Inventory and Transit Point Essay Example

to be sold. Under the current distribution system, the goods are only shipped when they have full truck loads. This phenomenon is called “batching orders” and it is one of the causes of the Bullwhip effect. Another problem identified was that, sales and storage responsibilities were not clearly split. In fact, it was up to the warehouse manager to deal with the customer once a sale had been made.

Thus, instead of managing the warehouse, they were occupied with client complaints.In spite of all this model disadvantages, it has some advantages as well. On one hand, the existence of inventories allows an easier response to fluctuations in demand. Thus, when for some reason, there is no replenishment the demand is still satisfied. On the other hand, comparing to the Transit Point, this system has lower transportation costs (Exhibit 6).

COSTS AND BENEFITS OF THE TRANSIT POINT SYSTEM The transit point system came with the necessity of creating an alternative mean of serving the Milano customers, while the warehouse was occupied with the Built-in appliance exposition.This system was also an opportunity to check the feasibility of a system with no need of holding inventory. The guide lines of this approach were very simple. It established that the regional warehouses should be eliminated in order to reduce inventory to zero. However, that place would be used like an “exchanged spot”, which means that the trucks were filled up in the central warehouse and unloaded to small local trucks that would deliver the products to clients. This allows them to save inventory costs and avoid the costs with discounts given to customers.

According to Mr. Bosi, under the transit

point system, the total operating costs could fall to 20% of the traditional distribution system (Exhibit 3). There were several rules that had to be followed, so that the Transit Point system could work efficiently. A need of discipline and responsibility for the schedules was something essential for the success.

So we can say that working on a daily basis allowed them to be “closer” to customers and therefore gather more reliable information regarding the demand.This is an effective way of mitigate the Bullwhip effect. Yet, and because the trucks could only leave the central warehouse when they were completely full, sometimes customers had to wait one more day to get their product. This normally leads to lower level of customer satisfaction. This approach also implied high transportation costs (Exhibit 4) which is a consequence of the large distances that each truck had to cover. We cannot also discard the importance of the weather conditions to the success of this system.

For instance, if the trucks have to remain stopped because of a snow storm, the company won’t be able to satisfy all demand. The inexistence of any regional warehouse doesn’t allow them to have safety stocks. In addition, we can state that the transit point requires a high level of control, monitor and coordination. Otherwise it would transform the operational activities of the company in a complete chaos. However, if it is well implemented it can be a synonym of lower operational costs and no inventory costs.

Nevertheless, the increase in the transportation costs associated can lead us to conclude that, in some situations, this system is not the suitable for the all regional centers, but

that is what we will analyze next. SHOULD MERLONI REPLACE ITS NETWORK OF REGIONAL WAREHOUSES WITH TRANSIT POINTS? CONTINGENCY PLANS AND RECOMMENDED CHANGES Before answering this question it is important to say that during our analysis we established some assumptions, due to the low level of available information.So, first of all we had to define which regions were urban or rural, for that we used the follow criteria: regions with more daily average demand of 92,75 (see formula in Exhibit 1) are considered urban regions and with less than that, rural regions. By this way we achieved 8 urban regions. Secondly, we considerer the monthly demand in business days (22 days) because customers of regional warehouses are retailers and not the final customer.

Thirdly, with the goal of computing the transportation costs between the central warehouse and the retailers, under the transit point system, we assumed that he transit point will be located somewhere near the regional warehouse. Until the transit point we used the long-haul transportation costs, from that place on (local delivery costs) we used the short-haul transportation costs. Finally, in our cost analysis of the two systems (Exhibit 6), we used some information from the text to compute the operating costs. At some point, Mr.

Bosi said that the costs achieved with the transit point system should be 20% of the traditional one.Thus, after analyzing the data from the two trial months of the Transit Point system, we conclude that the best solution for Merloni’s distribution network is a combine model between this one and the traditional distribution system. In fact, none of them are perfects solutions, so our challenge is to

find the best combination of the two. The conclusion that we make from the cost analysis is that, the transit point system only compensates in 6 regions, which are Ancona, Bari, Bologna, Firenze, Milano e Napoli (Exhibit 5).This is due to the higher transportation costs associated with this system. In fact, the transportations costs represent, for all regions, between 92 and 98% of the total costs under the transit point system while in the traditional distribution system it only represented something between 59-75%.

This is quite obvious, because in the transit point system we reduced dramatically the operating and inventory costs. When our only goal is to minimize costs, we conclude that Merloni should replace it is current distribution system by the transit point in the regions that we mentioned above.Nevertheless there could be some unprofitable factors that might influence our decision, for instance political issues. When adopting the transit point systems there are some contingency plans that the company should undertake, which are: Take advantage from the fact that the company is more “closer” to the customers to produce more realistic demand forecasts.

The use of “point-of-sale data” will help to mitigate the Bullwhip effect, and situations of stock out. This proximity to clients will also allow Merloni to adopt Pull strategies rather than Push ones.Invest in planning and monitoring, namely by improving the information system (IS). All data should be available, on time, to each point in the supply chain. This electronic data interchange (EDI) will help to make routing decisions more efficiently and therefore minimize transportation costs. The Human Resources must be prepared to adopt this critical system, so the company should

invest in training programs.

Having an alternative mean of transporting the products available in cases of predictable storm situations or other problems with the trucks.For instance by airplane, or ship (only applicable to long distances). Besides this contingency plans there are some changes that we recommend to the integrated distribution system of Merloni’s: In order to reduce transportation costs we recommend the creation of another central warehouse strategically located. Far from Fabriano and near a region with high demand.

The sales manager should be responsible for all sale process. Despite we do not have enough information to make such an important decision, Merloni should consider outsourcing for the transportation of the products.