Barilla SpA (A) Company Overview Barilla SpA is a large, vertically integrated, family owned pasta company based in Italy. It maintains a leadership position among a field of thousands of Italian competitors producing and distributing brand-name pasta. Its operations are divided among 3 production divisions and two distribution channels, based on product shelf life. life. Distribution Distribution was was further further divided divided between between two two central distribution centers (CDCs), based on geography. Customers were divided into three primary segments: Small retail shops; Large independ independent ent supermar supermarkets; kets; and Large Large supermar supermarket ket chains. chains. Distribut Distribution ion to small retail shops was direct from the CDCs. Distribution to the supermarkets went through intermediate distribution centers, either owned by the chain, or operated operated by a third third party party represent representing ing multiple multiple independ independent ent supermar supermarkets. kets. Fresh product was distributed through a network of brokers. Inventory levels in the supply chain, managed via periodic-review inventory systems, were high, with larger levels of safety stock held for dry pasta (which had longer shelf-lives) than for fresh pasta. The CDCs carried approximately a 1-month 1-month supply supply in inventory, inventory, and superma supermarket rket distribu distributors tors maintained maintained a 2week week supply supply,, yet stocko stockouts uts still still occurr occurred ed frequ frequent ently. ly. These These high high invent inventory ory levels were in part a result of heat control issues in the production process making it difficult to respond quickly to shortages, so increased safety stock was the preferred response to demand variability.
Distribution Problems The pasta supply chain suffered from classic bullwhip-effect problems: high inventory levels stored at each level of the supply chain; stockouts at the distributor level; demand variability magnification up the chain, and exacerbated by frequent promotions, Full Truck Load (FTL) and other volume incentives; and a lack of information information on which to forecast demand. Increasing product variability exacerbated all of these problems. Barilla maintained over 800 SKUs of dry pasta alone. To combat these problems, the Director of Logistics desired to implement a Just In Time Time Distr Distribu ibutio tion n (JITD) (JITD) syste system m utiliz utilizing ing a vendor vendor-co -contr ntroll olled ed invent inventory ory scheme. scheme. However However this proposal proposal faced faced severe severe oppositi opposition on both internally internally and among customers. Intern Internal al oppos oppositi ition on origi originat nated ed both both from from job securi security ty fear fear as well well as more more legitimate concerns, such as the culture of promotions and fear of competitor encroachment into distributor warehouse space following a reduction of Barilla inventories. Outside opposition was most vocal from distributors' buyers, who were most directly threatened by the JITD system. Availability of demand information, even at the store levels, also presented
difficulties in implementing a system that would be completely dependent upon using this information to forecast.
Recommendations & Implementation Plan Decrease in Total Inventory A JITD program would help to reduce inventory held at the distributors since it builds inventories at the central warehouses and then deliver only the quantities required by the end-users through more frequent checks of the distributors' inventory. Thus, the JITD approach will save the entire supply chain money in reduced inventory costs and will result in high service levels. But finding the right foothold on which to mount a successful pilot program is the key challenge for Barilla. A JITD system would have the following features: 1. Elimination of promotions to reduce demand variability caused by batch ordering 2. Everyday low pricing, to remain competitive 3. More frequent deliveries with mixed-orders per FTL 4. Demand forecast information made available 5. Vendor-managed inventory at the store and distributor levels Improved Fill Rate & Decreased Distribution Cost Since the inventory data and delivery patterns would be controlled by Barilla, it would be easier for their central factory and CDCs to schedule their production and deliveries to meet the customer demands. For the distributors, the increase in flexibility and reaction speed leads to lower inventory levels improving the fill and stockout rates. It will also help to improve scheduling of production and reducing lead-time, which will minimize the fluctuations seen currently. The delivery load will be balanced. Improved Customer Relations Reduced inventory costs, higher service levels, improved fill-rate and decreased distribution costs would all lead to improved customer relations. Increased Shelf Space for Distributors The improved delivery schedules will lead to a decrease in inventory enticing the distributors to take on more of Barilla's competitors' products. This is an opportunity for the sales representatives to sell the distributors on taking on more of Barilla's products to improve the selection they currently offer. Improved discount policy Instead of giving discounts for large order volumes, Barilla would give discount
for stable long-term orders (EDLPP). By doing so Barilla could have many reliable long-term orders to meet market demands, and considerably reduce the variability in the supply chain. New roles for sales representatives The role of sales representatives should be defined as JITD customer relationship and development managers. Not only would they be selling Barilla products, but they would also be providing services that improve customers' delivery program. The representatives can participate in the JITD program as the communication bridge between the company and the distributors helping to implement the JITD program. A system would be installed in the representatives' portable computer by which more information at the distributor warehouse level could be collected. By doing so, the sales representatives will still play a vital role in the new system, while reducing the distributors' work in implementing the JITD program, leading to greater participation.
Target Market It is our recommendation that Barilla focus the implementation of the JITD program on the delivery of dry pasta to small retail shops. The Italian government supports the small shops rather than the larger supermarkets and therefore Barilla may benefit in future dealings with the government. Small shops have shown to have better growth rates than supermarkets, and this is the segment in which Barilla does not have a significant market share. Small retail shops constantly struggle with providing product variety to its customers within the limited shelf space they operate by. This market would be the most willing of all segments to accept smaller order quantities to reduce the inventory they have on hand. This reduction would allow them to add greater variety of products. The small retail shops are currently served by Barilla's own regional distribution centers so there is a greater level of control within this supply chain. Sharing of information becomes easier which is paramount to the JITD program.
Analysis and Justification At the center of our recommendation is the implementation of the JITD. Showing the cost savings of the JITD can solve all the distractions of the sale representatives, distributors, and retail outlets. The JITD would require all parties, including Barilla, to move to a continuous review policy from the current periodic review policy in inventory replenishment. Keeping demand, standard deviation of demand, inventory carrying cost, and order cost constant, Barilla can make adjustments that would allow for an optimum order quantity, reorder point, safety stock, and average inventory based on the required service level of its customers. Moving to the optimal quantities will
reduce the physical inventory required at the retailers and distributors because of the steady stream of inventory that is moving in the pipeline. Moving to a continuous review policy means smaller shipment lots. To minimize the potential increase in order and transportation costs, Barilla should include joint replenishment of its various SKUs when considering order quantities. The smaller average inventory that will be required by the new policy will allow the distributors and retailers to add the full complement of Barilla products. This would require no additional shelf space. While this may have been a costly proposition in the periodic review policy, the continuous review policy allows the constant flow of products that are selling. Therefore, items that are not selling will only take up the current shelf space and no additional inventory of that good will be taking up unnecessary space. In the long term, it is recommended that Barilla move to a single distribution system for both fresh and dry pasta to increase the cost effectiveness of joint replenishment. This however cannot be done until the supply chain can reduce the delivery time to a level that suits both products.
Conclusion Barilla became a market leader by taking a simple product like pasta and selling it very differently than the rest of the industry. The product was put in sealed boxes and marketed as a higher end product. In doing this, the company was able to produce a greater profit margin than its competitors. The JITD program gives Barilla an opportunity to do something very similar. By moving to a distribution system that greatly reduces the variability, Barilla can greatly reduce the "Bullwhip" effect that plagues the industry.
