Barilla SpA (Barilla), is an Italian manufacturer that sells pasta to retailers largely through third-party distributors. Barilla has been experiencing widely fluctuating demand patterns from these distributors. Such unpredictable patterns are problematic because a specific sequence of pasta production is used that minimizes the incremental changes in kiln temperature in order to keep the changeover costs low and the product quality high. This process makes manufacturing unfortunately unresponsive to changes in anticipated demand. In order to address this issue, Brando Vitali’s has proposed a Just-in-Time Distribution (JITD) model, which is a continuous replenishment strategy under which the responsibility for determining shipment quantities to the distributors would shift from the distributors to Barilla. Such a system would result in Barilla pushing its pasta to suppliers based upon its demand forecasts. Implementing a JITD system should have the effect of reducing channel costs improving service levels to distributors for Barilla, and improving service and reducing Distributor inventory.
Barilla has been experiencing significant problems in its implementation of the JITD model. Preventing Barilla from effectively implementing a JITD system are: 1) internal opposition from its sales staff; 2) lack distributor buy-in stemming from a fear of loss of power; 3) an inability to collected needed information; and 4) the traditional Italian trade promotions system.
The main decision to be made by Barilla is not whether Barilla should apply the JITD model, but whether it can be applied. The benefits of introducing a successful system are numerous to an industry where both manufacturers are suffering from thinning margins. To Barilla a successful JITD would result in a decrease in distribution, inventory and manufacturing costs. To the distributors it would result in decreased inventory costs and a reduction in stockouts. This decision that Barilla faces is how such JITD would be implemented. In evaluating the solutions to the JITD’s major problems we will use four main evaluation criteria: 1.) Cost Savings to Barilla – The reduction inventory and transportation costs incurred by Barilla. 2.) Cost Savings to Distributors - The reduction in inventory incurred by the distributors.
3.) Service Level – As defined as the percent of retailer orders filled from distributors’ inventory.
4.) Internal resistance – Making adjustments to insure that internal “buy-in” for the JITD is high.
SOLUTIONS TO JITD IMPLEMENTATION PROBLEMS
LOSS OF POWER
An obvious concern of Distributors in allowing Barilla to implement a JITD system is that it gives Barilla the power to push product into distributor warehouses as it wishes. Such a system in the eyes of the distributor can result in obvious abuses as it could be used by Barilla to move inventory from the CDC to the Distributors inorder to decrease costs to Barilla at the expense of the Distributor. This concern can easily be mitigated by structuring the contractual supplier-distributor relationship in way that gives the Distributor the power to deny any shipment. In this way the Distributor still has the power to say no if it feels that the order is excessive. As most Distributors currently keep a 2 week supply of product on hand, and the JITD proposes to significantly cut inventories, theoretically there should not be many situations where the Distributor will be forced to ‘veto’ shipments as they should not be many situations where inventory will build up to the point where the distributor is not comfortable with the level.
In order for Barilla to use a JITD it requires that each distributor provide data on what Barilla products it has shipped out of its warehouse to retailers during the previous day, as well as the current stock level for each Barilla SKU. This information can then be used...