Barilla has been facing huge variability in demand which is straining the manufacturing and distribution network of the company. This fluctuation in demand, the two week limit on inventory from the distributor’s end and the difficulty of the manufacturing process to deal with fast-track orders are forcing the CDCs to maintain a higher level of inventory. This increases costs associated with holding inventory. Uncertainty in demand also upsets the production schedule which may lead to overtime shifts in order to meet the demand, higher inventory of raw materials and frequent capacity adjustments, which all increase the overall cost of the product. Frequent capacity adjustments and high raw material inventory may also lead to quality problems. Further, the difficulty in speeding up the manufacturing process to meet with fluctuating demand coupled with this uncertainty in demand will increase the lead time for customer orders which in turn may lead to stock outs at the customer end. This, besides causing a loss of sales revenue, also damages the reputation of Barilla and reduces their credibility in the market.
The fluctuation in demand is due to the “Bull-whip effect” where the variability in the demand increases as we move upstream in the supply chain. The primary reason for this effect is the absence of a central entity to match the capacity of the production and distribution chain with the customer demand. In the current mode of operation each vendor tries to minimize his variance which increases as we move up the supply chain leading to huge fluctuations at the production unit. Sporadic sales promotions by Barilla are also affecting the demand. This leads to increased demand for the items on promotion and because of the lack of effective forecasting techniques u ...