SKU’s: The huge range of SkU’s in each product line led to greater complexity
Gaming bevavior and wrong forecasting practices: The distributors were having full control of their orders to Barilla and used gaming during stock outs periods. The distributors did not use any sophisticated forecasting models or systems to calculate the order quantities without any threshold minimum order quantities but rather just followed a replenishment ordering.
Long lead times: Barilla was dealing with perishable items and the lead times of between 8 and 14 days after it received their orders, the average lead-time being 10 days was high given the nature of products and continuously changing ordering patterns.
Barilla’s cost implications:
The fluctuating demand had adverse cost implications for Barilla:
The production costs was rising heavily due to frequent changeover for offering wide range of SKU’s, and backorders. It also led to production scheduling difficulties and high labor & transportation costs to satisfy the high ordering during promotional periods. Finally the cash flows were also uneven.
Reasons for stiff opposition to JITD by Distributors:
The pasta industry distributors were not yet prepared for such an sophisticated information sharing process. The distributors were not ready to share their sales data to Barilla and were not aware of the benefits of supply chain collaboration through collaborative forecasting and planning. The distributors were sacred of the negative implications of sharing the sales data thinking of the loss of control over ordering process would make them loose competitive advantage over Barilla through adjustin their order quantities through their own forecasting & planning for attaining the profit margins, and Barilla would push their products and cut down their costs. They also felt that, they would loose the opportunity to gain advantage during the promotional periods and they cannot place orders at will. Since the distributors were working with nearly 200 suppliers, they did not have the trust comfort level by disclosing the sales data to Barilla, and their relations with other suppliers could be affected, if they were aware of sharing the proprietary data with Barilla.
Besides, the distributors, the internal Barilla’s sales force were also reluctant to these JITD implementation, as they were sacred of loosing their jobs, if the ordering process was automated and the Barilla would not need them for going to the field and putting their efforts to convince their distributors to order more quantities and get sales incentives.
Recommendations:
The first approach to effectively implement JITD is to convince and educate the internal sales force and the distributors of the benefits of Collaborative Planning Forecasting and Replenishment (CPFR). In order to condense the Bullwhip effect being experienced by Barilla, their supply chain would have to be centralized.
The JITD will work, only if Barilla gains control over the inventory throughout their supply chain. Since the pasta industry in Italy is not yet geared towards tracking the point of sales data through scanners and barcodes, hence each stage has to collaboratively make ordering forecasts based on the end customer sales data. The JITD system will eliminate the fixed costs in ordering for distributors through an effective centralized system through out the supply chain and for Barilla, they can improve their production scheduling and reduce the labor and transportation costs.
How to effectively implement JITD at Barilla?
Collaborative planning and Aggregate Demand:
Barilla and their Distributors can effectively team up and build a comprehensive forecasting model, which will take into account the perishable inventory system model, threshold inventory levels, demand fluctuation factors to capture the spikes in the demand by aggregating the demand throughout the supply chain.
Demand Planning:
Customer surveys can help Barilla and Distributors to understand the needs of their customers and help them to effectively manage and control the demand patterns.
Methodology:
To convince the internal staff and sales force, Barilla can run a 6-8 month pilot program or educate them by running a simulation of the whole exercise to show the benefits of sharing the sales data. The upper management should involve the sales managers in incorporating their needs and complications involved in executing the JITD in the field. The sales force should be given additional responsibilities for market development through adopting “Go-to-market” strategy in the event the whole ordering process is automated through the JITD system implementation.
The compensation system can be revamped into a new level and could still be in place by assigning target sales revenue through above mentioned market development and territory management programs.
The pilot programs and simulation exercise cost results should be circulated to the distributors to enable them to understand the cost cutting and better inventory management practices the JITD system can offer, so that the distributors initially become ready to adopt the JITD implementation in a phase manner.
Confidence and trust building with distributors can be achieved through long term strategic partnership development and having constant operational meetings with Barilla’s upper management instead of letting the sales force giving their inputs to the effective application of JITD. Policies governing the profit margin sharing can be formalized as part of building the supply chain collaboration strategies.
Since Barilla has more than 22% market share outside Italy in Europe, and it becomes easy to implement JITD in Europe locations where there is significant usage of barcodes and scanners systems to capture the POS data in place. The success story of these European locations can convince Italian distributors of the benefits of JITD. Barilla should conduct a study to track the most fast selling pasta SKU’s, region wise, so that they can reduce the amount of SKU’s they offer and streamline to offer a particular set of product line segmented across each region to reduce the complexity in the supply chain.
The huge # of intermediaries of distributors and selling agents is also one of the hindrances for existing inefficiencies, hence Barilla should consider reducing the # of levels in the logistics network.
The Efficient Customer Response (ECR) initiative can be a useful tool for Barilla for sharing the POS data all along the supply chain and understand the customer buying preferences and accordingly adjust the # of SKU’s to offer in each pasta product line and plan for new product introductions.