Barilla Case Study

Barilla Case Study

Introduction

Along with significant growth in revenue Barilla was increasingly facing challenges with keeping up with fluctuating demand. The export market was growing significantly as much as 20-25% per year in the early 1990s. The strain was being felt at both ends of the supply chain. On the manufacturer’s end there was a strain on plants and equipment to react to changing demand since the plants were always running on a optimized predetermined sequence. At the same time on the other end of the supply chain retailers were facing increasing stock outs as well. In order to reduce costs in an ever decreasing margin business Barilla would have to develop a strategy that encompasses all the stakeholders in the supply chain.

Analysis

From a manufacturing perspective Barilla plants were organized by types of pasta. Each plant had production run sequences optimized for the manufacture of different kinds of pasta at that plant. The distribution channels for dry and fresh products were separate because of the storage and replenishment requirements being different. They had an efficient distribution channel to supply fresh products with over 70 regional warehouses that could move the products quick. The dry products were supplied from the CDCs to distributors who would then supply to the supermarkets and small shops. There is a significant amount of inventory build up at the CDCs already ( 1 month of dry products) and the distributors would hold about 2 weeks worth of inventory. The Large distributors (GD) were owned by Barilla’s and the Organized distributors (DO) were a centralized buying organization representing a number of independent supermarkets. The GDs supplied supermarket chains and the DOs supplied independent supermarkets. The distributors would order from Barilla on a periodic basis (weekly) since most of them used periodic-review inventory systems. This results in periods of little to no demand followed by a spike in demand on the order date. This periodic ordering amplifies variability and contributes to the bullwhip effect. Supermarket managers were placing orders more frequently on a daily basis which would reduce the bullwhip effect. The sales force serving the DOs spent a considerable amount of time working at the stores. This provided them with valuable insight into the store operations and also a potential to influence the store managers purchasing behavior.

Typically distributors would place orders to Barilla on a periodic basis. Most of the distributors were on computer supported systems. This provides Barilla an opportunity to more tightly integrate systems with the distributors. The GD sales force was small and not as well as entrenched in the end customers operations as the DO sales force. Couple of other things to note here are that the GDs are owned by Barilla and the supermarket chains contributed to 70% of dry product sales. There is a possibility with the large orders and revenues associated with the supermarket chains that the sales force’s incentives were not well aligned with Barilla’s attempts and desire to optimize that channel strategy.

In terms of promotions they had 10-12 promotions throughout the year and they also offered volume discounts. This contributed to significant fluctuation in price throughout the year. This fluctuation can cause “forward buying”, where the distributors could be buying more than current demand because of low prices. This not only caused huge spiked in demand for the manufacturer but this may not always be optimal for the buyer who may not realize the hidden costs related to storing, transporting excess inventory. The excess promotions may also cause diversions where a buyer may be purchasing inventory at one location and shipping it to a different location. A key consideration of the JITD strategy was to let end customer demand