Slide 1MGB282, Session #8

Barilla and VMI

Session 8

Rachel R. Chen

Graduate School of Management

University of California, Davis

Slide 2MGB282, Session #8

Barilla

Manufacturer of “fresh” and “dry” pasta products

Largest pasta manufacturer in the world with >1000 SKUs

$2B in sales Very stable demand at retail level

Factory

North Central DC

South Central DC

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Slide 3MGB282, Session #8

Current challenges

Retailers do not have enough room to carry the very large inventories manufacturers would like them to (new products are continuously introduced).

Both manufacturers and retailers are suffering from thinning margins.

Stockouts at DOs despite their holding a couple of weeks of inventory. Need to cut cost out of the system.

JITD: effectively meet end consumer’s need yet evenly distribute the work load on Barillar’s manufacturing and logistics systems.· Modeled after the popular “Just-In-Time” manufacturing concept· Pull Push· Goal: decrease distributor’s inventories and improve their fill rate to their

stores · Encountered resistance from both the distributors and its own sales and

marketing personnel

Slide 4MGB282, Session #8

The bullwhip effect at Barilla pasta

Downstream variability at DC: mean demand is about 300, the std. dev. is about 75

Upstream variability is much higher (std. dev = 227)

What causes the Bullwhip effect?· Order synchronization?· Order batching?· Trade promotions and forward buying?· Reactive and over-reactive ordering?· Shortage gaming?

Slide 5MGB282, Session #8

JITD

Proposed solution:· JITD, also known as, Vendor Managed Inventory (VMI):

· Downstream distribution center (DC) reports inventory and sales data electronically to Barilla on a daily basis.

· Barilla decides how much and when to ship product to the DC.

Slide 6MGB282, Session #8

Remarks from sales and marketing personnel

Our sales level would flatten if we put this program in place.

We run the risk of not being able to adjust our shipments sufficiently quickly to changes in selling patterns or increased promotions.

A pretty good part of the distribution organization is not ready to handle such a sophisticated relationship.

The retailers will fill the reduction in Barilla inventory with competing products.

We increase the risk of having our customers stock out if we have disruption in our supply process.

We wouldn’t be ale to run trade promotions with JITD. How can we get the trade to push Barrila product to retailers if we don’t offer some sort of incentive.

It is not clear that costs would even be reduced. If a DO decreases its stock, we at Barilla may have to increase our own inventory.

Slide 7MGB282, Session #8

Comment from DO

Managing stock is my job; I don’t need you to see my warehouse or my figures.

I could improve my inventory and service levels myself if you would deliver my orders more quickly. I’ll place the order and you deliver within 36 hours.

We would be giving Barilla the power to push product into our warehouses just so Barilla can reduce its costs.

What makes you think that you could manage my inventories any better than I can?

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VMI’s impact on the DC

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VMI’s impact on the DC’s service

(stockout percentage) (DC shipments)

(Start of JITD)

(Start of the Gulf War)

(Time)

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VMI’s impact on the DC’s order volatility

Time

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Start of VMI

Time

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Coordination concept

Sequential, Myopic Optimization

Joint Optimization

Supplier Customer

Supplier Customer

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VMI implementation challenges

How to overcome the fear of change by all parties:· Barilla’s sales force is afraid …

– they will lose trade promotions as a selling tool (Reply: need not be so)

– the customer will fill the reduction in Barilla inventory with competing products (Reply: they will fill it with additional Barilla products)

· Customers are afraid …– they will be put at a competitive disadvantage vs. other distributors

that forward buy (Reply: no, deal time horizon extended for JITD customers)

– Barilla will channel stuff (send more inventory than needed) (Reply: we won’t, and if so, cancel the program)

– Barilla will not be able to do as good a job managing inventory (Reply: start with pilot program, extensive simulation offline before implementing).

Technology: can the necessary information systems and inventory algorithms be put in place to make this work?

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The Vendor Managed Inventory Approach

Some features of VMI include:· Shortening of the supply chain· Centralized forecasting· Frequent communication of inventory, stock-outs, and planned promotions.

Electronic Data Interchange (EDI) linkages facilitate this communication.· No manufacturer promotions· Trucks are filled in a prioritized order. For example, items that are expected to

stock out have top priority, then items that are furthest below targeted stock levels, then advance shipments of promotional items, and finally, items that are least above targeted stock levles.

· Relationship with downstream distribution channels· Result: inventory reduction and stock-out reduction.

Used by Wal-Mart and many other big box retailers. · Home Depot uses the technique with suppliers such as Moen, Delta, RIDGID,

Paulin.· Foster a closer understanding between the supplier and manufacturer by using

EDI formats, EDI software, statistical methodologies to forecast, and maintain correct inventory in the supply chain.

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VMI Challenges

VMI can be made to work, but the problem is not just one of logistics. VMI often encounters resistance from the sales force and distributors. At issue are roles and skills, trust, and power shifts.

Some of the sales force concerns are:· Loss of control· Effect of compensation – incentive bonuses may depend on how much

is sold, but sales force has less influence under VMI.· Possible loss of job (Transform the sales role into one of marketing)· Skepticism that it will function well-technical problems.· Concerns that reduced inventory will result in less shelf space and

therefore loss of market share (can be addressed by filling the shelf space with other stock keeping units from the same vendor).

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VMI Challenges

Distributors may also have concerns:· Inventory will be pushed on them· No more promotions, discounts, and forward buying· With less inventory, more risk of disruptions due to strikes, adverse

weather, etc.· The vendor enjoys the benefits while the distributor gives up its only

lever of power – data on what the retailers want.· Danger of being replaced – vendor may decide to forward integrate.