Part 1 – Executive Summary
The most important issue Barilla faces is the variability in distributor’s demand or order patterns even though consumer demand is relatively stable. To date, implementation of the Just in Time Distribution System (JITD) has not been successful. It has been resisted both internally and externally with distribution network. The company either can implement JITD or it should reject the strategy and develop a new one. Rather than placing traditional orders with our factories, the distributors will instead provide us the demand information from the retail store locations. Using the data from the retail store orders, we can determine the optimum schedule upon which to base our production and distribution plans.
This will eliminate demand fluctuation and the current lack of ability to plan. We will determine the replenishment orders for the distributors, offering them an additional value added service and minimizing stock outs. The benefits of the JITD system include reduced manufacturing costs, reduced inventory and carrying costs, production planning ability, and increased supply chain visibility.. The new strategy for implementing the JITD system will include a more targeted approach, only offering a smaller number of SKU’s that will provide the most dramatic returns. Also, we will offer alternative incentives to both our distributors and sales departments. Strategically offering incentives will ensure full support for our JITD system. We will discuss about this report in our meeting on Tuesday, February 19, 2013. Sanjay Pandya, CSP
February 15, 2013
Part 2 – Immediate Issue
The most obvious issue Barilla SpA is faces is the variability in distributors’ demand or order patterns even though consumer demand is relatively stable. Assuming a constant demand for pasta by Italian households over the entire year a high variability in distributors’ demand must have other causes which need to be identified and solved. This problem is also known as the bullwhip effect.
Part 3 – Systemic Issue
The incentives program for our sales team and distributors are not well aligned to our supply chain strategy. The strategic focus of the sales department needs to be revised as sales team will not put priority in implementing JITD system since their top priority in setting goals and achieving the targets. For distributors incentive program should not be tied with large volumes as it will help in decreasing the bullwhip effect.
Environment & Root Cause Analysis
Part 4 – Root Cause Analysis
In order to find out the root cause analysis and to solve Barilla’s problem, first the causes of the bullwhip effect need to be identified. Usually the variability in demand along the supply chain is linked to factors like inappropriate demand forecasting, lead times, batch ordering, price fluctuation, and inflated orders. Furthermore there is a strong connection between the centralization of demand information within the supply chain and the bullwhip effect. Inappropriate demand forecasting refers to the fact that in this case a periodic review policy is used by Barilla’s customers which is solely characterized by the base-stock level. This is determined by average demand to which a multiple of standard deviations is added (safety stock). Since demand is regularly modified, order quantities are adjusted, therefore increasing variability. Furthermore most of the retailers do not use any forecasting, which also increases the bullwhip effect. It is easy to see that as longer lead times are as larger is the variability in demand. Due to the fact that stock levels are determined by average demand and
standard deviation of this, a minor change in the estimate variability causes significant changes in stock levels, which will lead to an increase in variability. It takes in average 10 days to get the product to the customer after an order is placed. This time refers to the shipment from one of the central distribution centers to the distribution center of the customer, either grand distributors or organized distributors.
Part 5- Alternatives and Options
A more targeted approach to implementing the JITD system will increase the likelihood of success. Due to the high number of SKU’s we move through our supply chain, the project is considerably more complex than necessary. We should use a Pareto analysis to select a smaller number of SKU’s that account for 80% of our throughput. This will maximize the impact of our efforts, while keeping them achievable. In order to build faith in the JITD program, both with our sales force and the distributors, we should run a pilot project with a single product line and a single distribution center. We will offer any necessary compensation to a distribution center in order to ensure full co-operation in this initiative. We expect that we will be able to increase service levels while reducing inventory levels. Once we are able to demonstrate the advantages of the JITD system, we will have a much easier time achieving buy-in with the other distribution channels. The compensation program for our sales department needs to be modified, so as to benefit them while we achieve our strategic goals. Providing bonuses when the distribution centers achieve profit targets, inventory turn targets and target inventory levels will ensure that the sales department is working with us toward those goals. The focus of the sales department will be changed from a tactical nature to strategic nature. They will no longer need to pass along sales and shipment information, as the supply chain will be providing that already. Their focus should be strategic, building better relationships and creating trade promotions with our distributors. Clearly communicating our strategic focus to the sales department will relieve their concerns about their function becoming obsolete. The incentive program for the distributors will be redefined to support our objectives. We will no longer reward them for placing large orders. We will offer them incentives
at the start of the program in exchange for their full cooperation and support. As the program progresses, we will focus the incentives on order fulfillment and inventory reduction.
Part 6 – Recommendations and Implementation
We need to continue moving forward with the Just in Time Delivery System. We will approach the Marconi Distributor about participating in our pilot program. As an incentive, we will offer them the maximum 4% discount, normally offered on large orders, for all orders placed on the JITD system for the first 6 months of the pilot project. In exchange the Marconi will provide the entire retail store ordering data, and allow us to determine the order quantities and delivery schedule. Once we have achieved a 50% inventory reduction, and an 80% reduction in stock outs, we will conclude the pilot project.
Marconi will allow us to share the results of the pilot project with our other distributor partners. We will not offer them the 4% discount. Rather, we will be able to sell them on the benefits of the program, and offer them trade discount incentives as milestones are reached, such as inventory turns, and order fulfillment rates. We will revise the incentive program for our sales departments, offering them a bonus for each distributor that they are able to sign up for the JITD program. We will no longer offer them bonuses for reaching sales thresholds in a given period. As the distributors reach the milestones that allow them discounts, we will also offer bonuses to the sales employees.
Monitor & Control
Part 7 – Monitor and Control
As the JITD program develops, we will enjoy reduced inventory levels and increased order fulfillment. Also, the number of distributors will grow rapidly. We intend to have 80% of the distributors participating in the JITD system within the first year of implementation. Individually, we expect that
a distributor should reach a 50% inventory reduction and an 80% reduction in stock outs within the first six months of joining the system. Across the entire supply chain network, we are targeting a 25% increase in inventory turns and a 50% decrease in stock outs.
Part 8 – Conclusion
In order to increase the profitability Barilla SpA should implement JITD. In a strategic partnership, such as the vendor managed inventory (VMI) concept, the bullwhip effect can be avoided entirely due to sharing certain information. Using VMI the supplier is responsible for replenishing the stock of the customer and therefore does not rely on orders placed by the customer. Thus, the supplier can ship the goods according his forecasts and distribution strategy. Therefore, Barilla has to overcome the internal and external resistance to implement such a strategic partnership in terms of JITD. Furthermore, the promotional programs are identified as a cause of the variability in demand, which means that these have to be changed too.
Part 9 – 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.