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Merloni Elettrodomestici SpA: The transit Point Experiment Introduction Merloni Elettrodomestici is an Italian manufacturer of domestic appliances.

It has 4 plants, a centralized warehouse and 17 warehouses across Italy. Merloni was the pioneer of the innovation of Supply Chain. The purpose of this case study analysis is to calculate the benefits and the influence of cross docking technique for Merloni Elettrodomestici Spa Company across its all regional warehouses. Before innovating the solution of inventory, Merloni had already put into effect the programs that had successfully shortened production-planning lead times and decreased inventory levels. To further reduce inventory and enhance production efficiency, management was evaluating a proposal to replace regional warehouses with "transit-points". At these transit points, products arriving on trailers from the central warehouse and plants would then be transferred directly to smaller local delivery trucks. The primary issue being assessed was the viability of the transit point solution and its effectiveness in improving efficiency and reducing costs. Question 1: Compare 2 scenarios and calculate the costs 1. Current flows: Plants + Inventory Central Warehouse (Inventory) RegionalWarehouses (Inventories) CLIENTS In this situation, there are three levels of inventory: in Plants, in the Central Warehouse, and in Regional Warehouses. The most of the inventory is localised in the Central Warehouse (44 253 units 56%), followed by Plants inventories (21 050 units 26%), and the rest of the inventory is in shared between the regional Warehouses (14 330 units 18%). * Company focused on decentralized operations and dedicated one single plant for one product. Companys response for demand fluctuation could be good. All the operations and the risks are in control. * Every plant has its own plant warehouse area to store row materials, finished goods etc. in order to increase responsiveness at plant level. * The customers receives every 24 hours the product that was in stock at nearest warehouse. Otherwise it needs some days to replenish the stocks from central warehouse. Sometimes, the delivery delays occur for various reasons. * The company has tried to give a discount to customers ordering full-truck to economiser the resources and avoid higher transportation. * The products are sent from central warehouse to regional warehouses once accumulated orders leaded to full-truck. This increased the efficiency of Supply Chain Channel. * Merloni implemented of an A-B-C inventory classification program which was able to reduce inventory levels at regional warehouses, the production planning time horizon and also the required lead-time to firm orders.

Transit Points instead of regional warehouses: Plants + Inventory Central Warehouse (Inventory) Regional Transit Points (No Inventory) CLIENTS

Here cross-docking refers to moving product from a manufacturing plant and delivering it directly to the customer with little or no material handling in between. With Transit Points, there is no stock in regional Warehouses, which become crossdocking areas. Thats a way to reduce inventory and save the expense of holding it. In the current case the company ran a project for cross docking at Milano warehouse loading area. Calculate the costs: * transport form plant to central warehouse (cf. appendix -3 transport costs) According to the case, we use the large truck to deliver the product from plant to central warehouse. The formula we use to calculate one total cost: Total cost for one plant to central warehouse= Fix Cost* Numbers of trucks+ Varible Cost*Numbers of trucks* the distance We find that for the same of type of distance (short distance or long distance), the fix cost and the variable cost are the same price for one large truck. Fix cost is 262500 Lire for short distance and 450000 Lire for long distance. Variable cost is 1000 Lire/kilometre for short distance and 710 for long distance. The result is 6 413 /day * the central warehouses (cf. appendix facilities cost and inventory cost)

We define that the central warehouse which is located in Fabriano is a rural warehouse. So we use the tariff of rural warehouse: Operating cost for one year= operating cost *250*average daily served demand =1 401 565 Inventory cost for one year= inventory cost*inventory annual= 913 912 * the transport from central warehouse to transit points or regional depots (cf. appendix -3 transport costs) We use the same formula as the first calculation, the result is 13 630 /day * the transport from central warehouse to direct customers-(cf. appendix -3 transport costs) Most of regional warehouses or transit points cannot satisfy all the demands of customers, so we deliver the these quantities directly from central warehouses. As is the case with the third calculation, the result is 12 828 /day * Facilities costs in regional warehouse or transit points: We define that the unit of given data average inventory in regional warehouse is one month. the inventory + operating cost=2 184 894 * the distribution to customers from depots or transit points First of all, we have found all the distance between each of the two regional warehouses, and we found the one-fifths of the smallest distance as our distance from regional warehouse to customers. we use the same formula as the first one: the result is 5 402/day * inventory in the whole distribution chain In the whole distribution chain, there is 3 parts of stocks: in the plant stock area, in the central warehouse and in the regional warehouse. We classified the 17 regional warehouses into 2 parts: rural and urban. So, the whole inventory in the distribution chain is:36 227 /month in plants, 76 160/ month in central warehouse and 18 508/month in regional warehouse. We have also drawn a schema to represent the percentage of every part. Question 2: Conclusions, problems & risks Analysing all the precedents costs, We see that the most of the inventory cost is due to Central warehouses and to Plants inventories, the sum of the regional warehouse only represents: 14% of the total, so implantation of transit point in order to reduce stocks costs doesn't seem relevant. We will analyse the new structure by actors. Plants and its inventory: It means that the plants would be more efficient leading to cost savings Scraping the regional warehouses may also impact the inventory maintained at the plant site. This could lead to some investment and maintenance at the plant site. Central Warehouse: The use of transit points would not reduce inventory level requirements. It would increase inventories to the central warehouse. The impact of removing Milano warehouse would increase the load on central warehouse by 2.71% (1200/44253). By removing all regional warehouses would need central warehouse to expand itself by about 32% (14330/44253) in order to satisfy all the demands.

The increasing number of trailer which departs from the central warehouse would also require that extra shipping areas be constructed. We cost much more in the central warehouse than we economize in the part of cross-docking in the level of regional warehouse. Cross Docking Facilities & Regional Warehouse The company had planned to remove all regional warehouses and implement cross-docking facility, but we note that the cost of maintaining it could be very important. In Milano, there is some operational cost savings because of the reduction in space, utility, and labor usage. However, the cross-docking still need to be maintained. The facilities and the temporary storage of units that it was unable to delivery immediately also cost a lot of investment. In order to make the new structure to save money, the company should make the cross-docking work on both responsiveness and efficiency Customers The problem with the transit point organization is that the delivery from central warehouse has to be for the following day, (overnight delivery) so orders have to be transmitted by the client before 3 p.m. which reduce flexibility. In the case of rupture and high demand, the company would ask customers to accept some delay of replenishment instead of increasing the transport facility. This will leave a bad impression to customers. In the regional warehouse system, the order can be accepted later than 3 P.M., because the products are already in the regional warehouse so it is immediately available. The risk: Reducing the inventories at the level of regional warehouse will give more pression to central warehouse and increase the delivery time for all products. Though the beginning trial that took place between the central warehouse and Milan was successful, we cant say that the system of cross-docking will successful in every regional warehouse. Because we found that the distance between the two locations was relatively smaller than the distance between the central warehouse and the other regions. So this maybe will cause some rupture of delivery or stock. In conclusion, having no stock in Regional Warehouse constitutes a risk for the client service in case of the supply from Central Warehouse is delayed, the client delivery could be strongly delayed. It is very important to avoid ruptures because it could cause client loss. So, its unwise to change all the regional warehouses into transit point. Question 3: The suggestions of other distribution structure Suggestion 1: keep the regional warehouse and change the central warehouse Another distribution structure Merloni could use is one with no Central Warehouse, which could be changed in a cross-docking area (CDA). This structure would be more relevant than changing RWH in CDA because it would save more money and would affect less the security of the supply chain because an inventory in regional depots would be available to serve clients. The reason of this proposition is that the major part of the inventory (56%) is in the CWH so it is the most expensive to hold. Then in order to save money, it is the first inventory to reduce.(Cf . appendix) | Inventorycost () | %COST | Inventory (units) | % Inventory | Plants | 36227 | 27,68% | 21050 | 26,43% | CWH | 76159 | 58,18% | 44253 | 55,57% | RWH | 18509 | 14,14% | 14330 | 18,00% |

Total | 130895

| 100,00%

| 79633 | 100,00%

The plants could also work more in Just in time to reduce plants inventory, and a part of the transport could be direct from plants to RWH, in cases of important demands from the regional clients or when a plant is very close to a RWH, which can reduce transport expenses. Plants + Inventory Central Warehouse (No Inventory) Regional Transit Points (Inventory) CLIENTS Direct transport Distribution structure proposed for Merloni Organization

Suggestion 2: Having the transit point only in Milano The months trial showed us that the transit point is a successful solution in reducing the inventory and save money. But as we have said, the central warehouse will be very fragile if we cancel all the regional warehouses. In order to keep the system stable and the delivery punctual, its a good choice to keep only on transit point in Milano which is very near to central warehouse Suggestion 3: keep the big regional warehouse and cancel the little one After analysing the case, we find that the demand of every regional warehouse is very different from one to another. We think its also a good solution to cancel the regional warehouses which dont have much demand and volume in order to save the warehouse operating cost. In the same time, we can make a big warehouse nearby to extend its capacity to hold more inventories. Conclusion: Thanks to the case, we have learnt a new structure of Supply Chain which is much more efficient and more economical. At the same time, it requires more control and management to keep it work well. In order to reduce the possibility of delay, satisfy the customers and save money, we have much more work to do. The Merloni has given us a good example.