Merloni Elettrodomestici Spa

Problem/Situation

Merloni Elettrodomestici SpA (Merloni) is a major Italian manufacturer of built-in and freestanding Home appliances. Merloni's distribution network consists of five manufacturing plants, a centralized warehouse, and seventeen regional warehouses. During the past few years, Merloni has been successful in implementing programs that have significantly reduced production-planning lead times and decreased inventory levels. Particularly, with the implementation of an A-B-C inventory classification program and institution of a centralized inventory planning system (Refer to Figure 1 - Appendix 1), they were able to reduce inventory levels and shorten production planning cycles at the regional offices by 75%. Merloni was able to achieve a reduction from four to three months in the production planning time horizon while the required lead-time to firm orders was reduced from two months to one.

In their efforts to further reduce inventory and enhance production efficiency, management is evaluating a proposal to replace regional warehouses with "transit-points" (Refer to Figure 2 - Appendix 1). 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 that is being assessed is the feasibility of the transit point solution and its effectiveness in improving efficiency, reducing operating and transport costs, reducing inventory requirement and improving customer service. The secondary issue is the provision of an exhibition center in the Milano area without significant risks to product delivery.

Analysis of the Situation and Issues

The Transit Point experiment utilizes the concept of "cross-docking" (X-Dock) and is equivalent to Just In Time (JIT) in manufacturing. In cross-docking, goods are received at one place and are immediately shipped to another location, without the need for storage. In order to assess the pros and cons of this proposal, different critical factors/criteria need to be addressed and taken into consideration:

Inventory: The level of inventory held at the regional offices 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 minimize 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: Transit point concept would reduce operational costs and regional warehouse by eliminating the need for inventory storage, reduction in space, labor usage and utility, but more importantly it would still need to maintain the facilities for docking the trucks and temporary storage if the truck is unavailable for delivery immediately. Therefore, Merloni will not be able to completely eliminate the cost of operating its regional warehouses. Also, the use of transit points alone will not reduce inventory level requirements; it simply pushes inventories to the central warehouse. This means that the central warehouse will need to expand in order to accommodate this excess inventory. Increased number of trailer departures from the central warehouse may also require that extra shipping docks be installed. The cost of expanding and restructuring the central warehouse would further offset the potential cost savings realized at the regional warehouses.

Labor and staff: A transit point system would reduce material handling requirements and associated labor at the regional warehouses. While this would result into cost-savings, there may be significant negative impact of downsizing on its workforce. Also, since a transit point system requires greater coordination and skillful planning, the administration staff might need to work overtime, which could offset some of the cost savings realized from warehouse operations. Working overtime may also cause higher stress levels among the staff which could increase turnover and associated costs.

Transportation: Low variability in demand and relative closeness of distribution centers are critical in order for cross docking to be successful. The demand for Merloni's products however, are quire variable. For example, if the average demand for the free-standing products jumps by 200% from January to February. Not only this causes serious impediments to planning and coordinating shipments, but also 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 overture is the length of time that transportation would add to product delivery lead times.

Customer Service: Currently, over 65% of products are delivered within 24 hours, directly from the regional warehouses. And, 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. Additional delays owing to delivery problems or product damages could increase the delivery times. The significant increase in lead time will adversely affect customer satisfaction.

Although the two months trial that took place between the central warehouse and Milan was successful with most of the conditions favorable during the trial, the distance between the two trial locations was relatively less as compared to the distance between the other regions. Moreover, daily deliveries to some of the regions inaccessible via ground transport are neither possible nor efficient. Thus, the experiment conducted does not reflect a typical scenario for Merloni.

Alternatives

Merloni can consider other alternatives for increasing the efficiency of its distribution network while improving its delivery times. Some of these alternatives are as follows:-

1. Create two central warehouses, one in the South and the other in the North region. (Refer Figure 1 - Appendix 2): As Italy has a North-South geography it would be a good option for Merloni to put in place two central warehouses instead of existing one. Central warehouse in the Northern region of Italy will cater to the Northern region customers and regional warehouses similarly Southern region warehouse would serve the customers and the regional warehouses in that region. Both the central warehouse would be linked to each other as well in order to make