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Company Overview
Barilla SpA is a large, vertically integrated, family owned pasta company based
in Italy. It maintains a leadership position among a field of thousands of Italian
competitors producing and distributing brand-name pasta. Its operations are
divided among 3 production divisions and two distribution channels, based on
product shelf life. Distribution was further divided between two central
distribution centers (CDCs), based on geography.
Customers were divided into three primary segments: Small retail shops; Large
independent supermarkets; and Large supermarket chains. Distribution to
small retail shops was direct from the CDCs. Distribution to the supermarkets
went through intermediate distribution centers, either owned by the chain, or
operated by a third party representing multiple independent supermarkets.
Fresh product was distributed through a network of brokers.
Distribution Problems
The pasta supply chain suffered from classic bullwhip-effect problems: high
inventory levels stored at each level of the supply chain; stockouts at the
distributor level; demand variability magnification up the chain, and
exacerbated by frequent promotions, Full Truck Load (FTL) and other volume
incentives; and a lack of information on which to forecast demand.
Internal opposition originated both from job security fear as well as more
legitimate concerns, such as the culture of promotions and fear of competitor
encroachment into distributor warehouse space following a reduction of Barilla
inventories. Outside opposition was most vocal from distributors' buyers, who
were most directly threatened by the JITD system.
A JITD program would help to reduce inventory held at the distributors since it
builds inventories at the central warehouses and then deliver only the
quantities required by the end-users through more frequent checks of the
distributors' inventory. Thus, the JITD approach will save the entire supply
chain money in reduced inventory costs and will result in high service levels.
But finding the right foothold on which to mount a successful pilot program is
the key challenge for Barilla.
Since the inventory data and delivery patterns would be controlled by Barilla, it
would be easier for their central factory and CDCs to schedule their production
and deliveries to meet the customer demands. For the distributors, the
increase in flexibility and reaction speed leads to lower inventory levels
improving the fill and stockout rates. It will also help to improve scheduling of
production and reducing lead-time, which will minimize the fluctuations seen
currently. The delivery load will be balanced.
Instead of giving discounts for large order volumes, Barilla would give discount
for stable long-term orders (EDLPP). By doing so Barilla could have many
reliable long-term orders to meet market demands, and considerably reduce
the variability in the supply chain.
Target Market
Small retail shops constantly struggle with providing product variety to its
customers within the limited shelf space they operate by. This market would
be the most willing of all segments to accept smaller order quantities to reduce
the inventory they have on hand. This reduction would allow them to add
greater variety of products.
The small retail shops are currently served by Barilla's own regional distribution
centers so there is a greater level of control within this supply chain. Sharing
of information becomes easier which is paramount to the JITD program.
Conclusion
Barilla became a market leader by taking a simple product like pasta and
selling it very differently than the rest of the industry. The product was put in
sealed boxes and marketed as a higher end product. In doing this, the
company was able to produce a greater profit margin than its competitors. The
JITD program gives Barilla an opportunity to do something very similar. By
moving to a distribution system that greatly reduces the variability, Barilla can
greatly reduce the "Bullwhip" effect that plagues the industry.