Barilla SpA Case Presentation BY Group I PGXPM VI

Company Background
Barilla was founded in 1875 as a small pasta shop. High quality products, Innovative marketing programs, created a strong brand name. Constructed a 1.25 million square feet pasta plant drove it into dept. Sold the company to US MNC which struggled to payoff the acquisition. US MNC Sold it back to Pietro Barilla. Capital Investments, organizational changes, improving market conditions helped company achieve annual growth rate of over 21%. It 1992, Barilla became the largest pasta manufacturer in the world.

Company Overview
Worlds largest pasta manufacturer with 35% MS in Italy and 22% MS in Europe 50% of company revenue comes from North and 50% from South Italy Flat growth in Italian Market, 20%+ growth in international markets

BARILLA

Barilla

Voiello

Braibanti

Bakery

Fresh Bread

Catering

International

Customer Segments

Customers were divided into three primary segments:

Small retail shops, Large independent supermarkets & Large supermarket chains.

Distribution Channels

Distribution to small retail shops was direct from the Central Distribution Centers (CDCs). Distribution to the supermarkets went through intermediate distribution centers, either owned by the chain, or operated by a third party representing multiple independent supermarkets. Fresh product was distributed through a network of brokers.

Inventory Management within Supply Chain

Inventory levels in the supply chain, managed via periodicreview 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 supply in inventory, and supermarket distributors maintained a 2week supply, yet stockouts still occurred frequently. These high inventory 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.

Issues faced by Barilla

Demand Fluctuation High inventory at all levels in supply chain Stock outs despite high inventory In-effective utilization fluctuations of Manufacturing units due to

Huge number of SKU but only few reflected on shelf space of customers

The solution decided was to implement JITD but that faced internal and external resistance

Demand Fluctuations

Demand Fluctuations
Demand Variability strained Barillas manufacturing and logistics operations. Difficult to meet unexpected demand due to specific sequence of pasta production necessitated by the tight heat and humidity specifications in the tunnel kiln. On the other hand, holding more finished goods was expensive. Distributors faced stock outs and lesser service levels. Reason is customer is changing as they do not have enough room in their stores and warehouses. Nearly impossible to anticipate demand swings. Vitalis Suggestion: Company should look at all of the distributors shipment data and send only what is needed at the stores rather than sending product to the distributors according to their internal planning process.

Just In Time Distribution (JITD)

JITD is a service allowing distributors to operate with low stocks while maintaining optimal service standards at all its warehouses. Low Stocks at Distributors end. Inventory will be directly managed by Barilla. Distributors will also be able to do better on their service levels with this. This will stop building enormous stock at two facilities and will help us reduce our distribution costs, inventory levels and ultimately our manufacturing costs.

Just In Time Distribution (JITD)

Distributors should provide us data on what Barilla products it had shipped out of its warehouse to retailers and the current stock level for each Barilla SKU. We will then look at all the data and make decisions based on our forecasts. It would be similar to using Point of Sale data from retailers

Resistance towards JITD

There were resistance observed on the introduction of the concept of JITD, they were from; Barillas Sales Team & Its Distributors

Resistance form Sales Team

Sales level would flatten. Risk of not being able to adjust shipment sufficiently. Giving competitors more shelf space. Stock outs if there is disruption in supply process. Unable to run trade promotions in JITD. Not clear how the costs will be reduced.

Resistance form Distributors

Distributors felt that Managing stock is my job. Barilla will have undue power to push products. How can barilla manage the inventory more efficiently than distributors themselves?

Is JITD feasible ?
The JITD program is a futuristic program. The reasons for implementations are as follows:
The shelf space at Store levels and Distributor warehouses are limited and hence to stock the ever increasing SKU, they need more space. More space comes at a cost and hence the ROI of distributor will come down or the company will have to increase the margins of the products. In both cases the profitability of the chain takes a hit. Average 3-6% stock out means direct loss in sales. Unplanned and random orders make manufacturing plant function at less than efficiency. Hence increased CAPEX.

Factors of Project Feasibility

Cost Saving: Cost saving is clear for both Company and the channel partners. Cost of implementation: If cost of implementation is more than cost savings, then the project is unfeasible. Since the cost involved in this process is one time and majorly consists of computer hardware, software and algorithms, on purely arithmetic basis the project is feasible. Resistance from internal and external customers: If the resistance from Sales team and distributor is addressed then it is possible to roll out this program.

Targeting & Convincing Customers

1. Select few of the biggest DO/GD which are nearest to the CDC:
Monitor the sales data for six months without making any suggestions. On the basis of data assess the seasonality, the product mix, the stock out scenarios and inventory. After six months, start generating the Suggestive Order each week and give it to the DOs buyer. Incentivize the DO/GD by promising delivery of goods within 48-72 hours (since they are closest to CDC). Monitor the effect of suggestive order on Stock out/fill rates and inventory level.

Targeting & Convincing Customers

2. Taking the above as prototype, the Top 20% of GD/DO in ITALY should be presented with the findings and the profits to the channel partners 3. The same can then be extended to the self owned warehouse channel to service small outlets

Will the DO/GD find the findings conclusive? What should be the next steps?
After the successful roll out at the barilla owned warehouses, the next big step is to convince the GD/PO to rollout the program. The selection of GD/PO should be based on the following parameters:
A big and loyal Barilla distributor with a long business relationship Closer to CDC to reduce Delivery time, which would act as an incentive for DO/GD to cooperate. Greater degree of randomness in order generated by GD/DO each week Space constrained Warehouse.

Will the DO/GD find the findings conclusive? What should be the next steps?
The GD/DO who meets the above criteria should be convinced roll out the JITD program. The use of incentive is optional. The incentive can be as below:
Faster delivery. Special promotions. Dedicated manpower to monitor the program. Extra margins (not preferable but as last resort).

What type of Distributors should we focus on in future?

The distributors which carry the Dry products. Focus on Distributors which order minimum one FT load per week. The cost of installing the system to be offset by the increased order due to better fill rates. The company owned regional warehouses. The distance from CDC to distributor cut off should be decided, because the farther the distributor results in increased lead time for delivery, the increased minimum inventory level and more time gap between seasonality and corrective measures.

Where will the payoffs be?

Better promotion planning to have maximum impact. Lower inventory at all levels in supply chain. Lower STR (Stock Turnover) at stores meaning more SKU and faster rotation of money for channel partners. Better capacity utilization of manufacturing plants.

How to tie JITD to manufacturing?

On the basis of sale data of the previous months and years, the following steps should be followed;
3 months (12 weeks) rolling forecast should be submitted by the Sales team on the regional basis. The changes in the weekly production plan should be made on the basis of real time daily sales data received vis a vis the forecast submitted giving the accuracy of the forecast. Promotions plans to be shared with production and sales team 3 months in advance and forecasts taken accordingly.

Recommendations
SKU Rationalization. Discount Scheme Rationalization. Reduction in replenishment time(2 weeks to 3 days). Common Interest: More profit and inventory turn over. Stock out should be reduced from 6% to 1%. Cultural change. Better Demand Forecast.