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Published by Umair Babar Chishti

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Published by: Umair Babar Chishti on Nov 29, 2011
Copyright:Attribution Non-commercial


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Merloni Elettrodomestici has a total of five plants each manufacturing a separate product line(stoves, refrigerators, freezers, dish washers and washing machines). These appliances are further divided into two categories, the freestanding appliances and the built-in appliances. Freestandingappliances are sold through retailers which are either located in Urban or in rural areas. Urbanretailers are able to keep high inventory levels due to their operation size while rural retailerskeep only a small amount of inventory. Delivery to these retailers is dependent upon the proximity of a regional warehouse and availability of stock at these regional warehouses. If therequired order is available at a close regional warehouse it is usually delivered within a day butincase its not available at the regional warehouse it has to be called in from the central warehouse,which takes 2 to 6 days. 65% of Merloni’s freestanding products were delivered through theregional warehouses meaning that 65% orders were delivered in a day while the rest took 2 – 6days in being delivered from the central warehouse. At some occasions regional and centralwarehouse can be out of stock at the same time, this leads to major delays in delivery which has agreater effect on the rural retailers who keep low inventory levels. The built-in appliances are solddirectly to architects and builders from the central warehouse. All the manufacturing plants havetheir own warehouses for raw materials and finished goods. Finished goods are frequently sentfrom the regional warehouses to the central warehouse depending upon the demand. Since the buyers of built-in products were builders and architects they bought in truckload sizes and for thatMerloni offered a discount of 4000 lire’s. Furthermore, during the past few years, Merloniimplemented programs that successfully shortened its production planning time and alsodecreased the inventory levels. With the help of ABC inventory management system and byintegrating the inventory monitoring systems of all the regional warehouses with the centralwarehouse, Merloni had been able to bring down the inventory by 75%. The production planningtime horizon was reduced from four months to three while the required lead-time to firm orderswas reduced from two months to one.The current distribution system has several costs related to it. Starting with inventory costs, it can been observed that even though the inventory levels were reduced by 75%, the fact that Merlonistores inventory at 17 regional warehouses, 5 plant warehouses and 1 central warehouse, meansthat its inventory carrying costs must be extremely high. Related to this sort of inventory carryingis the cost of the vast infrastructure needed for such inventories. Warehouse costs, inventoryhandling labor costs, and insurance costs are a few significant costs related to such an inventorysystem. Besides these main costs, there is also the cost of having long delivery times. Althoughgood share of customers are served within a day, the rest are served within 2-6 days. Such delaysin delivery can be detrimental for the company’s goodwill development with its customers.Especially for retailers in the rural areas, the delivery times can tend to be very high if a closeregional warehouse is out of stock. This leads us to the next cost related to this type of adistribution system, stock out costs. Stockout costs seem to be quite high in the current scenario.There are instances when a regional warehouse is out of stock and at times even the centralwarehouse is found out of stock. This has led to high Stockout costs for Merloni.In contrast, there are some benefits which can be attributed to the current distribution system.Due to having a vast network of regional warehouses, Merloni has significantly controlled itsdelivery times. Delivery to 65% of freestanding appliance customers can be made within 24hours. This is only possible because Merloni holds high inventory levels at each of its regionalwarehouses.Moving onto the cost benefit analysis of transit point system, the most important cost reductioncomes from the fact that transit point eliminates the need of holding high inventories at the 17regional warehouses. This could mean huge amounts of cost reductions for Merloni. Transit pointcould help reduce the operational costs of regional warehouses by reducing the need for inventorystorage. These operational cost savings would be associated with reduction in space, utility, andlabor usage. At the same time it is important to notice that Merloni will need to setup crossdocking systems at these warehouses in place of inventory storage. Although they might offer 

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