Q1. What are the costs and benefits of Merloni's current distribution system?

Of a
transit-point-based distribution system?

Costs of Merloni's current distribution system

Calculation of Avg. Volume per Month at the Regional Distribution Centre (RDC) in Roma.

Assumption: 20 working days per month.

Avg. daily demand served from RW = 154.8 pieces (RW = regional warehouse)

Avg. Vol per mth = 154.8 x 20 = 3096 pieces.

Operating Cost at RDC in Roma

From 10th exhibit of the case

The operating cost at Roma is 3605 Lire per Piece per mth

From 8a exhibit

Avg. inventory levels at RDC = 1200 pieces

Total Operating Cost per mth at Roma RDC = 3605 x 1200 = 4326000 Lire

Operating Cost per piece sold = 4326000 / 3096 = 1397.28 Lire……..(R1)

Inventory Cost at RDC

From 10th exhibit

The intry cost at Roma is 1035 Lire per piece per mth.

Total Intry Cost per mth = 1035 x 1200 = 1242000 Lire

Intry cost per piece sold = 1242000 / 3096 = 401.16 Lire………(R2)

Short Haul Transportation Cost

Costs involved in transporting goods from RW or transit point to retailers. This cost would be
same for both pre and during Transit Point methodology
Short Haul Transportation cost = 4300 Lire/Piece…….. (R3)

Long Haul Transportation Cost

cost involved in transporting goods from the central warehouse to the RW or transit point.

Total number of pieces to be shipped per month = 3096 pieces

1 trailer truck capacity = 120 pieces

No. of trailer trucks = 3096 / 120 = 25.8 trucks

Distance btw Roma and Fabriano = 165 Km approx.

From 11th exhibit

transportion cost for using trailer truck upto 165 Km = 0.36 Million Lire

Transportation cost in total = 360000 x 25.8 = 9288000 Lire

Transportation cost per piece sold = 9288000 / 3096 = 3000 Lire…….(R4)

Therefore, Total Cost for the company in old method

= (R1) + (R2) + (R3) + (R4)

= 1397.28 + 401.16 + 4300 + 3000

= 9098.44 Lire

Cost of a transit-point-based distribution system

Operating Cost

20% of operating cost has decreased by using transit methodology.

New Operating Cost per piece sold = 0.20 x 1397.28 = 279.45 Lire…….(T1)

Inventory cost

In Transit Point methodology, no inventory will be maintained.

Inventory cost per piece sold = 0 Lire…..(T2)

Short Haul Transportation Cost

Short Haul Transportation cost = 4300 Lire/Piece…….(T3)

Long Haul Transportation Cost

In Transit Point methodology, Depending on the lot size trailer truck or smaller truck can be
used

154.8 pieces is the avg. daily demand, every day 1 trailer truck is used.

i.e. Total volume of goods carried by trailer trucks per mth= 20 x 120 = 2400 pieces

The remaining 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 trucks

This means that in addition to trailer truck a smaller truck also needs to be done for 4 days in
every week.

From 11th exhibit

smaller truck cost to transport upto 165 Km = 0.2 Million Lire

Total 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 Lire

Transportation cost per piece sold = Total transportation cost / No of pieces sold

= 10400000 / 3096 = 3359.17 Lire……(T4)

Inventory cost at central warehouse

As RW are removed some invtry should be in CW

Total invtry level at all 17 regional warehouses = 14330 pieces

Half of it is Cycle Stock and the rest Safety Stock, the Cycle Stock = 7165 should be in central
warehouse.

Avg. Safety stock = 7165 / 17 = 421 pieces.

Safety stock required at CW as per Risk Pooling (Service level is 65%, Z= 0.242) = 421 x 0.242 x
17 = 1735 pieces.

Therefore, central warehouse extra stock = Safety stock + Cycle stock

= 1735 + 7165 = 8900 pieces.

intry cost as those prevailing in Roma, the extra invtry cost at CW = 8900 x 1035 = 9211500 Lire

Additional intry cost/month/piece sold = 9211500/(20*3096) = 148.76 Lire…….(T5)

Transit Point methodology cost after implementation

= (T1) + (T2) + (T3) + (T4) + (T5)

= 279.45 + 0 + 4300 + 3359.17 + 148.76 = 8087.38 Lire

we can save 1011.06 Lire by using transit point methodology

Benefits of Merloni's current distribution system

o No additional cost to the company as capacity storage in central warehouse is remaining

same.
o Risk of demand variability will be low as safety stock is maintained at the regional
warehouse due to which goodwill of the customers will be maintained
o Risk in transportation due to weather conditions will be low
o Costs for training employees will be saved in comparison to transit methodology
o No additional costs to the company such as IT infrastructure, cross docking
infrastructure, Transportation

Benefits of Transit point methodology

o Cost can be saved from infrastructure of regional warehouse and maintenance

o Lesser amounts of overall inventory will be required
o No regional warehouses which will lead to lesser labor requirements.
o Bullwhip effect will be low due to synchronization of information
o More agile and responsive distribution system