Transit Point Case

Dr. Vittorio Merloni, the president of the major Italian domestic appliance manufacturer, Merloni Elettrodomestici, continues to push his employees to become a more efficient and cost-effective company.  Recently, while planning for a large three-day exposition, they team had to come up with a way to continue to provide great service to the customers, while eliminating the use of the warehouse in Milano.  In doing so, they began using transit points that held no inventory, but rather, was a transfer location from a large truck to small regional trucks to make the end deliveries.

After conducting the transit point experiment, it is clear there are significant reasons justifying a decision to move to all transit point locations and eliminate the regional warehouses.  On paper, it appears the cost savings of inventory and operations along could result in approximately $1,242,838 in urban warehouses and $1,343,705 in rural warehouses monthly (see exhibit 1).  The transit point locations do not need to be as large of buildings and require less man power, therefore, reducing operating costs, including labor, and eliminating the inventory holding costs in regional locations.

Before jumping right into a rash decision, it is imperative they consider the risks associated with the change.  Inventory at the regional locations would be eliminated, but inventory levels at the central distribution center are likely to increase in order to cover a longer lead time on orders to customers.  In addition, the transit time to get the goods to the region will vary, making the further locations less likely to be on time.  This is due to the fact that the methodology is very similar to just-in-time shipping the goods demand at a required time, not housing them until the order comes in.  In addition, the increased inventory levels at the central warehouse will require increased storage capacities resulting in increased operating costs.  The transit point strategy requires intense planning of the shipments, not only for the amount of goods needed, but also on the arrangement of the goods within the truck for less handling during unloading and reloading for final delivery.  This intense planning will require a more skilled and knowledgeable staff.  If customers have last minute, end of the day orders, they are no longer able to be filled the next day (as orders must be entered by 3pm for the next day delivery.  In addition, if products are out of stock at the central warehouse, they are out of stock.  Unlike the current situation where if the product is out at the regional warehouse, it is likely still available from the central warehouse and can be fulfilled within a few days.  When the demand is higher than the regular truckload capacity, the added costs to bring on another truck are likely to be very significant.  Customer dissatisfaction can arise from this cost (if passed along to them) or from making them wait if it is decided there will be excess room on the trucks in the coming days to finish fulfilling the order.