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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Continuous Improvement: Part 1

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This Reference Guide explains the common language of Continuous Improvement

(CI), a tool for creating standard work, achieving operational excellence, serving our

customers better and becoming more competitive.

Continuous Improvement

CI creates a system for operational excellence because it:

• Focuses on our customers

• Empowers our employees

• Provides tools and resources

• Helps prioritize opportunities

• Finds solutions based on root causes

• Builds sustainable results

• Uses a structured and disciplined process

• Offers the ability to leverage success across the organization and accelerate

improvement

This CI Reference Guide details the vision companies that want to be successful. It

defines key CI terms and explains tools that speed the improvement process and

help measure needs as well as progress.

Use it to focus department resources in ways that elate customers, streamline

processes and improve performance. If you can make CI a way of life and help those

who work with you do the same, you can unleash the power of the process. The

rewards are a delighted customer, reduced waste, fewer variations in our processes

and a sense of pride in a job well done.

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Sense of Urgency: Part 1

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A Sense of Urgency: Part 1

When we think about continuous development of highly innovative technology,

changing political environments, globalization and steep growth, tough competition,

mergers and acquisitions, it’s a whirlwind of rapid change that fosters urgency.

Urgency means a sense of pressing importance. To live out success factors, its

crucial to be able to distinguish between a “true sense of urgency” and a “false sense

of urgency.” In fact, distinguishing between them during the very first step of any

kind of change can mean the difference between success and failure.

A good change model is one whose leadership adopts and promotes a culture of

the “right” sense of urgency throughout the company. The thought leader on this

phenomenon is Harvard MIT Change Expert Dr. John Kotter, who says that 50%

of all change efforts fail during the first step of change. Why do they fail? Mainly

because of lack of vision, communication of the vision, empowering others to act on

the vision, and more, the lack of which creates a false sense of urgency.

In many cases, the opposite of a right sense of urgency is compliancy. We all

unconsciously experience complacency to a certain degree in certain situations. And

it is possible to see problems and be complacent because you do not feel tat they

require change from YOU.

On the other hand, people having a true sense of urgency think that action on

important issues is needed now and not eventually when it fits into their schedules.

“Now” means making progress every day. “Critically important” means that acting

upon it is central to success and winning. To illustrate something we all face every

day, a sense of urgency is not an attitude that I must have the team meeting today,

but rather, a positive, focused attitude that the team meeting must accomplish

something important today.

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Five Forces

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Five Forces

by Halden Zimmermann

The Five Competitive Forces model is a framework created by Michael E. Porter in 1980.

He included it in his book, “Competitive Strategy: Techniques for Analyzing Industries and Competitors.” This model is a tool used frequently in organizing an analysis of a company’s positioning and risks associated with entering to remaining in a specific market.

Five Forces Model

Thinking through the five forces, I wanted to address a few things with this model so that is can be effective, instead of a fill in the blank framework people discuss in meetings and then walk away.

For each of the forces there should be a specific understanding of the risk potential associated with each of the categorized responses. The risk metering should then be met with a specific action to offset or reduce this risk. A great tool for analyzing this is a PFMEA tool set which is typically used in process design and the risk of having a particular failure mode. The risk priority number (RPN) on the PFMEA tool would be the metric used to understand the potential of a failure occurring and then action surrounding those high potential problems would result in a recalculating of the RPN number. Using the PFMEA tool set you have a tool that not only captures potential risk factors but also puts a metric around level of risk and tracks actions to improve upon your position.

Another thing to consider is to completely sidestep the positioning in your market. If you are spending a lot of time trying to tactically address specific problems associated with weak barriers to the five forces, i would estimate your margin is in great risk for your business. This is because 80% of your time should be focused on creating new markets or “blue oceans” to be specific. Creating a new market starts at the customer and does not rely on how competitors and suppliers would respond as a priority.

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HALDEN ZIMMERMANN Leica Dananher

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