What are the underlying problems that the JITD program is supposed to solve? What causes them? What are the potential program benefits? Our framework will be the following. We will try to list all the problems that are faced by Barilla and the distributors and that the JITD program is supposed to solve, while relating them to their main roots. The main problem in this case is the fluctuating demand whose main causes include: • Promotions: Barilla’s sales strategy relied heavily on promotions, be it through price, transportation and volume discounts. They divided the year into 10 to 12 “canvass” periods, during which different products were offered at discounts with prices ranged from 1.4% to 10%. This obviously made the demand fluctuating as a function of prices but also turning final consumers to strategic ones as dry products have a very long shelf life, allowing consumers to store huge quantities and therefore to buy them at certain periods. Moreover, an intrinsic uncertainty accompanies this fluctuating demand with such consumer behaviour. • Sales Representatives compensation model: The compensation system for the sales representatives was based on sales volume. The main issue with this compensation system is that the sales representatives would push more products during the promotional period to get a bonus, while not being able/willing to push as much during non-promotional periods. This led to wide variations in demand and made forecasting even more difficult. • Large number of SKUs: Barilla’s dry products (which accounted for 75% Barilla’s revenues and are the focus of the JITD proposal) were offered in 800 different packaged Stock Keeping Units (SKUs). These large numbers led to greater complexity and consequently to an aggregated uncertainty since different SKUs were naturally treated separately when managing inventory, while at the end of the day, the different SKUs could somehow cannibalize one another. This large number of SKUs, coupled with promotions schemes that could differ from canvass to canvass, taking into account potential cannibalization, makes forecasting at the individual SKU level an extremely complex task, leading whatsoever to high standard deviations. • Bad forecasting and inventory management by distributors: The distributors not only had no efficient forecasting systems but they also did not have sophisticated analytical tools for determining optimal order quantities based on those forecasts. This could therefore result into excess inventory levels as well as high stock outs. Indeed, exhibit 13 shows average inventory levels much higher than the orders average (exhibit 12) _ an approximate estimate would be an average of 2.5 WOS held in Cortese Northeast DC. The following figure highlights this excess inventory. Moreover, a thorough analysis of stockout levels, shows that the average stockout level is around 6.1%
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Individual Assignment #3
Barilla S.p.A. Case Typed Individual Assignment
Name ___________________________ Email ________ Date______________
Honor Code: YOUR NAME ___________ A member of the Smeal College of Business Community, aspire to the highest ethical standards and will hold each other accountable to them. We will not engage in any action that is improper or that creates the appearance of impropriety in our academic lives and we intend to hold to this standard in our careers. YOUR SIGNATURE! ______________
The Barillas S.p.A. is the amongst the world’s largest manufacturer of Italian spaghetti. It sells mostly to it Italian retail shops through a network of third party distributors. Towards late 1980s the company faced numerous inefficiencies in its chain of operation. This in turn resulted in penalties in the costing of its product and a consequent fluctuation in the ordering patterns of the company’s product. There were reasons behind the changes in demand of Barilla’s products. They included discounts in terms of the volume to be distributed, reduction of promotional activity done by the company, product proliferation, poor communication to mention but a few.
As a result, Giorgio Maggiali the director of logistics suggested a system of distribution that he thought would counter this problem. He suggested the use of the just in time distribution system. In this system of distribution the mandate to distribute the company’s product would shift from the third party distributor to the company itself. Second, instead of just filling orders that the distributor had the company would supervise the flow of its product throughout the supply process and determine when and what to ship its product. In my opinion the just in time distribution was not the right method to implement at that time. This is because it caused fluctuations in demand of the product from the distributors.
Some of the distributors thought that the company was self-serving and would only use their warehouses to maximize their own benefits. The logistics manager also needed to include the decision making process a team effort and include the company top brass. This could have developed trust and enabled the distributors to see the logistics manager’s point of view.
The distribution chain that was in effect in the case of Barilla S.p.A. could be classified into various methods. I will discuss some of them below.
The company advertised its products extensively throughout Italy and the rest of the world. Its product was seen as a high end product not just a commodity that is for the middle and lower class of the economy.
2. Trade promotions.
The company was almost entirely reliant on trade promotions and trade fares. Since it distributes its product through third hand distributors the company took advantage of the trade promotions to put its product in the more lucrative grocery distribution network.
3. Canvass periods.
The company came up with periods in which the third hand distributors could buy the products for current and future use. These periods comprised of four to five weeks in which all the distributors affiliated to the company would buy as much product as they deemed necessary to maintain their supply shops in between canvass periods.
The company offered sales incentives to the distributors who reached certain sales targets set by the company in the canvass periods.
5. Volume discounts.
The company offered volume discounts to the distributors who bought products of a certain amount. This in addition to the incentives given by the company motivated the distributors to buy the products from the company in large quantities so as to enjoy these benefits.
6. Ordering procedure.
The distributors who ordered product a week in advance got a head start of approximately ten days in which they had the advantage of hitting a sales mark within a canvass period and enjoy the benefits that came with it.
In the case of the Barilla spa company the following reasons lead its fluctuations in demand.
1. There was poor communication between the logistics manager and the company’s managers. This in turn led to poor communication between the company and the various factions of supply in the distribution network.
2. The trade promotions that the company carried out caused the distributors to wait for such scenes where they could maximize their profits. Consequently in the periods without the trade promotions the demand of the products went significantly lower than could have been wanted.
3. Volume discounts. During the periods that the company offered trade discounts, there was high demand from the distributors. These offers ensured that the distributors got the maximum benefits from trading in the company’s product. The lack of discounts created less demand for the product, hence the fluctuations.
4. Transportation discounts. The company offered transportation discounts to 70% of the distributor shops that the company did not own. This was only if these distributors ordered a certain volume of the company’s product. Distributors that did not order a certain amount of the product did not get these discounts and in turn demanded for more in order to get the discounts or less if they did not have enough consumers hence the fluctuations in demand of the product…
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