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Supply Chain Management (SCM)

Case Study >> Barilla SpA


Arunvel T (EPGP-05-127)
Girish Pai (EPGP-05-117)
Pawan Lakhawat (EPGP-05-137 )
Venkata R.C. Tummala (EPGP-05-159 )
Vinod Kumar N (EEPGM-12-027)

Supply Chain Management (SCM)


EPGP 05

Contents
Company Background
Barillas Products & Market Share
Barillas Distribution Channel

Barillas Sales & Marketing


Analysis Note

Supply Chain Management (SCM)


EPGP 05

Barilla Company Background


Annual growth of over 21%
Expansion in Italy and other European
countries
Acquisition of new, related business

Largest pasta manufacturer in the world


- 35% market share in Italy
- 22% market share in Europe

1990

1980
1979

Pietro bought back the company from W.R.Grace

1971
1875

In 1971 due to bad debt ,company was sold to US


firm W.R.Grace

Founded in 1875 by Pietro Barilla in


Parma
Revolutionized the Italian pasta industry with
strong brand name and high quality
Supply Chain Management (SCM)
EPGP 05

Barillas Products and Market Share


In 1990 , Barilla had become the largest pasta manufacturer in the world
35% of pasta sold in Italy and 22% of pasta sold in Europe
Traditional Barilla brand - 32% of the market
Remaining 3% of market share divided across
Voiello brand (Competing in the high price segment)
Braibanti brand (High quality pasta made from eggs and semolina)
29% market share in Italian bakery products
Barilla had two product lines - Fresh & Dry
Fresh
Fresh pasta products 21 days of shelf lives
Fresh bread 1 day shelf lives
Dry
Constitutes 75% of Barilla sales
Dry pasta, Cookies, Biscuits, Flour, Bread sticks, dry toasts
18 24 months shelf lives Pasta and Dried toasts
Medium shelf lives 10 to 12 weeks (Cookies)
800 different SKUs

Voiello

Braibanti

Supply Chain Management (SCM)


EPGP 05

Barillas Distribution Channel


Barilla Plant

35%
65%

TL

TL

10%

CDCs

90%

TL

Barilla Run
Depot

TL
LTL

GD

DO

LTL
LTL
Signora Maria
Shops

Chain
Super Markets

Independent
Super Markets

* LTL : Delivery in Less than truck


load quantities
* TL : Delivery in truck load quantities
* CDC : Central Distribution Centre
Supply Chain Management (SCM)
EPGP 05

Barillas Distribution Channel (Contd..)


Each CDC held about a months worth of dry product inventory
Products were distributed via three types of retail outlets:
Small independent grocers
Super market chains
Independent super markets
Distribution system was traditional and followed information sharing in bottom up approach
35% of Barillas dry products were distributed from internally owned regional warehouses to small
independent shops , remaining 65% were distributed to supermarkets by outside distributors
GD Grand distributor meant for distributing to Super Market Chains
DO Organized distributors for distributing to independent super markets
GD & DO maintained inventory in their own warehouse and would typically held a two week supply
Super markets placed daily orders to Distributors
GD & DO placed order once a week , Avg. Lead time at Barillas was 10 days (Ranging from 8 14 days)

Supply Chain Management (SCM)


EPGP 05

Barillas Sales & Marketing


Heavy Advertising & Positioned as the Highest Quality brand
Promotion programs were frequent - 10 to 12 canvas periods - 4 to 5 weeks in length
each being a promotional program
Distributors buy as many products as desired to meet current and future needs
Incentives for Sales personnel of Barilla Sales target for each canvas period
Discounts 1.4% for Semolina pasta, 4% for egg pasta, 4% for biscuits, 8% for auces and
10% for breadsticks
Volume discounts Barilla paid for transportation i.e. almost giving 2 to 3% for orders in
full truckload
Huge discount if distributor purchased a minimum of three truckloads of barilla egg pasta

Supply Chain Management (SCM)


EPGP 05

Reasons for increase in variability in Barillas Chain


Demand forecasting : Traditional approach
Traditional inventory management technique practiced at each level in the supply chain lead to bullwhip
affect
i.e. Base stock level = (avg. demand during lead time + review period) * (SD (avg. demand during lead time,
review period) )

Increase in Lead Time


Increase in lead time leads to increase in variability
Safety stock & base stock level = Avg. daily customer demands + SD * (Lead time + review period)
Hence increase in lead time would increase safety and base stock , thus increases variability
Barilla typically would have around Avg. 10 days of lead time

Batch Ordering
High fluctuation in orders: Barilla would receive certain weeks with large orders followed by several period
of no orders with repetition in the pattern
Volume based discounts: Barilla used to give incentives like they would consume the transportation cost if
they purchase one full truck load
Incentives: Incentives given to sales people to achieve target during promotions, hence Sales would
influence distributors/retailers to buy in bulk

Price fluctuation Forward Buying


Retailers buying large quantities during promotion period given by distributors and manufacturers
Discounts 1.4% for Semolina pasta, 4% for egg pasta, 4% for biscuits, 8% for auces and 10% for
breadsticks
Huge discount if distributor purchased a minimum of three truckloads of barilla egg pasta

Supply Chain Management (SCM)


EPGP 05

How can the firm cope with increase in variability?


Apply effective forecasting techniques:
Variability is a function of No. Of demand observations(p) and lead time (L). By
Increasing p and reducing L forecasting errors can be reduced

To employ sophisticated analytical tools and forecasting techniques across supply chain

to reduce variance of orders placed.

Lead time reduction (LT):

To reduce LT, Barilla has to employ


- Cross docking
- Capturing data in digital form
- Information sharing by EDI- electronic Data interchange

Develop information systems at POS to transfer real time data from retailers to upwards
of supply time to reduce lead time

Supply Chain Management (SCM)


EPGP 05

How can the firm cope with increase in variability? (Contd..)


Trade Promotions/Volume Discounts:
Barilla employs 10-12 canvas periods per year as Promotional programs and provide
volume discounts to retailers. This causes price fluctuations which inturn increase demand
variability
Solution 1: Barilla has to do away with promotional programs or reduce no of
promotions and volume discounts to reduce variability of demand
Solution 2:Barilla can plan Every Day Low Pricing (EDLP) strategy
Solution 3: Barilla has to forecast demand variation during and after
advertisement/promotion based on historical data and plan for meeting spike in
demand

Supply Chain Management (SCM)


EPGP 05

Impact of transferring demand info across supply chain?


Extended
Company
(suppliers,
distributors,
transportation)

Company
(Barilla)
Reduction in
the high
variance of
production
targets
Elimination
of Bull whip
effect

Raw
material
suppliers at
economies
of scale

Discounts
at the right
time for
right
products

Control over
the inventories
of large
distributors
and in turn an
cost
governance

Ability to
respond to
the demand
fluctuation
directly
Efficient
production
planning

Governing
optimized
supply during
promotions
and discounts

Reduction in raw
materials
ordering costs
transportation
costs

Sales team
might lack
synergy as
their control is
lost to a
forecast model

Transporters
operating at
economies of
scale FTL /
LTL issues
resolved
Long term
customers
being afraid of
loosing
control over
their
inventories
Reduction in
ordering costs
and inventory
costs for
Trust and distributors
attitude
related
issues with
the
distributors
Supply Chain Management (SCM)
EPGP 05

Can the VMI strategy solve the operational problem faced by


Barilla?
Understanding Barillas
Operational Problem:

Is the VMI strategy a right fit


for Barilla?

What is VMI strategy? & its


benefits.

Variations in distributors order


pattern
causing
operational
inefficiencies and cost penalties
Operational
challenges
in
shifting between pasta varieties
due to tight heat and humidity
specifications of the tunnel kiln
While the variability in aggregate
demand for pasta is very small,
distributors order varies hugely.
Only few distributors had
forecasting
systems
or
sophisticated analytical tools for
determining order quantities
Resistance to changes in the
existing distribution system by
Barillas sales team and their
distributors

Opportunity: In Barilas case,


Nearly all of the distributors had
computer-supported
ordering
systems
The problem is the mindset
change, both internal to Barilla &
also with distributors
VMI would help in better
forecasting, thereby, help in
improving service levels and
reduces cost penalties
Further, VMI would also help in
effective planning of inventory,
resulting in better control on
tunnel kiln production schedule.
We believe that EDI should be
established with distributor in the
medium term and persuade retail
outlets to go for EDI, as a long
term strategy. This would benefit
the implementation of VMI.

An optimization of supply chain


in which supplier (Barila) takes
responsibility
in
managing
distributors inventory level.
Needs top management buy-in,
various stakeholders in the
transformation process, includes
distributors,
sales
team,
employees
An effective Electronic Data
Interchange
(EDI)/Internet is
necessary for harnessing the full
potential of VMI.
Benefits:
Improved service levels through
increased Fill rates, reduced stock
outs
Better control on inventory plan
& smooth operational schedule
Supply Chain Management (SCM)
EPGP 05

How can supply chain meet conflicting goals?


Different conflicting goals in supply chain:
Raw material suppliers

Stable volume requirements


Little variation in the mix of required materials
Flexible delivery times
Large volume demands - Take advantage of economies of scale

Manufactures
High productivity Low production cost
Demands patterns should be known and has little variability

Logistics
Minimize transportation cost - Take advantage of quantity discounts
Quickly replenish stock , minimize inventory level

Retailers
Short order lead times
Efficient and accurate order delivery

Customers
Items should be in stock
Low prices
Supply Chain Management (SCM)
EPGP 05

How can supply chain meet conflicting goals? (Contd...)


Replacing sequential planning processes with global optimization
With centralized system the SC can move toward global optimization and reduce system
wide cost while accounting for these conflicting goals and various trade offs

Trade offs across Supply Chain can be reduced by:The Lot Size Inventory trade off
Setup time reduction, kanban and CONWIP and other modern manufacturing practices
Reduce inventories and improve system responsiveness
Would help manufactures to more rapidly respond to customer needs
Retailers know factory status , they can quote lead time to customers
The inventory- Transportation Cost trade off
Carrying full truck loads
Cross docking
Advanced DSS to balance between inventory and transportation cost
Lowering overall transportation costs by using advanced transportation modes
The Lead time Transportation Cost trade off
Improved forecasting techniques and information system
It reduces lead time , so it many not be essential to reduce the transportation
component

Supply Chain Management (SCM)


EPGP 05

How can supply chain meet conflicting goals? (Contd..)


The Product Variety Inventory Trade-Off
Apply delayed differentiation concept
Generic products are shipped as far as possible down the supply chain before variety is
added
Applying above concept would mean applying the concept of risk pooling as well,
implying a more accurate demand forecast with much smaller variability, leading to
reduced safety stock
The Cost Customer Service Trade Off
Direct shipping from warehouses to the homes of retail customers, thus controlling
inventory cost at retail stores and allow warehouses to take direct advantage of risk
pooling effects. It improves the customer service as customers have large inventory to
choose from and are immediately delivered to their homes
Apply concept of mass communication , deliver high personalized goods and services
to customers at reasonable prices and at high volumes

Supply Chain Management (SCM)


EPGP 05

Thanks

Supply Chain Management (SCM)


EPGP 05