MM 6041

SUPPLY CHAIN DESIGN

Barilla SpA (A) Case Analysis, A Supply Chain Perspective

MBA YP 52 – SYNDICATE 4

Ishak Firdauzi R. (29114333)

Marthin Lukas P. (29114341)

Brian Lee (29114350)

Teja Pramesya A. (29114389)

MASTER OF BUSINESS ADMINISTRATION

SCHOOL OF BUSINESS AND MANAGEMENT

INSTITUT TEKNOLOGI BANDUNG

2016

Introduction

Giorgio Maggiali, director of logistics for the world’s largest pasta producer, Barrila SpA. At

that time (Arround 1988 to 1990) he was faced by the problem in fluctuated demand of the

company that affected the company’s manufacturing and distribution system. Based on the

idea proposed by Brando Vitali which served as Barilla’s director of Logistic before

Maggiali, the idea was to implement Just-in-Time Distribution (JITD), an improvement of

Just-in-Time manufacturing concept. Vitali used this method instead the traditional practice

of product delivery to meets the “appropriate” delivery quantities that will be effective in

meeting the consumer’s needs. Maggiali have spent two year to implement vitali’s proposal,

though until the spring of 1990 there were little progress that have been made. Many

consumers were reluctant in providing the detailed sales data. There were also internal

resistence inside Barilla’s sales and marketing division.

Company Background

Barilla was founded in 1875 by Pietro Barilla where it was a small shop in Parma, Italy on

via Vittorio Emanuele. The store was also a place for Pietro to make the pasta and bread

products to be selled. Pietro’s son Ricardo led the company through the company’s growth

until 1940 the company was passed to Ricardo’s sons, Pietro and Gianni.

As time goes by, there were over 2,000 italian pasta manufacturers. Pietro and Gianni Barilla

differentiated their company with a high quality products with the support of innovative

marketing programs. The programs have created strong brand image with good packaging

and large-scale advertising program. In 1968, Pietro and Gianni Barilla began to construct a

1.25 million square meter pasta plant in pedrignano, 5 km outside of Parma.

The cost of building the largest and most sophisticated advance pasta plant in the world have

led the Barillas deeply in debt. In 1971, they sold the company to the American multi-

national firm W. R. Grace, Inc., which brought additional capital investment and professional

management practices to the company and also introduced new line of bakery products the

Mulino Blanco (White Mill). Grace struggled to make the acquisition to be payed off despite

the 1970s economic condition and new italian legislation that both capped pasta prices and

increased cost-of-living allowances for employees. In 1979, Grace sold the company back to

Pietro Barilla.

In 1990, Barilla was the largest pasta manufacturer in the world making 35% of all pasta sold

in italy and 22% of all pasta sold in Europe. There were three brands which 32% of the

market was the traditional Barilla brand and the remaining 3% market share was consisted

with Voiello brand (high-priced segment Neapolitan past) and Braibanti brand (a high-

quality, traditional pasta made from eggs and semolina). Barilla held a smaller market share

in the south of Italy than in the north, although the market were larger. Barilla held a 29%

share of the Italian bakery-products market. Barrila have organized seven division, three

pasta division (Barilla, Voiello, and Braibanti), the Bakery Products division (Manufacturing

medium to long shelf-life bakery products), the Fresh Bread division (manufactruing very

short shelf-life bakery products), the Catering Division (distributing cakes and frozen

croissants to bars and pastry shops), and the International Division.

Fig 1. Barilla Group Structure

Fig 2. Barilla Organization Chart, 1990

Corporate headquarters were located adjacent to the Pedrignano pasta plant.

Industry Background

Per capita pasta consumption in Italy averaged nearly 18 kilos per year, exceeding other

western European countries. There were also limited seasonality in pasta demand, special

pasta types were used for pasta salads in the summer and egg pasta and lasagna were very

popular on Easter day.

Fig 4. Per Capita Consumption of Pasta and Bakery Products, in Kilograms, 1990

In the late 1980s, the Italian pasta market was relatively flat, growth only less than 1% per

year. By 1990, the market was estimated at 3.5 trillion lire. Semolina pasta and fresh pasta

were the only growth segment of the italian pasta market. Export market was experiencing

record growth and was expected to rise as much as 20-25% per year in the early 1990s.

Barilla management estimated that two-thirds of the increase would attributed new flow of

exported pasta to Eastern European market as export opportunity with the the potential to

encompass a full range of pasta products.

Plant Network

Barilla owned and operated several plants in Italy that includes large flour mills, pasta plants,

specialty product plants such as panettone (christmas cake) and croissants. Barilla maintained

state-of-the-art Research and Development facilities and a pilot production plant in

Pedrignano to develop and test new product and production process.

Pasta Manufacturing

The materials are flour and water (and for some products include eggs, and/or spinach meal).

All of them were mixed to form dough then rolled into a long continuous sheet by pairs of

rollers set at increasingly close tolerances. The dough sheet was forced through a bronze

extruding die screen; which make a distinctive shape. The pasta then be cutted into a specific

length. The cut pieces then were hung over dowels (or placed onto trays) and moved slowly

through a long tunnel kiln that snaked across the factory. The temperature and humidity in the

kiln were specified for each size and shape of pasta and tightly controlled to ensure high

quality. In keeping high quality with low cost of changeover. The drying process took four-

hour long, the pasta then weighed and packaged. Raw ingridients were transformed to

packaged pasta on fully-automated 120 meter long production lines. In the Pedrignano plant,

11 lines produced 9,000 quintals of pasta each day.

The plants were varied based on the special specification of the product. Producing pasta that

was composed with or without eggs or spinach and whether it was sold as fresh or dry pasta.

Non-egg pasta was made with flour ground from grano duro (high protein “hard” duru

wheat) the highest quality flour. For egg based pasta and bakery products, Barilla used flour

ground form grano tenero (tender wheat), such as farina. “Short” pasta product such as

macaroni and fusilli and “Long” products such as spaghetti or capellini were made in seperate

facilities due to different sizes of equipment required.

Channels of Distribution

Barilla divided its entire product, into two general categories : Fresh and dry. Fresh product

were moved quickly through the distribution system (only three days of fresh product

inventory was typically held in each of the CDC but dry product held about a month’s.

Barilla Product were distributed through three types of retail outlets: small independent

grocers, supermarkets chains and independent supermarkets.

The distributors’ order pattern is caused by the lag in distributors’ response in placing their

orders. There will always be delays in placing orders with Barilla SpA. However, distributors

have different levels of delay. Some of the distributors have longer delays. This condition is

problematic because delays lead to greater fluctuations in orders. For example, even a small

delay in a Grande Distribuzione (GD or large distributor) leads to significant fluctuations in

orders at Barilla SpA because a large distributor carries a big inventory and delivers

truckloads of Barilla SpA products to large supermarket chains.

Sales and Marketing

Barilla have a strong brand image in Italy with combination of advertising, promotion and

sales representative. Heavy advertised, its mean positioning as highest quality, most

sophisticated like jewels and luxury. Barilla avoided images of traditional italian folklore.

And then engaged with famous athletes and celebrities from many countryto strengthening

loyal relationships with Italian families to get images as “Where there is Barilla, There is a

home”. Promotion based strategy, its mean divided 1 year to 12 ‘canvas’ period,

corresponding a promotional program with different product in each program. At this time,

buyers could buy as many as possible. Incentives were given to those achieving sales target.

Offering volume discount and paid for transport if buyer buy truckload quantities. Sales

representative offer 1000 lire per carton discount, if they buy a minimum of 3 truckloads.

Sales Representatives

90% of Barilla Sales representative working time were spent at the store level. Sales

representative job tasks are: merchandising Barilla product and setting up in-store

promotions, taking note of other competitors’ information such as prices, stock outs, and new

product introductions. The representative usually discuss the Barilla products and ordering

strategies with store management. Usually, sales representative activities are weekly meeting

with distributors, assisting the weekly order placing by the distributor and setting up

promotions and discounts. They also have responsibility to resolve any problems with

previous delivery such as returns, deletions and any other possible disputes. They are also

involved in discussing the projection of new products and prices.

Distribution: Distribution Ordering Procedures

Majority of GDs and DOs of Barilla are constantly checking their inventory levels and placed

orders once per week. The arrival time of Barilla products delivery is around day eight till

day fourteen after the placing order. The average lead time of Barilla products was ten

calendar days. It can be illustrated as:

Fig 5. Illustration of the Ordering Process

The sales number of distributors is varied, for small distributors they usually order only one

truckload per week and the largest quantity of delivery is five truckload per week. The

majority of distributors used simple periodic-review inventory system. For example, a

distributor would do a weekly review (on Tuesday) on inventory levels of Barilla; the

distributor would then place orders for the products bellow the reorder level.

Impetus of JITD Program

During 1980s, Barilla experienced the uncertainty of fluctuating demand. This uncertainty

has put Barilla into mismanagement of manufacturing and logistics operations. As they

operate in food industry, Barilla found it difficult to hold the sufficient finished goods

inventories to meet distributor’s order requirement because it was considerably expensive

when weekly demand has fluctuated and has been difficult to predict.

The customers were changing. Their demands were fluctuating, yet the space in retail outlet

remained the same. At the same time, manufacturers were continuously introducing new

products, and they wanted retailers to display their new products in front of the shelves.

Meanwhile, the distributors had also the same pressure, when they had to increase inventory

items that they already stocked as well as add new inventories to their list.

Then, Brando Vitali, Barilla’s Directors of Logistics, envisioned an idea to change the way of

product delivery by having day-to-day logistics service. Therefore, rather than sending the

product to distributors’ internal planning processes, Barilla chose to manage their delivery

service by sending the product only when it is needed at the stores. By using this method,

Barilla could improve operations for themselves and their own customers if Barilla were

responsible for creating their own delivery schedules by examining the all shipment data.

The method would be processed as follows: Everyday, distributors would provide Barilla the

data on what Barilla products it had shipped out of its warehouse to retailers during the

previous day, as well as the current stock level for each Barilla SKU (Stock Keeping Unit).

Then, Barilla could look all of data and make replenishment decisions based on their own

forecasts. However, Barilla needed to improve its own forecasting systems. They need to

develop a set of decision rules that can be used to determine new forecast.

However, there are some risks on implementing JITD method. The sales level will flatten if

this JITD method is implemented. The adjustment for shipment might be insufficient due to

quick change of selling pattern. Since Barilla decided to manage the delivery by itself, the

company shall have an issue of relationship with distributors. Meanwhile, If Barilla’s product

decreased, while there is empty space in distributors, the distributors shall push the

competitor’s product in their shelves. Trade promotions should be impossible with JITD

method.

Nonetheless, JITD method can offer the customer additional service at no extra cost and will

improve Barilla’s visibility with the trade and make distributors more dependent to Barilla.

Therefore, this will improve the relationship between Barilla and distributors, as well as the

information from distributors such as warehouses, shipments can provide objective data that

would improve the planning procedures of Barilla.