2011

Enterprise Engineering Submission 2

Students Name FT12123 FT12125 FT12147 FT12161 Ekta Yadav Gokulendu Bharadwaj Prachi Garg Sebastian Deric

Introduction: The document evaluates the benefits or repercussion of cross docking technique for Merloni Elettrodomestici Spa Company across its all regional warehouses, and how does the proposal impact operating, inventory, short- and long-haul transportation costs. Analysis of the case Here cross-docking refers to moving product from a manufacturing plant and delivering it directly to the customer with little or no material handling in between. In the current case the company ran a pilot project for cross docking at Milano warehouse loading area. Key Logistics Channel Impacted Retailers/Customers The customers had to be educated that if they want to receive an order delivered by following day, they had to order before 3 PM. The company did not want to increase the transport facility in case of high demands. Instead it would ask customers to expect some delay in order replenishment. This will definitely create a negative effect on the customers. Here Merloni preferred efficiency to responsiveness. In the existing system over 65% of products were delivered within 24 hours, directly from the regional warehouses. Rest 35% of products was shipped from the central warehouse with a two to six day delivery times. Eliminating inventories at regional warehouses would increase the delivery time for all products to two to six days. (Page no 5 of case).Further delays due to product damage could potentially double the delivery times. The significant increase in lead time will certainly adversely affect customer satisfaction. The company may need higher

tracking facility for other regional warehouse. So we see that there is a trade off between responsiveness and efficiency and company preferred efficiency. Regional Warehouses Merlonis objective was to remove all regional warehouses and implement cross docking facility. By doing so, the company would save money.

Merloni Elettrodomestici SpA.x

Cross Docking Facility Although the company had planned to replace warehouses by cross docking facility, the cost of maintaining it could be significant. These operational cost savings would be associated with reduction in space, utility, and labor usage. However, Merloni would still need to maintain the facilities needed for cross-docking as well as temporary storage of units that it was unable to delivery immediately. The use of transit points would not reduce inventory level requirements. It would push inventories upstream to the central warehouse. Plant and its inventory The case clearly says that the plants would be more efficient leading to cost savings. Scraping the regional warehouses may also impact the inventory maintained at the plant site. This could lead to some investment and maintenance at the plant site. Inventory Management Current inventory levels held at the regional offices were already 75% lesser in comparison to historical figures. This level of inventory was established based on customer demands and constrained by production lead-times. Although the transit point

concept would eliminate inventory stocks at the regional warehouses, it could not reduce the overall required inventory levels. Therefore, the current requirements of inventory would not be affected. Logistics Communications The Company would require advance IT systems to integrate the demand forecast with all the logistic channels. Any instance of channels not being in sync would cost the company heavily. Good and reliable information flow across the entire supply chain. In the current case it was distribution crossdocking where the crossdock itself allocates material to its RWH. Labor and Staff The transit point system would reduce material handling requirements and associated labor at the regional warehouses. Although it would result as cost-savings, Merloni should be aware of the negative impacts that downsizing would have on its workforce at other places. The major operational cost for crossdock is the labor cost. Hence, the system performance is optimized by seeking to maximize the throughput of the crossdock operations by establishing an efficient freight flow. A transit point system requires much more diligent planning and coordination. The company would require skill labors which would cost it significantly. Or providing training to existing labors would also cost it. The administration staff might need to work longer and later hours, which could offset some of the cost savings realized from warehouse operations. Higher stress levels among the administration staff could also increase turnover and associated

costs. Traffic and Transportation The success of cross docking depends upon low demand-variance and relatively close distribution distances. However, the demands for Merlonis products were quite variable. This could present serious problems to planning and coordinating shipments, the peak in demand could result in serious service disruptions. Also, since products had to be shipped to regions on a daily bases, regardless of the quantity ordered, significant loss would result if the trailer-truck was not filled to maximum capacity. Recommendation  Transit Point Only at Milan  The conversion of the Milano warehouse into an exhibition center could lead to sales and marketing strategic advantage.  One alternative would be to continue serving the region through a transit point. The current distribution network could then be maintained for the remaining regions. Although this alternative would not address the primary issue (efficiency of the distribution network as a whole), it would allow Merloni to continue operating its exhibition center without significant risks to product delivery.  Transshipment to increase its performance on efficiency front. And to give Merloni some flexibility on delivering the products and increase in responsiveness. Many distribution resource-planning (DRP) software can be programmed to automatically choose optimum routes if they are provided with necessary information about route-specific transport costs and warehouse specific inventory storage and operational costs.

 Combination of Transshipment and Cross Docking where a regional office could be converted to a transit point as well as receives shipments from another regional office. Ans 2 After careful analysis of the primary issue and the critical factors, the recommendation is not to deploy the transit point concept across all the regional offices as doing so will increase average product delivery times and adversely affect customer satisfaction. At the same time, the cost-savings realized from conversion of warehouses to transit points may be offset by higher costs of transportation, costs of modifying the central office, and cost of lost sales due to customer dissatisfaction. Combination of transshipment and crossdocking leverages the benefits of the transit point concept as well as that of transshipment. Furthermore, it ensures that the Milano warehouse continues to operate as an exhibition center for Merloni's clients.

Ans 3: The cost of manufacturing a bag in San Francisco and the cost of manufacturing in China can be calculated from exhibit 4.

Items

San Francisco

China

Hourly Wage Direct labour content Manufacturing O/H Materials Other expense Shipment to San Francisco Shipment from San Francisco to customer

$12.50 35min 40% of DL $13 $1.5 $0 $3

$1.25 45min 40% of DL $13 $0.75 $0.10 $3

Direct labour cost

$7.29($12.5*0.58)

$0.9375(1.25*0.75)

Manufacturing OH

$2.916(7.29*0.40)

$0.375(0.9375*0.4)

Materials

$13

$13

Other Expense

$1.5

$0.75

Shipment to San Francisco

$0

$ 0.10(by ocean carrier)

Shipment from San Francisco to customer

$3

$3

Total Cost

$27.706

$18.1625(by ocean carrier) $33.0625(by air freight)

Ans 4: Timbuk2 can outsource the manufacturing of bags to China as the labour cost is very less their (1/20th of US wages), if they do manufacturing in China and then shipped bags via Ocean carrier then total manufacturing cost of bags comes to $18.1625 in comparison of $27.706 manufacturing cost of the bags that are made in San Francisco itself. So Timbuk2 can save $9.435 per bag manufactured in China. But there are many other challenges that Timbuk2 have to face in this whole process. y Timbuk2 would have to visit potential suppliers, as setting up its own shop in China seemed out of reach at the time. y Clear expectations would need to be set with the supplier, and Timbuk2 would probably have to make near-monthly (and costly) visits to maintain the relationship and to ensure high quality. y Manufacturing in China did not offer advantages in terms of material prices, because all materials already came from the Far East. y Labour in San Francisco was slightly more productive

Finished bags would have to be shipped from China to San Francisco, if bags were shipped via Ocean carrier which required at least a four- to six-week lead time. If bags were air-freighted, they would arrive within two or three days, but then the cost would rise to around $15 per bag, because of this high cost of shipment total cost of bags manufactured and supplied from China would be $33.0625, which is quite high in comparison of San Francisco manufacturing cost. So they have only one way of shipment and that is via Ocean carrier.

The long lead time from China (assuming ocean shipments) would also involve more inventories. This could easily mean holding finished-goods inventory in anticipation of demand, something that Timbuk2 had not done before.

At present all the manufacturing is done in San Francisco factory but as sales is increasing average 69.8% per year so demand of Timbuk2 bags will certainly increase with time and when e-commerce customer demand will get equal to the production capacity of Timbuk2 San Francisco plant then they can outsource to China for supplying International demand and Corporate demand. At that time San Francisco factory should be used to fulfil the demand of e-commerce customer and domestic customer and China for corporate and international customers. With increase in sale lead time of China factory can be reduced to 4 weeks, if sales increases and Timbuk2 start outsourcing then Timbuk2 should establish distribution channel in China also to supply to Asian international customer from China only, by doing this they can save shipment