Supply Chain Management at the BARILLA Group

The Barilla Group

Started in 1875 as a small shop in Parma, Italy Worlds largest pasta producer in 1990 Pasta Share - 35% in Italy and 22% in Europe

Channels of Distribution
Products divided in 2 categories Fresh & Dry Fresh Products had a shelf life of 21 days Shelf Life for dry products: Long - 18 to 24 Months Medium 10 to 12 Weeks 800 SKUs of Dry Products Retail Outlets - Small independent shops and Supermarkets

The Barilla Group(cont.)

Sales and Marketing
Heavy Advertising, Brand positioning Frequent Trade Promotion to push product into distribution network Canvas period,10 to 12 in a year, typical duration of 4 to 5 weeks Distributor could buy as much product as desired to meet present and future needs at the offered discount Advertisi Promotio Volume Discounts are also given
n Sales Represent atives ng

Use of Sales Representative

Merchandise Barilla Product Set up In-Store promotion Took note of Competitors price, stock-outs, new product introductions Worked out ordering strategies for retailer

Sales & Marketing Strategy

Key Issues
Q1) Diagnose the underlying causes of the difficulties that the JITD program was created to solve. What are the benefits and drawback of this program? Key issues identified: Distribution system Demand fluctuations Operational inefficiencies Organizational deficiencies

Key Issues(cont.)
1. Distribution system
The problem with Barillas distribution system is that it is centered around the DO
10 days lead time from order to delivery

Distributors inability to carry large number of SKUs

Key Issues(cont.)
Extreme demand fluctuations (Since 1980)- week to week variation in distributors order patterns. Pressures to manufacturing in terms of production lead-time and perishability of product High Inventory Carrying Cost & manufacturing cost due operational inefficiencies. Unacceptable Cycle Service Levels (CSL) inadequate product availability

Key Issues(cont.)
2. Demand Fluctuation
Reasons: Excessive Promotional activities Volume Discount No limit in order quantities from distributors Product proliferations Lack of sophisticated forecasting techniques.

Key Issues(cont.)
Methods adopted to curb fluctuation:
Excess FG inventory to meet Distributors demand Additional inventory at Distributors warehouses
Supply

Impact:
Overburdened Manufacturing and Logistic operations Poor product delivery Thinning of retailers/distributors margin Increased inventory carrying cost Unanticipated demand Demand Bullwhip effect

Key Issues(cont.)
3. Operational Inefficiencies
Identification Issue High Inventories Stock-outs

Why is operational inefficiency an issue?

The current operation of the Barilla dry pasta manufacturing

has many issues that drive costs upwards. This is mainly caused by: High inventory levels Upwards of 7% stockouts throughout the year A high number of SKUs

Key Issues(cont.)
4. Organizational Deficiencies
Barillas culture & attitude Strong brand name would create market share - Targeting 4Ps Push strategy Compensation-incentive strategy

Supply Chain culture

Garnering behavior: the distributors used to have full control of their orders and indulged in gaming by ordering different quantities in different periods Autonomy of distributors & supermarkets Lack demand information & cost sharing for inventory-planning purposes Miscalculated impression that revenue depends on sales alone

Underlying Causes
High Inventory Level
Labor cost: administrative, tracking and tracing Cash flow: cash will hold in the inventory, not in business Carry cost: product expire, insurance, inventory cost

Underlying Causes(cont.)
Bullwhip Effect
Variation in Demand caused Bullwhip effect in the entire supply chain
Order Transfer Plant Distributor Order Transfer Retailer

Magnified Variation in Order

Underlying Causes(cont.)
Causes of Bullwhip Effect
Inaccuracies in Demand Forecasting Long Lead Times Price fluctuation due to Promotional activities Order batching:
To reduce ordering Cost To take advantage of Transportation economics such as full truck load Sales incentive Forward buying due to promotional activities to get benefit from lower price

Underlying Causes(cont.)
Stock-out
On a weekly basis barilla sees around 7% stock-outs in their stores
This translates to backorders, lost sales and lost customers which have a significant impact on the bottom line These are caused by:
Simple periodic reviews of inventories occur at both the store level and distribution center level Each distribution center maintains their own inventory level without much or any input from Barilla sales representative

Potential of JITD
Introduce accurate forecasting (time series analysis) Match demand with supply Vendor Managed Inventory Concept Treats end customer data as the input Final authority to determine shipments is Barilla SpA Barilla would decide what to ship to distributors and when to ship it Distributors will provide POS data of different SKUs.

Potential of JITD(cont.)
Issues addressed by JITD
High inventory levels Stock-outs Demand variability Organizational deficiencies Information systems

Potential of JITD(cont.)
Expected benefits for Manufacturer
Reduced Manufacturing Cost Increased Supply Chain visibility High bargaining power over Distributors Reduced inventory cycle A planned production planning is possible

Expected benefits for Distributors

Improved fill rates to Retail store- Quick response High service level additional services to retailers without extra cost Reduced inventory carrying cost

Potential of JITD(cont.)
Q2) What conflicts or barriers internal to Barilla does the JITD program create? What causes these conflicts?
Internal(Sales & marketing team)
Sales representative feared reduction in responsibilities Inability to quick shipment may lead to Stock-out Inability to run Trade Promotion Lack of sophisticated infrastructure to handle JITD Skepticism about cost reduction

External(distributors)
Unconvinced distributors Fear of job loss Perceived power transfer to Barilla Distributors were skeptical about the effectiveness of the system Risk aversion-distrust of change

Potential of JITD(cont.)
As Giorgio how would you deal with this?
Giorgio Maggiali's response to the conflicts being created within Barilla to the JITD Program was for the sales organization to view JITD as a selling tool, and not a threat to sales . The JITD program offered additional service to the customer at no extra cost. It also would improve Barilla's visibility with trade and make distributors more dependent on Barilla.

Maggiali felt the JITD program could improve the relationships between Barilla and the distributors rather than harm them.
Information gained from the program would provide Barilla with objective data to improve their own planning process.

To be truly successful, the JITD program needed to be an end to end strategy that could respond to a composite demand signal at all stages in the value chain from sourcing, to production, distribution, marketing, sales and retail.

Potential of JITD(cont.)
Q3) As one of Barilla's customers, what would your response to JITD be? Why?
As one of Barillas traditional customers, I would be opposed to the JITD program.
I wouldnt want Barilla to manage my inventory. As a distributor, I feel inventory management is my job. I would also be concerned with Barilla viewing my warehouse and/or sales figures. It seems that allowing them to push their products into my warehouse would reduce their own expenses and not mine. Im also concerned that disruptions in the supply chain could lead to shortages/stock outs in my distribution center. Finally, I have a difficult time believing that Barilla would be better at forecasting or managing inventory, than Im already doing.

Problems Associated with JITD(cont.)

Q4) In the environment in which Barilla operated in 1990, do you believe JITD (or a similar kind of program) would be feasible? Would it be effective? If so, which customers would you target next? How would you convince them that the JITD program was worth trying? If not, what alternatives would you suggest to combat some of the difficulties that Barilla's operating system faces? YES Convince Barilla's own sales and marketing staff of the value of the program before approaching the distributors Barillas sales staff appeared to sabotage the JITD program from the start. They resisted the program for fear threatening their sales levels.

Problems Associated with JITD(cont.)

Once sales staff are convinced, they can promote the program to their distributors and retailers.

Convince the sales/buyers at the distributors that it would save them money and make their job more efficient before approaching the logistics people.
The logistics people seemed most willing to try the JITD program when Maggiali approached them in 1988. Once buyers became aware that the JITD program was designed to save money, and the objections created by sales staff's and the distributors were overcome, JITD would become a feasible program.

The key to making this effort successful was to obtain the inventory and sales data for Barilla to accurately forecast the demand for their products.

Problems Associated with JITD(cont.)

If so, which customers would you target next? How would you convince them that the JITD program was worth trying?
The customers to focus on next to promote the JITD program are : The independent retailers supplied from Barilla's own warehouses The retailers served by the distributors who had not signed onto the program. Barillas internally-owned regional warehouses distribute 35% of their products to small independent shops. Focusing on this segment could provide the opportunity for Barilla to collect the usage/demand data they need directly from the retailers.

Problems Associated with JITD(cont.)

How would you convince them that the JITD program was worth trying?
They could convince independent retailers of the value in the JITD program when they ordered new equipment. These retailers would become more committed to Barilla when they realized their orders would flow more efficiently and save them money on in-store inventory.

It would also be beneficial to provide these retailers with handheld computers so their orders would go directly to the distributor or Barilla warehouse (thus allowing Barilla to obtain near real time usage data)
The sales representatives could also visit the GDs that distributed products to supermarket chains. The GDs were rarely visited by the sales force yet, could be valuable for buy in to the program.

Problems Associated with JITD(cont.)

Alternatives
Barilla could benefit from implementing several key aspects discussed in our textbook with regards to creating lean manufacturing processes. They could use value-stream mapping to assist them to fully understand their production processes, material flows, and information flows. They could eliminate unnecessary activities in their processes, recognize their physical factory constraints, work with their retailers and distributors to understand their needs, and truly develop a cooperative association with their customers over the long term so everyone could mutually benefit. Inviting Barillas distributors into their factories to view first-hand the operations taking place would assist in building a staple relationship between the distributors and manufacturer.

Problems Associated with JITD(cont.)

Q5) Compare the JITD strategy proposed by Barilla to the celebrated JIT strategy developed by Toyota and others.
JIT refers to a system of manufacturing in which products are not built until the product is ordered and paid for. Some companies that have successfully implemented JIT include Toyota, Dell and Harley Davidson.
Important factors to Toyota success: Small amounts of raw material inventory must be kept at each node in production, so that production can take place for any product. These parts are then replenished when they are used. Accuracy of forecasting is important so the correct amount of raw materials can be stocked.

Problems Associated with JITD(cont.)

Barillas highly mechanized means of pasta production is completed in a

standardized time consuming way, with different shapes and sizes of pasta coming from different plants. Therefore, the manufacturing to support the JITD program would take an extreme effort at redesigning their production methods, schedules and learning how to be more agile, more flexible and lean. Both JITD and JIT solve the inventory problem and reduced the lead time

Conclusion
Takeaways
Better demand forecasting ensures a robust supply chain Excessive fluctuation leads to increased Average Inventory Level and stock-out. Information centralization reduces Bullwhip Effect and enhances inventory management system Decision needs to be taken amongst Pull based and Push based systems To succeed in a new initiative, involvement of Top management is important Credibility needs to be gained before enforcing any idea to others Customers need to be convinced with the win-win concept

Conclusion
Recommendations
JITD initially identified by Vitali - drawback is lack of computer systems among retailers Start with biggest supermarket chain customers Consider subsidizing computer systems for them Then rollout to independent supermarkets and Signora Marias

800 different SKUs currently offered - different shapes, packaging, sizes, promotions, etc Reduced range = fewer changeovers = more predictability
Restructure customer incentives Introduce discount for most consistent orders month on month Reduce dependency on trade promotions

Thank You!
Presented by: Hugo Tavernier Karthik G Jerin Josey Nalini Chandrika Pankaj Syal Somesh Goenka