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Barilla Case Study: Operational Ineffeciencies

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Case Presentation Barilla SpA Introduction Company & Industry background • World’s largest pasta producer in 1990 • Pasta Share – 35% in Italy and 22% in Europe Channels of Distribution • Products divided in 2 categories – “Fresh” and “Dry” • Fresh Products had 21 day Shelf Lives • Dry Products had Long ( 18 to 24 Months) or Medium(10 to 12 weeks) Shelf Lives • Retail Outlets – Small independent The Issue During the late 1980s, Barilla suffered increasing operational inefficiencies and cost penalties that resulted from large week-to-week variations in its distributors’ order patterns Distribution Procedure • Original flow of goods and information PLANT CDC’s Barilla run depots GD’s Chain supermarkets DO’s Independent supermarkets “Signora Maria” Shops Customers Customers Customers *CDC = Central Distribution Centre GD = Grand Distributors DO = Organized Distributors Sales and Marketing Advertising – Heavy, Brand Positioned as the Highest Quality • Trade promotions – Frequent • Canvass period, 10 to 12 in a year, typical duration of 4 to 5 weeks • Distributor could buy as much product as desired to meet present and future needs at the offered discount • Volume Discounts also given • Sales representatives used more at DO’s than GD’s – Merchandise Barilla Products – Set up In-Store Promotion – Take note of competitor’s prices, stockouts, new product launches – Work out ordering strategies for the retailer etc Demand Fluctuations • Just in Time Distribution Variability in Demand • Reasons – – – – Transportation discounts Volume discount Promotional activity No minimum or maximum order quantities – Product proliferation – Long order lead times – Lack of forecasting systems or sophisticated analytical tools at Distributer’s end Exhibit 12: Demand Fluctuations Variability in Demand • Methods employed to counter variability – Holding buffer FGs to meet Distributor requirements – Asking Distributors/Retailers to carry additional inventory Impact – Strained Manufacturing and Logistics operations* – Poor Product delivery management – Thinning retailer/distributor margins – Increased Inventory Holding costs – Impossible to anticipate Demand swings – Changing customers due to lack of storage space Bullwhip effect • Amplified Variation in demand as one moves up the Supply Chain (away from the order order customer) order Factory Distributor Wholesaler Retailer Order Variation The Causes of Bullwhip Effect Demand Forecast • Long lead times • Order Batching • Price fluctuation (Promotional sales) • Inflated orders in high estimated demand scenarios Counteracting the Bullwhip Effect • Reduce Uncertainty – POS – Sharing Information – Centralizing demand information • Reduce Variability – Year round or Everyday low pricing • Reduce Lead Times – Information lead times: EDI – Order lead times: Cross Docking • Strategic Partnerships – – – – Quick Response Continuous Replenishment Advanced Continuous Replenishment Vendor managed Inventory (VMI)

Just-In-Time Distribution (JITD) • Vendor-Managed Inventory Concept • Treats end-customer as the Input • Aims at managing the Input filter that Produces the Orders • Decision-making authority for determining shipments in hands of Barilla SpA • Barilla would monitor the flow of its products through the distributor’s warehouse, and then decide what to ship to the distributor and when to ship it • Distributor provides Data on the shipment and current stock levels for

Expected Benefits of JITD • Manufacturer – Reduced manufacturing costs – Better Relationship with Distributors • Increased supply chain visibility • Increase Distributor’s dependence on Barilla – Improvement in manufacturing planning using objective data – Reduced inventory levels • Distributors – Improved fill rates to Retail stores – Additional service without any extra cost – Reduced Inventory Holding costs JITD – Internal Resistance Sales Representatives feared reduction in responsibilities • Flattened sales levels • Risk of Inability to adjust shipments quickly to stock-outs • Lack of infrastructure to handle JITD • Increased competitor shelf space at distributor • Inability to run Trade promotions • Unsure about the cost benefits JITD – External Resistance • Unconvinced Distributors • Not willing to share warehouse data • Perceived power transfer to Barilla • Lack of faith in Barilla’s inventory management

Possible methods to counter Resistance • Demonstrate that JITD benefits the distributors – Run experiment at one or more of the distributor sites • Maggiali needs to look at JITD not as a logistics program, but as a company-wide effort – Get Top management closely involved Experiments at Dryproduct depots • Barilla spa ran first JITD experiment at its Florence depot • During the very first month of the program – Inventory dropped from 10.1 days to 3.6 days – Service level to retail stores increased from 98.

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9% to 99. % • Depot’s staff was not comfortable working with such low inventory levels – Inventory levels finally allowed to increase to 5 days • One of the arguments against JITD was that it will lead to waste empty spaces in the ware houses Experiments at Dryproduct depots • In Florence case – Barilla growing at rapid rate in the region – Plans to expand warehouse – Existing warehouse able to accommodate the increased requirement – Substantial investment on expansion was avoided • JITD next tried at Milan Depot – Similar performance improvement as Florence • These experiments established the credibility of JITD system

Implementation at D. O. Cortese • The decision to implement JITD in Marchese DC of Cortese involved – Barilla: Director of Logistics, Executive vice president of sales and Manager in charge of JITD implementation – Cortese: Nine managers including Managing director, new services manager, logistics manager and logistics, purchasing, marketing and sales personnel from Cortese’s Marchese DC • Consultant Claudio Ferrozzi was roped in – Neutral party trusted by both the groups

Implementation at D. O. Cortese • For six months, Barilla team analyzed daily shipment data of the DC – Created the data base of DC’s historical demand pattern – Simulated shipments with JITD in place • The implementation yielded phenomenal results – Prior to JITD • Stock out rate : 2 to 5% ( Occasionally as high as 10 to 13%) – After JITD • Negligible stock out rate of less than. 25%(Never exceeded 1%) • Average inventory level also dropped Adaptation to different distributors With new confidence they approached other customers • Customers apprehensive about JITD repeating the same success as Cortese for them as they had varied systems • Barilla’s team developed capacity to translate customer’s standard’s into internal standards Adaptation to different distributors • Developed a protocol which could be used to communicate with all customers • Each SKU identified with three different product codes – Barilla’s code – Customer’s code – EAN (European article numbering system) barcode – Most common barcode standard in Europe • Advantages of the coding system Information can be received through any code – Reduce impact of internal changes in product or code on client’s system Communication with consumers Customer each day sent following information to Barilla via EDI:1. Customer code number to identify itself 2. Inventory for each SKU carried by DC 3. Previous day’s “sell through”-All shipments of Barilla products out of DC to consumers on the previous day 4. Stock outs on previous day for every Barilla SKU carried by DC 5. An advance order for any promotions that the customer planned to run in the future 6. Preferred delivery carton size Lessons learnt One needs to prove credibility of any new performance initiative for others to buy his/her idea • Best place to experiment with an idea is within the organization • To succeed in a new initiative, involvement of top management is imperative • Market is ever growing. If performance measures seem to create spare time/capacity instead of chucking them, look out for ways to increase the – Barrilla could finally succeed in implementing JITD with Cortese. Whole of top management from both sides was involved in the decision making. Which never happened earlier – Sometimes roping a consultant helps THANK YOU

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