Pre-Requisite for Implementing Transit Point System

Pre-requisite for implementing transit point system:

1) Production process: The transit point experiment is does not work if there is high variability (shown in Ex. 6) in the demand since there is low inventory at the RDC and retailer to hedge for demand side fluctuations. Hence, this kind of a system needs an accurate forecasting model based on real time data. Such forecasting is better obtained at when the time to market is reduced. This can only be achieved with shorter production cycles and shorter lead times. Hence Merloni's efforts to reduce production cycle from 4 months to 2 months were necessary for the success of this system.

2) Information system: Dr. Uva had implemented a system to share order details at RDC with CDC seamlessly improving forecasting capabilities

Rolling out the plan - Benefit analysis

Cover farther RDCs first

The gain in inventory reduction from converting RDC setup to transit point is higher at farther locations given the longer lead times. The transportation costs would be the same for a stable demand period in both the systems. However given a high variability market, the transit point setup is counter-productive for farther markets.

Consider the example of two markets, Cantanzaro and Pescara with similar demand, the incremental savings in inventory costs in Cantanzaro which is 800KM farther away from the CDC than Pescara is (780-450)*75%*365= 90,000 units approx annually.

Cover urban RDCs first

Transit point systems are more beneficial to implement in the urban areas compared to rural areas. These systems work successfully given that volume of orders is large enough and do not vary significantly across time. Urban areas provide for larger volume of orders hence FTL consignments can be sent every 24 hours.

Consider the example of two markets, Cantanzaro and Roma with different demand, the incremental savings in inventory costs in Roma which is 2.5 times larger than Cantanzaro is 2.5*75%*1035 - 75%*1721 = 65,000 lire approx monthly.

Recommendation

Merloni should incorporate the forecasting and shorter production plan capabilities before implementing the transit point system on a wider basis given that any variability can serious hamper the productivity of such a system. It should roll it out to larger, stable markets where the cost of transportation is compensated by reduction in inventory.