SUPPLY CHAIN MANAGEMENT

Merloni Elettrodomestici SpA:

The Transit Point Experiment

Group – 02

Nishant Yadav – 18PGP135

Rahul Roshan – 18PGP143
1. What are the costs and benefits of Merloni's current distribution
Sarthak Navalakha – 18PGP169
system? Of a transit-point-based distribution system?
Sarvasuddi Akhila – 18PGP170
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Shubham Raj - 18PGP184
Current Distribution System

Benefits

a. Safety Stock:
The current distribution system will be impacted to a lesser extent due to production issues at
the manufacturing plants. This is because the regional warehouses in current distribution
system carry safety stock that can be used to meet customer demand during this period.
b. Customer Satisfaction:
In case of Transit the orders can’t be taken after 3:00PM, this case is eliminated in current
distribution system.
c. Variability in demand:
The daily variability in demand can be managed in a more efficient manner through regional
warehouses.
d. Environment Issues:
In the event of bad weather such as snowfall when transportation of supplies is not possible,
the excess stock at regional warehouses can be used to fulfil the demand for a few days.

Urban Rural
  (Roma) (Catanzaro)
Avg daily demand 154.8 58.7
Avg monthly demand (22-working day
month) 3406 1291
Operating cost (lire/piece/month) 3605 3324
Inventory cost (lire/piece/month) 1035 1721
Short Haul Transportation Costs (lire/piece) 4300 4700
Avg inventory 1200 780
Total op costs 4326000 2592720
Total inventory costs 1242000 1342380
Short haul transportation cost 14644080 6069580
Long haul transportation cost 11352000 10761666.7
Total costs 31564080 20766346.7
Total cost per piece sold 9268.288 16080.4915
Disadvantages

a. Higher Inventory holding costs:

The regional warehouse incur inventory holding costs due to inventory storage.
b. Higher Lease Cost and operational costs:
As all the warehouses are not owned there are high lease costs. Along with operational
costs.
c. Transportation Cost:
Transportation of materials from the central warehouses to regional warehouses. These
costs would be higher if the truck capacity isn’t used efficiently.
d. Higher Labour Cost:
The workforce required for operating regional warehouse is higher than that of transit
point distribution system.

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Transit Point System:

Benefits

a. Highly cost effective:

According to an estimate by a manager, the trial run of transit point system resulted in
reduction of operating costs by 80%.
b. Zero inventory holding costs:
There was zero inventory maintained in the transit point system, hence the inventory holding
cost was zero.
c. Reduction in production planning horizon:
There was reduction in the production planning horizon from four months to three months
d. Reduction in Labour costs:
There is reduction in labour costs since there won’t be a permanent facility to take care of and
is required only at the time of cross docking

Urban Rural
  (Roma) (Catanzaro)
Avg operating cost 254.0521 401.5363
Avg inventory cost 0 0
Avg trailer reqd per day 1 0
Avg small truck reqd per day 1 1.3
Trailer truck cost 8800000 0
Small truck cost 4400000 8800000
Inventory holding cost increase 11461239
Total costs 34844983
Cost per piece sold 7419
Disadvantages

a. Higher logistics cost:

In transit point system, logistics cost will increase as the products need to be transported
from the central warehouse to the regional warehouse on a daily basis.
b. Inability to meet unexpected demand:
The transit point may not be able to meet the unexpected demand from the customers as
no safety stock is maintained to fulfil such demand uncertainty.
c. Risk of malfunction of transport equipment:
The tractor trailer transporting the appliances from central warehouse to the cross docking
or the transit point may face some technical faults on the way. This will lead to disruption
of the whole supply chain as the trailer tractor is vital for suppling the ordered quantities.
d. Decreased Customer Satisfaction:

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 Since the products can’t be ordered after 3pm, customer satisfaction will be reduced upto
a certain level.

2. Should Merloni replace its network of regional warehouses with transit points? if so, what
contingency plans and support systems are necessary to support the new logistics network? if
not, what changes, if any, would you recommend Merloni make to its distribution system?

Merloni should not completely replace its network of regional warehouses with transit point system.
The transit points system has been proved quite successful in Milano where the regional warehouse
has been replaced with transit point system for a period of two months. But this successful trial of
transit point system was based on a number of factors that were favourable to the process such as no
stockout situations at the central warehouse, no new product introduction and absence of rough
weather.

Merloni should carry the experiment of the transit point for a complete season i.e. a year. This will
enable the transit point experiment to be tested against various situations and conditions that have a
potential to disturb this system.

Thus, management at Merloni should choose three regional warehouses out of the seventeen and each
of these three regional warehouses should be selected from the north, central and southern areas of the
country. The transit point experiment should be conducted at these three selected locations for a
period of one year and based on the result of this comprehensive trial run, the decision to continue
with the transit point experiment should be taken. Meanwhile, the operations at rest of the regional
warehouses should be continued using the ABC inventory classification.

The selected three locations that use transit point system instead of regional warehouse for a season
long trial will require following contingency plans –

1. Contingency for transportation : for situations like Periods of high demand, Cases of
transportation breakdown, Unfavourable weather conditions
2. Contingency for storage : Instead of complete removal of all warehouses, 3 zonal
warehouses should be kept as contingency for storage along with transit points. (hybrid
crossdocking)

The support systems needed for the transit point system are as follows –

1. Robust daily demand forecast

The daily order quantity placed by the regional manager should be as accurate as possible to
avoid the situations of underservice to customers and improper utilisation of truckload
capacity.
2. Servicing and maintenance of shipment trucks
The trailers and trucks used for shipment from the central warehouse to the transit points
should be regularly serviced and checked for any possible fault before every departure. This is
essential because any breakdown or failure of transport equipment midway would deprive the
cross docking area of the daily shipments which would affect the customer service and create
back orders.
3. Efficient operations at cross docking area

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 The unloading and loading of goods at the transit point should be carried out efficiently
through adequate deployment of labour and machinery such as forklift. In addition, the local
delivery trucks to be loaded should follow the daily arrival and departure schedule.
4. GPS
Tracking system to track the trucks from central warehouse to the transit hubs (if feasible)

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