Barilla Case: Causes of Fluctuation

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1.What are the causes of fluctuation? (20 points)
Fluctuation of Raw Materials
Pasta is produced with various types of raw material, including wheat and egg. If the supply of raw materials has high level of fluctuation, (which may be caused by weather condition or cost of raising chicken) then the production and supply of pasta will be influenced.

Diverse Product Category
Barilla’s products are divided into Fresh products and Dry products. The demand for these two distinct kinds of products is quite different, and the order, shipment and delivery methods for them are also various.

Diverse Distribution Methods
Three different types of retail outlets – small independent grocers, supermarket chains, and independent supermarkets, make the demand pattern more complex and delivery method have higher level of variety, which bring more fluctuation.

Marketing Strategy
Advertising, promotions and sales representatives will all influence the demand for pasta. They may cause great increase in demand within very short time, which result in fluctuation in demand. Moreover, different products are offered with the discount in different period, which make the demand unstable and more difficult to forecast.

Distribution Process
First of all, there is no limitation for order quantities size of the distributor, which results in various demand quantities and high level of fluctuation. Second, distributor’s ordering pattern and volumes is varied from each other, which makes demand various from time to time. In addition, most distributors’ inventory systems are simple, and few had forecasting systems or sophisticated analytical tools for determining order quantities. As a result, it is difficult to forecast the accurate demand.

2. What are the costs of fluctuation? (10 points)
When there is fluctuation on the demand, it is very difficult to Barilla, as the manufacturer of many different products with different categories, to produce efficiently. For instances, there are products more difficult to produce, and thus it will require more time and effort on the production, with a high fluctuation on the demand, Barilla is very difficult to plan for the inventory level, and thus make the production. As producing too less, it will cost them their reputation and loss of customer, producing too much, it will increase their cost and also the opportunity cost to produce other items. Not only on manufacturing, but fluctuation also creates challenges to the distribution channel. With the changing demand, Barilla can’t prepare the delivery schedule/plan (like truck load, warehouse) in time. For instances, if there is no regular pattern for a delivery truck, they have to do lot of extra works on the delivery schedule, from planning the delivery route, deciding what products to carry. And even more challenging issue will be, one week there is over demand, and the other week with very low demand, there are no ways for Barilla to get enough trucks to handle the peak, and also too costly when there is low demand.

3. What are the benefits of the JITD proposal? (10 points)
More accurate forecasting
The original approach is the individual distributor does the forecast and place order to Barilla. It has two problems, one is the bullwhip effect causing the inaccurate forecasting. The distributor will always add some buffer on the actual demand, it cause Barilla to add even more to meet the service level of the distributors. Another is when stockout happen, the distributor will place urgent order to Barilla and request a quick delivery of the products.

With JITD, Barilla will ship the product to distributor according to their shipment data, which is the demand from the retailer and the stock level. Since it is just one step behind the end customers, the forecast must be more accurate. The distributors can even skip the forecasting and order placing process...
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