2010

Barilla Spa Case

Page 1 of 12

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

Page 2 of 12

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 Figure 1 Current Barilla logo 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 caringi. 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. Barillas 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.

Page 3 of 12

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 Barillas products were shipped to one of its central distribution centers (CDCs). 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 Barillas dry products were shipped through Barilla depots to small neighborhood shops (So called Signora Maria Shops).

Figure 2 Barilla distribution patterns

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.

Firm Barrier

Firm Barrier

Supplier

Manufacturer

Warehouse

Retailer

Flow of information

Figure 3 Flow of information within distribution system

Page 4 of 12

Fluctuating Demand
Another key issue that arises within Barillas 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 Figure 4 The "Bullwhip effect" 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 Barillas case the following safety-stocks are held: Each Barilla Central Distribution Center (CDC) held about a months worth of dry product inventory A distributors 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.
Page 5 of 12

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 Barillas 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 companys 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.

Page 6 of 12

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 distributors 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.
Page 7 of 12

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 Barillas 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:

Its 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 Barillas 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

Page 8 of 12

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. Barillas 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 Barillas 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 Barillas 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
Page 9 of 12

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 buyers strategic vulnerability is the result of the buyer having more limited means of controlling the suppliers 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
Page 10 of 12

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 customers 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.

Page 11 of 12

Bibliography
Simchi-Levi, D., Kaminsky, P. and Simchi-Levi, E. Designing and managing the supply chain. 3rd ed. New York, Mcgraw-Hill, 2008.

References
Barilla mission statement, www.barillagroup.com, 11-4-2010. 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. 199215. 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
ii i

Page 12 of 12