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Merloni-Tranist Point Model

Merloni-Tranist Point Model

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Published by Umair Babar Chishti

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Published by: Umair Babar Chishti on Jan 06, 2012
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08/12/2013

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Merloni
-Transit Point Model
Q1: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 twocategories, the freestanding appliances and the built-in appliances. Freestanding appliances are soldthrough retailers which are either located in Urban or in rural areas. Urban retailers are able to keep highinventory levels due to their operation size while rural retailers keep 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 the required order is available at a close regional warehouse it isusually delivered within a day but incase its not available at the regional warehouse it has to be called infrom the central warehouse, which takes 2 to 6 days. 65% of Merloni¶s freestanding products weredelivered through the regional warehouses meaning that 65% orders were delivered in a day while the resttook 2 ± 6 days 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 a greater effect on the rural retailers who keep low inventory levels. The built-in appliances are sold directly toarchitects and builders from the central warehouse. All the manufacturing plants have their ownwarehouses for raw materials and finished goods. Finished goods are frequently sent from the regionalwarehouses to the central warehouse depending upon the demand. Since the buyers of built-in productswere builders and architects they bought in truckload sizes and for that Merloni offered a discount of 4000 lire¶s. Furthermore, during the past few years, Merloni implemented programs that successfullyshortened its production planning time and also decreased the inventory levels. With the help of ABCinventory management system and by integrating the inventory monitoring systems of all the regionalwarehouses with the central warehouse, Merloni had been able to bring down the inventory by 75%. The production planning time horizon was reduced from four months to three while the required lead-time tofirm orders was reduced from two months to one.The current distribution system has several costs related to it. Starting with inventory costs, it can beenobserved that even though the inventory levels were reduced by 75%, the fact that Merloni storesinventory at 17 regional warehouses, 5 plant warehouses and 1 central warehouse, means that itsinventory carrying costs must be extremely high. Related to this sort of inventory carrying is the cost of the vast infrastructure needed for such inventories. Warehouse costs, inventory handling labor costs, andinsurance costs are a few significant costs related to such an inventory system. Besides these main costs,there is also the cost of having long delivery times. Although good share of customers are served within aday, the rest are served within 2-6 days. Such delays in delivery can be detrimental for the company¶sgoodwill development with its customers. Especially for retailers in the rural areas, the delivery times cantend to be very high if a close regional warehouse is out of stock. This leads us to the next cost related tothis type of a distribution system, stock out costs. Stockout costs seem to be quite high in the currentscenario. 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 its deliverytimes. Delivery to 65% of freestanding appliance customers can be made within 24 hours. This is only possible because Merloni holds high inventory levels at each of its regional warehouses.Moving onto the cost benefit analysis of transit point system, the most important cost reduction comesfrom the fact that transit point eliminates the need of holding high inventories at the 17 regionalwarehouses. This could mean huge amounts of cost reductions for Merloni. Transit point could helpreduce the operational costs of regional warehouses by reducing the need for inventory storage. Theseoperational cost savings would be associated with reduction in space, utility, and labor usage. At thesame time it is important to notice that Merloni will need to setup cross docking systems at thesewarehouses in place of inventory storage. Although they might offer lower operational costs, the setup
 
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.
Qu
estion 2)
 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
 
costs. Roma is relatively nearer to the central warehouse so here the decrease in the operatingcosts was not offset by the increase in the transportation costs, but for Cantanzaro, which is about750kms away from the central warehouse this model would not be successful.Moreover, the further a location is, the greater is the lead time.In Milano, the delivery time was12 hours, as it is very near to the central warehouse. But as we move further away this lead timeswould drastically increase. This in turn would affect the customer service. Customers would bedelivered late and they might even prefer a competitor who has a regional warehouse at that place.If we see the total inventory kept at the central warehouse that come out to be (44 253 units56%), followed by Plants inventories (21 050 units 26%), and the rest of the inventory is shared between the regional Warehouses (14 330 units 18%). Already the demand for the regions isfluctuating a lot. If we adopt the Transit point model the impact of regional variations will betransferred from the regional warehouses to the Central warehouse. This will increase therequirements of safety stock at the Central Warehouse which will most probably offset the gainsfrom the reduced regional inventory.If we see the map of Italy in appendix 3, we see that southern Italy is not connected by road.There they would have to use a combination of both road and see shipments. Again this wouldhighly increase the lead times and can result in customer dissatisfaction. So the whole Italycannot be satisfied with one regional warehouse. So at least two large warehouses needs to beadded to implement the transit point system, one in the south and one in the north. Even withthis, we would have to apply the same framework on each individual region as we did above, tosee whether the cost of reduced operations is offset by the transportation cost or not.There are some other important qualitative measures that should be there when they plan toimplement this system. Firstly, as it is mentioned in the case that because of heavy rainfall someareas are not accessible. So in the winter season those areas should rent a small warehouse inwhich they can store inventory. Otherwise delays can cause significant availability problems.Secondly as we saw in the case on Cantanzaro that we have to send partially filled truck loads.So demand should be substantial in areas where it is implemented so that full truck loads can besent. Otherwise transportation economies would not be reaped.Thirdly as we can see that demands in particular regions is very volatile. This volatility maycause many problems. Firstly there could be many partially filled truck loads. Also planning andcoordinating the transportation might become a problem if the variability is high. So for exampleon one day we might need 8 trucks, and on another we might need just one truck. So such problems also need to be catered.So in regions where the above problems can be tackled, and the increase in transportation costsdoes not exceed the gain in the operating costs this model must be implemented. Also for thisnew distribution system it would have to train its employees as this system demands substantialemployee agility. If on a given day they are late to transmit orders then the whole system will bedisrupted. So with a strong strategy, this model with be highly succesful

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