Barilla Case: Causes of Fluctuation

1.What are the causes of fluctuation? (20 points)
Fluctuation of Raw Materials
Pasta is produced with various types of raw material, including wheat and egg. If the supply of raw materials has high level of fluctuation, (which may be caused by weather condition or cost of raising chicken) then the production and supply of pasta will be influenced.

Diverse Product Category
Barilla’s products are divided into Fresh products and Dry products. The demand for these two distinct kinds of products is quite different, and the order, shipment and delivery methods for them are also various.

Diverse Distribution Methods
Three different types of retail outlets – small independent grocers, supermarket chains, and independent supermarkets, make the demand pattern more complex and delivery method have higher level of variety, which bring more fluctuation.

Marketing Strategy
Advertising, promotions and sales representatives will all influence the demand for pasta. They may cause great increase in demand within very short time, which result in fluctuation in demand. Moreover, different products are offered with the discount in different period, which make the demand unstable and more difficult to forecast.

Distribution Process
First of all, there is no limitation for order quantities size of the distributor, which results in various demand quantities and high level of fluctuation. Second, distributor’s ordering pattern and volumes is varied from each other, which makes demand various from time to time. In addition, most distributors’ inventory systems are simple, and few had forecasting systems or sophisticated analytical tools for determining order quantities. As a result, it is difficult to forecast the accurate demand.

2. What are the costs of fluctuation? (10 points)
When there is fluctuation on the demand, it is very difficult to Barilla, as the manufacturer of many different products with different categories, to produce efficiently. For instances, there are products more difficult to produce, and thus it will require more time and effort on the production, with a high fluctuation on the demand, Barilla is very difficult to plan for the inventory level, and thus make the production. As producing too less, it will cost them their reputation and loss of customer, producing too much, it will increase their cost and also the opportunity cost to produce other items. Not only on manufacturing, but fluctuation also creates challenges to the distribution channel. With the changing demand, Barilla can’t prepare the delivery schedule/plan (like truck load, warehouse) in time. For instances, if there is no regular pattern for a delivery truck, they have to do lot of extra works on the delivery schedule, from planning the delivery route, deciding what products to carry. And even more challenging issue will be, one week there is over demand, and the other week with very low demand, there are no ways for Barilla to get enough trucks to handle the peak, and also too costly when there is low demand.

3. What are the benefits of the JITD proposal? (10 points)
More accurate forecasting
The original approach is the individual distributor does the forecast and place order to Barilla. It has two problems, one is the bullwhip effect causing the inaccurate forecasting. The distributor will always add some buffer on the actual demand, it cause Barilla to add even more to meet the service level of the distributors. Another is when stockout happen, the distributor will place urgent order to Barilla and request a quick delivery of the products.

With JITD, Barilla will ship the product to distributor according to their shipment data, which is the demand from the retailer and the stock level. Since it is just one step behind the end customers, the forecast must be more accurate. The distributors can even skip the forecasting and order placing process as they will receive the product from Barilla and then they can ship to the retailer according to the order.

Lower inventory level
JITD can lower the inventory level of both Barilla and the distributors as both parties are using the same accurate forecast. Both parties do not require to store a large amount of safety stock.

Lower costs
JITD can lower the distribution cost, inventory cost and even the manufacturing costs. Distribution can be more efficient as the delivery is not based on the order from distributors. It is based on the forecast from Barilla. Barilla can better utilize and arrange the distribution team by planning a more efficient route and schedule to deliver the require product to each distributor on time. Barilla become more proactive in controlling the delivery schedule and so lower its distribution cost.

Inventory cost can be lower as Barilla no longer needs to keep a large amount of stock in the distribution center. Especially for those fresh products, which will turn bad quickly and need a high cost to maintain.

The manufacturing cost can be lower as the rearrangement of the production line to meet urgent order can be minimize or even eliminated.

Improve operation efficiency
With JITD, the number of urgent order will be decrease. Barilla can put more focus on managing the standard order with the normal manufacturing setup. Extra work on rearranging the production line will not be required frequently. The whole operation can be more efficient and standardize.

4. As one of Barilla’s customers, what would your response to JITD? Why? (10 points) From the whole organization point of view, I would welcome the implementation of JITD by Barilla.

First of all, I could skip the forecasting and order placing process which could save the company a significant amount of cost and time. Barilla will do the forecasting for me and they will deliver the right amount of product to me at the right time.

Secondly, I can lower the inventory level and the cost of holding inventory. Barilla will deliver the right amount of products at the right time. As per the order we receive, the stock we keep should be in a level which can fulfill all the orders. Stockout will be minimized. At the same time, our client will be happy to see we can fulfill their orders on time. It can improve our service level as well.

Thirdly, Barilla can get the shipment data not only from us, but also from other distributors. It has more information to forecast the demand. The forecast will be more accurate as well. It is better for us to follow them and receive products according to their schedule.

Fourthly, Sales data is a very sensitive data, and by providing my sales data to Barilla, it means that they can use my figure to do all kinds of comparison between my competitors, and even more, if they have a plan to start their own distribution network, then I will be foolish to provide the data to Barilla now

Finally, while Barilla is one of the biggest supplier to me, there are still lot of other suppliers in the market, and there are different promotions in the year. The data selling to Barilla will not help them on the forecast because it only reflects Barilla Data only, but not the changing market environment. If there are 2 products with very little different, one with a higher margin, which items would you sell. This is a simple question!

5. Who should have the decision rights? (10 points)

In my opinion, with the adoption of such a huge change, the management should have the decision right, and once they have a green signal on the decision, they should start educating users on the benefits for the changes, and plan on how users can easily adopt to the changes.

When the projects start running, they should continue to monitor the situation, and look at issue that can be improved. If some distributors still do not want to participate, work with those dedicated one first, getting the numbers and data on improvement, and use figures to convince them.

6. What are the internal problems? (10 points)
Too many packaged stockkeeping units (SKUs)
There are over few hundreds of SKUs available in the market. It is difficult for customers to choose the right one. Moreover, distributors and retailers may only interest in some of the SKUs which leave the rest of SKUs keep storing in warehouse until expire. It will increase the inventory cost.

Dedicate equipment in specific plant which can only produce limited kinds of product Barilla has many special products which need special equipment to be produced. The problem is the special equipment usually can only produce limited kinds of product. The equipment will be under-utilized and the corresponding cost of using will be much higher.

Conservative sales forces
Barilla sales forces just want to follow the old way to do business. When company try to implement new distribution system, most of them just think of their current situation and interest. They do not want to take any risk to improve the whole supply chain as they are uncertain about the result and they may even be replaced by the new system.

Moreover, as workers believed the used of the program will seriously affected their works, and even costing their works, so workers, especially the sales force, are very reluctant on the adoption of the JITD. Also adopting the new system means they have to change their entire working model, and it might require them to learn something new. Some colleagues with higher age might feel picking new techniques and educating their partner on such techniques will create extra trouble, and thus refusing for the adoption of the change.

Overlap distribution channel
The distribution channel is not well-organized yet. Some of the channels are overlapped. It may be due to the insufficient/ inaccurate forecasting information. It may increase the shipping cost.

7. What are the external problems? (10 points)

Unconvinced Distributors

Several of Barilla’s distributors not really interested for the JITD program, because they think managing stock is their own job and disallow Barilla to interfere with their inventory.

Unwilling to share warehouse data with Barilla

Many distributors doesn’t want to share their inventory data to Barilla, because they don’t trust Barilla can do better inventory management better than them.

Not willing to give power to Barilla to push product

Distributors don’t want to be too closely linked to Barilla, because they don’t want to give Barilla the power to push product into their inventory just for reducing cost for Barilla. And they cannot gain any advantages of doing so.

Doubt about the effectiveness of the system

Some distributors doubt the effectiveness of the JIT system. They think the root cause is the long lead time delivery from Barilla. If Barilla can shorten the lead time, they can improve their inventory and service levels. Therefore, they don’t want to share their inventory data with Barilla.

8. What actions do you recommend? (20 points)

I think implementing JITD is a must to solve the problem of high demand variability caused by ordering from different distributors. JITD provides a great benefit to Barilla. It can reduce the manufacturing costs, distribution cost and the logistic costs.

However, most Barilla’s distributors don’t want to cooperate with Barilla for the JITD due to the following reasons:

• No benefit of sharing warehouse will Barilla

• Lack of faith in the JITD program

In order to implement the JITD, Barilla must solve those problems with the distributors, so that they are willing to cooperate with Barilla and implement the JITD.

In my opinion, Barilla managers can run a simulation to demonstrate the benefit of using JITD to the distributors. Also they can run experiment at one or more of the distributors’ sites. So that distributors will understand the advantages of using JITD and gain confident to cooperate with Barilla.

Barilla managers should also point out that using JITD not only reduces the operation cost for Barilla, but also distributors can reduce the inventory cost and increase shelf space by storing less Barilla’s products. Also JITD can improve the product fill-rate and decrease distribution costs which lead to improve customer relation.

On the other hand, Barilla managers have to solve the internal sales problem before they run the JITD. The role of sales representative should be redefined as the communication bridge between the distributors and Barilla. So that they are not only selling Barilla’s product, but they can also help on implementing the JITD program. Besides, they can help distributors to provide feedback to development managers. Therefore, it can increase their satisfaction level for the JITD program.

For the promotion, I think Barilla can use another strategy such as everyday low pricing to remain competitive and more discounts for those distributors who are willing to take a long-term orders.

In addition, Barilla can provide internal training for the new JITD program to the sales representatives. During the training session, Barilla should tell the sales representatives the JITD program is not only a new logistic operation, but also a new strategy to help Barilla to step another important milestone in the future. The training session can help sales representatives to have more understanding about the company situation and the JITD program in order to settle down their concerns.

On one hand, Barilla should build internal recognition for JITD program. This should start from the top management, which makes JITD get support from management level. Then, Barilla should reduce sales and marketing division’s resistant to JITD, so that its internal parties can implement JITD with less difficulties. This can be achieved by training or sales incentives, letting salesperson realize the benefit of JITD.

On the other hand, Barilla needs to handle the external problem of adopting JITD, which involves both suppliers and distributors parts. For suppliers, they may worry if Barilla adopts JITD, they need to take more responsibility for raw material’s inventory and thus increase inventory cost and reduce profit. For distributor, they may also don’t want to take responsibility for Barilla’s warehouse operation since it may increase their cost as well. Thus, Barilla should first of all let suppliers and distributors know the benefit of JITD, perhaps by presentation, experience sharing or finding some successful cases in order to build their confidence to JITD. Barilla should deliver the idea to its partners that JITD needs cooperation of partners from the upstream to the downstream of the whole supplier chain. More importantly, after suppliers and distributors gain more commitment to JITD, Barilla should encourage them to increase information sharing and get more involved into JITD program, so that both parties can enjoy the benefit from the program. Gradually, successful suppliers and distributors’ experience will attract more parties to join the program.