Amsterdam MBA Operations & Supply Chain Management

Barilla SpA, Inc.

HBS case 9-694-046

March 19, 2013 Gulcin Askin Michelle Donovan Kivanc Ozuolmez Peter Tempelman

The answers in this report relate to the questions given in the document Case 2: Barilla SpA Question 1: What are the underlying causes of the difficulties that the JITD program was created to solve? 1A. What are the underlying drivers of the fluctuations in Exhibit 12? The fluctuations in weekly demand from Cortese Northeast DC are caused by many factors. Firstly the demand from customers can vary due to seasonality (e.g. more lasagna is sold around Easter). This is largely predictable fluctuation. Secondly, demand from distributors varies due to a number of factors, namely promotions, transportation and volume discounts, long lead times (10 days), the large variety of products and pack sizes and designs, and no minimum or maximum order quantities. The distributors do not have forecasting tools or systems. They will take advantage of a volume or transportation discount or canvass promotional period to order stocks for weeks in advance and then order less or nothing in the following weeks while they use up inventory. Poor communication between retailers, distributors, sales, marketing and manufacturing may be one other driver for the fluctuations, as well as a lack of a forecasting system. The supply chain is very complex. Distributors have different types of customer (supermarkets vs small independent shops) and various different strategies. There are many stages between the factory and the end-customer (large or organized distributors with their own warehouses and brokers). This demand is unpredictable (or at least it is at the moment, with no way to monitor real sell-out in stores and with distributors and stores holding inventory). The fluctuating demand causes the bullwhip effect, amplified variation in demand the more steps in the supply chain (away from the end-customer) there are. This is most noticeable in Exhibit 12 where we see 4-6 spikes in orders, followed by an incredibly low order volume soon after. 1B. What is the impact of such fluctuation? What are the costs of having an order pattern like this? The impact of the fluctuations puts Barilla in a situation where its production is insufficient or Barilla produces excess finished goods. These results imply that either Barilla has stock outs or is holding excess inventory (or both). The costs are related to direct revenue loss due to competition and inventory holding cost respectively. Due to fluctuations, the manufacturing and logistics operations are put under pressure. At the distributors end, the impact of such fluctuation may cause them to establish additional capacity to hold Barillas excess production (which is expensive) or to buy any type of promotion. Stockouts are also costly because they mean a loss of sales (customers will presumably buy a competitor product) and we can see from Exhibit 13 that the level of stockouts is still at or over 5%. Since margins are reducing, cost reduction on the operations side would be beneficial to the company as a whole. The large buffers of inventory cost money and may conceal other problems in the process.

1C. To which extent is Brando Vitales JITD proposal a mechanism for reducing these costs? Vitales proposition to supply distributors with quantities chosen by Barilla, instead of according to distributor orders, is designed to meet end-customer needs more effectively and also distribute the workload of the factory and logistic departments more evenly. If he is right and the workload is distributed more evenly, the manufacturing and logistics operations will not be under so much pressure. It means production will operate more smoothly, only producing what is requested. Inventory and stockouts should also be reduced at Barilla and at the retailer and distributor sides. According to Vitales proposal, information gathered from distributors will help Barilla to estimate its production and inventory levels. Through forward integration to the first tier customers (distributors), Vitale aims to strengthen its competitive advantage in the market by reducing cycle time to manage the bullwhip effect at the same time. 2. What internal conflicts or barriers internal to Barilla does the JITD program create? What are the causes of these conflicts? As Giorgio Maggiali, how would you deal with these? Internal resistance comes from the sales and marketing departments. They were concerned that if there were a strike or other interruption in production, the risk of stockouts would increase. They also thought that sales figures would be reduced (due flattened demand) and that the new system would not be flexible enough to respond to changes, and that sales promotions would no longer be possible. Another concern was that if the shelves in the distributors warehouses were not full of Barilla products, their competitors will move in and fill the space and then the distributors will push sales of competitor products instead of Barilla products. The causes of these conflicts are the lack of sufficient flexibility in production, and the reward structure for sales representatives. The flat sales structure will take away the bonus for sales people and it will be hard to maintain trade promotions under JITD. Also salespeople are worried that they will lose power because the functioning areas of marketing and sales will be narrowed. Maggiali should convince his own boss and the CEO of the value of the proposal, because the implementation of JITD needs to be company-wide. The CEO and top management should make clear to everyone that this is in the best interests of the company and give them some time to get used to the new situation. Company-wide, the view should be adopted that the relationship with distributors is a long-term one, a partnership, and should be managed accordingly i.e. joint learning, sharing successes, sharing and aligning long term expectations, and having multiple points of contact through formal and informal channels. Vitali sees JITD as a selling tool, so the sales team needs to be persuaded of the value of this selling tool. The reward structure for salespeople could be reorganized, for example some of their KPIs could be related to reduction in inventory, getting accurate data from stores about sales. The jobs of the salespeople could be redesigned to introduce more job commitment from sales; ideas to design satisfaction into the job could include job enlargement (larger number of tasks and more variety), job enrichment (greater autonomy), job rotation, empowerment and team-working.

3. As one of Barillas customers, what would your response to JITD be? Why? How might Maggiali be more successful in persuading customers to at least try the JITD program? a. As one of Barillas customers, what would your response to JITD be? b. Why? c. How might Maggiali be more successful in persuading customers to at least try the JITD program? Barillas customers (third level SCM) that would be affected by the JITD program are its customers of the dry products: The distributors of supermarket chains, Grande Distributzione, The distributors of independent distributors, Distributzione Organizzata. The supermarkets themselves or the Signora Maria shops are not part of the JITD program. The root of all things good in managing a supply chain is cooperation. Only if there is cooperation can all parties in the supply chain benefit from the innovations in distribution that are achieved through cooperation. The incentive for cooperation is a clear win for all parties involved (Barilla and its customers, a win-win situation). This is where things start to get difficult. From the case description there seem to be two aspects that are important to distributors: 1. The optimizing of inventory increased fill rates to retail outlets but also reduced inventory holding costs and improved service by having enough variety and receiving orders fast. 2. Fulfilling the role of distributor independent from Barilla. A characteristic of this independence is that the distributor manages the stock by itself. 3a. As Barillas customer my response to the JIDT program would therefore be to ask: 1. how the program helps me improving on my performance measures: prevent stock outs (dependability), increase variety (flexibility), reduce delivery time (speed) at the lowest costs (costs) 2. how the program lets me fulfill my role as independent distributor, i.e. let me manage my own stock. 3b. The independence issue is a valid argument, since Brando Vitali of Barilla said that the JITD makes distributors more dependent on Barilla. The interesting thing is that this dependency is viewed by Barilla as positive and a way to improve relationships (Vitali p.9: it should improve the relationships rather than harm them), whereas a distributor regarded the JITD program negatively, because it results in getting too closely linked to Barilla and would be giving Barilla the power to push product into our warehouses just so Barilla can reduce its costs (p.10). As a distributor I would like to know how I can improve my performance measures without losing my independence from Barilla and obtain some of the cost savings that is thought to go to Barilla. This seems to be a choice where there is no win-win situation possible. However, the distributor quoted in the case (p.10) made a counter proposal when asked to participate in the JIDT program:

Barilla would have to deliver within 36 hours. Therefore, apparently there is another way to improve the supply chain. The question is to what extent the JITD program and the need for faster delivery are different. Perhaps both Barilla and the distributors want the same, but approach the problem from different sides. 3c. In order to create a win-win situation, Giorgio Maggiali must address the concerns of loss of independence and sharing some of the cost saving. There are a number of alternatives possible: 1. Giorgio Maggiali should ask the distributors about their strategic objectives and try to gear the JITD program in such a way that it helps the distributors to meet these objectives. For example: if a distributor ranks dependability as top performance measure, Maggiali could indicate that the JITD program helps this distributor to improve his dependability by having the right type of pasta in stock most of the time. 2. Maggiali could implement the JITD first in Barillas own depots, and then present the findings to the customers. 3. As a sign of goodwill Maggiali could offer a guaranteed delivery time of 36 hours for distributors willing to participate in the JITD program. If results are positive, they can be used to convince other distributors. 4. Maggiali could propose a joint venture with Barilla and the distributors as shareholders that control the sales data from the distributors. By becoming joint owner of this data both parties can benefit without the distributors losing some of their independence. 5. Maggiali could ask an objective consultant trusted by both Barilla and the customer to give their opinion. 6. Maggiali could propose a simulation which could be carried out over a fixed time frame, in which Barilla would continue to replenish the distributor stocks in the old way, but at the same time records figures of how they would replenish the same customer differently in the new way, and then compare the inventory and frequency of stockouts at the end of the period. This should prove the benefits of the JIDP. 4. Replace yourself in the position of Barillas management. What would you do? (What would be your strategy and what would your implementation plan be?) First of all, although the case focuses on domestic (Italy) distribution-related operational issues, the Barilla management team should define their operation strategy for the near future that covers both domestic and international markets in alignment of Barillas market vision. The operation strategy should identify the order of importance of the five KPIs, and explain managements expectations clearly from operations. From our perspective, Barillas management team should order the KPIs as follows (most important to least); - Cost - Speed - Dependability - Flexibility - Quality

In terms of cost, defined as the most important KPI in the operation strategy, the management team should listen to the concerns of Mr. Maggiali and ask for more details and expected numeric and financial results on the curse of inventory. Based on the given information in the case, we are not able to come up with exact financial numbers for the curse of inventory. But all the concerns Mr. Maggiali has, clearly show that focusing on inventory and distribution chain management can result in major cost savings. With all the issues, and management teams operational strategy in mind, we came up with the action items below. Short term: - Involve top level management and look for their buy-in that the high inventory and demand fluctuation is not an operational issue but a company-wide (First Level[1]) and even distribution chain-wide (Third Level[1]) problem. Focus on First Level (company internal, inter-department) issues in distribution. o Involve sales team in inventory / distribution management. Some changes in bonus calculation of sales teams can help; Reward for less average SKU in the CDCs and Depots. Cut bonuses for fluctuations (if standard deviation > X) Currently a very accurate and up-to-date market analysis flow from stores by Barilla sales representatives into CDCs exists. This information flow is used for new products, pricing, promotions, competitor analysis, etc. but not integrated into inventory and production management. However this information bypasses DOs and GDs and does not provide any indication on GD and DO inventory or orders; it should be integrated into order forecasting for Barillas operations management and can be used as a powerful indicator of actual demand. To create awareness on the inventory and distribution chain issues in organizations, organize workshops (maybe on an academic level) and invite other departments like sales, marketing, finance to participate

Mid-term: - Look at ways to speed up delivery; currently the average lead time is 10 days and varying from 8 to 14 days. If the lead-time can be shortened, and the orders fulfilled quicker, DOs and GDs will start keeping less inventory and probably start ordering more often.
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Change sales practices which cause demand fluctuations. Move away from large, batch orders at discounted prices, and introduce periodic orders at agreed prices. o Discontinue periodic trade credits o Discontinue canvass periods o Discontinue volume discounts o Arrange long term distributor agreements covering: Fixed pricing year-long (Every Day Low Pricing practice)

Order limits (min-max order levels) Encourage periodical orders (i.e. if distributor agrees to order twice a week for the coming 12 months, then the fixed price on the contract can be arranged at a lower rate)

Run JITD experiment with one of the Barilla owned depots.

Long term: - The ultimate goal of Barilla to realize JITD should be leaning towards Vendor Managed Inventory for all channels, as much as possible.
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Create a Third Level[1], (Distribution Chain Level) information network to better focus and analyse the demand. o To gain trust and convince distributors that their independence is not in jeopardy, Barilla could propose a joint venture with Barilla and the distributors as shareholders that control the sales data from the distributors. By becoming joint owner of this data both parties can benefit without the distributors losing some of their independence. o Barilla could ask an objective consultant trusted by both Barilla and the customer to give their opinion. o Convince DOs and GDs that the information sharing results in a win-win case by proposing a simulation that could be carried out over a fixed time frame, in which Barilla would continue to replenish the distributor stocks in the old way, but at the same time records figures of how they would replenish the same customer differently in the new way, and then compare the inventory and frequency of stockouts at the end of the period. This should prove the benefits of the JIDP. o Build trust by looking for strategically aligned relationships with individual DOs and GDs. Explore how Barilla can help its distributors to meet their strategic objectives. If the DOs or GDs do not want to share data, offer a closely working Barilla representative to be present at DO or GD premises who monitors the inventory and sales figures and advises on the ordering (similar practice is currently performed in supermarkets) For really skeptical distributors on information sharing, develop and roll out a Barilla Demand Forecasting System where DOs and GDs can order based on the outcomes of the forecasts. However this will still not fulfill all the required information for Barilla to flatten the demand, both Barilla and the distributor will benefit from better forecasted orders and decreased inventory.

References [1] Prof. dr. Jack A.A. Van der Veen, Operations & Supply Chain Management Course slides, Week 5, Slide #7