Submission by Group E

Barilla SpA (HBS 9-694-046) – Case Study Submission

Executive Summary
This case is a great example of “bullwhip effect” in supply chains characterised by the following:
 Demand forecast updating (forecasted demand inflated by safety stock at every level of the
supply chain through exponential smoothening resulting in high variability)
 Order batching (retailers checking stock only on a weekly basis, given the manual book-
keeping & invoicing practices)
 Price fluctuations (trade promotions across categories, during different periods of the year
resulting in forward buying)
 Rationing and shortage gaming (manufacturing team’s response to stockouts through
rationing resulting in increased stockouts y-o-y)
In our responses, we have detailed the specific impact on Barilla and its stakeholders and, solutions to
address this effect and help Barilla transform their supply chain.
A1. The JITD programme was designed to solve for the extreme variability of demand for dry goods
created by the Distribution Centers that intermediated demand between: (A) supermarket chains,
independent supermarkets and retail stores and, (B) Barilla. Weekly orders placed by a DC would
vary by an extraordinarily high factor even though weekly sales fulfilment was relatively stable. See
Exhibit 12 – mean (300 quintals) & std. dev (227 quintals) of orders from a Cortese NE DC to the
Central DC are nearly the same. Compare this data to Exhibit 13 which shows relatively stable
demand by retailer from the Cortese NE DC. This example represents the “Bullwhip Effect” in poorly
operated supply chains.
This adversely impacted Barilla in the following manner:
 High levels of stockouts at the Distribution Centers for dry goods that were in demand with
retailers.
 Poor lead times in satisfying the demand made by the Distribution Center resulting in poor
channel experience
 Poor quality of information on SKUs that were not in demand with retailers.
o All the above resulting in high inventory holding costs and manufacturing costs for
Barilla.
 Creating a workforce that was not incentivised to sell more to retailers and instead was
creating artificial demand among DCs by selling more only during periods of trade
promotion. So goals of the Sales team were not aligned with the company-wide goals of
growth in demand by end-customer. And, the manufacturing and logistics teams were bearing
the brunt of this misalignment.
 Barilla was not able to convert the branding efforts into price increases.
o All the above resulting in reduced profits & poor corporate culture.
It impacted Distribution Centers negatively by creating inefficiencies in their warehouse management
system caused by the following:
 Inefficiency created by stocking up on SKUs not based on demand by retailer but based on
trade promotions offered by Barilla. Thus, storage of goods for which there was no real
demand.
 Inefficiency created by not stocking up on enough SKUs which were in demand resulting in
stockouts. Thus, not earning revenue on goods for which there was real demand.
All the above resulting in high inventory holding costs for the DCs, making them less profitable and
potentially losing out on more revenue by stocking on items which sold faster.
Benefits of JITD
Submission by Group E

1. Significant improvement in forecasting of demand.

2. Reduction in inventory holding cost and manufacturing cost throughout the distribution
channel and for the end-customer.
3. Can effectively meet the order requirements from distributors with better lead times and
ordering cost.
4. Demonstrate improved supply chain efficiencies to the distributors, thereby reducing the need
for trade promotions and retaining brand power throughout the supply chain.
5. Learn which SKUs are worth manufacturing and which are not. Introduce a more effective
suite of products for sale.
Drawbacks of JITD
Increased frequency of deliveries may result in multiple deliveries in less than truck-load quantities
(like how transportation of dry goods to Small Independent Shops) resulting in increased costs.
A2. Barilla is facing strong resistance from its sales teams and the DCs to introduce JITD for the
reasons explained below.
Resistance by Sales & Marketing teams
By moving to a world where demand is managed by Barilla, it is threatening the current incentives
structure that it has designed for its sales teams.
Resistance by the DCs
By not clarifying how the new process will save the DCs money by improving efficiencies in
managing their stock, it has not been strategic in communicating the purpose of JITD to the relevant
external stakeholders. Instead, external stakeholders view the measure as increasing Barilla’s
bargaining power and reducing its need to provide the trade promotions that they are entitled to,
thereby potentially hurting their margins.
What should George Maggiali do?
Strategy
A. Restructure the incentive schemes for the Sales team such that they are paid incentives for
targets set with end-customers – i.e. retailers and penalise them for stockouts at the retailers.
Since most of the sales team is engaged with the DOs already engage with retail stores on a
daily basis (to help coordinate the demand between the DOs and the retail stores and promote
Barilla more effectively, this change will incentivise the sales team to help JITD become a
success. The sales team which is likely to be adversely affected is the small team working
with GDs. This team should be encouraged to set up relationships with supermarket chains
thereby helping GDs coordinate their sales more efficiently.
B. Reduce frequency and level of wholesale price discounting by setting up a uniform wholesale
pricing policy so that DCs are disincentivised from forward buying. With Barilla’s brand, this
is possible. Offer “every day low price” schemes to retailers and distributors to achieve this in
a collaborative way. For GDs who are more resistant, offer revenue-sharing arrangement
which will help transform them into an effective sales arm of the company.
C. Use mixed load trucks to optimise any potential increase in costs. Forecast initial demand
with the assistance of the sales team which is already in contact with the retailers daily.
D. When facing a shortage in inventory, allocate product based on sales records and not orders
received.
Change management
E. Convince the CEO to sponsor the initiative. Formulate a core team comprising of senior
leaders to help gain buy-in, including the head of the Sales function.
F. Set up a cross-functional team to project-manage this, one DC at a time. Identify SPOC
within the DC who will help liaise/coordinate the initiative.
Submission by Group E

G. Run a pilot with stakeholders who may be more amenable to this change – the DOs. Publicise
results of the pilot initiative.
H. Use activity-based accounting systems to demonstrate hidden costs of forward buying
suffered by the DCs which they may not be aware of.
A3. The answer is different depending on how we define “customer”. If we define the customer to be
a Distribution Center (DC), there are many benefits as identified above. The JITD proposal will
enable Barilla to improve its service performance and reduce the occurrence of stockouts at the DCs
by reducing variability in orders placed by DCs with its central warehouses.
However, if we define the customer to be the retailer then the answer is going to be different. For a
retailer, purchasing from a DC is therefore likely to experience better service. DCs may also become
more efficient at stocking increased variety of SKUs, thereby giving more options to the retailers. But
if a retailer were asked to participate in this effort, that would draw immediate rejection as they would
be unable to share data on demand at the store using existing technology and would not want to invest
in new technology for improvement in service by DCs. Remember that the bullwhip effect is most
pronounced as you move upstream; thus cost of investing in new technology may weigh over any
marginal improvements in service observed by the retailer.
A4. Yes, we believe that JITD program would be feasible and effective in 1990 with the Distribution
Centers (DCs). With retailers, it would have been more challenging to implement this, given lack of
automation of point-of-sale in stores and poor book-keeping practices. The possibility of success
through collaboration with DCs was proven in Barilla’s experiment with their dry product depots and
Milan depot where reduction in inventory holding costs and improvement in service levels were
demonstrated effectively.
We would target this customer to join the campaign by offering “every day low price” wholesale
pricing policy with improved delivery times, faster cycle times for goods at their warehouses – all this
reducing their inventory holding cost. We can demonstrate this benefit by helping the DOs with
activity-based accounting which would bring up their hidden costs caused by forward buying. Once
the DC signs up, we would adopt “DC replenishment collaboration” strategy to minimise the bullwhip
effect. Since this methodology requires only aggregate demand data and not point-of-sale data, given
the prevailing technology of stock management at the warehouses at this time, it would be relatively
easy to implement this strategy.
In case the above fails or there is excessive resistance to this initiative within Italy, Barilla may be
better off initiating this across other markets within Europe where it has a strong brand presence and
where distribution channel may be more responsive, given the record growth expected in the pasta
segment across new geographies in Europe (compared to the flat rate of growth for these products in
Italy).
Group E Members
 91920024 - Rahul Jagtap
 91920025 - Sreeram Tummala
 91920027 - Venkata Manik Gode Sri Naga Veera
 91920029 - Divya Venkatavaraghavan
 91920058 - Saiteja Jasthi
 91920061 - Richa Dwivedi