Barilla Spa

Barilla has been facing huge variability in demand which is straining the manufacturing and distribution network of the company. This fluctuation in demand, the two week limit on inventory from the distributor’s end and the difficulty of the manufacturing process to deal with fast-track orders are forcing the CDCs to maintain a higher level of inventory. This increases costs associated with holding inventory. Uncertainty in demand also upsets the production schedule which may lead to overtime shifts in order to meet the demand, higher inventory of raw materials and frequent capacity adjustments, which all increase the overall cost of the product. Frequent capacity adjustments and high raw material inventory may also lead to quality problems. Further, the difficulty in speeding up the manufacturing process to meet with fluctuating demand coupled with this uncertainty in demand will increase the lead time for customer orders which in turn may lead to stock outs at the customer end. This, besides causing a loss of sales revenue, also damages the reputation of Barilla and reduces their credibility in the market.

The fluctuation in demand is due to the “Bull-whip effect” where the variability in the demand increases as we move upstream in the supply chain. The primary reason for this effect is the absence of a central entity to match the capacity of the production and distribution chain with the customer demand. In the current mode of operation each vendor tries to minimize his variance which increases as we move up the supply chain leading to huge fluctuations at the production unit. Sporadic sales promotions by Barilla are also affecting the demand. This leads to increased demand for the items on promotion and because of the lack of effective forecasting techniques used to predict this increase, the existing inventory for these items is affected. The volume discounts given to distributors may be forcing them to order in quantities that are too large, aggravating the problem by increasing the variability in demand. Further, the current mode of operation gives sales representatives incentives on achieving sales targets in “canvass” periods which are typically 4-5 weeks. This may lead to higher demand towards the end of the evaluation period when the sales representatives push harder to achieve targets. The fluctuation because of this reason may be reduced by moving to a shorter evaluation period (say 1-2 weeks). Too many product offerings with a lack of a sophisticated tracking and forecasting system are adding to the demand fluctuations as well. The effect of the fluctuating demand on the production and distribution has led to an increased lead time and frequent stock outs which have reduced Barilla’s credibility amongst distributors. This is leading to “false orders” where distributors are ordering in larger quantities than their projected demand to hedge themselves against these uncertainties.

The proposed new system, Just-In-Time Distribution (JITD), is one solution suggested to resolve the demand fluctuation issues and lower costs. This new process would move forecasting and shipment allocation responsibilities to Barilla rather than allowing each distributor/retailer place the order amounts separately. This approach has both internal and external complications as there is much resistance from both within the company and from the suppliers and distributors. The internal resistance comes from the production, sales and marketing divisions and the top management. The production division is concerned about the lack of a sophisticated forecasting system in order to properly use the data received from the distributors in an efficient way. The sales team is concerned about their compensation and minimized responsibilities under the new mode of operation. The top