Giorgio Maggiali is the director of Logistics for Barilla and was appointed to this position when his predecessor Brando Vitati was promoted. Vitati had proposed a Just in Time Delivery (JITD) model for Barilla. Vitati has commented on the thinning margins the industry was experiencing and the need to take costs out of our distribution channel without compromising service. He felt operations could be improved if Barilla was responsible for determining the quantities and delivery schedules to their customers. Giorgio is frustrated with the opposition and resulting lack of progress in implementing this new process. My decision upon reviewing the information provided in the case is to recommend that Barilla continue to implement JITD focusing on dry goods shipped to distributors.
Maggiali must first convince Barillas employees (Sales especially) that the JITD system will be a success before influencing its distributors. Sales personnel and distributors will have to work together to implement the JITD program. The system will require the distributors to share their sales data with Barilla, who would then forecast and deliver appropriate amounts of products to the distributors at the right time in order to effectively meet demand. This will not only result in better performance in terms of time and money but also promote trust and good relations among all the partners in the supply chain. Barilla made its mark in the world by taking a commodity and selling it in a very different way. They now need to apply this innovative thinking again and use the JITD system and reduce the bullwhip effect in its supply chain.
Barilla SpA is a large, vertically integrated Italian pasta manufacturer and in 1990, was the largest pasta manufacturer in the world, making 35% of all pasta sold in Italy and 22% of all pasta sold in Europe. Barilla is organized into seven divisions: three pasta divisions named Barilla, Voiello and Braibanti, the Bakery products division, the Fresh Bread division, the Catering division and the International division. Barilla has three production divisions and two distribution channels based on the shelf life of the product. Distribution is also further divided between two central distribution centers. Corporate headquarters are located next to the plant in Pedrignano. Barillas pasta plants are specified to the type of pasta to be made. The main distinction is what the pasta is made of, as different types of pasta use a different combination of flours and other ingredients. There is also a further distinction made within these families of products based on the size and shape of the pasta.
Temperature and humidity have to be very tightly controlled and there is a specific production sequence that must be followed. Barilla has three main customer types, larger supermarkets chains, large independent supermarkets and small retail shops. How the product is distributed is influenced by customer type and expiration date of the product being shipped. Fresh product is distributed through brokers directly but all other products flow through the Central Distribution Centers (CDC). Barilla is increasingly feeling the effects of fluctuating demand as orders for Barilla dry products often swing wildly from week to week. This demand variability is straining Barillas manufacturing and logistics. Plants are so tightly specified to the types of pasta they can produce, that it makes the production facilities inflexible and unable to respond to these fluctuations.
Environmental and Root Cause Analysis
Barilla has a very complex distribution system, an inflexible production process and many SKUs it has to manage. It cannot tolerate the huge swings in demand and the resulting overstocks or shortages that results. It must address this demand variation. There are many bullwhip effect issues contributing to the demand variation that need to be addressed: 1. Marketing and Sales Trade promotions and volume discounts create fluctuations in purchase orders. 2. Too many SKUs Over 800 SKUS in dry goods causing high inventory levels at each level of the supply chain yet stock outs at the distributors. 3. Long Lead time to delivery Average lead time is 10 days. 4. No restrictions on order quantities No min/max inventory levels established for creating orders. 5. Weekly orders from stores No structure to ordering process. Opposition to the JITD system is from both distributors and Barillas own sales force.
1. New idea distributors felt they were losing control, lack of trust. 2. Distributors did not want to provide sales data to Barilla The perception was they would lose control of their own businesses. 3. Distributors didnt really perceive there was a problem. The Sales force concerns:
1. They are worried their job description will change Currently 90% of their time is working at the store level. 2. Sales force did not think the new JITD system would work, as distributors would lose their incentive to order. 3. How could Barilla still offer trade promotions and volume discounts? 4. If space were freed up at the distributors warehouse, then the competitors would fill up that space.
It is a huge task ahead is to convince first the sales staff at Barilla and then the distributors that this is a good move for everyone to change to a JITD system. The following steps are options to make the JITD system successful. 1. Sales staff must be reassured that their jobs are safe, however their roles will change. They will be needed to implement the new system and to maintain vendor relationships. Compensation could be based on success of converting distributors and how many orders are placed using the new system. They should also share in the increased profits that will result from these changes. Sales staff will also be needed to sell a larger variety of SKUs to the each distributor. The freed up shelf space caused by JITD could be filled with a broader range of Barilla product. 2. Trade Promotions should be replaced with everyday low pricing and a rebate system should be put in place that rewards the distributors who use the JITD system. Distributors could then pass the savings on to the end consumers. In the current marketplace consumers notice the reduced price immediately.
3. Barilla needs to rationalize its product offering. Their dry products are offered in over 800 SKUs, some with 8 different packaging options. Reducing the number of SKUs, will make production planning and distribution much more efficient. 4. Barilla must offer incentives, in the form of rebates, to their distributors to buy in to the new process. Barilla must show that they and the distributors need to become partners in the process and they will then share in the resulting efficiencies and profits. JITD delivery will result in reduced inventory levels and therefore increase in cash flow and service levels to the customer. 5. Barilla may also have to invest in information infrastructure. Some of the smaller customers do not have sophisticated inventory systems and this information is the key to the system.
As a vertically integrated company with no outsourcing, Barilla has a very inflexible production process. It is very difficult for the production process to adapt to demand. The ordering process must be stabilized in order to create efficient production. Product consumption is relatively consistent throughout the year. Production should reflect this. A Just in Time Delivery approach will help Barilla. They have controls on the production side, but now have to include the sales and logistics functions fully into their strategy. Convincing the sales staff a JITD system is key to the companys future is an absolute necessity. It is crucial for Barilla to overcome the opposition to this new way of working for JITD to work. All of the above options should be implemented in order to ensure JITD success.
Barilla should target those distributors with computer-supported ordering systems first. The necessary inventory tracking information required to rollout JITD can be attained easier. Each day distributors would provide data to Barilla on what products they shipped out of their warehouse to retailers. Barilla would then make replenishment decisions based on their own forecasts. Barilla should then rollout JITD to the small shops. Barilla does not have a significant market share in this area. Barilla can use the existing sales force to initiate the JITD at the small shop level. Each sales rep already possesses a portable computer for inputting orders. They could use these computers to track current inventory levels and send the information to Barilla. Barilla can then use their sophisticated forecasting systems or analytical tools for determining order quantities.
Monitor and Control
Barilla can monitor success of the JITD by tracking the following KPIs: 1. Inventory reduction orders will be based on real sales data and Barilla will push the product to the customer in a planned, managed way. This will stabilize the shipping of product, which in turn, will reduce on hand inventory and out of stocks. 2. Better production planning plants will be able to make their production more efficient now that reliable and stable order data is used. 3. Better distribution with stabilized ordering in place, Barilla can look at its very complicated distribution system and make it more efficient. It will be able to reduce present 10 day lead time. 4. Increased profitability the reduction in inventory and a more efficient production and distribution system will make Barilla more profitable
Shelf space at the store level is always an issue and the opportunity to have smaller, more frequent deliveries and therefore offering a wider selection of SKUs, would be very compelling to the distributors, large supermarkets and small shop owners alike. The JITD system will reduce demand fluctuations in the manufacturing process therefore eliminating the bull-whip effect of these demands. The end result of JITD will be increased market share and reduced production costs for Barilla and increased sales at the distributor and store levels.