Case Analysis On Merloni Elettrodomestici Spa Economics Essay

Case Analysis On Merloni Elettrodomestici Spa Economics EssayMerloni Elettrodomestici SpA is an Italian fraternity based in Fabriano and is genius of Europes sorrygest put to workrs of station appliances. In February 2005, Merloni Elettrodomestici was renamed Indesit Company, Indesit being the best known of the Groups brands emergeside Italy. The Company was also operating under its historic brand, Ariston, and the regional brands Hot berth, Scholtes and Stinol.During the perio from 1984 to 1986, Merloni undertook a number of initiatives to improve efficiency in memorial control and logistics. One such initiative was the voyage point experiment where in the Milano region, regional distribution centre was eliminated in favour of tranit points which held zero pedigree.The following is an analysis of the conveying battery-acid Experiment conducted by Merloni be saving in foothold of infrastructure approach of regional warehouses and their maintenance.The company would requ ire lesser amounts of over tout ensemble inventory to be maintained.As regional warehouses would be mostd there would be lesser labor requirements.Transit Point methodology works similar to JIT where-in the require amount of goods are shipped at the required time.Since it works much on the Pull from the customer and due to elimination of regional warehouses, the effect of bullwhip should be disgrace.Be drift the regional warehouses will be eliminated, the faculty storage of the central warehouses should be expand to meet the requirements of the otiose Cycle inventory. This would come as an increaseitional cost to the company.Intensive inventionning of daily shipment should be done. It is not only required to calculate the exact amount of goods to be shipped but also the arrangement of the goods (to eliminate time in loading/unloading activities).Because of this intensive planning more skilled administration staff would be required.If the customer does not order wihin 3pm, the address of the product would happen only after the second day. This can lower customer gladness.Since no inventory is maintained in near-by locations (as all goods come from central warehouse) if there is any purposeless demand or out of line of credit condition (for retailers), the goods will have to be f and so oned from central warehouse which would take a lot of time. This can go past to loss of goodwill with retailers especially those portion the rural markets.Demand variability is not easily supported by employing Transit Point methodology. If there is an urgent demand for goods in excess of truckload capacity indeed it can lead to huge additional cost.Another outstanding point which is not mentioned in the case is the importance of the transportation medium. If any of the vehicles breaks-down it could lead to huge delays and pile up of demand. Merloni call for to keep some extra vehicle for a backup. It also submits to maintain the vehicles in good condition. Th e cost of this has not been accounted for. Since the experiment was carried out only in Milano a relatively little numbers of trucks (1 Trailer truck and 3 Small trucks) were required.If the Transit Point methodology is applied through-out Italy, Merloni will need to build up infrastructure and teams to coordinate the the movement of trucks and their transactions.In Merloni, it is the responsibility of the warehouse manager to manage and explicate the customer relationship. If the warehouses are eliminated Merloni would still need additional office property for the warehouse managers who also act as Customer Relationship Managers.Another important question is where would Merloni keep the spare parts required for its service personnel. If these too are kept at the central warehouse it could lead to delay olibanum have a negative impact on the quality of service.The Merloni experiment was conducted when the weather was good. If the weather is bad near the central warehouse but ve ry well in other areas where there is demand, then it can lead to delays. The cost of such delays would be large as Merloni would have to use extra vehicles to go steady the earliest delivery of all the goods once the weather becomes good.Quantitative AnalysisNow we shall look at a quantitative analysis of cost incurred by the company before and after apply Transit Point methodology. The case is for region of itinerant (information as per possess 10). (Ax) would represent cost incurred by using Pre-Transit Point methodology and (Bx) would denote cost incurred by using Transit Point methodology.Calculate the modal(a) people/Month at the Regional statistical distribution Centre (RDC) in Roma.Assuming 20 working days in a month.Average daily demand served from regional warehouse = 154.8 piecesAverage Volume/Month = Average daily demand x No of working days= 154.8 x 20= 3096 pieces. direct Cost at RDCFrom exhibit 10 of the case it can be seen that the operating cost at Roma is 360 5 Lire/ set/MonthAverage inventory levels at RDC = 1200 pieces (from Exhibit 8a)Total Operating Cost/Month at Roma RDC = Operating Cost/Piece/Month x Avg Inventory= 3605 x 1200= 4326000 Lire thus, Operating Cost per piece sell = Total operating cost / No of pieces sold= 4326000 / 3096= 1397.28 Lire (A1)As per the case, by using Transit Point methodology the Operating Cost has reduced to 20%.Therefore, New Operating Cost per piece sold = 20 % of original Total Operating Cost= 0.20 x 1397.28= 279.45 Lire -(B1)Inventory Cost at RDCFrom exhibit 10 of the case it can be seen that the inventory cost at Roma is 1035 Lire/Piece/Month.Total Inventory Cost / Month = Invetory Cost/Piece/Month x Avg Inventory= 1035 x 1200= 1242000 LireInventory cost per piece sold = Total inventory cost / No of pieces sold= 1242000 / 3096= 401.16 Lire. (A2)Using the Transit Point methodology, zero inventory is maintained.Therefore, Inventory cost per piece sold = 0 Lire (B2)Short Haul Transportation CostThe short haul transportation cost is the cost of transporting goods from regional warehouse or transit point to retailers. This cost would be common for both pre and during Transit Point methodoly usage issuingShort Haul Transportation cost = 4300 Lire/Piece (A3),(B3)Long Haul Transportation Costis the cost of transporting goods from the central warehouse to the regional warehouse or transit point.During the pre Transit Point period goods were transported from the central warehouse to the regional warehouses using trailer trucks.Total number of pieces to be shipped per month = 3096 piecesCapacity of one trailer truck = 120 piecesTherefore, Number of trailer trucks required = Total quantity / Capacity of trailer truck= 3096 / 120= 25.8 trucksDistance between Roma and Fabriano = 165 Km approx. (source http//www.distance-calculator.co.uk/distance-from-fabriano-to-rome.htm)From Exhibit 11, Cost of using a trailer truck for transport upto 165 Km = 0.36 Million LireTherefore, Total transp oration cost = Cost/Truck x No of trailer trucks= 360000 x 25.8= 9288000 LireTransportation cost per piece sold = Total transportation cost / No of pieces sold= 9288000 / 3096= 3000 Lire (A4)In Transit Point methodology both trailer truck and smaller trucks can be used depending upon the lot size.Since the average daily demand is 154.8 pieces, a minimum of one trailer truck will have to be used every day.i.e. Total volume of goods carried by trailer trucks/month = No of trailer truck in a month x Volume carried by 1 trailer truck= 20 x 120= 2400 piecesThe remain amount would be carried by smaller trucks.Volume to be carried by smaller trucks = 3096 -2400= 696 pieces.Therefore, No of smaller trucks required per month = Volume carried by smaller trucks / Capacity of smaller truck= 696 / 45= 16 trucksThis means that in addition to trailer truck a smaller truck also needs to be done for 4 days in every week.From Exhibit 11, Cost of using a smaller truck for transport upto 165 Km = 0.2 Million LireTotal transportation cost = (Cost / Trailer truck x No of trailer trucks) + (Cost / Small truck x No of smaller trucks)= (360000 x 20) + (200000 x 16)= 10400000 LireTransportation cost per piece sold = Total transportation cost / No of pieces sold= 10400000 / 3096= 3359.17 Lire -(B4)Inventory cost at central warehouseBecause the regional warehouses are going to be removed, some amounts of inventory will be moved to the central warehouse.Total inventory level at all 17 regional warehouses = 14330 piecesAssuming 50% of this is Cycle Stock and the remaining Safety Stock, the Cycle Stock (= 7165) will be moved to the central warehouse.Average Safety rip = 7165 / 17= 421 pieces.Safety stock required at central warehouse as per Risk Pooling = 421 x 17= 1735 pieces.Therefore, additional stock required at central warehouse = Safety stock + Cycle stock= 1735 + 7165= 8900 pieces.Assuming inventory cost as those prevailing in Roma, the extra inventory cost at central warehouse = 8900 x 1035= 9211500 LireAdditional inventory cost/month/piece sold = 9211500/(20*3096)= 148.76 Lire -(B5)Therefore, Total Cost incurred by the company before deploying Transit Point methodology= (A1) + (A2) + (A3) + (A4)= 1397.28 + 401.16 + 4300 + 3000= 9098.44 LireTotal Cost incurred by the company by deploying Transit Point methodology= (B1) + (B2) + (B3) + (B4) + (B5)= 279.45 + 0 + 4300 + 3359.17 + 148.76= 8087.38 LireTherefore by using Transit Point methodology, Merloni has saved 1011.06 Lire.Now taking this Transit point experiment to India, we can make the following observationsGeography The geography of India is different from Italy. India is equally wide in North- South and East West directions. The approximate width is 3500Kms. This is very high compared to Italy. The towns and cities are farther apart compared to Italy. For a product wish well crustal plate appliances (refrigerator , washing machine , dish washer etc) the market is still in towns and cities in India. The road conditions are also not that good. This means the transportation time between cities will be more compared to Italy. Another point to consider is the demand in a town this whitethorn not be enough to meet a truck load of products. Company will have to find a way to store the excess products which is not being supplied. See exhibit1 for details.Infrastructure Another option we can consider is to have a transit point method for big cities comparable Mumbai, New Delhi, and Bangalore etc. We can have a transit point set up in outskirts of city and we can have small trucks to penetrate units to retailers. This will help to free up or reduce the storage space in ware house in each city. But this once again will depend on where you have the center ware house located and will be applicable only if ware house is in a days drive from the city. Also we can try this in states like Kerala where the towns are closer by. But even though this frees up inventory storage space, company may still have to have a small space to store items which dont get distributed or collected the same day. As granted in Merloni case we will not be able to leave products in alley or plan to keep in gross revenue office as space is a big constraint.As in Merloni case we may not be able to reuse the storage space for an exhibition house in the case of India, as the storage location is located in outskirts of city in most places. The market segment for home appliances is the people who stay in the city limits and will be reluctant to travel so much for buying a home appliance.Transportation The open fire price costs and spare parts costs will contribute to the transportation cost and will drive it higher. This in turn will top in a higher transportation cost per unit and will eat into the margins. This will be significant in case of a transit point experiment since the delivery is made per day. Another concern is the quality of service timely delivery and state of goods delivered . The time of delivery is very searing in the case of a transit point plan. The delivery to the hub should reach on time to ensure the timely delivery of goods to retailers. With the poor condition of roadstead and lack of service/repair support along the way, there is a significant risk associated with timely delivery. If a truck breaks down, it is definitely going to add half a day delay to the delivery.Inventory As explained in Infrastructure section, the transit point plan will help to reduce inventory held in big cities and move the same to central ware house location. This again may help company to close down its own fund location in cities and use private/public warehouse option for the storage of minimal inventory in cities.Customer Service With the transit point plan, the timely delivery of goods in big cities will improve. This will make the retailers in this area happy. But if we try to implement this pan India, it will result in poor delivery times and dissatisfactio n. The reasons for this are given above.Labor Cost There may not be any significant diminution in labor expenses, as company may have to get new systems in place to support the transit point plan for big cities. This will kind of compensate for the reduction in storage space cost we are getting in cities. Again we will also need people to take care of the transit point plan execution in big cities.RecommendationBased on the above analysis, below given are the recommendations to implement a transit point plan in India.Implement this plan only in big cities like Bangalore, New Delhi, Mumbai, Chennai ,Kolkata, Kerala etc. We can try out this experiment first in a big city like Mumbai and get learnings from there to improve the system and then fan it out to other cities.Another option to make this work is to have multiple large ware houses spread across the country so that every major city is located at a distance of 300-400Kms from the ware house. From this point we can try to run t rucks to cities and do a delivery of products to retailers in the city and nearby areas in a 12Hr time frame.For e.g. We can collect distribution data from Tier II big cities like Ahmadabad , Bhopal , Allahabad ,etc. over a period of time and see if it any of the cities have enough demand to meet a truck load. We can also include the close by towns for this calculation. Based on this we can run a transit point distribution around those cities. See exhibit 2.The transit point plan will work well for a manufacturing line where the demand is more fixed than a home appliance store. This will work well as the factory have a well defined schedule on what products will be running in which Assy lines and for how long. In the case of a home appliance store the demand is driven high by a number of local factors like local holidays, local festivals, bonus pay out etc. For a diverse country like India these factors vary widely. A local festival is more limited to a local city or a town and may not be even applicable for the entire state. This makes it more difficult to forecast and plan.On a big figure the transit point plan in this format cannot be implemented pan India as it will result in delayed deliveries and low satisfaction levels. The poor infrastructure, widely spread cities, diverse culture and quality of transportation service all act as variables and makes forecast difficult and can cause a failure in the plan.Exhibit 1Let us consider a case where the central ware house is located in Bhopal. The approximate distance to close by cities like is as given below.1. Bhopal Ahmadabad 500Kms2. Bhopal Allehabad 500kms3. Bhopal New Delhi 700kms4. Bhopal Patna 700kmsIn Indian road conditions we cannot expect a truck to elevation more than 400Kms during night and to add to it there will be delays in check posts , for having dinner , traffic blocks etc. More issues will be there in rainy season winter. Hence it is clear that with a central ware house in Bhopal w e will not be able to make a delivery to these cities on time.Exhibit 2We can have ware house in Ahmadabad and use it to meet the demands of close by cities like Vadodara, Surat, and Gandhi Nagar etc.1. Ahmadabad to Vadodara 100Kms2. Ahmadabad to Surat 300kms3. Ahmadabad to Gandhi Nagar 70kms4. Ahmadabad to Udaipur 250kms.But before implementing this we need to do an ROI calculation to see whether this is viable or not.