and initial management costs will offset the overall profitability of transit points.Although, transit points reduce the inventory storage costs at the regional warehouses, it fails to take intoconsideration factors that affect the overall inventory levels, for instance production planning lead timesor production lot sizes. This means that inventory will just be transferred from the regional warehouses tothe central warehouse. Low inventory at regional warehouses would mean that the central warehousewould have to hold much higher levels of safety stock in case of disruptions in the transit point system.To manage the extra inventory and handling the central warehouse will need further expansion. Thisagain can offset the cost cuts from reducing inventory at regional warehouses. The transit point systemalso leads to an increase in the customer delivery times. This was also noted during the trial whencustomers had to be requested to wait another day or two for delivery. This increase in delivery timeoccurred even when Merloni was very close to the central warehouse. This might mean that applyingtransit point to other regions which are at a greater distance from central could lead to a great deal of increase in the delivery times. Furthermore, reducing inventory at the regional warehouses would meanthat incase the central warehouse closes down (for instance in winters due to snow), deliveries anddistribution throughout Italy would be disrupted. This poses a major risk for Merloni.
As we have seen in the first question that there are many benefits of the Current system, andthere are many benefits of the second question. Similarly there are many costs attatched to thetwo systems. But to decide which system to implement, we should be doing explicit cost analysisalong with analyzing the quantitative analysis to reach a conclusion.We have Data on Roma and Cantazaro, so we can calculate the costs for the both locations whichwill greatly help us in our decision. So based on the cost Data Given to us for Roma andCantanzaro we can calculate the total cost for both the current model and the Transit Point modeland then we can compare to see which model is best. We have the cost data for Operating costs,Inventory costs and Short-Haul Transportation costs. Here we can assume that short-haul is thesame in both models for Roma and Cantanzaro. We also have the map with the scale in exhibit 9.So we can calculate the distance and the respective transportation cost too. Distance from Romato Febriano is 164kms (Google Maps+Exihibit9) and we can see on Exhibit 11 that a large truck will cost us .35million, and a small truck will cost us .18m. We can further assume that the totalcost of inventory would reduce by 80% as was the case in Milano. The details of the calculationfor Roma are given in appendix 1. We can see that the total cost of transportation under thecurrent model for Roma is 4153 liras, but for Transit Point Model it is 3725 liras. So they canhave a cost saving of 428 liras per piece in each performance cycle. This saving is substantial inthe current case. We have 4 cycles per month, with1200 in average inventory, so this wouldmean a saving of 1200*4*428 = 2.05 million each month!Let¶s see the impact Catanzaro. Using the Same Exhibits we can calculate that the distance of Cantanza from Fabriano. We can see that the distance comes out to be approximately 750kms.For this distance the cost of a large truck would be 1million and of a small truck would be.55million. So based on the data¶s from exhibit 9, 10 and 11, and using the same method as wedid in Roma, we can calculate the costs for the two methods (Appendix 2). The cost withwarehouse comes out to be 10990 liras, and the cost without warehouse comes out to be 20054liras. So in this case, if Transit Point Model is implemented, it will cost them about 9064 liras per cycle. And if we calculate the monthly impact, this would be 9064*2*780=14.14 million. So thismodel would not be feasible. It should be noted that in the above analysis we have useddisplacement, because actually distance by road might be different.If we look at the Maps and the Exhibits carefully, we realize that by adopting transit point model,two areas have been affected. One being the operating costs and the other is the transportation