Barilla’s pasta supply chain suffers from classic bullwhip-effect problems: High inventory levels maintained at each level of the supply chain; frequent stockouts at the distribution level; demand variability exaggeration up the chain, and aggravated by constant sales promotions, Full Truck Load(FTL) and other volume incentives; and a lack of information on which to forecast demand. In addition, the increasing variability of Barilla’s dry pasta product (about 800 SKUs) intensifies all the problems mentioned-above.
The growing pain caused by bullwhip–effect in Barilla’s dry pasta supply chain can not be ignored. High inventory levels in Barilla’s Central Distribution Centers (CDCs) and in its distributors’ distribution centers represent increasing financial burdens on both Barilla and its distribution partners. The tight heat and humidity specifications in the pasta dry process makes it difficult for Barilla to quickly respond to the huge fluctuation and uncertainty of demand form distributors. As a result, Barilla’s customer order fill rate is suffering and so does its manufacturing and distribution operation cost.
Despite the excess stocks held in the distributors’ warehouses, stockout happens all the time and the order fill rate of the distributors are suffering as well. Further down the chain, end-consumers’ needs will not be fully satisfied if the dysfunction of Barilla’s dry pasta supply chain continues. Barilla’s customers are divided into three primary segments: small retail shops, large independent supermarkets, and large supermarket chains. Distribution to small retail shops is done by Barilla-Run Depots.
Distribution to supermarkets goes through intermediate distribution centers, either owned by the chain, or operated by a third party representing multiple independent supermarkets. The retailers send their orders to their distributor on a daily basis. The distributor, however, place their orders to Barilla once a week. Even though all of the distributors have computer-supported ordering system, few of them have sophisticated forecasting system or analytical tools for determining order quantities. The distributor’s poor handling of determining order quantities based on inventory levels is vividly demonstrated by Exhibit 12 14. For example, the inventory level at Cortese DC was 450 quintals in week 29 which was very low comparing with that in other weeks during the year. However, this DC’s order quantities in week 29 were less than 200 quintals which were 50% less than its Mean order quantity (300 Quintals). The result, it incurred the highest stockout rate (about 8. 5%) in the next week (week 30) for the year of 1989. The situation of Cortese DC is not an isolated case. Barilla’s other distributors were not effective with regard to their ability to determine order quantities when placing orders with Barilla.
In order to combat the demand fluctuation from their retailers, Barilla’s distributors use safety stock as the cushion to address the demand uncertainty. This strategy, however, makes their overall inventory level higher than it should be and tends to cover the inefficiencies of their demand forecast. To make things even worse, Barilla’s sales and marketing promotion programs and varies volume incentives encourage distributors to place large order in batches further magnifying the demand variability toward Barilla itself.
On Barilla’s side, increase safety stock level and eventually overall inventory level is the natural response to the huge demand variations come from the distributors. The fact that the heat control issues in its production process makes it difficult for Barilla to respond to product shortages. Therefore, further increase the need to hold huge inventory to offset this inflexibility of its manufacturing operations. Without knowing the sales data of its distributors, Barilla encounters great difficulties to forecast pasta demand and plan production accordingly.
In addition, Barilla’s increasing variability of pasta products complicates its demand forecast and inventory management and makes the bullwhip-effect more severe. In summary, the root causes of the bullwhip-effect Barilla is suffering are the preference of using safety stock as the major cushion to combat the demand variability at each level of the supply chain, the lack of demand information sharing between the distributors and Barilla as well as the traditional sales and marketing promotion strategies to increase demand volume at the cost of manufacturing planning and inventory control.
In order to combat the bullwhip-effect problems faced by Barilla’s pasta supply chain, my predecessor, Mr. Brando Vitali, proposed Just-In-Time Distribution (JITD) approach, which was modeled after the popular “Just-In-time” manufacturing concept. Instead of following the traditional approach of delivering product to Barilla’s distributors based on the orders they placed with the company, Vitali suggested that Barilla’s own logistics organization would look at all of the distributors’ shipment data and determine the quantities and delivery schedules to the distributors.
The JITD proposal met with significant resistance within Barilla, particularly from the sales organization. In addition, our attempt to convince some of our distributors to sign on and try the program seems not going anywhere. As the Director of Logistics, I am frustrated with the outcome of promoting JITD in the past two years. I feel that it’s time to seriously re-exam the pros and cons of this initiative and to make up my mind whether to go for the JITD system or just simply discard it and move on. Benefits: JITD will enable Barilla to increase the visibility of inventory and demand across the whole pasta supply chain.
As a result, Barilla can make better delivery decisions and improve its demand forecasts, be more effectively meet end-consumer’s need and more evenly distribute the workload on its manufacturing and logistics system. It means great opportunities for Barilla to reduce its inventory as well as production cost. For Barilla’s distributors, the need for holding excessive inventory is diminished if they sign on the JITD program and they will enjoy reduced inventory and facility cost. Furthermore, distributors will enjoy demand forecast and inventory management services provided by Barilla at no additional cost.
Drawbacks: It will be difficult to run trade promotions with JITD system and Barilla’s sales personnel will lose their incentives to generate big orders. This may have negative impact on sales organization and reduce their moral. Internal conflict could be created between sales organization and the manufacturing/distribution organization. Such conflict might hurt Barilla’s business as a whole. Externally, since distributors are very reluctant to share their sales and inventory data, they may turn to Barilla’s competitors if we push too hard on JITD program.
Generally speaking, JITD will usually reduce distributors’ inventory level of Barilla products. However, the distributors might use the saved space to store the SKUs from other pasta vendors. Based on the analysis in Part 5, I have decided to promote and implement the JITD program in Barilla’s dry pasta supply chain despite the possible drawbacks mentioned in Part 5. It is obvious to me that the performance measures of Barilla’s sales organization is not in line with that of the manufacturing and distribution organization.
To ensure long term success of the JITD program, the performance measures of the sales organization have to be redefined to align them with that of the manufacturing and distribution organizations within the company. More specifically, in addition to be measured by meeting a rather flat sales target, the sales personnel’s performance measures should also tie to the company and/or division’s overall performance targets of manufacturing efficiencies, inventory control and customer order fill rates, to name just a few.
Step1 is to obtain buy-in internally. I am confident that Mr. R. Carelli, General Manager, Dry Products, will stand on my side if I explain to him the JITD proposal and its potential benefits to Dry Product organization. Since the corporation from sales and marketing organization is essential for the success of the JITD, I will schedule meetings with Mrs. F. DiMaria, the head of the sales organization to present JITD program to her and address the comments and concerns gathered from the sales and marketing personnel.
If the meeting is a success, I will move on to Step 2 immediately; if not, I will ask Mr. Carelli to help with the issue and put pressure on Mrs. DiMaria to work together with my department on promoting JITD to the distributors. A cross-functional team consists of sales, manufacturing and logistics personnel will be assembled to coordinate and manage the implementation of the JITD program. And I will lead the team myself. Step 2 is to set up a pilot JITD program with one of the Barilla’s distributors.
Given the unsuccessful experience with the other distributors, I would target the Barilla-run depots to promote the JITD. Since these depots are own and controlled by Barilla, getting their buy in of the JITD program is realistically easier than getting the buy in from the external GDs or DOs. With the support from Mr. R. Carelli and the cooperation from Mrs. F. DiMaria, we should be able to set up a pilot JITD program with on of the depots first and gradually extend the program to other depots within a couple of months.
Step 3 is to approach the GDs and DOs with the positive tangible results from the pilot program runs from the 18 Barilla-run depots, such as reduced inventory levels, improved customer order fill rates and cost reduction benefits. I believe that a few of the GDs and DOs will eventually be impressed by the benefit that the JITD program can bring to them and agree to sign on to try it. A prudent approach should be followed to gradually bring the GDs and DOs on board one after another when situation allows.
I am aiming to fully implement JITD program with all the GDs and DOs within 3 to five years. Monitor and control For Implementation Plan Step 2, the inventory levels and customer order fill rates in the depots will be closely monitored on a daily basis and reviewed once every week to fine-tune the program itself. After three to six month test run of the pilot program, the inventory levels and customer order fill rate before and after the JITD program will be analyzed thoroughly and the positive results will be used to show to the other distributors(GDs & DOs) how JITD program can benefit them.
Conclusion The re-evaluation of the JITD program further strengthens my belief that it is the right solution to address the bullwhip-effect suffered by Barilla’s entire dry pasta supply chain. If implement JITD program properly according to the recommendations and implementation plans in Part 6 and Part 7, I expect to see the reduction of inventory levels and the improvement of customer fill rates at each level of Barilla’s pasta supply chain.