Barilla SpA, an Italian manufacturer and world’s largest pasta producer that sells to its retailers largely through third-party distributors, experienced widely fluctuating demand patterns from its distributors during the late 1980s and Barilla suffered increasing operational inefficiencies and cost penalties. Brando Vitali, Barilla’s ex-Director of Logistics, proposed a Just-In-Time Distribution (JITD) system to counter this demand variation. This 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. This new system brought resistance within Barilla's different functional areas and within the distributors Barilla approached with the proposal.
The extreme demand variability due to Bullwhip effect in entire supply chain seriously strained Barilla’s manufacturing and logistics operations (see Exhibit 12).
- Barilla’s highly automated manufacturing system was not designed to accommodate large fluctuations in demand nor, was it designed to accommodate sudden changes in demand or product. For example the manufacturing sequences of pasta production made it very difficult to produce particular types of pasta that had been sold out due to unexpectedly high demand. The temperature and humidity in the kiln had to be precisely specified for each size and shape of pasta and had to be tightly controlled to ensure that quality was maintained. This procedure limited the ability to rapidly shift production between different pastas.
- Different sizes of pasta were also made in different plants based on the variety of equipment required for pasta production. This limited Barilla’s production flexibility to shift plant locations as needed to meet product demand.
- Distributors’ and retailers inability to carry large number of SKUs.
High Cost & Low Margin
- Variability in demand are resulting in operational inefficiencies and significantly increased manufacturing, inventory and distribution cost.
- Both manufacturers and retailers are suffering from thinning margins
ROOT CAUSE ANALYSIS – Underlying causes of the difficulties that drive for the JITD (Just in Time Distribution) program.
1. Excessive Promotional Activities
Barilla’s enjoyed a strong brand image and its marketing and sales strategy was based upon a combination of heavily advertising and promotions. Barilla’s sales strategy relied on the use of trade promotions to push product into the grocery distribution network. Typical promotional discounts ranges from 1.4% to 10 %
2. Volume Discount
Barilla 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.
3. No Limit in Order Quantities from Distributors
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.
4. Lack of Sophisticated Forecasting Techniques
Most distributors used simple periodic-review inventory systems. For example, a distributor might review inventory levels of Barilla products each Tuesday; the distributor would then place orders for those products whose...