Introduction:

The Merloni case seeks to evaluate the benefits or repercussion of cross docking technique for Merloni Elettrodomestici Spa Company across its all regional warehouses. The firm had already implemented programs that resulted in reduction of production-planning lead times along with decreased inventory levels. The management wanted to reduce inventory and enhance production efficiency and was thus evaluating a proposal to replace regional warehouses with "transit-points". 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 being assessed then was the viability of the transit point solution and its effectiveness in improving efficiency and reducing costs. The second issue was the provision of an exhibition centre in the Milano area especially during the lengthy event-preparation period when the Milano warehouse would have to be emptied of all inventory without disturbing existing patterns related to: 1. Product Delivery 2. Efficiently serve customers. 3. Maintaining the current level of service

Summary of Merlonis Profile;

Merloni Elettrodomestici SpA is a major Italian manufacturer of domestic appliances. The company has four manufacturing subsidiaries which have been mentioned below. Besides above four plants Merloni had a centralized warehouse and seventeen warehouses across Italy.In February 2005, Merloni Elettrodomestici was renamed Indesit Company, Indesit being the best known of the Groups brands outside Italy. 1. Merloni Elettrodomestici (domestic appliances): It manufactured both freestanding and build-in appliances like washing machine etc. It had five plants in Italy. This unit had highest (75%) sales revenue share in 1984.

2. Merloni Igienico Sanitari (Bath and heating products): It manufactured water heaters, bath tubs etc. This unit had 20% revenue share in 1984 for overall group . 3. Merloni Casa (Build-in kitchen and furniture): It designed, manufactured and installed built-in kitchen and bath furniture. 4. Merloni Progetti (industrial projects): This unit licensed Merloni technology and oversaw the construction of plants to produce products locally in other countries.

Case Facts:
1. The firm had a dedicated plant for one product. Reliable pools of semi-skilled people were available close to the plant. This would enable the company to respond to demand fluctuations easily. The firm also emphasized on decentralizing operations. 2. Some retailers generally received 24-hours delivery of product that was in stock at nearest warehouse. Otherwise two to six days were required to replenish the stocks from central warehouse to regional warehouse to retailers. 3. Shipment delays occurred time to time for variety of uncontrollable and controllable reasons. Under such conditions small retail customers with no or little stocks were impacted most leading to unsatisfied consumers. It affected Merlonis responsiveness and efficiency both. 4. No built-in appliances were distributed through regional warehouses. 5. Each plant had its own warehouse area to store raw materials, finished goods etc. It was to increase responsiveness at plant level. 6. Merloni would provide customers with discounts if they had ordered a full truckload through their plants. Otherwise the orders were fulfilled from regional or central warehouses. This was done in order to avoid higher transportation costs while a full truck load was not being delivered to customers. 7. Shipments were sent to regional warehouses from central warehouse once accumulated orders had reached a full truckload level. This increased the efficiency at transportation as a SCM channel.

8. Those regions which were located at more than days journey from the central warehouse would hold higher inventory in order support demands with longer replenishment lead times. 9. Merloni had reliable contracts with operators in each region. After sales service was a major function with responsibility for sales planning, physical distribution and warehouse management, customary maintenance and repair activities. 10. The firm used a centralized inventory planning system. They had implemented an AB-C inventory classification program. With these procedures in place , they were able to reduce inventory levels at the regional warehouses by 75%. The production planning time horizon was also reduced from four months to three while the required lead-time to firm orders was reduced from two months to one.

Case Analysis Impact on Key logistics Channels:

Retailers/customers: The customers had to be educated that if they want to receive an order delivered by following day, they had to order before 3 PM. The company did not want to increase the transport facility in case of high demands. Instead it would ask customers to expect some delay in order replenishment. This will definitely create a negative effect on the customers. Here Merloni preferred efficiency to responsiveness. In the existing system over 65% of products were delivered within 24 hours, directly from the regional warehouses. Rest 35% of products was 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. Further delays due to product damage could potentially double the delivery times. The significant increase in lead time could have an adverse impact on customer satisfaction. Although the two months trial that took place between the central warehouse and Milan was successful, the distance between the two locations was relatively small as compared to distance between other regions. Inventory: The level of inventory held at regional offices is established based on customer demands and is constrained by production lead times. With this experiment inventory stocks get eliminated from the regional warehouses but that would not bring down the overall inventory levels. This basically implies that constraints which determine inventory levels such as production lot sizes or set up times are not affected in any manner. Thus transit point experiment may not impact the current level of inventory.

Infrastructure: The transit point experiment would help in reducing operational cost and regional warehouse by eliminating the need for inventory storage, labor usage and utility but facilities would need to be maintained for docking the trucks and temporary storage incase the trucks arent available immediately. This suggests that the cost of eliminating the regional warehouse will not be completely done. Moreover we need to understand that as inventories are now pushed on to the central warehouse it will have to be expanded in order to accommodate the excess inventory. The implication from above is that benefits realized due to elimination of regional warehouses may be lost in order to compensate for costs incurred at expanding and restricting the central warehouse. Labor/staff: the transit point experiment would bring about a reduction in the material handling cost and labor associated with it and thus brings about cost savings. But it could adversely impact the workforce due to this downsizing. The experiment would also mandate more coordination, better planning, developing better training programs for the staff who would be working. Transportation: In order for a cross docking experiment to be successful low variability in demand close proximity to the distribution centers is required. But as mentioned in the case, the demand for Merloni products is quite variable. For ex- If the average demand for free standing products jumps by 150% by Jan to Feb, it would cause major impediments towards planning and coordinating shipments, it also has the grave potential of causing service disruptions that would be detrimental to the companys brand image. Moreover as the units will have to be shipped on a daily basis, regardless of the quantity ordered, inefficiencies would creep in if the trailer is not fully loaded. Customer Service: Currently over 65% of products are delivered within 24hours directly from the regional warehouse and the remaining 35% from central warehouse with a delivery time ranging from 2-6 days. If inventories are eliminated at regional warehouses the delivery time for all the products would increase by 2-6 days. Additional delays due to breakdown of trucks or damage in products could increase the delivery time further. All this would negatively impact customer satisfaction. Delivery Planning: Now the decision to deliver products to each transit point was based on historical average demand, it could result in actual demand being mismatched with the forecast. This could either result in shortage of certain products desired by customer or excess inventory.

Benefits the firm hopes to realize:

1. Cost saving in terms of infrastructure cost of regional warehouses and their maintenance. 2. The company would require lesser amounts of overall inventory to be maintained as regional warehouses would be closed and thus there would be lesser labor requirements. 3. Transit Point methodology works similar to JIT where-in the required amounts of goods are shipped at the required time. 4. Since it works more on the Pull from the customer and due to elimination of regional warehouses, the effect of bullwhip should be lower.

Possible Alternatives:
In order to improve delivery times and increase overall efficiency of distribution the firm could consider some other options such as: 1. The firm could think about having two central warehouses, one in the northern region and the other in south. Now as Italy has a North south geography the firm would be able to cater to regions easily. Both these central warehouses could also be linked to each other so that in case of any shortfall, a backup option is available. This option can bring down the transportation costs from the central warehouse to the customer. 2. The option of Transshipment: Instead of delivering products directly to the region from the central warehouse, the firm could use the excess capacity on trailers and in regional warehouses for delivery to other regional warehouses. By exercising this option, Merloni could possibly leverage the excess transport and storage resources and choose optimum transport solutions on order to minimize costs simultaneously reducing the delivery times. A DRP (Distribution resource planning program) could be used to plan optimum routes based on the route specific transport costs, warehouse specific inventory storage and operational costs. 3. Combination of Transshipment and Cross Docking: Merloni could think about Cross docking at some locations along with a contingency warehouse. While allowing Merloni to operate the Milano warehouse as an exhibition centre, it would also leverage the benefits of transshipment and transit points to maximize overall efficiency in the distribution network. In other words, where it is more economical, a

regional office could be converted to a transit point as well as receive shipments from the regional office.

Key Takeaways:
After analyzing the primary issue and critical factors impacting Merloni, we feel that it would be an arduous task for the firm if it wanted to go ahead with implementing the Transit point on a big scale across all its offices. We feel that the cost benefits gained due to elimination of regional warehouses would be offset by: 1. Higher costs of transportation 2. Costs of modifying the central office 3. Cost of lost sales due to customer dissatisfaction 4. Implementing the transit point would also require change in forecasting and rigorous analysis of cost implications. Migrating to this new system would definitely be an expensive proposition for Merloni. 5. Shutdown of regional warehouses would result in Job losses that could negatively impact the brand image of the company. 6. The quality of service- (timely delivery and state of goods delivered) is a cause of concern as delivery to the hub should be on time so that timely delivery of goods to retailers can be ensured.