RETAIL DISTRIBUTION REVIEW

Retail Distribution Review



Retail Distribution Review

Company Overview

Barilla SpA is a large, vertically integrated, family owned pasta company based in Italy. It maintains a leadership position among a field of thousands of Italian competitors producing and distributing brand-name pasta. Its operations are divided among 3 production divisions and two distribution channels, based on product shelf life. Distribution was further divided between two central distribution centers (CDCs), based on geography.

Customers were divided into three primary segments: Small retail shops; Large independent supermarkets; and Large supermarket chains. Distribution to small retail shops was direct from the CDCs. Distribution to the supermarkets went through intermediate distribution centers, either owned by the chain, or operated by a third party representing multiple independent supermarkets. Fresh product was distributed through a network of brokers.

Inventory levels in the supply chain, managed via periodic-review inventory systems, were high, with larger levels of safety stock held for dry pasta (which had longer shelf-lives) than for fresh pasta. The CDCs carried approximately a 1-month supply in inventory, and supermarket distributors maintained a 2-week supply, yet stockouts still occurred frequently. These high inventory levels were in part a result of heat control issues in the production process making it difficult to respond quickly to shortages, so increased safety stock was the preferred response to demand variability.

Distribution Problems

The pasta supply chain suffered from classic bullwhip-effect problems: high inventory levels stored at each level of the supply chain; stockouts at the distributor level; demand variability magnification up the chain, and exacerbated by frequent promotions, Full Truck Load (FTL) and other volume incentives; and a lack of information on which to forecast demand.

Increasing product variability exacerbated all of these problems. Barilla maintained over 800 SKUs of dry pasta alone.

To combat these problems, the Director of Logistics desired to implement a Just In Time Distribution (JITD) system utilizing a vendor-controlled inventory scheme. However this proposal faced severe opposition both internally and among customers.

Internal opposition originated both from job security fear as well as more legitimate concerns, such as the culture of promotions and fear of competitor encroachment into distributor warehouse space following a reduction of Barilla inventories. Outside opposition was most vocal from distributors' buyers, who were most directly threatened by the JITD system.

Availability of demand information, even at the store levels, also presented difficulties in implementing a system that would be completely dependent upon using this information to forecast.

Recommendations & Implementation Plan

Decrease in Total Inventory

A JITD program would help to reduce inventory held at the distributors since it builds inventories at the central warehouses and then deliver only the quantities required by the end-users through more frequent checks of the distributors' inventory. Thus, the JITD approach will save the entire supply chain money in reduced inventory costs and will result in high service levels. But finding the right foothold on which to mount a successful pilot program is the key challenge for Barilla.

A JITD system would have the following features:

1. Elimination of promotions to reduce demand variability caused by batch ...