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Barilla SpA (A) Case Study Analysis ROBERT PAUL ELLENTUCK Diagnose the underlying causes of the difficulties that the JITD program was created to solve. What are the benefits and drawback of this program? Brando Vitali, Barilla’s director of logistics, proposed the idea of Just-In-Time Distribution (JITD) in the 1980’s as an alternative to Barilla’s traditional practice of delivering products to their distributors (Hammond, 1). Instead of distributing Barilla’s products based on the orders the distributors placed with the company, Barilla’s own logistics organization would determine the product quantities to distribute that would most effectively meet end-consumers needs. This in turn, would more evenly distribute the workload on Barilla’s manufacturing and logistics systems (Hammond, 1). Vitali hoped his innovative idea would solve the tremendous fluctuation that occurred from week to week in the number of Barilla dry products being ordered by the distributors. The extreme demand variability seriously strained Barilla’s manufacturing and logistics operations. Barilla’s highly automated manufacturing system was not designed to accommodate large fluctuations in demand nor, was it designed to accommodate sudden changes in demand or product. The manufacturing sequences of pasta production made it very difficult to produce particular types of pasta that had been sold out due to unexpectedly high demand. The temperature and humidity in the kiln had to be precisely specified for each size and shape of pasta and had to be tightly controlled to ensure that quality was maintained (Hammond, 3). This procedure limited the ability to rapidly shift production between different pastas. Different sizes of pasta were also made in different plants based on the variety of equipment required for pasta production (Hammond, 3). This limited Barilla’s production flexibility to shift plant locations as needed to meet product demand. The JITD program was also created to address the amount of inventory being held at Barilla’s Central Distribution Centers (CDC’s), their Grande Distribuzione (GD’s), their Distribuzione Organizzata (DO’s), and their retailers. Some distributor’s inventory levels were so low that they were experiencing high-stock out rates when attempting to fill retailer orders (Hammond, 7). Other distributors and retailers were carrying too much inventory. Barilla felt their customers were realizing that they didn’t have enough room in their stores or warehouses to carry the large inventories Barilla wanted them too (Hammond, 8). On the other hand, the distributors felt that they were being pressured to increase the inventory levels they had already stocked and to add items they didn’t carry to their product offerings (Hammond, 8). The JITD program would look at all the distributor’s shipment data and send only what was needed to the stores (Hammond, 8). This would eliminate Barilla scrambling to meet demand swings from the distributor. It would also improve operations for Barilla and their customers. Barilla would be able to ship products as needed, rather than build huge stocks in their facilities (Hammond, 8). Finally, holding sufficient finished goods inventories at Barilla’s CDC’s to meet distributor's order requirements, was extremely expensive when weekly demand fluctuated so much and was so difficult to predict. Production sequencing based on type (and size of facility), made it cost prohibitive to change-over product runs or mix multiple types. Flexible scheduling based on orders from distributors could not be achieved. Vitali’s position on the JITD program was that it would save manufacturers and retailers money due to thinning margins by taking costs out of the distribution channel without compromising service. Barilla would use forecasting systems and analytical tools to determine product quantities in a sensible and logical manner. They would look at data provided by the distributors and make decisions based on their forecasts (Hammond, 8). Their process would be very similar to using point-of-sale data from retailers. Barilla’s forecasting would need to include predicting sales for individual products within each line, calculating equipment and labor requirements to meet product line forecasts, and projecting labor and equipment availabilities over the planning horizon (Jacobs & Chase, 48-49). 2 Benefits to the JITD program include delivering only what was needed to the distributors to avoid large inventories, limiting the variation in order swings from week to week for dry products, and improving operations to determine quantities and delivery schedules. If Barilla didn’t have to respond to volatile demand patterns from their distributors, they could reduce distribution costs, inventory levels, and ultimately manufacturing costs. They could respond to the ultimate demand (from the end-consumer), by using the consumers input to produce orders (Hammond, 8). Barilla’s replenishment decisions would be based on forecasts created from actual daily demand from each distributor. In the end, the distributor’s cost would be lowered because they wouldn’t need to carry as much inventory (they would only receive what they needed to supply their retailers from the manufacturers) and Barilla’s strain on their logistics and manufacturing processes would decrease. The JITD program would also allow distributors and retailers to carry more variety with fewer inventories. The JITD program would limit Barilla’s ability to run frequent, and expected, trade promotions to push products into their grocery distribution network (Hammond, 6). They would no longer be able to run traditional "canvass" periods (times when distributors could buy as much product as desired to meet current and future needs) and would need to eliminate volume discounts. Elimination of the “canvass” periods would discourage sales representatives who used these periods to sell more products to distributors to achieve sales targets (Hammond, 6). The volume discounts that were offered to the distributors for truck load quantities and multiple truck load purchases of pasta would also cease to exist with the JITD program. The entire relationship between the sales representatives and distributors appears to weaken with the JITD program, as the sales representatives lose their traditional areas of influence and the ability for distributors to control their inventory is taken away. The JITD program is a shortsighted view of a “push” model based on point-of-sale demand (i.e. “pull” from the end consumer). In other words, even though the end-customer demand would be used to generate production quantities, the demand would not be pulled from the downstream process, i.e. the distribution centers. The program would completely cut-out the distributers needs and the majority of the distributors and supermarkets did not have the infrastructure to realize Barilla’s vision. Most grocers in Italy weren’t equipped with the necessary bar-code scanners and computer linkages to provide actual retail sell–through data to Barilla. On the other hand, Barilla wasn’t prepared to invest in their vision to the degree they needed to in order to succeed with the JITD program. An overwhelming opposition between Barilla and its distributors continued for over two years. By replacing Vitali with Giorgio Maggiali in 1988, Barilla appeared to have a better chance of getting the distributors to buy-in to the proposed JITD program, based on Maggiali’s hands-on methods (Hammond, 9). What conflicts or barriers internal to Barilla does the JITD program create? What causes these conflicts? As Giorgio Maggiali, how would you deal with these? Barilla’s sales and marketing organizations viewed the JITD program as infeasible and dangerous (Hammond, 1). Its marketing and sales strategy was based on a combination of advertising and promotions (Hammond, 5). This strategy could be eliminated with the JITD program. The sales and marketing organizations were very vocal in expressing their opposition to the plan and how it could adversely affect their departments (Hammond, 9). Barilla’s sales representatives worked closely with the grocery stores and distributors and felt the JITD program would take away their influence. They feared that their ability to have specials and increase sales levels would not exist with the JITD program. They were also concerned that they would be unable to adjust shipments quickly to changes in selling patterns, If they were unable to run promotions, they didn’t know how they could get their distributors to push the Barilla products. 3 The sales and marketing organizations raised additional issues about the JITD program such as the possibility of a strike or other disturbance in the supply process leading to a stock out, competitor advantage if space was freed up in distributor warehouses and an increase in costs if production schedules weren’t changed. Sales representatives clearly thought the distributors couldn’t handle a “sophisticated relationship” with the supplier. Distributors viewed the JITD program as Barilla’s attempt to dump inventory and the cost of carrying it on them to absorb the fluctuations in demand (Hammond, 8). Vitali noted they Barilla should only ship when needed (from inventories in distributor warehouses) to meet demand and absorb the pressure on production. This approach was not acceptable to the managers of the GD’s or DO’s. The DO’s that served the independent markets, were not able to devote storage to compensate for the inflexible production system at Barilla. Causes of the internal conflicts came from the sales representatives’ fear of losing its traditional power and influence with the distributors. They felt their relationship with the distributors would be weakened and considered the JITD program a huge threat to their sales. Giorgio Maggiali's response to the conflicts being created within Barilla to the JITD Program was for the sales organization to view JITD as a selling tool, and not a threat to sales (Hammond, 9). The JITD program offered additional service to the customer at no extra cost. It also would improve Barilla's visibility with trade and make distributors more dependent on Barilla. Maggiali felt the JITD program could improve the relationships between Barilla and the distributors rather than harm them. Information gained from the program would provide Barilla with objective data to improve their own planning process. The JITD program would need to be linked to volume discount incentives for distributors and promotion discounts for retailers in order to receive buy-in from the distributors, sales, and marketing organizations. These strategies heavily influenced the demand. To be truly successful, the JITD program needed to be an end-to-end strategy that could respond to a composite demand signal at all stages in the value chain from sourcing, to production, distribution, marketing, sales and retail. As one of Barilla's customers, what would you response to JITD be? Why? As one of Barilla’s traditional customers, I would be opposed to the JITD program. I wouldn’t want Barilla to manage my inventory. As a distributor, I feel inventory management is my job. I would also be concerned with Barilla viewing my warehouse and/or sales figures. It seems that allowing them to push their products into my warehouse would reduce their own expenses and not mine. I’m also concerned that disruptions in the supply chain could lead to shortages/stock outs in my distribution center. Finally, I have a difficult time believing that Barilla would be better at forecasting or managing inventory, than I’m already doing. In order for the JITD program to be acceptable to me (and to the other distributors), it would have to include my needs as opposed to excluding them. To make the JITD program manageable across the supply chain, a range of limits could be placed at each stage (particularly with the distributors with regards to how much they could inflate their orders based on their forecast and the lead-time needed to fill them). Placing limits at the various stages, could act as a restoring force to stabilize the volatile demand by balancing the order frequency with the fill frequency. I would also give the factory the time it needed to change production runs to fill the orders. 4 It appears that what has happened over time in the Barilla company, is similar to the adversarial relationship described in our textbook between supply chain partners. Barilla has allowed its distributors to purchase large amounts of inventory turning “canvass” periods into forward buying incentives that actually become costly for them to carry the additional supply in their warehouses. In turn, Barilla has had a difficult time reacting quickly to the surge in raw material requirements and is trying to implement the JITD program (Jacobs & Chase, 226). The variability that has been created between the customers to the producer in the supply chain indicates a lack of synchronization among the supply chain members, otherwise known as the bullwhip effect (Jacobs & Chase, 227). Barilla’s efforts to implement the JITD program appear very similar to Campbell Soup’s continuous replenishment efforts, which typify what many manufacturers are doing to smooth the flow of materials through their supply chain (Jacobs & Chase, 227). If Barilla’s supply process becomes imbedded through advanced technology and the establishment of a mature supply process, Barilla’s distributors will become more response to the JITD program. In the environment in which Barilla operated in 1990, do you believe JITD (or a similar kind of program) would be feasible? Would it be effective? If so, which customers would you target next? How would you convince them that the JITD program was worth trying? If not, what alternatives would you suggest to combat some of the difficulties that Barilla's operating system faces? If properly implemented, the JITD program would be feasible in the environment in which Barilla operated in 1990. However, it’s critical to convince Barilla's own sales and marketing staff of the value of the program before approaching the distributors for program buy-in and implementation plans. Barilla’s sales staff appeared to sabotage the JITD program from the start. They resisted the program for fear of the program threatening their sales levels. Once Barilla convinced their sales staff of the JITD program benefits, they could utilize their sales representatives to positively promote the program to their distributors and retailers. Barilla would also need to convince the sales/buyers at the distributors that the JITD program would save them money and make their job more efficient before approaching the logistics people. The logistics people seemed most willing to try the JITD program when Maggiali approached them in 1988. Once buyers became aware that the JITD program was designed to save them money, and the objections created by sales staff's and the distributors were overcome, JITD would become a feasible program. The key to making this effort successful was to obtain the inventory and sales data for Barilla to accurately forecast the demand for their products. The problem with the JITD program is whether or not Barilla would be able to adjust their production to meet the goal of decreasing their inventory (as well as the distributor’s inventory). Barilla’s highly mechanized means of pasta production is completed in a standardized time consuming way, with different shapes and sizes of pasta coming from different plants. Their plants are not designed to quickly shift from making linguini to macaroni, from spaghetti to capellini, etceteras. Therefore, the manufacturing to support the JITD program would take an extreme effort at redesigning their production methods, schedules and learning how to be more agile, more flexible and lean. Pasta production is very different from a Toyota plant that makes five models and can shift, based on demand (i.e. Camry to Prius). Once Barilla possesses the demand data from their distributors, they could adjust manufacturing to meet actual demand, and not just the “wild swings” that were occurring. Changes in Barilla’s manufacturing process are critical for an effective JITD program. The customers to focus on next to promote the JITD program are the independent retailers supplied from Barilla's own warehouses and the retailers served by the distributors who had not signed onto the program. Barilla’s internally-owned regional warehouses distribute 35% of their products to small independent shops (Hammond, 5). Focusing on this segment could provide the opportunity for Barilla to collect the usage/demand data they need directly from the retailers. They could convince the 5 independent retailers of the value in the JITD program when they ordered new equipment. These retailers would become more committed to Barilla when they realized their orders would flow more efficiently and save them money on in-store inventory. It would also be beneficial to provide these retailers with handheld computers so their orders would go directly to the distributor or Barilla warehouse (thus allowing Barilla to obtain near real-time usage data). The independent supermarkets served by the DO's are an excellent place to collect data, while at the same time convincing them of the JITD program benefits. Sales representatives spent 90% of their time working at the store level setting-up in store promotions, discussing products and strategy with store management, and inputting distributor orders (Hammond, 6). The sales representatives could also visit the GD’s that distributed products to supermarket chains. The GD’s were rarely visited by the sales force yet, could be valuable for buy-in to the program. By reaching out to the DO’s and GD’s, Barilla could gather the data they need to better assist the distributors in serving their customers. Barilla could also demonstrate to the distributors how the JITD program would work and save them money. Barilla and their stakeholders would benefit greatly from analyzing the sales data and decomposing it using least squares regression to help normalize the seasonal and trend factors attributable to the severe fluctuations. This would each stakeholder at every stage in the value chain to schedule for those causal relationships and better absorb the demand (Jacobs and Chase, 318-319). After convincing the in-house sales team that the JITD program was worth trying, Barilla should focus on convincing the outside companies that the program would work for them. This step is critical, as this is where the opposition to the JITD program stems from. Barilla’s sales force was opposed to the program and sabotaged the program with distributor's buyers. The buyers, in turn appeared to sabotage the logistics departments. It’s important to obtain buy-in to the JITD program from the entire team. The sales force needed to understand that the JITD program could be promoted as a selling tool and not a threat to their sales. It provided an additional service offered by Barilla at no additional cost. Distributors also would benefit by realizing that the JITD program would eliminate the need for faster delivery because merchandise would be delivered as desired just-in-time. There would be no need for them to place an order and with a week or more of delay before it to be delivered. The program could decrease their inventories and improve their delivery rate to their stores. If Barilla could gather demand data directly from retailers, they could use that data to better level their production schedule by adjusting inputs appropriately and ultimately being able to better demonstrate to customers that JITD program was feasible (Jacobs & Chase 371-371). Likewise having robust end-customer demand data Barilla could determine whether a fixed-order quantity and/or a fixed-time quantity would be viable as a function of sales to establish more accurate and responsive inventory controls (Jacobs & Chase, 388). In the event that the sales force and distributors continue to be opposed to the JITD program, we suggest that Barilla turn its attention to improving their manufacturing operation. Barilla’s manufacturing operation needs to gain more flexibility to allow it to react more quickly to meet the changes in demand. The system needs to adjust to the JITD program by manufacturing to meet that demand without building up large inventories (which is what they are trying to avoid). Barilla can’t promise their distributors that they could save money by carrying less unnecessary inventory unless they can prove that their manufacturing processes have changed to meet fluctuations in demand. They have overinvested in making their facilities efficient at producing like types and sizes of pasta, which made it cost and schedule prohibitive for them to changeover production runs to meet variations in demand. Barilla could benefit from implementing several key aspects discussed in our textbook with regards to creating lean manufacturing processes. They could use value-stream mapping to assist them to fully understand their production processes, material flows, and information flows (Jacobs & Chase, 278). They could eliminate unnecessary activities in their processes, recognize their physical factory 6 constraints, work with their retailers and distributors to understand their needs, and truly develop a cooperative association with their customers over the long term so everyone could mutually benefit (Jacobs & Chase, 291). Inviting Barilla’s distributors into their factories to view first-hand the operations taking place would assist in building a staple relationship between the distributors and manufacturer. The JITD program is definitely reasonable with proof of changes in Barilla’s manufacturing process and buy-in from all levels of retailers, marketing, sales, and distributors. These divisions of Barilla’s value chain ARE their customers. They need included as equitably as possible in balancing their system to respond to fluctuating demand. Barilla could not rely solely on trying to push a strategy through “grass roots” efforts by visiting their customers individually and hoping to convince them of the JITD program benefits. This approach was clearly not working. Barilla needed to restructure the JITD program to include the needs of every “customer” in the system as best possible. Perhaps working with on a pilot scale initially to entice other stakeholders in the value chain would be the most effective strategy to establish the sense of buy-in the program absolutely depended on to be a success. References Hammond, J.H. (2006). Barilla SpA (A). Harvard Business Review. Jacobs, R., and Chase, B. (2008). Operations and Supply Management The Core. McGraw-Hill, Irwin. 7 COPYRIGHT © 2010. ALL RIGHTS RESERVED. ROBERT PAUL ELLENTUCK THE COPYRIGHT HOLDER EXPRESSLY PROHIBITS ANY AND ALL COPYING, FAXING, SCANNING, XEROXING, REPRODUCING, TRANSMISSION, DISSEMINATION, FORWARDING, PRINTING, SUBMISSION (EITHER ELECTRONICALLY OR OF A SCANNED OR OTHERWISE REPRODUCED COPY, OR OF THE ORIGINAL COPYRIGHTED MATERIAL, A COPY OF THE COPYRIGHTED MATERIAL, OR OF A PORTION OF THE ORIGINAL OR COPIED COPYRIGHTED MATERIAL), OR ANY AND ALL OTHER ACTIONS: ELECTRONIC OR OTHERWISE, OF ANY PORTION OF THIS COPYRIGHTED MATERIAL OR THE ENTIRE COPYRIGHTED MATERIAL, WHICH MAY IN ANY WAY VIOLATE THE RIGHTS OF THE COPYRIGHT HOLDER. SUCH PROHIBITION INCLUDES THE ORIGINAL COPYRIGHTED MATERIAL, A COPY OF THE ORIGINAL COPYRIGHTED MATERIAL, A PORTION OF THE ORIGINAL COPYRIGHTED MATERIAL, A PORTION OF THE COPIED COPYRIGHTED MATERIAL, AN ELECTRONIC VERSION OF THE COPYRIGHTED MATERIAL, OR ANY OTHER POTENTIAL VERSION OF THE COPYRIGHTED MATERIAL (WHETHER THE TECHNOLOGY EXISTS AS OF THE COPYRIGHT DATE, OR IS YET TO BE INVENTED). THIS PROHIBITION EXPLICITLY EXTENDS TO ALL OF THE ABOVE ACTIONS, BUT IS IN NO WAY LIMITED TO THEM. ANY USE OF THE COPYRIGHTED MATERIAL, IN ANY MANNER, CAN ONLY BE WITH THE PRIOR CONSENT AND AUTHORIZATION THAT IS BOTH WRITTEN AND EXECUTED BY THE COPYRIGHT HOLDER AND THE OTHER PARTY, RELATING SPECIFICALLY TO THIS COPYRIGHTED MATERIAL. THIS COPYRIGHT, AND ALL OF THE PROTECTIONS THAT IT AFFORDS THE COPYRIGHT HOLDER EXPLICITLY EXTEND TO ANY COPYRIGHTED MATERIAL, IMAGE, FILE, DATA, OR ANY OTHER ATTACHMENT IN ANY FORM, ELECTRONIC, PRINTED, OR IN ANY OTHER FORMAT, THAT ARE ATTACHED TO THIS COPYRIGHTED MATERIAL IN ANY MANNER OR FORM, AND TO WHICH THE COPYRIGHT HOLDER HOLDS OR IS ELIGIBLE, UNDER THE WIDEST POSSIBLE INTERPRETATION, TO HOLD A COPYRIGHT TO. THE INTERPRETATION OF THE COPYRIGHT HOLDER’S RIGHTS SHALL BE AS BROAD AS THE LAW ALLOWS, AND IN NO WAY SHALL BE LIMITED BY THE RIGHT OR RESTRICTION NOT BEING STATED. THE COPYRIGHT SHALL ALSO EXTEND TO ALL FUTURE PROTECTIONS, AS THEY BECOME AVAILABLE. THIS COPYRIGHT IS IN NO WAY INTENDED TO INFRINGE ON THE RIGHTS OF ANY OTHER PARTY. 8
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