Barilla Spa

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