Barilla S.p.AGROUP 3

Case Facts

Started in 1875 as a small shop in Parma, Italy

By 1990, Barilla SPA became the World’s largest pasta producer

Pasta Share - 35% in Italy and 22% in Europe Fresh Products had 21 day Shelf Lives Dry Products had Long ( 18 to 24 Months) or

Medium(10 to 12 weeks) Shelf Lives

800 SKUs of Dry Products

Product Categories

Dry (75%)

Fresh (25%)

Retail Outlets

Small Independent Shops Supermarkets

Chain Independent

Distribution System

PLANT

CDC’s

GD’s DO’s

“Signora Maria” ShopsIndependent supermarkets

Chain supermarkets

Customers Customers Customers

Barilla run depots

Flow

of I

nfor

mati

on

CDC = Central Distribution CentreGD = Grand DistributorsDO = Organized Distributors

65%35%

Issues Faced

Extreme demand fluctuations - Week to Week variation in distributors’ order patterns

Pressures on PPC - Production lead time and perishability of product

High Inventory Carrying Cost

High manufacturing cost due to operational inefficiencies

Inadequate Product Availability ( Low CSL)

Inability of Distributors to carry large number of SKUs

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Distribution Problem High Inventory Level:

◦ Labor cost: administrative, tracking and tracing…◦ Cash flow: cash will hold in the inventory, not in business◦ Carry cost: product expire, insurance, inventory cost

Stock out◦ Lost customer ◦ Lost sale opportunity

Bull Whip Effect

ConsumerRetailerDistributorBarilla DC

BarillaPlant

Causes of Bullwhip Effect Inaccuracies in Demand Forecasting Long Lead Times Price fluctuation due to Promotional activities Order batching

To reduce ordering Cost To take advantage of Transportation economics such as full truck load Sales incentive Forward buying due to promotional activities to get benefit from lower price

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Just In Time Distribution (JITD)

JITD system or Vendor Managed Inventory (VMI)1.Collect data from Distributors2.Make the distribution process responsive3.JIT distribution can make sure you aren’t paying for goods that you don’t

need right now, and might never need. (Perishable Items)

Challenges from Distributors:◦ They were unwilling to give up their authority to place orders◦ Were reluctant to provide detailed sales data◦ Saw Benefit only for Barilla◦ Preferred to sell the information rather than share it.

JIT ExperimentsFlorence Depot:Results:Inventory dropped from 10.1 days to 3.6 daysService level to retail stores increased from 98.9% to 99.8%Challenges:Depot’s staff was not comfortable working with such low inventory levels Inventory levels finally allowed to increase to 5 days

Milan Depot:Similar performance improvement as Florence

Marchese DC of Cortese:Prior to JITDStock out rate : 2 to 5% ( Occasionally as high as 10 to 13%)After JITDNegligible stock out rate of less than.25%(Never exceeded 1%)Average inventory level also dropped

Expansion of JITD Program Barilla approached other distributors based on the credibility of its experiments and its results. Developed a protocol which could be used to communicate with all distributors.

Distributors each day sent following information to Barilla Electronically

1. Customer code number to identify customer2. Inventory for each SKU carried by DC3. Previous day’s “sell through”-All shipments of Barilla products out of DC to consumers on the

previous day4. Stock outs on previous day for every Barilla SKU carried by DC5. An advance order for any promotions that the customer planned to run in the future6. Preferred delivery carton size

This coding system would have the following advantages: Information can be received through any code Real Time data sharing MIS – Improved Analytics

Takeaways

Effective Demand Forecasting ensures a robust supply chain. Excessive fluctuation(SD) leads to increased Average Inventory Level, poor USL and

frequent stock-out.

Information centralization reduces Bullwhip Effect and enhances inventory management system

“Pull based” vs “Push based” systems

Involvement of Top management is important

Effective Communication of the Win-Win Proposition to Customers

Thank You