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Transit Point methodology works similar to JIT where-in the required amount of goods are shipped at
the required time.
Since it works more on the Pull from the customer and due to elimination of regional warehouses,
the effect of bullwhip should be lower.
Because the regional warehouses will be eliminated, the capacity storage of the central warehouses
should be expanded to meet the requirements of the extra Cycle inventory. This would come as an
additional cost to the company.
Intensive planning of daily shipment should be done. It is not only required to calculate the exact
amount of goods to be shipped but also the arrangement of the goods (to eliminate time in
loading/unloading activities).
Because of this intensive planning more skilled administration staff would be required.
If the customer does not order wihin 3pm, the delivery of the product would happen only after the
second day. This can lower customer satisfaction.
Since no inventory is maintained in near-by locations (as all goods come from central warehouse) if
there is any excess demand or out of stock condition (for retailers), the goods will have to be fetched
from central warehouse which would take a lot of time. This can lead to loss of goodwill with retailers
especially those serving the rural markets.
Demand variability is not easily supported by employing Transit Point methodology. If there is an
urgent demand for goods in excess of truckload capacity then it can lead to huge additional cost.
Another important point which is not mentioned in the case is the importance of the transportation
medium. If any of the vehicles breaks-down it could lead to huge delays and pile up of demand.
Merloni needs to keep some extra vehicle for a backup. It also needs to maintain the vehicles in
good condition. The cost of this has not been accounted for. Since the experiment was carried out
only in Milano a relatively smaller numbers of trucks (1 Trailer truck and 3 Small trucks) were
required.
If the Transit Point methodology is applied through-out Italy, Merloni will need to build up
infrastructure and teams to coordinate the the movement of trucks and their transactions.
In Merloni, it is the responsibility of the warehouse manager to manage and develop the customer
relationship. If the warehouses are eliminated Merloni would still need additional office space for the
warehouse managers who also act as Customer Relationship Managers.
Another important question is where would Merloni keep the spare parts required for its service
personnel. If these too are kept at the central warehouse it could lead to delay thus have a negative
impact on the quality of service.
The Merloni experiment was conducted when the weather was good. If the weather is bad near the
central warehouse but alright in other areas where there is demand, then it can lead to delays. The
cost of such delays would be large as Merloni would have to use extra vehicles to ensure the earliest
delivery of all the goods once the weather becomes good.
Quantitative Analysis:
Now we shall look at a quantitative analysis of cost incurred by the company before and after using
Transit Point methodology. The case is for region of Roma (information as per exhibit 10). (Ax) would
represent cost incurred by using Pre-Transit Point methodology and (Bx) would denote cost incurred
by using Transit Point methodology.
Calculate the Average Volume/Month at the Regional Distribution Centre (RDC) in Roma.
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
= 154.8 x 20
= 3096 pieces.
= 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 Inventory Cost / Month = Invetory Cost/Piece/Month x Avg Inventory
= 1035 x 1200
= 1242000 Lire
Inventory cost per piece sold = Total inventory cost / No of pieces sold
= 1242000 / 3096
= 401.16 Lire. - (A2)
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 warehouse or
transit point to retailers. This cost would be common for both pre and during Transit Point methodoly
usage period
Short Haul Transportation cost = 4300 Lire/Piece - (A3),(B3)
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 days in every
week.
From Exhibit 11, Cost of using a smaller truck for transport upto 165 Km = 0.2 Million Lire
Total transportation cost = (Cost / Trailer truck x No of trailer trucks) + (Cost / Small truck x No of
smaller trucks)
= (360000 x 20) + (200000 x 16)
= 10400000 Lire
Transportation cost per piece sold = Total transportation cost / No of pieces sold
= 10400000 / 3096
= 3359.17 Lire -(B4)
Inventory cost at central warehouse
Because the regional warehouses are going to be removed, some amounts of inventory will be
moved to the central warehouse.
Total inventory level at all 17 regional warehouses = 14330 pieces
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 central warehouse
= 8900 x 1035
= 9211500 Lire
Additional inventory cost/month/piece sold = 9211500/(20*3096)
= 8087.38 Lire
Therefore by using Transit Point methodology, Merloni has saved 1011.06 Lire.