Post Graduate Programme in Management 2011 – 13

Course name: Marketing II

Barilla Spa Case Analysis

Course instructor: Prof. Jayasimha K R

Submitted by: Group – 7, Section - A

Date of submission: 24 November 2011

Name Roll no.

Aneesh Chopra PGP2011542

A Balasubrahman PGP2011582

Ishang Jawa PGP2011655

Krishanu Sikdar PGP2011695

Rameen Khan PGP2011818

Smita Narayan PGP2011887

Vivekanand PGP2011947

Barilla Spa

1. About Barilla Spa : Barilla was founded by Pietro Barilla as a small shop in Parma, Italy in 1875. Pietr’s son Ricardo led the company through a period of significant growth andI in 1940s passed on the reigns of the company to his sons (Pietro and Gianni) who played a great role in eventually making Barilla the world’s largest producer of pasta. In the period from 1940-75,Barilla grew from a small shop to a large vertically integrated corporation with flour mills, pasta plants and bakery-product factories all over Italy. In 1971, due to a period of economic slowdown, the ownership changed hands and the company was sold off to W R Grace Inc. Grace brought about a lot of organizational changes but he failed to turn around the company and Pietro managed to buy the company back in 1979. Barilla revolutionized the industry with its marketing strategy. They believed in instant product recall and hence gave higher importance on the packaging of the product along with quality. During the 1980s, Barilla grew annually at over 21% through expansion of existing businesses, both in Italy and other European countries, as well as through acquisition of new businesses. By the year 1990, Barilla held a 35% market share in Italy and was responsible for 22% of all pasta sold in Europe. Barilla also held a 29% market share in the Italian bakery-products market.

2. Problems Faced :

In Distribution Systems : In Current distribution network of Barilla the informational flow is unidirectional, i.e from customer side to distributors then to Barilla. Problem with this type of structuring is large lead time of 8- 10 days. There is discrepancy between the speed of information flow between various units and this is creating problems. In our case, distributors are getting slow response from supermarkets and information flow between Barilla and distributor is at different pace, thus lead time is increasing because of lack of synchronization.

Due to Demand Fluctuations : Frequent trade promotions are hurting Barilla SpA. Customers buy in bulk during these trade promotions and the “stock-up” thus built up on customer end causes less demand after the season of trade promotion. Sales people being concerned to their incentives try to sell more during the canvass periods which results in fluctuation at the end of the canvass periods. Huge numbers of SKUs kept by distributors also cause uncertainty in demand for some products. Customers also get attracted towards trade promotions offered by other companies. Most of the distributors do not practice forecasting systems in order to determine order quantities.

To fight against these tribulations, the Director of Logistics desired to set into practice a Just In Time Distribution (JITD) configuration using a vendor-controlled stock system. The main idea of JITD is to ship products only when needed to the distributors/retailers, rather than building up enormous stocks both in the distribution centers and the retail outlets. This would save the distributors costs, inventory levels and manufacturing costs.

3. Alternatives :

In order to achieve the objectives stated above, Barilla SpA may evaluate upon the following alternatives:-

Implement the JITD in an effective way.

Recommend Distributors to order twice a week instead of once a week.

Elimination of promotions and other multiple discount schemes to reduce demand variability caused by batch ordering

4. Evaluation of Alternatives

Implementing JITD : The company is facing problems in implementation of JITD due to both Internal as well as External Factors. Internally because of opposition from inside arising out of job security fear, promotions delay etc. by its employees.

Externally because of distributors who were threatened by the JITD system. However the advantages were numerous and once these two factors are overcome, the company would have the following benefits:-

(a)Decrease in Total Inventory: - A JITD program would go a long way in reducing inventory held at the distributors since it would stock inventories at the central warehouses and deliver only the quantities required by the end-users through more frequent checks of the distributors' inventory thus saving supply chain money

(b)Improved Fill Rate & Decreased Distribution Cost: - Since the inventory data and delivery patterns would be controlled by Barilla, it would be easier for their central factory and CDCs to schedule their production and deliveries to meet the customer demands. For the distributors, the increase in flexibility and reaction speed leads to lower inventory levels improving the fill and stockout rates..

(c)Improved Customer Relations:- Reduced inventory costs, higher service levels, improved fill-rate and decreased distribution costs would all lead to improved customer relations.

(d)Increased Shelf Space for Distributors:-The improved delivery schedules will lead to a decrease in inventory giving them additonal space and encouraging them to

take on more of Barilla's competitors' products. This is an opportunity for the sales representatives to sell the distributors on taking on more of Barilla's products to improve the selection they currently offer.

Recommending the distributors to order twice a week : Presently, distributors make order once a week which further cascades to increase lead time in manufacturing and delivering to the distributors. If the distributor orders it twice a week, then the company will be in a better situation to forecast the demand and deliver it twice a week which would reduce the pressure on manufacturing and logistics operations faced by the company.In other words, more frequent deliveries with mixed-orders per FTL will be viable trade-off than the process currently followed by the company.To minimize the potential increase in order and transportation costs, Barilla could go for including joint replenishment of its various SKUs when considering order quantities. This would require no additional shelf space.

Elimination of promotions and multiple discount schemes : The company may go for this option to reduce demand variability caused by batch ordering and instead offer everyday low pricing to remain competitive. The purpose behind is that the loss due to everyday low pricing will be less than the loss being currently faced due to operational issues

5. Conclusion : The company should seriously consider adopting JITD because of the numerous benefits on offer. At the center of our recommendation is the implementation of the JITD. JITD can solve all the distractions of the sale representatives, distributors, and retail outlets. The JITD would require all parties, including Barilla, to move to a continuous review policy from the current periodic review policy in inventory replenishment.

November 2011