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For the exclusive use of S. Patel, 2015.9-694-046REV: MARCH 25, 2008JANICE H. HAMMONDBarilla SpA (A)Giorgio Maggiali was becoming increasingly frustrated. As director of logistics for the world’slargest pasta producer, Barilla SpA1, he was acutely aware of the growing burden that demandfluctuations imposed on the company’s manufacturing and distribution system. Since hisappointment in 1988 as director of logistics, he had been trying to make headway on an innovativeidea proposed by Brando Vitali, who had served as Barilla’s director of logistics before Maggiali. Theidea, which Vitali called Just-in-Time Distribution (JITD), was modeled after the popular “Just-InTime” manufacturing concept. In essence, Vitali proposed that, rather than follow the traditionalpractice of delivering product to Barilla’s distributors on the basis of whatever orders thosedistributors placed with the company, Barilla’s own logistics organization would instead specify the“appropriate” delivery quantities—those that would more effectively meet end-consumer’s needs yetwould also more evenly distribute the workload on Barilla’s manufacturing and logistics systems.For two years Maggiali, a strong supporter of Vitali’s proposal, had tried to implement the idea,but now, in the spring of 1990, little progress had been made. It seemed that Barilla’s customers weresimply unwilling to give up their authority to place orders as they pleased; some were even reluctantto provide the detailed sales data upon which Barilla could make delivery decisions and improve itsdemand forecasts. Perhaps more disconcerting was the internal resistance from Barilla’s own salesand marketing organizations, which saw the concept as infeasible or dangerous, or both. Perhaps itwas time to discard the idea as simply unworkable. If not, how might he increase the chances thatthe idea would be accepted?Company BackgroundBarilla was founded in 1875 when Pietro Barilla opened a small shop in Parma, Italy on viaVittorio Emanuele. Adjoining the shop was the small “laboratory” Pietro used to make the pasta andbread products he sold in his store. Pietro’s son Ricardo led the company through a significantperiod of growth, and in the 1940s, passed the company to his own sons, Pietro and Gianni. Overtime, Barilla evolved from its modest beginnings into a large, vertically integrated corporation withflour mills, pasta plants, and bakery-product factories located throughout Italy.1SpA (Società per Azioni) can be translated as “Society for Stockholders” and interpreted as “Inc.”________________________________________________________________________________________________________________Professor Janice H. Hammond prepared this case. HBS cases are developed solely as the basis for class discussion. Cases are not intended toserve as endorsements, sources of primary data, or illustrations of effective or ineffective management.Copyright © 1994, 2006, 2008 President and Fellows of Harvard College. To order copies or request permission to reproduce materials, call 1800-545-7685, write Harvard Business School Publishing, Boston, MA 02163, or go to http://www.hbsp.harvard.edu. No part of this publicationmay be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any means—electronic, mechanical,photocopying, recording, or otherwise—without the permission of Harvard Business School.This document is authorized for use only by Sheena Patel in MBA 560 – P?zer – Fall 2015 taught by Paul Mangiameli, University of Rhode Island from October 2015 to December 2015.For the exclusive use of S. Patel, 2015.694-046Barilla SpA (A)In the 1960s, competing in a crowded field of over 2,000 Italian pasta manufacturers, Pietro andGianni Barilla differentiated their company using a high quality product supported by innovativemarketing programs. Barilla revolutionized the Italian pasta industry’s marketing practices bycreating a strong brand name and image for its pasta, selling pasta in a sealed cardboard box with arecognizable color pattern, rather than in bulk, and investing in large-scale advertising programs. In1968, to support the double-digit sales growth the company experienced during the 1960s, Pietro andGianni Barilla began construction of a 1.25 million square meter state-of-the art pasta plant inPedrignano, a rural town 5 km outside of Parma.The cost of this massive facility—the largest and most technologically advanced pasta plant in theworld—drove the Barilla brothers deeply into debt. In 1971, they sold the company to the Americanmulti-national firm W. R. Grace, Inc. Grace brought additional capital investment and professionalmanagement practices to the company and launched an important new Mulino Bianco (“White Mill”)line of bakery products. Throughout the 1970s, facing difficult economic conditions and new Italianlegislation that both capped retail pasta prices and increased cost-of-living allowances for employees,Grace struggled to make its Barilla acquisition pay off. In 1979, Grace sold the company back toPietro Barilla, who by then had secured the necessary funds to purchase it.The capital investments and organizational changes that Grace had brought to Barilla, combinedwith improving market conditions, helped Pietro Barilla launch a successful return to the company.During the 1980s, Barilla enjoyed an annual growth rate of over 21% (see Exhibit 1). Growth wasrealized through expansion of existing businesses, both in Italy and other European countries, as wellas through acquisition of new, related businesses.In 1990, Barilla was the largest pasta manufacturer in the world, making 35% of all pasta sold inItaly and 22% of all pasta sold in Europe. In Italy, Barilla offered pasta products under three brands:the traditional Barilla brand represented 32% of the market and 3% of market share was dividedbetween its Voiello brand (a traditional Neapolitan pasta competing in the high-priced segment of thesemolina pasta market) and its Braibanti brand (a high-quality, traditional Parmesan pasta madefrom eggs and semolina). About half of Barilla’s pasta was sold in northern Italy and half in thesouth, where Barilla held a smaller share of the market than in the north but where the market waslarger. In addition, Barilla held a 29% share of the Italian bakery-products market.In 1990, Barilla was organized into seven divisions: three pasta divisions (Barilla, Voiello, andBraibanti), the Bakery Products Division (manufacturing medium to long shelf-life bakery products),the Fresh Bread Division (manufacturing very short shelf-life bakery products), the Catering Division(distributing cakes and frozen croissants to bars and pastry shops), and the International Division.(Exhibits 2 and 3 show the organizational structure of the company.) Corporate headquarters werelocated adjacent to the Pedrignano plant.Industry BackgroundThe origins of pasta are unknown. Some believe it originated in China and was first brought toItaly by Marco Polo in the 13th century. Others claim that pasta’s origins were rooted in Italy, citingas proof a bas relief on a 3rd century tomb located near Rome that depicts a pasta roller and cutter.“Regardless of its origins,” Barilla marketing literature proclaimed, “since time immemorial, Italianshave adored pasta.” Per capita pasta consumption in Italy averaged nearly 18 kilos per year, greatlyexceeding that of other western European countries (see Exhibit 4). ). Total pasta consumption wasrelatively consistent throughout the year. A few pasta types experienced some seasonality—for2This document is authorized for use only by Sheena Patel in MBA 560 – P?zer – Fall 2015 taught by Paul Mangiameli, University of Rhode Island from October 2015 to December 2015.For the exclusive use of S. Patel, 2015.Barilla SpA (A)694-046example, special pasta types were used for pasta salads in the summer and egg pasta and lasagnawere very popular for Easter meals.In the late 1980s, the Italian pasta market as a whole was relatively flat, growing less than 1% peryear. By 1990, the Italian pasta market was estimated at 3.5 trillion lire. Semolina pasta and freshpasta were the only growth segments of the Italian pasta market. In contrast, the export market wasexperiencing record growth; pasta exports from Italy to other European countries were expected torise as much as 20-25% per year in the early 1990s.Plant NetworkBarilla owned and operated an extensive network of plants located throughout Italy (see Exhibit5), including flour mills, pasta plants, and fresh bread plants, as well as plants producing specialtyproducts such as panettone (Christmas cake) and croissants. In Pedrignano, Barilla maintained stateof-the-art R&D facilities and a pilot production plant for developing and testing new products andproduction processes.Pasta ManufacturingThe pasta-making process is similar to the process by which paper is made (see Exhibit 6). InBarilla plants, flour and water (and for some products, eggs and/or spinach meal) were mixed toform dough, which was then rolled into a long, thin continuous sheet by sequential pairs of rollers setat increasingly close tolerances. After being rolled to the desired thickness, the dough sheet wasforced through a bronze extruding die screen; the die’s design gave the pasta its distinctive shape.After passing through the extruder, the pasta was cut to a specified length. The cut pieces then werehung over dowels (or placed onto trays) and moved slowly through a long tunnel kiln that snakedacross the factory floor. The temperature and humidity in the kiln were precisely specified for eachsize and shape of pasta and had to be tightly controlled to ensure a high quality product. To keepchangeover costs low and product quality high, Barilla followed a carefully chosen productionsequence that minimized the incremental changes in kiln temperature and humidity between pastashapes. After completing this four-hour drying process, the pasta was weighed and packaged.At Barilla, raw ingredients were transformed to packaged pasta on fully-automated 120-meterlong production lines. In the Pedrignano plant, the largest and most technologically advanced ofBarilla’s plants, 11 lines produced a total of 9,000 quintals (900,000 kilos) of pasta each day. Barillaemployees used bicycles to travel within this enormous facility.Barilla’s pasta plants were specialized by the type of pasta produced in the plant. The primarydistinctions were based on the composition of the pasta, for example, whether it was made with orwithout eggs or spinach, and whether it was sold as dry or fresh pasta. All of Barilla’s non-egg pastawas made with flour ground from grano duro (high protein “hard” durum wheat), the highest-qualityflour for making traditional pasta products. Semolina, for example, is a finely ground durum wheatflour. Barilla used flours made from grano tenero (tender wheat), such as farina, for more delicateproducts, like egg pasta and bakery products. Barilla’s flour mills ground flour made from bothtypes of wheat.Even within the same family of pasta products, individual products were assigned to plants basedon the size and shape of the pasta. “Short” pasta products, such as macaroni or fusilli, and “long”products, such as spaghetti or capellini, were made in separate facilities due to the different sizes ofequipment required.3This document is authorized for use only by Sheena Patel in MBA 560 – P?zer – Fall 2015 taught by Paul Mangiameli, University of Rhode Island from October 2015 to December 2015.For the exclusive use of S. Patel, 2015.694-046Barilla SpA (A)Channels of DistributionBarilla divided its product line into "dry" and "fresh" product categories, representing 75% and25% of Barilla’s sales, respectively.•Dry products included dry pasta and longer shelf-life bakery products such ascookies, biscuits, flour, bread sticks, and dry toasts. Dry products had either“long” shelf lives of 18 to 24 months (e.g., pasta and dried toasts) or “medium”shelf lives of 10 to 12 weeks (e.g., cookies). In total, Barilla dry products wereoffered in about 800 different packaged SKUs. Pasta was made in 200 differentshapes and sizes and was sold in over 470 different packaged SKUs (see Exhibit7). The most popular pasta products were offered in a variety of packagingoptions; for example, at any one time Barilla’s #5 spaghetti might be offered in a5-kg package, a 2-kg package, a 1-kg package with a northern Italian motif, a 1kg package with a southern Italian motif, a 0.5-kg “northern-motif” package, a0.5-kg “southern-motif” package, a special promotional package with a freebottle of Barilla pasta sauce, and a display pallet.•Fresh products included fresh pasta products, which had 21-day shelf lives, andfresh bread, which had a one-day shelf life.Most Barilla products were shipped from the plants in which they were made to one of two Barillacentral distribution centers (CDCs): the Northern CDC in Pedrignano or the Southern CDC in theoutskirts of Naples (See Exhibit 8). Fresh products were moved quickly through the distributionsystem—only three days worth of fresh product inventory was typically held in each of the CDCs; incontrast, each CDC held about a month’s worth of dry product inventory. Certain fresh products,such as fresh bread, did not flow through the CDCs.Barilla maintained different distribution systems for its dry and fresh products due to theirdifferences in perishability and retail service requirements. Fresh products were purchased from thetwo CDCs by independent agents (concessionari) who then channeled the product through 70 regionalwarehouses located throughout Italy. Each of these warehouses held about three days of freshproduct in inventory.Nearly two-thirds of Barilla’s dry products were destined for supermarkets; these products werefirst shipped to one of Barilla’s CDCs, from which they were purchased by distributors. Thedistributors in turn shipped the product to supermarkets. Brando Vitali’s JITD proposal focusedsolely on dry products sold through distributors. The remainder of the dry products was distributedthrough 18 Barilla-owned “depots” (small warehouses), mostly to small shops.Barilla products were distributed through three types of retail outlets: small independent grocers,supermarket chains, and independent supermarkets. In sum, Barilla estimated that its products wereoffered in 100,000 retail outlets in Italy alone.1.Small Independent ShopsSmall shops were more prevalent in Italy than in other Western European countries (see Exhibits9 and 10). Through the late 1980s, the Italian government had supported small grocers (often referredto as “Signora Maria” shops in Italy) by restricting the number of licenses provided to operate largesupermarkets. In the early 1990s, the number of supermarkets began to grow as governmentalrestrictions abated.4This document is authorized for use only by Sheena Patel in MBA 560 – P?zer – Fall 2015 taught by Paul Mangiameli, University of Rhode Island from October 2015 to December 2015.For the exclusive use of S. Patel, 2015.Barilla SpA (A)694-046Approximately 35% of Barilla’s dry products (30% in the north of Italy and 40% in the south) weredistributed from Barilla’s internally-owned regional warehouses to small independent shops, whichtypically held over 2 weeks of inventory at the store level. Small shop owners purchased productthrough brokers that dealt with Barilla purchasing and distribution personnel.2.SupermarketsThe remaining dry products were distributed through outside distributors to supermarkets—70%to supermarket chains and 30% to independent supermarkets. A supermarket typically held from tento twelve days of dry-grocery inventory within the stores, and on average carried a total of 4,800 dryproduct SKUs. Although Barilla offered many pasta products in multiple package types, mostretailers would carry the product in only one (and at most two) packaging options.Dry products destined for a supermarket chain were distributed through the chain’s owndistribution organization, known as a “Grande Distribuzione” (Large Distributor) or GD; thosedestined for an independent supermarket were channeled through a distributor known as a“Distribuzione Organizzata” (Organized Distributor) or DO. A DO acted as a centralized buyingorganization for a large number of independent supermarkets. Most DOs had regional operations,and the retailers they served usually sourced product from only a single DO.Due to regional preferences and differences in retail requirements, a typical distributor mightdistribute 150 of Barilla’s 800 dry-product SKUs. Most distributors handled products coming fromabout 200 different suppliers; of these, Barilla typically would be the largest in terms of the physicalvolume of product purchased. Distributors typically carried from 7,000 to 10,000 SKUs in total.However, distributors’ strategies varied. For example, one of Barilla’s largest DOs, Cortese, carriedonly 100 of Barilla’s dry products and carried only 5,000 SKUs in total.Both GDs and DOs purchased product from the Barilla CDCs, maintained inventory in their ownwarehouses, and then filled supermarkets’ orders out of their warehouse inventory. A distributor’swarehouse typically held a two-week supply of Barilla dry products in inventory.Many supermarkets placed orders with distributors daily; the store manager would walk up anddown the store aisles and would note each product that needed to be replenished and the number ofboxes required (the more sophisticated retailers used hand-held computers to record order quantitiesas they checked store shelves). The order would then be transmitted to the store’s distributor;deliveries were typically received at the store 24 to 48 hours after the receipt of the order at thedistribution center.Sales and MarketingBarilla enjoyed a strong brand image in Italy. Its marketing and sales strategy was based upon acombination of advertising and promotions.AdvertisingBarilla brands were heavily advertised. Advertising copy differentiated Barilla pasta from basiccommodity “noodles” by positioning the brand as the highest quality, most sophisticated pastaproduct available. One ad campaign was built on the phrase: “Barilla: a great collection of premiumItalian pasta.” The “collection” dimension was illustrated by showing individual uncooked pasta5This document is authorized for use only by Sheena Patel in MBA 560 – P?zer – Fall 2015 taught by Paul Mangiameli, University of Rhode Island from October 2015 to December 2015.For the exclusive use of S. Patel, 2015.694-046Barilla SpA (A)shapes, as though they were jewels, against a black background, evoking a sense of luxury andsophistication (see Exhibit 11). Unlike other pasta manufacturers, Barilla avoided images oftraditional Italian folklore, preferring modern, sophisticated settings in major Italian cities.Advertising themes were supported by sponsorships of well-known athletes and celebrities. Forexample, Barilla engaged tennis stars Steffi Graf to promote Barilla products in Germany and StefanEdberg to promote Barilla products in Scandinavian countries. Luminaries such as Paul Newmanwere also used to promote Barilla products. In addition, Barilla advertising focused on developingand strengthening loyal relationships with Italian families by using messages such as “Where there isBarilla, there is a home.”Trade PromotionsBarilla’s sales strategy relied on the use of trade promotions to push product into the grocerydistribution network. A Barilla sales executive explained the logic of the promotion-based strategy:We sell to a very old-fashioned distribution system. The buyers expect frequent tradepromotions, which they then pass along to their own customers. So a store will know rightaway if another store is buying Barilla pasta at a discount.You have to understand how important pasta is in Italy. Everyone knows the price ofpasta. If a store is selling pasta at a discount one week, consumers notice the reduced priceimmediately.Barilla divided each year into 10 or 12 “canvass” periods, typically four to five weeks in length,each corresponding to a promotional program. During any canvass period, a Barilla distributorcould buy as much product as desired to meet current and future needs. Incentives for Barilla salesrepresentatives were based on achieving sales targets set for each canvass period. Different productcategories were offered during different canvass periods, with the discount depending on the marginstructure of the category; typical promotional discounts were 1.4% for semolina pasta, 4% for eggpasta, 4% for biscuits, 8% for sauces and 10% for breadsticks.Barilla also offered volume discounts. For example, Barilla paid for transportation to distributors,and offered incentives of 2% to 3% for orders in full truck-load quantities. In addition, a salesrepresentative might offer a buyer a 1,000 lire/carton discount (representing a 4% discount) if thebuyer purchased a minimum of three truck-loads of Barilla egg pasta.Sales RepresentativesBarilla sales representatives serving DOs spent an estimated 90% of their time working at the storelevel. In the store, sales reps helped merchandise Barilla product and set up in-store promotions;took note of competitive information including competitors’ prices, stockouts, and new productintroductions; and discussed Barilla products and ordering strategies with store management. Inaddition, each sales rep spent half a day in a regularly scheduled weekly meeting with thedistributor’s buyer, helping the distributor place its weekly order, explaining promotions anddiscounts, and settling problems such as returns and deletions associated with the last delivery. Eachrep carried a portable computer for inputting distributor orders. The rep would also spend a fewhours a week at the CDC, discussing new products and prices, discussing problems associated withthe previous week’s deliveries, and settling disputes about different discounts and deal structures.6This document is authorized for use only by Sheena Patel in MBA 560 – P?zer – Fall 2015 taught by Paul Mangiameli, University of Rhode Island from October 2015 to December 2015.For the exclusive use of S. Patel, 2015.Barilla SpA (A)694-046In contrast, a very small sales force served the GDs. The GD sales force rarely visited the GD’swarehouses; GDs usually sent their orders to Barilla via fax.DistributionDistributor Ordering ProceduresMost distributors—GDs and DOs alike—checked their inventory levels and placed orders withBarilla once per week. Barilla product would then be shipped to the distributor over the course of theweek that started eight days after the order was placed and ended fourteen days after the order wasplaced—the average lead time was ten calendar days. Thus for example, a large distributor thatordered every Tuesday might order several truckloads that would be delivered from the followingWednesday through the following Tuesday (see below). Distributors’ sales volumes varied; smalldistributors might order only one truckload per week whereas the largest warranted deliveries of asmany as five truckloads per week.Receive DeliveriesPlace OrderMonTuesWedThurFriMonTuesWedThurFriMonTuesWedMost distributors used simple periodic-review inventory systems. For example, a distributormight review inventory levels of Barilla products each Tuesday; the distributor would then placeorders for those products whose levels fell below a specified reorder level. Nearly all of thedistributors had computer-supported ordering systems, but few had sophisticated forecastingsystems or analytical tools for determining order quantities.Impetus for the JITD ProgramAs the 1980s progressed, Barilla increasingly felt the effects of fluctuating demand. Orders forBarilla dry products often swung wildly from week to week (see Exhibit 12). Such extreme demandvariability strained Barilla’s manufacturing and logistics operations. For example, the specificsequence of pasta production necessitated by the tight heat and humidity specifications in the tunnelkiln made it difficult to quickly produce a particular pasta that had been sold out due tounexpectedly high demand. On the other hand, holding sufficient finished goods inventories to meetdistributors’ order requirements was extremely expensive when weekly demand fluctuated so muchand was so difficult to predict.Some manufacturing and logistics personnel favored asking distributors or retailers to carryadditional inventory to dampen the fluctuation in distributors’ orders, noti…