Barilla Case Study: The Underlying Factors In Operation Management

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case analysis|
MGSM890 Operations Management|
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Thursday 9 AM class | Term 3, 2012 Deepika Choudhary | 42621186 | |
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Question 1. What underlying factors are driving the distributors order patterns to look the way they do in Exhibit 12, and the DC sales, inventory and stock-out levels in Exhibit 13? The underlying factors that are driving the distributors order patterns to look the way they do are primarily due to extreme demand fluctuations where it was week to week variation in distributors order patterns due to which Barilla suffered increasing operational inefficiencies and cost penalties. The major reasons that speak for demand fluctuation are –excessive promotional activities, volume discount, transportation discounts, no limit in order quantities from distributors or worked out ordering strategies for retailers, product proliferations, poor customer service rates, poor communication and lack of sophisticated forecasting techniques or analytical tools at distributors end. The method adopted to curb this demand fluctuation was in two ways; one with excess FG inventory to meet distributors demand and second additional inventory at distributors warehouses. However this method adoption led to impact in - overburdened manufacturing and logistic operation, poor product delivery, thinning of retailers/distributors margin, increased inventory carrying cost, unanticipated demand, and bull whip effect in the entire supply chain. Whereas the causes for bullwhip effect was due to inaccuracies in demand forecasting, long lead times, inflated orders in high estimated demand scenarios, and, price fluctuation due to promotional activities and order batching (to reduce ordering costs, to take advantage of transportation economies such as full truck load, sales incentives and forward buying due to promotional activities to get benefit from lower price). Thus to counteract the bull-whip effect four strategic options became crucial, which are, to: reduce variability (every day or year around low pricing), reduce lead times (information lead times: EDI and order lead times: Cross Docking), reduce uncertainty (POS, sharing and centralizing demand information) and strategic partnerships (quick response, continuous replenishments and vendor managed inventory (VMI)) The other factors are as follows:

* Orders placed once a week – most distributors (GDs and Dos) checked the inventory levels and placed orders with Barilla once per week which was not inlined with the pace of demand variation * Average lead time ten calendar days – order once placed would be shipped by Barilla to the distributor over the course of the week that started eight days after the order was placed and ended fourteen days after the order was placed; which was recognized as a bottleneck for distributors * Usage of simple periodic-review inventory systems – distributors placing orders on a weekly basis for those products whose levels fell below a specified reorder level, which made their ordering system obsolete * Computer-supported ordering systems – which all of the distributors possessed but lack of sophisticated forecasting systems or analytical tools for determining order quantities for future demand * Holding huge current inventory levels – distributors and retailers carrying huge current inventories followed by requests from Barilla (manufacturing and logistics personal) to carry additional inventory (to hold goods bought on any type of promotion, including quantity discounts, truckload discounts and canvas period discounts) to dampen the fluctuation in distribution orders; this incurred additional costs to their operating systems * Retail inventory pressure – retailers realizing space crunch in their stores and warehouses to carry very large inventories; limited shelf space in retail outlets; continuous launch of new products and attain...
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