Executive Summary
Barilla is currently facing a major challenge related to the fluctuation in demand or ordering patterns from distributors, despite consumer demand remaining relatively consistent. Unfortunately, the implementation of the Just in Time Distribution System (JITD) has not been successful thus far. Both internal and external sources within the distribution network have shown resistance.
The company has two options: either it can implement JITD or it should reject the strategy and develop a new one. Instead of placing traditional orders with our factories, the distributors will provide us with the demand information from the retail store locations. By using the data from the retail store orders, we can determine the best schedule to base our production and distribution plans on.
This will address the issue of fluctuating demand and the current inability to plan effectively. By determining replenishment orders for distributors, we can provide them with an added value service while also reducing stock shortages. The benefits of implementing the JITD system include lower production costs, decreased inventory and carrying expenses, enhanced production planning capabilities, and improved visibility within the supply chain.
The new approach for implementing the JITD system will focus on a smaller selection of SKU’s that will yield the most significant returns. Additionally, alternative incentives will be provided to both our distributors and sales departments in order to strategically generate support for our JITD system.
Immediate Issue
Barilla SpA is facing a noticeable challenge with the inconsistency in distributors’ demand or order patterns, despite the fact that consumer demand remains relatively stable. If Italian households have a consistent demand for pasta throughout the year, then the fluctuation in distributors’ demand must have underlying causes that must be identified and resolved. This issue is commonly referred to as the bullwhip effect.
Systemic Issue
The current incentives program for both our sales team and distributors is not aligned with our supply chain strategy. It is crucial to revise the strategic focus of the sales department as they may not prioritize implementing the Just-in-Time Delivery (JITD) system. Their main focus is on setting goals and achieving targets. Additionally, for distributors, it is recommended to decouple the incentive program from the volume of sales to mitigate the bullwhip effect.
Root Cause Analysis
To address Barilla’s problem and conduct a root cause analysis, it is necessary to identify the causes of the bullwhip effect. Typically, this variability in demand throughout the supply chain can be attributed to factors such as inadequate demand forecasting, lead times, batch ordering, price fluctuations, and exaggerated orders. Additionally, the bullwhip effect is closely related to the centralized availability of demand information within the supply chain.
Barilla’s customers use a periodic review policy to determine order quantities based on the base-stock level. This policy involves adding a multiple of standard deviations (safety stock) to the average demand. The use of this policy leads to inappropriate demand forecasting and increases variability in order quantities. Additionally, many retailers do not use any forecasting, further exacerbating the bullwhip effect. It is evident that longer lead times contribute to greater variability in demand.
The variability in stock levels is greatly influenced by the average demand and standard deviation. Even a small adjustment in estimate variability can have a substantial impact on stock levels, ultimately leading to increased variability. On average, it takes 10 days for the product to reach the customer following an order placement. This refers to the shipping duration from one of the central distribution centers to either grand distributors or organized distributors located at the customer’s distribution center.
Alternatives and Options
Implementing a more focused strategy for the Just-in-Time Delivery (JITD) system can increase the likelihood of success. The project is unnecessarily complex due to the large number of Stock Keeping Units (SKU’s) in our supply chain. Utilizing a Pareto analysis can assist us in identifying a smaller subset of SKU’s that account for 80% of our throughput. This approach will allow us to optimize our efforts and make them more achievable. To instill confidence in the JITD program, both among our sales force and distributors, it would be advantageous to conduct a pilot project involving one product line and a single distribution center.
We are prepared to offer compensation to a distribution center in order to obtain their complete cooperation in this initiative. Our objective is to enhance service levels and decrease inventory levels. Once we can demonstrate the advantages of the Just-In-Time Delivery (JITD) system, it will be simpler to garner support from other distribution channels.
The compensation program for our sales department needs to be revised in order to both benefit them and help us achieve our strategic goals. By implementing a system where bonuses are given when the distribution centers reach profit targets, inventory turn targets, and target inventory levels, we can ensure that the sales department is aligned with our objectives. This change will shift the focus of the sales department from being tactical to being strategic. Rather than having to relay sales and shipment information, as that will now be provided by the supply chain, their main focus should be on building stronger relationships and creating trade promotions with our distributors.
Clearly conveying our strategic focus to the sales department will address their worries about the possibility of their role becoming outdated. We will redesign the incentive program for the distributors to align with our goals. Instead of rewarding them solely based on volume of orders, we will provide incentives at the beginning of the program in return for their complete cooperation and support. As the program advances, our incentives will shift towards order fulfillment and reducing inventory levels.
Recommendations and Implementation
To advance the Just in Time Delivery (JITD) System, we will propose to the Marconi Distributor their involvement in our trial program. To motivate them, we will provide a 4% discount, typically reserved for large orders, on all orders made through the JITD system during the initial 6-month period of the pilot project. In return, Marconi will furnish us with the complete data on retail store orders and grant us the ability to determine order quantities and delivery schedule. Upon achieving a 50% reduction in inventory and an 80% decrease in stock outs, we will conclude the pilot project.
Marconi will enable us to share the outcomes of the trial project with our other distributor partners. We will not provide them with the 4% discount. Instead, we will be able to convince them about the advantages of the program and provide them with trade discount incentives as they achieve certain milestones, such as inventory turns and order fulfillment rates. We will modify the incentive program for our sales departments by giving them a bonus for each distributor they successfully enroll in the JITD program. We will no longer give them bonuses based on sales thresholds within a specific timeframe. As the distributors meet the milestones that entitle them to discounts, we will also give bonuses to our sales employees.
Monitor and Control
As the JITD program progresses, inventory levels will decrease and order fulfillment will increase. Additionally, there is an expected rapid growth in the number of distributors. Our objective is to ensure that 80% of distributors participate in the JITD system within the first year of implementation. Individually, we anticipate each distributor achieving a 50% reduction in inventory and an 80% reduction in stock outs during the initial six months after joining the system. On a larger scale, our goal is to achieve a 25% increase in inventory turns and a 50% decrease in stock outs throughout the entire supply chain network.
Conclusion
To increase profitability, Barilla SpA should adopt the Just-in-Time Distribution (JITD) system. By forming a strategic partnership, such as the Vendor Managed Inventory (VMI) concept, it becomes possible to completely avoid the bullwhip effect by sharing specific information. Under VMI, the supplier takes responsibility for replenishing the customer’s stock, eliminating the need for customer orders. Consequently, the supplier can ship goods based on their own forecasts and distribution strategy. However, Barilla must overcome both internal and external resistance to implement this strategic partnership for JITD. Additionally, the variability in demand is linked to promotional programs, indicating the need for change in those as well.
References
- Hammond, J.H. (2006). Barilla SpA (A). Harvard Business Review.
- Jacobs, R., and Chase, B. (2008). Operations and Supply Management The Core. McGraw-Hill, Irwin.
- www.docstoc.com/docs/23285172/Barilla-SpA-A-Harvard-Bus…
- www.slideserve.com/adlai/case-barilla-spa-a
