Barilla Spa Case Module 5 Darryl Poyner Jane Hedley 80008 October 20, 2010

Executive Summary:

Barilla SpA is a large, vertically integrated Italian pasta manufacturer and in 1990, was the largest pasta manufacturer in the world, making 35% of all pasta sold in Italy and 22% of all pasta sold in Europe. Barilla is organized into seven divisions: three pasta divisions named Barilla, Voiello and Braibanti, the Bakery products division, the Fresh Bread division, the Catering division and the International division. Barilla has three production divisions and two distribution channels based on the shelf life of the product. Distribution is also further divided between two central distribution centers. Corporate headquarters are located next to the plant in Pedrignano.

Barillas pasta plants are specified to the type of pasta to be made. The main distinction is what the pasta is made of, as different types of pasta use a different combination of flours and other ingredients. There is also a further distinction made within these families of products based on the size and shape of the pasta. Temperature and humidity have to be very tightly controlled and there is a specific production sequence that must be followed.

Barilla has three main customer types, larger supermarkets chains, large independent supermarkets and small retail shops. How the product is distributed is influenced by customer type and expiration date of the product being shipped. Fresh product is distributed through brokers directly but all other products flow through the Central Distribution Centres (CDC)

Barilla is increasingly feeling the effects of fluctuating demand as orders for Barilla dry products often swing wildly from week to week. This demand variability is straining Barillas manufacturing and logistics operations. Plants are so tightly specified to the types of pasta they can produce, that it makes the production facilities inflexible and unable to respond to these fluctuations.

Giorgio Maggiali is the director of Logistics for Barilla and was appointed to this position when his predecessor Brando Vitati was promoted. Vitati had proposed a Just in Time Delivery (JITD) model for Barilla. Vitati has commented on the thinning margins the industry was experiencing and the need to take costs out of our distribution channel without compromising service. He felt operations could be improved if Barilla was responsible for determining the quantities and delivery schedules to

their customers. Giorgio is frustrated with the opposition and resulting lack of progress in implementing this new process.

My decision upon reviewing the information provided in the case is to recommend that Barilla continue to implement JITD. JITD would focus just on dry goods shipped to distributors. Two thirds of dry products are shipped to supermarkets.

It is crucial for Maggiali to overcome the opposition to this new way of working. Barilla has a very complex distribution system, an inflexible production process and many SKUs it has to manage. It cannot tolerate the huge swings in demand and the resulting overstocks or shortages that results. It must address this demand variation.

There are many bullwhip effect issues contributing to the demand variation that need to be addressed: 1. Marketing and Sales commissions based on sales, trade promotions, volume discounts 2. Too many SKUs over 800 SKUS in dry goods high inventory levels at each level of the supply chain, stock outs at the distributors

3. 4. 5.

Long Lead time to delivery average lead time is 10 days No restrictions on order quantities, no min/max Weekly orders from stores, no structure to ordering process

Opposition to the JITD system was: 1. 2. new idea, distributors felt they were losing control, lack of trust Distributors did not want to provide sales data to Barilla. Perception was they would lose control of their own businesses. 3. 4. Distributors didnt really perceive there was a problem The Sales force at Barilla were scared they would lose their jobs as their main role was to take orders from distributors and encourage them to buy. Their pay was based on how much distributors ordered. 5. Sales force did not think the new JITD system would work, as distributors would lose their incentive to order. How could you still offer trade promotions and volume discounts? If space were freed up at the distributors warehouse, then the competitors would fill up that space.

Maggialis biggest challenge is to convince his sales staff, as they have been sabotaging the process with the distributors. He must first get them in line and then the distributors on board.

As a vertically integrated company with no outsourcing, Barilla has a very inflexible production process. It is very difficult for the production process to adapt to demand. The ordering process must be stabilized in order to create efficient production. A Supply Chain Management (SCM) approach will help Barilla. They have controls on the production side, but now have to include the sales and logistics functions fully into their strategy to have true SCM.

The benefits of a JITD system are:

Inventory reduction orders will be based on real sales data and Barilla will push the product to the customer in a planned, managed way. This will stabilize the shipping of product, which in turn, will reduce on hand inventory and out of stocks.

Better production planning plants will be able to make their production more efficient now that reliable and stable order data is used.

Better distribution with stabilized ordering in place, Barilla can look at its very complicated distribution system and make it more efficient. It will be able to reduce the 10 day lead time it now has.

Increased profitability the reduction in inventory and a more efficient production and distribution system will make Barilla more profitable

It is obvious that a JITD system is needed at Barilla, but the huge task ahead is to convince first the sales staff at Barilla and then the distributors that this is a good move for everyone.

The following steps should be taken to create buy in for the JITD system and to make it successful.

Sales Personnel: Sales staff must be reassured that their jobs are safe, their roles will just change. They will be needed to implement the new system and to maintain relationships. Pay should be based on success of converting distributors and how many orders are placed using the new system. Staff should also share in the increased profits that will result from these changes. Give the incentive as increasing the profit, not increasing sales.

They will also be needed to sell more products to the distributors. The freed up shelf space caused by JITD could be filled with a broader range of Barilla product.

Pricing: Trade Promotions should be replaced with everyday low pricing and a rebate system should be put in place that rewards the distributors who use the JITD system.

Number of SKUs: Barilla needs to rationalize its product offering. Their dry products are offered in over 800 SKUs, some with 8 different packaging options. Reducing the number of SKUs, will make production planning and distribution much more efficient. As Pareto says, 80% of a companys sales usually come from 20% of its products.

Convince the distributor: It seems like change does not come easy to Italians, but I think we all understand the language of money. Barilla must offer incentives, in the form of rebates, to their distributors to buy in to the new process. Barilla must show that they and the distributors need to become partners in the

process and they will then share in the resulting efficiencies and profits. JITD delivery will result in reduced inventory levels and therefore increase in cash flow and service levels to the customer. Barilla may also have to invest in information infrastructure. Some of the smaller customers in the smaller stores do not have sophisticated inventory systems and this sales information is the key to the system. Barilla should target those larger distributors with technologically sophisticated customers in their first roll out.

Barilla may also want to focus on the small shops as well. They are supported by the government and Barilla does not have a significant market share in this area. It might be easier to start smaller. Shelf space at the store level is always an issue, they cant make their stores bigger. The opportunity to have smaller, more frequent deliveries and therefore offering a wider selection, would be very compelling to the small shop owner.

Monitor and Control: Today Barilla does a periodic review of inventory. Under JITD, inventory review would be a constant endeavour. Stabilized inventory costs would

then allow Barilla to determine the best order quantities, reorder points and safety stock required.

Sales staff should be equipped with laptops and inventory software so then when they are visiting customers, they can facilitate the information exchange process and monitor in real time, what is happening in terms of inventory.

Barilla made its mark in the world by taking a commodity and selling it in a very different way. They now need to apply this innovative thinking again and use the JITD system and reduce the bullwhip effect in its supply chain.