Barilla Spa

Maulik Patel
Maulik.patel@westburne.ca

Module 1

Table of content
Table of content
Executive Summary
Issue Identification
Environmental & Root cause Analysis
Alternative and Options
Recommendations and Implementation
Monitor and Control

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Executive Summary
The incredible fluctuation that occurred from week to week in the number of Barilla dry products being
ordered by the distributors and the extreme demand unpredictability seriously strained Barillas
manufacturing and logistics operations. Barillas highly automated manufacturing system was not
designed to accommodate large fluctuations in demand nor, was it designed to accommodate sudden
changes in demand or product. Brando Vitali, Barillas director of logistics, proposed the idea of Just-InTime Distribution (JITD) in the 1980s as an alternative to Barillas traditional practice of delivering
products to their distributors. The problem is increased by the fact that the customers are not willing to
cooperate and they are not willing to provide a detailed sales data to ease the delivery decision by
Barilla.
In spite of the reluctant reaction from distributors, as a decision maker, Giorgio Maggiali, I should
promote the JITD initiative and change their attitude to this program. I should convince 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. 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.
Issue Identification
Barilla Spa is the worlds largest pasta manufacturer. It owned and operated an extensive network of
plants located throughout Italy. Most Barilla products were shipped from its manufacturing plants to
one of two Barilla central distribution centers (CDDCs). Third party distributors purchased pastas from
CDCs and sent them to supermarkets.
Barilla allowed its distributors to purchase large amounts of inventory turning canvass periods into
forward buying incentives that actually become costly for them to carry the additional supply in their
warehouses.
In the 1980s, Barilla increasingly felt the effect of fluctuating demand. Orders for dry products often
swung wildly from week to week, even though the underlying pasta demand pattern in Italy was
relatively flat.
Such extreme unpredictability strained Barillss manufacturing and logistics operation. Due to the high
manufacturing changeover costs, they were forced to either break the best production sequence and
therefore compromise efficiency or carry extra inventory.
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The demand fluctuation was having negative impacts on the entire supply chain including warehousing,
central distribution and the distributors. They had to maintain extra capacity on a long term basis, and
obtain extra capacity at a premium to meet short term demands. The same can be said in the
transportation area, they had to maintain extra trucks long term and obtain trucking capacity at a
premium in the short term.
Last issue that needs addressing is the resistance to change. This is observed internally and externally to
Barilla. Internally, sales representative within Barilla are not in favor of the new system, as many sales
representative are feeling that work is being taken away from them.
Environmental & Root Cause Analysis
The fundamental question is: What exactly was causing the distributors order pattern to fluctuate so
much? What are the underlying drivers of the fluctuation? Several drivers were at play:
Bullwhip Effect: The demand fluctuation is a reflection of the Bullwhip effect, wherein minor
fluctuations in demand at the end user result in huge variations in demand at upstream operations in
the supply chain. The demand for pasta is stable and flat in Italy, yet Barillas supply chain was
experiencing wild demand fluctuations. A major cause is the lack of visibility. Participants in the supply
chain work with limited information due to lack of communication between supply chain members. Each
party acted in their self interest and on the basis of their own forecasts. The long lead time also
contributed significantly to demand fluctuation.
Transportation discounts: Barilla paid for transportation to distributors during promotion
Volume discounts that varied from 2-4% if distributors ordered in full truck load quantities
Long lead time: Average manufacturing lead time was 10 days.
Many stages in the supply chain: Barilla manufacturing plant- Barilla warehouse- Distributor warehouseRetail stores- End customers
No minimum or maximum order quantities: During promotional periods, distributors could order as
much as they wanted.
Trade promotions: 10 to 12 canvass periods every year, during which a distributor could buy as much
as desired at discounted price to meet current and future needs.
Product proliferation: Continuously introducing new products that required more room in stores and
warehouses.

Poor customer service: Despite the fact that distributor held several weeks of inventory; service levels to
retailers were unacceptable with stock out rate of 5-6%. Stockouts are highly costly to a distributor and
Barilla in the long run. When Barilla products are unavailable, customers will be quick to find an
alternative and begin to buy the competitors product, as can be seen in Exhibit 13, where the level of
stockouts is around 6%. Since margins are reducing, cost reduction on the operational side would be
beneficial to the company as a whole. Reducing stockout will allow distributor to not lose any money as
well as Barilla is able to keep a strong hold on their market share.
Poor communication: Sales representative spent time on settling disputes about different discounts and
deal structures.
Alternatives and/or Options
Based on the previous analysis, we can conclude that variation in demand led to cost increases
throughout the supply chain. The problem was exacerbated by the fact that both manufacturers and
retailers were suffering from thinning margins, therefore Barilla was under increased pressure to find
ways to take costs out of the supply chain without compromising service.
To address this problem, Giorgio Maggiali, the director of logistics, suggested implementing Just-in-time
distribution (JITD) with Barillas distributors. Rather than follow the traditional practice of delivering
product to distributors on the basis of whatever orders the distributors placed, Barillas own logistics
organization would instead specify the appropriate delivery quantities that would more effectively
meet end-consumers needs and more evenly distribute the workload on Barillas manufacturing and
logistics systems. Barilla would look at all of the distributors shipment data and send only what is
needed at the stores.
This proposal is essentially a vendor managed inventory system. It replaces the current delivery pattern
with one that better suits the entire supply chain. JITD eliminates an artificial demand pattern that
drives traditional ordering process. The input data would ideally be demand from end customers that
are stable instead of fluctuating demand from distributors. Without demand fluctuations, many benefits
can be gained. Operations at Barilla and its customers can be improved, inventory levels can be reduced,
and distribution costs can be lowered. Ultimately manufacturing costs can be reduced if Barilla didnt
have to respond to the volatile demand patterns of the distributors.
The last alternative can be for the distributors and Barilla to form a joint venture, since the distributors
control the sales data, this can now be shared information that is highly needed by Barilla. Both parties
will benefit without the distributors losing their independence.

Recommendations and Implementation

My recommendation is to implement JITD system that provides visibility on the demands that customers
made on Barillas distributors and retailers. With the acquired visibility, Barilla will be able to specify
where inventory should be held in the downstream distribution facilities. This system will allow Barilla to
match the supply from the production and distribution network with the demand from the end
customer. The Bullwhip effect that was so common in the supply chain should be mitigated significantly.
To successfully implement this system, Barilla needs to:
-Have POS data available to determine end customers requirements
-Reduce lead time of entire supply chain to reduce Bullwhip effect
-Keep prices stable: reduce/eliminate promotions that artificially distort demands. This reduces the
temptation of distributors to buy more than necessary
In order to implement the JITD idea and have everyone from the customers to the internal sales
representative to buy into the new system, Barilla will need to properly communicate to all involved of
the new strategy. Barilla management will need to convince everyone that JITD is worth trying because
it will be a win-win process for all that is involved. The JITD program at Barilla can be feasible if Barilla
focuses on faster delivery and a smoother production process. A fundamental reform needs to be taken
to improve the relationships between the sales, advertising and logistics departments through redesign
the performance measurement system. To motivate the distributors to actively participate in the JITD
initiative, a group of both suppliers and the distributors on a supply chain should be formed to discuss
the present problems and come up with solutions. It is always easier to roll out something within the
willing participants than throw something to them randomly.
Barilla will be smart to perform a pilot test first to see how the JITD will function. This pilot will last a
total of 12 months. Targeting the small independent shops will be the best step to ensure success and
soften the blow if the JITD does not perform to standards. Independent shops are ideal as opposed to
the large supermarkets because they are more likely to accept the small quantities of orders to reduce
their inventory since they have worsen inventory levels and more than two weeks, longer than
supermarkets. Smaller shops do not have much resource and power to manage their inventory.
Products will be shipped directly through Barillas own regional houses. This will allow Barilla to access
the end-user demand information directly without dealing with outside distributors. This will be ideal
and beneficial in limiting the privacy issues.
Internally to mitigate the discontent expressed by sales representative, who are worried sales
promotions will be affected by the new JITD system, it will be recommended that Barilla instead of
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giving discounts for big order volume, Barilla would give discounts for stable long-term orders. By doing
this, Barilla would have many long-term orders to fill the market demands, and fluctuation could be
reduced considerably
Another burden affecting the SCM implementation is a lack of common goals and objectives. Barilla
management must convince the distributors that the new program will benefit them as well, leading to
lower inventory levels, reduced cost, higher efficiencies, better return on investment and better capacity
utilization etc. They need to manage the relationship with distributors, establish inter- organizational
teams, and facilitate dialogue and communication. This effort should also build and gain trust from
other partners.
To be truly successful, the JITD program needs 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.
Monitor and Control
There are several aspects to the monitor and control functions within Barilla.
1. The first one is the successful implementation of the recommendations above. This process can
be completed by timely checks in regard to what has to be completed, by whom and when.
2. Secondly, Barilla should monitor and control flow of its products through the distributors
warehouses.
3. The third aspect is to use provided below metrics to measure the performance of Barilla:
* Change of weekly fluctuations
* Inventory level both in DCs and at the customers warehouses
* Fulfillment of orders
* Number of orders waiting in queue weekly
* Lead time
* Flexibility
* Total number of customers
* Total revenue

* Revenue
* Return on investment
* Revenue and profit growth