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Barilla Case Solution

Barilla is a large Italian pasta company that faces issues like high inventory levels, stockouts, and demand variability throughout its supply chain. It wants to implement a Just-In-Time Distribution system using vendor-managed inventory to reduce costs and improve customer service. However, there is opposition internally and from customers. The document recommends piloting the JITD system with small retail shops for dry pasta first, as this market is most receptive to smaller, more frequent orders and information sharing is easier in this supply chain. Analysis shows the JITD approach using continuous review and joint replenishment can optimize order quantities and significantly reduce overall inventory levels in the supply chain.

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Jules Rimet
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5K views4 pages

Barilla Case Solution

Barilla is a large Italian pasta company that faces issues like high inventory levels, stockouts, and demand variability throughout its supply chain. It wants to implement a Just-In-Time Distribution system using vendor-managed inventory to reduce costs and improve customer service. However, there is opposition internally and from customers. The document recommends piloting the JITD system with small retail shops for dry pasta first, as this market is most receptive to smaller, more frequent orders and information sharing is easier in this supply chain. Analysis shows the JITD approach using continuous review and joint replenishment can optimize order quantities and significantly reduce overall inventory levels in the supply chain.

Uploaded by

Jules Rimet
Copyright
© Attribution Non-Commercial (BY-NC)
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as RTF, PDF, TXT or read online on Scribd

Barilla SpA (A)

Company Overview

Barilla SpA is a large, vertically integrated, family owned pasta company based
in Italy. It maintains a leadership position among a field of thousands of Italian
competitors producing and distributing brand-name pasta. Its operations are
divided among 3 production divisions and two distribution channels, based on
product shelf life. Distribution was further divided between two central
distribution centers (CDCs), based on geography.

Customers were divided into three primary segments: Small retail shops; Large
independent supermarkets; and Large supermarket chains. Distribution to
small retail shops was direct from the CDCs. Distribution to the supermarkets
went through intermediate distribution centers, either owned by the chain, or
operated by a third party representing multiple independent supermarkets.
Fresh product was distributed through a network of brokers.

Inventory levels in the supply chain, managed via periodic-review inventory


systems, were high, with larger levels of safety stock held for dry pasta (which
had longer shelf-lives) than for fresh pasta. The CDCs carried approximately a
1-month supply in inventory, and supermarket distributors maintained a 2-
week supply, yet stockouts still occurred frequently. These high inventory
levels were in part a result of heat control issues in the production process
making it difficult to respond quickly to shortages, so increased safety stock
was the preferred response to demand variability.

Distribution Problems

The pasta supply chain suffered from classic bullwhip-effect problems: high
inventory levels stored at each level of the supply chain; stockouts at the
distributor level; demand variability magnification up the chain, and
exacerbated by frequent promotions, Full Truck Load (FTL) and other volume
incentives; and a lack of information on which to forecast demand.

Increasing product variability exacerbated all of these problems. Barilla


maintained over 800 SKUs of dry pasta alone.

To combat these problems, the Director of Logistics desired to implement a Just


In Time Distribution (JITD) system utilizing a vendor-controlled inventory
scheme. However this proposal faced severe opposition both internally and
among customers.

Internal opposition originated both from job security fear as well as more
legitimate concerns, such as the culture of promotions and fear of competitor
encroachment into distributor warehouse space following a reduction of Barilla
inventories. Outside opposition was most vocal from distributors' buyers, who
were most directly threatened by the JITD system.

Availability of demand information, even at the store levels, also presented


difficulties in implementing a system that would be completely dependent upon
using this information to forecast.

Recommendations & Implementation Plan

Decrease in Total Inventory

A JITD program would help to reduce inventory held at the distributors since it
builds inventories at the central warehouses and then deliver only the
quantities required by the end-users through more frequent checks of the
distributors' inventory. Thus, the JITD approach will save the entire supply
chain money in reduced inventory costs and will result in high service levels.
But finding the right foothold on which to mount a successful pilot program is
the key challenge for Barilla.

A JITD system would have the following features:

1. Elimination of promotions to reduce demand variability caused by batch


ordering
2. Everyday low pricing, to remain competitive
3. More frequent deliveries with mixed-orders per FTL
4. Demand forecast information made available
5. Vendor-managed inventory at the store and distributor levels

Improved Fill Rate & Decreased Distribution Cost

Since the inventory data and delivery patterns would be controlled by Barilla, it
would be easier for their central factory and CDCs to schedule their production
and deliveries to meet the customer demands. For the distributors, the
increase in flexibility and reaction speed leads to lower inventory levels
improving the fill and stockout rates. It will also help to improve scheduling of
production and reducing lead-time, which will minimize the fluctuations seen
currently. The delivery load will be balanced.

Improved Customer Relations

Reduced inventory costs, higher service levels, improved fill-rate and


decreased distribution costs would all lead to improved customer relations.

Increased Shelf Space for Distributors

The improved delivery schedules will lead to a decrease in inventory enticing


the distributors to take on more of Barilla's competitors' products. This is an
opportunity for the sales representatives to sell the distributors on taking on
more of Barilla's products to improve the selection they currently offer.

Improved discount policy

Instead of giving discounts for large order volumes, Barilla would give discount
for stable long-term orders (EDLPP). By doing so Barilla could have many
reliable long-term orders to meet market demands, and considerably reduce
the variability in the supply chain.

New roles for sales representatives

The role of sales representatives should be defined as JITD customer


relationship and development managers. Not only would they be selling Barilla
products, but they would also be providing services that improve customers'
delivery program. The representatives can participate in the JITD program as
the communication bridge between the company and the distributors helping
to implement the JITD program.

A system would be installed in the representatives' portable computer by which


more information at the distributor warehouse level could be collected. By
doing so, the sales representatives will still play a vital role in the new system,
while reducing the distributors' work in implementing the JITD program, leading
to greater participation.

Target Market

It is our recommendation that Barilla focus the implementation of the JITD


program on the delivery of dry pasta to small retail shops. The Italian
government supports the small shops rather than the larger supermarkets and
therefore Barilla may benefit in future dealings with the government. Small
shops have shown to have better growth rates than supermarkets, and this is
the segment in which Barilla does not have a significant market share.

Small retail shops constantly struggle with providing product variety to its
customers within the limited shelf space they operate by. This market would
be the most willing of all segments to accept smaller order quantities to reduce
the inventory they have on hand. This reduction would allow them to add
greater variety of products.

The small retail shops are currently served by Barilla's own regional distribution
centers so there is a greater level of control within this supply chain. Sharing
of information becomes easier which is paramount to the JITD program.

Analysis and Justification

At the center of our recommendation is the implementation of the JITD.


Showing the cost savings of the JITD can solve all the distractions of the sale
representatives, distributors, and retail outlets. The JITD would require all
parties, including Barilla, to move to a continuous review policy from the
current periodic review policy in inventory replenishment. Keeping demand,
standard deviation of demand, inventory carrying cost, and order cost
constant, Barilla can make adjustments that would allow for an optimum order
quantity, reorder point, safety stock, and average inventory based on the
required service level of its customers. Moving to the optimal quantities will
reduce the physical inventory required at the retailers and distributors because
of the steady stream of inventory that is moving in the pipeline.

Moving to a continuous review policy means smaller shipment lots. To


minimize the potential increase in order and transportation costs, Barilla should
include joint replenishment of its various SKUs when considering order
quantities. The smaller average inventory that will be required by the new
policy will allow the distributors and retailers to add the full complement of
Barilla products. This would require no additional shelf space. While this may
have been a costly proposition in the periodic review policy, the continuous
review policy allows the constant flow of products that are selling. Therefore,
items that are not selling will only take up the current shelf space and no
additional inventory of that good will be taking up unnecessary space.

In the long term, it is recommended that Barilla move to a single distribution


system for both fresh and dry pasta to increase the cost effectiveness of joint
replenishment. This however cannot be done until the supply chain can reduce
the delivery time to a level that suits both products.

Conclusion

Barilla became a market leader by taking a simple product like pasta and
selling it very differently than the rest of the industry. The product was put in
sealed boxes and marketed as a higher end product. In doing this, the
company was able to produce a greater profit margin than its competitors. The
JITD program gives Barilla an opportunity to do something very similar. By
moving to a distribution system that greatly reduces the variability, Barilla can
greatly reduce the "Bullwhip" effect that plagues the industry.

Common questions

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Barilla SpA faces several challenges in implementing the JITD program, including internal resistance due to fear of job security issues and disruptions in the traditional promotion culture . Additionally, there is opposition from distributors' buyers who feel threatened by the new system . The company plans to overcome these challenges by focusing on the benefits of reduced inventory costs, improved service levels, and enhanced customer relations that JITD can provide . Furthermore, emphasis will be placed on the improved roles for sales representatives, redefining them as customer relationship managers to facilitate distributor adoption of JITD . To demonstrate success, Barilla is recommended to pilot the JITD program in small retail shops, benefiting from governmental support and higher growth rates in this segment .

The JITD system helps to reduce the bullwhip effect by eliminating the use of traditional promotions, thus minimizing demand variability driven by batch ordering . It introduces everyday low pricing and more frequent deliveries with mixed orders, which allow for smoother inventory flows and reduce order sizes, therefore dampening demand spikes . Furthermore, the system facilitates vendor-managed inventory and enhanced demand forecast information, allowing Barilla to control inventory levels more precisely and react quickly to actual demand . These measures together help stabilize inventory levels across the supply chain, diminishing the bullwhip effect .

Joint replenishment in Barilla's JITD program allows the company to bundle various SKUs in a single order, thereby optimizing order quantities and reducing order frequencies and related costs . This approach becomes especially beneficial for managing over 800 SKUs of dry pasta, as it simplifies inventory control by minimizing the processing complexities linked with multiple small orders . It also facilitates consistent delivery schedules, which streamlines transportation planning and reduces the fluctuating costs of logistics . Joint replenishment contributes to reduced average inventories and enhances service levels, while maintaining the product variety customers expect from Barilla .

Adopting the JITD program's new system of order and delivery scheduling offers strategic advantages by enhancing production scheduling efficiency and minimizing lead times, thus lowering inventory levels and stockout incidences . Furthermore, it aligns inventory data and delivery patterns with actual market demand, allowing Barilla's central factory and distribution centers to meet customer demands more accurately . This improved synchronization facilitates a balanced delivery load, reduces distribution costs, and strengthens customer relationships, giving Barilla a competitive edge in service quality and cost-effectiveness . Additionally, it offers Barilla the potential to redefine market positioning by reshaping customer expectations and reducing the bullwhip effect .

In the JITD program, sales representatives transition from being primarily product sellers to acting as JITD customer relationship and development managers . They not only sell Barilla's products but also provide services that enhance customers' delivery programs, such as assisting in implementing the JITD system and serving as communication bridges between Barilla and distributors . This new role aims to reduce the distributors' workload in adopting JITD, leading to greater participation and emphasizing relationship management rather than just transactional selling .

Moving to a continuous review policy in the JITD system is expected to bring several benefits, including reduced physical inventory levels at retailers and distributors due to a consistent stream of inventory . This systematic replenishment approach allows for optimal order quantities and reorder points, minimizing safety stock necessities and average inventory based on service level requirements . The consistency also enables accommodation of the full range of Barilla products without needing additional shelf space, thereby utilizing existing inventory space more efficiently . Ultimately, it improves Barilla's supply chain efficiency by reducing the order and transportation costs through joint replenishment practices .

The JITD approach suggests altering the discount policy from offering discounts for large volume orders to providing them for stable, long-term orders, known as Everyday Low Pricing Policy (EDLPP). This modification aims to incentivize reliability and to reduce demand variability within the supply chain . By encouraging steady, repeat business instead of sporadic bulk purchases, Barilla can better stabilize demand, leading to a more predictable and manageable inventory system and ultimately improving overall supply chain efficiency .

Small retail shops are particularly suitable for the JITD program pilot due to their limited shelf space which requires efficient inventory management to offer product variety . This segment is supported by the Italian government, potentially benefiting Barilla in governmental dealings . Additionally, small shops are experiencing better growth rates compared to supermarkets, presenting a strategic opportunity for Barilla to increase market share where it is currently limited . Moreover, these shops, served by Barilla's own regional centers, allow for better control and easier information sharing, which is critical for JITD implementation .

The JITD program aligns with Barilla's past strategy of market differentiation by extending the company's focus from product to process innovation. Barilla initially differentiated itself by packaging pasta in sealed boxes and marketing it as a higher-end product, thereby commanding higher profit margins . Similarly, the JITD program aims to differentiate Barilla's supply chain capabilities by implementing a system that reduces variability and enhances reliability, thus potentially offering a superior level of service . This reinforces Barilla's image of being not only a quality product provider but also a leader in supply chain efficiency, further solidifying its market dominance through innovative practices that competitors might struggle to replicate .

Internal opposition to the JITD system at Barilla stems from fears of job security as employees worry about changes to established roles and responsibilities . Concerns also arise from skepticism about dismantling the established promotion-driven sales culture, fearing reduced competitiveness and potential exposure to aggressive tactics by competitors . Externally, distributors' buyers, who are directly affected by inventory shifts, may resist due to perceived threats to their traditional functions and financial incentives in inventory management . Despite its efficiency benefits, resistance emerges largely from entrenched practices and uncertainties related to shifting operational paradigms .

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