Introduction:

The Merloni Company is an Italian company founded in 1930 by

Aristide Merloni. It is based in Fabriano and is one of the biggest
makers of home appliances in Europe. Merloni Company was renamed
in 2005 to Indesit Company.
Merloni has a distribution network that consists of five
manufacturing plants, a centralized warehouse and seventeen regional
warehouses. Merloni were able to reduce production-planning lead
times and inventory levels by successfully implementing A-B-C
inventory classification program.
During the years 1984 to 1986, Merloni aimed at improving
efficiency even more by taking the initiative of experimenting the
transit point method in the Milano region, where the regional
distribution center was eliminated and the use of transit points, which
held zero inventory, was applied.
Merloni aimed at saving costs by removing regional warehouses
which in turn eliminates maintenance cost of these warehouses.
Moreover, having less inventory will decrease the holding cost and
maintenance for the products. In addition, eliminating warehouses will
decrease the amount of labor required.
The transit point method is similar to JIT in which the required
amount of goods are shipped and delivered at the needed time. This

method works on the pull from the customer which leads to lower
effect of the bullwhip. On the other hand, eliminating regional
warehouses would require the central warehouses to expand to
withstand the extra cycle inventory which will lead to extra costs for
Merloni.
This forces Merloni to calculate and plan exactly the daily
shipments to be done. Moreover arranging the goods will be integral in
order to avoid time wasted while loading and unloading shipments and
deliveries. This planning would require more experienced and skilled
staff.

Problem Identification
The primary issue Merloni face in implementing the transit point
method is its feasibility and effectiveness in improving efficiency and
customer service while reducing costs and inventory.
Of the problems that Merloni might face by applying the Transit
Point method is the decrease in customer satisfaction due to
postponing the delivery of orders after 3pm to the second day. In
addition, if there is excess demand or stock-outs, this would require the
retailers to get products from central warehouses due to the absence
of near-by warehouses and this will take a lot of time which will result
in hindering of the reputation of the retailers.

Furthermore, applying the Transit Point methodology will not

easily adapt to the variability in demand. Ordering excess products in
urgent times will lead to additional costs for the company.
Another problem that Merloni might face is the breaking down of
vehicles which will lead to delays in delivery and thus unsatisfied
demand. The cost of maintaining the vehicles was not accounted for by
Merloni, mainly because their experiment was done in one city which is
Milano.
Additionally, Merloni will have to build teams to coordinate the
movements of the delivery trucks. If Merloni decides to eliminate
warehouses, offices for warehouse managers will still be needed since
they are also customer relationship managers in Merloni.
Also, the location of spare parts that are kept by Merloni will be
an issue. If they keep them in the central warehouses, this will
decrease the quality of their services due to the delay for the parts to
be delivered.
The final issue for the Merloni experiment was that it was done
when the weather in Milano was good. However, if the weather is bad
near the central warehouse, this will also lead to delays. These delays
will cause Merloni more costs by forcing them to use more
transportation vehicles to guarantee that the delivery of orders will be
done as early as possible when the weather is better.

Qualitative Analysis
If Merloni go on and implement the transit point method, many
factors should be taken into consideration. The transit method is
similar to JIT system, so there will be no need for regional warehouses
to hold inventory. Only locations where the products are
loaded/unloaded to the trucks.
The first factor is inventory. Inventory that is held in regional
warehouses is determined by customer demand and controlled by lead
time of production. The benefits of using a transit point is to exclude
regional warehouses, but this has no effect on reducing the overall
needed inventory levels. So a transit point does not minimize the
constraints that determine inventory levels such as decreasing setup
times or product lot sizes. So inventory will not be actually reduced by
applying this new method.
Next factor is infrastructure. The new method would reduce
operational costs and regional warehouses by getting rid of the need to
store inventory, decreasing space, amount of labor and the usage of
utilities. On the other hand, a need for proper docking facilities arises
in order for trucks and temporary storage of inventory in case all trucks
are busy. This means that Merloni can not completely exclude
operational costs. This also results in the need for the central
warehouse to increase in size to accommodate the excess inventory

that was usually stored in regional warehouses. Furthermore, the

central warehouse will need restructuring to put up with more vehicles
and operations to transfer products, which is done by increasing the
number of shipping docks. Both expansion and reconstruction of the
central warehouse will cause costs to increase heavily.
The third factor is labor and staff which when removing regional
warehouses would suggest that labor will decrease. Downsizing
workforce is a cost saving idea, but it may have a negative impact on
the working environment. Moreover, applying a transit point method
will require the need for more skilled employees to handle planning
and coordinating operations or for the current employees to work
overtime which will offset some employees.
Another factor is transportation, which due to the high variability
in demand for Merloni products, might cause problems. For example, if
demand doubles from one month to another, this will cause difficulties
in planning and coordinating shipments in addition to severe service
disorders. Lead time of delivery will also increase.
Finally, customer service will be affected heavily. 65% of the
products are delivered, from regional warehouses, within 24 hours. And
only 35% of the products are shipped from central warehouses. These
have a delivery time between 2 to 6 days. If Merloni were to implement

transit point, customer service will suffer since eliminating regional

warehouses will increase delivery time which will dissatisfy customers.