SCM

Barilla SpA Case

Team 2

26/04/2017
 Barilla Case Study - Background
The company was founded in 1875 by Pietro Barilla.
By 1990 Barilla is the worlds largest pasta manufacturer, capturing 35% of
Italian pasta sales and 22% of all European pasta sales. They also hold a
29% share of the Italian bakery-products market.
Sales are divided by product lines: dry 75% and fresh 25%. The majority of
the dry sales are distributed through the two company owned central
distribution centers, one in Pedrignano and the other in Naples.
Increasingly throughout the 1980s, the company suffered from volatile
demand with wild weekly fluctuations in orders for dry products straining
Barillas manufacturing and logistics operations.
In 1987 Brando Vitali, then Barillas director of logistics proposed a JITD
program as a resolution to the demand volatility. This proposition has met
with both internal and external opposition.
 Barilla Case Study - Objective and Goals
Analysis of the Bullwhip Effect on Barilla SpAs supply chain
Specifying risks and costing issues
Demonstrating supply issues with concepts learned from the class readings
Summarizing implementation challenges and solutions
 Agenda
Barilla SpAs Supply Chain Diagram
Demand Fluctuations vs. Consumer Demand Pattern
Underlying Causes of the Ordering Pattern
Principle Cost Categories Impacted by the Order Pattern
JITD as a Mechanism to Reduce Supply Chain Costs
Underlying Causes of Internal Resistance to JITD
Distributor Response to JITD
Recommendations to mitigate Internal and External JITD resistance
 Barilla SpA Supply Chain
Raw Materials Barilla SpA Operations Distributors Retail Outlets
Suppliers
Manufacturing Distribution GD Supermarkets
Dry ~150 SKUs, ~2 Chains
Durum Wheat 800 Dry SKUs 65% all dry inventory Weeks dry inventory 45.5% of dry
Dry 18 24 Months/10 12 weeks 2 wks dry inventory
Fresh 21 days/1 day bread 10 day lead time to GD/DO
products
DO ~10 12 days of
Tender Wheat ~150 SKUs, ~2
inventory
Northern CDC Weeks dry inventory
Pasta Plants Independent
Eggs Independent Agents Supermarkets
Flour Specialty Southern CDC (Concessionari) 19.5% of dry
products
Spinach Meal Mill Plants 70 warehouses throughout Italy
~10 12 days of
Depot inventory
Bread Plants 35% all dry inventory

Small Independent
Grocers
35% of dry products
2 weeks inventory

Fresh
Demand Fluctuations vs Consumer Demand Pattern
A Cause for Concern Wild Demand Fluctuations Put a Strain on the Supply Chain

The attached chart shows the pattern

of weekly orders received over the
course of a year for Barilla dry
products from the Cortese Northeast
DC to the Pedrignano CDC. The
average weekly order is 300 Quintals
with a Std Dev of 227 Quintals. This
represents a high 76% coefficient of
variation.
 Demand Fluctuations vs. Consumer Demand Pattern
Variance in orders placed to the CDC and sales from the DC
A Large Degree of Variance can
be seen between the weekly
orders placed from the DCs to
the CDC and the actual weekly
sales from the same DOs to the
supermarkets.
Demand fluctuations Vs. Consumer demand pattern
(Blue) Orders from Cortese DC to
Pedrignano CDC. (Red) Weekly sales from
the Cortese DC to supermarkets. The
severity of the distortion between actual
consumer demand and the signals being
transmitted are large.
 Underlying Causes of Ordering Pattern

Lack of information sharing and poor communication

between Barilla and the downstream members of
their supply chain

Price fluctuations / Forward buying

Shortage Gaming

Long lead times

 Underlying Causes of Ordering Pattern

Transportation discounts

No min/Max order limits

Barilla compensation structure for

sales

Push versus Pull Supply

 Principle Cost Categories Impacted by Order Pattern

There is high volatility in the demand signals received at the central distribution centers .
This is evidenced by the wide fluctuations in weekly orders from the downstream distributors
documented in previous slides. This inefficient order pattern has a negative cost impact over
the entire supply chain.

Manufacturing Costs-Increase

Inventory Holding Costs-Increase

Transportation Costs-Increase
 Principle Cost Categories Impacted by Order Pattern

Additional areas and costs affected by the fluctuating order pattern:

Replenishment lead time-Increases

Shipping and Receiving Costs- Increase

Level of Product Availability- Decrease

Profitability-Decrease
Conflicts internal to Barilla
The current method of promotion and discount policy :
Currently Barilla divides each year into 10 or 12 "canvass" period with each corresponds to a
promotional program. The incentives for the Barillas sales representatives lie on achieving
sales goal for each canvass period. Therefore they are actually welcoming distributors to buy
as much as possible. Besides, one of the representatives sales tools is volume discount
larger volume orders. This, to some extent, encourages distributor to order less frequently
with larger order quantity every time.
With JITD implementation,
The decrease in Barilla's CDC inventory level at current period, the distributor's inventory
level will increase considerably. And, if distributors are ordering more at a time and less
frequently, it will cause pilling up of inventory if there exist less demand leading to demand
fluctuations.
Conflicts internal to Barilla
The current method of promotion and discount policy :
Currently Barilla divides each year into 10 or 12 "canvass" period with each corresponds to a
promotional program. The incentives for the Barillas sales representatives lie on achieving
sales goal for each canvass period. Therefore they are actually welcoming distributors to buy
as much as possible. Besides, one of the representatives sales tools is volume discount
larger volume orders. This, to some extent, encourages distributor to order less frequently
with larger order quantity every time.
With JITD implementation,
The decrease in Barilla's CDC inventory level at current period, the distributor's inventory
level will increase considerably. And, if distributors are ordering more at a time and less
frequently, it will cause pilling up of inventory if there exist less demand leading to demand
fluctuations.
Barillas customers concern:
As one of Barillas customer, the response to Barillas JITD proposal would be a combination of the following
emotions:
Sense of burden. Barilla requires us to report to them our inventory level and sales amount everyday, which
contradicts our periodic/weekly review policy and will add extra burdens to our staff. Will Barilla pay for the
extra cost incurred? We might require Barilla to pay for the extra staffing cost. Besides, since information is
money, Barilla needs to pay for our regularly provided information.
Sense of distrust. It seems that Barilla thinks that it can do a better job than us in managing our inventory.
Their greatly reduced shipping amount to our company indicates that they think our predictions in the past are
not correct. As a counter action, we might refuse to provide past sales data to Barilla so that they will have
difficulties in predicting the market demand
Barillas customers concern:
Sense of defense. How could Barilla demand sales data from us which are considered confidential? Does
Barilla have the authority to do this? Are they intending to monopoly the supply chain? If we release our sales
data to Barilla, will this information go to our competitors? These doubts will result in defensive actions such as
procrastination in responding to Barillas request or refuse to cooperate.
Sense of losing control. If it is left for Barilla to decide how much we need and how much should be shipped to
us, we will lose control of our inventory. Besides, Barilla will base its daily distribution amount to us on the
information of our sales amount and inventory level as well as similar information from our peer distributors.
This does not seem to be a robust approach because their criteria for quota distribution is vague and
subjective. It is easy to cause unfair treatment. What if we need to order more due to a sudden market surge?
Will we be granted more shipment? As a protection, we might intentionally alter sales data and inventory level
reported to Barilla whatever is advantageous to us.
Improvements of current JITD Program:
The current proposed JITD program at Barilla is not feasible because the crux of problems lies in its slow
delivery speed and rigid production process which are commonly seen within a traditional functional
organization. A fundamental reform need to be taken to improve the relationships between the sales,
advertising and logistics departments through redesign the performance measurement system.
To motivate the distributors to actively participate in the JITD initiative, a consortium of both suppliers and the
distributors on a supply chain should be formed to discuss the present problems and come up with solutions. It
is always easier to roll out something within the willing participants than throw something to them arbitrarily.
The latest development in information technology makes Vendor Managed Inventory (VMI) possible for data
sharing and synchronizing.
Improvements of current JITD Program(contd):
It will have following advantages :
Decrease the Total Inventory in the Whole Supply Chain: JITD helps to reduce inventory held at the distributors.
Theoretically, it eliminates the needs for each distributor to hold it own Safety Buffer. Therefore, it benefits the
distributors through releasing their inventories space and cost
Better Customer Fill Rate both in Barilla and the Distributors: JITD emphases quick response. Since the
inventory data and delivery pattern are controlled by Barilla, their central factory and CDCs are therefore easier
to schedule their production and deliveries to meet the customer demand. For the distributors, since their
flexibility and reaction speed have all been increased due to the lowered inventory level, they surely could have
better customer fill rate and less stockouts rate than before.
Further Distribution and Manufacturing Cost Reduction based on Scheduled Production : The less interruption,
the more cost-efficient. But this is only true for bottleneck machines. This is also true for distribution cost. In
contrast to the fluctuating due to unknown situations in the past, a better delivery schedule could be built by
using complete data obtained from the end-users.
Improvements of current JITD Program(contd):
New Targets:
Small shops
The Italian government supports the small shop rather than big supermarket. Small shops
have better growth rate than supermarket, and Barilla didnt get that much market share in
this area.
They are more likely to accept the small quantities of order to reduce their inventory since
they have worse inventory level more than two weeks, longer than supermarket. And they
don not have much resource and power to manage their inventory.
They are shipped directly through Barillas own regional houses. Barrila could get the end-
user demand information directly without dealing with outside distributors. There is no
privacy issue here.
Based on the above reasons, it is easier to implement JITD in small shops. And we can use it
as good examples to persuade other distributors to join the JITD program.
New customers
easier to get their cooperation during contract negotiation and reinforce the agreement in the contract.
 JITD as a Mechanism to Reduce Supply Chain Costs

As evidenced in the previous slides, high demand variation is adversely affecting

Barillas supply chain costs.
Bruno Maggiali , director of logistics for Barilla has proposed a version of VMI dubbed
JITD ( just in time distribution) as a possible mechanism for reducing these costs.
We feel that this new supply chain strategy is definitely a viable mechanism for
reducing costs across the Barilla supply chain.
Implementation of JITD would positively affect the cost structure by addressing some
of the underlying supply chain inefficiencies contributing to the current bullwhip
effect evidenced by the demand volatility.
 JITD as a Mechanism to Reduce Supply Chain Costs

Adoption of the new JITD strategy would incorporate fundamental changes in the
current supply chain allowing for improved overall efficiency.

Convert from a push to a pull strategy

Reduce Costs

Improves Customer Service

Optimize logistics across the supply chain.

 Retailers Advantages & Disadvantages
Advantages
Benefits for a manufacturer:
Improved brand reputation because of better product availability throughout the
distribution channel
Increased manufacturing efficiency due to fewer small quantity manufacturing runs and
expedited delivery crises
Reduction in unwanted inventory in the distribution channel, reducing the pressure to
take it back and improving the financial health of the distribution channel
Benefits for a distributor:
Fewer lost orders and backorders, increasing revenue and decreasing open order
management time and costs
Outlet for slow moving inventory for improved asset recovery and financial health
Opportunity for incremental revenue from sales to like-franchised distributors
Benefits for customers:
Improved product availability from a local source, reducing PO fulfillment delays and
open PO management costs
 Retailers Advantages & Disadvantages
Disadvantages
On the other hand, the retail inventory method is only accurate if all pricing across the
board is the same and all pricing changes occur at the same rate. In most cases, this is
not realistic in retail because of the many variations that exist in merchandise pricing.
For example, depreciation, markdowns, product damage and theft can affect the price
of the retail inventory. For this reason, any calculations made using the retail inventory
method should serve only as an estimate.
The main drawbacks associated with inventory sharing include increased
transportation, handling and administration costs. Moreover, its a complex system
requiring more accounting entries.
INTERNAL RESISTANCE TO THE JITD PROGRAM

Brando Vitalis proposed J ITD program did not receive universal acceptance within
Barilla. It met with significant resistance specifically from the from two different
groups internally

Manufacturing and Logistics personnel

Sales & Marketing personnel

 Distributor Response to JITD
Barilla would like to introduce the JILD concept to its distributors of dry goods. The
Grande Distribuziones and the Distribuzione Organizattas are the supply chain members
best situated to benefit from this implementation. As one of these distributors what
would my response be to this proposal.
What Are the Advantages to My Organization

Will JITD Reduce My Costs, If So How

How Will Reduced Inventory Affect Stock Outs

How Much Input Will I Have In Order Size and Mix

What Will Happen To Price Discounts and Promotions

How Will My Information Be Used and By Whom

 Recommendations to Mitigate External Resistance JITD
Resistance to change is not surprising when trying to coordinate between two unrelated
entities in a supply chain. Since this an unproven strategy in the eyes of the external
stakeholders , Barilla is asking for a leap of faith on the part of their distributors to buy
into the JITD process. In order to get their external partners to make this leap of faith
Barilla has to design an implementation process that is based on cooperation and trust
and that emphasizes the mutual benefits attainable through cooperation. Some specific
points to address would be:

Assess and Stress the Value of JITD to Both Partners

More Competitive Pricing Structure
Clear Identification of Individual Operational Roles and Decision Rights
Effective Contracts
Well Defined Conflict Resolution Mechanisms.
 Recommendations to Mitigate External Resistance JITD
Slide 2

Pilot Project Results

Data Security
 Recommendations to Mitigate Internal JITD
Internally Maggiali has encountered resistance to his plan to implement
JITD as a solution to the distribution challenges facing Barilla. It is essential
that he mitigate the internal resistance before attempting to convince the
distributors of JITDs value as a supply chain strategy

Formulate a Well Defined and Documented Proposal

Get Top Management on Board

Internal Implementation Plan

Collaborate with Sales & Marketing

 Summary and Recommendation

Barilla, Italys largest pasta manufacturer is experiencing supply chain

inefficiencies evidenced by a high incidence of stock outs and highly
variable order patters from their distributors. This distortion in demand
signals is mainly a result of price promotions/discounts and the inflexibility of
their production process. We recommend Barilla take the following actions
to address these challenges.

Implement the JILD supply chain strategy

Implement an EDLP (every day low price ) pricing policy
Optimize Transportation costs for the Barilla run depots
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Thank You

Any
Questions?