Per exhibit 12 the impact of order fluctuations are as follows:
- Creates a bullwhip effect at Barilla.
- Resource and material planning becomes cumbersome and inefficient.
- Might increase the lead time because of the bullwhip effect.
- Reduces overall operational efficiency.
- Reduces the overall profitability due to reduction in efficiency.
- Reduces the utilization of central distribution center.
- The distributor must build excess capacity to hold goods bought on any type of promotion, including quantity discounts, truckload discounts and canvass period discounts.
Causes of Demand fluctuation are:
- Transportation discounts
- Volume discount
- Promotional activity
- No minimum or maximum order quantities
- Product proliferation
- Long order lead times
- Poor customer service rates
- Poor communication
2. Diagnose the underlying causes of the difficulties that the JITD program was created to solve. What are the benefits and drawbacks of this program?
The main incentive behind the proposal of Just-in-Time Distribution (JITD) program is to correct the fluctuation in demand from Barilla’s immediate distributors. The variation in demand, known as the Bullwhip Effect, makes it hard for Barilla to meet the actual demand of the end consumers. The JITD program would be introduced to predict actual demand so that Barilla could attempt to produce the exact amount of products to meet customer’s demands.
The large fluctuations in demand are due to a number of factors. First, let’s look at the distributor’s role. Distributors place orders to Barilla based on retailers orders and the space available to stock inventory. As a result, distributors might sometimes run out of products or might overstock their inventory due to the lack of anticipation or real demand. Also, Barilla and its distributors suffer a high cost in distribution channels caused also by the lack of forecasting and poor inventory management. The unawareness of the real demand causes distributors to overstock their inventory and that raises the cost of distribution. The distributors, nor the retailers, have any forecasting system in place to give them a glimpse at demand. While forecasting is not 100%, it would, at least, show when certain pasta is extremely popular due to a holiday or highlight if demand varies or generally remains steady.
The fluctuations in demand are also caused by Barilla’s own internal functions. First of all, the sheer amount of SKU’s lead to a much more complex system than just trying to gauge how much one type of pasta is sold. Being able to anticipate the demand for all of Barilla’s 800 different dry good SKU’s is absolutely impossible without a robust forecasting system. The matter is further complicated by the long lead times that it takes for Barilla to fulfill an order from the distributor, which was usually between 8 and 14 days from when the order is received. Due to the nature of the tunnel kiln in the pasta-making process, it is impossible for Barilla to change the order of the pasta production to quickly fill an order of sold out pasta. Last but not least, Barilla’s own sales structure is also to blame for the large fluctuations in demand, due to their heavy use of promotions and discounts which warps the demand curve.
The JITD program is designed to help Barilla be more efficient in executing its operations and better serve its customers. JITD would be an efficient forecasting tool to predict the real demand of the end-consumer. Barilla will require its distributers to provide daily sales data so Barilla could utilize the data...