Barilla SpA, an Italian pasta manufacturer, is experiencing greater levels of inefficiencies and rising costs due to variability in demand from its distributors. In order to restore things to order and to improve margins, Giorgio Magialli, the Director of Logistics at Barilla wants to implement a Just-In-Time Distribution (JITD) system that was proposed by his predecessor Brando Vitali. This system is completely different from the existing setup and is being opposed by both the distributors and Barilla’s Sales and Marketing Department.
Barilla SpA, an Italy based company, is the world’s largest Pasta manufacturer. It has a 35% market share in Italy and a 22% market share in Europe. In addition to the family of pastas (macaroni, spaghetti, fusilli, etc.) it also manufactures bread, cookies, biscuits, rusks, sauces, breadsticks, etc. Barilla has a very complex distribution network consisting of Grand Distributors (owned by large Supermarket chains), Organized Distributors (independent third party distributors) in addition to its own depots. Due to such a complex and multi-echelon network, Barilla has been experiencing large amounts of variability in demand which are resulting in operational inefficiency and increased manufacturing, inventory and distribution costs.
Brando Vitali, Barilla’s ex-Director of Logistics, had 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. 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.
Giorgio Magialli, Barilla’s current Director of Logistics, is trying to implement this idea since two years but has not made much progress. Our objective in this report is to study the problems and come up with recommendations to resolve them.
a. While variability in end-customer demand is quite small, Barilla experiences wild fluctuations in pasta demand. Once the main problem of fluctuating demand is brought under control, many other problems will be solved.
Some of the causes of this fluctuating demand are:
← Promotions: Barilla’s sales strategy relied heavily on the use of promotions, in the form of price, transportation and volume discounts. They divided the year into 10 to 12 canvass or promotional periods, during which different products were offered at discounts. These price discounts ranged from 1.4% to 10%. Barilla’s volume discounts consisted of carton discounts offered by sales representatives and the transportation discounts consisted of free shipping to the distributors. ← Transportation discounts: This induces distributors to order larger quantities less frequently. ← Sales Representatives: The compensation system for the sales reps was flawed in that they were rewarded based on the amount of the products that they sold to the distributors. This was causing problems as the sales reps would try and push more products during the promotional period to get a bonus and were not able to sell as much during non-promotional periods. This led to wide variation in demand and made forecasting very difficult. ← Large number of SKU’s: Barilla’s dry products (the focus of the JITD proposal) were offered in 800 different packaged stock keeping units (SKUs). Most of the popular products were offered in as many as 8 different packaging options. These large numbers led to greater complexity. ← Gaming Behaviour: The distributors were used to having full control of their orders to Barilla and indulged in gaming by...