Barilla: What Is the Impact of Fluctuating Demand on Operations?

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Case Analysis 3
Barilla SpA

MGT 371 Section 2 – Team 6

What is the impact of fluctuating demand on operations?
Because of the way Barilla’s manufacturing process works, demand fluctuations have a significant impact on the company’s operations. Tight heat and humidity specifications in factory tunnel kilns require very specific sequences of pasta production, which means Barilla has limited flexibility in ramping up (or ramping down) the production of pastas experiencing unexpected demand levels. Furthermore, because of extremely high holding costs, it is simply not economically viable for Barilla to maintain substantial finished goods inventories to guarantee fulfilling distributors’ fluctuating order quantities. Demand
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The overarching problem is distributors base their actions off of retail demand on the one side and Barilla sales incentives on the other with no means to reconcile the two. GD’s and DO’s use a variety of inventory systems, but for the most part these systems are based on a simple periodic review. They take a weekly inventory of their stock and place orders accordingly. There are no forecasting systems in place to determine future retail demand on which to base orders. With a lead time of 10-14 days between order placement and delivery and a reactionary ordering system, high costs due to cycles of stockouts and bullwhip effects will continue.
The other side of the problem is caused by Barilla’s sales and marketing practices, which are based on achieving sales goals without regard to efficient operations. Barilla promotional “canvass” periods are the most problematic of these discounts because they make it in a distributors best interest to invest in months’ worth of stock of a discounted product. This bulk purchase is unrelated to the near term retail demand and muddles the picture for a Barilla operations manager trying to tailor operations to demand. The volume discounts less problematic because they are incremental, and lead to small changes in orders to achieve a truck-load quantity. This saves on Barilla distribution costs and is unlikely to induce large swings in demand for a given product as trade promotions do.
Barilla

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