Barilla Spa(a) Case Study

CASE STUDY

 Barilla SpA (A)

1. What problem was Just-In-Time Distribution (JITD) designed to solve? What are its underlying causes?

In this paper, Barilla SpA is facing difficulty to meet fluctuated demand while keeping costs at low level. The JITD would be introduced to predict actual demand so that Barilla could attempt to produce the exact number of products to meet customer’s demand. The fluctuated demand is resulted from various factors and we are going to list them in the following for further analysis.

Based on the story of Barilla, its business heavily relies on investment of promotion. Promotion certainly could improve sales performance, but it also makes demand hard to predict. First, they divide a fiscal year into about 10 periods and each period offers different sales promotion. As a result, customers are more likely to purchase high volume of dry products since these products have long shelf life. And, customers are also likely to buy larger volume of products when promotion is high. This promotion strategy makes operational management hard to manage its product line because great fluctuation of demand exists among different period. Overall, the costs are high due to the fluctuated demand. Second, sales representatives’ compensation is based on the volume of sales. In this scenario, representatives are driven to push customers to purchase more while promotional periods, whereas less motivated when non-promotional periods. This further curve the demand line for the year.

The next cause is related to delivery or distribution. Distributors place orders to Barilla based on retailer’s orders and the space available to stock inventory. Hence, distributors might sometimes run out of products or possible overstock their inventory because of the lack of anticipation or real demand. As described in this case, Barilla has 800 packaged Stocked Keeping Units for dry products which weighs for 75% of its revenues. The high SKUs create complexity and uncertainty which makes inventory management hard to control and monitor. Forecasting an individual SKU is extremely time-consuming so the forecast will have high standard deviations. Along with promotion strategy, demand will be fluctuated prominently.

Additionally, the forecasting system and distributor do not have efficient and accurate analytical technique to determine optimal order quantities. As a result of the poor forecasting, the inventory level will be sometimes extremely high or sometimes serious stock out. The exhibit 12 and 13 shows average inventory levels are much higher than the orders average. This may be caused by high fluctuating demand but the forecasting and distribution system themselves do not perform efficiently indeed.

Another factor driving inventory level high is that lead time is average of 10 days after receiving the orders. If this could improve couple days, then inventory level should be lowered down therefore reducing the holding cost.

Besides, manufactures are continuously introducing new products to their customers. With limited room of warehouses, the distributors and retailers feel impossible to carry large volume of inventories and add extra number of inventory for the products they already stored while accepting new products offering from manufactures to stock or display on the shelves.  Products proliferation brings the manufactures a problem of customer changing and losing that affected the customer loyalty.

As discussed above, there are some factors behind the fluctuated demand problems. And due to its high fluctuated demand, additional problems arise as well. Because of high deviation, it is difficult to schedule labor, machine and delivery efficiently throughout the year. On the other hand, Barilla has a massive automated manufacturing plant for production which is not ideal for high variation demand, making the plant less efficient and productive. Plus, since high variation in demand and poor estimation, freight cost is high, so they have to deliver more times rather than deliver all at once.

2. What are the key components of JITD? How is it supposed to correct or mitigate the problem you described in question 1?

As we learned in the textbook, “Just-in-time (JIT) is about matching supply with demand. The goal is to create a supply process that forms a smooth flow with its demand, thereby giving customers exactly what they need, when they need it” (Gerard Cachon and Christian Terwiesch,2013). Just-in-Time Distribution (JITD), which extends from the JIT, is also a very important part of enterprise logistics and supply chain. Xiang Yang, Hanwu Ma, and Dengfan Zhang explained that JITD is a mode of distribution in terms of demand-pull replenishment (2010).

The key components of JITD as follows:

1) Supply the correct quantity of goods arriving at exactly the right time

I. Information sharing -- Accurate and timely

    As one of the key components of JITD, information sharing includes distributor’s data on what products it had shipped out of its warehouse to retailers during the previous day, even actual retail sell-through data, as well as the current stock level. Effective, timely and accurate information communication can help to improve planning and optimize decision-making.

II. Information technology support

    Information technology support is also important. Such as bar code technology, automatic sorting system, computer network system, the recognition system and positioning system, etc. To realize the rapid identification, sorting, handling and tracking of the goods through them, thus ensuring the accuracy and timely delivery of the goods.

III. The improvement of the prediction system

When we get real-time data, we need to analyze and predict. If the company's forecasting system improves, then the data can be fully utilized. At the same time, we can make better decisions after we’ve made a better forecast. Otherwise, demand fluctuation could be exacerbated.

IV. Build trust and strategic partnerships

Even with the most advanced information systems, infrastructure and human cooperation are needed. It is important to establish cooperation mechanisms and trust relationships. Thus, the JITD strategy can be implemented smoothly.

2) Delivery "in time" and to the right place

     Under the JITD mode, the pursuit is to reduce the volume of logistics and accelerate the logistics frequency, and finally realize the zero inventory. This will require “in time” delivery of the product to the right place.