Barilla SpA Case Slides

B ill S A CBarilla SpA Case• Barilla SpA is the world’s largest pasta

manufacturer

• The company sells to a wide range of Italian retailers primarily through third party distributorsretailers, primarily through third party distributors

• During the late 1980s, Barilla suffered increasingDuring the late 1980s, Barilla suffered increasing operational inefficiencies and cost penalties that resulted from large week-to-week variations in itsresulted from large week to week variations in its distributors’ order patterns

The global ranking of company reputations

1 L (D k)1. Lego (Denmark),2. IKEA (Sweden), 3. Barilla (Italy), 4. Mercadona (Spain), 5. AP Moller–Maersk (Denmark),

Referred to as Global RepTrak 2009, the study aims to measure positive perception, confidence, respect and admiration consumers feel regarding the world’s leading companiesg g g p

Barilla case questions:Barilla case questions:1.) What does consumer demand pattern for pasta look like

in Italy? (guess)in Italy? (guess)

2.) What factors are causing the distributor’s big variability in orders? (list three)in orders? (list three)

3.) What are the disadvantages of high order variability?) g g y(list three)

Figure 4.3 Weekly Demand for Barilla Dry Products from Cortese’s Northeast Distribution Center to the Pedrignano CDC, 1989.

Causes for Demand Fluctuations

• Transportation discounts

• Volume discount

P ti l ti it• Promotional activity

• No minimum or maximum order quantitiesq

• Product proliferation

• Long order lead times

• Poor customer service ratesPoor customer service rates

• Poor communication

What is the impact of demand pfluctuation seen in Figure 4.3?

B th l t h hi h d t h• Because the plant has high product change over costs, Barilla has either inefficient production or

fi i h d d i texcess finished goods inventory

• Utilization of central distribution is lowUtilization of central distribution is low

– Workers

– Equipment

• Transportation costs are higher than necessary

What is the impact of demand fluctuation seen in

Fi 4 3 ?Figure 4.3 ?

• The distributor must build excess capacity p y

– to hold goods bought on any type of promotion includingpromotion, including

– quantity discounts, truckload discounts and q y ,canvass period discounts

What if the distributor passes the discount• What if the distributor passes the discount along to the retailers?

• What is the value of the promotion game?

Missing part of the sentence in pdf file, at bottom of page 76

Our customers are changing. And do you know why they are changing? As I see it, they are y y g g , yrealizing they do not have enough room in their stores and warehouses to carry the verytheir stores and warehouses to carry the very large inventories manufacturers would like them tothem to.

Barilla case questions:Barilla case questions:4.) What is the main idea of JITD proposal?

(changes for producer and distributor)(changes for producer and distributor)

5.) Why are the distributors not supporting the JITD5.) Why are the distributors not supporting the JITD proposal?

6 ) H d thi k JITD ld d i bilit d6.) How do you think JITD could decrease variability and uncertainty for producer?

JITD Proposal• Director of logistics suggests the implementation of

Just-in-Time Distribution (JITD), with Barilla’s ( )distributors.

decision-making authority for determining shipments from– decision-making authority for determining shipments from Barilla to a distributor would

transfer from the distributor to Barilla– transfer from the distributor to Barilla.

• Rather than simply filling orders specified by the distributor, – Barilla would monitor the flow of its product through theBarilla would monitor the flow of its product through the

distributor’s warehouse, and then

decide what to ship to the distributor and when to ship it– decide what to ship to the distributor and when to ship it.

Missing sentence in pdf file, at bottom of page 80

Thus, unlike traditional supply chains in which distributors place orders and manufacturers trydistributors place orders and manufacturers try to satisfy these orders as much as possible, in JITD ''Barilla's own logistics organization wouldJITD Barilla s own logistics organization would specify the appropriate delivery quantities --those that would more effectively meet the endthose that would more effectively meet the end consumer's needs yet would also more evenly distribute the workload on Barilla'sdistribute the workload on Barilla s manufacturing and logistics systems.'' In the last few years, such a strategy has been referred tofew years, such a strategy has been referred to as vendor managed inventory (VMI).

Evaluation of the JITD Proposal

• Clearly the variation in demand is imposing dditi l t th h ladditional costs on the channel.

• What do you think of the JITD proposal as aWhat do you think of the JITD proposal as a mechanism for reducing these costs?

• Why should this work?

• How does it work?• How does it work?

• What makes Barilla think that it can do a better job of determining a good product/delivery sequence than its distributors?q

T K C B hi d JITDTwo Key Concepts Behind JITD

• Replace Sequential optimization with Joint optimizationoptimization

– Who will optimize?Who will optimize?

• Eliminate some of the ‘false’ economicsEliminate some of the false economics that drive traditional ordering processes

Implementation IssuesResistance from the Distrib torsResistance from the Distributors

• “Managing stock is my job; I don’t need g g y j ;you to see my warehouse or my figures.”

• “I could improve my inventory and service level myself if you would deliver my y y yorders more quickly; I would place my order and you would deliver within 36order and you would deliver within 36 hours.”

• “We would be giving Barilla the power to push products into our warehouse just sopush products into our warehouse just so that Barilla can reduce its costs.”

Implementation Issues Resistance from Sales and MarketingResistance from Sales and Marketing

• “Our sales levels would flatten if we put thi i l ”this program in place.”

• “How can we get the trade to push Barilla gproduct to retailers if we don’t offer some sort of incentive?”

• “If space is freed up in our distributors’ warehouses…the distributors would then push our competitors’ product more than ours.”

• “…the distribution organization is not yet ready to handle such a sophisticated

”relationship.”

How Can MaggialiSolve the Implementation Problems?Solve the Implementation Problems?

• Demonstrate that JITD benefits the distributors – lowering inventory,

– improving their service levels and

– increasing their returns on assets

– run experiment at one or more of Barilla’s 18 depots

M i li d t l k t JITD t l i ti• Maggiali needs to look at JITD not as a logistics program, but as a company-wide effort;

• Get top management closely involved

T t• Trust

Barilla (B) Case( )• What did Barilla learn from the

experiments in Florence and Milan?experiments in Florence and Milan?

• How should Barilla change the way it• How should Barilla change the way it attempts to sell the JITD concept to its di t ib t ?distributors?

• If you were a Barilla distributor would you• If you were a Barilla distributor, would you sign onto the program after seeing these

l ?results?

• How do you evaluate the implementation process Barilla usedimplementation process Barilla used with Cortese?