What is the impact of fluctuating demand on operations? Because of the way Barilla’s manufacturing process works, demand fluctuations have a significant impact on the company’s operations. Tight heat and humidity specifications in factory tunnel kilns require very specific sequences of pasta production, which means Barilla has limited flexibility in ramping up (or ramping down) the production of pastas experiencing unexpected demand levels.
Furthermore, because of extremely high holding costs, it is simply not economically viable for Barilla to maintain substantial finished goods inventories to guarantee fulfilling distributors’ fluctuating order quantities. Demand fluctuations are also causing tension and disagreements among Barilla’s manufacturing and logistics personnel. Some believe that distributors and retailers should shoulder the burden of carrying additional inventory, while others believe these points on the supply chain are already holding too much inventory.
Most important, as end-consumer demand fluctuates – even slightly – the perceived variation in demand increases significantly moving down the supply chain toward Barilla’s manufacturing facilities. This phenomenon, called the bullwhip effect, leads manufacturing personnel to make demand forecasts that do not accurately reflect real demand levels. This is the primary issue facing Barilla’s operations process. Specifically, management must understand that forecasting demand levels based on data received from only distributors will overstate variability and may not accurately reflect the true needs of the retailer and the end-consumer.
The JITD proposal has been met with significant resistance within the company; sales representatives and distributors believe that Barilla’s response to demand fluctuations simply diminishes their inventory and service responsibilities. What are the underlying causes of the fluctuating demand? Fluctuating demand in the supply chain is caused by a number of factors but is exacerbated by incentives that are uncoordinated with consumer demand. The overarching problem is distributors base their actions off of retail demand on the one side and Barilla sales incentives on the other with no means to reconcile the two.
GD’s and DO’s use a variety of inventory systems, but for the most part these systems are based on a simple periodic review. They take a weekly inventory of their stock and place orders accordingly. There are no forecasting systems in place to determine future retail demand on which to base orders. With a lead time of 10-14 days between order placement and delivery and a reactionary ordering system, high costs due to cycles of stockouts and bullwhip effects will continue. The other side of the problem is caused by Barilla’s sales and marketing practices, which are based on achieving sales goals without regard to efficient operations.
Barilla promotional “canvass” periods are the most problematic of these discounts because they make it in a distributors best interest to invest in months’ worth of stock of a discounted product. This bulk purchase is unrelated to the near term retail demand and muddles the picture for a Barilla operations manager trying to tailor operations to demand. The volume discounts less problematic because they are incremental, and lead to small changes in orders to achieve a truck-load quantity. This saves on Barilla distribution costs and is unlikely to induce large swings in demand for a given product as trade promotions do.
Barilla creates another problem for its supply chain by packaging the same product in multiple ways. They make pasta in 200 shapes and sizes and package them in 470 SKU’s. This reduces the flexibility of the system and makes other problems associated with the supply chain worse. If they offered only a single packaging option for each pasta, then any unit of inventory of that pasta would be interchangeable with any other unit. The system now treats them as two entirely different products that cannot be substituted for one another in the supply chain.
What are the internal and external barriers to implementation of JITD? What actions should Giorgio Maggiali take to deal with these? Barilla’s main internal source of barriers were from the sales and marketing department. They feared that operations would assume many of the sales and marketing responsibilities and sales would flatten. Currently, sales representatives spend 90% of their time at the store level. The JITD program, however, is focused on strengthening the distributor relationship with Barilla.
Maggiali should highlight that operations will be focusing on the distributor relationship and request that sales and marketing continue to focus on the retailer relationships. Operations has a better understanding of the challenges that a distributor will have and can offer more value to the strengthening of those relationships. Sales and marketing will drive sales up through the stores. The JITD program essentially uses the point-of-sale data from the retailers, though one step behind; as such, sales and marketing will be directly influencing the JITD program.
Another internal barrier was the fear that if inventories in the distributor warehouses decrease, it would compel the distributors to push the competitor’s product. However, since the fluctuating inventory is partly in due to the 4-5 week trade promotions, Maggiali should remove these canvass periods and replace with a more sustainable promotion that will not drive demand up periodically. Internally, Barilla also thought that JITD could face more stockouts if there were a disruption in the supply process.
Stockouts are already a frequent issue that Barilla has to face with the current system. By implementing JITD, Maggiali can reassure the internal skeptics that a greater understanding of the distributor warehouse processes and demands will eventually lead to less stockouts. Externally, Maggiali faced resistance from the distributors. Distributors did not want to share their inventory levels with Barilla and felt insulted that Barilla was trying to do their job for them. Further, they thought Barilla was using the distributor warehouses to reduce their own costs.
The JITD program will, however, reduce the inventory holding and stockout costs for the distributors as well as it will increase efficiency across the supply chain. Maggiali should dedicate an operations account manager to each distributor who would serve as the point of contact to continually discuss the supply chain operations with the distributors. The operations account manager will be dedicated to operations issues, but who also has basic skills in sales and marketing to be able to provide them with high customer service.
