Pirelli is in the midst of a digital transformation. This transformation seeks to use data, digital ecosystems, and AI to enhance data driven decision-making. In terms of the commercial operation, it seeks to provide greater value to dealer customers by arming their sales representatives with more actionable data on what the dealers will likely need to order. Strengthening the sales process required putting in place a more robust integrated business planning process.
One key executive involved in this transformation is Pier Paolo Tamma. Mr. Tamma is the chief digital officer at Pirelli and oversees the digital department at Pirelli at the group level. The digital department includes IT, big data analytics, AI, and the digitization program.
Pirelli’s Business Model and Supply Chain
Pirelli (PIRC.MI) is a consumer tire company headquartered in Milan, Italy. Pirelli had revenues of about €6.65 billion in 2023. This company focuses on the high-value segment of the market: they provide tires for premium and prestige car makers like BMW, Audi, Mercedes, JLR, Lamborghini, Ferrari, Maserati, Aston Martin, and McLaren. In the Prestige tire segment, the company has a market share of over 50% in the OEM channel.
This is a complex supply chain. Pirelli designs a specific tire for a particular model, and even a specific version of the model, for one luxury brand. For example, Mr. Tamma explained, “for the BMW X5 model, we have a specific corresponding products ranging from 19-inch to 22-inch rim sizes.” Each of these variants is a distinct stock keeping unit. In contrast, most of their competitors provide off-the-shelf tires that can be used across many models and brands. Consequently, Pirelli has a much larger number of SKUs than their competitors.
The tires put on the new cars generate subsequent pull-through demand. On average, the owners of these cars will replace the original tire with a new tire after three or four years. The aftermarket provides about 75% of Pirelli’s revenues.
Pirelli’s challenge is determining how many units will need to be made and where this replacement demand will come from. Demand forecasting is done in collaboration with OEM customers. Two to three years before the car hits the market, Pirelli will be working with the OEM to design the tire for the model. In many cases, carmakers will also share their projection of how many of those models they believe they will sell and how much they will sell in regions around the world.
This forecast provides a starting point for creating production and logistics plans to serve the OEM market. Replacement demand comes three to four years later, followed by a second wave three or so years after that. Therefore, their integrated business planning process needed to create point-of-consumption SKU forecasts across a 10 to 12 year planning horizon!
Pirelli’s Digital Transformation
The best digital transformations begin with a vision of how the company can better serve its customers. In this case, the customers were dealers. Pirelli needed to move from using an army of representatives visiting dealer sites, showing them massive catalogs, and saying to the dealer, “You could buy this or this or this.”
They needed to transition to a consultive sales approach where a rep could show the dealer their forecast of precisely what that dealer would need to buy to support the replacement demand. “This is a completely new way of selling,” Mr. Tamma explained. Rethinking the sales process required the company to rethink “how we plan and how we design tires.”
Pirelli’s digital transformation challenge was to use a new digital platform that could scale to meet its complex integrated business planning process. Implementing a supply chain planning solution that could scale up to solve such a massive problem was anything but straightforward, and success was far from guaranteed.
Supply chain projects depend upon data. On the demand planning side, in some cases, carmakers provided Pirelli with visibility to dealer-level demand. In some cases, the company had to buy market data. Pirelli also had forecasts based on input from sales reps. This data needed to be cleaned, combined, analyzed, and available in one place.
The demand data then needed to be made available to the supply planning application. With 18 production plants in 12 countries and a commercial presence in over 160 nations, Pirelli needed to create a model of how the plants could support the demand. Not every plant could manufacture every SKU. This led to a massive combinatorial problem where the supply planning solution created a schedule that met demand while minimizing manufacturing and transportation costs, as well as finished product and raw material inventories, while also considering greenhouse gas emissions.
Ultimately, Pirelli decided that o9 Solutions was the right solution. Like other SCP solutions, the o9 supply chain planning solution creates a digital twin of the supply chain. But o9’s graph technology, in Mr. Tamma’s view, created a deeper demand model capable of supporting the complex SKU by point of demand forecasts. These forecasts are then shared with the supply planning module, creates scenarios on how that demand could most profitably be met. Because of their business model, Pirelli produces small lots. This creates the need to run many more scenarios. “So, what happens if I move production of this SKU from this plant to another plant? How does it impact the profitability of the deal?”
The supply model also encapsulates where tires are stored. In some cases, tires are stored by their logistics service provider, in other cases at a distributor site, and in other cases at a master distributor site. A master distributor is a distributor that services other distributors. There are different commercial arrangements by region and by channel. “This makes our commercial network very complex and filled with regional peculiarities. All this needs to be considered in our long-term planning,” Mr. Tamma stressed.
The supply chain planning project has three phases. Implementation began in 2020. The first phase supported strategic planning – the plan that goes out for ten years. At this level, Pirelli is looking at the expected profitability of the deal. Pirelli may decide to do a low-margin deal with the OEM to supply tires for new cars rolling off an assembly line if there is sufficient aftermarket demand and margin. If the deal is profitable, this plan also designates which plants will take the lead on manufacturing that SKU. This part of the project is complete.
In the second phase, which covers tactical planning, the SCP engine is capable of creating a rolling monthly plan that extends out 18 months. These monthly plans are refined every month as the actual demand becomes clearer.
The last phase will be done by the end of the year. This involves implementing detailed scheduling for the factory.
Pirelli has also built an ROI monitoring system that will allow them to fine-tune their models as results roll in.
Understanding the ROI associated with strategic planning will take several years because of the length of the planning horizon. However, with two years of results under their belt, Pirelli has used the o9 platform to monitor the deviations from the original plan. This was something they could not do with Excel. Without this feedback loop, it was very difficult to understand why a particular deal was not as profitable as initially projected. This tool allows them to look at what has changed. Was it higher raw material costs? More costly freight? Higher warehousing costs? “This provides great business value for our key stakeholders,” Mr. Tamma explained.
