Barilla and JITD

In 1990 Barilla is the largest pasta manufacturer in the world. It manufactures 35% of all pasta sold in Italy, and 22% of all pasta sold in Europe. Barilla markets extensively through advertising and trade promotions for all of its divisions: pasta, bakery, fresh bread, catering, and international. In it’s product categories, Barilla has fresh and dry products. The dry products (dry pasta, dried toast, cookies etc.) are offered in about 800 different SKU’s. Pasta alone is made in 200 different shapes and sizes and is sold via 470 different SKU’s. Barilla caters to it’s consumers of pasta with three different pasta divisions (Barilla, Voiello, and Braibanti), each at a different price point. To make Barilla, the number one manufacturer of pasta Barilla employs massive state of the art factories that can not only produce mass quantities, but produce the variety of pasta to satisfy the world. In fact, just one of its factories, the Pedrignano plant, is capable of producing 900,000 kilos of pasta a day.

The competitive dimensions important for the logistics flow of an item like pasta are flexibility and delivery. The metrics to focus on include order size (Q) and re-order (R) quantity across various supply chain entities (retailers, DOs, CDCs). The efficiencies of information flow among various entities, as well as the response rate, queue size and lead time at various points in the distribution channels are also important. For Barilla factories, the setup costs and batch sizes to produce it’s various products along with the ease of changing among various batch loads also needs to be measured. These metrics, when combined, can improve flexibility and delivery requirements among the various pasta product lines to the end consumer.

The major factors (enemies of flow) that contribute to inefficiencies in supply chain are variability of demand in orders from the DO’s and the batching issues at Barilla. Each DO is different in size, and each DO has a different sales volume each week as the demand for Barilla dry products varies from week to week. Most DO’s are doing simple periodic-review inventory systems, and ordering each week. There is no sophisticated method of tracking or forecasting ordering quantities. The end result is that demand variability from DO’s to Barilla puts a severe strain on Barilla’s manufacturing and logistics flow lines. Furthermore, even though Barilla produces a variety of pasta styles, it takes a long time to switch over from a batch of one pasta type to another. “For example, the specific sequence of pasta production necessitated by the tight heat and humidity specifications in the tunnel kiln made it difficult to quickly produce a particular pasta that had been sold out due to unexpectedly high demand.” (Barilla Case, Page 7)

To take a look at the logistics situation at Barilla, we will look at both the quantitative and qualitative aspects of the situation. Following is the quantitative analysis of implementing a Just In Time Distribution (JITD) system through a cross-docking process at the CDC level (please see the accompanying spreadsheet for detailed metrics):

1. Pre-JITD: The cycle stock is 200 units and the safety stock is 218 units at the DO. The pipeline stock that DO owns between CDC and DO is 280 units.

2. Pre-JITD: A different Q and R value that delivers a lower cost policy than one described in the note is Q value of 422 units, and R value of 200 units, for total costs at $13999.62 (versus previous total costs of $14043.68).

3. Pre-JITD for the CDC: the daily demand average is 400 units with a standard deviation of 158 units. The cycle stock is 1600 units, safety stock is 727 units, and pipeline stock is 2000 units.

4. After the new JITD implementation: The total inventory in the system is 8770 units. The cycle stock is 2000 units and is owned by the DO. The safety stock is 2700 and is owned by the DOs as well. Barilla owns the Pipeline Stock of 4000 units.

In comparison to pre-JITD, the stock level is 2537 units less in the whole system. The stock levels for Barilla have decreased from 4327 units to 4000 units. The stock levels for all the DOs have decreased from 6980 units to 4770 units, and the service level has improved slightly at the DOs (96% versus 95%). The total lead time between DO & Factory is reduced by 2 days with new system as well (from 12 to 10 days). The DOs have lower overall inventory costs by the elimination of their pipeline expenses. Due to a higher service level requirement, they do have more safety stock than before and an increased cost on that end. However, their capital is also not tied down to the pipeline inventories. Overall, the situation is a win-win for both parties as there are lower inventory costs, faster delivery times and both parties attain or exceed their previous service levels.

Besides just implementing a cross-docking scenario described above, there are a variety of other options at disposal for JITD system and operational efficiencies to consider. If Barilla gets control of the inventory management in the whole supply chain, here are some of the additional recommendations for improving the logistics. First of all, there could be total system integration amongst all the supply chain parties to improve visibility of current data and help Barilla forecast future demand. The system would also help create a pull system if we are integrated down to the local supermarket shelf level. If Barilla fully integrates the systems, it can re-negotiate the re-order points, order quantities, and help reduce inventories and safety stock system-wide across all channels. There would be higher service levels, lower inventory costs, and lower lead times across the system. To further reduce lead times within its supply chain, Barilla could hire lean consultants to reduce the setup times amongst various batch loads.

The retooling of machines to make quick batch changes can make Barilla factories much more flexible to the variance in consumer demand. With lower costs of batch changes, Barilla could introduce newer varieties faster to test the market. In case of a shortage or high variance in demand, the back orders could be delivered much faster, making all the Barilla supply chain customers happy. Muda could be eliminated by reducing the number of product sizes or labels or packages used in production. By running a thorough analysis on what are the most profitable product lines at retailers, and what is in high demand, Barilla can target its most profitable markets and lines. Furthermore, it can internally take a closer look at its packaging and use just enough materials and sizes to differentiate itself from competition without Muda and position more profitable products on the retailer’s shelves. This would benefit the retailers who will have more profitable products sitting on their shelf-space, and at the same time reduce the setup, materials costs, and batch varieties at Barilla. In order to get this type of JITD established, there will need to be linkages among Barilla and its supply chain partners. Barilla will have to face a variety of internal and external barriers to the implementation of the JITD program.

Internal Barriers:

1. Sales and marketing organizations oppose the plan out of fear that their responsibilities and sales levels would be diminished or eliminated with JITD in place.

2. Forecasting systems and a set of decision rules need to be improved upon to better use the new data collected and to determine what and how many products to be sent to which supply chain party.

3. Risks of stock outs are increased if there is disruption in supply process (a strike for example), giving competitors more of the distributor’s shelf space.

4. How JITD can lower costs is not clear. If a DO decreases its stock, Barilla may have to increase inventory for which it can’t change production schedules due to our lack of manufacturing flexibility, unless it implements the whole JITD program (more flexible batch sizes, lower setup costs, etc.).

External Barriers:

1. Sell-through data needed for JITD is hard to come by, especially at the retailer level, given the structure of the distribution channel and the fact that most grocers in Italy aren’t equipped yet with the necessary bar-code scanners and computer linkages.

2. Distribution organizations are not yet ready to handle such a sophisticated relationship required by JITD. Distributors have little understanding of it and are even less interested or responsive in sharing data with Barilla.

3. Distributors have concerns about becoming too closely linked to Barilla and hence giving it the power to push product into their warehouses which they do not want or need.

4. Pushback from supply chain partners who feel they can manage their own inventories better than Barilla can and want Barilla to first get its manufacturing to produce orders more quickly.

Certainly there are a lot of barriers, let’s take a look at how Giorgio Maggiali could potentially handle such barriers.

Barilla needs to build better understanding that the use of JITD system should be seen as a selling tool, not a threat to sales. With more consumer demand being met, sales are higher. With reduced lead times across the board, and lower costs of inventory across the board, the profits are higher to all parties involved. There is less wastage of time focused on the logistics side of things. The supply chain partners can spend more time selling the products at higher profit margins. There needs to be a lot of time spent on building these relationships and getting the buy-in from parties, and slowly, over time, the full JITD can be implemented. Barilla’s current sales and marketing staff, with proper incentives placed on getting buy-in from external parties, can help move the process along faster. Also, the technologies to get implemented may require capital outlay from Barilla to get its local suppliers up and running on it’s system. Proper use of discounts and incentives to local supply chain participants will get the process going faster. Further, it is also crucial that Barilla internally optimize its production and reduce its setup costs and lead times to show how that it is using its resources to make its supply chain customers happier.

Some problems to execute such a plan include getting the corporate go ahead on revised incentives plans to internal sales and marketing departments as well as the supply chain participants. Even if Barilla can get most of its major retailers involved, getting and storing all the data and reacting in real-time to market fluctuations can be costly, especially in the 1990s. Furthermore, if a strike happens, there can be greater collateral damage to the shelf space that Barilla currently enjoys at retailers, as there would be simply less inventory in the system. However, Barilla is a market leader and to stay in control and gain market share, it needs to implement a cutting edge technology solution. Barilla needs to go ahead with the slow process of buy-in from its major supply chain partners (with technology support & subsidies from Barilla) through a focused sales and marketing program (with incentives to staff) to get the JITD program implemented.