Barilla Spa, Just In Time Distribution

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