Introduction Barilla SpA, an Italy based company Worlds largest pasta manufacturer 35% market share in Italy and

22% market share in Europe In addition to the pasta, it also manufactures bread, cookies, biscuits, etc Barilla is highly vertically integrated and as such contends with the supply chain issue at both ends of manufacturing. It operates everything from flour mills to some distribution warehousing.

Distribution 65% of dry products (pasta/cookies) are routed through the CDC (central distribution center) The shelf life of the dry products varied from 2.5 to 24 months. 10% of the products went to company run depots. The remaining pasta goes through either the GD (grande distribuzione) or DO (distribuzione organizzata). GD handles all the chain supermarket orders (38.5% of total) and is integrated into Barilla. DO is a separate distributor that represents the independent supermarkets (16.5% of total). The independent supermarkets sourced from a single DO. The remaining 45% is routed to 18 Barilla run depots. 78% arrives direct from factory while 22% arrives from the CDC. The depots deliver partial truck loads to both types of supermarkets and small independent grocers.

Problems with Barillas Distribution The problems with Barillas distribution are centred around the DO. -Flow of information. It is important to the successfully management of demand in the supply chain. It is unidirectional. Information must flow from retailer to the supplier through the supply chain.

The speed of information flow is dependent on the level of communication and synchronicity between two entities (entities in different firms or of the same firm) The vertical integration and organization of the supply chain are somewhat different than the previous scenario. With the ability to observe orders directly from the distributor Barilla is able to effectively remove one of the inter-firm barriers and bypass the other. -Demand Fluctuations Large number of SKUs. Dry products: 800 different packaged SKUs. (cookies & dry pasta) Pasta: 200 different shapes and sizes and 470 different packages Promotions. Price Discount, Volume Discount, Transportation Discount. Result: More variable demand and inventory at distribution centers Improper Forecasting: Did not use forecasting model, just followed replenishment ordering Miscalculation of ROP and safety stock. Order batching, no minimum or maximum quantities.

Result: Stockouts and backorders Irregular Pasta demand: No sophisticated forecasting models despite computerized ordering systems. Pasta market in Italy is price driven and any discounts are noted immediately by the customer. It can be translate to irregular orders varying in size. Order lead time is 10 days from the receipt of order. Orders are typically placed on a weekly basis by the distribution centers by various methods and inconsistent amounts. Possibly throwing the supply system out of control. North and South distribution allows faster service to the regional DCs, however also adds complexity to the distribution system. The large number of customers requesting specific stock items is a staggering 100,000 locations throughout Italy. Results: Information flow from downstream to upstream causes bullwhip effect. The whole supply chain experiencing lower profit.

- Operational Inefficiencies it drives costs upwards Identification Issue High Inventories Overall the CDCs carry 1 month of inventory, the distribution centers typically carry 2 weeks of inventory and the supermarkets carry 10-12 days of inventory, therefore there is typically 2 months of inventory in the system at any given time. One DO, Cortese, carries greater than 600 quintals of inventory. Typically they order only 300 quintals of inventory. Typically carry only 150 of the 800 SKUs. Currenty Barilla carries approximately 1 month of inventory in both of their two central distribution centers. DCs carry 2 weeks of inventory. High inventory levels cause Barilla to produce more pasta than required and subsequently is likely spoiled since it is a perishable item. Typically, inventory accounts for over 12% of the product cost, therefore any reduction will result in large savings. This takes into account the costs related to the storage, transportation and management of this extra inventory. As the WPI rises the cost of the inventory does as well, which has grown by 2x since 1980. Therefore when in 1980 it wasnt such a large issue the inventory has grown in value significantly. The high levels of inventory are result of various factors: -fluctuating demand by the supermarkets due to seasonal items

-high number of SKUs causes the CDCs to carry a variety of their products to accommodate the stores even though the supermarkets typically carry 1-2 SKUs at the store. -production of the different types of pasta occurs at different plants and therefore fluctuates in delivery to the CDCs -Barilla offers promotional and volume discounts to its customers (full truckloads and volume discounts) which is then transferred to the consumers causing fluctuating demand in the pasta.

Stockouts (7%) On a weekly basis Barilla sees 7% of stockouts in their stores. This translates to backorders, lost sales ad lost customers which have a significant impact on the bottom line. The stockouts are caused by simple periodic reviews on inventories occurs at both the store level and distribution center level. Each distribution center maintains their own inventory level without much or any input from Barilla sales representative. High number of SKUs

Organizational Deficiencies Issues: Barillas Culture and Attitude Gaming behaviour: the distributors were used to having full control of their orders and indulged in gaming by ordering different quantities in different periods. Autonomy of the distributors and supermarkets Poor communication: dealing with situations in which suppliers and retailers are two separate entities. Lack of sharing cost or demand information for inventory-planning purposes Miscalculated impression that revenue depends on sales alone. Causes: Promotions, Barillas sales strategy relied heavily on the use of promotions. Price, they had 10 to 12 canvass or promotional periods, during which different products were offered at discounts. Discount ranged from 1.4% to 10%.

Sales Rep, the compensation system (sales rep rewarded based on the amount of the products that they sold to the distributors. Sales rep would try and push more products during the promotional period to get a bonus. Lack of direct input and dependency of the system. Lack of trust, unwilling to give Barilla the power to push products into our warehouse just so that Barilla can reduce its costs.Manage stock is my job. Blame Barilla for backorders. Communication Gap, success measured by shelf space not low inventory. Unknown inventory costs. Lack of urgency for improvement. JITD implementation High inventory levels It allows Barilla to better forecast demand fluctuations. With more sophisticated technology and application of forecasting techniques. Barilla would be able to more accurately predict demand for promotional and seasonal items. Improved forecasting would allow Barilla to better plan production, packaging and distribution of their pasta. By dictating what the stores required to stock, Barilla would be able to reduce the number of SKUs in an effort to maximize the effectiveness of advertising and reduce production complexity. This would allow both CDCs and DCs to reduce their inventory levels of their various products. Stockouts Similarly to reduction of inventories, JITD would reduce the number stockouts because of the improved forecasting techniques. Demand variability Currently operate as a very traditional view of an extended supply chain; a network needs to be created. Developing better 3PL relations with the DC will allow better communications Focus has already been given in developing 3 out of the 5 elements of the SC, focus must be given to developing the distribution and demand management aspects. Current system is very push SC oriented, transition must be made towards a more pull oriented system.

By increasing centralized information on product flow, the Bull whip can be mitigated. JITD is a form of logistics postponement, thereby increasing the flexibility of the distribution system. Organizational Deficiencies Centralization: Benefits everyone, Centralization based on the sales data distributors. Elimination of unwanted costs Elimination of fixed ordering costs for the distributors Customized production schedule for Barilla. Cheaper production and distribution costs for Barilla. Info Systems Issues on JITD Implementation Internal Job loss: JITD does not require as many sales reps to market products, since a portion of their current duties include inventory management and order processing for customers. This issue would need to be addressed strategically within the organization since it is a large concern. Incentive based pay changes: The sales force fear that they would lose control over their compensation methods because the system would move forwards a pull based supply chain. The current incentive program for the sales representatives would need to be revised to better accommodate the changes in supply of product. Lack of belief: Info was not presented to demonstrate the actual benefits of JITD implementation; hard facts and figures would help to sell the concept. They felt that JITD was too complex. They believed that trade promotions cannot be run with JITD. External Lack of trust Fear of change Loss of autonomy

Organizational Issues

Changes need to be made to the organization of Barilla to better align the sales and logistics departments. Information needs to flow freely between the two for JITD to succeed. Barillas fresh products add complexity to the structure of the company. It is unclear if this will be affected by JITD, however simplification of the entire distribution system will assist with JITD implementation.

Logistical Issues JITD requires a high level of technological sophistication in order to provide the proper information to the producers. This is a large initial investment that would reside with Barilla. The new technology would be met with resistance by traditional nosiness owners. Training would be required to implement internally and at the various sites. The scale of this training would be very large initially as well as on-going on a smaller scale after the initial sessions.

Unaddressed by JITD SKU Complexity No Cost Benefit Analysis Failure to bring all Stakeholders on Board Incentive system may no longer be appropriate A concerted effort to implement a supply chain wide information system.

Target local customers initially and limit to a region by region implementation. This would minimize the resources required to facilitate the initial implementation.