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)

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

Introduction
Founded in 1930, The Merloni Company is the manufacturer of domestic home appliances and daily use products. 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. Merloni Ellettrodomestici: Manufactured both free-standing and built in stoves, refrigerators, freezers, dishwashers and washing machines. It was the largest of the subsidiaries and accounts of 75% of the companys consolidated sales. Merloni Igienico Sanitari: Manufactured water heaters, bathtubs and sinks. This subsidiary contributed to 20% of the companys consolidated sales. Merloni Casa: Manufactured built-in kitchen and bath furniture. This subsidiary contributed to 4% of Merlonis total sales. Merloni Progetti: This was an engineering company and contributes to 1% of the net sales. Merloni Elettrodomestici essentially catered to two categories of product segments; the free- standing appliances and the built-in appliances. The freestanding products were sold to urban as well as rural retail establishments. 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. These products accounted for 55% of Merloni Elettrodomestici sales. 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. In consonance with its ultimate goal of streamlining its Distribution system, the company is evaluating effectiveness of the Transit Point model of operation, eliminating regional warehouses altogether. The analysis compares cost structure for the current model vs. the transit point model.

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

Benefits of Current Distribution System

1. Retailers will not need to stock inventory in their stores because of proximity to regional warehouses. 2. In case of supply disruption due to unknown reasons, regional warehouses can maintain service level through safety stock 3. 17 regional warehouses ensure low lead time and high service level. 4. All products are aggregated at central warehouse then shipped to regional warehouses depending on demand. This reduces transportation cost which will occur if products are shipped directly from factory to regional warehouses. 5. ABC inventory classification brought down inventory levels by 75%.

Costs of Current Distribution System

1. Decrease in profitability owing to operating cost of 17 regional warehouses like lease payments and unnecessary labor duplication. 2. High inventory levels have to be maintained in each regional warehouses which results in more inventory holding costs. 3. Scope of consolidating multiple regional warehouses. 4. Shipping only full truckload from central warehouse can decrease service level and increase stock out costs.

Benefits of Transit Point System

1. There will be no need to maintain inventory levels in 17 regional warehouses. Inventory holding cost will go down. Aggregate inventory can be held in central warehouse. This will reduce the requirement for the safety stock. 2. Operating cost may decrease as low as to 20% of original cost through reduction in labor cost and lease payments.

Costs of Transit Point System

1. Response time will increase since Merloni will not be able to quote 24 hrs. lead time (when stock was available in regional warehouses). In some transit point, Truck might not be able to cover distance from central warehouse to transit point in 24 hrs. 2. Sophisticated information infrastructure is needed for product movement. Extensive coordination between manufacturers and transit point will be needed. 3. Frequency of truck shipment will be higher since products will be shipped depending on order in that day. 4. Higher transportation cost compared to Regional warehouse shipping since regional warehouses have flexibility of maintaining inventory and they can aggregate orders. 5. If retailer is not available to receive/pick up the shipment, handling of inventory becomes difficult due to lack of space. 6. Central warehouse will now have to invest in infrastructure and transportation to hold inventories and supply more frequently. 7. In case of snow or disaster if central warehouse closes down then distribution will be disrupted.

8. In case of peak demand, distribution might be limited by truck capacity. 9. Return of defective items will be difficult if regional warehouses are replaced by transit point. 10. Truck capacity will be idle even for small trucks during low season.

Analysis
As discussed earlier, transit point model has an advantage in terms of reduced cost in inventory and operational cost. At the same time, transportation cost would be on the higher side as daily shipment, full truck load or otherwise, is necessary to provide delivery within 24 hours.

Assumptions:
The warehouses are operational on 30 days in a month. Operating cost provided in the exhibit is based on per piece sold at the regional warehouse. Inventory cost in the exhibit is based on average inventory piece in the warehouse. The capacity for small truck and large truck is taken for the mixed appliances.

Roma
Appendix 1 shows the calculations for cost incurred in the present and proposed model. A cost reduction of nearly 23% is achievable by implementing transit-point model. This is because of these reasons: The distance between central warehouse and regional warehouse is very less. Hence, the change in transportation cost is not significant. There is not significant change in the number of shipments. This is because in spite of daily shipments, the average demand is such that the trucks are nearly fully loaded. Hence, there isnt significant increase in the transportation cost per piece. Roma warehouse stocks a huge inventory of 1200 which translates into very high inventory costs. The Transit-Point model helps in reducing these costs significantly. There is high demand in Roma region. This means the operating cost including labor etc. is very high. The transit-point model decreased this cost by nearly 80%.

Catanzaro
On the contrary, Catanzaro has actually shown a negative impact of the new model. There is an overall 27% increase in the total transportation and operational cost. Reasons are as below: The distance between central warehouse and regional warehouse is high. Hence, any addition to the number of trucks would have high impact on transportation cost. The number of trucks has increased from 14 to 30. It is evident that the trucks are not fully loaded because of which per piece transportation cost has increased sharply.

Demand and hence the operating cost not significantly high in Catanzaro. Hence there are not any significant benefits of setting u transit-points for this warehouse.

Based on the above results, it is advisable to implement a Transit-point model for Roma but not for Catanzaro.

Other Warehouses
By extension, the impact of transit-point model has also been calculated for other facilities. 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. The operating and inventory cost for Roma and Catanzaro are representative of the costs for all the urban and rural regions respectively. Distances have been taken from Google maps.

Following are the major observations: The cost benefits are in general positive for the urban regions. 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. Similarly, for most of the rural regions, the transit-point model is yielding a higher cost. The cost benefits reduce with increasing distance. For example Firenze and Torino, both have same demand. Yet, for Torino, the transit-point is resulting in higher cost than for Firenze.

Recommendations
Distribution Model
Based on Cost Analysis, it seems that transit system is unprofitable in areas which are far away from central warehouse and areas with low demand like rural areas. Ancona, Bari, Milano, and Roma should be made transit point. These areas have high daily demand (These areas can gain more than 10% cost advantage since there is also issue of uncertainty). Rest of other regions should have regional warehouses. It will be hybrid model of both regional warehouses and transit point. Instead of supplying from Central Warehouse to transit point for all transit point regions, they should be supplied from regional warehouse if it is near.

Tackling Less than Truck Load (LTL) truck cost

Because of daily shipments, LTL trucks are unavoidable. These steps should be taken to reduce these costs:

The loads for the transit points in the same direction should be clubbed together to minimize number of shipments. For example, Roma and Bari can be supported by the single truck. Orders for direct delivery from CDC can be loaded in the same truck. This would also reduce the delivery time for these customers thereby improving customer relationship. If demand is slightly higher than truck capacity, customers should be persuaded to wait for additional period. A strong customer relation team should be setup to achieve customer favor. Additional staff should be appointed to fasten the order processing. The IT system must be upgraded to get real time data from Transit points. This would enable the order processing much earlier. Central warehouse capacity must be expanded to accommodate the excess inventory that would be required because of cancellation of regional warehouses. More number of trucks would be required for daily shipment. Hence, transportation procurement must be strengthened for smoothen the process. A possibility of serving the transit points through nearby regional warehouses must be considered. This would help reducing the transportation costs. Inventory requirement at CDC needs to be recalculated to handle the new dynamics. Merloni can choose to opt for a much cheaper docking station rather than operating the transit-point by itself. Moreover, Merloni can subcontract the unloading-loading of trucks to a local handling and distribution company.

Central Distribution Centre

Other Recommendations

Contingency Plan
If supply from regional/central warehouse is disrupted due to weather, production shut down or other reasons, there must be a provision for supply from other regional warehouses. Hence, an additional safety stock must be maintained at nearby regional warehouses.

Possible Alternatives
Merloni can consider a possibility for multiple warehouses for North and South region. Both will serve their respective regions of Italy. The central warehouses could be linked to ensure better coordination and elimination of shortfalls in case any arises. It will lower transportation costs from central to regional warehouses. Merloni can convert one of their regional warehouses to central to operationalize this idea. Merloni can do away with the concept of a central warehouse. 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.

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 154.8 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 38.7 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

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 58.7 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

1170712.8 20% of original Op cost 0 No Inventory

Long Haul Cost 27000000 Small-Haul Cost 8276700 Total Cost 35276700 LH + SH 36447412.8

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

Cost Analysis