Barilla case report

by Yasser Hammoud

Part 1: Executive Summary

After having full exposure to Barillas current production and distribution infrastructure, I instantly became aware of the uncertainties and risks that the company is facing and will continue to face in the future. Barillas major difficulty is matching supply with demand and is struggling to keep up with the weekly variable demand from its distributors who were in control and dictating Barillas production and distribution equation. Furthermore, variability in demand had caused Barilla to overproduce and hold buffer finished goods to meet distributors requirements as well as, it was asking retailers and distributors to carry additional inventory. After careful analysis of the whole situation, I have recommended the implementation and execution of the JITD system because production under this system is driven by the consumer demand and controlled by Barilla instead of being controlled by the distributors orders. As well, JITD system will resolve all barillas other issues such as: decrease in manufacturing and inventory holding costs and improves manufacturing planning by using objective data. On the other hand, JITD will increase the profit margin and lay the foundation for Barilla to forecast its annual sales and plan for production and resourcing in a more effective and efficient way. In addition to cost reduction and better production planning, JITD system will increase distributors dependence on Barilla and as a result, a better relationship will emerge. I highly recommend Barilla to implement the JITD system as soon as possible. To start, they should plan for a kick off date and gradually change to the new system. Once the system is in place, they should carefully monitor the new system to make sure its performing as planned and at the same time identify new areas for improvement. The success of such system will highly depend on the support of Barillas management and on the cooperation of their supply chain partners. Once the JITD system is implemented and fully operational at Barilla, I will be confident of its stunning success and I will not be surprised to see Barilla Spa as an important player in Europe and on the world stage for many years to come.

Yasser Hammoud. Supply Chain student (PMAC)

Part 2: Fundamental ISSUE

The fundamental issue that was facing Barilla in the 1980s was the lack of sales data information that was necessary to produce inventory quantities according to the actual market demand. Due to the lack of this vital input information, Barilla has suffered increased operational inefficiencies and cost penalties which were the result of large week to week variations in demand due to its distributors order patterns. This major issue was a real concern for Barillas executive management and was the symptom which has been caused and became worst overtime by the following systematic issues:

Part 3: Systematic Issues

1. Lack of Forecasting:
Nature: Strategic Timing: Short term and long term

Barillas customers and distributors were still mainly using traditional reporting system. They relied heavily on physical inventory counts to replenish inventories rather than using a more modern or sophisticated accounting system. The ordering method which has been by Barillas distributors has created manufacturing and logistics issues mainly due to two reasons: the unavailability of actual POS figures at the customers end and the lack of professional sales forecasting. 2. Promotional activities:
Nature: Tactical Timing: Short term

Barilla ran periodic promotional activities which caused fluctuations in prices which in turn had a major impact in demand variations. Barilla had to over produce in these periods, therefore, creating high demand and inventory build-up in their distribution centers that has caused them to take some uncalculated measures to reduce inventory such as pushing over produced inventory to distributors at discount prices. 3. Transportation incentives:
Nature: Tactical Timing: Short term

In order to encourage full truck loads of shipments, Barilla provided discounts to its distributors and customers to buy more inventories so that distributors can save money by ordering larger quantities of goods. Barilla was responsible for product shipments from the production plants to its main distribution center, so by doing so, Barillas transportation costs may have been reduced at the expense of such factors as, initial inventory carrying costs, extra labour cost and transportation cost.
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4. Long order lead times:

Nature: Strategic

Timing: Long term and Short term

The distributors placed orders with Barilla once per week then the products will be shipped to distributors in an average of 10 calendar days after the order was received. This long order lead time caused distributors to order more products than they really need. 5. No minimum or maximum quantities:
Nature: Strategic
Issues Continued

Timing: Long term and Short term

Barilla didnt impose restrictions on customers order quantities. The lack of these order restrictions may have caused price fluctuations among distributors as well as made Barilla over produce unnecessary inventory just to satisfy the greed of some of its distributors who wants to have lower prices than others by ordering more quantities at a discount.

Part 4: ENVIROMENTAL AND ROOT CAUSE ANALYSIS

Part 4.1: Quantitative and qualitative analysis As one of the largest pasta producers in the world, Barilla has a market share of 35% in Italy and about 22% in Europe and is considered by consumers to be a high quality manufacture of pasta and other pasta related products. Barilla manufactures two product categories: fresh products represent 25% of production and 75% for dry products. Fresh products have 21 days shelf life whereas dry products have long shelf life of 18-24 month or medium shelf life of 10-12 weeks. Barilla owns its transportation system so after orders are received and production is complete, products are delivered to its two distribution centers: Dry and fresh goods only to Barillas main distribution centers where the distributors pick them up and distribute them as they wish to their own customers mainly to chain and independent supermarkets and the rest of the products were delivered to Barillas own run depots for further distribution to independent retailers and restaurants throughout Italy, please see Exhibit 1 for original flow of goods and information. In the past decade, Barilla showed a growth rate of about 21% and the future seems very promising due to the high economic growth in the whole region and the high per capita consumption of pasta in Italy and in Europe. The current market situation in Europe and particularly in Italy clearly indicates a high level of competition in the production and distribution of pasta products. Barilla has about 2000 competitors in Europe all of whom fighting for shelf space in supermarkets, restaurants and small shops. This fierce shelf space display competition may result in shelf space negotiation with key account supermarkets and ultimately shelf space rent has to be paid for best product exposure for faster inventory turnover. However, Barilla
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was at a disadvantage in handling this merchandising scheme at more organized and professional level at all their customer locations due to the lack of sales data and customer traffic information per store and other statistical data analysis and more importantly, its present marketing and distribution policy have prevented them from gaining access in directly dealing with their end customers. Barillas sales representatives were strictly involved in promotional activities only in independent supermarkets so Barillas products at key account locations such as the chain supermarkets are left without any inside marketing activities. Success in the market place is dependent on few key success factors such as pricing, brand image, product availability and customer service. Despite having excellent brand image, Barilla lacked being in control of their prices most of the time and that is due to the fluctuating demand which their system had created. Barillas production decisions were driven by the distributors varying weekly orders. These order patterns varied every week and the result was a major fluctuation in production due to fluctuation in demand. This fluctuation in demand had been fuelled by the following factors
1. 2. 3. 4. 5.
Analysis continued

Lack of forecasting. Promotional activities. Transportation incentives. Long order lead time. No restriction on order quantities.

Exhibit 2 shows you a clear illustration of how the weekly demand for Barilla dry products in their Northeast distribution center was fluctuating. As shown in the illustration, weekly demand started at 200 in week one and came down to 100 in week 2 and then rose rapidly in weeks 5 and 6. Again, in week 9 the demand was extremely low at less than a 100 and in two weeks the demand skyrocketed to almost 900 and this trend continues. This extreme fluctuation put high strain on both the manufacturing and inventory and raw material control. On the other hand, the current situation of demand fluctuation and the lack of forecasting up the supply chain from the customer to the supplier could have a negative major impact on the resourcing and management of raw material that Barilla needs for production. In this situation, Barilla may have to carry higher safety stock in their inventory in order to cover unforeseen demand. Carrying this high level of raw material will result in higher inventory management cost due to increased labour, transportation and the cost of borrowing. Its obvious that the present distribution system at Barilla is traditional and is completely outdated. In fact, the distributors are the ones who are dictating
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production and Barillas production department seems to be only making the production schedule. By having the distributors control most of their production of dry and fresh goods; Barilla will be running at the risk of losing their market share to competition if distributors decide to push other brands instead of barillas brand. Barilla, as the worlds biggest supplier of pasta products had no relationships with their customers customers. This missing link in the supply chain will negatively affect their performance, if not in the short run, it will definitely in the long run. The bridge between any organization, whether its big or small, and the final customer is its sales force. At Barilla, there is only one sales position at the top management and is occupied by F. DiMaria who reports to two general managers at the same time. Having one executive sales management position in a multinational firm like Barilla is a clear indication that this companys only focus is production; see Exhibit 3 for Barillas organizational chart. As shown in this chart, Barilla had no representation in what so ever in Europe and particularly in big markets such as France, Spain, West Germany and the United Kingdom. Lacking management representation in In Europe puts Barilla at a risk of being pushed out gradually by local competitors. As mentioned earlier, proper shelf display in terms of space and location inside large supermarkets is vital for faster inventory turnover and brand name image. Therefore, being away and not being able to monitor the brand position in neighbouring European countries is a clear indication of Barillas weakness to face any potential threats.

Part 5: ALTERNATIVES AND OPTIONS

Part 5.1: Alternative 1

Is an internal strategy which focuses at managing production and aims at fixing production fluctuation due to the weekly demand variability. Therefore, under this alternative, Barilla will keep its existing system but adjust its production plans by making production forecast based on its own historical sales figures and on taking into consideration additional factors such as promotion, growth and safety stock. Barilla must act immediately and come up with an action plan to resolve this issue. The logistics manager, Mr. Maggiali should prepare the following action plan:
1. Schedule a meeting with general managers, Mr. Carelli-dry goods and

Mr. Allodi-fresh products and the sales manager Mr. DiMaria. 2. Discuss and explain the urgent need to change the status quo of the whole manufacturing process by providing them with the important reasons as to why the changes should be done.

3. Ask for permission from all department managers to in order to gain access to all available data, historical and present, regarding production and sales.
4. Gather all other necessary information related to production such as

raw material sourcing records, inventory on hand and any purchase and sales forecast data available. After gathering all the necessary information, Mr. Maggiali should calculate demand forecast for every product category based on historical sales data figures. For example, if the company sold 100 units in January last year then the production for January this year should be 1000 units plus safety stock, plus a percentage of growth plus a percentage for promotional campaigns. To further illustrate the example, the production for January this year should be: 1000 units + 100 units (assuming Barilla wants %10 growths) + 50 units safety stock (estimated) + 50 units for promotion (assuming Barilla is conducting a promotional campaign in January) equal a total production of 1200 units for the month of January. Therefore, the weekly production should be 300 units (1200/4 weeks). Same calculation should be repeated for every month for the entire year. After arriving at monthly figure for production every month, then Barilla should allocate monthly targets for every distributor based on their performance in the previous year. By following this action plan, Barilla will have pre-prepared production schedule for the whole year, as well as dictate what should be produced and sold to distributors. This proposed action plan will allow Barilla to plan its resourcing for raw material purchases in advance and in according to their production plan and schedule. Before executing this action plan, Mr. Maggiali along with both general managers should plan for a start date before obtaining the approval of the Chief executive Officer, Mr. Manfredi.

ALTERNATIVE 1 PROS AND CONS

Pros. a. Eliminate the weekly production variability. b. Reduces the frustration and anxiety of the production department. c. Barilla will be in control of their production instead of distributors being in control. d. Cost reduction due to the decrease in inventory carrying cost such as raw material and finished inventory carrying cost. e. Decrease in labour cost due to better labour management system, i.e. no overtime needed. f. Decrease in transportation cost due to less shipments to CDCs Cons. a. A dispute with the distributors may intensify.
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b. Market demand may exceed the planned production. c. Lack of P.O.S data is still missing from the new production forecasting equation. d. The aim of this action plan is to fix production issues but ignored new strategies to improve customer service and increase sales. e. Inflexible because it doesnt respond fast to market needs. Part 5.2: Alternative 2 Its an internal and external sales distribution strategy which aims at fixing the production and demand fluctuation issues at barilla and at the same time improve customer service, decrease cost and increase sales, all that is done by the implementation and execution of the Just In Time Distribution system (JITD). As mentioned earlier, Barilla is obviously facing a challenging situation in dealing with its constant production fluctuations which had been caused by demand fluctuation as a result of the varying weekly orders that had been created and issued by its distributors. In order to deal with this recurring issue, Barilla employed counter variability measures such as holding buffer inventory and asking distributors and retailers to do the same. These counter measures made things even worst. However, the implementation of the JITD strategy in this case will involve all Barillas supply chain partners, please see Exhibit 4 for a simplified illustration. The goal of such project is to help the company resolve all present issues without the need of holding and producing additional inventory. This may sound easy, but the implementation of such sophisticated strategy will require time and patience in the short run. The following is a step by step process on how this project should be implemented: 1. Mr. Maggiali and his assistant should discuss and explain JITD strategy to Barillas executive management and have them approve it since its success depends on their cooperation.
2.

Meet with distributors and retailers and convince them by teaching them how JITD will help them reduce cost of carrying extra inventory and getting faster deliveries and stock replenishment.

Alternative 2 continued

3. Work out an implementation of procedures for daily data transmission from the distributors and retailers to Barilla by using electronic data transmission (EDI) method. Upon receiving daily sales figures from retailers and wholesalers, Barilla should replenish their sold inventory within 48 hours from receiving the data.

4. While replenishing their inventory within 48 hours, Barilla should start

building their sales data base by collecting and checking of data to generate a significant forecasting base for the future.
5. In order to build their data base, Barilla needs data for 12 month

period from the day they put JITD for use. If the implementation stated in January last year then the production forecasting will be ready for January this year. Barilla should plan and schedule their production this year according to the sales forecast which has been generated throughout the previous year using accurate sales information. 6. When planning for production, Barilla should also take into consideration promotions, growth and safety stock. ALTERNATIVE 2 PROS AND CONS Pros. a. Immediate reduction in lead time due to the 48 hours response time for delivery. b. Less strain on manufacturing and logistics operations c. Barilla is in full control of their production due to the vendor managed inventory (VMI) system that they are using. Barilla decides what to deliver to distributors not the other way around. d. Sharing of information among all parties involved in the supply chain, from the customers customer to the suppliers supplier. e. The elimination of the Bullwhip effect due to lowering order lead times, centralizing demand information and sharing information. f. Less inventory carrying cost and more profit margins for both, Barilla and the distributors. Cons. a. Its time consuming to analyse due to the large amount of information. b. Lack of the infrastructure to handle JITD. c. Requires initial investment due to buying and implementing the EDI system. d. No back up of stock is available. In case of breakdown in manufacturing or other internal or external factors then Barilla will be in bad position to compensate its customers. e. Increase in competitors shelf space at the expense of Barilla. Part 6: Recommendation and Implementation. Part 6.1: RECOMMENDATION Based on the overall analysis and the given facts of the case, I strongly recommend alternative 2 to be implemented and carefully executed by Barilla. The reason for my recommendation is because Barilla was unable to
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match supply and demand and JITD system fixes their problem by allowing them to produce only what is needed in the market place. Furthermore, JITD will provide Barilla with a vital sales data base for forecasting future production demand and give them the flexibility to make prompt shipments to distributors. In addition to that, Barilla will experience improvement in manufacturing planning and raw material resourcing. Unlike alternative 1, JITD will increase their supply chain visibility which will result in customers satisfaction and more importantly, reduce inventory holding cost and increase sales and profit margins. Part 6.2: IMPLEMENTATION In order to implement JITD, Barilla must specify a kick off date for starting the project. Before this date Barillas top priority is to make sure that all distributors and retailers are ready to co-operate and have the necessary information transmitting tools such as EDI equipments ready and are in place. Barilla would have to monitor and record the flow of its products through the distributors warehouses, and then decide what to ship to the distributors and when to ship. On the other hand, distributors have to provide data on shipments to their customers and current stock levels for each barilla SKU, having such information is like being only one step behind Point Of Sale sales data information. Based on this information, Barilla then will have to replenish the difference between what has been shipped out by distributors and the current stock level. On the other hand, knowing exactly the quantity which was replenished from their warehouse, Barilla then will produce an equivalent quantity to replenish their current inventory. From the other side of the supply chain, Barilla will resource the required raw material from their suppliers in according to their production schedule. Part 7: MONITOR AND CONTROL 1. In the process of utilizing the JITD, Barilla should start identifying more objectives that need more improvement. 2. After every 6-8 month, check on the projects progress 3. Once fully implemented, Barilla management should hold yearly meetings to define other areas for improvements. Part 6: CONCLUSION Barilla can look forward to a much more efficient and profitable future as a result of implementing these recommendations concerning the JITD system:
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their demand would become steadier and easier to produce and transport, their operating costs will decrease and these savings would result in better overall margins. On the other hand, cycle times would decrease and the cash flow would become even.

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