Memorandum To: M. Manfredi, CEO Barilla SpA. From: G.

MAggiali, Director of Logistics Date: 10/23/2006 Re: JITD implementation plan - Executive Summary Currently, Barilla SpA is experiencing a growing burden of increasing production costs, inventory levels and inefficiencies in manufacturing and distribution system due to huge fluctuations on demand and lack of forecasting information. In order to combat this problem, we would like to introduce and implement a Just-in-time distribution system (JITD) to enable information sharing along supply chain, improve production and distribution forecasts and reduce costs associate with inventories and inefficiency at the company level. However, the implementation plan is engaging troubles with resistances from both internal and external sides. Internal Resistance - Sales representatives are afraid of job security under JITD system - Sales representatives are afraid of not earning enough compensation under JITD External Resistance - Distributors do not want to reveal information because of lack of trust

There are three alternative solutions that Barilla can use to deal with oppositions. After analyzing current situation and other factors, the most feasible solution for Barilla to deal with internal sales team first by enhancing their job security and explaining their important roles under JITD to seek their support to the system. Externally, we need to gain distributors' participation by showing them the benefits that they can have with JITD in place. Implementation Plan - seeking support from sales team first by providing job security commitment - negotiating with distributors with solid data on cost saving and efficiency improvement There are risks associate with the implementation of JITD. To implement JITD, we need a large initial investment on IT equipments, training programs for IT specialists and system design. If in case the JITD project failed, we have to suffer a huge loss. Also, in order to successfully implement the...

Barilla spA case analysis Barilla SpA, an Italian pasta manufacturer, is experiencing amplified levels of inefficiencies and rising costs due to variability in demand from its distributors. The main problem addressed in this case is how to effectively implement JITD system suggested by Giorgio Magialli, the Director of Logistics by resolving the issue of gaining control over the fluctuating demand. Barilla has a very complex distribution network including independent third party distributors and due to such a multi-echlon network, Barilla has been experiencing large amounts of variability in demand which are resulting in operational inefficiency and increased manufacturing, inventory and distribution costs. The proposed JITD system required the distributors to share their sales data with Barilla, who would then forecast and deliver appropriate amounts of products to the distributors at the right time in order to effectively meet demand. This was a radical change from the current and more traditional supply-chain setup where the distributors were not sharing any data and could place orders at will. Vitali's proposal came under severe criticism from not only the distributors but also Barilla's own Sales and Marketing department for an array of reasons. Main reasons for fluctuating demand: Promotions: The use of promotions in the form of price, transportation, and volume discounts was the main strategy to sell more products to the distriutors. Sales Reps: The compensation system in place at Barilla for Sales reps, made them to push more products into the pipeline during promotional periods and not able to

sell sufficient quantities during non promotional periods created wide variation in demand patterns. SKU's: The huge range of SkU's in each product line led to greater complexity Gaming bevavior and wrong forecasting practices: The distributors were having full control of their orders to Barilla and used gaming during stock outs periods. The distributors...

Barilla's supply chain What are the reasons for the increase in variability in Barilla's supply chain? The reasons for the increase in variability are as follows. Demand Forecasting: It is evident from the case study that most of the retail stores are not equipped with the necessary bar code scanners and computer linkages. The distributors have computer supported systems but few have the forecasting systems or sophisticated analytical tools for determining the order quantity. Lead Time: Average lead time for the Barilla products between Barilla CDC and distributors GDs and Dos is 10 days. This increases the variability further down the supply chain. Batch ordering: When retailer uses the batch ordering, then the distributor will observe a larger order, followed by several periods of no order and then again a larger order. This makes the distributor see the demand as distorted and highly variable. Retailers order the quantity which allows them to take the advantage of transportation discounts. Barilla offered the transportation volume discounts for the orders which consisted of full truck loads. Price Fluctuation: Barilla divide year in 10-12 canvass (promotional) periods. During which different products are offered at different discount rates. These price discounts range from 1.4% -10%. During the canvass period a distributor could buy

as many as product as desired to meet the current and future needs. Also the incentives for sales representative were based on achieving the sales target set for each canvass period. Hence the price incentives led to high demand in canvass period.

How can the firm cope with increase in variability? Reduce Uncertainty: Barilla can reduce the demand uncertainty throughout the supply chain by centralizing demand information. Each stage of the supply chain should be provided with complete information on actual customer demand.

Reduce Variability: Barilla should consider "everyday low pricing" (EDLP) strategy. Thus periodic promotions can be eliminated and product can be offered at single consistent price. This strategy will lead to stable and less variable demand from customer.

Lead Time Reduction: Lead time typically consist of two components: order lead times and information lead times. Order lead times can be reduce through the use of cross docking while information lead time can be reduced through the use of electronic data exchange (EDI).

Strategic Partnership: Barilla can consider implementing Vendor Managed Inventory (VMI). Here the manufacturer manages the inventory at retail outlet. Thus determines how much inventory to keep in hand and how much to ship. What is the impact of transferring demand information across the supply chain? Transferring the demand information from the retailer across the supply chain would result in a better estimation of the actual demand. Furthermore, each entity in the supply chain would be able to create better forecast rather than relying on orders received from the immediate customer. The following benefits can be obtained: Each stage of the supply chain obtains the actual customer data which enables improvement in forecasting and reduction in variability of demand in supply chain. The safety stock and the inventory level can be reduced due to less variability. This in turn reduces the inventory carrying cost. Information sharing mitigates the Bullwhip effect. Service level provided to the end customers can be improved by eliminating stock outs. Thus customer satisfaction can be improved significantly. Information sharing reduces the order and delivery lead times. Information sharing also enhances the shelf space and room for the new products to be displayed to the customers. Can the VMI strategy solve the operational problems faced by Barilla?

Vendor Managed Inventory at Barilla would enable the company to specify the appropriate delivery quantities to its distributors instead of distributors placing orders. VMI is a good strategy for Barilla if implemented in the right way. Barilla needs to convince its distributors and retailers in sharing sales information. In addition, Barilla needs to build strategic partnerships with its distributors. A VMI strategy would help mitigate the bullwhip effect across the supply chain and reduce demand variability.

However,

implementation

of VMI

would

not help

Barilla in improving its

manufacturing efficiencies. The organization needs a transition of its manufacturing strategy with a focus on being flexible and responsive. How can supply chain meet conflicting goals of different partners and facilities? A typical supply chain involves conflicting tradeoffs in lot size-inventory, inventorytransportation cost, lead time-transportation cost, product variety-inventory, and cost-customer service. However, with the advancement in technology and high information sharing, an efficient supply chain that can combat the aforementioned tradeoffs can be designed. This is explained in the following: Lot size - Inventory tradeoff A transition towards flexible manufacturing system, kanban systems with a focus on reducing inventories and increasing responsiveness enables manufacturers to meet the customer needs effectively. Information sharing across supply chain ensures the demand requirements from the distributors and retailers. Information sharing also

provides a better picture for the distributors and retailers of the factory status which can further result in promising a customer a reliable lead time. Inventory - Transportation cost tradeoff Cross docking system and distribution control system can be used to ship different products from warehouse to retail stores. The above strategies can be used to achieve economies of scale in transportation costs by shipping in full truck load. However, this requires information sharing in order requirements, supplier delivery schedules, and demand forecasts. Lead time - transportation cost tradeoff Total lead time which comprises of order processing time, raw materials procurement time, manufacturing time, and delivery time can be reduced by better forecasting techniques and information sharing of demands. Product variety - Inventory tradeoff An effective strategy to combat the above tradeoff is applying the concept of delayed differentiation wherein the generic items are shipped as far as possible down the supply chain and product variety added later. As the demand variability is lower down the supply chain, delayed differentiation would help in reducing the inventory levels. Cost - Customer service tradeoff Transshipping of certain shelf space directly to the customers home can help reduce inventory carrying costs as well as maintain customer satisfaction. For example, Target delivers large furniture directly from its warehouse to the end customer. This

reduces the inventory carrying cost as well as provides customer delight. Information sharing and fast transmission of customer order is imperative to achieve this. In addition, the POS system implemented by Wal-Mart enables rapid and accurate information flow and helps the company in reducing supply chain costs and increase in the service level.

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