Forthcoming in International Journal of Logistics Management

Evaluating the applicability of merge-in-transit: A step by step process for supply chain managers

Timo Ala-Risku*, timo.ala-risku@hut.fi Mikko Krkkinen*, mikko.karkkainen@hut.fi Jan Holmstrm*, jan.holmstrom@hut.fi

* Helsinki University of Technology Department of Industrial Engineering and Management

Corresponding author: Timo Ala-Risku Department of Industrial Engineering and Management Helsinki University of Technology P.O. Box 9555 FIN-02015 HUT Finland

Biographies

Timo Ala-Risku (MSc) is a PhD student at the Department of Industrial Management and Engineering at the Helsinki University of Technology. Timo's research is focusing on developing cost benefit models for alternative supply chain control solutions.

Mikko Krkkinen (MSc) is a PhD student at the Department of Industrial Management and Engineering at the Helsinki University of Technology. Mikko's research is focusing on developing distributed supply chain control models.

Jan Holmstrm (Dr. Tech) is a Senior Research Fellow at the Department of Industrial Management and Engineering at the Helsinki University of Technology. Jan is responsible for the coordination of research activities in supply chain management and electronic business. Previously Jan worked as a systems analyst for Lever Nordic and as a technology consultant for McKinsey & Company.

Abstract The physical distribution of goods is one of the key success factors in the fast moving markets of today. Many companies are involved in the search for efficient distribution alternatives, as the lead times for customer order fulfilment need to be shortened while the costs and risks of warehousing need to be minimised. Merge-in-transit is a distribution model where several shipments originating at different dispatching locations are consolidated into one customer delivery, without inventories at the consolidation points. This removes the need for distribution warehouses in the supply chain, and allows the customers to receive complete deliveries for their orders. However, no guidelines are available for logistics managers on how to evaluate the applicability of merge-in-transit operations for their particular business situation. This paper presents a systematic procedure for the evaluation of merge-in-transit distribution in a specific supply chain of a company. The procedure is based on recent research on activity based costing models in distribution operations. Additionally, the paper clearly defines merge-in-transit and makes a distinction between it and crossdocking with which it is often confused. Keywords: Logistics, Supply chain management, Merge-in-transit, Distribution models, Activity based costing, Warehousing

Introduction
Some of the biggest challenges in operations management lie in the management of physical distribution. This is especially so for companies with high inventory carrying costs, for example companies in the electronics industry [1] or wholesalers with a broad product assortment [2]. Due to high inventory carrying costs it is often not possible to stock all the offered products in a central distribution warehouse. Direct deliveries from the product manufacturers remove the need for excessive warehousing in the delivery chain, but result in several individual deliveries to the customer. Merge-in-transit is an efficient means for reducing both the need for warehousing and the number of customer receipts [3]. Merge-in-transit is a delivery model where shipments from multiple suppliers are consolidated into one customer delivery at merge points that operate without inventory. This reduces the cycle times of the 3

products, which is especially valuable in the electronics industry where high product values are combined with the significant risk of obsolescence brought about by rapid technological change. Merge-in-transit also enables companies to offer a broad product assortment with an integrated delivery infrastructure without a need for warehouses. This makes it an attractive alternative for distributors. In cases such as those mentioned above, the change in distribution practices that can be achieved with merge-in-transit distribution is especially beneficial [4]. However, merge-in-transit distribution increases the complexity of material flow control [5]. This is especially evident when a multitude of suppliers are included in the merge-in-transit process. Each of the individual consignments related to an end customer delivery must be identified and information on the associated customer order must be available at all the terminals where consolidation is performed. As the number of consignments in the process increases, matching the material flow with the respective information flow becomes very challenging [6]. This complexity poses new problems for information management when moving to merge-in-transit distribution. Despite there being several practitioner-oriented publications, there is very little published research on the merge-in-transit concept. This is perhaps because the complexity of its implementation on a large scale has prevented merge-in-transit from becoming a common distribution model. However, logistic service providers capable of offering a merge-in-transit service are increasingly available on the market, and recent developments in information technology have also made the management of merge-in-transit operations easier [7]. Nevertheless, there is still an absence of systematic guidelines that can help to determine whether merge-in-transit would be applicable for a certain business situation or not. As this new delivery model develops as a practical alternative, supply chain managers need effective procedures for assessing the benefits of the concept for their particular business situation. This paper presents a systematic procedure for evaluating the applicability of mergein-transit operations for different distribution chains, as well as a general activitybased costing model for assessing the logistics costs of different distribution alternatives. The focus of the costing model is on the mission costs of a customer delivery [8]. The model reveals the total costs of serving a customer within a particular distribution channel, and provides information on costs for each participant in the distribution chain. 4

In the first section of the paper, we present the background to our study. A review of related literature is presented in the second part. The proposed evaluation procedure for the applicability of merge-in-transit is presented in the third part, and concluding remarks and further research areas are presented in the final section.

Research design
The objective of this paper is to construct a decision-making procedure for evaluating the benefits of merge-in-transit in a particular business situation. The ABC-tool used in the procedure was first developed in an action research case study with a Finnish maintenance, repair, and operations (MRO) goods distributor [9]. The procedure that utilised the tool was then further developed and applied to a merge-in-transit feasibility study with a project oriented industrial electronics company. Following this study it was refined in order to be applicable as a general tool. The MRO distributor planned to implement merge-in-transit distribution together with its logistics service provider and some of its suppliers. The goal of the merge-intransit implementation was to radically reduce the need to store the offered products in a centralised warehouse owned by the distributor. Direct deliveries from the suppliers of the goods did not provide an acceptable solution because of customer resistance to receiving several shipments for one order. The industrial electronics company started studying the possibility of lowering the number of stock keeping units (SKUs) in its distribution warehouses. In project oriented business it is essential to have complete deliveries arrive on time at the project site, which ruled out direct deliveries by the suppliers. They were interested in evaluating the effect of merge-in-transit in their operations, as it offers a means of reducing distribution warehouses without reducing the level of customer service. The problem studied in both of these cases can be stated more precisely as: How to evaluate the applicability of merge-in-transit distribution for a particular business situation? In order to answer this question two research objectives were set: 1) Develop a procedure for evaluating a specific distribution situation, and 2) define a model for assessing the logistics costs of different distribution structures.

Our study started with a literature survey. In this survey, the current knowledge on merge-in-transit distribution was reviewed and the potential cost and service benefits associated with merge-in-transit operations were identified. Initial prerequisites for merge-in-transit distribution were also recognised. We then proceeded to conduct an action research case study with the MRO distributors logistics specialists. The distribution alternatives for the company were modelled with an activity-based costing tool that was developed in the project. The individual steps necessary for using the costing model were recorded in the form of an evaluation procedure. This procedure was utilised with the industrial electronics case study and developed further. During the two case studies the prerequisites for mergein-transit distribution were refined and the implications for different supply chain partners were specified. The costing model is based on general activities in distribution operations, and it is applicable to most distribution cases. The activity costs of operations in the distribution chain are needed as a starting point. Average activity costs can be used for estimations of the costs, but they only provide approximate results. The evaluation procedure presented in the third section of this paper will show the reader how to use the costing model for a specific situation. The evaluation procedure and the costing model focus on the costs associated with the physical handling of goods. Costs related to order flow are not dealt with in the general model, although they can be inserted as additional activities. This scope selection is important as today order and delivery flows are separate channels, the development of which is not necessarily interlinked. However, the costs of the order flow affect the attractiveness of different distribution alternatives, even though the channels are usually developed interdependently. For example, in the industrial electronics case the number of sales transactions significantly increases with mergein-transit distribution. This means that lowering the costs of the transactions, e.g. with automation, makes merge-in-transit a more attractive alternative. Although operational costs are not the only criteria for selecting the appropriate distribution strategy for each product, these costs play an essential part in making informed decisions [10]. An in-depth discussion of the strategic aspects of distribution logistics management can be found in [11], for example.

Literature review
Traditionally, distributors and wholesalers have taken care of both the order and material flow [12]. This means that they have first purchased products from suppliers, stored them in their own warehouses, and then sold them to their own customers. When there is a wide variety of products on offer, the number of stock-keeping units becomes too big to be economically warehoused by the distributor [13]. An alternative approach is to separate the marketing channel from the logistical channel in respect to both time and performer [14]. An obvious application of this is to have all individual suppliers ship their products directly to the customers, without intermediate storing at the distributor. A problem with this approach is that it results in multiple deliveries to the customer, which increases the costs of reception activities [15]. In cases where the component deliveries form a unit, for example a personal computer and a monitor, an unsynchronised delivery is hardly good customer service. The solution is merge-intransit distribution, defined in [16] thus: Merge-in-transit is the centralised coordination of customer orders where goods delivered from several dispatch units are consolidated into single customer deliveries at merge points, free of inventory. Merge-in-transit operations are very similar to another in-transit consolidation process, cross-docking, made famous by Wal-Mart [17]. Today typical

implementations of cross-docking are between manufacturers and retailers [18] or sub-contractors and manufacturers [19]. The main difference between these two consolidation processes is in their focus. With merge-in-transit, it is important to make complete deliveries to the customers by delaying the earliest component shipments if necessary. With cross-docking the process efficiency is emphasized by forwarding each incoming shipment to a goods terminal with the next possible transportation heading towards the destination. To sum up, this means that merge-intransit is more suitable for fulfilling infrequent orders from customers where the component shipments form an integral entity, or where receiving component shipments is inconvenient for the recipient. Cross-docking is preferable for continuous flows of standard goods where each unit provides value for the recipient. Companies that have been reported to be utilising merge-in-transit distribution include Hewlett Packard [20], Dell [21], Cisco [22], and Ikea [23]. Although there are some

studies and reports on the usefulness of the merge-in-transit operations, we have not found studies on how companies approach the decision to start merge-in-transit distribution. Expected general cost and service effects of merge-in-transit are presented both in [24] and in a study prepared by Jan Fransoo and Laura Kopczak [25]. The expected effects consist of reduced inventory and warehousing costs in the chain, increased or reduced transportation costs, reduced receiving costs at the customers, increased supply chain visibility, reduced cycle times from customer order receipt to delivery, and improved customer service. The actual cost and service impacts of the listed merge-in-transit effects depend on the channel structure, and they must be evaluated separately for each case. There has also been work in defining optimisation models for configuring merge-intransit networks [26]. However, a more fundamental question remains unanswered: What should a supply chain manager consider before starting to implement merge-intransit in a distribution network? One of the main difficulties for the managers is in comparing the costs of different distribution alternatives. This is mainly due to the shortcomings of traditional accounting operations that do not provide detailed enough information. Christopher [27], and Bowersox and Closs [28] claim that activity-based costing is the most appropriate way to identify and control logistics expenses. At the Technical Research Centre of Finland, useful logistics activities for activitybased costing have been identified as: receiving, receiving inspection, shelving, holding cost of inventory, storage costs, picking, packaging, shipping, and transportation [29]. In addition to these, one more activity is included in this study in order to assess the costs of the merge-in-transit distribution channel: consolidation costs.

The merge-in-transit evaluation procedure

This section presents the procedure for assessing the applicability of merge-in-transit in a particular distribution network. The cases suggest that in the assessment it is best to transfer single products or suppliers to merge-in-transit. For example, the industrial electronics case revealed that changing the distribution of only one product could result in a reduction of over 10 percent in total logistics costs. Furthermore, an 8

incremental implementation of a new distribution channel requires less investment and effort, while savings can be quickly obtained by focusing on the most promising products. A flowchart for the evaluation process is presented in Figure 1. The process includes three distinct parts, each ending with an assessment of whether to continue the evaluation procedure or not. In the first part of the procedure, current distribution operations are reviewed to determine whether there are products that could benefit from merge-in-transit distribution. Then, potential suppliers and logistics service providers for merge-intransit are identified and current distribution operations are modelled and a scenario for merge-in-transit distribution is constructed. In the second part, the distribution models are analysed from the viewpoint of logistics costs. In the third part, issues related to eventual implementation of merge-in-transit, including requirements for the necessary information systems, are discussed.

PART 1: Selection of merge-in-transit partners Step 1.1: Identify potential products Step 1.2: Model the distribution alternatives

Suitable products and partners?

Yes

No

PART 2: Evaluation of merge-in-transit Step 2.1: Identify operations costs Step 2.2: Assess costs of distribution alternatives Step 2.3: Evaluate merge-in-transit profitability

Is merge-in-transit preferable?
Yes

No

Reassess later

PART 3: Implementation of merge-in-transit Step 3.1: Review information system requirements Step 3.2: Evaluate implementation feasibility

Is merge-in-transit feasible?
Yes

No

Construct a detailed business case

Figure 1 Illustration of the procedure to analyse benefits of merge-in-transit process

Part 1: Selection of initial merge-in-transit partners In this section potential products for merge-in-transit distribution are selected and initial partner companies are identified. Current operations and merge-in-transit operations are modelled for subsequent comparison. Step 1.1 Identify potential products for merge-in-transit Before starting the merge-in-transit evaluation procedure, a company should review its current operations and select the products for which merge-in-transit could potentially be the best available distribution model. The three different alternatives for arranging distribution are customer deliveries from a central warehouse, direct deliveries from individual manufacturing units or suppliers, and consolidated deliveries achieved with cross-docking or merge-in-transit [30]. It may well be that 10

the optimum distribution strategy is a combination of these three, with the most appropriate for each product depending on its characteristics. Direct deliveries are the most cost-effective solution for products that are ordered in amounts large enough to form a full or near full truckload from a single supplier. Requirements for direct deliveries can exist for time-critical goods, as they offer the shortest possible lead-time from supplier to customer [31]. The goods are not stored in the distribution chain, and the deliveries are not dependent on the delivery schedules of other goods in the same order. Warehousing is necessary for products with long lead times compared to required customer delivery times (e.g. imported products). Warehousing also offers a natural way of consolidating the material flows of different suppliers to single customer deliveries. Merge-in-transit can be considered as an alternative for products not clearly requiring either one of the above alternatives. Products that form an integral entity should be delivered from a warehouse or with merge-in-transit. The cases suggest that merge-intransit is more cost efficient than warehousing for products with the following features. Products of high value, as they incur high inventory carrying costs and their cycle time in the chain should be minimised. Products with substantial depreciation or obsolescence related costs, e.g. a large number of variants or short life-cycles, since these kinds of products should be stored as centralised and as upstream as possible to minimise the amount of inventory. Bulky products that are space consuming and hard to handle, as they incur high warehousing costs and should visit as few warehouses as possible. Industrial electronics example: In this case, we calculated delivery costs with different kinds of products, confirming our initial assumptions concerning the effect of product characteristics on distribution costs. However, the extent of the influence was a considerable surprise. For some products the distribution costs can be halved or doubled by changing the delivery channel.

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Step 1.2 Model the distribution alternatives To compare the costs of merge-in-transit operations and current distribution operations a structural presentation of both alternatives needs to be constructed. The first thing to do when modelling the alternatives is to identify the relevant suppliers, customers, and logistics service providers for both alternatives. The evaluation of merge-in-transit can be started with only a few supplier partners with the most suitable products. Several prerequisites must be considered for each of the suppliers. First, the supplier needs to be capable of delivering customer order sized lots. Second, availability at the supplier has to be guaranteed, as in merge-in-transit the safety stocks at distribution warehouses are removed. These two requirements mean that the supplier has to provide warehouse functionalities for the chain, which is also the situation with direct delivering suppliers. Third, the delivery lead times from the supplier must be within the lead-time accepted by the customers. Finally, the delivery lead-times of the supplier should be consistent, as predictable lead-times ease the coordination of time-critical material flows. Another important factor is related to the selection of the logistics service provider. The first consideration is that the logistics company can provide consolidation services at conveniently located distribution centres. Second, the service provider needs to have a high-quality delivery management system for coordinating the complex information and material flows. This includes efficient information exchange with each merge-in-transit partner and the capability of tracking each component delivery, especially in international merge-in-transit operations [32]. For a more comprehensive treatment of logistics service provider selection, see for example [33]. After identifying the potential products, suppliers, and logistics service providers for merge-in-transit, the delivery chain for current material flows is then modelled. The modelling phase includes identification of the suppliers geographical locations and sales volumes, as well as the geographical distribution of customers and an estimation of their order volumes. If the current delivery chain includes distribution warehouses, their product-specific inventory values and inventory turns also need to be identified. Correspondingly, the considered merge-in-transit scenario is constructed with the material flows through the consolidation centres.

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The resulting delivery chain models should include all the activities performed in the material flow. In our model the delivery activities are sorted into five groups: shipping, transporting, warehousing, consolidating, and receipt of the deliveries. If it is evident that no products whose suppliers meet the prerequisites are suitable for merge-in-transit distribution, or no capable logistics service providers are found, merge-in-transit is not a feasible alternative at the present time. MRO example: In the MRO case, the distributor had one central warehouse, to which the majority of suppliers delivered. Some suppliers only delivered directly to the customers and some both to the customer and to the warehouse. These material flows are illustrated in Figure 2. It was estimated that about twenty percent of the distributors total material flow would remain outside the merge-in-transit operations and in a direct delivery mode, as some products have special distribution requirements.

Suppliers

Distributor Warehouse

Custom er

Figure 2 The original material flows for the case company

Leaving out the non-suitable products, the constructed merge-in-transit scenario for the selected products and suppliers is illustrated in Figure 3. The distributor warehouse is modelled as one of the suppliers, since there are products that remain warehoused by the distributor for the time being. These include products imported by the distributor.

Suppliers and Warehouse

Consolidation

Custom er

Figure 3 The constructed merge-in-transit scenario for the case company

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Part 2: Evaluation of merge-in-transit operations In this section the feasibility of merge-in-transit operations is evaluated. First, the distribution operations and their costs in the current chain and the merge-in-transit scenario are identified. Second, the costs of the operations in the alternative channels are compared. Finally, the feasibility of the merge-in-transit scenario is assessed. Step 2.1 Identify the activity costs in distribution operations This section presents the costs of the five activity groups modelled above. The activity groups are illustrated in Figure 4 along with the basic delivery chain structures for direct deliveries, warehouse deliveries, and merge-in-transit deliveries. The picking activities at each supplier and the receiving activities at the customer are common to all distribution channels, but their costs depend on the structure of the handled order. Warehousing operations include these two activities, and also activities related to stock-keeping. The consolidation activity is associated with merge-in-transit deliveries. Transportation activities are dependent on the channel structure.

Direct Deliveries
Customer delivery Order picking

Receiving

Deliveries through warehouse

Collection Batch picking

Warehousing Customer delivery

Receiving

Merge-in-transit deliveries
Collection Order picking

Consolidation Customer delivery

Receiving

Figure 4 The activities needed in the different distribution channels

Two types of data are needed for the model. The first type of data is the costs of the activities with their respective cost drivers. Generally, the activity costs do not depend on the selected distribution model, but on the efficiency of the logistical operations of 14

each participant in the delivery chain. Therefore it is justified to use the same activity costs in all the distribution models that are compared. The activity cost data include the transportation and consolidation pricing tables of the chosen logistics service provider, the outbound and inbound logistics costs at each supplier and customer, and costs related to warehousing activities. The second type of data is the characteristics of the case situation under consideration, i.e. the usage of the activities based on the respective cost drivers. This data includes figures such as the number of suppliers in an order, number of order lines in an order, shipment weights, transportation distances, inventory turns, and order quantities. MRO example: At the case distributor, the costs associated with the logistics structures were identified as follows. The current pricing agreement with their logistics service provider covering transportation and consolidation costs was used for both the current operations as well as the merge-in-transit scenario. Outbound logistics costs at the suppliers and the inbound logistics costs at the customers were approximated with average costs of Finnish manufacturers and wholesalers warehouse activities [34]. Step 2.2 Assess costs of distribution alternatives Next, the costs of the constructed merge-in-transit scenario are compared with those resulting from current operations. To illustrate the use of the costing model based on distribution activities, a comparison of direct deliveries, warehouse deliveries, and merge-in-transit deliveries is presented using the basic delivery chain structures in Figure 4. When evaluating a specific situation, the activities need to be mapped according to the scenarios constructed in Step 1.1. An example customer order for the MRO distributor including products from three suppliers (5, 3, and 2 order lines respectively) is used to demonstrate the cost evaluation. Direct deliveries. The delivery costs are fairly straightforward to evaluate for a direct delivery. They are the sum of all the individual order-picking, transportation, and receiving costs needed to fulfil the customer order. Outbound costs for a shipment can be estimated with a cost driver consisting of two components: A component for delivery-specific costs and a component for costs associated with each order line of the shipment. Thus the total order costs are of the 15

form: A + B number of order lines. On average in Finnish warehouses A and B have values of around 10 and 3.00, respectively. [35]. Transportation costs are the charges made by the logistics service provider, and they usually depend on the weight (or volume) of the shipment and the delivery distance. Inbound costs can be estimated in the same way as outbound costs. Receiving activities A and B have values averaging around 15 and 5 in Finnish warehouses [36]. The figures in Table 1 demonstrate the direct delivery costs by activity for our example delivery. The costs are calculated with the above cost drivers, e.g. the outbound costs at Supplier 1 are 10 + 5 3 = 25.
Table 1 Direct delivery costs for the example customer order

Outbound at supplier Supplier 1 Supplier 2 Supplier 3 Total 25 19 16 60

Transportation Inbound at customer 14 40 13 30 14 25 41 95 TOTAL 196

Deliveries through a warehouse. The costs of deliveries through a warehouse are evaluated in two phases: The costs of replenishing the warehouse inventory, and the costs of the customer delivery from the warehouse. The replenishment costs include outbound logistics costs at the suppliers, transportation costs, and inbound logistics costs in the warehouse. These all depend on the replenishment order structure and can be estimated using the same approach as was taken with the direct deliveries above. However, the allocation of warehouse replenishment costs to individual customer orders is somewhat problematic. This is because each replenishment delivery from a supplier may include a different amount and composition of products. The most straightforward way is to work out a typical replenishment delivery for a stock-keeping unit and divide its costs by the number of units in the delivery. In our example, we assume that the replenishment quantity is fifty times that of the order, and that each stock-keeping unit is replenished separately. Thus, we calculate the shipping, transportation, and receiving costs of each replenishment delivery and divide it by 50 to arrive at the replenishment costs of the individual goods in the

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customer order. In Table 2 calculations for the five stock-keeping units for Supplier 1 in the example customer order are presented.
Table 2 Warehouse replenishment delivery costs for one supplier allocated to one customer order

Outbound Transportation Inbound Total at warehouse for SKU Supplier 1 at supplier SKU 1 13 45 20 SKU 2 13 55 20 SKU 3 13 33 20 SKU 4 13 48 20 SKU 5 13 59 20 TOTAL

78 88 66 81 92

Customer order share 1,56 1,76 1,32 1,62 1,84 8,1

In addition to the replenishment costs, each stock-keeping unit has individual warehousing costs allocated to it, such as the fixed costs of the warehouse and the inventory holding costs. These cost types are discussed in more detail in Appendix 1. In the example we use an average percentage of value to estimate the warehousing and inventory holding costs. The ordered goods originating at Supplier 1 are worth some 1200 in the example order. In Finnish warehouses inventory carrying and warehousing costs are approximately 2,8% of the value of the goods [37]. Thus, we evaluate the warehousing costs for these goods to be 34 . After estimating the replenishment and warehousing costs of each stock item in the customer order, the delivery costs of the assembled order are evaluated. These are assessed with the same activities as in the case with the direct deliveries. In the Table 3 below, the replenishment costs for each supplier's products are summarised under one column, and the warehousing costs are presented in their own column.
Table 3 Warehouse delivery costs for the example customer order

Replenishment Warehousing Outbound Transportation Inbound to warehouse at distributor at distributor at customer Supplier 1 8 34 40 23 65 Supplier 2 4 6 Supplier 3 3 26 Total 15 66 40 23 65 TOTAL 209

Merge-in-transit. The costs of merge-in-transit distribution also consist of two distinct parts: Costs of deliveries from each supplier to the merge point, and costs of final customer delivery.

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The costs of deliveries to the merge point are calculated separately for each supplier delivery. They consist of outbound costs at the supplier, transportation costs, and a potential consolidation fee charged by the terminal operator. In the MRO case study the LSP had a weight-based fee for each shipment to be consolidated. We use these prices with our example order. The transportation to the customer and the inbound costs at the supplier are then added to evaluate the total costs of the merge-in-transit delivery. In Table 4 below, the merge-in-transit cost calculation for each activity is illustrated.
Table 4 Merge-in-transit delivery costs for the example customer order

Outbound at supplier Supplier 1 Supplier 2 Supplier 3 Total

Transportation Consolidation Transportation Inbound at terminal at customer 25 13 3 23 65 19 10 3 16 10 3 60 33 9 TOTAL 23 65 190

If the costs of delivering the ordered items with the current distribution structure are greater than the costs with the merge-in-transit scenario, this type of an order is more cost efficient to fulfil with a merge-in-transit delivery. Comparing sufficiently large samples of different types of deliveries provides information on the operational feasibility of the constructed merge-in-transit scenario as a whole. The costs of the example delivery alternatives are compared in Figure 5. The receiving costs at the customer form a notable share of the total delivery costs, which clearly illustrates the disadvantage of direct deliveries for the customers. For the example customer order merge-in-transit seems most favourable in terms of total supply chain costs. If the customer receiving costs are ignored, it can be seen that direct deliveries are the most inexpensive to produce. The warehouse delivery alternative remains the most expensive supply channel for this customer order. However, it must be noted that the costs are presented here as an example and are somewhat modified, in order to protect the interests of the case company. Some average costs were used and assumptions made, as is described in the sections above. The costs are nonetheless close enough to reality to reliably highlight the differences in the distribution alternatives.

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Cost comparison
250 200 Costs 150 100 50 0 Direct WH Delivery Model MiT Transportation to customer Warehouse / Consolidation Transportation to warehouse / merge-point Outbound at supplier

Inbound at Customer

Figure 5. Cost comparison for the delivery alternatives for the example customer order

Step 2.3 Evaluate merge-in-transit profitability The most significant benefits when moving from warehousing to merge-in-transit can be expected to arise from reducing the operational and inventory carrying costs of warehouses. The trade-off, however, is increased outbound logistics costs at the supplier since the supplier moves from delivering according to aggregated demand at the warehouse to shipping individual customer orders (illustrated as batch picking vs. order picking in Figure 4). The costs resulting from transportation depend on the locations of warehouses and consolidation centres, and may increase or decrease when moving from warehouse deliveries to merge-in-transit deliveries. Only customer receiving costs remain the same in both models. The potential cost savings when moving from direct deliveries to merge-in-transit result from reduced transportation costs due to shipment consolidation, and reduced inbound logistics costs at the customer by reducing the number of deliveries per order. If these savings outweigh the costs of consolidation operations, merge-in-transit distribution is worth considering for the situation. The costs of order picking activities at the suppliers do not differ between these two models, as in both cases the supplier is shipping to individual customer orders. After extensively evaluating the operational costs of each potential product category and supplier, the entire constructed scenario is assessed. If the scenario is deemed to be attractive, an implementation project for the new distribution channel should be 19

considered. However, if the scenario results in higher costs than exist in current operations, restructuring the scenario may be useful. Thus, the evaluation procedure should be used to assess the suitability of individual product categories, suppliers, or logistics service providers for the merge-in-transit distribution. If no realistic merge-in-transit scenario seems more attractive than the current operations, the merge-in-transit distribution channel must be discarded as unsuitable for the current business situation. MRO example: In the final evaluation for the case business situation, the costs of merge-in-transit were generally lower than costs of current operations, although for some of the studied deliveries the opposite was true. Nevertheless, the service benefit of having only one delivery for one customer order and the opportunity to reduce own warehousing operations were deemed to be so important that the distributor chose to continue with the implementation project. Part 3: Implementation of merge-in-transit When analysing the feasibility of merge-in-transit implementation, attention has to be paid to the information system requirements controlling the merging operations. Since the logistics service provider needs to be able to correctly identify shipments belonging to the same customer order, independent of their source, this information needs to be made available to the service provider in an efficient way. In this section, we first address the requirements for merge-in-transit information management, and then take a final view on the feasibility of merge-in-transit implementation. Step 3.1 Identify requirements for information systems Merge-in-transit poses new challenges in logistics information management the availability, accuracy and timeliness of information are essential requirements for successful operations [38]. Furthermore, to run successful merge-in-transit operations up-to-date information on the movement of goods has to be at hand, i.e. tracking of the in-transit goods is a critical enabler of merge-in-transit [39]. Two main ways of communicating logistics information between companies in the supply chain have been messaging with standard messages and business-to-business application integration. Both approaches have their distinct strengths and weaknesses. 20

Perhaps the greatest weaknesses of message-based integration are the batch processing of message transfer and possible transaction fees associated with the messages. Batch processing violates the timeliness requirement for information transfer [40], and transaction fees can increase costs significantly. Although standard message structures exist, the initializing of a connection between companies typically takes up a significant amount of time and resources. For example, it took over six months for our case distributor to establish an EDIFACT connection with one of its largest suppliers. Emerging data structure standards, e.g. XML based standards such as ebXML, can significantly alleviate the problems of building new connections. Business-to-business application integration can offer real time information processing, and it reduces the transaction costs associated with message transfer [41]. In addition, it is much easier to make tracking information available using application integration, as the information can be accessed directly in the databases, with no need to send tracking messages proactively. However, by integrating deeply with the information system of a particular logistics service provider, a company is locked in to their service. This makes it difficult to replace a service provider, or to use different logistics service providers in different geographical areas even though it would otherwise make sense [42]. Furthermore, it is not possible to integrate these systems with all suppliers if there are more than a few of them. Regardless of how the merge-in-transit operations are controlled, timely and accurate information must be available from the whole distribution chain. Information concerning the whereabouts of component deliveries of an order should be available to all parties, and especially to the logistics service provider performing the consolidation. Step 3.2 Evaluate the feasibility of merge-in-transit implementation The final evaluation step includes assessment of the implementation costs and their payback time taking into consideration the operational cost benefits and customer service benefits attainable with merge-in-transit distribution. If the merge-in-transit process is deemed attractive, a pilot project should be considered. The difference in the cost of physical distribution is not the only distinction between the alternative distribution models. Depending on current operations, merge-in-transit

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can affect supply chain processes in a number of other ways. The following implications were considered important by our case companies: Wider product assortment for distributors. The utilisation of merge-in-transit enables a distributor to add products to the assortment offered to customers without additional investment in warehouses or inventory. This is especially relevant if customers have been requesting products that are not available in the current assortment due to inventory related costs. Point-of-sales data for suppliers. Compared to deliveries through a warehouse, the separation of order and material flows increases the transparency of the supply chain for the suppliers. Since the suppliers get their orders based on real demand, they may experience much more stable demand [43]. This is especially important for slowmoving goods [44]. Manufacturing postponement. Another benefit for suppliers of merge-in-transit compared to warehouse deliveries may result from the ability to postpone assembly activities and thus reduce risks and costs associated with finished goods inventories in the chain [45] and enable customer configurable products. This could prove valuable for the industrial electronics company. Supplier shipment consolidation. An advantage over direct deliveries is that suppliers may be able to take advantage of the economies of scale offered by mergein-transit process. If one logistics service provider takes care of all the merge-intransit deliveries, the delivery address for the suppliers can be arranged so that it is permanently fixed, regardless of where the end-customer is located. The suppliers in the MRO case company regarded this as a notable benefit. Increased number of sales transactions. When moving from warehouse deliveries to merge-in-transit, the number of purchase orders to suppliers increases. If transaction processing is not automated, moving to merge-in-transit can considerably increase information processing costs. In the industrial electronics case, sales transaction costs had a great influence on the relative attractiveness of different distribution channels.

22

Concluding remarks
The evaluation procedure presented helps to assess the applicability of merge-intransit operations for a particular distribution situation. The main focus is on comparing the logistics costs of merge-in-transit distribution with the current distribution operations using an activity based costing model. The goal is to provide better decision support for supply chain managers considering merge-in-transit. The cost structure of the distribution chain changes when moving from warehouse deliveries to merge-in-transit. In particular, supplier inventory levels may rise, as merge-in-transit demands nearly perfect availability. Suppliers outbound warehousing costs usually increase and the greater number of sales transactions also affect the suppliers costs. Thus, it is important to identify incentives for each supplier to encourage them to join the development efforts [46]. In this context, it is again particularly useful to be aware of the degree of changes in cost structure with the new operations. This is because participants often perceive the cost changes as being exaggeratedly unfavourable for themselves when functional shifts in the chain are performed [47]. For suppliers operating with direct deliveries, the changes are smaller and thus the threshold for joining merge-in-transit is also significantly lower. One of the biggest obstacles encountered during the implementation project with the MRO distributor has been the configuration of information exchange. Due to the industrys tradition of using EDIFACT, it was also chosen as the message standard for the merge-in-transit implementation. However, the implementation was repeatedly delayed, as the formation of a new message for merge-in-transit information proved more complicated than had been expected. This indicates the need for more sophisticated solutions in information management. A current research effort of our research group is to analyse the information management challenges of merge-in-transit in more detail. We are assessing software packages with functionalities that support merge-in-transit operations, and studying the possibility of solving the challenges with a multi-agent system utilising the concept of product centric control [48]. During the industrial electronics case study, we noticed that obsolescence costs have a significant effect on the relative cost efficiency of merge-in-transit and warehouse distribution. This means that the phase of a products lifecycle can affect its preferable 23

distribution channel. We have formulated a hypothesis that products nearing the end of their lifecycle should be transferred to merge-in-transit distribution or direct supplier deliveries, as the obsolescence costs are likely to increase. The effect of product lifecycle on the attractiveness of merge-in-transit forms an interesting area requiring further study.

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[24] Ibid. [25] Bradley, Peter, Jim Thomas, Toby Gooley and James Aaron Cooke, Merge-intransit yields benefits, Logistics Management and Distribution Report, Vol. 37, No. 10 (1998), p. 30; GeoLogistics, A summary of: Merge in Transit From Theory to Practice, [online], Available from: http://www.geologistics.com/pdfs/internet_mit.pdf [accessed 25.2.2002]. [26] Cole, Michael H. and Mukundh Parthasarathy, Optimal Design of Merge-intransit Distribution Networks, Technical Paper 1998, University of Arkansas, Available from: http://intra.engr.uark.edu/~mhc/research/mbtc1064.pdf [accessed 10.7.2002]; Croxton, Keely L., Bernard Gendron and Thomas L. Magnanti, Models and Methods for Merge-in-transit Operations, forthcoming in Transportation Science, Available from: http://www.iro.umontreal.ca/~gendron/CRT_0030.ps [accessed 10.7.2002]. [27] Christopher, Martin, Logistics and Supply Chain Management, London: Pitman Publishing, 1992, pp. 75-79. [28] Bowersox, Donald J. and David J. Closs, Logistical Management: The Integrated Supply Chain Process, International Edition, Singapore: McGrawHill Companies Co., 1996, p. 642. [29] Manunen, Outi, An Activity Based Costing Model for Logistics Operations of Manufacturers and Wholesalers, International Journal of Logistics Research and Applications, Vol. 3, No. 1 (2000), pp. 53-65. [30] Simchi-Levi, David, Philip Kaminsky and Edith Simchi-Levi, Designing and managing the supply chain concepts, strategies, and case studies, The McGraw-Hill Companies, Inc., 2000, pp. 112-116. [31] Ibid., p.113. [32] McLeod, Marcia, Cutting both ways, Supply Management, Vol. 4, No. 7 (1999), pp. 24-25; Samuelsson, Per, Greg Maiers and Evan P. Armstrong, Creating Value in North American Communications, Council of Logistics Management annual conference 2002, September 29th October 2nd 2002, San Francisco. [33] Boyson, Sandor, Thomas Corsi, Martin Dresner and Elliot Rabinovich, Managing effective third party logistics relationships: What does it take?, Journal of Business Logistics, Vol. 20, No. 1 (1999), pp. 73-100; Gould, Stephen A., Sourcing logistics services offshore, Transportation & Distribution, Vol. 43, No. 6 (2002), pp. 50-51. [34] Manunen, Outi, An Activity Based Costing Model for Logistics Operations of Manufacturers and Wholesalers, International Journal of Logistics Research and Applications, Vol. 3, No. 1 (2000), pp. 53-65; Aminoff, Anna, Outi Kettunen and Hanna Pajunen-Muhonen, Research on Factors Affecting Warehousing Efficiency, International Journal of Logistics: Research and Applications, Vol. 5, No. 1 (2002), pp. 45-57.

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[35] Aminoff, Anna, Outi Kettunen and Hanna Pajunen-Muhonen, Research on Factors Affecting Warehousing Efficiency, International Journal of Logistics: Research and Applications, Vol. 5, No. 1 (2002), pp. 45-57. [36] Manunen, Outi, An Activity Based Costing Model for Logistics Operations of Manufacturers and Wholesalers, International Journal of Logistics Research and Applications, Vol. 3, No. 1 (2000), pp. 53-65. [37] Aminoff, Anna, Outi Kettunen and Hanna Pajunen-Muhonen, Research on Factors Affecting Warehousing Efficiency, International Journal of Logistics: Research and Applications, Vol. 5, No. 1 (2002), pp. 45-57. [38] Richardson, Helen, Cross Docking: Information Flow Saves Space, Transportation & Distribution, Vol. 40, No. 11 (1999), pp. 51-54; McLeod, Marcia, Cutting both ways, Supply Management, Vol. 4, No. 7 (1999), pp. 2425; Pedler, Mike, Information Technology in the Supply Chain, Purchasing & Supply Management, Sep 1994, pp. 15-16. [39] McLeod, Marcia, Cutting both ways, Supply Management, Vol. 4, No. 7 (1999), pp. 24-25; GeoLogistics, A summary of: Merge in Transit From Theory to Practice, [online], Available from: http://www.geologistics.com/pdfs/internet_mit.pdf [accessed 25.2.2002]. [40] Bowersox, Donald J. and David J. Closs, Logistical Management: The Integrated Supply Chain Process, International Edition, Singapore: McGrawHill Companies Co., 1996, p. 191. [41] Linthicum, David S., B2B application integration: e-business-enable your enterprise, Addison-Wesley, Boston, 2001 [42] Shapiro, Carl and Hal R. Varian, Information Rules: A strategic guide to the network economy, Boston: Harvard Business School Press, 1999. [43] Lee, Hau L., V. Padmanablan and Seungjin Whang, Information distortion in a supply chain: The bullwhip effect, Management Science, Vol. 43, No. 4 (1997), pp. 546-558; Evans, G. N., Mohamed M. Naim and Denis R. Towill, Dynamic supply chain performance: Assessing the impact of information systems, Logistics Information Management, Vol. 6, No. 4 (1993), pp. 15-25. [44] Kaipia, Riikka, Jan Holmstrm and Kari Tanskanen, What are you losing if you let your customer place orders?, Production Planning & Control, Vol. 13, No. 1 (2002), pp. 17-25. [45] Pagh, Janus D. and Martha C. Cooper, Supply Chain Postponement and Speculation Strategies: How to Choose the Right Strategy, Journal of Business Logistics, Vol. 19, No. 2 (1998), pp. 13-33. [46] Samuelsson, Per, Greg Maiers and Evan P. Armstrong, Creating Value in North American Communications, Council of Logistics Management annual conference 2002, September 29th October 2nd 2002, San Francisco.

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[47] Norek, Christopher D. and Terrance L. Pohlen, Cost Knowledge: A Foundation for Improving Supply Chain Relationships, International Journal of Logistics Management, Vol. 12, No. 1 (2001), pp. 37-51. [48] Holmstrm, Jan, Kary Frmling, Jukka Tuomi, Mikko Krkkinen and Timo Ala-Risku, Intelligent product agents: The key to implementing collaboration process networks?, forthcoming in International Journal of Logistics Management, 2002; Krkkinen, Mikko, Timo Ala-Risku and Kary Frmling, Integrating material and information flows using a distributed peer-to-peer information system, APMS-2002 (International Conference on Advanced Production Management Systems), September 8-13, 2002, Eindhoven, The Netherlands; Krkkinen, Mikko, Jan Holmstrm, Kary Frmling and Karlos Artto, Intelligent Products a Step Towards a More Effective Project Delivery Chain, Computers in Industry 2002, in press, Available from Elsevier: Science Direct. [49] Simchi-Levi, David, Philip Kaminsky and Edith Simchi-Levi, Designing and managing the supply chain concepts, strategies, and case studies, The McGraw-Hill Companies, Inc., 2000, pp. 26-27. [50] Manunen, Outi, An Activity Based Costing Model for Logistics Operations of Manufacturers and Wholesalers, International Journal of Logistics Research and Applications, Vol. 3, No. 1 (2000), pp. 53-65. [51] Bowersox, Donald J. and David J. Closs, Logistical Management: The Integrated Supply Chain Process, International Edition, Singapore: McGrawHill Companies Co., 1996, pp. 254-256. [52] GeoLogistics, A summary of: Merge in Transit From Theory to Practice, [online], Available from: http://www.geo-logistics.com/pdfs/internet_mit.pdf [retrieved 25.2.2002]. [53] Manunen, Outi, An Activity Based Costing Model for Logistics Operations of Manufacturers and Wholesalers, International Journal of Logistics Research and Applications, Vol. 3, No. 1 (2000), pp. 53-65.

Appendix 1
Warehousing costs Warehousing costs can be estimated using three main components: handling costs, fixed costs, and inventory holding costs [49]. The handling costs can be calculated with the outbound and inbound logistics cost models, as was presented earlier. The fixed storage costs resulting from equipment and space can be allocated to the orders on a per pallet or per shelf-metre basis, as these cost drivers characterise the differences in treatment of individual SKUs. Another option is to use the percentage of sales or percentage of the average inventory [50], as these percentages are easier to 28

obtain for the purposes of evaluation. However, calculations result in more productspecific figures by using costs per pallet or shelf-metre, and thus give better decision support. Inventory holding costs include the main components of capital cost, insurance and obsolescence [51]. Of these, capital cost is often the most influential component, and at the same time the hardest to determine. Obsolescence is calculated based on experience of how products have been marked-down or discontinued. Obsolescence is often remarkable for high tech products, where technological development rapidly decreases the value of older products [52]. These costs can be expressed as a percentage of sales or as a percentage of the inventory average. The individual percentages are then summed up to assess the total inventory holding costs. In the formula below, both the storage costs and inventory holding costs are expressed as percentages of the average inventory for a stock-keeping unit. Using the stockkeeping unit (SKU) specific percentages enables the differentiation of costs between separate product types. Warehousing costs = (Pstorage + Pinventory ) Value Where Pstorage = storage costs as percentage of average inventory for the SKU of the order line Pinventory = inventory holding costs as percentage of average inventory for the SKU of the order line Value = sales value of the order line DoS = Days of supply of the SKU in the warehouse inventory According to Manunen [53], for Finnish wholesalers the storage and inventory costs average at 0,7 and 1,1 percent of sales, respectively. These figures can be used for very rough approximations of the warehousing cost impact on total distribution costs, if no case specific data are available. However, using average figures such as these doesnt provide any real information on the feasibility of warehousing for specific products.
DoS 365

29