Manager

BARILLA SpA (A), (C) and (D)

1. Draw a flow diagram for Barilla dry products sold through distributors. Your diagram will have four major sections: Barilla production, Barilla Finished Goods Inventory, Distribution Centers, and grocers. Indicate the flows of both physical goods and information. At appropriate places on your diagram, collect any relevant statistics mentioned in the case, for example on inventories, lead-times, etc.

Please refer to the following page (page 2 of this document) for the process flow diagram for Barilla dry products sold through distributors.

INSERT PROCESS FLOW DIAGRAM

2. What are the problems and difficulties facing the supply chain? What is their

impact? Diagnose their underlying causes.

The supply chain of pasta and pasta-related products in Italy was facing significant problems, including excessive inventory levels, high levels of stock-outs, extreme reliance on promotional activities, inefficient logistics operations and poor communication and cooperation between the supply chain participants. The industry had not leveraged technology to improve communication amongst its members, tracking of inventory or demand forecasting. These problems resulted in higher inventory carrying costs, as supply chain members sought to reduce the frequency and magnitude of stock-outs. Furthermore, industry suppliers competed fiercely on price, resulting in extreme peaks in demand during promotional periods.

The core cause of these problems was unpredictable demand, which resulted in higher inventory levels and carrying costs, in addition to making logistics operations more difficult. Because there was limited demand visibility within the supply chain, any significant fluctuation in demand potentially resulted in stock-outs. Poor communication and cooperation amongst the supply chain participants also contributed to the limited visibility of demand within the supply chain. Because the supply chain participants were not actively sharing information with other members of the supply chain, the participants were unable to react quickly to peaks in demand. As a result, higher levels of safety stock were maintained by all parties in the supply chain to avoid potential stock-outs. Barilla suffered from this demand variability to an even greater extent than the grocery stores or distributors due to its position in the supply chain and the associated bull-whip effect.

In addition to poor communication, the extensive use of promotions and discounts also contributed to the variability of demand. The grocery and pasta business in Italy had a long history of using promotions and discount pricing to move products. The central distributors expected frequent trade promotions and stocked up on inventory during the promotional periods to benefit from the favorable pricing. As a result of promotions, the demand for BarillaЎЇs products would swing significantly from week to week and was not stable throughout the year. Demand peaked when promotions were offered and dropped significantly when the promotions expired. As a result, higher inventory levels were maintained both by Barilla and the distributors as the distributors purchased sufficient pasta to meet both current and future needs.

An additional cause of the high inventory levels was the manufacturing process. Barilla carried approximately 800 SKUs of dry products, and many of these products were produced in precise conditions (temperature and humidity) to ensure the quality of the product. The manufacturing process used by Barilla focused on producing large quantities of individual products since adjusting the manufacturing conditions to suite a new product was a time-consuming process. As a result, Barilla could not react quickly to changes or peaks in demand as its manufacturing process faced long lead times. This inability to produce a balanced combination of pasta products was illustrated by the fact that the BarillaЎЇs plants were specialized by the type of pasta produced in the plant. This manufacturing system can be contrasted against ÐŽoHeijunkaÐŽ± which provides for a balanced production schedule. Because BarillaЎЇs manufacturing operations could not switch quickly between products, Barilla was forced to maintain overall higher inventory. The long set up times and lack of manufacturing flexibility resulted in higher cycle times to produce the product.

3. How does the JITD program hope to correct these problems?

The core problem facing Barilla is the high degree of demand variance that it experiences by product and throughout the year. The main causes of the demand variance are limited visibility downstream, and reliance on promotions to push product downstream.

In order to increase visibility downstream, Barilla has developed a program that pulls relevant shipping information from their downstream partners. This allows Barilla to optimize production and transportation decisions given the information. BarillaЎЇs Just-In-Time-Distribution program (JITD) effectively looks at the daily shipping decisions made by distributors and warehouses, combines that information with each distributorЎЇs stock position by SKU and plans future production and replenishment decisions for each distributor.

In order to reduce BarillaЎЇs reliance on promotions to push product downstream, Barilla plans to reduce the frequency and magnitude of its promotions. Barilla will demonstrate to its customers that the gains (reduced inventory carrying cost, reduced stock outs, reduced damages etcÐŽ­) experienced by distributors/warehouses using the JITD program outweigh any changes in the average per unit price that a distributor pays. Due to the benefits that Barilla extracts from the JITD program, Barilla may be able to reduce the average price of their product or offer an incentive to adopt the JITD program.

By adopting the JITD program each step in the supply chain is able to extract benefits that result in reduced costs, improved customer service and can increase and stabilize revenue. After BarillaЎЇs JITD program is up and running a company can expect to fulfill a higher percentage of its orders from stock thus reducing its stock out rate and increasing its revenue.