Group 7

Merloni
Elettrodomestici
SpA
 What are the costs and benefits of
About the Merloni's current distribution
system? Of a transit-point-based
Company distribution system?

Its an Italian company based in Fabriano

Its one of Europe's biggest makers of home appliances

In February 2005, Merloni Elettrodomestici was renamed Indesit

Company

Indesit became the best known of the Group's brands outside Italy

The Company was also operated under its "historic" brand, Ariston

It also has regional brands like Hotpoint, Scholtes and Stinol

Costs Associated with Transit Point Method

Increasing storage capacity of the central

Intensive planning of daily shipment

Skilled administration staff would be required

In case of urgent demand it can lead to huge additional costs

Maintenance costs of extra vehicles needed

In case of any excess demand it can lead to loss of goodwill

Orders made after 3pm, will be delivered the second day. This can
lower customer satisfaction.
Benefits of Transit Point Method

Improved costs

Better efficiency

More agile

More responsive

More visibility

Reduced workforce
Quantitative Analysis
Assuming 20 working days in a month.
Average daily demand served from regional warehouse = 154.8 pieces
Average Volume/Month = Average daily demand x No of working days= 3096 pcs

Operating Cost at RDC (Exhibit 10)

Operating cost at Roma = 3605 Lire/Piece/Month
Average inventory levels at RDC = 1200 pieces (from Exhibit 8a)
Total Op Cost/Month at Roma RDC = Op Cost/Piece/Month x Avg Inventory=
4326000 Lire

Therefore, Op Cost per piece sold = Total op cost/No of pieces sold

= 4326000 / 3096
= 1397.28 Lire - (A1)
As per the case, by using Transit Point methodology the Operating Cost has
reduced to 20%.
Therefore, New Operating Cost per piece sold = 20 % of original Total Operating
Cost
= 0.20 x 1397.28
= 279.45 Lire -(B1)
Inventory Cost at RDC
From exhibit 10 of the case it can be seen that the inventory cost at Roma is 1035
Lire/Piece/Month.
Total Inv Cost / Month = Inv Cost/Piece/Month x Avg Inv = 1242000 Lire
Inventory cost per piece sold = Total inventory cost / No of pieces sold = 401.16 Lire. - (
Using the Transit Point methodology, zero inventory is maintained.
Therefore, Inventory cost per piece sold = 0 Lire - (B2)
Short Haul Transportation Cost
The short haul transportation cost is the cost of transporting goods from regional wareh
or transit point to retailers. This cost would be common for both pre and during Transit
methodology usage period
Short Haul Transportation cost = 4300 Lire/Piece - (A3),(B3)
Long Haul Transportation Cost
is the cost of transporting goods from the central warehouse to the regional warehouse
transit point.
During the pre Transit Point period goods were transported from the central warehouse
regional warehouses using trailer trucks.
Total number of pieces to be shipped per month = 3096 pieces
Capacity of one trailer truck = 120 pieces
Therefore, Number of trailer trucks required = Total quantity / Capacity of trailer truck
= 3096 / 120
= 25.8 trucks
Distance between Roma and Fabriano = 165 Km approx. (source: From Exhibit 11, Cos
using a trailer truck for transport upto 165 Km = 0.36 Million Lire

Therefore, Total transporation cost = Cost/Truck x No of trailer trucks
= 360000 x 25.8
= 9288000 Lire
Transportation cost per piece sold = Total transportation cost / No of pieces sold
= 9288000 / 3096
= 3000 Lire - (A4)
In Transit Point methodology both trailer truck and smaller trucks can be used dependin
the lot size.
Since the average daily demand is 154.8 pieces, a minimum of one trailer truck will hav
used every day.
i.e. Total volume of goods carried by trailer trucks/month = No of trailer truck in a month
Volume carried by 1 trailer truck
= 20 x 120
= 2400 pieces
The remaining amount would be carried by smaller trucks.
Volume to be carried by smaller trucks = 3096 -2400
= 696 pieces.
Therefore, No of smaller trucks required per month = Volume carried by smaller trucks
Capacity of smaller truck
= 696 / 45
= 16 trucks
This means that in addition to trailer truck a smaller truck also needs to be done for 4
every week.
From Exhibit 11, Cost of using a smaller truck for transport upto 165 Km = 0.2 Million L
Total transportation cost = (Cost / Trailer truck x No of trailer trucks) + (Cost / Small tru
No of smaller trucks)

= 10400000 Lire Big concept

= (360000 x 20) + (200000 x 16)

Transportation cost per piece sold = Total transportation cost / No of pieces sold
= 10400000 / 3096
= 3359.17 Lire -(B4) Bring the attention of
Inventory cost at central warehouse
your audience over a key
Because the regional warehouses are going to be removed, some amounts of invento
concept using icons or
be moved to the central warehouse.
Total inventory level at all 17 regional warehouses = 14330 pieces
illustrations
Assuming 50% of this is Cycle Stock and the remaining Safety Stock, the Cycle Stock
7165) will be moved to the central warehouse.
Average Safety stock = 7165 / 17
= 421 pieces.
Safety stock required at central warehouse as per Risk Pooling = 421 x 17
= 1735 pieces.
Therefore, additional stock required at central warehouse = Safety stock + Cycle stock
= 1735 + 7165
= 8900 pieces.
Assuming inventory cost as those prevailing in Roma, the extra inventory cost at centra
You can
warehouse alsox 1035
= 8900
= split
9211500your
Lire
Additional inventory cost/month/piece sold = 9211500/(20*3096)
= content
148.76 Lire -(B5) White Black
Is the
Therefore, Total Cost incurred bycolor of milk beforeIsdeploying
the company the color of coal,
Transit Point methodo
= (A1) + (A2) + (A3) + (A4)and fresh snow, the ebony, and of outer
= 1397.28 + 401.16 + 4300color
+ 3000
produced by space. It is the
= 9098.44 Lire
the combination of darkest color, the
Total Cost incurred by the company by deploying Transit Point methodology
= (B1) + (B2) + (B3) + (B4)all the colors of the
+ (B5) result of the absence
visible
= 279.45 + 0 + 4300 + 3359.17 spectrum.
+ 148.76 of or complete
= 8087.38 Lire absorption of light.
Should Merloni replace its network
of regional warehouses with
transit points?
 Cost saving in terms of infrastructure cost of regional warehouses and
their maintenance

Lesser amounts of overall inventory to be maintained

As regional warehouses would be closed- lesser labor requirements

Transit Point methodology works similar to JIT where-in the required

amount of goods are shipped at the required time

Pull from the customer and elimination of regional warehouses- effect

of bullwhip should be lower
 Implement this plan only in big cities to improve the system and then
fan it out to other cities

Multiple large ware houses spread across the country so that every
major city is located at a distance of 300-400Kms from the ware
house

The transit point plan will work well for a manufacturing line where
the demand is more fixed than a home appliance store

In case of a home appliance store the demand is driven high by a

number of local factors like local holidays, local festivals, bonus pay
out etc. A local festival is more limited to a local city or a town and
may not be even applicable for the entire state. This makes it more
difficult to forecast and plan.
 Use of project management software-for intensive planning of daily
shipment

Hiring more skilled administration staff

Same day delivery to increase customer satisfaction

Maintaining inventory in near-by locations of retailers to meet

demand variability

Build up infrastructure and teams to coordinate the movement of

trucks and their transactions

Local office space for the warehouse managers who also act as
Customer Relationship Managers and to keep the spare parts
required for its service personnel

Provision of extra vehicles to ensure the earliest delivery of all the

goods in case of harsh weather condition