What are the reasons for the increase in variability in Barilla's supply chain?

The reasons for the increase in variability are as follows.

Demand Forecasting: It is evident from the case study that most of the retail stores are not equipped with the necessary bar code scanners and computer linkages. The distributors have computer supported systems but few have the forecasting systems or sophisticated analytical tools for determining the order quantity.

Lead Time: Average lead time for the Barilla products between Barilla CDC and distributors GDs and Dos is 10 days. This increases the variability further down the supply chain.

Batch ordering: When retailer uses the batch ordering, then the distributor will observe a larger order, followed by several periods of no order and then again a larger order. This makes the distributor see the demand as distorted and highly variable. Retailers order the quantity which allows them to take the advantage of transportation discounts. Barilla offered the transportation volume discounts for the orders which consisted of full truck loads.

Price Fluctuation: Barilla divide year in 10-12 canvass (promotional) periods. During which different products are offered at different discount rates. These price discounts range from 1.4% -10%. During the canvass period a distributor could buy as many as product as desired to meet the current and future needs. Also the incentives for sales representative were based on achieving the sales target set for each canvass period. Hence the price incentives led to high demand in canvass period. Ans 1: Barillas supply chain is facing significant problems, including excessive inventory levels, stock-outs, excessive reliance on promotional activities, inefficient logistics operations and poor communication and cooperation between the supply chain participants. The inefficiencies in Barillas distribution system are driven by significant fluctuations in demand and the inability to forecast accurately. The reasons for increase in variability in Barillas supply chain are illustrated below: 1. Long Lead Times:

It takes around 8 to 14 days for the receipt of goods at the distributers end from the date the order was placed and the average lead time being 10 days. This long lead time adds to variability and reduced service levels. 2. Lack of Centralized data: Barilla does not maintain a centralized database for its order processing, thus the Bullwhip effect comes into play thereby causing the retailers and distributors to maintain higher inventory thus adding to variability. 3. Sales Promotions: Sporadic sales promotion campaigns such as volume discounts leads to inflated demand which in turn leads to forecasting errors thus causing variability in the supply chain. 4. Lack of an Order quantity range: There is neither a Minimum nor a Maximum order quantity specified; thus demand fluctuations are hard to predict and thus there is a very high co-efficient of variation in the demand patterns. 5. Large number of SKUs: There are around 800 different SKUs for dry products. Maintaining inventory for such a large array of products certainly adds to variability. 6. Improper Forecasting: Distributers do not use scientific forecasting techniques to track demand patterns accurately. This leads to reduced traceability of variation in demand. 7. Sales Representatives: Incentives provided to sales representatives for different SKUs are inconsistent, so they end up pushing those SKUs which earns them more incentives. 8. Batch Ordering: Retailers indulge in batch ordering. A large order one week is followed by no orders for the next

couple of weeks. Such sporadic ordering leads to variability.

How can the firm cope with increase in variability?

Reduce Uncertainty: Barilla can reduce the demand uncertainty throughout the supply chain by centralizing demand information. Each stage of the supply chain should be provided with complete information on actual customer demand.

Reduce Variability: Barilla should consider "everyday low pricing" (EDLP) strategy. Thus periodic promotions can be eliminated and product can be offered at single consistent price. This strategy will lead to stable and less variable demand from customer.

Lead Time Reduction: Lead time typically consist of two components: order lead times and information lead times. Order lead times can be reduce through the use of cross docking while information lead time can be reduced through the use of electronic data exchange (EDI).

Strategic Partnership: Barilla can consider implementing Vendor Managed Inventory (VMI). Here the manufacturer manages the inventory at retail outlet. Thus determines how much inventory to keep in hand and how much to ship. Ans 2: In order to cope up with the aforementioned drivers of variability, Barilla will need to take some proactive steps. Some of which are punctuated below: 1. Everyday Low Price policy: Rather than canvassing periodic promotional campaigns, Barilla must concentrate on maintaining a constant low but competitive pricing the year round, in order to negate variability in demand triggered by excessive buying during promotional periods. 2. Implement JITD/EDI:

Barilla needs to implement JITD and EDI so that real time information is readily available to each member of the supply chain and demand can be easily followed upon. Thus Bullwhip effect can be eliminated. The company should also conduct training seminars in order to convince retailers and distributers about the need for JITD/EDI. 3. Establish a fixed Order Quantity range: Barilla should contemplate implementing a Minimum and Maximum order quantity in order to reduce variation in demand. 4. Incentive Policy: Barilla should try and do away with its selective multi-product incentive policy and should come up with a new enhanced incentive policy which would not bias the sales rep towards a particular SKU. 5. Reduce number of SKUs: As mentioned in the case, Barilla sells similar products in different packages in different regions, which adds to the number of SKUs. The company should try and reduce the number of SKUs from 800 at the moment by adopting common packaging styles for similar products sold in different regions. 6. VMI:

In addition to its JITD proposal, Barilla should implement VMI at DOs and GDs. After an ABC analysis of its products, the company should settle on the level of inventory to be maintained for each product. After implementation of JITD and EDI, the company can track the dispatches and decide on the quantities to be shipped to each DO and GD, which will avoid the time wasted while order is received from the distributers.

What is the impact of transferring demand information across the supply chain?

Transferring the demand information from the retailer across the supply chain would result in a better estimation of the actual demand. Furthermore, each entity in the supply chain would be able to create better forecast rather than relying on orders received from the immediate customer. The following benefits can be obtained: Each stage of the supply chain obtains the actual customer data which enables improvement in forecasting and reduction in variability of demand in supply chain. The safety stock and the inventory level can be reduced due to less variability. This in turn reduces the inventory carrying cost. Information sharing mitigates the Bullwhip effect. Service level provided to the end customers can be improved by eliminating stock outs. Thus customer satisfaction can be improved significantly. Information sharing reduces the order and delivery lead times. Information sharing also enhances the shelf space and room for the new products to be displayed to the customers. Ans 3: A well organized, real time transfer of demand data across the supply chain is the need of the hour for Barilla Spa. The impact of transferring demand data vertically across the entire chain is as follows: Centralized demand data reduces variability to a large extent. Real time sales and demand data can reduce the Bullwhip effect drastically. Service levels will improve since customer needs will be easily understood. It will help avoid stock out situations at distributer and retailer level, which are caused by panic ordering and non fulfillment of such orders, which in turn will improve the service level. Inventory levels will reduce across the supply chain as everyone in the supply chain will be

assured about the timely receipts of the products. Accuracy of forecasting will improve, as the forecasts will be based on actual customer demand rather than on received orders and speculation. Visibility and Traceability in the supply chain will improve. All stages in the supply chain will be aware of the inventory positions of the upstream and downstream partners. Any order receipt will trigger a swift response throughout the chain resulting in reduced delivery lead times. As the forecasts will improve, the manufacturing units will be able to optimize their schedules which will balance the demand patterns as well as the specific manufacturing environment required for each product.

Can the VMI strategy solve the operational problems faced by Barilla?

Vendor Managed Inventory at Barilla would enable the company to specify the appropriate delivery quantities to its distributors instead of distributors placing orders. VMI is a good strategy for Barilla if implemented in the right way. Barilla needs to convince its distributors and retailers in sharing sales information. In addition, Barilla needs to build strategic partnerships with its distributors. A VMI strategy would help mitigate the bullwhip effect across the supply chain and reduce demand variability.

However, implementation of VMI would not help Barilla in improving its manufacturing efficiencies. The organization needs a transition of its manufacturing strategy with a focus on being flexible and responsive. Ans 4:

The goal of VMI is to align all business objectives and streamline the operation of the supply chain for both suppliers and their customers. In VMI, the manufacturer manages the inventory of its product at the retailer outlet. Thus the manufacturer does not rely on orders placed by the retailer, thus avoiding the bullwhip effect entirely. VMI results in increased profitability due to: Reduced inventory. Reduced administrative costs. Fewer stock-outs. Increased sales. Implementation of VMI at Barilla SpA: As explained in brief in question 2, implementing a VMI strategy can be a shot in the arm for Barilla SpA. The major delay in demand information to Barillas CDC is initiated at DOs and GDs. Even though these centers receive demand information daily, the forward order to CDC is placed only once a week thus creating a batch ordering effect. After implementation of VMI, Barilla will have real-time demand data enabling it to schedule dispatches effectively from CDCs. This will reduce the delivery lead times for

the distributers. The necessity to keep excess inventory to counter these delays will be erased, causing overall inventory in the supply chain to drop. Also the distributers will be confident of the supplies from Barilla and will be able to give realistic commitments to retailers. Thus implementation of VMI will not only reduce inventory holding costs but the service levels will also increase. The information will be updated rapidly through EDI instead of media like Fax, Email and Phone which do not provide real time

information. But first the company will have to convince its distributers that this system will benefit them as effectively and will reduce their costs as well, as their involvement in this project is the key to successful implementation of VMI.

How can supply chain meet conflicting goals of different partners and facilities?

A typical supply chain involves conflicting tradeoffs in lot size-inventory, inventory-transportation cost, lead time-transportation cost, product variety-inventory, and cost-customer service. However, with the advancement in technology and high information sharing, an efficient supply chain that can combat the aforementioned tradeoffs can be designed. This is explained in the following: Lot size - Inventory tradeoff

A transition towards flexible manufacturing system, kanban systems with a focus on reducing inventories and increasing responsiveness enables manufacturers to meet the customer needs effectively. Information sharing across supply chain ensures the demand requirements from the distributors and retailers. Information sharing also provides a better picture for the distributors and retailers of the factory status which can further result in promising a customer a reliable lead time. Inventory - Transportation cost tradeoff

Cross docking system and distribution control system can be used to ship different products from warehouse to retail stores. The above strategies can be used to achieve economies of scale in transportation costs by shipping in full truck load. However, this requires information sharing in order requirements, supplier delivery schedules, and demand forecasts. Lead time - transportation cost tradeoff

Total lead time which comprises of order processing time, raw materials procurement time, manufacturing time, and delivery time can be reduced by better forecasting techniques and information sharing of demands. Product variety - Inventory tradeoff

An effective strategy to combat the above tradeoff is applying the concept of delayed differentiation wherein the generic items are shipped as far as possible down the supply chain and product variety added later. As the demand variability is lower down the supply chain, delayed differentiation would help in reducing the inventory levels. Cost - Customer service tradeoff

Transshipping of certain shelf space directly to the customers home can help reduce inventory carrying costs as well as maintain customer satisfaction. For example, Target delivers large furniture directly from its warehouse to the end customer. This reduces the inventory carrying cost as well as provides customer delight. Information sharing and fast transmission of customer order is imperative to achieve this. In addition, the POS system implemented by Wal-Mart enables rapid and accurate information flow and helps the company in reducing supply chain costs and increase in the service level.

Ans 5: A typical supply chain has various stages like Raw Material Suppliers, Manufacturer, and distribution channels like Outbound Logistics, Warehouses, Retailers and finally the Customer. Each entity has its own objectives for optimizing its operations. The RM supplier wishes to gain stable volumes with little variety, flexible delivery times and demand in large batches. Manufacturers want accurate forecasts of future demand for better scheduling, less variety for higher productivity. Distribution sources desire minimal transportation costs, least possible inventory and rapid replenishment. Customers crave items to be always in stock with a variety of options to choose from and of

course, low prices. It can be easily inferred that the above goals are conflicting. In the past, to achieve some of the prominent goals like manufacturing and transportation efficiency, matters such as high variety, lowest possible inventory were sacrificed. But in recent years, as organizations have become more customer oriented these trade-offs are no longer permissible. But these changes are also accompanied by advances in manufacturing and information technology. Use of these technologies can have an enormous impact on the overall efficiency of the supply chain. These can be summarized as follows: The advances in manufacturing technology such as Flexible Manufacturing Systems has reduced the necessity of large production quantities to justify the change over costs. Also the availability of demand information instantly provides manufacturers with as much lead time as possible. The downstream members can quote lead times accurately and need not keep extra safety stocks in anticipation of manufacturing problems. Materials Managers have a broader view of orders and forecasts through distribution control system. Thus they can combine many shipments to make use of full truck load cost efficiencies which reduces the transportation costs. Also, advanced mathematical methods like network optimization can be used for balancing the inventory levels and the transportation costs. The trade-off between higher variety and lower manufacturing costs can be addressed by using advance manufacturing techniques enabling quick changeovers. Also another way to overcome this conflict is to use delayed differentiation . In this concept, the product is in its generic form to the last possible stage of supply chain. This asks for an integrated information system throughout the chain

which can be achieved through EDI. Transshipping has emerged as a new tactic implemented by organizations to maintain the service levels without increasing the costs. The product is shipped directly to customer household from

warehouse on receipt of order from the retailer. For this strategy to be effective, the availability of warehouse inventory data to the retailer is must. As a next step in use of information technology, Product Customization by end customer through the internet has been used by some organizations e.g. Dell Computers. At present this approach is limited to a select few products but has a high potential for expansion. It is evident from above explanation that information technology holds the key towards resolving the conflicts between various stages of supply chain. It is a step towards global optimization from the entire supply chains perspective.