operations management & production efficiency analysis

04/27/2014

UNIVERSITY OF FLORIDA

MAN5501 – Operations Management

Barilla SpA Case Assignment – Executive Summary

I2MBAF14 – Summer 2014

Team 11 Myuran Kanga and Chrystal Cain Shiarla

MAN5501 – Operations Management – Barilla SpA Executive Summary

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COMPANY BACKGROUND

Barilla SpA was found in 1875 as a small pasta and bread shop in Parma, Italy. Over time Barilla evolved into

a largely successful, vertically integrated corporation. The company supported flourmills, pasta plants, and

bakery-product fac tories located throughout the country. Barilla grew to be the world’s largest pasta

producer, distributing 75% dry pasta and 25% fresh goods. Barilla’s products were sold to consumers

through small independent shops and supermarket retail outl ets. Barilla’s distributors and retailers retained

long-life dry product inventory for 18-24 months and medium shelf life product for 10-12 weeks.

UNDERLYING DIFFICULTIES SOLVED BY JUST-IN-TIME DISTRIBUTION

Just-in-Time Distribution Solution: Mr. Giorgio Maggiali, the recently appointed Director of Logistics for

Barilla, recognized the need to address the demand fluctuations that were impacting Barilla’s manufacturing

and distribution system. The previous Director of Logistics, Mr. Brando Vitali, had proposed a Just-in-Time

Distribution (JITD) solution modeled after “Just-in-Time” manufacturing concepts. He proposed that instead

of allowing customers to place traditional orders to be fulfilled by Barilla, the company should analyze

product quanti ty data from each distributor to make educated estimations of optimal delivery quanti ties,

both meeting end-user demand and more evenly distributing the load across Barilla’s manufacturing and

distribution systems. Although Barilla has two sizeable product categories, the aim was to apply this concept

to the dry products category as it was the channel in which Barilla was experiencing uncontrolled

fluctuations. Further, the dry products were distributed through multiple distribution channels. Vitali’s

proposal was to focus on the two-thirds of dry products that distributors touched before reaching retailers.

Upon entering his role in 1988, Maggiali began attempting to implement the JITD concept at Barilla

with no success. Instead, Maggiali was met with strong opposition from both internal and external forces.

Maggiali is now reconsidering whether JITD is an appropriate concept to apply at Barilla.

Demand Fluctuation and th e Bullwhip Effect: Barilla’s supply chain struggled to quickly match supply with

demand or to compensate for low demand periods. The result caused stock out scenarios or excess safety

stock inventory at Large Distributors (GDs) and Organized Distributors (DOs) that purchased product from

Barilla’s central distribution centers (CDCs). GDs sourced Italy’s small independent shops and DOs sold

Barilla’s products to supermarkets. Though pasta consumption was said to be relatively consistent


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throughout the year when analyzing inventories at retailers, there was extreme variability in demand

experienced by Barilla. The variability can be explained by amplified variability that is compounded

upstream in the supply chain. Making matters worse, Barilla’s distribution centers and distributors could not

accurately predict demand at the retail level and resorted to inappropriate order forecasting processes or

fixed periodic order placements (batches). These problems created a Bullwhip Effect. This phenomenon

occurs when variability in supply chain orders exceeds the variability of actual retail demand. The negative

impact on Barilla caused higher labor costs, stagnant cash flows, storage/carry costs, reduced customer

satisfaction/service, and increased transportation costs to meet demand.

How JITD Addresses the Issues: JITD is a form of Vendor Managed Inventory (VMI) that allows suppliers to

monitor distributors’ and buyers’ inventory level to make logical repl enishment decisions in advance. The

information sourced by the supply chain would allow Barilla to establish a prediction system with decision

rules based on real-time demand lower in the supply chain. The shared demand and inventory information

alleviates many negative effects caused by the Bullwhip Effect.

BENEFITS AND DISADVANTAGES OF JITD

Benefits Gained by Moving to a JITD System: Vitali’s approach aimed to address the decreasing margins of

both Barilla and their distributors. The concept was to produce a mutually beneficial rel ationship throughout

the supply chain. The system would reduce supply/demand uncertainty, variability, and l ead time

discrepancies by allowing Barilla to examine real-time distributor shipment data to identify exact product

quantities required. As the manufacturer, Barilla would gain the capability to execute advanced

manufacturing planning - resulting in lower costs, alleviating the need to overproduce or store excessive

product to combat the supply and demand fluctuations, and establish a more prominent role in the supply

chain as coordination and visibility grows. Distributors would be able to receive needed product, minimize

storage and spoilage losses, and provide better service to retailers. End-consumers would also enjoy accurate

product delivery estimates, inventory availability, and greater service without added product costs.

Disadvantages to Implementing a JITD System: Barilla would be faced with managing supply chain power

dominance perceptions. Distributors and retailers may perceive Barilla’s JITD solution as a hostile take-over

attempt to gain control of their own value-added activities. These parties would fear job loss scenarios.


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Barilla’s strategic move could become toxic to the supply chain as it can easily introduce distrust between

partners. In addition, acquiring data from retailers and/or distributors may not be the most efficient

approach, as many parties would require fees for the proprietary data. Finally, arranging a seamless data-

sharing infrastructure could be complex and costly if partners within the supply chain do not already

implement formal supply/demand metric measurement practices, especially if these measurements are not

collected through electronic means. Ultimately, information cannot replace inventory or production.

Furthermore, acquiring the required information can be difficult. From the customer perspective, a JITD

system does impose greater expectations on the supply chain. Informed consumers will hold the supply

chain to higher standards, as they will expect their products to arrive within newly quoted deliver windows.

INTERNAL CONFLICTS CAUSED BY JITD

Upon the initial introduction of the JITD System, Barilla’s Sal es and Marketing organizations were particularly

vocal in their opposition to the plan. The activities conducted by these groups involved a combination of

advertising and promotions. Consequently, these individuals fel t that their responsibilities would be

diminished by such a system. Many legi timate fears were expressed to the effect that sales levels would

flatten, response agility and adaptability to changing demand or increased promotions would be limited,

competitors would gain retail shelf space (previously occupied by inventory) for promotional/advertising

advantages, the company would expose itself to stock out risks should unpredicted disturbances such as

strikes occur within the supply chain, and Barilla would lose the ability to run trade promotion incentives

when leveling prices. Furthermore, the sales and marketing organizations doubted the potential for cost

benefits. They feared that the DOs and GDs could lower their inventory levels so much that Barilla would be

forced to increase their own inventory. This in itself would be costly due to manufacturing process

inflexibility. The marketing department was particularly concerned that distributors and retailers may not be

sophisticated enough to handl e data sharing relationships. Overall, the human factors rel ated to a changing

infrastructure troubled internal company representatives.

CUSTOMER RESPONSE TO JITD

Retailer and Distributor Perspectiv e: Distributors felt threaten by the proposition to share proprietary

warehouse information or sale figures. They fel t that managing stock was their job and Barilla was


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overstepping their rol e by requesting such data. The potential for allowing Barilla to snatch power within the

supply chain caused some distrust and defensive reactions. Retailers and distributors were highly skeptical

of Barilla’s ability to manage supply/demand better than they could. Human factor attributes played a role in

the reaction by retailers and distributors. Fears related to the idea that Barilla was imposing JITD to reduce

their own costs without considering the effect on other supply chain partners grew. Some distributors even

expressed that the system would give Barilla the power to push product into their warehouses just to reduce

manufacturing inventory. In addition, retailers and distributors blamed Barilla for the Bullwhip Effect by

pointing out their inability to deliver product orders within short periods. Some distributors were so

concerned about the variability and uncertainty that they preferred to avoid becoming too closely linked to

Barilla should operations catastrophically fail. After reviewing the entire proposal, a small number of

distributors hesitantly agreed to offer sal es and distribution data for a fee. These additional costs defeated

the purpose of creating an efficient supply chain flow.

Consumer Perspectiv e: Though the case does not specifically describe the consumer perspective to the JITD

proposal, our team has identified some expected reactions that could occur. Initially consumers would

appreciate in-stock inventories at no additional cost and the added information that provides expected

product deliveries. However, many consumers enjoy and even seek promotions when making purchasing

decisions. Flattening prices to a consistent level could urge some consumers to switch to other brands . The

change would prevent entire ‘deal seeking’ market segments from purchasing Barilla products.

FINAL RECOMMENDATIONS AND SUMMARY

Based on the analysis of the case facts, our team recommends pursing a JITD system. The benefi ts involved

with impl ementing a JITD system outweigh the potential disadvantages for both Barilla and the supply chain.

Many of the disadvantages that have been identified can be mitigated or reduced by properly executing a plan

to establish the system. A plan for successful deployment would involve several key steps.

Distributor/Retailer Support: Trial runs of the JITD system must be conducted to prove that the system can

be successful and profitable for all parties. We suggest the purchase of Marconi’s sales and transportation

data to establish a baseline for decisions and to conduct the trial run. Positive results will allow Barilla to gain

distributor/retailer confidence. In addition, clearly explaining the cost benefits of reduced inventory and


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improved fill rates will provide a greater impact after a successful trial. It would even be beneficial to conduct

multiple trial runs by offering initial incentives to those who participate. Incentives could involve free

Electronic Data Interchange (EDI) equipment to jumpstart the system and overcome technology barriers.

Process Improvements: Barilla must emphasize the need to eliminate promotions to l evel pricing. A

uniform pricing model will lead to predictable economic fluctuations to minimize the uncertainty and

variability caused by the Bullwhip Effect. Another important step to creating a JITD system would be to

reduce Barilla’s large product variation quanti ties. If the company determines that custom offerings

distinguish themselves from competitors, the firm could move product differentiation activities to the end of

the process flow where del ays and uncertainty woul d only affect the supply chain minimally. To implement

EDI, Barilla should encourage Point of Sal es (POS) and transportation SKU (Stock Keeping Unit) code or UPC

(Universal Product Code) scanning to manage accurate product flow monitoring at each supply chain step.

Internal Sales, Marketing, and Supply Chain Relationship Changes: Barilla must change the mindset

within the supply chain to a cooperative interaction between partners. Focus must be placed on the interest

in the entire process flow rather than individual partners to build trust. Maggiali must involve more than just

Barilla’s logistics department. He should acquire management support to promote a company-wide cultural

change. When management believes in the system, it will be much easier to gain the support and trust of the

sales and marketing departments. O nce Maggiali is able to attain management support, he should encourage

collaborative management communication and decision-making throughout the supply chain to improve

business relationships.

Summary: Information sharing through a JITD system is the best solution to reduce the costs and frustrations

experienced by the Bullwhip Effect within Barilla’s supply chain. Making decisions based on sales and

transportation data will allow the supply chain to optimize a hybrid push/pull inventory management

process. By initiating a trial run of the system, successful cost reduction and avoidance will allow Barilla to

gain internal and external constituent support. To ensure successful deployment, it is essential to acquire

management support to drive and promote JITD implementation. Finally, greater cross-partner management

communication and decision-making coordination is necessary to build supply chain relationships and trust.

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