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2010

Barilla Spa Case

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Table of Contents

Introduction ..............................................................................................3

Company characteristics and problem diagnosis ....................................................3

Distribution System ...................................................................................4

Fluctuating Demand ..................................................................................5

Operational inefficiencies ...........................................................................5

Proposed solution ........................................................................................7

Implementation issues ..................................................................................8

Internal business issues ..............................................................................8

Sales promotions ......................................................................................9

External business issues ..............................................................................9

Conclusion .............................................................................................. 11

Bibliography ............................................................................................ 12

References .............................................................................................. 12

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Introduction

It was all the way back in 1877, in the strada Vittorio Emanuele in Parma (Italy), that

Pietro Barilla senior opened a small bread and pasta shop, after having learned the

craftsmanship from his grandfather. In 1940, Riccardo and Gualtiero Barilla (grandsons

of Pietro Barilla) took reins of the company. Under their management, Barilla started

up industrial production at its first factory. During those days the Barilla company

employed 80 people and produced somewhere around 80 tons of pasta per day.

Nowadays Barilla employs over 16.000 people worldwide, with over

50 production facilities in 11 countries; they currently produce over

8.000 tons of food products per day. Barilla is world leader in the

pasta business and is currently active in the segments of oven-baked

products, of pasta and of ready-made sauces.

“Since 1877, Barilla is the Italian family company that believes food is a joyful

convivial experience, is taste, is a form of sharing and caring”i. Growing from a small

shop in Parma to the multinational company that Barilla is today meant Barilla had to

change several parts of its business from producing, to selling and distribution. Facing

growth and changes brought along a lot of opportunities, but also some challenges for

Barilla.

One of the challenges, the supply chain, will be discussed in detail in this paper.

During the late 1980s, the company faced increasing operational inefficiencies inter

alia caused by the variability in demand the company had to deal with.

This paper will describe what issues the company faced and what the underlying causes

were. Furthermore this paper will look into the proposed solution by management to

work with Just-in-time-delivery (JITD) also known as Vendor Managed Inventory (VMI).

It will look in detail at the issues solved by this method but also the challenges it

creates when implementing a solution like this.

Company characteristics and problem diagnosis

Barilla is a highly vertically integrated company in the sense that they are active on a

lot of different levels in the supply chain. The company operates its’ own flour mills,

pasta plants and even has some own warehouses. Barilla’s entire product line is

divided into two general categories: “Fresh” products and “dry” products. “Fresh”

products, including i.e. fresh pasta products have a short shelf life of around 21 days.

“Dry” products, including i.e. dry pasta, bread sticks, etc. have medium (10-12 weeks)

to long shelf life (18 to 24 months). Because of differences in perishability and retail

service requirements Barilla maintained separate distribution systems for its fresh and

dry products.

Figure 1 Current Barilla logo

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We have determined three somewhat related issues, that the Barilla company faced:

• Issues within the distribution system

• Issues regarding demand fluctuations

• Issues involving operational inefficiencies

Most of the issues arise within the “dry” product category. As a result we will focus on

this product category when describing the issues. Presented, here you see a schematic

representation of the distribution system

Distribution System

Barilla had an in-house warehousing and distribution

organization to distribute its “dry” products. Most of

Barilla’s products were shipped to one of its central

distribution centers (CDC’s). From there on

independent distributors would buy the products and

sell them to supermarkets. The distributors would

maintain their own inventory levels in their own

warehouses and from that inventory would fill the

supermarket orders. Next to that approximately 35% of

Barilla’s dry products were shipped through Barilla

depots to small neighborhood shops (So called Signora

Maria Shops).

One issue that arised within the distribution system is the speed at which information

flows through the system. Since the supermarkets, distributors and Barilla are

independent companies, the flow of information is compromised through the

organizational barriers it needs to cross. The compromising of the information flow

results in information held and slowed down. Not having accurate/timely demand

information available throughout the system results in all kinds of other issues for

example demand fluctuations. This “failure to synchronize demand and supply chain

signals” is one of the top ten supply chain mistakes described by Senguptaii.

ManufacturerSupplier Warehouse Retailer

Firm

Ba

rrier

Flow of information

Firm

Ba

rrier

Figure 2 Barilla distribution patterns

Figure 3 Flow of information within distribution system

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Fluctuating Demand

Another key issue that arises within Barilla’s logistics is the fluctuating demand. As is

described in the case the standard deviation of the demand (variability) is very high,

whilst underlying consumption (consumer demand) is relatively stable and predictable.

The variability in demand increases as we go up in the supply chain as is shown in

figure 4.

There are a number of possible reasons for

the variability to arise, some of which are

the case within Barilla. The first reason, as

mentioned above, is not (timely) sharing

demand information. Since information on

POS-demand is not actively shared

throughout the distribution system the

forecasting is done per stage in the supply

chain. Since there are no sophisticated

forecasting tools used, “most distributors used simple periodic review inventory

systems”, mean and standard deviation often change, increasing variability. The time

it takes for the information to flow through the system also stretches the lead-time. A

stretched lead-time will also amplify the variability in the system.

The second reason for increased variability is batch ordering, the distributors usually

order only once a week, but would then order a number of truckloads. Ordering in

batches shows a combination of no demand and high demand (variability).

Finally the variability is heavily influenced by the frequent price promotions Barilla

has. Since there are no minimum or maximum lot sizes and the products have a

relatively long shelf life, distributors stock up during price promotions resulting in

extra variability. Since variability is higher, the manufacturer and supplier (Barilla) is

forced to carry more safety stock or have a higher capacity to meet the same service

level as the retailer, this effect is called the “bullwhip effect” iii.

Operational inefficiencies

Barilla has operational inefficiencies that also cause issues in the supply chain. One of

the main operational issues is the high levels of inventories. As mentioned above lead

time is one of the five main causes of the bullwhip effect and therefore one of the

main reasons for a company to increase its safety-stock. In Barilla’s case the following

safety-stocks are held:

• Each Barilla Central Distribution Center (CDC) held about a month’s worth of

dry product inventory

• A distributor’s warehouse typically held a two-week supply of Barilla dry

products in inventory.

• A supermarket typically held from 10 to 12 days of dry product inventory within

the stores.

Figure 4 The "Bullwhip effect"

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These high levels of inventory, in total adding up to 2 months at any time, were held

to protect the process against regular supply disturbances. In other words the high

safety stock was held because supplies were not always reliable so distributors and

supermarkets were afraid of stock-outs and thus would make sure that they always had

enough stocks available. The downside of this is that high inventories can results in

inefficient production. This means that the high safety stocks are worsening the

problem of irregular supply, creating a vicious circle.

An optimal production plan would be a plan which reflects the dynamics of the

aggregate demand forecast. As in Barilla’s case the Italian pasta market is relatively

flat and there is limited seasonality (only for special pasta types some peak periods

were experienced), so an optimal production plan would be relatively flat as well,

without accommodating for the varying demand from the Central Distribution Centers

(CDCs), the distributors and/or the supermarkets. The current production plan, which

does accommodate for the peaks in CDC demand, is therefore not optimal. As each

CDC keeps its own two-week supply of Barilla products without any input from Sales

representatives about changes in demand, new innovations, seasonality (for special

pasta types), this will in turn result in obsoletes and stock-outs.

Keeping high inventory levels therefore may in the end have a very negative effect on

supply chain management efficiency and customer service levels. Both Barilla, the

distributors and the supermarkets face the risk of having obsolete stock especially for

the medium shelf life products like breadsticks that are overdue after only 10 to 12

weeks. So the risk of having to throw out products that cannot be sold anymore is

there for all parties involved in the supply chain. Next to that stock-outs are a serious

issue for Barilla. Due to the highly fluctuating demand it can happen easily that Barilla

does not have the products available when the distributors want to buy them. This

leads to reduced customer satisfaction. Efficient and effective management of

inventory throughout the supply chain significantly improves the ultimate service

provided to the customeriv.

Next to the customer satisfaction issues caused by stock-outs and obsolescence the

high inventories also can have a big financial implication. Keeping inventory ties up a

company’s working capital, which basically means that the money that they spend on

the stock they have in their warehouses cannot be spend on anything else anymore.

This could mean that investment opportunities can be missed due to the capital being

tied up in inventories. When extra inventory is needed due to operational

inefficiencies, like in the Barilla case, tying up at least part of the money in the

inventories could be prevented. Price increases make this impact even worse. As prices

of raw materials have increased (i.e. price of wheat rose from $102 per ton in 1986 to

$178 per ton in 1989)v, inventory value, and thus working capital costs increases. The

largest part of the carrying charge of keeping inventory is made up of the opportunity

of the money (capital) that is tied up that otherwise could be used elsewhere in the

organization.

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Proposed solution

The management of Barilla has suggested to work with “Just-in-time delivery” (JITD)

to cope with the key issues. JITD is also known as Vendor Managed Inventory (VMI)

which means that Barilla would not only manage its own stock levels but also the stock

levels of the distributors. Barilla would monitor the inventory levels in the distributors

and the flow of its products through the distributor’s warehouse, and then decide what

to ship to the distributor and when to ship it. The decision authority over determining

shipments would then come in the hands of Barilla. Using this solution will concede to

the theoretical solutions. Furthermore studies have already shown the positive effects

JITD has on the bullwhip effectvi.

There are multiple ways to reduce the Bullwhip effect that is the driver of all above

mentioned problems. Theory describes the following possibilities to reduce the

Bullwhip effect:

• Reduce uncertainty (share information)

• Reduce variability (everyday low pricing)

• Reduce lead times (EDI)

• Strategic partnerships (VMI)

JITD will reduce uncertainty, it will require information being shared throughout the

supply chain, even though this may bring along some implementation issues (which will

be described later on), this will certainly lead to a faster flow of information since the

company barriers will be lifted. By sharing POS-information and by using sophisticated

forecasting models, the forecasting will be more accurate (forecasting error will be

smaller), which reduces uncertainty. As Zhang (2004)vii shows forecasting methods play

an important role in determining the impact of lead time and demand autocorrelation

on the bullwhip effect.

JITD will reduce variability since lot sizes can be coordinated and batch ordering is

better coordinated. JITD will change the current supply chain, a chain of individual

companies, into a supply network. The pull oriented organization that existed will

change into a push oriented organization reducing variability as well as lead-time.

Since JITD is a form of logistics postponement, the flexibility of the system will also

increase. Increasing flexibility means Barilla will be better able to cope with the

remaining variability.

Implementing JITD will also solve many of the organizational issues that Barilla is

currently facing. By having shared information on customer demand, production and

distribution plans can be optimized, which will lead to a decrease in production and

distribution costs. By sharing information on final customer demand, highly fluctuating

production plans can be eliminated whereby inventory of Barilla and inventory of the

distributors/supermarkets is reduced. Reducing inventory means freeing up capital in

the organization that can be used elsewhere. As Barilla will determine which deliveries

will go to the distributor, this also eliminates the fixed ordering costs which earlier had

to be incurred by the distributors.

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Moreover, as JITD leads to a closer communication link between Barilla and its

distributors, this actually also advantages the rest of the organization as more

information is shared on market trends, customer trends and innovations. Distributors

are getting more dependent on the accuracy of Barilla’s forecast, this might be seen

by the distributors as a risk, but this perception can be reduced by introducing risk

sharing initiatives (e.g. penalties for Barilla when distributors have stock-outs).

Implementation issues

The implementation of JITD requires changes within Barilla, within its distributors and

within the relationship between the two of them. To be able to implement JITD

successfully Barilla needs to convince its own staff as well as the distributors that this

change is best for everyone involved. Since people are naturally resistant to change

managing this will be the main challenge of the implementation of the JITD system. To

be able to manage the implementation effectively the following internal and external

business issues must be addressed.

Internal business issues Implementing JITD would solve a lot of the organizational issues that exist within Barilla.

However the Barilla employees have quite some objections to JITD. Like Barilla sales and

marketing personnel stated:

“It’s not clear that costs would even be reduced, we at Barilla may have to increase

our own inventory of those products for which we cannot change production schedules

due to our lack of manufacturing flexibility.”

“Our sales levels would flatten if we put this program in place” and “If space is freed

up in our distributors’ warehouses when inventories of our own products decrease, we

run the risk of giving our competitors more distributor self space. The distributors

would then push our competitors’ product more than our own, since once something is

bought it must be sold.”

Above statements shows that Barilla’s sales force does not believe JITD will add value

and they are afraid of their job security and bonuses. In order to get the support from

the sales force Barilla management needs to set-up information meetings and

obligatory workshops. This will help Barilla to get their staff to see the positive sides of

JITD and the vision that Barilla wants to achieve with implementing JITD. When

employees are unclear of the vision of their company they can also not work towards

that vision. Also the compensation schemes of the sales force will need to be changed.

Part of the high sales swings can be caused by the sales force that sometimes pushes

the sale of certain products at the end of the month or during the promotion periods in

order to still reach their targets. Especially the sales targets for the promotional

products are causing a lot of issues. Barilla Sales targets should not only comprise a

minimum sales level, but also a maximum stock-out level within Barilla and its

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distributors. Having the right bonus schemes will help Barilla in getting its employees

to strive for the right resultsviii.

Sales promotions

Another implementation issue are the sales promotions. Barilla’s sales force does not

believe in running promotions in combination with the JITD program. This is one of

their main concerns, because if the buyers do not get an incentive like a promotion,

why would they buy the products at all? Currently Barilla has promotions every 4 to 5

weeks. In this period the distributor can buy as many products as they want to meet

future needs and the Barilla sale staff is getting targets based on the total sales

achieved for the promotion. In the past this meant that all distributors would buy vast

quantities of Barilla products when they were on sale, since long lasting dry products

had a self-life of 18 to 24 months. For them it was worthwhile stocking as much as

possible during sale periods and then using up the inventories until the next promotion.

This way of working was one of the causes of high demand fluctuations making it very

hard for Barilla to get the right production plan in place. Even when JITD would be in

place these promotions could cause major risks in Barilla’s supply chain, so two

changes need to be made. First Barilla should not give its sales force targets based on

what they sell during promotions, but they should have a target per week with a

minimum and a maximum sales amount. This should help in stabilizing demand,

decreasing the number and magnitude of fluctuations. Secondly the distribution

centers should receive a maximum order quantity during promotions to avoid that they

buy as much as possible during promotional periods in order to flatten out their

demand.

External business issues

The distributors also have some concerns about the JITD program. For starters to

enable this information flow through the supply network, substantial funds must be

available to invest in electronic data interchange (EDI) systems or Electronic Point of

Sales systems (EPOS). This gives the distributors the idea that they need to invest in

expensive systems in order to help solve Barilla’s problems. Next to that the

distributors had some additional comments:

“We would be giving Barilla the power to push product into our warehouse just so

Barilla can reduce its costs” and

“What makes you think that you could manage my inventories any better than I can”

Distributors clearly did not trust Barilla and its intentions completely. Lack of trust is

recognized as the biggest obstacle in JITD and similar initiativesix. Due to the lack of

this trust in Barilla and its competencies the distributors did not want to share

information, were afraid that Barilla would get too much power over their processes

and most importantly that Barilla would do a bad job. These issues are quite serious.

Information needs to flow freely in order for JITD to work. When a distributor, or

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another critical part of the supply chain, objects to sharing information, this

immediately brings down the likelihood of a successful implementation. When the

information provider stops collaborating, the process does not work anymore as was

found in the SoundScan case in 1999.

The only way Barilla could gain the distributors’ trust is by showing them they can do a

good job. Unfortunately JITD is what is needed to do a good job and implementing it

only for a small part to prove trustworthiness is not an option. The best way to solve

the issues with the distributors is to have clear and open discussions with them. During

these discussions the distributors can present their concerns and the JITD program can

be optimized to serve both Barilla and its distributors. If only one distributor is on

board the implementation then the advantages for this specific distributor can be used

as a case to convince other distributors.

Unfortunately the first discussions did not lead to a lot of support from any of the

distributors. As most of the supply chain initiative demand joint efforts and close

cooperation managers feel themselves at the mercy of other individuals or

organizations and to be held accountable for issues that have distributed

responsibilitiesx. This uneasy dependence can be described as “strategic vulnerability”,

the risk associated with acting as if firms are vertically integrated when they are not.

A buyer’s strategic vulnerability is the result of the buyer having more limited means

of controlling the supplier’s behavior than under vertical integrationxi.

The distributors do not perceive the current issues as their problem (“I could improve

my inventory and service levels myself if you would deliver my orders more quickly.”),

there is no lack of urgency for improvement at their side. So goals must be aligned

between Barilla and its customers. Reducing inventory is not the goal, but means to

optimizing customer service and total system cost.

Solving these issues with the distributors is not easy. As mentioned above open and

clear discussions did not lead to anything. Having a clear cost-benefit analysis might

help a bit, but since there are trust issues the distributors might not believe the

analysis made by Barilla. Hiring an independent third party to help in the discussions

would probably help. If an independent analysis on advantages and disadvantages

would be presented to the distributors they will be more likely to take it seriously.

This third party could also help with the discussions to align Barilla with its distributors

and help with the implementation of JITD.

On top of this a benefit and risk sharing scheme should be initiated. In this scheme

Barilla should for example agree on a penalty in case of stock outs, but also in case of

inventories that are too high at the distributor. Next to that in the beginning the

benefits of JITD should be shared. So as mentioned above the fixed ordering costs that

Barilla charges to the distributors should be stopped. If the advantages for Barilla are

bigger than the advantages for the distributors Barilla should pay the distributors a

bonus for participating in the beginning. Barilla could make commitments on a

reduction in the transportation and warehouse costs in the distributor if they are

convinced that they can reach a minimum savings level for the distributors. From most

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distributors the logistics organizations are already convinced, having financial

compensations might help in convincing the buyers and the general management.

Conclusion Barilla identified a strong need to implement the Just In Time Delivery program. In

their view this will be the only way to get their supply processes under control.

However during the implementation of this JITD program they are facing quite some

issues within the company and with its distribution centers. In order to overcome this

resistance Barilla should take some actions.

Barilla will need to change the company buy-in by trying to change its own culture.

They should try to make the sales force, logistics team and production managers

enthusiastic about the oncoming changes. Ways to do this could be through information

meetings, workshops and setting the right bonus schemes. That way the Barillla

employees will know the company goals and vision and will also be stimulated to work

towards those goals. Furthermore implementing JITD should be approached as a

company wide effort not just one in logistics.

Secondly Barilla will need to change their way of working with regards to promotional

activities. Currently the promotions are causing a big fluctuation in demand that is

making supply chain reliability and an optimal production process virtually impossible.

In order to change this Barilla will need to implement some rules for their own sales

force but also for the distribution centers. That way demand will be flatter just like

the end customer’s demand and Barilla can optimize its production plan.

Finally Barilla will need to convince their distributors to participate in the JITD

program. This will be the most challenging part to be able to implement JITD since

there is not a lot of trust between the distributors and Barilla and trust is critical in

implementing JITD. Barilla should get help here from a third party to help in the

discussions with the distributors.

Next to that they should share the benefits of the JITD implementation fairly with the

participating distribution centers to show that this is a program that they are in it

together. If necessary Barilla should even be willing to take up certain penalties in

their contracts like a penalty for stock-outs or obsolescence in the distributors’

warehouse. Barilla should aim at developing long-termrelationships with its distributors

to raise trust and strengthen the cooperation within the supply network.

If Barilla can manage to overcome the issues and implement the necessary measures

JITD could very well solve their problems. But even after the implementation of JITD

open communication, information sharing and trust are critical. Barilla will thus have

to deliver on its commitments to make sure that the trust that the distributors give

them will not be violated.

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Bibliography - Simchi-Levi, D., Kaminsky, P. and Simchi-Levi, E. Designing and managing the supply chain. 3rd

ed. New York, Mcgraw-Hill, 2008.

References i Barilla mission statement, www.barillagroup.com, 11-4-2010. ii Sengupta, S., 2004. “The Top ten mistakes in supply chain”, Supply chain management review, Jul/Aug 2004 number 8, 5, pg. 42 iii Lee, H.L., Padmanabhan V. and Whang, S., 1997a “The paralyzing curse of the bullwhip

effect in a supply chain”, Sloan Management Review Spring, pg. 93-102 iv Lee, H. L., and C. Billington, 1992. “Supply Chain Management: Pitfalls and Opportunities”, Sloan Management Review, 33, Spring, pg. 65-73. v Indexmundi commodity prices, www.indexmundi.com, 11-4-2010. vi Disney, S.M. and Towill, D.R., 2003. “The effect of vendor managed inventory (VMI) dynamics on the bullwhip effect in supply chains”, International journal of production economics 83, pg. 199-215. vii Zhang, X., 2004, “The impact of forecasting methods on the bullwhip effect”, International journal of production economics 88, pg. 15-27 viii Merchant, K.A. and Van der Stede, W.A., “Management Control Systems – Performance Measurement, Evaluation and Incentives”, 2nd ed. Prentice Hall, 2007. ix Duris, R., “Seven deadly sins of SCM implementations”, Fleet Equipment, Oct 2003, number 29, 10, pg. T6 x Moberg, C. R., Speh, T. W., Freese, T., “SCM: Making the vision reality”, Supply chain management review, Sep/Oct 2003 number 7, 5, pg. 34 xi Spekman, R.E., "Perceptions of strategic vulnerability among industrial buyers and its effect on

information search and supplier evaluation", Journal of Business Research 17 (1988), pg.313-326