Supply Chain Management

Case Report On Merloni Elettrodomestici SpA: The Transit Point Experiment
Submitted to: Prof. Devanath Tirupathi On 21th January, 2013
Presented By Group 1 Hardik Jain (1211020) Manish Gupta (1211275) Rohan Khankhoje (1211051) Satya Surekha Y S (1211297) Swadesh Kumar Nayak (1211307)

................................................................................................................................................................................ 9 Cost Analysis ..... 3 Benefits of Current Distribution System ....................................... 7 Other Recommendations .............................................................................................................................................. 7 Contingency Plan .................................................................................................................................................. 7 Possible Alternatives .................................................................................................................................................................................................................................................................................................................................................................................................................................................................................................................... 6 Tackling Less than Truck Load(LTL) truck cost ............................................................................................................................................................................ 5 Roma ...................................................................... 4 Costs of Transit Point System ...... 6 Central Distribution Centre ............................................................... 6 Distribution Model ...................................................................................... 8 Cost Analysis – Catanzaro .................................................................................................................................................................................................................................................................. 8 Roma – Cost Analysis ............................................................................................................................................................................................................................ 6 Recommendations....................................................................................................................................................................................................................................................................................................................Contents Introduction .............. 5 Catanzaro ............................................................................................................................................................................................................................... 11 .................................... 4 Costs of Current Distribution System ....................................................... 5 Assumptions: ....................... 7 Appendix ................................................................................................. 4 Benefits of Transit Point System ........................................................................................................................ 4 Analysis......... 5 Other Warehouses........................................................................................................................................................................................................................................................................................................................................................................................................................................................

This subsidiary contributed to 20% of the company’s consolidated sales.standing appliances and the built-in appliances. Merloni Igienico Sanitari: Manufactured water heaters. It was the largest of the subsidiaries and accounts of 75% of the company’s consolidated sales. the company is evaluating effectiveness of the Transit Point model of operation. The analysis compares cost structure for the current model vs. The Merloni Company is the manufacturer of domestic home appliances and daily use products. This subsidiary contributed to 4% of Merloni’s total sales. Transit Point System: Transit Point 1 Plant1 Plant2 Plant3 Plant4 Plant5 Transit Point 2 Transit Point 3 Central Warehouse Transit Point 4 Transit Point 15 Transit Point 16 Transit Point 17 . Merloni Progetti: This was an engineering company and contributes to 1% of the net sales. dishwashers and washing machines. These products accounted for 55% of Merloni Elettrodomestici sales. Merloni Casa: Manufactured built-in kitchen and bath furniture. The retailers were mostly served within 24hrs by the regional warehouses which in turn were delivered the finished products by the Central warehouse located at Fabiano. freezers. refrigerators. The remaining 45% were the built-in customers which were directly served by the Central warehouse at Fabiano and were mainly the large builders and architects. the free. Merloni Ellettrodomestici: Manufactured both free-standing and built in stoves.Introduction Founded in 1930. The freestanding products were sold to urban as well as rural retail establishments. bathtubs and sinks. In consonance with its ultimate goal of streamlining its Distribution system. the transit point model. Merloni Elettrodomestici essentially catered to two categories of product segments. eliminating regional warehouses altogether. The company is consisted of three separate manufacturing divisions organized by product line and an engineering company which licensed Merloni technology and managed construction of plants to produce its products abroad.

. Higher transportation cost compared to Regional warehouse shipping since regional warehouses have flexibility of maintaining inventory and they can aggregate orders. 3. Response time will increase since Merloni will not be able to quote 24 hrs. 5. High inventory levels have to be maintained in each regional warehouses which results in more inventory holding costs. regional warehouses can maintain service level through safety stock 3. Aggregate inventory can be held in central warehouse. Shipping only full truckload from central warehouse can decrease service level and increase stock out costs. Costs of Transit Point System 1. If retailer is not available to receive/pick up the shipment. handling of inventory becomes difficult due to lack of space. 7. 4. Scope of consolidating multiple regional warehouses. 6. ABC inventory classification brought down inventory levels by 75%. Benefits of Transit Point System 1. 2. 2. In some transit point. 5. Frequency of truck shipment will be higher since products will be shipped depending on order in that day. Truck might not be able to cover distance from central warehouse to transit point in 24 hrs. This reduces transportation cost which will occur if products are shipped directly from factory to regional warehouses. All products are aggregated at central warehouse then shipped to regional warehouses depending on demand. 3. Extensive coordination between manufacturers and transit point will be needed. Costs of Current Distribution System 1.Benefits of Current Distribution System 1. This will reduce the requirement for the safety stock. In case of supply disruption due to unknown reasons. Retailers will not need to stock inventory in their stores because of proximity to regional warehouses. 4. 4. 2. lead time (when stock was available in regional warehouses). 17 regional warehouses ensure low lead time and high service level. Operating cost may decrease as low as to 20% of original cost through reduction in labor cost and lease payments. 2. In case of snow or disaster if central warehouse closes down then distribution will be disrupted. Inventory holding cost will go down. Central warehouse will now have to invest in infrastructure and transportation to hold inventories and supply more frequently. Sophisticated information infrastructure is needed for product movement. There will be no need to maintain inventory levels in 17 regional warehouses. Decrease in profitability owing to operating cost of 17 regional warehouses like lease payments and unnecessary labor duplication.

Roma Appendix 1 shows the calculations for cost incurred in the present and proposed model. Inventory cost in the exhibit is based on average inventory piece in the warehouse. Truck capacity will be idle even for small trucks during low season. Assumptions:     The warehouses are operational on 30 days in a month. The Transit-Point model helps in reducing these costs significantly. 9. distribution might be limited by truck capacity. This means the operating cost including labor etc. Operating cost provided in the exhibit is based on per piece sold at the regional warehouse. It is evident that the trucks are not fully loaded because of which per piece transportation cost has increased sharply. is very high.  There is not significant change in the number of shipments. The transit-point model decreased this cost by nearly 80%. Hence. is necessary to provide delivery within 24 hours. A cost reduction of nearly 23% is achievable by implementing transit-point model. The number of trucks has increased from 14 to 30. Catanzaro has actually shown a negative impact of the new model. In case of peak demand.8. The capacity for small truck and large truck is taken for the mixed appliances. Reasons are as below:   The distance between central warehouse and regional warehouse is high. the average demand is such that the trucks are nearly fully loaded. . This is because of these reasons:  The distance between central warehouse and regional warehouse is very less. There is an overall 27% increase in the total transportation and operational cost. the change in transportation cost is not significant. any addition to the number of trucks would have high impact on transportation cost. Return of defective items will be difficult if regional warehouses are replaced by transit point. Hence. transportation cost would be on the higher side as daily shipment. At the same time.  Roma warehouse stocks a huge inventory of 1200 which translates into very high inventory costs. full truck load or otherwise. This is because in spite of daily shipments. Hence. 10. Analysis As discussed earlier. there isn’t significant increase in the transportation cost per piece.  There is high demand in Roma region. Catanzaro On the contrary. transit point model has an advantage in terms of reduced cost in inventory and operational cost.

Bari. the impact of transit-point model has also been calculated for other facilities. Demand and hence the operating cost not significantly high in Catanzaro. For example Firenze and Torino. Other Warehouses By extension. These steps should be taken to reduce these costs: .  Rest of other regions should have regional warehouses. The cost benefits reduce with increasing distance. This is because the urban regions have comparatively higher demand and costs benefits are reduced with reduced demand as the truck is less and less loaded with reduced demand. The operating and inventory cost for Roma and Catanzaro are representative of the costs for all the urban and rural regions respectively. These areas have high daily demand (These areas can gain more than 10% cost advantage since there is also issue of uncertainty). they should be supplied from regional warehouse if it is near. for Torino. and Roma should be made transit point. LTL trucks are unavoidable. for most of the rural regions. it seems that transit system is unprofitable in areas which are far away from central warehouse and areas with low demand like rural areas. both have same demand. Similarly. Distances have been taken from Google maps. We have taken following additional assumptions while making calculations:    The regions where demand is greater than average demand have assumed to be urban regions and rests are assumed to be rural regions. Hence there are not any significant benefits of setting u transit-points for this warehouse. the transit-point model is yielding a higher cost. Based on the above results. Yet. the transit-point is resulting in higher cost than for Firenze.  Instead of supplying from Central Warehouse to transit point for all transit point regions. it is advisable to implement a Transit-point model for Roma but not for Catanzaro.   Recommendations Distribution Model Based on Cost Analysis. Milano. Following are the major observations:  The cost benefits are in general positive for the urban regions. Tackling Less than Truck Load (LTL) truck cost Because of daily shipments.  Ancona.  It will be hybrid model of both regional warehouses and transit point.

Merloni can choose to opt for a much cheaper docking station rather than operating the transit-point by itself. Central Distribution Centre     Other Recommendations    Contingency Plan If supply from regional/central warehouse is disrupted due to weather. This would enable the order processing much earlier.   The loads for the transit points in the same direction should be clubbed together to minimize number of shipments. Merloni can subcontract the unloading-loading of trucks to a local handling and distribution company. Orders for direct delivery from CDC can be loaded in the same truck. Roma and Bari can be supported by the single truck. A strong customer relation team should be setup to achieve customer favor. This would help reducing the transportation costs. Merloni can do away with the concept of a central warehouse. For example. Moreover. It will lower transportation costs from central to regional warehouses. Hence. Hence. If demand is slightly higher than truck capacity. The plants will ship inventory directly to the regional warehouses. The operating cost would reduce but the transportation costs may increase from the plant to the regional warehouse because the plants produce only one type of product. Central warehouse capacity must be expanded to accommodate the excess inventory that would be required because of cancellation of regional warehouses. The IT system must be upgraded to get real time data from Transit points. production shut down or other reasons. The central warehouses could be linked to ensure better coordination and elimination of shortfalls in case any arises. This would also reduce the delivery time for these customers thereby improving customer relationship. an additional safety stock must be maintained at nearby regional warehouses. Merloni can convert one of their regional warehouses to central to operationalize this idea. transportation procurement must be strengthened for smoothen the process. Additional staff should be appointed to fasten the order processing. Inventory requirement at CDC needs to be recalculated to handle the new dynamics.  . customers should be persuaded to wait for additional period. A possibility of serving the transit points through nearby regional warehouses must be considered. Possible Alternatives  Merloni can consider a possibility for multiple warehouses for North and South region. More number of trucks would be required for daily shipment. there must be a provision for supply from other regional warehouses. Both will serve their respective regions of Italy.

Appendix Roma – Cost Analysis Daily Demand No of Days in Month Monthly Demand Average Inventory Cost of Large Truck Cost of small Truck Operating Cost Inventory Cost Small Haul Cost 154.7 4644/120 0 16741620 (4644*3605) 1242000 (1200*1035) 34288200 LH + SH 52271820 Transit Point Model Truck Requirement Large Trucks/ month Small Trucks/ month Costs Operating Cost/ Month Inventory Cost/ Month Transportation Cost/ Month Long Haul Cost 17100000 Small-Haul Cost 19969200 30 1 Large truck per day 30 1 small truck per day 3348324 20% of original Op cost 0 No Inventory 37069200 LH + SH .8 30 4644 1200 370000 200000 3605 1035 4300 piece/day Days piece/ month Piece Lires/ Truck Lires/ Truck Lires/piece/month Lires/Piece/Month Lires/piece Current Model Truck Requirement Large Trucks/ month Small Trucks/ month Costs Operating Cost/ Month Inventory Cost/ Month Transportation Cost/ Month Long Haul Cost 14319000 Small-Haul Cost 19969200 Total Cost 38.

8 20% of original Op cost 0 No Inventory .7 30 1761 780 900000 500000 3324 1721 4700 piece/day Days piece/ month piece Lires/ Truck Lires/ Truck Lires/piece/month Lires/Piece/Month Lires/piece Current Model Truck Requirement Large Trucks/ month Small Trucks/ month Costs Operating Cost/ Month Inventory Cost/ Month Transportation Cost/ Month Long Haul Cost 13207500 Small-Haul Cost 8276700 Total Cost 14.675 1761/120 0 5853564 (1761*3324) 1342380 (1200*1721) 21484200 LH + SH 28680144 Transit Point Model Truck Requirement Large Trucks/ month Small Trucks/ month 30 1 Large truck per day 0 No small trucks required Costs Operating Cost/ Month Inventory Cost/ Month Transportation Cost/ Month 1170712.Total Cost 40417524 Cost Analysis – Catanzaro Daily Demand No of Days in Month Monthly Demand Average Inventory Cost of Large Truck Cost of small Truck Operating Cost Inventory Cost Small Haul Cost 58.

8 Comparison between Regional Warehouse Cost and Transit Point System Cost Rural Operating Cost (Lires/piece/month) Inventory Cost (Lires/piece/month) Small Haul Cost (lires/piece) 3324 1721 4700 Urban 3605 1035 4300 .Long Haul Cost 27000000 Small-Haul Cost 8276700 Total Cost 35276700 LH + SH 36447412.

Cost Analysis .

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