Barialla Spa Case Study
Business and Management
Submitted By averyd09
The Barialla SpA (A) Written case Report for the JITD Program
Module # 5
Oct 15, 2015
Table of Contents
Barilla SpA, an Italian pasta manufacturer is experiencing problems in manufacturing and distribution systems caused by fluctuations in demand. They are the worlds largest pasta producer and are initiating the Just in time Distribution (JITD), which is supposed to help the company to meet the demand fluctuations imposed by the company’s manufacturing and distribution system.
The current delivery system at Barilla follows the traditional way of ordering through distribution centres placing orders with the company. Instead Barialla wants to engage its own logistics organizations, which would specify the appropriate delivery quantities that would meet end customer needs and distribute the workload on Barilla’s manufacturing and logistics systems.
The Just in time Distribution has been met with significant resistance by the distributors and Barilla’s own sales and marketing organizations. After looking at all of the information provided and careful analysis of the problem I have suggested that Barilla should implement the JITD at the pilot level and once successfully implemented with positive results it should be implemented throughout in stages. I will be providing analysis and recommendations on how to increase the chances that the JITD program will work and be accepted and also consider the reasons why it should be implemented.
Barilla started its production in 1875 as a small shop in Parma Italy. By the early 90s the company became one of the largest producers of pasta. It became a large, vertically integrated corporation with mills, plants and factories located throughout Italy. They had a wide range of products from pasta with a large variety and a large variety of packaging combinations. Their channel of distribution was broken down into two categories, dry and fresh. Their dry products consisted of dry pasta and longer shelf life bakery products such as cookies, biscuits, flour and bread sticks. These were offered in 800 different packaged SKUs. The fresh products included fresh pasta products, and fresh bread. Both of these had a shelf life that was short. Their products were distributed to three types of retail outlets small independent grocers, supermarket chains and independent supermarkets.
Their flow of distribution was an upstream one flowing from customers to the retail outlets and up the chain till it reached the plant production. Barilla enjoyed a strong brand image in Italy. They used brand positioning and heavy advertising to get their products shown in the marketplace, sometimes using celebrities to showcase products. They used frequent trade promotions to push product into the distribution network. They also used volume discounts to customers. Sales representatives spent an estimated 90% of their time working at the store level setting up instore promotions, taking notes of competitors pricing and stock outs. They also worked out order strategies for the retailers.
The company has decided to promote the Just in time Distribution initiative. The JIDT program is aimed primarily at reducing flow times within production as well as response times from suppliers to customers. Barillas own logistics organization would specify the appropriate delivery quantities to customers.
Key issues, goals and problems
The underlying main issues that the JITD program was created to solve were the effects of fluctuating demands. (Exhibit 2) Demand fluctuation was caused by a number of problems such as excessive promotional activities, volume discounts, retailers had no quantity limits, and there was a lack of forecasting techniques. Some of their products often had extreme demand and this put a strain on the manufacturing and logistics operations. Certain pastas sold out due to unexpected high demands but holding sufficient finished goods for too long to meet the distributors order requirements was too costly. One logistics manager states that retail inventory pressure that was occurring within the business as a difficulty. Brando Vitali, in 1987 expressed strong feelings that an alternative approach to order fulfillment must be found. He noted that both manufacturers and retailers were suffering from thinning margins. They needed to find a way to take costs out of the distribution channel without compromising service.
There is also the issue of the distributors not being able to carry large numbers of SKUs. Barilla has 800 SKU’s of dry pasta and has 200 different shapes and sizes, all of these are sold in 470 different packaged SKU’s. Having such a variety has caused problems in the supply chain as each variety needs different packaging.
Random Trade promotions is another issue. Barilla sales strategy relied heavily on the use of trade promotions to push product into grocery distribution networks. The company has to offer promotional discounts many time of the year to achieve their desired sales. Due to random trade promotion and a differentiated sales strategy if faces the problem of demand variability.
The system that they have in place now is an order based production and the manufacturing is based on orders and has an average of 10 day’s lead time. An order based production causes burdens on the manufacturing and distribution sections of the company as demand is uncertain. Due to demand fluctuations Barilla was experiencing incremental increases in production costs. To change production from one type of pasta to the next was time consuming and expensive.
There is also conflicting goals between Barilla's employees and distributors that make changes from traditional inventory management to JITD scary for both parties.
Relinquishing control and working together is challenging or non-existent.
Environmental and Root Cause Analysis
Barilla has an expansive and complex distribution network. Based in Italy, they operate through their own central distribution centers (CDCs) as well as a chain of distributors including Grand Distributors (GDs) which are owned by large supermarket chains, and
Organized Distributors (DOs) which are third-party independent suppliers. History has dictated the level of personal contact between Barilla and its distributors ranging from very hands-on at the DO level to extremely limited when concerning the GDs.
Traditionally most all distributors within the network have limited analytical tools and low-tech forecasting systems which are ineffective in predicting demand resulting in inaccurate forecasts and faulty order quantity requirements for Barilla. Customers are left with inadequate supply and distributors are left with unhappy customers.
Barilla's brands are heavily advertised with an emphasis on high quality and sophistication. In regards to their Advertising, Barilla's sales strategy is to frequently offer promotions. Throughout the year they have ten to twelve periods in which distributors can save anywhere from 1.4% to 10% from buying in large quantities (full truckloads) or purchasing particular SKUs at a discount. These promotions increase sales while increasing extensive demand fluctuations.
Internally, Barilla's sales representatives are compensated in direct correlation to their growth in sales. The more they sell the more they will earn. There are no exceptions during the promotional periods. Sales representatives receive bonuses based on their gains but in turn are limited in their ability to sell during non-promotional periods. Distributors are not eager to buy without a promotional offer when they are aware that another opportunity for savings is around the corner. This creates huge demand increases for Barilla at certain times and extremely slow demand requirements at other times.
In addition to the distribution complexity, is the vast number of stock keeping units
(SKUs) in which they maintain. Within their dry pasta line alone, Barilla offers 800 different packaged varieties where every family of pasta (“short” (macaroni and fusilli) or
“long” (spaghetti and capellini)) are made in separate facilities due to the equipment required to accommodate the variations in size and shape. Production processes are also tightly controlled to ensure the output of high quality products that are expected from Barilla. Long lead times and increasing order cycles ensue while the inability to change production processes quickly to off-set demand variations is challenging
Barilla's bottom line.
Alternatives and/or Options (pros and cons)
Barilla proceeds and convinces the distributors to implement the JITD system.
Reduces Barilla's manufacturing costs by more accurately allocating production requirements decreasing stock outs.
Distributors improve customer order requirements while Barilla offers additional services for no extra costs.
Barilla experiences decreases in erratic transportation costs.
The benefits for implementing the JITD program for Barilla was to improve operations for themselves and their customers through the anticipation of demand swings. Barialla would become responsible for determining the quantities and delivery schedules of products which would trim inventory levels and could help reduce delivery costs and manufacturing costs.
Vitali saw the JITD program as a service to customers at no additional costs to them. It could help improve the relationship between Barilla and the distributors and improve their own planning process. Distributors become more dependent on Barilla, enhancing their visibility in the supply chain.
Cons: Barilla sales representatives would lose their incentives and sales become flat. Some representatives within the company felt that their responsibilities would be diminished. Of course there was also resistance from inside the company, in the sales and marketing organizations, which saw the concept as infeasible or dangerous. Distributors develop relationships with Barilla competitors to fill the free spaces in their warehouses.
Retailers need to improve their IT capabilities to have the ability to share sales information. Promotional activities become obsolete causing strife between distributors and
Distributors are hesitant to believe that Barilla has better inventory management practices then they do. Customers were unwilling to give up their authority to place orders as they pleased and some customers did not want to provide the detailed sales data upon which Barilla could make delivery decisions and improve its demand forecasts.
One recommendation is to run pilot testing at Barilla’s own depots as evidence to convince third party distributors about the JITD program. Also to get the whole company involved in implementation as opposed to just top management. This way the company can iron out any flaws that arise and get their customers feed back. Barilla must convince that success will come for all involved if the JITD system is implemented. Convincing the distributors as well as their internal sales team is imperative. There will have to be a
The Barilla organization as a whole will have to work together to implement the JITD program. Of course as a business owner I would always be looking for ways to reduce the costs related to operating the business while at the same time increasing profits. The JITD program is aimed primarily at reducing flow times within production as well as response times from suppliers and customers.
The sales representatives should then be involved in each step of the process starting from day one. They need to be reassured that there will be gains within their employment framework as well not just in Barilla's bottom line. New compensation packages should be outlined to the sales department, including how they now will receive bonuses based on share value within Barilla company.
Implementing the JITD system within one of their own depots will help show the distributor’s that this really can work. It will also show that the systems success and value and show cost savings and money making values. This might prompt the distributors to show a better incentive for the program. Barilla should build trust by involving the distributors in each step of the process and making their plans known without withholding any imperative information of their own business activities.
Monitor and Control
The management at Barilla can have hold monthly meetings and conferences to keep distributors up to date on all activities while at the same time building that needed trust to ensure everything is working well. The management team can also implement more training and technology to their own sales representatives so that they are consistently up to date with sales forecasts.