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Case Analysis On Merloni

Elettrodomestici Spa Economics


Essay
Merloni Elettrodomestici SpA is an Italian company based in Fabriano and is one of Europes biggest
makers of home appliances. In February 2005, Merloni Elettrodomestici was renamed Indesit
Company, Indesit being the best known of the Groups brands outside Italy. The Company was also
operating under its historic brand, Ariston, and the regional brands Hotpoint, Scholtes and Stinol.
During the perio from 1984 to 1986, Merloni undertook a number of initiatives to improve efficiency in
inventory control and logistics. One such initiative was the transit point experiment where in the
Milano region, regional distribution centre was eliminated in favour of tranit points which held zero
inventory.
The following is an analysis of the Transit Point Experiment conducted by Merloni:
Cost saving in terms of infrastructure cost of regional warehouses and their maintenance.
The company would require lesser amounts of overall inventory to be maintained.
As regional warehouses would be closed there would be lesser labor requirements.

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.

Operating Cost at RDC


From exhibit 10 of the case it can be seen that the operating cost at Roma is 3605 Lire/Piece/Month
Average inventory levels at RDC = 1200 pieces (from Exhibit 8a)
Total Operating Cost/Month at Roma RDC = Operating Cost/Piece/Month x Avg Inventory
= 3605 x 1200
= 4326000 Lire
Therefore, Operating Cost per piece sold = Total operating 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 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)

Long Haul Transportation Cost


is the cost of transporting goods from the central warehouse to the regional warehouse or transit
point.
During the pre Transit Point period goods were transported from the central warehouse to the
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: http://www.distancecalculator.co.uk/distance-from-fabriano-to-rome.htm)
From Exhibit 11, Cost of 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 depending upon the
lot size.
Since the average daily demand is 154.8 pieces, a minimum of one trailer truck will have to be used
every day.
i.e. Total volume of goods carried by trailer trucks/month = No of trailer truck in a month x 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 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)

= 148.76 Lire -(B5)


Therefore, Total Cost incurred by the company before deploying Transit Point methodology
= (A1) + (A2) + (A3) + (A4)
= 1397.28 + 401.16 + 4300 + 3000
= 9098.44 Lire
Total Cost incurred by the company by deploying Transit Point methodology
= (B1) + (B2) + (B3) + (B4) + (B5)
= 279.45 + 0 + 4300 + 3359.17 + 148.76

= 8087.38 Lire
Therefore by using Transit Point methodology, Merloni has saved 1011.06 Lire.

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