Barilla Spa

Barilla SpA

Analysis - Problem & Causes

Problem: Fluctuating demand

        Barilla is experiencing demand fluctuations called Bullwhip effect, which has strained the manufacturing and logistical operations.

Causes:

1. Excessive promotion activities. The sales strategy of Barilla relied heavily on promotions. They provide great discount ranged from 1.4% to 10% on product price, transportation and volume. The sales strategy will cause great demand fluctuation of Barilla’s products.
2. Barilla does not have any minimum or maximum order quantities.  Maximum quantities assist in reducing the risk of customers ordering unnecessarily large amounts in hopes that they will receive their orders discount and receive the shipment faster.
3. The bonus system of Barilla for the sales representatives was based on sales volume. This compensation system gives sales representatives the incentive to push more products during the promotional period to get a bonus, while not to push as much during non-promotional periods.
4. The distributors have no efficient forecasting techniques and they do not have sophisticated analytical tools for determining optimal order quantities based on those forecasts. Therefore, it caused excess inventory levels and high stocks.
5. Barilla’s dry products were offered in 800 different packaged Stock Keeping Units (SKUs). [pic 1][pic 2]

Exhibit 1 (McGraw-Hill, 2003)

As shown above, the exhibit 1 describe the sample stock out and inventory levels of Cortese’s Northeast Distribution Center, 1989. The mean order quantity is 300. We can see average inventory levels much higher than the orders average. These large numbers led to greater complexity and uncertainty because different kinds of SKUs should be treated differently when managing inventory. The complexity and uncertainty make forecasting at the individual SKU level extremely difficult and brings huge variation.

1. Long lead time. Barilla supplied its distributors between 8 and 14 days after it received their orders, the average lead-time being 10 days.

Analysis – Benefit of JITD system

#1 Collaborative planning

• Barilla and its distributors have the opportunity to work together and share information.
• Develop more accurate demand forecasts and flowline the inventory management allowing to determine optimal order quantities. Therefore, the inventory levels should be diminished.

#2 Aggregate Demand

• If Barilla can decide the order quantities for all distributors, it could aggregate the demands and thus ensure better forecasts and reduced costs. The aggregated demand has fewer uncertainties and complexities because the information asymmetry between distributors and Barilla was terminated.
• Barilla is able to treat the end customer data as the input and distributors will provide POS data of different SKUs. Therefore, Barilla can accurately determine the quantities of shipment to distributors.

Analysis – Risk of JITD system

Opposition from Distributors and retailers

        Although the introduction of JITD would be beneficial in reducing inventory levels and stock-outs, the distributors may still reject the JITD system. From their perspective, distributors will lose their independence in determining exactly what and when to order from your company. 

Recommendations:

#1 Continue implementing the JITD system

        Implementation of JITD is in line with Barilla’s business objectives. With JITD, Barilla is able to determine the appropriate delivery quantities based on customer information shared from distributors. In addition, Barilla can cooperate with distributors monitoring the flow of products into and out of each. As a result, JITD will theoretically allow Barilla to reduce the demand uncertainty, which maximized the utilization of its assets, decrease the inventory levels and increase its returns by eliminating the stock-outs.