MARKETING ASSIGNMENT

BARILLA SPA [A]

CASE ANALYSIS
PROF. SARIPALLI BHAVANI SHANKAR
28 Nov 2014

Harshad Sachani
Kiran S
Milind Kumar Naik
Ragasudha
Sanchit Garg

Group No. 11
SECTION- E
(2014PGP131)
(2014PGP164)
(2014PGP203)
(2014PGP188)
(2014PGP322)

Turnitin report suggested similarity of 12%, but that is present in initial

sections where analysis was not present.

I.

Case Facts

Barilla SpA was the largest pasta producer and it differentiated itself
from its other competitors by manufacturing high quality products
supported by innovative marketing program. It successfully created a
strong brand name and image for its pasta by also advertising in large
scale advertising programs.
During the 1980s Barilla grew at an annual rate of 21%. This was
achieved by expanding business both in Italy and other European
countries. It also acquired new and related businesses. In 1990s, Barilla
made 35% of all pasta sold in Italy and 22% of all pasta sold In Europe.
Barilla divided its products into the dry (75% sales) and fresh (25%
sales). Dry products had longer shelf life of about 18-24 months in the
case of pasta and about 10-12 weeks in case of cookies. The fresh
products had a shelf life of about 21 days in the case of fresh pasta
product and 1 day in case of fresh bread.
In total Barilla produced 800 SKUs of dry products out of which Pasta
had 470 different SKUs. Ok

Distribution Channels

About 65% of the products were shipped from the plant to two central
distribution canters (CDCs). Each CDC held about a months worth of
dry products. The remaining were sent to the Barilla run depots.
Out of the volume sent to the CDCs, about 90% were sent to the
Grande Distribuzione and Distribuzione Organizzata (separate
distributors).
The Grande Distribuzione directly supplied to the chain supermarkets
and the Distribuzione Organizzata supplied to the independent
supermarkets. Also, the
Barilla run depots supplied to each of the chain supermarkets,
independent supermarkets and the Signora Maria shops in less than
truckload quantity.
The average lead time was 10 days.
Barilla gave promotions in terms of:
Price discount
Volume discount
Transportation discount
The result of all this was that there was varying demand at the side of
the distributors. As of now there were no forecasting methods to
determine the demand.
The market was also characterised by highly aware customers who
were fully aware of prices and discounts of pasta. Ok
1

Just in Time Distribution (JITD)

II.

The JITD would be a solution to the varying demand levels and the
subsequent stock-outs and high inventory levels.
By implementing the JITD, Barilla would get the shipment data from the
distributors and use it to decide how much volume to send to the
distributors.
However, the distributors were not ready to implement JITD and
Barilla faced resistance from internal management too.

Statement of the Problem

State the problem
1. Barilla Spa was troubled by the high demand variability from the distributors
2. The growing demand fluctuations imposed burden on manufacturing and
distribution system
3. This incurred high manufacturing costs, high distribution costs and high
inventory costs
4. Holding sufficient finished goods inventories to meet distributors order
requirements was extremely expensive
5. Despite having a high inventory level, the company was facing stockouts at the distributors end
6. Implementation of Just-in-time delivery program to help reduce its inventory
levels. This internal planning will help determine quantities and delivery
schedules.
7. The proposal met significant resistance within the organization and
from distributors. They perceived it as a threat to their competitive
advantage rather than a selling tool.
8. This conflict made Giorgio Maggiali contemplate on whether they shall move
ahead with JITD and how shall they reposition themselves in a conflicting
environment

Identify and link the symptoms and root causes of the problems
1. Problem 1: Barilla suffered increasing operational inefficiencies and cost
penalties

Root cause: Large week-to-week variations in its distributors order

patterns ok
2

Symptom: Pressure on the distributor and retailers to provide shelf

space to each and every variety of in-demand SKU and increase
inventory even when they keep 10-14 days inventory.

2. Problem 2: High fluctuation in demand

Root causes:
i. High number of SKUs supplied by the manufacturers is creating a
problem
ii. No Minimum and maximum order quantities for distributors
iii. Long order lead times
iv. Product Proliferation, i.e., 800 SKUs and pasta constitutes 470
SKUs
v. Promotional activities
vi. Volume discounts
vii. Transportation discounts
viii. Absence of forecasting system; they just followed replenishment
system ok
Symptoms: ok
i. No shelf space to keep the rising demanded products
ii. Fluctuating order sizes, that also you own sales rep estimates at
the doorstep of Dos and order at impulse and unwilling to give
their authority to place orders as their whims and fancies
iii. Too much information flow across the system causing higher order
lead times (Fig. below)
iv. No shelf space at retailers and distributors end and thinner
margins on product lines
v. Higher retailer order placing authority and more variable demand
and inventory at distribution centers (DCs)
vi. Higher retailer order placing authority and more variable demand
and inventory at DCs
vii. Absence of forecasting system leads to stock outs (7% weekly),
backorders and eventually lost customers thus affecting the
companies revenues

PLANT
CDCs
GDs

Information flow

DOs

Chain supermarkets
Independent

Customers

Barilla run depots

Signora Maria Shops

supermarkets

Customers

Customers
3

*CDC = Central Distribution Centre

GD = Grand Distributors
DO = Organized Distributors

3. Problem 3: Irregular Demand in Pasta

Root cause:
i. No forecasting models and only sales reps updating the orders
ii. Price and discount driven, impulse driven market; market lacks
standardization
iii. Order lead time is 10 days from receipt of order
iv. System of North and South distribution gives faster service to DCs
but adds complexity to the distribution system
v. Catering to 100,000 locations from one manufacturing location is
challenging ; A hub and spoke model can help the company
Symptoms: ok
i. Orders are placed weekly by the DCs which disrupts the supply
chain system: Bull whip effect
ii. Lesser contributions along the whole supply chain
4. Problem 4: Implementation of JITD for Barilla SpA
Root cause:
i. Non acceptability and unwillingness of distributors to collaborate:
Lack of trust
ii. Concerns of sales organization: their substitution by an
operational design (JIT)
iii. Lack of sharing the costs of transportation and MoUs for sharing
customer data
iv. Attitude that low inventory is a threat and filled shelf
space gives a mental repose
v. The mentality that orders were an unchangeable part of the
supply-chain process
Symptoms:
i. Unwilling to let Barilla lead and give it a chance to display its
concepts of JITD; E.g. I dont need you to see y warehouse
or my figures, You just deliver within 36 hours
ii. Sales organizations hues and cries because of loss from the
elimination of their role and their compensation system which was
proportional to sales
iii. Inability to be ready to change

Differentiate short term from long term problems ok

Variability in demand
Short term Impact
Impossible to
Long Term
anticipate demand
Impact
Hold buffer FGs to
swings
High inventory
levels

meet distributors'
needs
Ask
retailer/distributor
to carry additional
inventory
Starined
manufacturing and
logistic operations

Poor product delivery

Higher costs and
unable to increase
price
"Price Squeezing"
Thinning middlemen's
margins
Changing customers
due to lack of storage
space
Bull-whip effect

Decision facing the manager/key person:

1. To go with JTID Program or not?
2. Is this program feasible for the environment at this particular time?
3. Do we need to reposition ourselves for customers and need further
improvement?
4. How to convince distributors to sign up for the JTID program? Ok

III. Causes of the Problem

Provide a detailed analysis of the problems identified in the Statement
of the Problem

Barilla Spa-evolved as a small pasta and bread store and transformed into a
corporation with flour mills, pasta manufacturing plants and bakery product
factories throughout Italy. Currently, Barilla is troubled by the high demand
variability from the distributors. Orders fluctuated wildly from week to week.
Ok
As per Exhibit 12 data which gives the weekly demand for Barilla Dry
Products from Corteses Northeast Distribution Centre, the mean demand is
300 Quintals and standard deviation happens to be 227 Quintals. Such a
fluctuating demand made it difficult to produce a particular pasta within the
required time. Thus, the growing demand fluctuations imposed burden on
manufacturing and distribution system.

On the other hand, holding sufficient finished goods inventories to meet

distributors order requirements was extremely expensive when the demand
fluctuated so much and was difficult to predict. Ok
In the proposed JITD model, rather than following traditional practice of
delivering product to Barillas distributors on the basis of whatever orders
those distributors placed with the company, Barillas own logistics
organization would instead specify the appropriate delivery quantities-those
that would effectively meet end-consumers needs yet would also more
evenly distribute the workload on Barillas manufacturing and logistics
system.
The trend of larger and larger swings in inventory in response to changes in
demand is nothing but a Bullwhip effect. Just In time replenishment is good
counter measure for this effect. JITD would reduce the inventories and
improve the fill rates at the stores by predicting the actual demand from the
shipment data. Ok
We can say that, the implications of demand fluctuations are high due to lack
of proper forecasting system at the distributor/retailer; orders from
distributors are based on retailers orders and the available shelf space. So,
the JITD was created to solve the difficulties of demand production due to
high demand fluctuations and to have optimum inventory levels. The
shipment data collected from the distributors will be used to assess the future
demand and the production is planned accordingly, thus minimizing the lead
times and inventory levels at the retailers/distributors end.
The problem got aggravated with the resistance of channel partners and
sales force within the organization. They perceived JITD as a threat to their
position and a willow that shall make distributors depend on Barilla SpA.
They were expected to see it as an assistive technology that will help them
plan their sales forecast and keep lower inventory and let Barilla SpA help the
distributors to fill their shelves at a faster rate. Ok

As per the theories presented in Marketing Management by Philip Kotler and

the readings given for the case.
1. Explanation of vertical channel conflict as mentioned in Marketing

Management by Kotler
Vertical channel conflict occurs between different levels of the channel.
Generally, greater retailer consolidation leads to increased price
pressure and influence on the retailers [1]. The price squeeze affects
entities other than the middlemen too such as its own managers who
are concerned that their division is losing profits or their compensation
is decreased in the short term in lieu of being worried about the larger
system which they are a part of [2].
Using this theory of Vertical channel conflict, we explain the concept of
Bullwhip Effect: An amplified Variation in demand as one moves up

the Supply Chain (away from the customer) as shown in the figure
below. Ok
order

order

Factory

Distributor

Order Variation

The problem arises because of the following factors:

North-south distribution system:

The company designed the distribution system which gave an ease to
the DCs but it created inconvenience and problem of fluctuating
regional demand and meeting it by the supplying different SKUs at
different times.

IV.

Decision Criteria and Alternative solutions

Decision Criteria:

Improvement in inventory levels

Reduction in stock outs
Acceptability from concerned stakeholders (senior management,
sales representatives, distributors)
Improvement in efficiency of Barillas manufacturing and logistics
operations
Flexibility in managing demand fluctuations
Ease of implementation
Cost savings

Alternative solutions

Wholesale

1. Reduce product SKUs:

Currently, Barilla has 800 SKUs of dry products out of which a typical
distributor carries only 150 SKUs. Just the Pasta product has 470
SKUs which in shapes and sizes. If SKUs can be reduced, it will help
in reducing the inventory levels.
A market research should be done to identify the core products and
products which have very low sales volume (fillers). Barilla should
focus on popular products in most of the regions and use fillers only
in areas in which it is the market leader. This will help Barilla to
effectively utilise the shelf space available at the retailers
(Reference: Snacko Case [3])
Recently Parle also reduced it no. of brands from 50 to 20 to focus on
popular products and solve problems similar to those stated above.
Even the rivals of Parle, Britannia and Mondelez have adopted
similar strategies of reducing their SKUs [4].
In this approach, distributors will be happy as they will have to take
in lesser SKUs and can also help Barilla in improving its
manufacturing processes.

2. Collect sales data from the distributors

Barilla can persuade distributors to share their sales and inventory

data, but let the decision making authority vest with them only.
Using the data, Barilla can improve its own production planning
procedures and inventory levels. It can also forecast demand and be
ready to meet huge fluctuations.
Barilla can then share this information with the distributors and
recommend them the orders which they should take, however it will
be up to the distributor to decide how many orders to make.
Barilla could incentivise distributors by offering discounts to them
who followed their recommendations.
However, the distributors might be reluctant to even share the sales
data with Barilla which can be a problem. Also implementing proper
forecast mechanisms is a complex task. This Can be initiated on pilot
basis with good distributor

3. JITD in Barilla run depots

As per the distribution diagram given below, the Barilla run depots
cater to 41.5 % of the demand of dry products. These depots cater
to Signora small shops and cater in very small margins to the Chain
supermarkets (CS) and Independent Supermarkets (IS).

Barilla run depots get 35% stock from Barilla plant and 10% from CDC.
Total stock = 35% + 10% of 65% = 41.5%

The following actions can be taken by the company to stimulate a

pseudo competitive spirit in the market to let the DCs feel the need
to adopt to JIT-D.

Step 1: First strengthen your own internal organisation. Yes

We understand the need of the company to control the higher
revenue contributing sectors first but we can see that the sectors are
in an uncontrollable pattern in the present environment. The best
strategy that the company can adopt is to strengthen the
controllable wings of its organisation, i.e., the sales force and
implementing JIT-D through its depots.
9

Step 2: Consequence of the above action

This pilot run and risk-taking manoeuvre, if it works, shall lead to
better inventory maintenance, faster shelf-filling rates and constant
availability at all times. This will further help depots to cater to
the small shops without any stock-outs. This creates a brand
presence at all times and helps in repurchase behaviour of retailers
and also consumers at retail shops. Moreover, being a premium
product, its demand at supermarkets, be it low-moderate:
5%-10%, will forces CS and IS to increase their supply from
depots. Be it initially at low levels, if the DCs continue to work in
their old-fashions, the depots will take a significant place in the value
chain of CS and IS.

Step 3: Depots working at optimum rate ok

The first group to disintegrate and start supplies from depots shall
be the IS group since it contains the independent supermarket. This
increases their presence as a supplier of premium pasta products.
The market demand will force these retailers to depend on the
trusted supplier. This will increase the competitiveness and change
the environments dynamics for DCs to start adapting to JIT-D.

Step 4: Barilla starting allied services bundling for DCs ok

Now, when these DCs approach Barilla for accommodation to JIT-D
planned way, Barilla can give them an option to accommodate to the
system by offering a bundled product of allied services to shift
information flow for planning inventory and guarantee that it will
buyback any residual inventory at any point of time if its project
fails. This give a good head start for the companies to adapt to the
present policies of Barilla SpA.

Thus, Barilla can strengthen both channels to work at the desired

benefit of the end-consumer.

Pros & Cons of alternatives against the decision criteria

Decision Criteria:

Reduce
SKUs
10

Collect
JITD
in
data &
Barilla
forecas
run

depots

Improvement in inventory
levels

Reduction in stock outs

Depends on
distributor

Acceptability from concerned

stakeholders
Improvement in efficiency of
Barillas mfg. & logistics
operations
Flexibility in managing demand
fluctuations

Ease of implementation

Cost savings

Good representation

V.

Recommendation, Solution, Implementation,

Justification

Our recommendation is that Barilla should go ahead with implementing JITD

system. JITD system will lead to significant savings and increase in revenue
which have been shown in the calculations below.
Savings due to reduced inventory levels
Assumption Cost of goods sold is not mentioned. Hence we are using sales
for calculating inventory value
Total Estimated Sales (1990) =2390 Bn Lire

[Exhibit 1]

Sales per day = 2390/365 = 6.548 Bn Lire

Therefore, 1 day inventory is worth 6.548 Bn Lire.
For keeping 30 days of inventory for Barilla,
Average Inventory held = 6.548 X 30 = 196.438 Bn Lire
Assuming by implementing JITD, Barilla is able to bring down its inventory
levels to 5 days from 30 days.
Associated savings = (30-5) x 6.548 = 25 x 6.548 = 163.7 Bn Lire worth of
inventory.

11

Currently, a distributor stores 2 weeks of inventory. Using JITD similar savings

can be attained at the distributor level also. Ok
Savings due to reduction in stock outs
From exhibit 13, we can see that on average the company faces a stock out
rate of around 7% at Cortese Northeast DC. Assuming this is the stock out
rate throughout all stores, the company loses significant revenue which can
be calculated as follows.
Currently, the company meets only 93% of the potential demand / orders
(avg 7% stock out).
93% orders = 2390 bn lire estimated sales in 1990 [Exhibit 1]
Net potential = 2390/0.93 = 2570 bn lire.
Associated loss due to stock out = (2570 2390) bn lire = 180 bn lire
Assuming 50% reduction in stock out, increased revenue = 90 bn lire. Ok

Implementation
However, as stated in the case the distributors are not ready to go ahead
with JITD and Barilla is also facing internal conflicts amongst the
management and sales representatives.
To deal with this Barilla should initially launch JITD in its own depots and see
the improvements it will bring in the companys inventory levels and
revenue.
Barilla actually went on to implement JITD in two of its depots as mentioned
in Barilla SpA (B) [5].
From the exhibits in Barilla SpA B it can be seen that JITD implementation
actually led to significant reduction in inventory levels. Inventory reduced by
almost 7 days in both the depots and the line fill rates also increased
considerably (From 98.8% and 98.4% to 99.8 % in both Milan and Florence
depots respectively).
Barilla can present these facts to the distributors to convince them of the
savings which JITD can generate. The distributors will have benefits liked
reduced workload for demand forecast, reduced holding costs for excess
inventory levels, reduced lead times.
Since it will lead to cost savings for Barilla, the management will be
convinced with this strategy. Barilla can also lay off some of its sales
representatives as they will no longer be required to reduce its costs further.
12

These cost benefits can be passed to the distributors as incentives since

offering volume discounts will no longer be feasible now. Ok
Contingency plan: In case the distributors do not agree to go ahead with
the implementation of JITD, Barilla should follow alternative approach 3, in
which case it will first implement JITD in all its depots and then can
compel the distributors to follow JITD as has been explained above.

Justification
Using JITD is the best approach as it solves all the major problems faced by
Barilla. It will help in managing the demand fluctuations in a better way, will
lead to lower inventory levels and will also help in reducing stock outs. Fore
casting demand will help in improving the manufacturing processes.

VI. References:
1. Marketing Management, A South Asian Perspective, 14e, Kottler, Keller,
Koshy, Jha
2. Fit Products and channels to your market, Robert E Weigand, 77111-PDFENG
3. Extend Profits, Not Product lines, John Quelch & David Kenny, HBR,
94509
4. http://www.business-standard.com/article/companies/parle-products-torationalise-portfolio-cut-brands-from-50-to-20-114112600576_1.html
5. Barilla SpA [B], HBS, 9-695-064

13