Background While performing as an amateur chief, savoring over a pot of marinara that has been cooking all day

and sipping on a fine Italian Chianti, one should give more thought to the type and quality of the pasta that will lie as the one of the primary culinary agents of your dining experience. Such were our thoughts as we reviewed the case study of Barilla SpA, the largest producer of pasta in the world. In 1990, the base period for the Harvard Business School case, Barilla SpA was the largest producer of pasta in the world. It provided 35% of the pasta sold in Italy and 22% of all the pasta sold it Europe. Overall sales in 1990 were 2.390 trillion lire or $1.994b.1 The company had grown from a small operation founded by Pietro Barilla in 1875 in Parma, Italy. In its third generation, Pietro and Gianni, grandsons of the founder, had grown the operation only to be forced to sale it to W.R. Grace in 1971. In a turn of fate, Pietro regained control of Barilla in 1979 in a repurchase of Barilla from Grace. But, even with its growth and successes through the late 70s and 80s, Barilla found itself at a crossroads. Giorgio Maggiali, Director of Logistice, faced the same issue his predecessor, Brando Vitali; how was Barilla going to address its ongoing logistics and supply chain issues resulting primarily from the overt demand being placed on Barillas production and logistics operations? Based on the 2010 results, global sales were 4.029b or $5.4b2 3. Barilla has increased its market penetration in Italy to 40 45%, while gaining 29% of the US pasta market4. It is apparent from its 2010 release that Barilla came to terms with its logics and supply chain issues allowing it to prosper into the 2000s. Revenue: Euro 4,029 million; Recurring EBITDA: Euro 556 million; Significant fall in borrowings to Euro 683 million (1.23 times EBITDA); Barilla G. e R. Fratelli (Revenue: Euro3.1billion) maintains leading position in the world

1 2

Hammond, Janice, Barilla SpA (A), Harvard Business Review March 25, 2008, Page 1 XE Converter based on the conversion rate of .7461 Euro to US Dollar at December 31, 2010. 3 Barilla Published Financial Results 2010, http://barillagroup.com/corporate/en/home/media/news/company-news/110505-2010consolidated-results.html 4 http://en.wikipedia.org/wiki/Barilla_Group

pasta market and the Italian bakery market; Strengthened leadership position in the US pasta market (29%in value terms;+1%vs.2009),increased volumes and revenue; Lieken, leader in the German bread market, improved efficiency and profitability and continues its restructuring and brand strengthening activities5. Barillas Dilema Cause and Drivers In the 1980s, Vitali was addressing pressures being brought on the company by the onging variations in its supply pattern. The issue: In the late 1980s, Barilla suffered from increasing operational inefficiencies and cost penalties that resulted from the large week to
Case Presentation Barilla SpA

week variations in its distributors order

patterns.6 'Mater artium necessitas'7 or Necessity is the Mother of Invention. Viltali knew something had to be done. First he had to understand the problem and the cause. The problem was the extreme variability of orders, as is exhibited in table Orders from Cortese Northeast DC to Pedrignano CDC.8 This table demonstrates the extreme weekly order pattern that was plaguing Barilla. This pattern is also a classic example of the Bullwhip effect, noting the similarity in the Barilla ordering pattern to the appearance of a bullwhip. The bullwhip effect occurs when the demand order variabilities in the supply chain are amplified as
5

Barilla Published Financial Results 2010, http://barillagroup.com/corporate/en/home/media/news/company-news/110505-2010consolidated-results.html 6 Case Presentation: Barilla SpA, http://www.scribd.com/doc/36901237/7325445-Barilla-SpA-Case-Solution 7 Horman, William (the headmaster of Winchester and Eton) , Vulgaria published in 1519, 8 Hammond, ibid, Page 20

they moved up the supply chain. Distorted information from one end of a supply chain to the other can lead to tremendous inefficiencies.9 The reasons for the variability included: Transportation discounts Volume discount Promotional activity No minimum or maximum order quantities Product proliferation Long order lead times Lack of forecasting systems or sophisticated analytical tools at Distributers end 10

Effectively, it was Barilla that was promulgating its own variability issues. Historical Italian Order Patterns and Fluctuating Orders As demonstrated in the table showing the Order from Cortese Northeast DC, the ordering pattern for pasta in Italy varied from almost nothing in week 48 to 900 quintals in week 37. The mean order was 300 quintals with a standard deviation 227 quintals. As one can discern from viewing the chart the ordering pattern was extreme. As noted, the causes of this variability were numerous and resulted primarily from Barillas own sales and marketing programs. Transportation discounts Barilla offered transportation discounts, offering incentives for full-truckload orders. This induced buyers to concentrate their orders for full truckloads Volume discount Reps offers 1,000 lire per carton discounts when buyers ordered minimums of certain products. This had an identical impact of inducing the buyer to consolidate orders and take full truckloads. Promotional activity trade promotions were used frequently to induce customers to buy. A typical promotion lasted 4 to 5 periods. Barillas reps were incented to achieve sales targets for each period, hence inducing patterns of increased orders at the end of a period, resulting in lower orders at the beginning of the next period.
9

Lee, H., V. Padmanabhan, S. Whang. 1997a. Information distortion in a supply chain: The bullwhip effect. Management Sci. 43 546558. 10 Case Presentation: Barilla SpA, http://www.scribd.com/doc/36901237/7325445-Barilla-SpA-Case-Solution

 No minimum or maximum order quantities Buyers were not required to achieve minimum order quantaties as long as they achieved their canvas budget. Therefore, buyers were induced only by their achievement of the canvass period quotas and not balanced order patterns. Product proliferation in 1990, Barilla offered its products in over 800 difference packaged SKUs.11 Long order lead times the average lead time for an order was 10 calendar days.12 Orders were delivered eight to fourteen days after the order was placed. Large distributors and small distributors are varying order demands resulting from their respective sizes, resulting in logistics and production variances. Just-In-Time Distribution (JITD) A Blessing or a Curse Vitali understood something had to be done to resolve the impact of the extreme variability on Barilla. His solution was the JITD. It was in fact, one of the options that allowed Barilla more than double its revenue base from 1990 to 2010 and become the premier pasta provider in the world. Vitalis original plan was fought by customers who did not want to give up information they felt was proprietary to them and internal sales and marketing organizations felt the concept to be infeasible or dangerous or both.13 It was apparent, though, that doing nothing was not an option. Barilla was confronted with a dilemma discussed by Hau Lee when he discussed the postulate of Dont Tweak Your Supply Chain-Rethink it End To End.14 The JITD concept should work as it would provide a more consistent measuring tool by examining daily inventory requirements. The unfortunate issue was the customer, the distributors and the internal sales and marketing organizations felt it to be intrusive; and it fact it would be. One of Barillas sales executives put it best when he said We sell to a very old-fashioned distribution system.15 And
11 12

Hammond, ibid, Page 4 Hammond, ibid, Page 7 13 Hammond, ibid, Page 1 14 Lee, Hau, October 2010, Dont Tweak Your Supply Chain-Rethink It End to End, Page 3 15 Hammond, ibid, Page 6

in this case the entire system was at fault, a system that was fashion over 115 years. Vitali had the right idea with JITD. What he did not understand at the time was what Lee points out. A well-intentioned individual action or demand aimed at making a business [better] can create a long string of unanticipated consequences that collectively dwarf the benefits.16 The consequences of implementing a JITD system were far reaching and eventually would impact all of Barillas operations as well as its distribution relationships and ultimately the end customer. To implement the JITD system, Barilla transformed Barilla Logistics with the intent to transform the system of customer interface and sales/marketing to address the variability issue. It had the backing of all senior management. Barilla Logistic successfully accomplished the implementation of JITD. It did so by establishing a understanding and addressing the issues which consisted of: Vendor-Managed Inventory Concept Treats end-customer as the Input Aims at managing the Input filter that Produces the Orders Decision-making authority for determining shipments in hands of Barilla SpA Barilla would monitor the flow of its products through the distributors warehouse, and then decide what to ship to the distributor and when to ship it Distributor provides Data on the shipment and current stock levels for each Barilla SKU Sell-through Info one step behind POS Data17 The overall results of the implementation of JITD included: Manufacturer Reduced manufacturing costs Better Relationship with Distributors Increased supply chain visibility Increase Distributors dependence on Barilla Improvement in manufacturing planning using objective data Reduced inventory levels Distributors Improved fill rates to Retail stores Additional service without any extra cost Reduced Inventory Holding costs18

16 17

Lee, ibid, Page 4 Case Presentation: Barilla SpA, http://www.scribd.com/doc/36901237/7325445-Barilla-SpA-Case-Solution 18 Case Presentation: Barilla SpA, http://www.scribd.com/doc/36901237/7325445-Barilla-SpA-Case-Solution

As a testament to the success of the program, Barilla spun-off Barilla Logistics to from Number 1 Logistics Group, which today is one of Italys premier logistics companys introduces itself to its Partners as the leading Italian logistics operator in the grocery industry.19

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http://www.number1.it/inglese/chi_siamo/index.html