sc barilla case 9.july.13 agpvv

8/10/2019 SC Barilla Case 9.July.13 AGPVV

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Supply Chain Management (SCM)EPGP 05

Supply Chain Management (SCM)

Case Study >> Barilla SpAArunvel 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)


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Contents

Company Background

Barillas Products & Market Share

Barillas Distribution Channel

Barillas Sales & Marketing

Analysis Note


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Barilla Company Background

1875

1971

1979

19801990

Founded in 1875 by Pietro Barilla in

Parma

Revolutionized the Italian pasta industry with

strong brand name and high quality

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

firm W.R.Grace

Pietro bought back the company from W.R.Grace

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


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Barillas Products and Market ShareIn 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 productsBarilla had two product lines - Fresh & Dry

Fresh

Fresh pasta products21 days of shelf lives

Fresh bread1 day shelf lives

Dry

Constitutes 75% of Barilla salesDry pasta, Cookies, Biscuits, Flour, Bread sticks, dry toasts

1824 months shelf livesPasta and Dried toasts

Medium shelf lives10 to 12 weeks (Cookies)

800 different SKUs

Voiello

Braibanti


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Barillas Distribution Channel

Barilla Plant

CDCs

GD DO

Chain

Super Markets

Independent

Super Markets

Barilla Run

Depot

Signora Maria

Shops

65%35%

90%

10%TL TL

TL

TL

LTL

LTL

LTL

* LTL : Delivery in Less than truck

load quantities

* TL : Delivery in truck load quantities

* CDC : Central Distribution Centre


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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

GDGrand distributor meant for distributing to Super Market Chains

DOOrganized 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 814 days)


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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 lengtheach being a promotional program

Distributors buy as many products as desired to meet current and future needs

Incentives for Sales personnel of BarillaSales target for each canvas period

Discounts1.4% for Semolina pasta, 4% for egg pasta, 4% for biscuits, 8% for auces and10% for breadsticks

Volume discountsBarilla paid for transportationi.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


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Demand forecasting : Traditional approach

Traditional inventory management technique practiced at each level in the supply chain lead to bullwhipaffect

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 ifthey purchase one full truck load

Incentives: Incentives given to sales people to achieve target during promotions, hence Sales wouldinfluence distributors/retailers to buy in bulk

Price fluctuationForward Buying

Retailers buying large quantities during promotion period given by distributors and manufacturers

Discounts1.4% for Semolina pasta, 4% for egg pasta, 4% for biscuits, 8% for auces and 10% forbreadsticks

Huge discount if distributor purchased a minimum of three truckloads of barilla egg pasta

Reasons for increase in variability in Barillas Chain


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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). ByIncreasing p and reducing L forecasting errors can be reduced

To employ sophisticated analytical tools and forecasting techniques across supply chainto 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 upwardsof supply time to reduce lead time


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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

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


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Eliminationof Bull whip

effect

Ability to

respond tothe demand

fluctuation

directly

Efficient

production

planning

Reduction in

the high

variance of

production

targets

Sales team

might lack

synergy as

their control is

lost to a

forecast model

Long term

customers

being afraid of

loosing

control over

theirinventories

Company

(Barilla)Extended

Company(suppliers,

distributors,

transportation)

Reduction in

ordering costs

and inventory

costs for

distributors

Reduction in raw

materials

ordering costs

transportation

costs

Impact of transferring demand info across supply chain?

Discounts

at the right

time for

rightproducts

Governing

optimized

supply during

promotions

and discounts

Trust andattitude

related

issues with

the

distributors

Control over

the inventories

of largedistributors

and in turn an

cost

governance

Raw

material

suppliers at

economies

of scale

Transporters

operating at

economies of

scaleFTL /

LTL issues

resolved

f


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Opportunity: In Barilas case,

Nearlyall 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 betterforecasting, 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

distributorsinventory 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

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,

distributorsorder 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

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.


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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 productivityLow 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

How can supply chain meet conflicting goals?


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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 SizeInventory 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 timeTransportation Cost trade off

Improved forecasting techniques and information system

It reduces lead time , so it many not be essential to reduce the transportation

component


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

The Product VarietyInventory Trade-Off

Apply delayed differentiation concept

Generic products are shipped as far as possible down the supply chain before variety isadded

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 CostCustomer 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


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Thanks

sc barilla case 9.july.13 agpvv

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