Barilla Spa Questions

1. What is the impact of the fluctuations seen in Exhibit 12? What are the underlying drivers of the fluctuation we see in this exhibit? Your analysis should consider full range of implications to the entire channel, and not just Barilla.

Per exhibit 12 the impact of order fluctuations are as follows:

– Creates a bullwhip effect at Barilla.

– Resource and material planning becomes cumbersome and inefficient.

– Might increase the lead time because of the bullwhip effect.

– Reduces overall operational efficiency.

– Reduces the overall profitability due to reduction in efficiency.

– Reduces the utilization of central distribution center.

– The distributor must build excess capacity to hold goods bought on any type of promotion, including quantity discounts, truckload discounts and canvass period discounts.

Causes of Demand fluctuation are:

– Transportation discounts

– Volume discount

– Promotional activity

– No minimum or maximum order quantities

– Product proliferation

– Long order lead times

– Poor customer service rates

– Poor communication

2. Diagnose the underlying causes of the difficulties that the JITD program was created to solve. What are the benefits and drawbacks of this program?

The main incentive behind the proposal of Just-in-Time Distribution (JITD) program is to correct the fluctuation in demand from Barilla’s immediate distributors. The variation in demand, known as the Bullwhip Effect, makes it hard for Barilla to meet the actual demand of the end consumers. The JITD program would be introduced to predict actual demand so that Barilla could attempt to produce the exact amount of products to meet customer’s demands.

The large fluctuations in demand are due to a number of factors. First, let’s look at the distributor’s role. Distributors place orders to Barilla based on retailers orders and the space available to stock inventory. As a result, distributors might sometimes run out of products or might overstock their inventory due to the lack of anticipation or real demand. Also, Barilla and its distributors suffer a high cost in distribution channels caused also by the lack of forecasting and poor inventory management. The unawareness of the real demand causes distributors to overstock their inventory and that raises the cost of distribution. The distributors, nor the retailers, have any forecasting system in place to give them a glimpse at demand. While forecasting is not 100%, it would, at least, show when certain pasta is extremely popular due to a holiday or highlight if demand varies or generally remains steady.

The fluctuations in demand are also caused by Barilla’s own internal functions. First of all, the sheer amount of SKU’s lead to a much more complex system than just trying to gauge how much one type of pasta is sold. Being able to anticipate the demand for all of Barilla’s 800 different dry good SKU’s is absolutely impossible without a robust forecasting system. The matter is further complicated by the long lead times that it takes for Barilla to fulfill an order from the distributor, which was usually between 8 and 14 days from when the order is received. Due to the nature of the tunnel kiln in the pasta-making process, it is impossible for Barilla to change the order of the pasta production to quickly fill an order of sold out pasta. Last but not least, Barilla’s own sales structure is also to blame for the large fluctuations in demand, due to their heavy use of promotions and discounts which warps the demand curve.

The JITD program is designed to help Barilla be more efficient in executing its operations and better serve its customers. JITD would be an efficient forecasting tool to predict the real demand of the end-consumer. Barilla will require its distributers to provide daily sales data so Barilla could utilize the data to anticipate future demand and arrange production schedule accordingly. JITD will also minimize the lead-time as manufacturing would be only one step behind the end-customer’s demand and Barilla would be able to steadily make the pasta necessary to fulfill orders, ³no more, no less.´ In addition, JITD will help reduce the costs associated with distribution channels. Distributors would not stock their inventory with Barilla products that exceed the real demand. Thus, the JITD program would help Barilla’s partners reduce distribution costs and allow them to be more efficient. The project also might help improve Barilla’s relationship with its partners, as Barilla won’t exert pressure on distributors to hold more finished products than necessary. The implementation of the program will eventually improve the planning procedures for Barilla and enable the company to provide exceptional service to its customers at low costs.

On the other hand, the JITD program will not be implemented without costs to Barilla. Although it is expected to highly benefit Barilla, JITD program would be costly to implement. Barilla would be responsible to provide its distributers with the technology needed to report daily sales. Moreover, it might not be possible for some retailers to report daily sales because their stores are not equipped with point-of-sale technology that captures sales data. Also, distributors might need to hire new employees in order to be able to prepare sales reports. In addition, implementing JITD means that Barilla would do the work for its distributors. This might cause a conflict with some partners as some distributors would not accept others to intervene with their internal processes.

3. What conflicts/barriers internal to Barilla does the JITD program create? What are the causes of these conflicts? What would you do to deal with the conflicts?

Before Barilla can implement JITD it must first garner acceptance from the different internal bodies that make up its distribution framework. There are several internal departments that are affected by switching to JITD. First and foremost, Barilla’s sales and marketing department would be greatly affected by the move. Barilla’s sales representatives spend significant amounts of time working with distributors and helping them place weekly orders and incorporating promotions and discounts into their selling strategies. Sales representatives argue that the JITD system would eliminate most of the sales representatives’ responsibilities. Also, the sales representatives are most likely receiving much of their compensation through commission on their sales. The JITD system would put a great strain on commission because the sales representatives will but unable to push Barilla’s products to the distributors. Not only does the sales staff have to worry about diminished responsibility and compensation, but a JITD system may result in job cuts for the sales staff.

The marketing of promotions is also part of Barilla that would be affected by this new process. Much of Barilla’s sales come as a result of trade promotions and discounts given to distributors as an incentive to purchase larger amounts of Barilla’s products. If the JITD system is implemented, distributors will no longer be able to take advantage of volume discounts and other promotions because Barilla will dictate the amount of product purchased by the distributors.

Another concern within Barilla was that a JITD system would leave empty space at distributors’ warehouses that could be filled with products from Barilla’s competitors. Within Barilla there are worries that if a distributor is overstocked with a competitor’s product, then the distributor will push the competition’s product to markets and supermarkets in order to alleviate its inventory.

The sheer number of SKU’s that Barilla deals with is also a contributing factor. With 800 dry-product SKU’s, it’s a very complicated adjustment to change the distribution protocol. However, it can also be argued that Barilla is the only company that could correctly and accountably be able to create a robust forecasting system that would include it’s wide variety of SKU’s and pasta.

One of the managers of Barilla’s largest distributor stated in retaliation to the JITD system that Barilla could get their orders out to the distributor’s faster ± within 3 days. Currently it takes 8-14 days for Barilla to complete an order. The internal distribution process is extremely time consuming as it is and adding the JITD system might only prolong the process with little to show to the distributors.

In order to resolve the conflict, I would provide opportunities for both sale and marketing personnel that might be impacted by this program do cross training for other company’s functions and provide a new way of doing sale or trade promotion using JITD as a tool. Most of the times educating and empowering internal employees makes things more simple. The incentive or bonus for sales persons could be fixed and be more customer service oriented.

4. As one of Barilla’s customers, what would your response to JITD be? Why? How might Maggiali be more successful in persuading customer to at least try JITD program?

From an independent supermarket’s perspective, the JITD proposal offers both advantages and disadvantages. First off, the primary challenge being faced by independent supermarkets is the over and/or under stocking of Barilla Products during any given period. With a JITD program in place more frequent deliveries from the distributer are possible, resulting in an overall store inventory reduction. Instead of keeping a two-week supply of pasta products retailers could reduce their inventory overhead quite significantly; thus, reducing their own costs. Another advantage that JITD provides is the management of product promotions. Under the current system, independent supermarkets are forced to carry more inventory of promotional products. Ideally, with JITD in place, Barilla would determine how much promotional products the independent supermarkets would carry, thus alleviating the stress of being overstocked. The last advantage that JITD provides for independent supermarkets is based on inventory tracking. Most independents do not use any tracking such as RFID 1 and rely on hand counting of inventory and shelf space. Using JITD will help these retailers understand their selling patterns as it offloads some of the demand estimation up the supply chain, which will eliminate the need for tedious forecasting.

As a customer of Barilla, one of the biggest concerns would be allowing Barilla to control all forecasting and supplying of its products. All of Barilla’s customers would need to disregard all previous forecasting measures and blindly put faith in Barilla’s ability to keep the stores stocked at a proper level. This may obviously lead to certain problems, including being overstocked or under-stocked at times. While being overstocked is merely a question of the cost of unnecessary storage, a retailer being under-stocked can lead to losing customers to its competition. Couple this perfectly normal concern with Italy’s pension for labor strikes and the JITD system could come crashing down, bringing its retailers with it.

Overall, the advantages outweigh the disadvantages for an independent supermarket, because more frequent deliveries from their distributor outweigh the risk of being under-stocked. For Barilla’s JITD system to be implemented, independent supermarkets must make the decision to trust Barilla and Barilla’s new distribution structure. If independent supermarkets can get over the fact that this new system will inherently mitigate their responsibilities, then JITD could be advantageous for both Barilla and its independent supermarket customers.

Maggiali might be more successful in persuading customer to at least try the JITD program by making their customer understand the benefits of the program. Unless the distributor doesn’t see the value they will simply feel intimidated by the idea of handing over their information to Barilla. Maggiali should work with top management of distributors and should provide them statistical data to prove his point. Once that is done he can run a pilot project with one of the distributors and then flourish the success story to tap in others.