Barilla Spa Case Anaylsis

Contents

Executive Summary        

Issue Identification        

Environmental and Root Cause Analysis        

Alternatives or Options        

Recommendations and Implementation        

Monitor and Control        

Executive Summary

Barilla SpA, a large vertical integrated corporation that makes pasta and bread products is experiencing rising costs due to extreme variability in demand from its distributors. In order to improve company’s sale margins, Giorgio Magialli, the Director of Logistics at Barilla suggests to implement a Just-In-Time Distribution (JITD) system. The JITD system is a continuous replenishment distribution strategy, which the responsibility for determining inventory quantities shifts from the distributors to Barilla based upon its demand forecasts. This system is entirely different from the existing distribution system and is rejected by Barilla’s internal sales and marketing department and the external distributors.

In this case analysis, the main issues: whether JITD system is feasible for Barilla and how it can be implemented effectively is discussed. Some other issues such as difficult to obtain sales data from distributors, inefficient forecasting techniques, highly complex manufacturing processes, large selections of SKUs, and long lead time to full fill the orders that have made the distributor’s order pattern volatile and have made JITD system difficult to apply are also discussed in the case.

After identifying the issues and analyzing their root causes, alternatives, recommendations and implementations are provided in this case. By following the recommendations and implementations that have been provided, all existing issues can be resolved. As a conclusion, JITD system, a centralized supply chain with Barilla controlling the orders will result in better profits for all parties. JITD system should be implemented.

Issue Identification

The main issue in this case is how to effectively implement JITD system, which Barilla analyses, forecasts and delivers products to the distributors by getting support from the entire corporation and requiring the distributors to share their sales data with Barilla. This in turn will decrease Barilla’s distribution costs, inventory levels, and ultimately makes the entire operation more effective.

        The following lists some other issues Barilla facing when the company tries to implement JITD system:

1. Data sharing: distributors are not willing to lose their control over managing their own inventory by sharing data with Barilla.
2. Forecast techniques: Barilla does not have enough experiences and sophisticated techniques to forecast demand from distributors and retailers.
3. Manufacturing process: Barilla has a long manufacturing process for its dry products, which makes the company more difficult to quickly react to the unexpected demand from the distributors.
4. SKUs: Barilla has an enormous amount of different packaged SKUs for its dry products, which makes the business complex to operate.
5. Lead-time: Barilla has a long lead-time for distributors to order the right amount of products.

Environmental and Root Cause Analysis

Environmental Analysis

In the late 1980´s, the Italian pasta market as a whole was practically a mature industry with growth less than 1% per year. The higher growth trend was through international expansion from Italy to other European countries. By the year 1990 Barilla was the largest pasta manufacturer in the world, with 35% of all pasta sold in Italy and 22% sold in Europe. Starting from 1980s, Barilla felt the effects of fluctuating demand, which strained the manufacturing and distribution network of the company. This variability in demand, week forecast techniques, large selection of SKUs, long order lead time, along with the difficulty of the manufacturing process to deal with fast-track orders were forcing the company to maintain a higher level of inventory, which in turn affects the profit margins for both Barilla and its distributors.

Root Cause Analysis

1. Data sharing: 65% of Barilla’s dry products are distributed through outside distributors (70% to supermarket chains and 30% to independent supermarkets). Barilla has experienced difficulties in collecting needed information. These outside distributors, especially the supermarket chains such as Marconi, have sophisticated experience in managing their inventories. They simply do not believe Barilla can do a better job than themselves on controlling the inventory level.
2. Forecast techniques: In order to react correctly and immediately to the fluctuation demand from distributors, Barilla not only needs to obtain sale information from its distributors but also use good forecast techniques to analyze the data. Additional safety inventory level can then be eliminated to reduce costs.
3. Manufacturing process: At Barilla, raw ingredients were transformed to packaged pasta on fully automated 120-meter-long production lines. This highly automated manufacturing system was not designed to accommodate large fluctuations in demand. In addition, the manufacturing sequences of pasta production made it very difficult to produce particular types of pasta that has been sold out due to unexpectedly high demand.
4. SKUs: Dry products were offered in about 800 different packaged SKUs. Pasta was made in 200 different shapes and sizes and was sold in over 470 different packaged SKUs. The most popular pasta products were offered in a variety of packaging options (a 5-kg package, a 2-kg package, and a 1-kg package). Such variety of SKUs made sales representatives from Barilla and buyers from distributors’ job harder. It also made the manufacturing and packaging process less efficient.
5. Lead-time: Most distributors checked their inventory levels and placed orders with Barilla once per week. The average lead time for Barilla to ship out its products was ten calendar days. Such long lead-time pushed the distributors to order more products then they actually needed to prevent inventory stock out. This then increased the variability in demand.

Alternatives or Options