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Barilla Case Study: The Underlying Factors In Operation Management

case analysis| MGSM890 Operations Management| | Thursday 9 AM class | Term 3, 2012 Deepika Choudhary | 42621186 | | | Question 1. What underlying factors are driving the distributors order patterns to look the way they do in Exhibit 12, and the DC sales, inventory and stock-out levels in Exhibit 13?

The underlying factors that are driving the distributors order patterns to look the way they do are primarily due to extreme demand fluctuations where it was week to week variation in distributors order patterns due to which Barilla suffered increasing operational inefficiencies and cost penalties.

The major reasons that speak for demand fluctuation are –excessive promotional activities, volume discount, transportation discounts, no limit in order quantities from distributors or worked out ordering strategies for retailers, product proliferations, poor customer service rates, poor communication and lack of sophisticated forecasting techniques or analytical tools at distributors end.

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The method adopted to curb this demand fluctuation was in two ways; one with excess FG inventory to meet distributors demand and second additional inventory at distributors warehouses. However this method adoption led to impact in – overburdened manufacturing and logistic operation, poor product delivery, thinning of retailers/distributors margin, increased inventory carrying cost, unanticipated demand, and bull whip effect in the entire supply chain.

Whereas the causes for bullwhip effect was due to inaccuracies in demand forecasting, long lead times, inflated orders in high estimated demand scenarios, and, price fluctuation due to promotional activities and order batching (to reduce ordering costs, to take advantage of transportation economies such as full truck load, sales incentives and forward buying due to promotional activities to get benefit from lower price).

Thus to counteract the bull-whip effect four strategic options became crucial, which are, to: reduce variability (every day or year around low pricing), reduce lead times (information lead times: EDI and order lead times: Cross Docking), reduce uncertainty (POS, sharing and centralizing demand information) and strategic partnerships (quick response, continuous replenishments and vendor managed inventory (VMI)) The other factors are as follows: Orders placed once a week – most distributors (GDs and Dos) checked the inventory levels and placed orders with Barilla once per week which was not inlined with the pace of demand variation * Average lead time ten calendar days – order once placed would be shipped by Barilla to the distributor over the course of the week that started eight days after the order was placed and ended fourteen days after the order was placed; which was recognized as a bottleneck for distributors * Usage of simple periodic-review inventory systems – distributors placing orders on a weekly basis for those products whose levels fell below a specified reorder level, which made their ordering system obsolete * Computer-supported ordering systems – which all of the distributors possessed but lack of sophisticated forecasting systems or analytical tools for determining order quantities for future demand * Holding huge current inventory levels – distributors and retailers carrying huge current inventories followed by requests from Barilla (manufacturing and logistics personal) to carry additional inventory (to hold goods bought on any type of promotion, including quantity discounts, truckload discounts and canvas period discounts) to dampen the fluctuation in distribution orders; this incurred additional costs to their operating systems * Retail inventory pressure – retailers realizing space crunch in their stores and warehouses to carry very large inventories; limited shelf space in retail outlets; continuous launch of new products and attain best shelf display; which reinforced distributors attitude and felt similar pressure to increase inventory of items they already stocked and to add items they currently did not carry to their product offerings * Lack of good service from distributors to its retailers – Exhibit 13 (in case study) depicts the huge stockouts that Dos experienced in 1989 despite holding a couple of weeks of inventory.

This reflects lack of Dos efficient job servicing to its retailers * Plant has high product change over costs because Barilla has either inefficient production or excess finished goods inventory * Utilization of central distribution is low in terms of workers and equipment’s Question 2. How might they be addressed? Will the proposed JITD system solve the problem? The underlying factors in the traditional approach of order fulfillment had a direct impact on manufactures and retailers in the form of thinning margins. Thus, to address these factors an alternative approach of product delivery was crucial and also to take costs out of distribution channel without compromising service.

This was introduced by Brando Vitali’s JITD (Just-In-Time-Distribution) proposal, which focused solely on dry products to be sold through distributors. This approach was also expected to radically change the way in which Barilla’s logistics managed product delivery with JITD bringing in its two key concepts of: replacing sequential optimization with global optimization and eliminating some of the “false” economies that drive traditional ordering processes. The major challenges of the traditional and rhetoric logistics and distribution channel were: * Extreme demand fluctuations – Barillas dry products often swung wildly from week to week creating extreme demand variability in distributors’ order patterns and also for Barilla’s manufacturing and logistics operations (since 1980s). Distributors sales volumes variation – to manage demand and supply amongst small distributors order and large distributors order by forecasting and keeping a check on what is required and where it is required and when it is required * Pressures to manufacturing in terms of production lead-time and perishability of product * High Inventory Carrying Cost & manufacturing cost due operational inefficiencies * Unacceptable Cycle Service Levels (CSL)–inadequate product availability * Distributors’ inability to carry large number of SKUs The proposed JITD system will help to, first, determine the quantities and delivery schedules and assist to improve the operations for Barilla and its customers. Second, ship products only when they are needed and what products are needed, rather than building enormous stocks in Barillas’ facilities. Third, Barilla will reap an indirect advantage by reducing its own distribution costs, inventory levels, and ultimately manufacturing costs, by not responding to the volatile demand patterns of the distributors.

Fourth, Barilla will be able to manage the much-needed and important capability to achieve “flexibility” to respond to the demand from end-consumer, which manages the input filter to produce the orders. Fifth, Vendor Managed Inventory Concept. Sixth, using point-of-sale data from retailers (but this is a limitation of Barillas given distribution channel and lack of bar-code scanner and computer linkage at most grocers in Italy). Seventh, ultimate authority to determine shipments is Barilla SpA. Eight, distributors will provide POS data (current) stock level of all SKUs. Hence, expected benefits for Manufacturer are: * Reduced manufacturing cost * Reduced inventory cycle Increased supply chain visibility will lead to better relationships with distributors * High bargaining power over distributors * Increased distributors dependence on Barilla * A planned production planning is possible * Improvement in manufacturing planning using objective data Expected benefits for distributors are: * High service level–additional services to retailers without incurring extra cost * Improved fill rates to Retail store with a quick response * Reduced inventory carrying cost Question 3. What conflicts and barriers does implementation of the JITD system face? The implementation of the JITD system does experience some conflicts/resistance and barriers. The conflicts/resistance experienced are internal and external as follows: Internal Sales representative feared reduction in responsibilities and flattening of sales levels * Risk of failing to adjust shipments sufficiently quickly to changes in selling patterns or increased promotions * Firms distribution unit not prepared to handle such a sophisticated relationship * Free space in distributor’s warehouses will give competitors an advantage to acquire more shelf space * Inability to quick shipment or disruption in supply process may lead to stock-out of product * Inability to run trade promotion * Lack of sophisticated infrastructure to handle JITD * Skepticism about cost reduction External * Unconvinced distributors Distributors were not willing to share their warehouse data * Distributors got impression that they were not handling their inventories well * A strategic move by Barilla to justify their long delivery cycle * Perceived transfer of power to Barilla * Lack of faith in Barillas current inventory management * Distributors were skeptical about the effectiveness of the system Question 4. How would you address these? Barilla should focus in external context on implementing the JITD in a staged fashion where it starts to target one of its largest distributors with whom its relishes excellent and elongated relationship. The resistance could then be handled by running experiments at Dry Product Depots where top management is involved actively to reinforce Barillas strategic vision of the company to adopt JITD as a company wide effort and not just as logistics program.

By doing so, the qualitative and quantitative implication of performance improvements can be made public (like, average inventory level drop down, increase in service level to retail stores, drop in stock out rate, existing warehouse to accommodate the increased requirement and thus saving on substantial investment on expansion) to share with other distributors. In doing so, such experiments will help establish the credibility of JITD system. Also, other benefits highlighted will add substance to the JITD implementation, such as: better demand forecasting using JITD that ensures robust supply chain; insulate from the excessive demand fluctuations that leads to increased average inventory level, poor USL and recurrent stock-outs; Centralized information to reduce bull-whip effects and enhance inventory management system; ease to make strategic decisions amongst “push” or “pull” based systems; customers to be convinced with the vision of win-win concept.

Following which Barilla can showcase the real results of running such experiments with JITD to other distributors and approach them with confidence. This will buy-in vote of confidence from all of Barillas distributors to implement JITD by adapting to different distributors where Barillas team develops capacity to translate customer’s standards into internal standards. During the implementation process people from all levels (top management to implementation managers) from both parties to get involved along with a neutral party which is trusted by both groups. After implementation of the JITD, Barilla team could analyze daily shipment data of the distributors and create a database of its historical demand pattern. In addition, Barilla should stimulate shipments with JITD in place.

Following which it can develop a protocol which could be used to communicate with all of Barillas customers. To ease the process of identification, each SKU can be identifies with three product codes – Barillas code, customers code and EAN (European article numbering system) barcode. This coding system will facilitate the information reception through any code and will significantly improve data sharing. This will significantly increase Barillas interactivity with all its customers where they are linked by electronically to Barillas headquarters and can exchange information on a daily basis for: * Customer code number to identify the customer Inventory for each SKU, carried by DC * Previous day’s “sell through”: all shipments of Barilla’s products out of DC to consumers on the previous day * Stock outs on previous day, for every Barilla SKU carried by DC * An advance order for any promotions that the customer plans to run in the future * Preferred carton size of the delivery Internal address Links https://www. google. com. au/search? q=Barilla+case+study&ie=utf-8&oe=utf-8&aq=t&rls=org. mozilla:en-US:official&client=firefox-a&channel=fflb http://www. slideshare. net/himadrisingha/barilla-spa-a-case-on-supply-chain-integration http://www. youtube. com/watch? v=PQgBY5wn0aE