Merloni Electtrodomestici SpA

Group 4

Founded in 1930 by Aristide Merloni Diversified its business from production of weighing instruments into production of gas cylinders, electric water heaters, and gas stoves Further diversified in making wide range of kitchen and bath appliances In 1970s formed Merloni Group and distributed into 3 separate domestic manufacturing divisions based on product line and an engineering company.

Merloni Electtrodomestici (Domestic Appliances) Products : Freestanding and built in stoves, Freezers, Refrigerators, dishwashers and washing machines Plants: Italy-5, Other European countries-3 Sales : 75% of the company consolidated sales in 1984.

Merloni Igienico Sanitari (Bath & Heating Products) Products: Water Heaters, Bathtubs and Sinks, Solar Panels, Solar energy based heating systems and Heat Pumps Sales: 20% of the company consolidated sales in 1984.

Merloni Casa (Built in Kitchen and Bath Furniture) Products : Design, manufacture and installed built in Kitchen and modular designed bath Furniture. Sales : 4% of the company consolidated sales from modular furniture in 1984. Products: Licensed Merloni technology and oversaw construction of plants to produce products based on Merloni Technology. Plants: 15 plants through JVs outside of Italy. Sales: 1% of the company consolidated sales in 1984.

Merloni Progetti (Industrial Projects)

Followed decentralization policy Small plant size with dedicated product line Production facility at outskirts of small country towns Harmonious relationship with surrounding society Access to reliable pool of semi skilled workers. Reputed for Innovation and Quality in Italy and abroad All plants connected to central computers at Merloni Head Offices. CAD aided designing Group sales : 626 billion lire, Export -60% 20% average annual increase in sales from 1980-84

Freestanding products were sold to retailer at urban and rural areas. Urban retailers keep stock due to high sales volume while rural retailers ordered products directly from Merloni. Lead time of products : 24 hour for goods in regional warehouse. 2-6 days for goods from central warehouse. Shipment delays due to either : a) Production problem at plant, b) New product introduction, c) Unexpected high demand, d) Transportation equipment failure or adverse weather Stock out at warehouses creates more impact on small retailer than the bigger ones.

5 small plants with dedicated product line. Distribution system consists of 3 echelons: plant warehouse, a central warehouse and regional warehouses. FG sent regularly to central warehouse from each plant which is further dispatched to 17 regional warehouses or directly to customers. Volume discount given to customers @4000 lire. Regional warehouses constitute 65% of freestanding product sales. Shipment from central warehouse to regional warehouse is only when orders accumulate for a full truckload. Distant locations warehouse store high inventory.

4 month long production planning horizon, warehouse manager used informal replenishment methods. Phase wise implementation of ABC model with 2 week, 4 week and no inventory of A, B, C items respectively. Inventory level calculation and other systems were tied to the central warehouse. Performance based incentive of warehouse managers. Inventory level dropped by 75% within 2 weeks. Production planning horizon reduced from 4 to 3 months. Set up times reduced, shorter and economic production run size, short production planning periods, distribution resource planning program are further improvement done.

The Transit Point ExperimentIntroduction of Cross docking : Full truckloads of goods from the company central warehouse could be transported to smaller trucks for local delivery.

Mr. Bose encountered more orders that can be accommodated in the three local delivery trucks or one trailer trucks He would call some of his customers and ask if they could wait an extra day for their products. Majority of the customers never realized that they were not being served from their regional warehouse. Total operating cost estimated to have fallen by 20% ( by means of suspending warehouse lease payments and discharge our warehouse employees). No additional strains on the systems ( No New products were introduced and Weather cooperated) Would require precision planning to avoid stock outs.

The Transit Point Experiment Issues and results

The Transit Point Experiment Inventory Management and InfrastructureCurrent inventory level in the warehouse had already reduced to 75% . This was dependent on the customer demand and constrained by production lead times. Although the transit point would eliminate the inventory stocks at the regional warehouses it does not reduce the level of overall required inventory. It would just push the inventory in the central warehouse and this might result into additional expenses in building warehouses. Additional shipping docks might be required at the central warehouse because of increased number of trailers . This cost will also offset the operational cost savings. Regional warehouses might succeed in reducing the operational expenses , these warehouses still need to be maintained for cross docking and temporary storage of goods . The operational expenses will not be completely eliminated.

The Transit Point Experiment Transportation Average Capacity of a Small Truck Average Capacity of a Tractor Trailer Days per monthSales of Refrigerator Total Sales 2000 7000 5000 19000 9000 12000 16000 200 8000 7000 5000 4000 Average Daily sales(25 Days) 80 280 200 760 360 480 640 8 320 280 200 160 Number of Trailers Required Daily 1 3 2 8 4 5 7 1 4 3 2 2

45 100 25

Jan Feb March April May June July August September October November December

The Transit Point Experiment TransportationLow Demand variance and relatively close distribution distances are critical success factors for the cross docking. Merlonis product sales was highly variable. High sales variability will present serious obstacles to planning and coordination of shipments. The peaks in demand could result in serious service disruptions. Since goods have to be transported on a daily basis regardless of the quantity orders , this might result in significant inefficiencies.( Building of overcapacity and under utilization) Although the experiment was successful , the two locations (Milano and Fabriano) were not too far , in addition weather conditions were favorable. These conditions do not truly reflect the actual conditions across all warehouses and therefore cannot be termed a success.

The Transit Point Experiment Conclusion

The amount of operational cost saving can be offset by 1.Cost incurred for converting warehouses into docking stations 2. 3.Additional warehouse capacity and shipping docks at the Central warehouse 4. 5.Planning and coordination ( Either by Technology and Manual) 6. 7.Additional transportation costs 8. 9.Cost of lost sales due to customer dissatisfaction ( Due to huge spikes in demand for example New product Introduction ) .

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