Assignment Supply Chain Management

Merloni Elettrodomestici SpA : The Transit Point Experiment

Submitted By : Satish Kumar P Ramkumar Sameer Sarkate Manish Maurya Y9125037 Y9125026 Y9125036 Y9125021

Based on the data provided for Roma and Cantazaro, following is the numerical analysis of regional warehousing model and transit point experiment model. Short haul transportation cost will remain unchanged as the trucks will still be delivering to retailers. Case 1: Roma Average Inventory Demand filled by regional warehouse Order cycle Current Model (values in Lire on per piece basis) Operating cost per order cycle Inventory cost per order cycle Transportation cost (10 trucks in 8 days delivering 1200 items) Total cost per piece per order cycle 1200 154.8 7.751937984 (1200/154.8) 961.3333333 (3605*(8/30)) 276 (1035*(8/30) 3166.666667 (0.38m*10/1200) 4404

8 Days

TPE Model (values in Lire on per piece basis) Operating cost (8days) Inventory cost Transportation cost (1 small and one big truck daily for 8days)

192.2666667 (20% of 3605)*(8/30) 0 No inventory 3866.666667 (8*(0.38+0.2)m/1200 4058.933333 345.0666667

Saving (Lire per piece per 8 days)

Case 2: Catanzaro Average daily demand filled by regional warehouse Demand filled by regional warehouse Order cycle Current Model (values in Lire on per piece basis) Operating cost per order cycle Inventory cost per order cycle Transportation cost (5 large and 4 small trucks in 8 days delivering 1200 items) Total cost per piece per order cycle Transit Point Experiment Scenario 1 (2 small trucks daily) Operating cost per cycle Inventory cost Transportation cost ( 2 small truck daily partially loaded) 58.68 780 13.29243354 (780/58.68) 1551.2 (3324*(14/30) 803.1333333 (1721*(14/30)) 8333.333333 ((5*0.9m+4*0.5m)/780) 10687.66667

14 days

310.24 0 17948.71795

18258.95795 Scenario 2 (1 Big truck daily) Operating cost per cycle Inventory cost Transportation cost ( 1 big truck daily partially loaded) Total cost 265.92 0 16153.84615 16419.76615

Scenario 3 (Mixed strategy, 1 big truck alternate day, small warehouse needed) Approximation: Daily demand is approximated to 60. Days Input Supply Inventory Average Inventory 1 120 60 60 2 60 0 3 120 60 60 4 60 0 5 120 60 60 6 60 0

30

Operating cost per cycle Inventory cost Transportation cost ( 1 big truck alternate day) Inventory cost Total cost

265.92 28.688974359 (1721*(14/30)/840 Average inventory will be 30 7500 (7*0.9m/840) 28.68333333 7823.28

Analysis: TPE model saves primarily on operating cost and inventory cost. But the transportation cost is high as the trucks have to go to regional office daily. It has to be done even if demand is not full truckload. So there is a tradeoff. Whenever cost saved from operation and inventory exceeds the increase in transportation cost, TPE model seems desirable. So, the demand volume and distance from central warehouse have important roles to play for the success of the model. Whenever the demand at regional warehouse is high enough for full truckload, transportation cost is optimal. But a lesser demand will lead high transportation cost per piece and inefficiencies. With increase in distance between regional and central warehouses, the lead time will high in case demand is fluctuating. Also, the transportation cost rises exponentially compounded by orders which are not full truckload (case of low demand).

1.Cost and benefits the regional warehousing and TPE model of at Merloni:

Inventory: In current system, inventory is held at regional warehouse and is absorbs the fluctuations in demand. In the case of Transit Point Experiment (TPE), the inventory is eliminated from reginaol warehouse, but the the mean to absorb the fluctuation in demand is also lost. It is passed on to central warehouse. Now, central warehouse will have to manage this fluctuation through increased inventory. Thus, the overall inventory level in the system is not changed. It is just moved from one node to another. The inventory cost will remain the same if we consider the system as a whole. Regional warehouse will look good with numbers but the central warehouse will be worse off. Operating Cost: With the current system, company is maintaining warehouse and related activities at all the regional warehouse. It constitutes large operating expenses. But it leads to better customer service level. Transit point concept would reduce operational costs and regional warehouse by eliminating the need for inventory storage, reduction in space, labor usage and utility at regional warehouse. Though, they have to maintain a certain level of storage space in case immediate delivery to customer is not possible. As illustrated earlier, the central warehouse has to maintain higher level of inventory. Thus, operating expenses are also shifted from regional to central warehouse. Robustness: The current system of having regional warehouse is more robust. As evident from case, the supply is subject to weather condition and availability of transport facility. If there is a temporary blockage in supply from central warehouse, the regional warehouse can mitigate the effect through their buffer stock. On the other hand, since the newly proposed system is like JIT in logistic, any blockage in supply will cripple the network. If the fluctuation can be foreseen, then excess inventory can be built up in advance, but that may not be possible as the regional warehouses have no storage space. Customer responsiveness: If we assume the customer service level to be maintained, the responsiveness to the customer demand will be higher in case of current system. TPE has transportation cost as a major component. If transportation cost tends to rise quickly if fluctuating customer demand is tried to be met. Low variability in demand and relative closeness of distribution centers are critical in order for TPE to be successful. The demand for Merloni's products however, are quite variable. For example, if the average

demand for the products jumps by 200% from January to February. It causes serious impediments to planning and coordinating shipments. Also, since units must be shipped to regions on a daily bases, regardless of the quantity ordered, significant inefficiencies result if the trailer is not filled to maximum capacity. For the location which are far away, the length of time that transportation would add to product delivery lead times will be high.

2. The TPE model cannot be implemented as a total replacement of existing warehouse system. It should be implemented, if at all, with focus on individual RWs. Following are the points that needs to be considered: y Extending Central warehouse capacity: With implementation of TPE, issue of dealing with daily demand fluctuations will be passed from regional warehouses to central warehouse. It will lead to increase the inventory level at central warehouse and make the inventory management more complex. Volume of regional demand: TPE can be implemented for the regions where the demand is enough to make the transportation cost efficient. Distance from central warehouse: Regions which are close to central warehouse can be included in TPE. Longer distance will lead to deteriorated customer service, low responsiveness and longer lead time.

y y

In case of Roma, demand is high and distance is short, ideal conditions for TPE implementation. On the other hand, Implementing TPE at Catanzaro is not a good option. Regional demand is low and the distance is high. Low demand leads to low truck efficiency and thus high transportation cost per piece. Long distance makes the supply vulnerable to demand fluctuation leading to high lead time. However, for locations like Catanzaro which can be served with acceptable deviation from existing service level, it is beneficial to select a Mixed Strategy of the given two options. As per the calculations shown in Case-2, Scenario 3 it can be realized that total cost (transportation+operation+inventory) is minimized by adopting a mixed strategy.