance 122 = 144 s = $50.00

Therefore, Q*

= [2(10)(52)(50)/2.00]1/2 = 161

Cs = $11.00 - $4.00 = $7.00 Ce = h(Q/¦Ë) = 2[161/(10)(52)] = $0.62

Hence, SL* = 7/7.62 = 0.919

Z0.919 = 1.40 from the normal distribution table.

Hence, R*

= L¦Ë + ZSL¦ÒL1/2 = 2(10) + 1.40 (12)(2)1/2 = 20 + 23.76 ¡Ö 44

Cost Analysis

INV = Q*/2 +SS = 161/2 + 23.76 = 104 Annual Inventory cost = 104($2.00) = $208 Annual ordering cost = (10)(52)(50)/161 = $161.50

Total annual cost per DC = $208 + $161.50 = $369.50

For all DCs, total annual cost = 6($369.50) = $2,217 per title.

2. Now consider a centralized analysis (their current system), using the same service level derived for the decentralized system. Estimate the optional parameters for a (Q,R) inventory policy for each of the 4 SKU types detailed in the case for a centralized DC. Estimate the total annual inventory holding plus ordering costs for each of the 4 item types for the centralized DC.

Centralized Analysis:

Soft Cover I

(Q, R) Analysis

Centralized demand is normally distributed with mean 6(25) = 150 and variance 6(52) = 150 = 12.252

Therefore, Q*

= [2(150)(52)(50)/0.4]1/2 = 1,396

R*

= L¦Ë + ZSL¦ÒL1/2 = 2(150) + 1.73(12.25(2)1/2 = 300 + 30 = 330

Cost Analysis

INV = Q*/2 +SS = 1,396/2 + 30 = 728 Annual Inventory cost = 728($.4) = $291 Annual ordering cost = (150)(52)(50)/1,396 = $279

Total annual cost = $291 + $279 = $570 per title

Soft Cover II

(Q, R) Analysis

Centralized demand is normally distributed with mean 6(50) = 300 and variance 6(502) = 15000 = 122.472

Therefore, Q*

= [2(300)(52)(50)/0.5]1/2 = 1,766

R*

= L¦Ë + ZSL¦ÒL1/2 = 3(300) + 1.83(122.47(3)1/2 = 900 + 388 = 1,288

Cost Analysis

INV = Q*/2 +SS = 1,766/2 + 388 = 1271 Annual Inventory cost = 1271($.5) = $636 Annual ordering cost = (300)(52)(50)/1,766 = $442

Total annual cost = $636 + $442 = $1,078 per title

Hard Cover I

(Q, R) Analysis

Centralized demand is normally distributed with mean 6(100) = 600 and variance 6(202) = 2400 = 48.992

Therefore, Q*

= [2(600)(52)(50)/2]1/2 = 1,249

R*

= L¦Ë + ZSL¦ÒL1/2 = 3(600) + 1.91(148.99(3)1/2 = 1800 + 162 = 1,962

Cost Analysis

INV = Q*/2 +SS = 1,249/2 + 162 = 787 Annual Inventory cost = 787($2.00) = $1,574 Annual ordering cost = (600)(52)(50)/1,249 = $1,249

Total annual cost = $1,574 + $1,249 = $2,823 per title

Hard Cover II

(Q, R) Analysis

Centralized demand is normally distributed with mean 6(10) = 60 and variance 6(122) = 864 = 29.392

Therefore, Q*

= [2(60)(52)(50)/2]1/2 = 395

R*

= L¦Ë + ZSL¦ÒL1/2 = 2(60) + 1.40(29.39(2)1/2 = 120 + 58 = 178

Cost Analysis

INV = Q*/2 +SS = 395/2 + 58 = 256 Annual Inventory cost = 256($2.00) = $512 Annual ordering cost = (60)(52)(50)/395 = $395

Total annual cost = $512 + $395 = $907 per title

3.

Estimate the difference in annual expenses between the centralized and decentralized system over the 150,000 titles classified in the table.

Difference in Annual Expense:

Soft Cover I

Number of titles = 50,000 Total annual cost in decentralized system = 50,000($1,398) = $69,900,000 Total annual cost in centralized system = 50,000($570) = $28,500,000 Hence, cost difference = $69,900,000 - $28,500,000 = $41,400,000

Soft Cover II

Number of titles = 70,000 Total annual cost in decentralized system = 70,000($2,640) = $184,800,000 Total annual cost in centralized system = 70,000($1,078) = $75,460,000 Hence, cost difference = $184,800,000 - $75,460,000 = $109,340,000

Hard Cover I

Number of titles = 10,000 Total annual cost in decentralized system = 10,000($6,912) = $69,120,000 Total annual cost in centralized system = 10,000($2,823) = $28,230,000 Hence, cost difference = $69,120,000 - $28,230,000 = $40,890,000

Hard Cover II

Number of titles = 20,000 Total annual cost in decentralized system = 20,000($2,217) = $44,340,000 Total annual cost in centralized system = 20,000($907) = $18,140,000 Hence, cost difference = $22,140,000 - $18,140,000 = $26,200,000

By decentralizing additional cost incurred will be $41,400,000 + $109,340,000 + $40,890,000 + $26,200,000 = $217,830,000

4.

In what ways is this analysis approximate? In what ways does this

exaggerate or underestimate the differences in inventory costs between the current centralized system and the proposed decentralized system?

The standard deviation for the centralized system is overestimated when it is represented by ¦Ò(n)1/2. This is evident from the statement in the case that if the variability in the decentralized system is characterized by ¦Ò, the variability in the centralized system is less than ¦Ò(n)1/2.

My decision is to implement the Just-in-Time Delivery system. JITD will resolve the increasing operational inefficiencies and cost penalties that have resulted from large week-to-week variations in Barilla’s distributors order patterns. In order to reduce the Bullwhip effect being experienced by Barilla, their supply chain would have to be Centralized. This solution allows Barilla to see end customer demand and eliminate costs involved with inventory, manufacturing, and transportation. JITD would allow Barilla to work directly with its distributors and create a flexible manufacturing process. By following the suggestions made in the plan of action, Barilla will succeed in influencing its distributors and Sales personnel to work together and implement the JITD program, which will produce better performance in

terms of time and money but will also promote trust and good relations among all the associates in the supply chain.

The main problem addressed in this case is how to effectively implement the JITD system suggested by Giorgio Magialli, the Director of Logistics. Barilla has a very complex distribution network. Barilla has been experiencing large amounts of variability in demand which are resulting in operational inefficiencies and increased manufacturing, inventory and distribution costs. The proposed JITD system requires 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. The system is received with resisitance from unconvinced and leery distributors as well as internally with the sales reps who fear, among other things, reduction in responsibilities.

In this case, a successful decision would result in the reduction of the Bullwhip effect, which Barilla is experiencing. It would also reduce the variable demand that is causing inefficiencies and increasing costs. The decision should bring positive results to the entire supply chain and ensure that all concerns brought up both internally and externally are met.

Barilla SpA, an Italian pasta manufacturer, is experiencing levels of inefficiencies higher than ever before. They are also occurring rising costs due to variability in demand from its distributors. The distribution system at Barilla SpA is excessively complex. That complexity is causing them to be unresponsive to their widely variable customer demand and consequentially operational inefficiencies and increased manufacturing, inventory and distribution costs are caused. Their customers and distributors are required to possess high levels of inventories while at the same time maintaining stock outs on average of 7%. The central reasons for fluctuating demand include the use of promotions (price, transportation, and volume discounts), the compensation system in place for Sales reps (they push more products into the channel during promotional periods and not able to sell sufficient quantities during non promotional periods), the large range of SKU's in each product line, and incorrect forecasting practices. The fluctuating demand has had adverse cost implications for Barilla. The production costs were rising heavily due to frequent changeover for offering wide range of SKU's, and backorders. It also led to production scheduling difficulties and high labor and transportation costs to satisfy the high ordering during promotional periods. The fluctuations in demand have several negative impacts to the pasta business. Neither the distributors nor Barilla had the ability to precisely predict future demand. For Barilla and its distributors, holding inventory is a costly. Without proper demand information the distributors did not know how much stock to hold and Barilla did not know how much pasta should be produced. The climax of the inventory trouble is when a stock out occurs because it is felt on both ends. A second impact of incorrectly predicted demand relates to the manufacturing limitations of the pasta. Each type of pasta had different temperature and humidity requirements. The lack of demand

information coupled with the different specifications left it difficult to respond quickly to changes in demand. Finally, the lack of information changed the effect of Barilla's incentives to distributors. The distributors were offered volume discounts for making a full truckload or multiple truckload order. The lack of forecasting meant Barilla was offering a reward for the distributors' inability to predict demand. If Giorgio were to implement JITD to control the demand fluctuations, there would be several issues he would need to address. Internally, Barilla's own sales and marketing organizations saw the idea as infeasible and risky. The sales representatives are apprehensive that their functions at the company would be reduced. The proposed JITD system required the sharing of sales data from the distributors with Barilla. Barilla would then forecast and deliver appropriate quantities of the products to the distributors at the accurate time in order to meet demand effectively. This would be a fundamental change from the current traditional supply-chain system where there was no sharing of information from distributors and they could place orders as they saw fit. The JITD proposal received severe disapproval and criticism from the distributors and from Barilla's own Sales and Marketing department. The distributors are unconvinced and unwilling to share warehouse data with Barilla. They lack both faith and trust in Barilla and they feel that Barilla will hold the power that they currently hold themselves. The sales representatives fear a reduction in their responsibilities. As well, they predict reduced sales levels, possibility of stock outs due to the lack of ability to adjust shipments quickly, increased shelf space for their competitors at the distributor, inability to run Trade promotions, unsure about the cost benefits. There is a concern that the pasta industry distributors are not prepared for such a complicated process of information sharing. They are not ready to share their sales data with Barilla and are not aware of the benefits of supply chain collaboration. The distributors are concerned of how the change will negative implicate them with the sharing the sales data. They think that the loss of control over the ordering process would make them lose competitive advantage over Barilla by adjusting their order quantities using their own forecasting and planning for attaining the profit margins, and Barilla would push their products and cut down their costs. They also feel that they would lose the opportunity to gain advantage during the promotional periods and they cannot place orders at will. The distributors are working with a large amount of suppliers. They do not have the trust level necessary to disclose their sales data to Barilla without being certain that their relations with other suppliers wouldn’t be affected

The first thing that needs to be done to effectively implement JITD is to convince and inform the internal sales force and the distributors of the benefits of JITD. Change is good for a company and necessary to grow. However, in order to do this, the distributors and the sales and marketing people at Barilla will have to be convinced that this proposal will do more good to them than bad. Sales and marketing would need to be convinced that their roles would not diminish, just change. They are influential in forecasting since they spent most of their time helping distributors place orders and examine competitors' information. The supply chain at Barilla would need to be centralized in order to reduce the Bullwhip effect being experienced. If Barilla gains control over the inventory throughout their supply chain, the JITD will work and operate successfully. For distributors, the JITD

system will eliminate the fixed costs in ordering. This will be done through an effective centralized system throughout the supply chain. For Barilla, they can improve their production scheduling and reduce the labor and transportation costs. By teaming up, Barilla and their distributors can successfully build a comprehensive forecasting model. This model will take into account the perishable inventory system, threshold inventory levels, and demand fluctuation factors. It will capture the high points in the demand by combining the demand throughout the supply chain. In order to convince the internal staff and sales force, Barilla should run pilot program which would run 6 months. Another option is running a simulation of the whole exercise. This will demonstrate to the staff and sales the benefits of sharing the sales data. Upper management should be involved and they should ensure that the sales managers are involved in order to incorporate their needs and obstacles involved in implement the JITD in the field. Additional responsibilities for market development should be given to the sales force and the compensation system should be overhauled to incorporate the new system by assigning target sales revenue through market development and territory management programs. SKU reduction needs to happen. Barilla needs to track the fastest selling pasta SKU's, so that they can reduce the amount of SKU's they offer. These lesser SKU’s will be more efficient by offering a particular set of product lines to each region to reduce the complexity in the supply chain. The cost results from the pilot program and simulation exercises should be dispersed to the distributors. This will enable them to understand the cost cutting and better inventory management practices the JITD system can offer. After seeing these they should be ready to adopt the JITD implementation by approaching the first phase. Trust needs to be built in order for the JITD to be successful. This is a major issue between Barilla and its distributors. To convince its distributors that Barilla is worth trusting and that they are making the right decision, Barilla should have a transparent policy and should not hide any of its plans from the distributors. Instead of sending the Logistics personnel to talk to the distributors, Barilla should send the upper management. This would generate favor among the distributors and they would feel important. Consistent operational meetings with Barilla's upper management and open communication will be required. Confidence and trust can be achieved with the distributors through longterm strategic partnership development.

-Magialli needs to look at JITD not as a logistics problem but as a company –wide effort. The senior managers need to be involved to show the whole company the importance of the proposal. They need to educate the staff first specially sales and marketing organizations, put some specific strategies for relationship of the these organizations with DCs. The whole company need to believe in the proposal and trust it with the top managers involvement.

-Barilla need to run experimental projects for the proposal with its 18 depots , establish a sophisticated IT system with them to exchange information because they need to show the results to internal organizations and also distribution centers.

-Magialli needs to ask senior managers to be involved into the case and keep on negotiations with the DCs and try to educate them and make them more familiar with the proposal and show them that they have already run the system with their depots and exchange the information with them. They need to gain the DCs trust , show them the benefits of the new system for both parties and also the end customers.

-Magialli need to establish a closer relationship with the end customers to make the customer service better and get a good feedback from them. They can establish this relationship with small groceries and in distribution of fresh products.

Key Assumptions

In spite of the fact that the pasta market is flat the demand fluctuation has mad a lot of problems for Barilla in forecasting the demands and reducing the changeover costs, inventory costs and increasing sales.

The JITD is considered as a good proposal to forecast the demand swings but the implementation of this proposal is difficult of the traditional environment, cultural issues, intertie , lack of communication and internal strategies.

The internal resistance make the situation harder for Migialli in the implementation process. He is facing a big resistance by the sales and marketing organizations. The issue is considered as a logistics problem and Migialli and his assistant make the most effort.

The external resistance makes the situation worse for Migialli and makes him disappointed .After tow years negotiations with the distribution centers there is still a little improvement. Most of the centers are reluctant and are not even interested in sharing the information with Barilla to help them forecast the demands.

Statement of Issues

The first and main issue for Barilla in 1980s the was the effects of fluctuating demand. As it is shown in Exhibit 12 orders for Barilla dry products often swung widely week to week. Such fluctuating demand put a huge pressure on Barilla’s manufacturing and logistics operations and forced Barilla to have a big stock for the items which seemed to have more demands which was expensive.

such extreme demand also caused distributors to have more out of stock peaks which had a bad effect on sales and customer service.

The second issue was implementation of the Brando Vitali’s alternative approach for order fulfillment. He believed that by the way that they were operating it was impossible for them to anticipate the demand swings. He believed that they should look at the distributors’ shipment data and send only what is needed at the stores, no more, no less. They could reduce their distribution costs, inventory levels and manufacturing costs. He called this approach Just-In-Time Distribution. Vitali’s proposal met with two sroblems which were derived from the second issue (implementation).

The first problem was the opposition of Barilla’s sales and marketing organizations. They had a range of concerns. They thought the sales level would flatten, they are not ready to handle such complicated relationship with distributors, it is risky and they can not adjust shipments sufficiently to changes to selling patterns or promotions, they increase the risk of having their customers Stock out of their products. I was not clear for them that the costs would be reduced, because in 1980s it was a new approach and the business environment of Italy was traditional and it was not cleared enough for them. I think this issue was the main issue for Vitali in the implementation process because when a company wants to start a new approach in any field first it should be cleared and justified internally and all the departments and staff needed to trust it then they could do their best to implement it externally, as a matter of fact it is not just a matter of logistics and it is an issue for the whole company so they have to know it by their best and believe in it first.

The second issue in implementation process was the resistance of the distributors. They had also some concerns. They weren’t Interested in talking about it. They thought they could managed their inventory better than the manufacturer , they were not Interested to share their internal information with the manufacturer. Some of them thought that they lose the power of managing and controlling their inventory and orders and the manufacturer get the power and push their orders to them. I think the main reasons for the distributors resistance were :

1- The traditional environment of distribution and ordering system of Italy 2- Barilla’s internal resistance is conveyed to distributors so they can not clear it for them efficiently

3- The distributors are not cleared enough about Barilla’s manufacturing problems and its effects on them and the advantages of the new approach on their inventory costs and sales.

Criteria

In this case a good decision would result in implementation of the new approach on inventory system which Vendor-Managed Inventory (VIM) which would lead to anticipation of demand change. This will help Barilla to reduce distribution costs, inventory levels and manufacturing costs and also help the distributors to reduce their inventory charges, reduce the risk of being out of Stock when the demand fluctuate and increase their sales and customer services.

Therefore the first criterion is to figure out the main reasons of demand swings to be able to manage them as much as possible.

A second criterion is to make the new approach clear enough for internal organizations and staff to be able to create harmony and a trust to the new approach in the whole company.

A third criterion is to talk with distributors and make the new approach clear as much as possible for them and catch their trust and make them believe that they can save a lot in their inventory charges and have more sales by new approach and it is not just for the Barilla’s benefit. This will lead to implementation of the new approach and resolving the manufacturing problems for Barilla and ordering and inventory problems for Barilla and distributors and they can save in inventory and manufacturing charges and also control and anticipate the demands swings.

Analysis

For two years Maggiali had tried to implement Vitali’s proposal (Just – in Time Distribution) but he has still had a little progress .

Vitalis’s reason for implementing his proposal and Maggiali support to it is because of demand fluctuation and swings for Barilla’s dry products. They are trying to forecast demands and provide as much as the distributors need and not more. They think they can resolve their manufacturing problems in case there is a high demand for any product , reduce their inventory levels and also their distribution and

manufacturing costs. They also believe that the distributors can also reduce their inventory levels and save money in it and also reduce the risk of being out of stock when there is a high demand for any product , increase their sales and also have a better customer service.

It seemed that Barilla’s customers were simply unwilling to give up their authority in ordering and controlling their inventory.

Some were even reluctant to provide the detailed sales data upon which Barilla could make delivery decisions and improve its demand forecasts. There is also internal resistance from Barilla’s own sales and marketing organizations , they do not believe in the proposal and see the concept infeasible and dangerous. They think they are not ready to have the necessary relationship with distributors and it is sophisticated for them now.

From 1989 to 1990 Barilla’s growth was 3.22% , it seems that the demand fluctuation (Exhibit 12) has not a specific pattern. The demand swings and distributors’ order pattern can have several reasons. One of the main reasons can be the Barilla’s strategies in marketing, manufacturing and distribution. Poor communication and customer service between distributors and retailers can be another reason for this ordering pattern. Distribution centers are not equipped with computer forecasting system , they just review their inventory levels in their systems and order those products which are below the specified recorder level .The retailers also are not equipped with bar code system and they use the traditional system for checking their inventory and ordering the products. In this scenario the distributors place an order when they receive and order so they have to builtexcess capacity to hold goods which they guess may have more demands.

On the other side Barilla’s marketing strategies for increasing their sales, encourage the distributors to buy some items more than they need and buy some in smaller amounts. These marketing strategies which are called trade promotions are used to push products into the grocery distribution network ,Barilla has 10 -12 “Canvass” periods for their promotional programs. These are:

Transportation discounts (DCs want to reduce their transportation costs so they may buy more than what they need so it effect the demand pattern)

Volume discounts and Promotional activities: It makes the DCs to order more than what they need to reduce their costs, it affects Barilla’s and DC’s inventory levels and demand pattern.

Lack of min/max volume constraints : means that DCs can order any product as much as they need and it may make the Barilla’s stock empty what if they receive more demands from other DCs?

Product proliferation: Barilla has 800 dry-product SKUs, but 100-150 of them are mostly distributed by DCs, as the products have a huge variety so if they receive an order for a product which has not a high demand they have to produce it what if they receive a big order for a high demand product at the same time, this variety affect demands fluctuation.

Long Lead Times: Average lead time from placing an order by DCs to receiving it is 10 to 14 days, it means if Barilla receive two or three or more orders at the same time the lead time for the second or third order would be 30 to 42 days which is so long for a product such Pasta which customers consume it daily or weekly, definitely it affects demand swings and customer service.

Poor communication : Barilla has neither a stable and continues communication with DCs nor with the retailers, it will affect the demand fluctuation because they do not receive the necessary information about sales and inventory levels of DCs and retailers so they can not forecast the demands, as Barilla has no feedback from the retailer so they have poor customer service as well.

Incentives and sales compensations : These encourage sales representatives to sell more ,they may have no concern regarding stock levels or the amount the orders which have already been received.

These incentives and promotions force excess inventory somewhere in the chain or with the customer even though there is no extra demand for pasta. As a matter of fact this order pattern gives Barilla a high manufacturing changeover costs they are forced to carry extra inventory which is very expensive or break the “best” production sequence. In order to Keep changeover costs low and product quality high, Barilla follows a carefully chosen production sequence that minimizes the incremental changes in kiln temperature and humidity between pasta shapes. It also forces the DCs to maintain extra capacity for inventory (long term) or obtain extra capacity at a premium (short term).This pattern has extra transportation charges for Barilla and DCs because they are forced to maintain extra trucks for long term or obtain trucking capacity at a premium for a short term period. When the retailers see such swings in demand an feel the risk of not to receive any specific product on time they may be froced to maintain

extra inventory that is expensive also they are limited in stock worth period of the products. This pattern at the end will affect

customer service and Barilla and DCs may lose some of their customers because of poor service.

JITD that can be a part of VMI inventory systems is a great proposal for the Barilla to forecast the demand fluctuation and at the same time reduce its manufacturing change over cost, inventory costs , transportation costs , improve service and increase sales.

Vendor Managed Inventory (VMI) is a streamlined approach to inventory management and order fulfillment. VMI involves collaboration between suppliers and their customers (e.g. distributor, retailer or product end user) which changes the traditional ordering process. Instead of sending purchase orders, customers electronically send daily demand information to the supplier.

the supplier generates replenishment orders for the customer based on this demand information. The process is guided by mutually agreed upon objectives for the customer's inventory levels, fill rates, and transaction costs.

The goal of VMI is to align business objectives and streamline supply chain operations for both suppliers and their customers. The business value is a direct result of increased information flow:

Improved Inventory Turns Improved Service Increased Sales

The basic Vendor Managed Inventory (VMI) process can be described in terms of the following steps: data communications, calculations, monitoring and reporting. This can be done by a third party inventory company or by the supplier. Maggiali is tryingto implement this system in Barilla and in communication with DCs. There is internal resistance because other organizations in the company are not cleared enough about the advantages of this system. The sales and marketing departments think the sales levels would flatten, actually they think the DCs won’t buy product if they are not there selling it. They think they run the risk of not being able to adjust their shipments sufficiently quickly to changes. Thy think the DCs are not ready for

this relationship. They think if space freed up in DCs warehouses they will push the competitors products. They think it increase the risk of having the customers stock out of their products.

As a matter of fact the system has not been elaborated by the managers because they consider it just a logistics issue. This issue is not just a logistics issue so the entire company so everybody need to believe it. The managers need to focus on the proposal to educate all the staff about the advantages of the approach because Barilla need a mutual trust between all the organizations inthe company. For Barilla as a supplier, VMI results in increased profitability due to:

Increased sales Reduced operating costs Stronger customer relationships

Magialli is faced an external resistance in his implementation process. Actually they need internal unity and trust to persuade the DCs to adopt JITD. The DCs are not familiar with VMI so they think they lose their authority in their traditional ordering system,

They have not experienced the advantages of this system practically so they fear that Barilla may not fulfill its job perfectly and their space been freed up and it affects their sales and their relationship with the retailers. As DCs are using the traditional inventory control and order pattern so they do not have the necessary sophisticated computer system to establish this important relationship with Barilla so they think they will be pushed by Barilla’s products and cannot select what ever they need. Barilla needs to educate the DCs and show them the positive effects of the new approach to gain their trust. Barilla needs to show them experimentally the advantages of this system for them and for the whole supply chain because they think Barilla is implementing This proposal just to reduce their costs and push their products and get the authority to manage the demands. As stated before it is not just a logistics problem and needs the whole company and especially managers attention. Barilla need to pay attention to its internal strategies , its relationship with DCs, cultural issues, inertia and DCs concerns.Barilla need to show DCs that for them VMI results in increased profitability due to:

Reduced inventory/increased turns

Reduced administrative costs Fewer stock-outs or shortages Increased sales (for distributors and retailers)

As the one of the DCs concerns is decision making Barilla can consider going to an agreement with a third party inventory control company. This partnership can help Barilla to make the proposal clear internally and externally and show both sides that VMI can Provide for both parties

Better information for planning (e.g. demand visibility) A closer, more effective working relationship - both parties work together to sell more to and/or better serve end customers

They can also make decisions about channels activities such as type of info being transferred, size of firm, knowledge of competitors, operational capabilities, geographical density and type of decisions to be made.

Magialli arrange a meeting with the top managers and explain them the problems that he is facing for the implementation of the new approach and ask their involvement to educate the staff about the proposal to gain the whole company trust in the Proposal.

Magialli hire some experts in VMI or go into an agreement with a third party inventory control to run some classes for the staff to make them familiar with the advantages of the new proposal for Barilla , DCs and retailers.

Magialli arrange a meeting with all the organizations staff, depots and some top managers and specify a date to start the implementation of the new proposal internally and with Barilla’s depots and ask them to do their best and offer some incentives.

Magialli go into an agreement with an IT company to establish a good IT system intenally and between internal DCs and depots.

Magialli arrange some meetings with some senior mangers and DCs to explian the proposal in details and make them familiar with the advantages of the proposal for both parties and end user and offer them to send their staff to the classes about the proposal in Barillia. They show them the results of their system with the depots and do their best to sign an agreement with them to implement the new proposal.

Magialli arrange a conference with some retailers to make them familiar with the new system and explain them that their feedback has the high importance for them and make them familiar with barcode system to establish a better information system with DCs and supplier (Barilla) 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 supply-chain 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 pointof-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. Executive Summary The Italian Pasta Manufacturer, Barilla SpA, is experiencing inefficiencies and increases in cost due to variability in demand from its distributors. Giorgio Magialli, the Director of Logistics, wants to implement a Just-In-Time Distribution (JITD) system to gain more control. The JITD system was originally proposed by Barilla's former Director of Logistics, Brando Vitali. The new system is untraditional and is being rejected by both distributors and Barilla's internal departments. I have reviewed the reasons for opposition and have made recommendations to gain support for the new JITD system.

Statement of Issues The main reasons for the fluctuations in demand are: Promotions: Barilla's sales strategy relies on the use of trade promotions. They divided the year into 10 to 12 canvass periods, during which various products were offered at a discount. Incentives for sales reps were based on targets for each canvass period. Barilla offered volume discounts to its distributors for orders placed in full truck loads, and sales reps offered discounts for multi-truck load orders. Sales Representative: Barilla rewarded its sales reps based on amount of product sold. Therefore, they would push product during the promotional period but were not able to sell as much during a non-promotional period. Lack of Forecasting: Although nearly all of the distributors had computer supported ordering systems, few had sophisticated forecasting systems for determining order quantities. Lack of Order Control: Barilla does not require its distributors to place minimum orders, or have a maximum order amount in place during its promotional periods. Implications of Fluctuation Demand: Manufacturing Costs: These costs would increase substantially as the demand variation increased.

This was because of the pasta specific temperature and humidity requirements for drying. This process could not be changed fast enough to accommodate the fluctuating demand for different types of pasta which would create increased costs, and back orders. Transportation Costs: Transportation costs would be directly linked to demand. High demand would mean high transportation costs. This uneven demand would make it difficult to forecast transportation costs.

These factors are what lead Vitalito initiate the JITD system. However, it was meet with opposition from both Barilla's distributors and their own Sales and Marketing department. Reasons for Opposition from Distributors: Loss of Control: With the JITD system distributor would disclose sales data to Barilla, who would then forecast and provide products in the right quantity at the right time to meet demand. The distributors felt that giving Barilla this control meant that they would be losing control of their business,Barilla would push their products to cut their costs. The distributors wanted to keep placing orders at will. Lack of Trust: Distributors did not trust Barilla with their sales data. They were used to dealing with approximately 200 suppliers and felt that by disclosing sales data, their relations with other suppliers would be affected. Reasons for Internal Opposition: Job Loss: Sales personnel voiced fears that the JITD system would diminish their responsibilities, making them unnecessary. Loss of Bonus System: Presently, the sales team was rewarded based on quantity sold. They would lose this opportunity with the new JITD system as they would no longer be responsible for selling products. Lack of Belief: Overall, the sales department did not believe the JITD would work. The felt that the new system was inflexible, and pushed competitors product. Recommendations: Centralization: The JITD system will work if Barilla becomes more centralized. Having more control of their inventory ensures that customer data will be given at each stage in the supply chain, making forecasting more accurate. Forecasting will be done based on the sales data of the distributors. A centralized system will cut down costs. Distributors will not have fixed ordering costs, which decreases production and distribution costs for Barilla. Forecasting: Barilla should be utilizing sophisticated forecasting techniques and software. Internal Resistance: Running a simulation to educate sales staff the benefits of the JITD system. Management should work with sales managers to address concerns and to critique the new system. Keeping the sales department involved at all stages is critical to also show that they will still be needed andhave responsibilities after the new system is in place. There will be no job cuts, just job changes. The Sales Team will be needed to help with the new work load Logistics will take on as a result of planning for the distributors. The will play a critical role in maintaining relationships with distributors, as well as, still be needed to do in store set up, and monitor demand to help forecast.

Bonus Packages: Although sales employees will lose their promotional bonuses, a new system should be put in place. Barilla will be reducing costs and saving money, so a percentage of profits would be passed along to its employees. Trial: A 6 month trial of the JITD system at Barilla's depots. It would be smaller scale and dealing with fresh product, but should it be successful it will convince the critics. Distributor Resistance: Savings: Distributors need to be shown that the JITD system does not just benefit Barilla but that the cost reduction is pastalong to everyone in the supply chain. Distributor will need to be shown that by controlling the fluctuations that means potentially ending stock outs, which means they will be serving their supermarkets better. Distributors should also be shown and explained the results of the simulation. Trust: Barilla should have an open policy with its distributors, and include them in decision making and planning when it comes to distribution. Conclusion Barilla should move to the JITD system. By doing so it they will be a more efficient and profitable company. Their demand will be more steady, easier to manufacture, and transport. The JITD system would encourage co-operation between Barilla and its distributors which would create a better relationship and future potential.

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 supply-chain 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 pointof-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.

ASSIGNMENT 2: BARILLA SPA

INTRODUCTION Barilla SpA (Barilla), is an Italian manufacturer that sells pasta to retailers largely through third-party distributors. Barilla has been experiencing widely fluctuating demand patterns from these distributors. Such unpredictable patterns are problematic because a specific sequence of pasta production is used that minimizes the incremental changes in kiln temperature in order to keep the changeover costs low and the product quality high. This process makes manufacturing unfortunately unresponsive to changes in anticipated demand. In order to address this issue, Brando Vitali’s has proposed a Just-in-Time Distribution (JITD) model, which is a continuous replenishment strategy under which the responsibility for determining shipment quantities to the distributors would shift from the distributors to Barilla. Such a system would result in Barilla pushing its pasta to suppliers based upon its demand forecasts. Implementing a JITD system should have the effect of reducing channel costs improving service levels to distributors for Barilla, and improving service and reducing Distributor inventory.

PROBLEMS Barilla has been experiencing significant problems in its implementation of the JITD model. Preventing Barilla from effectively implementing a JITD system are: 1) internal opposition from its sales staff; 2) lack distributor buy-in stemming from a fear of loss of power; 3) an inability to collected needed information; and 4) the traditional Italian trade promotions system.

EVALUATION CRITERIA The main decision to be made by Barilla is not whether Barilla should apply the JITD model, but whether it can be applied. The benefits of introducing a successful

system are numerous to an industry where both manufacturers are suffering from thinning margins. To Barilla a successful JITD would result in a decrease in distribution, inventory and manufacturing costs. To the distributors it would result in decreased inventory costs and a reduction in stockouts. This decision that Barilla faces is how such JITD would be implemented. In evaluating the solutions to the JITD’s major problems we will use four main evaluation criteria: 1.) Cost Savings to Barilla – The reduction inventory and transportation costs incurred by Barilla. 2.) Cost Savings to Distributors - The reduction in inventory incurred by the distributors. 3.) Service Level – As defined as the percent of retailer orders filled from distributors’ inventory. 4.) Internal resistance – Making adjustments to insure that internal “buy-in” for the JITD is high.

SOLUTIONS TO JITD IMPLEMENTATION PROBLEMS LOSS OF POWER An obvious concern of Distributors in allowing Barilla to implement a JITD system is that it gives Barilla the power to push product into distributor warehouses as it wishes. Such a system in the eyes of the distributor can result in obvious abuses as it could be used by Barilla to move inventory from the CDC to the Distributors inorderto decrease costs to Barilla at the expense of the Distributor. This concern can easily be mitigated by structuring the contractual supplier-distributor relationship in way that gives the Distributor the power to deny any shipment. In this way the Distributor still has the power to say no if it feels that the order is excessive. As most Distributors currently keep a 2 week supply of product on hand, and the JITD proposes to significantly cut inventories, theoretically there should not be many situations where the Distributor will be forced to ‘veto’ shipments as they should not be many situations where inventory will build up to the point where the distributor is not comfortable with the level.

INFORMATION: In order for Barilla to use a JITD it requires that each distributor provide data on what Barilla products it has shipped out of its warehouse to retailers during the previous day, as well as the current stock level for each Barilla SKU. This information can then be used by Barilla to make its own replenishment decisions based on its forecast. Hitherto distributors have been very reluctant to share this information citing their lack of confidence that Barilla can create better estimates. There are three alternative solutions addressing this problem: Firstly, buy information for Distributors. One of the larger Distributors has already offered to sell the information. It is likely that many other Distributors would

similarly part with this information for the right price. Unfortunately such an exercise would create a dangerous precedent that could be difficult to reverse in the long run. Though it might be useful to purchase such information until the JITD method catches on it could create an expectation for such payments to continue in the long run. Secondly, gather information from point of sale. Another information source which JITD forecasts could be generated from is data from retail outlets. This is an interesting proposal as retail outlets already take inventory on a daily basis. However, it is unlikely that such a system can be implemented in the near future due to the lack of relationship between Barilla and the retailers and the fact that many retailers do not have the necessary computer equipment to properly monitor and communicate this information to Barilla efficiently. Thirdly, introducing a pilot project. Obtaining information is much more accessible if Distributors are convinced that Barilla can actually reduce costs and increase service through its own forecasting. This can be demonstrated using a pilot project that would demonstrate the difference decrease in stockout rates, and the amount of warehouse space used due to the implementation of the JITD strategy. In order to implement such a pilot project, Barilla should contact a distributor and offer significant discounts in order to get them to sign on. We recommend this third option as it best satisfies the aforementioned criteria, and it is likely to be the most effective in the long run.

DISCOUNTS/PROMOTIONS Well established in the Italian grocery industry, promotions and volume discount cause significant fluctuations in demand for Barilla. The promotion system encourages distributors to deplete inventory and buy during the appropriate canvas period, or to make purchases by the multiple truckload to receive further sales representative induced discounts. There are two alternative solutions addressing this problem: Firstly, keep prices fixed/ constant. Instead of constantly adjusting prices through promotions, Barilla instead could decrease all prices equally to all distributors by incorporating the savings that result from the elimination of trade promotions and the increased efficiencies resulting from the JITD system. Such a strategy would be unfair for the larger distributors who buy more and are accustomed to greater discounts, and such a strategy would also not be aligned with Italy’s trade promotion culture and may result in significant pushback from Distributors. Secondly, negotiate volume discounts and push canvas discounts. Barilla can still keep its canvas discount system by building it into their forecasting model. Thus allowing Distributors discounts during the appropriate canvas period, but by not allowing them to stock up inventory to maximize these discounts (as only the amount recommended by the forecast is discounted). Furthermore, volume discounts can still be offered in the form of refunds. Instead of giving discounts for each order, the amount purchased over a monthly period can be used to calculate the size of discount the distributor receives. Thus larger purchasers still receive their expected discounts.

INTERNAL PUSHBACK Within the current system, the sales representatives are playing important roles, and many fear that their responsibilities in managing inventory and setting up promotion would be reduced if JITD system is implemented. The lack of buy-in especially be the sales team can be a huge problem as they are the ones would are in constant communication with the Distributors. Negative perceptions of the salespeople will reflect poorly on Barilla’s ability to implement a JITD, and may result in poor Distributor buy-in. Barilla could require that each sales person be trained to monitor the JITD system, and give commissions to those salespeople who convince their distributors to buy-in to the program. In so doing, the sales representative will still play an important role in the new system, and therefore encourages them to participate and support the JITD system.

JITD DISTRIBUTOR TARGET The JITD program eventually should be implemented throughout the entire distribution system. However in order to make implementation as smooth of a process as possible it is important to target smaller sections of the distribution channel intially. Three alternatives for an initial distributor implementation exist; the Grande Distribuzione(GD), Distributione Organizzata (DO) and Barilla run depots. The benefits of using GDs are that they are the largest part of the supply chain and presumably they follow more standardized processes within the company. The large size may make it difficult to implement thus it may make more sense to initially use one or two GDs. DOs would be more difficult as they serve independent supermarkets and thus they use less sophisticated and less standardized inventory procedures and are also more vulnerable to pressure from other suppliers. If the GDs do not immediately sign on running a pilot project with the 18 Barilla Run Depots would make the most sense as information would be more available. However as it is an internal part of the distribution chain, its success may be less convincing to sceptical distributors. As such we would suggest that the JITD target the Depots first, the GDs second and the DOs last.

Conclusion: The JITD system has the potential to substantial reduce costs if it is implemented correctly. In order to do so Barilla should begin implementing JITD within its own Depots and expand with pilot projects with the Distributors. The aforementioned analysis discussed a variety of methods bywhich to make such implementation more viable than it was in the past. However, such a list is in no way conclusive. Ideas such as reducing the number of SKUs and rearranging distribution channels should also be explored in the long term as they can also result in substantial cost savings.

The Just-in-Time Distribution was created to solve many difficulties that Barilla and their customers were facing. Barilla increasingly felt the effects of fluctuating demand. Orders for Barilla dry products often swung widely from week to week. With this demand variability, it strained Barilla’s manufacturing and logistics operations. Even though JITD was created to solve the problems they were having, many stakeholders did not agree with the program. Some manufacturing and logistics personnel would rather ask distributors or retailers to carry additional inventory to reduce the fluctuation in distributors’ orders even though with their current inventory levels, many distributors’ service levels to the retailers were unacceptable. Others felt that the distributors and retailers were already carrying too much inventory. Customers were not helping also. They were simply unwilling to give up their authority to place orders as they pleased. But what was more disconcerting was the internal resistance from Barilla’s own sales and marketing organizations, which saw the concept as infeasible and dangerous. Barilla and their customers are now realizing that they do not have enough room in their stores and warehouses to carry the very large inventories manufacturers would like them to. It is not easy to increase shelf space in retail outlets and manufacturers are constantly introducing new products and wanting retailers to display each product on the fronts of their shelves. Distributors feel similar pressure, both to increase inventory of items they already stocked and to add items they currently did not carry to their product offerings. Both manufacturers and retailers are suffering from thinning margins. The JITD proposes to rather than send product to the distributors according to their internal planning processes, they should look at all of the distributors’ shipment data and send only what is needed at the stores. They will send no more and no less of what is needed. With the way they are currently operating, it is nearly impossible to anticipate demand swings, so they end up having to hold a lot of inventory and do a lot of scrambling in their manufacturing and distribution operations to meet distributors demand. Also the distributors don’t seem to do a good job serving their retailers because the DOs (“Distribuzione Organizzata” Organized Distributor) have experienced many stockouts in the last year. With the JITD, the director of logistics, Brando Vitali, believes they could improve operations for Barilla and their customers if they were responsible for determining the quantities and delivery schedules. Barilla would be able to ship products only as it is needed, instead of building enormous stocks in both of their facilities. They could try to reduce their own distributions costs, inventory costs, inventory levels, and they manufacturing costs if they did not have to respond to the unstable demand patterns of the distributors. With the JITD, every day each distributor would have to provide Barilla with data on what products it had shipped out of its warehouse to retailers during the previous day as well as the current stock level of each Barilla SKU. They will then look at all the data and make replenishment decisions based on their own forecasts. Barilla would need to improve their own forecasting systems to make better use of the data they receive from their distributors. They will also need to develop a set of decision rules that they can use to determine what to send after they have received new data and made new forecasts. There are many disputes about integrating this proposal. There is internal resistance from Barilla’s own sales and marketing organizations. A number of sales

representatives felt that their responsibilities would be diminished if the JITD were put in place. There were a range of concerns that were expressed from the bottom to the top of the sales organization. Some concerns were, “We run the risk of not being able to adjust our shipments sufficiently quickly to changes in selling patterns or increased promotions,” or “we increase the risk of having our customers stock out of our product if we have disruption in our process.” To counter the concerns, the director of logistics said, “I think JITD should be considered a selling tool, rather than a treat to sales. We’re offering the customer an additional service at no extra cost. The program will improve Barilla’s visibility with the trade and make distributors more dependent on us—it should improve the relationship between Barilla and the distributors rather than harm them.” Another problem was that distributors did not like the program. The manager of one of Barilla’s largest distributors said, “Managing stock is my job. I don’t need you to see my warehouse or my figures. I could improve my inventory and service levels myself if you would deliver my orders more quickly…” Another distributor said, “What makes you think that you could manage my inventories any better than I can?” Distributors felt Barilla was asking for too much control over their own facilities. If I were a customer of Barilla, I would just be concerned with getting all the products I need in a fast time and in good quality. If they could do that, then I would be happy. If I were an investor in the Barilla company, my perspectives would probably not change regarding JITD. I feel that the program will help the company enormously. It will create more revenues for the company, reduce working capital, and it will provide better service to the customers. If they provide better service, customers will return and they could also get new customers. I feel it would be a great investment. Maggiali can increase the overall likelihood or percentages that JITD would be adopted by convincing their distributors, sales and marketing organizations that the program will work better than anything they have tried before. It would bring higher revenue because it will reduce working capital, and it will provide a better service to their customers at no extra cost. To do this, he can come up with an agreement with the distributors to use the program for a certain amount of time as a trial to see if the program will deliver a positive result. This will let the employees have an idea of how the JITD will work and what is expected of them. If the results are negative they can go back to whatever method works best for them. I do believe the Just-in-Time Distribution would be feasible and effective. Distributors and retailers are asked to hold an excessive amount of inventories and it is very costly for any company to hold a lot of inventory. This program will help them carry the amount of inventory needed; no more no less. Rather than following the traditional practice of delivering products to their distributors on the basis of whatever orders the distributors place with the company, their own logistics organization would instead specify the appropriate delivery quantities. It would more effectively meet end consumer’s needs and would also evenly distribute the workload on their manufacturing and logistics system.

The idea is good, but they can not only send what the end users need. They also need to have safety stock on every item in their distribution centers. They also have to make sure their production line has the capacity and reliability to produce and deliver the product when the distributors need it. They need to have better communication between manufacturers and distributors. Barilla increasingly feels the effects of fluctuating demand and this demand hurts their manufacturing and logistics operations. This program will help them improve operations for themselves and their customers. They would be able to ship products only as it is needed, rather than building up large stocks in their facilities. Without the demand swings, they will be able to work more efficiently and effectively and get their products where they need to be in a faster cycle time. If the program works well, they would be able to target new customers like restaurant chains. They could also go overseas to sell their products in international chains. If the proposal was based upon the environment in today’s world, I would not go forward with the Just-in-Time Distribution. It would not be feasible or effective in our time today. In the 1990’s, nearly all of Barilla’s distributors had computer-supported ordering systems, but few had sophisticated forecasting systems or analytical tools for determining order quantities so the JITD would help them a lot with their orders. Also Barilla’s GD (“Grande Distribuzione” large distributor) sales force usually sent their orders via fax which is rarely ever used in our time today. The JITD would not work today because we have so many new upgraded technological machines that are used to communicate so much easier and faster than in the 1990’s. We have new technology that already holds all the information needed. The JITD would end up putting more work on Barilla and their distributors and would cause inefficiency. The JITD would cause them to lose profitability because they would be wasting their time in gathering, collecting, and interpreting the data and information given to Barilla from the distributors. Now we use technology programs to help with inventory management and make everything more effective and efficient. Barilla spA case analysis Barilla SpA, an Italian pasta manufacturer, is experiencing amplified levels of inefficiencies and rising costs due to variability in demand from its distributors. The main problem addressed in this case is how to effectively implement JITD system suggested by Giorgio Magialli, the Director of Logistics by resolving the issue of gaining control over the fluctuating demand. Barilla has a very complex distribution network including independent third party distributors and due to such a multi-echlon network, Barilla has been experiencing large amounts of variability in demand which are resulting in operational inefficiency and increased manufacturing, inventory and distribution costs. The proposed JITD 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 supply-chain 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.

Main reasons for fluctuating demand: Promotions: The use of promotions in the form of price, transportation, and volume discounts was the main strategy to sell more products to the distriutors. Sales Reps: The compensation system in place at Barilla for Sales reps, made them to push more products into the pipeline during promotional periods and not able to sell sufficient quantities during non promotional periods created wide variation in demand patterns. SKU's: The huge range of SkU's in each product line led to greater complexity Gaming bevavior and wrong forecasting practices: The distributors were having full control of their orders to Barilla and used gaming during stock outs periods. The distributors did not use any sophisticated forecasting models or systems to calculate the order quantities without any threshold minimum order quantities but rather just followed a replenishment ordering. Long lead times: Barilla was dealing with perishable items and the lead times of between 8 and 14 days after it received their orders, the average lead-time being 10 days was high given the nature of products and continuously changing ordering patterns. Barilla's cost implications: The fluctuating demand had adverse cost implications for Barilla: The production costs was rising heavily due to frequent changeover for offering wide range of SKU's, and backorders. It also led to production scheduling difficulties and high labor & transportation costs to satisfy the high ordering during promotional periods. Finally the cash flows were also uneven. Reasons for stiff opposition to JITD by Distributors: The pasta industry distributors were not yet prepared for such an sophisticated information sharing process. The distributors were not ready to share their sales data to Barilla and were not aware of the benefits of supply chain collaboration through collaborative forecasting and planning. The distributors were sacred of the negative implications of sharing the sales data thinking of the loss of control over ordering process would make them loose competitive advantage over Barilla through adjustin their order quantities through their own forecasting & planning for attaining the profit margins, and Barilla would push their products and cut down their costs. They also felt that, they would loose the opportunity to gain advantage during the promotional periods and they cannot place orders at will. Since the distributors were working with nearly 200 suppliers, they did not have the trust comfort level by disclosing the sales data to Barilla, and their relations with other suppliers could be affected, if they were aware of sharing the proprietary data with Barilla. Besides, the distributors, the internal Barilla's sales force were also reluctant to these JITD implementation, as they were sacred of losing

their jobs, if the ordering process was automated and the Barilla would not need them for going to the field and putting their efforts to convince their distributors to order more quantities and get sales incentives.

Recommendations: The first approach to effectively implement JITD is to convince and educate the internal sales force and the distributors of the benefits of Collaborative Planning Forecasting and Replenishment (CPFR). In order to condense the Bullwhip effect being experienced by Barilla, their supply chain would have to be centralized. The JITD will work, only if Barilla gains control over the inventory throughout their supply chain. Since the pasta industry in Italy is not yet geared towards tracking the point of sales data through scanners and barcodes, hence each stage has to collaboratively make ordering forecasts based on the end customer sales data. The JITD system will eliminate the fixed costs in ordering for distributors through an effective centralized system through out the supply chain and for Barilla, they can improve their production scheduling and reduce the labor and transportation costs. How to effectively implement JITD at Barilla? Collaborative planning and Aggregate Demand: Barilla and their Distributors can effectively team up and build a comprehensive forecasting model, which will take into account the perishable inventory system model, threshold inventory levels, demand fluctuation factors to capture the spikes in the demand by aggregating the demand throughout the supply chain. Demand Planning: Customer surveys can help Barilla and Distributors to understand the needs of their customers and help them to effectively manage and control the demand patterns. Methodology: To convince the internal staff and sales force, Barilla can run a 6-8 month pilot program or educate them by running a simulation of the whole exercise to show the benefits of sharing the sales data. The upper management should involve the sales managers in incorporating their needs and complications involved in executing the JITD in the field. The sales force should be given additional responsibilities for market development through adopting "Go-to-market" strategy in the event the whole ordering process is automated through the JITD system implementation. The compensation system can be revamped into a new level and could still be in place by assigning target sales revenue through above mentioned market development and territory management programs. The pilot programs and simulation exercise cost results should be circulated to the distributors to enable them to understand the cost cutting and better inventory management practices the JITD system can offer, so that the distributors initially become ready to adopt the JITD implementation in a phase manner.

Confidence and trust building with distributors can be achieved through long term strategic partnership development and having constant operational meetings with Barilla's upper management instead of letting the sales force giving their inputs to the effective application of JITD. Policies governing the profit margin sharing can be formalized as part of building the supply chain collaboration strategies. Since Barilla has more than 22% market share outside Italy in Europe, and it becomes easy to implement JITD in Europe locations where there is significant usage of barcodes and scanners systems to capture the POS data in place. The success story of these European locations can convince Italian distributors of the benefits of JITD. Barilla should conduct a study to track the most fast selling pasta SKU's, region wise, so that they can reduce the amount of SKU's they offer and streamline to offer a particular set of product line segmented across each region to reduce the complexity in the supply chain. The huge # of intermediaries of distributors and selling agents is also one of the hindrances for existing inefficiencies, hence Barilla should consider reducing the # of levels in the logistics network. The Efficient Customer Response (ECR) initiative can be a useful tool for Barilla for sharing the POS data all along the supply chain and understand the customer buying preferences and accordingly adjust the # of SKU's to offer in each pasta product line and plan for new product introductions.

Continuous Replenishment: Brando Vitali's has proposed a Just-in-Time Distribution (JITD) model, which is a continuous replenishment strategy under which the responsibility for determining shipment ASSIGNMENT 2: BARILLA SPA

INTRODUCTION Barilla SpA (Barilla), is an Italian manufacturer that sells pasta to retailers largely through third-party distributors. Barilla has been experiencing widely fluctuating demand patterns from these distributors. Such unpredictable patterns are problematic because a specific sequence of pasta production is used that minimizes the incremental changes in kiln temperature in order to keep the changeover costs low and the product quality high. This process makes manufacturing unfortunately unresponsive to changes in anticipated demand. In order to address this issue, Brando Vitali’s has proposed a Just-in-Time Distribution (JITD) model, which is a continuous replenishment strategy under which the responsibility for determining shipment quantities to the distributors would shift from the distributors to Barilla. Such a system would result in Barilla pushing its pasta to suppliers based upon its demand forecasts. Implementing a JITD system should have the effect of reducing channel costs improving service levels to distributors for Barilla, and improving service and reducing Distributor inventory.

PROBLEMS Barilla has been experiencing significant problems in its implementation of the JITD model. Preventing Barilla from effectively implementing a JITD system are: 1) internal opposition from its sales staff; 2) lack distributor buy-in stemming from a fear of loss of power; 3) an inability to collected needed information; and 4) the traditional Italian trade promotions system.

EVALUATION CRITERIA The main decision to be made by Barilla is not whether Barilla should apply the JITD model, but whether it can be applied. The benefits of introducing a successful system are numerous to an industry where both manufacturers are suffering from thinning margins. To Barilla a successful JITD would result in a decrease in distribution, inventory and manufacturing costs. To the distributors it would result in decreased inventory costs and a reduction in stockouts. This decision that Barilla faces is how such JITD would be implemented. In evaluating the solutions to the JITD’s major problems we will use four main evaluation criteria: 1.) Cost Savings to Barilla – The reduction inventory and transportation costs incurred by Barilla. 2.) Cost Savings to Distributors - The reduction in inventory incurred by the distributors. 3.) Service Level – As defined as the percent of retailer orders filled from distributors’ inventory. 4.) Internal resistance – Making adjustments to insure that internal “buy-in” for the JITD is high.

SOLUTIONS TO JITD IMPLEMENTATION PROBLEMS LOSS OF POWER An obvious concern of Distributors in allowing Barilla to implement a JITD system is that it gives Barilla the power to push product into distributor warehouses as it wishes. Such a system in the eyes of the distributor can result in obvious abuses as it could be used by Barilla to move inventory from the CDC to the Distributors inorderto decrease costs to Barilla at the expense of the Distributor. This concern can easily be mitigated by structuring the contractual supplier-distributor relationship in way that gives the Distributor the power to deny any shipment. In this way the Distributor still has the power to say no if it feels that the order is excessive. As most Distributors currently keep a 2 week supply of product on hand, and the JITD proposes to significantly cut inventories, theoretically there should not be many situations where the Distributor will be forced to ‘veto’ shipments as they

should not be many situations where inventory will build up to the point where the distributor is not comfortable with the level.

INFORMATION: In order for Barilla to use a JITD it requires that each distributor provide data on what Barilla products it has shipped out of its warehouse to retailers during the previous day, as well as the current stock level for each Barilla SKU. This information can then be used by Barilla to make its own replenishment decisions based on its forecast. Hitherto distributors have been very reluctant to share this information citing their lack of confidence that Barilla can create better estimates. There are three alternative solutions addressing this problem: Firstly, buy information for Distributors. One of the larger Distributors has already offered to sell the information. It is likely that many other Distributors would similarly part with this information for the right price. Unfortunately such an exercise would create a dangerous precedent that could be difficult to reverse in the long run. Though it might be useful to purchase such information until the JITD method catches on it could create an expectation for such payments to continue in the long run. Secondly, gather information from point of sale. Another information source which JITD forecasts could be generated from is data from retail outlets. This is an interesting proposal as retail outlets already take inventory on a daily basis. However, it is unlikely that such a system can be implemented in the near future due to the lack of relationship between Barilla and the retailers and the fact that many retailers do not have the necessary computer equipment to properly monitor and communicate this information to Barilla efficiently. Thirdly, introducing a pilot project. Obtaining information is much more accessible if Distributors are convinced that Barilla can actually reduce costs and increase service through its own forecasting. This can be demonstrated using a pilot project that would demonstrate the difference decrease in stockout rates, and the amount of warehouse space used due to the implementation of the JITD strategy. In order to implement such a pilot project, Barilla should contact a distributor and offer significant discounts in order to get them to sign on. We recommend this third option as it best satisfies the aforementioned criteria, and it is likely to be the most effective in the long run.

DISCOUNTS/PROMOTIONS Well established in the Italian grocery industry, promotions and volume discount cause significant fluctuations in demand for Barilla. The promotion system encourages distributors to deplete inventory and buy during the appropriate canvas period, or to make purchases by the multiple truckload to receive further sales representative induced discounts. There are two alternative solutions addressing this problem:

Firstly, keep prices fixed/ constant. Instead of constantly adjusting prices through promotions, Barilla instead could decrease all prices equally to all distributors by incorporating the savings that result from the elimination of trade promotions and the increased efficiencies resulting from the JITD system. Such a strategy would be unfair for the larger distributors who buy more and are accustomed to greater discounts, and such a strategy would also not be aligned with Italy’s trade promotion culture and may result in significant pushback from Distributors. Secondly, negotiate volume discounts and push canvas discounts. Barilla can still keep its canvas discount system by building it into their forecasting model. Thus allowing Distributors discounts during the appropriate canvas period, but by not allowing them to stock up inventory to maximize these discounts (as only the amount recommended by the forecast is discounted). Furthermore, volume discounts can still be offered in the form of refunds. Instead of giving discounts for each order, the amount purchased over a monthly period can be used to calculate the size of discount the distributor receives. Thus larger purchasers still receive their expected discounts.

INTERNAL PUSHBACK Within the current system, the sales representatives are playing important roles, and many fear that their responsibilities in managing inventory and setting up promotion would be reduced if JITD system is implemented. The lack of buy-in especially be the sales team can be a huge problem as they are the ones would are in constant communication with the Distributors. Negative perceptions of the salespeople will reflect poorly on Barilla’s ability to implement a JITD, and may result in poor Distributor buy-in. Barilla could require that each sales person be trained to monitor the JITD system, and give commissions to those salespeople who convince their distributors to buy-in to the program. In so doing, the sales representative will still play an important role in the new system, and therefore encourages them to participate and support the JITD system.

JITD DISTRIBUTOR TARGET The JITD program eventually should be implemented throughout the entire distribution system. However in order to make implementation as smooth of a process as possible it is important to target smaller sections of the distribution channel intially. Three alternatives for an initial distributor implementation exist; the Grande Distribuzione(GD), Distributione Organizzata (DO) and Barilla run depots. The benefits of using GDs are that they are the largest part of the supply chain and presumably they follow more standardized processes within the company. The large size may make it difficult to implement thus it may make more sense to initially use one or two GDs. DOs would be more difficult as they serve independent supermarkets and thus they use less sophisticated and less standardized inventory procedures and are also more vulnerable to pressure from other suppliers. If the GDs do not immediately sign on running a pilot project with the 18 Barilla Run Depots would make the most sense as information would be more available. However as it is an internal part of the distribution chain, its success may be less

convincing to sceptical distributors. As such we would suggest that the JITD target the Depots first, the GDs second and the DOs last.

Conclusion: The JITD system has the potential to substantial reduce costs if it is implemented correctly. In order to do so Barilla should begin implementing JITD within its own Depots and expand with pilot projects with the Distributors. The aforementioned analysis discussed a variety of methods bywhich to make such implementation more viable than it was in the past. However, such a list is in no way conclusive. Ideas such as reducing the number of SKUs and rearranging distribution channels should also be explored in the long term as they can also result in substantial cost savings.

The Just-in-Time Distribution was created to solve many difficulties that Barilla and their customers were facing. Barilla increasingly felt the effects of fluctuating demand. Orders for Barilla dry products often swung widely from week to week. With this demand variability, it strained Barilla’s manufacturing and logistics operations. Even though JITD was created to solve the problems they were having, many stakeholders did not agree with the program. Some manufacturing and logistics personnel would rather ask distributors or retailers to carry additional inventory to reduce the fluctuation in distributors’ orders even though with their current inventory levels, many distributors’ service levels to the retailers were unacceptable. Others felt that the distributors and retailers were already carrying too much inventory. Customers were not helping also. They were simply unwilling to give up their authority to place orders as they pleased. But what was more disconcerting was the internal resistance from Barilla’s own sales and marketing organizations, which saw the concept as infeasible and dangerous. Barilla and their customers are now realizing that they do not have enough room in their stores and warehouses to carry the very large inventories manufacturers would like them to. It is not easy to increase shelf space in retail outlets and manufacturers are constantly introducing new products and wanting retailers to display each product on the fronts of their shelves. Distributors feel similar pressure, both to increase inventory of items they already stocked and to add items they currently did not carry to their product offerings. Both manufacturers and retailers are suffering from thinning margins. The JITD proposes to rather than send product to the distributors according to their internal planning processes, they should look at all of the distributors’ shipment data and send only what is needed at the stores. They will send no more and no less of what is needed. With the way they are currently operating, it is nearly impossible to anticipate demand swings, so they end up having to hold a lot of inventory and do a lot of scrambling in their manufacturing and distribution operations to meet distributors demand. Also the distributors don’t seem to do a good job serving their retailers because the DOs (“Distribuzione Organizzata” Organized Distributor) have experienced many stockouts in the last year. With the JITD, the director of logistics,

Brando Vitali, believes they could improve operations for Barilla and their customers if they were responsible for determining the quantities and delivery schedules. Barilla would be able to ship products only as it is needed, instead of building enormous stocks in both of their facilities. They could try to reduce their own distributions costs, inventory costs, inventory levels, and they manufacturing costs if they did not have to respond to the unstable demand patterns of the distributors. With the JITD, every day each distributor would have to provide Barilla with data on what products it had shipped out of its warehouse to retailers during the previous day as well as the current stock level of each Barilla SKU. They will then look at all the data and make replenishment decisions based on their own forecasts. Barilla would need to improve their own forecasting systems to make better use of the data they receive from their distributors. They will also need to develop a set of decision rules that they can use to determine what to send after they have received new data and made new forecasts. There are many disputes about integrating this proposal. There is internal resistance from Barilla’s own sales and marketing organizations. A number of sales representatives felt that their responsibilities would be diminished if the JITD were put in place. There were a range of concerns that were expressed from the bottom to the top of the sales organization. Some concerns were, “We run the risk of not being able to adjust our shipments sufficiently quickly to changes in selling patterns or increased promotions,” or “we increase the risk of having our customers stock out of our product if we have disruption in our process.” To counter the concerns, the director of logistics said, “I think JITD should be considered a selling tool, rather than a treat to sales. We’re offering the customer an additional service at no extra cost. The program will improve Barilla’s visibility with the trade and make distributors more dependent on us—it should improve the relationship between Barilla and the distributors rather than harm them.” Another problem was that distributors did not like the program. The manager of one of Barilla’s largest distributors said, “Managing stock is my job. I don’t need you to see my warehouse or my figures. I could improve my inventory and service levels myself if you would deliver my orders more quickly…” Another distributor said, “What makes you think that you could manage my inventories any better than I can?” Distributors felt Barilla was asking for too much control over their own facilities. If I were a customer of Barilla, I would just be concerned with getting all the products I need in a fast time and in good quality. If they could do that, then I would be happy. If I were an investor in the Barilla company, my perspectives would probably not change regarding JITD. I feel that the program will help the company enormously. It will create more revenues for the company, reduce working capital, and it will provide better service to the customers. If they provide better service, customers will return and they could also get new customers. I feel it would be a great investment. Maggiali can increase the overall likelihood or percentages that JITD would be adopted by convincing their distributors, sales and marketing organizations that the program will work better than anything they have tried before. It would bring higher

revenue because it will reduce working capital, and it will provide a better service to their customers at no extra cost. To do this, he can come up with an agreement with the distributors to use the program for a certain amount of time as a trial to see if the program will deliver a positive result. This will let the employees have an idea of how the JITD will work and what is expected of them. If the results are negative they can go back to whatever method works best for them. I do believe the Just-in-Time Distribution would be feasible and effective. Distributors and retailers are asked to hold an excessive amount of inventories and it is very costly for any company to hold a lot of inventory. This program will help them carry the amount of inventory needed; no more no less. Rather than following the traditional practice of delivering products to their distributors on the basis of whatever orders the distributors place with the company, their own logistics organization would instead specify the appropriate delivery quantities. It would more effectively meet end consumer’s needs and would also evenly distribute the workload on their manufacturing and logistics system. The idea is good, but they can not only send what the end users need. They also need to have safety stock on every item in their distribution centers. They also have to make sure their production line has the capacity and reliability to produce and deliver the product when the distributors need it. They need to have better communication between manufacturers and distributors. Barilla increasingly feels the effects of fluctuating demand and this demand hurts their manufacturing and logistics operations. This program will help them improve operations for themselves and their customers. They would be able to ship products only as it is needed, rather than building up large stocks in their facilities. Without the demand swings, they will be able to work more efficiently and effectively and get their products where they need to be in a faster cycle time. If the program works well, they would be able to target new customers like restaurant chains. They could also go overseas to sell their products in international chains. If the proposal was based upon the environment in today’s world, I would not go forward with the Just-in-Time Distribution. It would not be feasible or effective in our time today. In the 1990’s, nearly all of Barilla’s distributors had computer-supported ordering systems, but few had sophisticated forecasting systems or analytical tools for determining order quantities so the JITD would help them a lot with their orders. Also Barilla’s GD (“Grande Distribuzione” large distributor) sales force usually sent their orders via fax which is rarely ever used in our time today. The JITD would not work today because we have so many new upgraded technological machines that are used to communicate so much easier and faster than in the 1990’s. We have new technology that already holds all the information needed. The JITD would end up putting more work on Barilla and their distributors and would cause inefficiency. The JITD would cause them to lose profitability because they would be wasting their time in gathering, collecting, and interpreting the data and information given to Barilla from the distributors. Now we use technology programs to help with inventory management and make everything more effective and efficient.

GOOGLE SEARCH:

Allows students to analyze how a company can effectively implement a continuous replenishment system both to reduce channel costs (in this case, inventory and transportation costs incurred by Barilla as well as inventory costs incurred by the distributors) and to improve service levels (defined in this case as the percent of retailers' orders filled from distributors' inventory). Barilla SpA, an Italian manufacturer that sells to its retailers largely through third-party distributors, experienced widely fluctuating demand patterns from its distributors during the late 1980s. This case describes a proposal to address the problem by implementing a continuous replenishment program, under which the responsibility for determining shipment quantities to the distributors would shift from the distributors to Barilla. Describes support and resistance within Barilla’s different functional areas and within the distributors Barilla approached with the proposal.