Halden Zimmermann – Barilla SpA Case Analysis part 3

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Logistics

Traditionally, logistics would work with manufacturing on the quantity of product to make to meet the orders from the distributors. This system is totally reactive and not giving enough control to Barilla. JITD systems would allow the logistics department to plan with production increases in demand due to holidays or seasonality and replenish only what is used up at the distributors. This system reduces the emotional effect of being out of stock or having low inventory because it is backed up by data. Logistics could work with the distributors and end users to allow them to have some safety stock and still implement a smoothed delivery system without having radical swings with orders (Graph III). Depending on customer demand, the same quantity could be delivered every week and still fulfill the 2-week safety inventory requirement by the distributors.

Proposed 2 Week Inventory

Barilla needs to implement an inventory control system being managed by Barilla instead of orders coming in from downstream channels. It is these downstream channels that are the causes of the amplified fluctuations. Furthermore, by having Barilla manage inventory, movement of goods (i.e., trucking and delivery) can be more effectively controlled and trucks filled with higher density. This method subsequently reduces the number of trucks required to deliver the same quantity of product. In addition, “milk runs” can be developed as a smoother schedule will allow for better planning on departure and arrival of trucks from depots.

Another major change required is a reduction in the number of stock keeping units (SKUs) to a minimum. Although Barilla offered many pasta products in multiple package types, most retailers would only carry the product in one and, at most, two packaging option(s). Instead of having multiple packages, pack pasta in the most popular package size.

On the marketing aspect, Barilla will be able to benefit from the fact that through the JITD system, the company can provide its customers with the inventory required using a “collaborative planning” of inventory.

Technologically, Barilla should implement a paperless ordering system (e.g., Electronic Data Interchange – EDI or Point-of-Sale [POS] terminals) to facilitate the transmission of orders from end-users. Through the POS terminals, reorder quantities are automatically transmitted to the manufacturer (an electronic Kanban system) thereby eliminating the need for distributors to gather inventory information to relay to Barilla.

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Halden Zimmermann – Barilla SpA Case Analysis part 2

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Barilla’s goal is to smooth demand and only ship and manufacture what the “end customer” will need. The desired outcome would be to reduce the fluctuations caused by overcompensation or padded ordering from downstream channels. By having a better ordering system, the manufacturer would know the approximate demand of the particular store or supermarket, and manufacture what is needed. This allows the manufacturing and logistics department to plan ahead to meet anticipated demand.

The major change in the ordering system would result in decision rights shifting the inventory management from the distributor to the logistics division of the manufacturer.

Logistics would review the anticipated or understood demand from the end customer, working with manufacturing, to deliver the product in time to the distributor to meet consumer demand. The distributor would only communicate what had been shipped to the customer that day and the producer would ship to replenish according to end customer demand.

Sales

The traditional role of sales was to get distributors to buy in bulk and give quantity discounts at different levels of volume. Sales could affect the distributors request for more product because of the volume discount. With the smoothed out deliver system, it must be explained that one doesn’t make profit on products one doesn’t sell and buying in bulk cost more money in the form of floor space and inventory. Furthermore, by offering incentives to buy in bulk, an inflated demand is created by the downstream channels to the manufacturer. This action results in an undesirable bullwhip effect.

Under the Barilla system, its sales force spends an estimated 90% of their time working at the store level. Through the JITD system, sales people would be able to sell additional services to the supermarkets to improve retail presence (e.g., shelf positioning, promotional signage, taste testing, etc.) and generate new business.

Potentially, Barilla’s savings due to the smoothed and planned delivery system could be passed on to the distributor (via reduced inventory levels by at least 2 weeks due to possibly daily replenishments from the factory) as well. In addition, stock outs would be reduced because there would be a connection between actual demand and production channels. Graph II shows the “shoot-by-the-hip” re-order system with a date-driven system. Graph II is a perfect example of a “Bullwhip” system. As seen below, sales relatively flat, but the inventory levels at the supplier are fluctuating dramatically.

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Halden Zimmermann – Barilla SpA Case Analysis Part 1

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Barilla SpA Case Analysis

Just In Time Distribution Systems

Background

Barilla SpA is one of the world’s largest pasta and bread products manufacturers. They ship to small “mom and pop” stores, large independent super markets and large chain supermarkets. These customers all purchase their products through a broker or an intermediary warehouse and then the distributors (also known as “Grande Distribuzione” and “Distribuzione Organizzata”) deal with Barilla’s sales and distribution centers for Barilla’s product line is composed of “fresh” and “dry” products. Fresh pasta products have a 21-day shelf life while fresh bread has a one-day shelf life. Dry products, represent 75% of Barilla’s sales and have shelf lives ranging from 10 weeks to 24 months. It should be noted that, in total, Barilla’s dry products are offered in 800 different packaged stock keeping units (SKUs). Although Barilla offered many pasta products in multiple package types, most retailers would only carry the product in one (at two) packaging options. Currently, Barilla’s distributors check their orders and place their orders once a week. Average lead time in the current scenario is ten calendar days. While the demand for pasta is relatively flat, the variability resulting from distributors’ sales volume and demand triggered the need to find a way to “take costs out of the distribution channel without compromising customer service.”

Proposal

Organizational Changes

Barilla’s dilemma revolves around how product is ordered by its distributors based on a weekly ordering system. Instead of using forecasted or actual demand data, distributors used a simple periodic-review inventory system and place orders for products whose levels fall below a targeted reorder level. This system causes an “emotional” knee jerk reaction issue when an end customer is out of product. Many times the end grocer will order more product than is necessary, as may the distributor, causing the plant to go into production for a specific product that is hugely inflated. After the customer receives the order they realize they do not need the large amount of inventory and discontinue future orders. This sinusoidal ordering effect is called the “bullwhip effect” (Graph I). As can be observed, the inventory/order levels are amplified from the downstream to the upstream channels (i.e., retailers to distributors to manufacturer) within the supply chain. This “artificial inflation” results in increased costs to the manufacturing plant, distributors and end customers because of the lack of planning, excessive overtime and inventory costs in the form of floor space and potential spoiling.

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