GENERAL OVERVIEW Merloni Company was created in 1930 by Aristide Merloni.
After the Second World War Merloni started to expand their range of products, and in the 60s and 70s Merloni was already the biggest producer of high quality domestic appliances, operating in both, Italy and Europe. At some point in the 70s, the company became Merloni Group formed by four subsidiaries. Merloni Progetti for industrial projects; Merloni Igienico Sanitari for bath and heating products; Merloni Casa for built-in kitchen and bath furniture; and Merloni Electtrodomestici for domestic appliances.The latter is the subsidiary with the biggest percentage of consolidated sales. COSTS AND BENEFITS OF MERLONI’S CURRENT DISTRIBUTION SYSTEM When analysing the actual distribution model, we find out several faults.
Firstly, the inventory management is much decentralized and there are few formal replenishment methods. The regional warehouses managers just define the stock goals and call central warehouse daily with a list of restocking needs. This lack of control can lead to an excess of stock, creating a higher inventory cost, or to a situation of stock out.When the latter happens, regional warehouse manager must order the required product from central warehouse and in order to compensate costumers he offers a discount of 4. 000lires per piece. We also realized that transportation costs are particularly high because every finished good, no matter where it came from, must be taken to the central warehouse and just afterwards it is sent to a regional warehouse.
However, in some cases the products are just “travelling” across Italy creating...
useless transportations costs.For example, a dishwasher produced in Bonferraro goes to the central warehouse, in Fabriano, and then comes back to Padova 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
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