Case Study: Merloni Elettrodomestici SpA: The Transit Point Experiment

The Organization
Merloni Elettrodomestici SpA (Merloni), is a major Italian manufacturer of freestanding and built-in appliances.
Merloni's distribution network consists of five manufacturing plants, a centralized warehouse, and seventeen
regional warehouses.
During the past few years, Merloni has implemented programs that have successfully shortened production-planning
lead times and decreased inventory levels. In particular, with the help of a centralized inventory planning system
and implementation of an A-B-C inventory classification program, they were able to reduce inventory levels at the
regional offices by 75%. The production planning time horizon was reduced from four months to three while the
required lead-time to firm orders was reduced from two months to one.
In line with a new wave of efforts to further reduce inventory and enhance production efficiency, management is
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 then is the viability of the transit point solution and its effectiveness in improving
efficiency and reducing costs. The secondary issue is the provision of an exhibition center in the Milano area
without significant risks to product delivery.

Analysis
The proposal being evaluated utilizes the concept of "cross-docking" and is synonymous with JIT in manufacturing.
In cross-docking, goods are received on one dock and are immediately shipped through another, without the need for
storage. To carefully assess the benefits and disadvantages of this proposal, a number of critical factors must be
addressed:
Inventory: As describe above, the current inventory levels held at the regional offices already reflect a 75%
reduction in comparison to historical figures. This level of inventory is established based on customer demands and
constrained by production lead-times. Although the transit point concept eliminates inventory stocks at the regional
warehouses, it does nothing to reduce the overall required inventory levels. That is, it does not alleviate any of the
constraints that determine inventory levels such as reducing production set up times or production lot sizes.
Therefore, the current requirements of inventory would not be affected.
Infrastructure: By eliminating the need for inventory storage at the regional offices, the transit point concept could
help reduce operational costs at the regional warehouses. These operational cost savings would be associated with
reduction in space, utility, and labor usage. However, it is important to remember that Merloni will still need to
maintain the facilities needed for cross-docking as well as temporary storage of units that it was unable to delivery
immediately. Therefore, Merloni will not be able to completely eliminate the cost of operating its regional
warehouses.
Also, as discussed above, the use of transit points alone will not reduce inventory level requirements; it simply
pushes inventories upstream to the central warehouse. This means that the central warehouse will need to expand by
about 32% in order to accommodate this excess inventory (please refer to Exhibit 1 for calculations). Increased
number of trailer departures from the central warehouse may also require that extra shipping docks be installed
(please refer to Exhibit 2 for calculations). The cost of modifying the central warehouse would further offset the
potential cost savings realized at the regional warehouses.
Labor and staff: As stated above, a transit point system would reduce material handling requirements and associated
labor at the regional warehouses. While this yields cost-savings, Merloni must be aware of the negative impacts that
downsizing will have on its workforce.
Also, since a transit point system requires much more diligent planning and coordination, the administration staff
might need to work longer and later hours, which could offset some of the cost savings realized from warehouse
operations. Higher stress levels among the administration staff could also increase turnover and associated costs.
Transportation: Low demand-variance and relatively close distribution distances are critical success factors for cross
docking. For example, Wal-Mart is able to benefit from cross docking for distributing some of its non-staple
products that have very stable demands throughout its retail stores in a small region. The demand for Merloni's
products however, are quire variable. For example, the average demand for the free-standing products can jump
from about 1,000 units in August to over 12,000 in September. Not only this presents serious obstacles to planning
and coordinating shipments, the peak in demand could result in serious service disruptions. Also, since units must
be shipped to regions on a daily bases, regardless of the quantity ordered, significant inefficiencies result if the
trailer is not filled to maximum capacity.
Another significant concern with the transit point proposal is the length of time that transportation would add to
product delivery lead times (please refer to the Customer Service issue for further explanation).
Customer Service: Currently, over 65% of products are delivered within 24 hours, directly from the regional
warehouses. Only 35% of products are shipped from the central warehouse with a two to six day delivery times.
Eliminating inventories at regional warehouses would increase the delivery time for all products to two to six days.
Further delays due to problems with the delivery or product damage could potentially double the delivery times.
The significant increase in lead time will undoubtedly adversely affect customer-satisfaction.
Although the two months trial that took place between the central warehouse and Milan was successful, the distance
between the two locations is quite small relative to the distance to the other regions. Moreover, daily deliveries to
some of the regions inaccessible via ground transport are neither possible nor efficient. The experiment does not
reflect a typical scenario for Merloni.

Alternatives
Merloni has other alternatives for increasing the efficiency of its distribution network while maintaining the same or
improving its delivery times. Some these alternatives are:

1.Transit Point Only at Milan

As explained above, cross docking can be viable and cost-effective under certain conditions. While cross docking is
not advisable for most of the regions for the reasons explained above, the two month trial was a success for Milan.
Given that the conversion of the Milano warehouse into an exhibition center can lead to sales and marketing
strategic advantage, one alternative would be to continue serving the region through a transit point. The current
distribution network can then be maintained for the remaining regions. Although this alternative would not address
the primary issue (efficiency of the distribution network as a whole), it would allow Merloni to continue operating
its exhibition center without significant risks to product delivery.

2.Transshipment
Instead of delivering products from the central warehouse directly to a region for use by that region, Merloni could
use the excess capacity on the trailers and regional warehouses for deliver to other regional warehouses. By doing
so, Merloni could leverage its excess storage and transport resources to choose optimum transport solutions in order
to minimize costs while reducing delivery times. Many distribution resource-planning (DRP) software can be
programmed to automatically choose optimum routes if they are provided with necessary information about route-
specific transport costs and warehouse specific inventory storage and operational costs. Implementing this Please
refer to Exhibit 3 for a demonstration of such a solution.

3.Combination of Transshipment and Cross Docking

While allowing the Merloni to operate the Milano regional warehouse as an exhibition center, this alternative would
leverage the benefits of transshipment and transit points to maximize the efficiency of the distribution network. In
other words, where it is more cost-effective, a regional office could be converted to a transit point as well as receive
shipments from another regional office.

Recommendation and Implementation

After careful analysis of the primary issue and the critical factors, the recommendation is not to deploy the transit
point concept across all the regional offices. For the reasons explained above (please refer Analysis), doing so will
increase average product delivery times and adversely affect customer satisfaction. At the same time, the cost-
savings realized from conversion of warehouses to transit points may be offset by higher costs of transportation,
costs of modifying the central office, and cost of lost sales due to customer dissatisfaction.
The third alternative explained above, however, addresses the primary issue. It leverages the benefits of the transit
point concept as well as that of transshipment. Furthermore, it ensures that the Milano warehouse continues to
operate as an exhibition center for Merloni's clients.
In order to implement this alternative, careful analysis of transportation costs between different regions as well as
operational costs of carrying inventory in each region must be determined. This data can then be used in
combination of a linear programming solution or a DRP software capable of determining the optimum distribution
and delivery solution for maximizing efficiency and minimizing costs and delivery times.
1. Would you adopt the transit point system for Rome and/or Catanzaro?
2. In what other regions, if any, should the transit point system be adopted?
3. Why ship product from the factories to the central warehouse in Fabriano? (The alternative would be
to ship product from the factories directly to each region.)
4. How would logistics change if each factory produced every product?

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 Plant’s 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. Company’s
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 cross-docking areas. That’s 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
can’t 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, it’s 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, it’s 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 it’s also a good solution to cancel the regional warehouses which don’t 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.

Students are asked to evaluate this proposal and recommend a configuration for Merloni's distribution
network. Issues to be considered in the analysis of the case include the impact of different network
configurations on customer service and on inventory, labor, operating, and transport costs.