Merloni Elettrodomestici has a total of five plants each manufacturing a separate product line (stoves, refrigerators, freezers, dish

washers and washing machines). These appliances are further divided into two categories, the freestanding appliances and the built-in appliances. Freestanding appliances are sold through retailers which are either located in Urban or in rural areas. Urban retailers are able to keep high inventory levels due to their operation size while rural retailers keep only a small amount of inventory. Delivery to these retailers is dependent upon the proximity of a regional warehouse and availability of stock at these regional warehouses. If the required order is available at a close regional warehouse it is usually delivered within a day but incase its not available at the regional warehouse it has to be called in from the central warehouse, which takes 2 to 6 days. 65% of Merlonis freestanding products were delivered through the regional warehouses meaning that 65% orders were delivered in a day while the rest took 2 6 days in being delivered from the central warehouse. At some occasions regional and central warehouse can be out of stock at the same time, this leads to major delays in delivery which has a greater effect on the rural retailers who keep low inventory levels. The built-in appliances are sold directly to architects and builders from the central warehouse. All the manufacturing plants have their own warehouses for raw materials and finished goods. Finished goods are frequently sent from the regional warehouses to the central warehouse depending upon the demand. Since the buyers of built-in products were builders and architects they bought in truckload sizes and for that Merloni offered a discount of 4000 lires. Furthermore, during the past few years, Merloni implemented programs that successfully shortened its production planning time and also decreased the inventory levels. With the help of ABC inventory management system and by integrating the inventory monitoring systems of all the regional warehouses with the central warehouse, Merloni had been able to bring down the inventory by 75%. The production planning time horizon was reduced from four months to three while the required lead-time to firm orders was reduced from two months to one. The current distribution system has several costs related to it. Starting with inventory costs, it can been observed that even though the inventory levels were reduced by 75%, the fact that Merloni stores inventory at 17 regional warehouses, 5 plant warehouses and 1 central warehouse, means that its inventory carrying costs must be extremely high. Related to this sort of inventory carrying is the cost of the vast infrastructure needed for such inventories. Warehouse costs, inventory handling labor costs, and insurance costs are a few significant costs related to such an inventory system. Besides these main costs, there is also the cost of having long delivery times. Although good share of customers are served within a day, the rest are served within 2-6 days. Such delays in delivery can be detrimental for the companys goodwill development with its customers. Especially for retailers in the rural areas, the delivery times can tend to be very high if a close regional warehouse is out of stock. This leads us to the next cost related to this type of a distribution system, stock out costs. Stockout costs seem to be quite high in the current scenario. There are instances when a regional warehouse is out of stock and at times even the central warehouse is found out of stock. This has led to high Stockout costs for Merloni. In contrast, there are some benefits which can be attributed to the current distribution system. Due to having a vast network of regional warehouses, Merloni has significantly controlled its delivery times. Delivery to 65% of freestanding appliance customers can be made within 24 hours. This is only possible because Merloni holds high inventory levels at each of its regional warehouses. Moving onto the cost benefit analysis of transit point system, the most important cost reduction comes from the fact that transit point eliminates the need of holding high inventories at the 17 regional warehouses. This could mean huge amounts of cost reductions for Merloni. Transit point could help reduce the operational costs of regional warehouses by reducing the need for inventory storage. These operational cost savings would be associated with reduction in space, utility, and labor usage. At the same time it is important to notice that Merloni will need to setup cross docking systems at these warehouses in place of inventory storage. Although they might offer

lower operational costs, the setup and initial management costs will offset the overall profitability of transit points. Although, transit points reduce the inventory storage costs at the regional warehouses, it fails to take into consideration factors that affect the overall inventory levels, for instance production planning lead times or production lot sizes. This means that inventory will just be transferred from the regional warehouses to the central warehouse. Low inventory at regional warehouses would mean that the central warehouse would have to hold much higher levels of safety stock in case of disruptions in the transit point system. To manage the extra inventory and handling the central warehouse will need further expansion. This again can offset the cost cuts from reducing inventory at regional warehouses. The transit point system also leads to an increase in the customer delivery times. This was also noted during the trial when customers had to be requested to wait another day or two for delivery. This increase in delivery time occurred even when Merloni was very close to the central warehouse. This might mean that applying transit point to other regions which are at a greater distance from central could lead to a great deal of increase in the delivery times. Furthermore, reducing inventory at the regional warehouses would mean that incase the central warehouse closes down (for instance in winters due to snow), deliveries and distribution throughout Italy would be disrupted. This poses a major risk for Merloni.