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Barilla SpA Part A

Barilla Case Study

Barilla SpA is the world's largest pasta manufacturer The company sells to a wide range of Italian retailers, primarily through third party distributors 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

Exhibit 12 Weekly Demand for Barilla Dry Products from Cortese's Northeast Distribution Center to the Pedrignano CDC, 1989.

Questions:

What exactly is causing the distributor's order pattern to look this way? What are the underlying drivers of the fluctuations?

Causes of Demand Fluctuations

Transportation discounts Volume discount Promotional activity No minimum or maximum order quantities Product proliferation Long order lead times Poor customer service rates Poor communication

Demand Fluctuations

The extreme fluctuation is truly remarkable when one considers the underlying aggregate demand for pasta in Italy. What does the underlying consumer demand pattern for pasta look like in Italy?

Pasta Demand Pattern in Italy The underlying pasta demand pattern in Italy is relatively flat. The pasta demand pattern at the distribution centers (DCs) shows a rather large fluctuation. This appears to be because of the channel policies and dynamics.

Impact of the Order Pattern

Q: What is the impact of the fluctuation? Q: How much does it cost to have order pattern like this? (What line items would be affected?

Implications of the Order Pattern

Inefficient production Excess finished good inventory Low utilization of central distribution Higher transportation costs Excess storage stage at the distributors

Demand Fluctuations

What are the differences and similarities between the Barilla channel and the beer distribution channel?

What is the impact of demand fluctuation? Because the plant has high product change over costs, Barilla has either inefficient production or excess finished goods inventory Utilization of central distribution is low

­ Workers ­ Equipment

Transportation costs are higher than necessary

What is the impact of demand fluctuation? The distributor must build excess capacity to hold goods bought on any type of promotion, including quantity discounts, truckload discounts and canvass period discounts

­ What if the distributor passes the discount along to the retailers? ­ What is the value of the promotion game?

Barilla SpA Part A (continued)

To address this problem, the director of logistics suggests:

­ Implementation of Just-in-Time Distribution (JITD) with Barilla's distributors.

What is the JITD System?

­ Decision-making authority for determining shipments from Barilla to a distributor would transfer from the distributor to Barilla ­ Rather than simply filling orders specified by the distributor, Barilla would monitor the flow of its product through the distributor's warehouse, and then decide what to ship to the distributor and when to ship it.

Evaluating the JITD Proposal

Q: What do you think of Brando Vitale's JITD proposal as a mechanism to reducing these costs? Q: Why should the JITD program work? How does it work? Q: What makes Barilla think it can do a better job of determining a good product delivery sequence than its distributors?

Key Elements of JITD

Replace the current delivery pattern with one that it better suits the entire channel (I. e., sequential myopic optimization vs joint optimization). JITD program eliminates a "false" economics that drive traditional ordering processes.

Two Key Concepts Behind JITD

Replace sequential optimization with global optimization

­ Who will optimize?

Evaluating the JITD Proposal

Q: Can Barilla act in an unbiased manner? Does Barilla have the right incentives to do so? Q: Does the JITD program eliminate the forces that drive the worst of the fluctuations? Q: What is the impact of retailers being so small?

Eliminate some of the `false' economics that drive traditional ordering processes

­ What does this mean?

Implementation Issues

External conflicts (the Distributor's Perspective) Q: Why are Barilla's customers so resistant to the JITD? Q: Why should the customers accept JITD? Q: How might Maggiali be more successful in persuading customers to at least try the JITD program?

Implementation Issues Resistance from the Distributors

"Managing stock is my job; I don't need you to see my warehouse or my figures." "I could improve my inventory and service level myself if you would deliver my orders more quickly; I would place my order and you would deliver within 36 hours." "We would be giving Barilla the power to push products into our warehouse just so that Barilla can reduce its costs." ?

Implementation Issues

Internal Conflicts (the Sales Perspective) Q: Why is there so much internal resistance to what seems, in concept, to be an effective idea for Barilla? Q: What are these salespeople REALLY saying?

Implementation Issues Resistance from Sales and Marketing

"Our sales levels would flatten if we put this program in place." "How can we get the trade to push Barilla product to retailers if we don't offer some sort of incentive?" "If space is freed up in our distributors' warehouses...the distributors would then push our competitors' product more than ours." "...the distribution organization is not yet ready to handle such a sophisticated relationship." ?

How Can Maggiali Solve the Implementation Problems?

Demonstrate that JITD benefits the distributors (lowering inventory, improving their service levels and increasing their returns on assets); Run experiment at one or more of Barilla's 18 depots Clearly, the implementation issues are much broader than just a logistics program. Maggiali needs to view it as a company-wide effort and get top management closely involved in this. Trust needs to be developed and conditions created for people to change

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