Barilla: Just-In-Time Distribution System Paper
Executive Summary My decision for this case is to implement the Just-In-Time Distribution (JITD) system that was proposed by his predecessor Brando Vitali. This system is entirely different from the existing set up and is being opposed by both the distributors and Barilla’s Sales and Marketing Department. Barilla Spa, an Italian pasta manufacturer, is experiencing amplified levels of inefficiencies and rising costs due to variability in demand from its distributors. In order to bring things back and to improve its margins. I have studied the reasons for this opposition by several facts and have suggested recommendations.
I suggest that in order to condense the Bullwhip effect being experienced by Barilla, their supply chain would have to be centralized. I have given my rationale for the JITD system to work and have suggested recommendations to resolve all existing issues. I think that a centralized supply chain with Barilla controlling the orders will result in better margins for all the partners. I also believe that by following my recommendations, Barilla will succeed in influencing its distributors and Sales personnel to work together and implement the JITD program.
This will not only result in better performance in terms of time and money but also promote trust and good relations among all the partners in the supply chain. 2. Identification of the problem •Transportation Costs: As a result of uneven demand, Barilla had to transport more products to its distributors in periods of high demand in lesser time than when compared to periods of low demand. The greater number of trucks, etc. that it required in periods of high demand increased its Transportation costs. 3. Environmental and Root Cause Analysis Quantitative Trade Promotions
Barilla’s sales strategy relied on the use of trade promotions to push product into the grocery distribution network. Barilla divided each year into 10 or 12 “canvass” periods, typically four to five weeks in length, each corresponding to a promotional program. During any canvass period, a Barilla distributor could buy as much product as desired to meet current and future needs. Incentives for Barilla sales representatives were based on achieving sales targets set for each canvass period. Different product categories were offered during different canvass periods, with the discount depending on the margin structure of the category.
Barilla also offered volume discounts. For example, Barilla paid for transportation to distributors, and offered incentives of 2% to 3% for orders in full truck-load quantities. In addition, a sales representative might offer a buyer a 1,000 lire/carton discount (representing a 4% discount) if the buyer purchased a minimum of three truck-loads of Barilla egg pasta. Sales Representatives and Customer Service Barilla sales representatives serving DOs spent an estimated 90% of their time working at the store level.
In the store, sales reps helped merchandise Barilla product and set up in-store promotions; took note of competitive information including competitors’ prices, stock outs, and new product introductions; and discussed Barilla products and ordering strategies with store management. In addition, each sales rep spent half a day in a regularly scheduled weekly meeting with the distributor’s buyer, helping the distributor place its weekly order, explaining promotions and discounts, and settling problems such as returns and deletions associated with the last delivery. Each rep carried a portable computer for inputting distributor orders.
The rep would also spend a few hours a week at the CDC, discussing new products and prices, discussing problems associated with the previous week’s deliveries, and settling disputes about different discounts and deal structures. In contrast, a very small sales force served the CDs. The CID sales force rarely visited the GD’s warehouses; CDs usually sent their orders to Barilla via fax. As a result some customers are served better than others, creating imbalance. Distribution Distributors Ordering Procedures: Most distributors of CDs and DOs alikechecked their inventory levels and placed orders with Barilla once per week.
Barilla product would then be shipped 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 the average lead time is ten calendar days. Distributors’ sales volumes varied; small distributors might order only one truckload per week whereas the largest warranted deliveries of as many as five truckloads per week. Channels of Distribution Barilla’s distribution channel handle about 800 different packaged SKUs of its product line divided into “dry” and “fresh” product categories, representing 75% and 25% of Barilla’s sales, respectively.
Dry products had either “long” shelf lives of 18 to 24 months or “medium” shelf lives of 10 to 12 weeks . Fresh products had 21-day shelf lives, and fresh bread, which had a one-day shelf life. Most Barilla products were shipped from the plants in which they were made to one of two Barilla central distribution centers (CDCs). Fresh products were moved quickly through the distribution system only three day worth of fresh product inventory was typically held in each of the CDCs; in contrast, each CDC held about a month’s worth of dry product inventory. Certain fresh products, such as fresh bread, did not flow through the CDCs.
Barilla maintained different distribution systems for its dry and fresh products due to their differences in perishability and retail service requirements. Fresh products were purchased from the two CDCs by independent agents (concessionary) who then channelled the product through 70 regional warehouses located throughout Italy. Each of these warehouses held about three days of fresh product in inventory. Nearly two-thirds of Barilla’s dry products were destined for supermarkets; these products were first shipped to one of Barilla’s CDCs, from which they were purchased by distributors.
The distributors in turn shipped the product to supermarkets. The remainder of the dry products was distributed through 18 Barilla-owned “depots” (small warehouses), mostly to small shops. Barilla products were distributed through three types of retail outlets: small independent grocers, supermarket chains, and independent supermarkets. In sum, Barilla estimated that its products were offered in 100,000 retail outlets in Italy alone. Qualitative Barilla is experiencing bullwhip effect and fails to establish JITD. Example Cortese Northeas to Pedrignano CDC Week 12| 850|
Week 13| 175| Week 14| 90| Week 15| 30| Week 16| 180| Week 17| 770| Week 18| 100| Mean 300 –Std Dev + 227 4. Alternatives and Options Tactical Short Term Alternatives Alternative 1 (ST1) Barilla could reduce order variability by reducing and changing eventually trade promotion. It should also redefine the discounts based on annual sales, rather than order to order. Both of these will force DC to order based on actual natural demand and not based on cost of acquisition. Alternative 2 (ST2) Barilla could carry high Inventory or ask DC to increase their stock.
Obviously this reduce the number of stock out, but it tie up lot of finance in inventory, plus this alternative may not be suited for all the SKU’s as many of them have short shelf like. This may lead to more obsolesce Strategic Long Term Alternative Alternative1 (LT1) Barilla can maintain current situation. Under this scenario, we have both DC purchasing people & Barilla sales force happy, but it will continue to add strain to operation, more & more stockout. Ultimately if end customer at retail end does not see products on the shelf for few times he will move to competitor’s brand.
Alternative 2 (LT2) Implement Just in Time Distribution Program, by sharing information, both upstream & downstream. This would lead to decrease in the variability, leading to stabilized schedules at the plant, improved visibility of inventory across the chain, improved fill rate. Success of this program depends on the amount of cooperation Barilla can get from its customers. Its own sales force will be unhappy at first. The implementation will require funding for computers and related hardware.
Distributors may not be happy, as they feel they are passive player and may have to incur addition costs due to more frequent delivery. 5. Recommendation The decision to implement JITD program is very strategic for Barilla if it has to remain ahead of its competitors. Daily stock outs will drive away the customers and high inventory will drain its resources. I recommend immediate implementation of, alternative ST1 followed by alternative LT2 JITD will reduce inventory at distributors levels, as inventory will be built at their warehouses and will be delivered in quantities required based on distributors inventory & forecast.
This approach will eventually reduce inventory across the chain, improve profitability both for Barilla and Distributors. Improve fill rates. The essential feature of JITD Program should be elimination of promotion, reducing the demand variability. Barilla should offer everyday low prices, rather than order volume based discounts. Instead of weekly of once in two week delivery, more frequent LTL delivery should be offered.
Sharing of sales data and forecast between Barilla and Distributors should be done on regular basis Reduced inventory, better fill rate and decrease in inventory will lead to higher customer satisfaction. Reduced inventory will free up space at distributors, which can be used by sales person to sell other products of Barilla to distributors Sales person will be champion of change, besides selling the products, they will be bridging the gap between distributors and Barilla after implementing the JITD system Barilla can look forward to a much more efficient and profitable future.
As a result of implementing these recommendations concerning the JITD system: their demand would become more steady, easier to produce, and transport, as well as their operating costs will be reduce and these savings would result in better margins and the cycle times would decrease allowing the cash flow to become even throughout the supply chain. .6. Implementation Plan I would like to start focusing the JITD program on small retail shops.
They represent 35 % of market for Barilla. Typically they have less shelf space to start with. Their cooperation would be easy to obtain for small, but frequent deliveries. Also since they are served by Barilla’s own DC’s, the control and sharing of information will be much easier as compared to large chain DC’s . Once this is successfully implemented, cost saving would be for all to see, and then resistance of other segments will be easily wean away.
Based on the forecast, desired service levels, a details analysis will have to be done to decide on the optimum quantity to be ordered Sales person should be providing with portable device by which information at distributors warehouse can be collected by them. 7. Monitor and Control The key points shat should be measured for a particular includes number of stock outs at DC, inventory levels at DC, How often plant schedule has to be adjusted due orders, client satisfaction. This data has to be collected for Barilla every day, process and keep as historical data to show improvements.