merge in transit

7/28/2019 Merge in Transit

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Forthcoming in International Journal of Logistics Management

Evaluating the applicability of merge-in-transit: A step by step

process for supply chain managers

Timo A la-Risku*, [email protected]

M ikko Krkkinen*, [email protected]

Jan Holmstrm*, [email protected]

* Helsinki University of Technology

Department of Industrial Engineering and Management

Corresponding author:

Timo Ala-Risku

Department of Industrial Engineering and Management

Helsinki University of Technology

P.O. Box 9555

FIN-02015 HUT

Finland


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Biographies

Timo Ala-Risku (MSc) is a PhD student at the Department of Industrial Management

and Engineering at the Helsinki University of Technology. Timo's research is

focusing on developing cost benefit models for alternative supply chain control

solutions.

Mikko Krkkinen (MSc) is a PhD student at the Department of Industrial

Management and Engineering at the Helsinki University of Technology. Mikko's

research is focusing on developing distributed supply chain control models.

Jan Holmstrm (Dr. Tech) is a Senior Research Fellow at the Department of

Industrial Management and Engineering at the Helsinki University of Technology. Jan

is responsible for the coordination of research activities in supply chain management

and electronic business. Previously Jan worked as a systems analyst for Lever Nordic

and as a technology consultant for McKinsey & Company.


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Abstract

The physical distribution of goods is one of the key success factors in the fast moving

markets of today. Many companies are involved in the search for efficient distribution

alternatives, as the lead times for customer order fulfilment need to be shortened

while the costs and risks of warehousing need to be minimised. Merge-in-transit is a

distribution model where several shipments originating at different dispatching

locations are consolidated into one customer delivery, without inventories at the

consolidation points. This removes the need for distribution warehouses in the supply

chain, and allows the customers to receive complete deliveries for their orders.

However, no guidelines are available for logistics managers on how to evaluate the

applicability of merge-in-transit operations for their particular business situation. This

paper presents a systematic procedure for the evaluation of merge-in-transit

distribution in a specific supply chain of a company. The procedure is based on recent

research on activity based costing models in distribution operations. Additionally, the

paper clearly defines merge-in-transit and makes a distinction between it and cross-

docking with which it is often confused.

Keywords: Logistics, Supply chain management, Merge-in-transit, Distribution

models, Activity based costing, Warehousing

Introduction

Some of the biggest challenges in operations management lie in the management of

physical distribution. This is especially so for companies with high inventory carrying

costs, for example companies in the electronics industry [1] or wholesalers with abroad product assortment [2]. Due to high inventory carrying costs it is often not

possible to stock all the offered products in a central distribution warehouse. Direct

deliveries from the product manufacturers remove the need for excessive warehousing

in the delivery chain, but result in several individual deliveries to the customer.

Merge-in-transit is an efficient means for reducing both the need for warehousing and

the number of customer receipts [3]. Merge-in-transit is a delivery model where

shipments from multiple suppliers are consolidated into one customer delivery atmerge points that operate without inventory. This reduces the cycle times of the


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products, which is especially valuable in the electronics industry where high product

values are combined with the significant risk of obsolescence brought about by rapid

technological change. Merge-in-transit also enables companies to offer a broad

product assortment with an integrated delivery infrastructure without a need for

warehouses. This makes it an attractive alternative for distributors. In cases such as

those mentioned above, the change in distribution practices that can be achieved with

merge-in-transit distribution is especially beneficial [4].

However, merge-in-transit distribution increases the complexity of material flow

control [5]. This is especially evident when a multitude of suppliers are included in

the merge-in-transit process. Each of the individual consignments related to an end

customer delivery must be identified and information on the associated customerorder must be available at all the terminals where consolidation is performed. As the

number of consignments in the process increases, matching the material flow with the

respective information flow becomes very challenging [6]. This complexity poses new

problems for information management when moving to merge-in-transit distribution.

Despite there being several practitioner-oriented publications, there is very little

published research on the merge-in-transit concept. This is perhaps because the

complexity of its implementation on a large scale has prevented merge-in-transit frombecoming a common distribution model. However, logistic service providers capable

of offering a merge-in-transit service are increasingly available on the market, and

recent developments in information technology have also made the management of

merge-in-transit operations easier [7]. Nevertheless, there is still an absence of

systematic guidelines that can help to determine whether merge-in-transit would be

applicable for a certain business situation or not. As this new delivery model develops

as a practical alternative, supply chain managers need effective procedures for

assessing the benefits of the concept for their particular business situation.

This paper presents a systematic procedure for evaluating the applicability of merge-

in-transit operations for different distribution chains, as well as a general activity-

based costing model for assessing the logistics costs of different distribution

alternatives. The focus of the costing model is on the mission costs of a customer

delivery [8]. The model reveals the total costs of serving a customer within a

particular distribution channel, and provides information on costs for each participantin the distribution chain.


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In the first section of the paper, we present the background to our study. A review of

related literature is presented in the second part. The proposed evaluation procedure

for the applicability of merge-in-transit is presented in the third part, and concluding

remarks and further research areas are presented in the final section.

Research design

The objective of this paper is to construct a decision-making procedure for evaluating

the benefits of merge-in-transit in a particular business situation. The ABC-tool used

in the procedure was first developed in an action research case study with a Finnish

maintenance, repair, and operations (MRO) goods distributor [9]. The procedure that

utilised the tool was then further developed and applied to a merge-in-transit

feasibility study with a project oriented industrial electronics company. Following this

study it was refined in order to be applicable as a general tool.

The MRO distributor planned to implement merge-in-transit distribution together with

its logistics service provider and some of its suppliers. The goal of the merge-in-

transit implementation was to radically reduce the need to store the offered products

in a centralised warehouse owned by the distributor. Direct deliveries from the

suppliers of the goods did not provide an acceptable solution because of customerresistance to receiving several shipments for one order.

The industrial electronics company started studying the possibility of lowering the

number of stock keeping units (SKUs) in its distribution warehouses. In project

oriented business it is essential to have complete deliveries arrive on time at the

project site, which ruled out direct deliveries by the suppliers. They were interested in

evaluating the effect of merge-in-transit in their operations, as it offers a means of

reducing distribution warehouses without reducing the level of customer service.

The problem studied in both of these cases can be stated more precisely as:

How to evaluate the applicability of merge-in-transit distribution for a

particular business situation?

In order to answer this question two research objectives were set: 1) Develop a

procedure for evaluating a specific distribution situation, and 2) define a model for

assessing the logistics costs of different distribution structures.


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Our study started with a literature survey. In this survey, the current knowledge on

merge-in-transit distribution was reviewed and the potential cost and service benefits

associated with merge-in-transit operations were identified. Initial prerequisites for

merge-in-transit distribution were also recognised.

We then proceeded to conduct an action research case study with the MRO

distributors logistics specialists. The distribution alternatives for the company were

modelled with an activity-based costing tool that was developed in the project. The

individual steps necessary for using the costing model were recorded in the form of an

evaluation procedure. This procedure was utilised with the industrial electronics case

study and developed further. During the two case studies the prerequisites for merge-

in-transit distribution were refined and the implications for different supply chainpartners were specified.

The costing model is based on general activities in distribution operations, and it is

applicable to most distribution cases. The activity costs of operations in the

distribution chain are needed as a starting point. Average activity costs can be used for

estimations of the costs, but they only provide approximate results. The evaluation

procedure presented in the third section of this paper will show the reader how to use

the costing model for a specific situation.

The evaluation procedure and the costing model focus on the costs associated with the

physical handling of goods. Costs related to order flow are not dealt with in the

general model, although they can be inserted as additional activities. This scope

selection is important as today order and delivery flows are separate channels, the

development of which is not necessarily interlinked. However, the costs of the order

flow affect the attractiveness of different distribution alternatives, even though the

channels are usually developed interdependently. For example, in the industrial

electronics case the number of sales transactions significantly increases with merge-

in-transit distribution. This means that lowering the costs of the transactions, e.g. with

automation, makes merge-in-transit a more attractive alternative.

Although operational costs are not the only criteria for selecting the appropriate

distribution strategy for each product, these costs play an essential part in making

informed decisions [10]. An in-depth discussion of the strategic aspects of distribution

logistics management can be found in [11], for example.


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Literature review

Traditionally, distributors and wholesalers have taken care of both the order and

material flow [12]. This means that they have first purchased products from suppliers,

stored them in their own warehouses, and then sold them to their own customers.

When there is a wide variety of products on offer, the number of stock-keeping units

becomes too big to be economically warehoused by the distributor [13]. An

alternative approach is to separate the marketing channel from the logistical channel

in respect to both time and performer [14]. An obvious application of this is to have

all individual suppliers ship their products directly to the customers, without

intermediate storing at the distributor.

A problem with this approach is that it results in multiple deliveries to the customer,

which increases the costs of reception activities [15]. In cases where the component

deliveries form a unit, for example a personal computer and a monitor, an

unsynchronised delivery is hardly good customer service. The solution is merge-in-

transit distribution, defined in [16] thus: Merge-in-transit is the centralised co-

ordination of customer orders where goods delivered from several dispatch units are

consolidated into single customer deliveries at merge points, free of inventory.

Merge-in-transit operations are very similar to another in-transit consolidation

process, cross-docking, made famous by Wal-Mart [17]. Today typical

implementations of cross-docking are between manufacturers and retailers [18] or

sub-contractors and manufacturers [19]. The main difference between these two

consolidation processes is in their focus. With merge-in-transit, it is important to

make complete deliveries to the customers by delaying the earliest component

shipments if necessary. With cross-docking the process efficiency is emphasized by

forwarding each incoming shipment to a goods terminal with the next possible

transportation heading towards the destination. To sum up, this means that merge-in-

transit is more suitable for fulfilling infrequent orders from customers where the

component shipments form an integral entity, or where receiving component

shipments is inconvenient for the recipient. Cross-docking is preferable for continuous

flows of standard goods where each unit provides value for the recipient.

Companies that have been reported to be utilising merge-in-transit distribution include

Hewlett Packard [20], Dell [21], Cisco [22], and Ikea [23]. Although there are some


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studies and reports on the usefulness of the merge-in-transit operations, we have not

found studies on how companies approach the decision to start merge-in-transit

distribution.

Expected general cost and service effects of merge-in-transit are presented both in

[24] and in a study prepared by Jan Fransoo and Laura Kopczak [25]. The expected

effects consist of reduced inventory and warehousing costs in the chain, increased or

reduced transportation costs, reduced receiving costs at the customers, increased

supply chain visibility, reduced cycle times from customer order receipt to delivery,

and improved customer service. The actual cost and service impacts of the listed

merge-in-transit effects depend on the channel structure, and they must be evaluated

separately for each case.

There has also been work in defining optimisation models for configuring merge-in-

transit networks [26]. However, a more fundamental question remains unanswered:

What should a supply chain manager consider before starting to implement merge-in-

transit in a distribution network?

One of the main difficulties for the managers is in comparing the costs of different

distribution alternatives. This is mainly due to the shortcomings of traditional

accounting operations that do not provide detailed enough information. Christopher

[27], and Bowersox and Closs [28] claim that activity-based costing is the most

appropriate way to identify and control logistics expenses.

At the Technical Research Centre of Finland, useful logistics activities for activity-

based costing have been identified as: receiving, receiving inspection, shelving,

holding cost of inventory, storage costs, picking, packaging, shipping, and

transportation [29]. In addition to these, one more activity is included in this study in

order to assess the costs of the merge-in-transit distribution channel: consolidation

costs.

The merge-in-transit evaluation procedure

This section presents the procedure for assessing the applicability of merge-in-transit

in a particular distribution network. The cases suggest that in the assessment it is best

to transfer single products or suppliers to merge-in-transit. For example, the industrial

electronics case revealed that changing the distribution of only one product could

result in a reduction of over 10 percent in total logistics costs. Furthermore, an


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incremental implementation of a new distribution channel requires less investment

and effort, while savings can be quickly obtained by focusing on the most promising

products.

A flowchart for the evaluation process is presented in Figure 1. The process includes

three distinct parts, each ending with an assessment of whether to continue the

evaluation procedure or not.

In the first part of the procedure, current distribution operations are reviewed to

determine whether there are products that could benefit from merge-in-transit

distribution. Then, potential suppliers and logistics service providers for merge-in-

transit are identified and current distribution operations are modelled and a scenario

for merge-in-transit distribution is constructed. In the second part, the distribution

models are analysed from the viewpoint of logistics costs. In the third part, issues

related to eventual implementation of merge-in-transit, including requirements for the

necessary information systems, are discussed.


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Step 1.2: Model the distribution alternatives

PART 1: Selection of merge-in-transit partners

Suitable products

and partners?

Step 2.2: Assess costs of distribution alternatives

PART 2: Evaluation of merge-in-transit

Step 2.1: Identify operations costs

Is merge-in-transit

preferable?

PART 3: Implementation of merge-in-transit

Reassess later

No

Yes

Yes

No

Is merge-in-transit

feasible?

Yes

No

Construct a detailed

business case

Step 3.1: Review information system requirements

Step 2.3: Evaluate merge-in-transit profitability

Step 3.2: Evaluate implementation feasibility

Step 1.1: Identify potential products

Figure 1 Illustration of the procedure to analyse benefits of merge-in-transit process

Part 1: Selectio n of ini t ial merge-in-transit partners

In this section potential products for merge-in-transit distribution are selected and

initial partner companies are identified. Current operations and merge-in-transit

operations are modelled for subsequent comparison.

Step 1.1 Identify potential products for merge-in-transit

Before starting the merge-in-transit evaluation procedure, a company should review

its current operations and select the products for which merge-in-transit could

potentially be the best available distribution model. The three different alternatives for

arranging distribution are customer deliveries from a central warehouse, direct

deliveries from individual manufacturing units or suppliers, and consolidated

deliveries achieved with cross-docking or merge-in-transit [30]. It may well be that


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the optimum distribution strategy is a combination of these three, with the most

appropriate for each product depending on its characteristics.

Direct deliveries are the most cost-effective solution for products that are ordered in

amounts large enough to form a full or near full truckload from a single supplier.

Requirements for direct deliveries can exist for time-critical goods, as they offer the

shortest possible lead-time from supplier to customer [31]. The goods are not stored in

the distribution chain, and the deliveries are not dependent on the delivery schedules

of other goods in the same order.

Warehousing is necessary for products with long lead times compared to required

customer delivery times (e.g. imported products). Warehousing also offers a natural

way of consolidating the material flows of different suppliers to single customer

deliveries.

Merge-in-transit can be considered as an alternative for products not clearly requiring

either one of the above alternatives. Products that form an integral entity should be

delivered from a warehouse or with merge-in-transit. The cases suggest that merge-in-

transit is more cost efficient than warehousing for products with the following

features.

- Products of high value, as they incur high inventory carrying costs and their cycle

time in the chain should be minimised.

- Products with substantial depreciation or obsolescence related costs, e.g. a large

number of variants or short life-cycles, since these kinds of products should be

stored as centralised and as upstream as possible to minimise the amount of

inventory.

- Bulky products that are space consuming and hard to handle, as they incur highwarehousing costs and should visit as few warehouses as possible.

I ndustri al electroni cs example: In this case, we calculated delivery costs with

different kinds of products, confirming our initial assumptions concerning the effect

of product characteristics on distribution costs. However, the extent of the influence

was a considerable surprise. For some products the distribution costs can be halved or

doubled by changing the delivery channel.


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Step 1.2 Model the distribution alternatives

To compare the costs of merge-in-transit operations and current distribution

operations a structural presentation of both alternatives needs to be constructed. The

first thing to do when modelling the alternatives is to identify the relevant suppliers,

customers, and logistics service providers for both alternatives.

The evaluation of merge-in-transit can be started with only a few supplier partners

with the most suitable products. Several prerequisites must be considered for each of

the suppliers. First, the supplier needs to be capable of delivering customer order sized

lots. Second, availability at the supplier has to be guaranteed, as in merge-in-transit

the safety stocks at distribution warehouses are removed. These two requirements

mean that the supplier has to provide warehouse functionalities for the chain, which is

also the situation with direct delivering suppliers. Third, the delivery lead times from

the supplier must be within the lead-time accepted by the customers. Finally, the

delivery lead-times of the supplier should be consistent, as predictable lead-times ease

the coordination of time-critical material flows.

Another important factor is related to the selection of the logistics service provider.

The first consideration is that the logistics company can provide consolidation

services at conveniently located distribution centres. Second, the service provider

needs to have a high-quality delivery management system for coordinating the

complex information and material flows. This includes efficient information exchange

with each merge-in-transit partner and the capability of tracking each component

delivery, especially in international merge-in-transit operations [32]. For a more

comprehensive treatment of logistics service provider selection, see for example [33].

After identifying the potential products, suppliers, and logistics service providers for

merge-in-transit, the delivery chain for current material flows is then modelled. The

modelling phase includes identification of the suppliers geographical locations and

sales volumes, as well as the geographical distribution of customers and an estimation

of their order volumes. If the current delivery chain includes distribution warehouses,

their product-specific inventory values and inventory turns also need to be identified.

Correspondingly, the considered merge-in-transit scenario is constructed with the

material flows through the consolidation centres.


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The resulting delivery chain models should include all the activities performed in the

material flow. In our model the delivery activities are sorted into five groups:

shipping, transporting, warehousing, consolidating, and receipt of the deliveries.

If it is evident that no products whose suppliers meet the prerequisites are suitable for

merge-in-transit distribution, or no capable logistics service providers are found,

merge-in-transit is not a feasible alternative at the present time.

MRO example: In the MRO case, the distributor had one central warehouse, to which

the majority of suppliers delivered. Some suppliers only delivered directly to the

customers and some both to the customer and to the warehouse. These material flows

are illustrated in Figure 2. It was estimated that about twenty percent of the

distributors total material flow would remain outside the merge-in-transit operations

and in a direct delivery mode, as some products have special distribution

requirements.

Figure 2 The original material flows for the case company

Leaving out the non-suitable products, the constructed merge-in-transit scenario for

the selected products and suppliers is illustrated in Figure 3. The distributor

warehouse is modelled as one of the suppliers, since there are products that remain

warehoused by the distributor for the time being. These include products imported by

the distributor.

Figure 3 The constructed merge-in-transit scenario for the case company

SuppliersDistributor

Warehouse Customer

Suppliers and

Warehouse Consolidation Customer


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each participant in the delivery chain. Therefore it is justified to use the same activity

costs in all the distribution models that are compared. The activity cost data include

the transportation and consolidation pricing tables of the chosen logistics service

provider, the outbound and inbound logistics costs at each supplier and customer, and

costs related to warehousing activities.

The second type of data is the characteristics of the case situation under consideration,

i.e. the usage of the activities based on the respective cost drivers. This data includes

figures such as the number of suppliers in an order, number of order lines in an order,

shipment weights, transportation distances, inventory turns, and order quantities.

MRO example: At the case distributor, the costs associated with the logistics

structures were identified as follows. The current pricing agreement with their

logistics service provider covering transportation and consolidation costs was used for

both the current operations as well as the merge-in-transit scenario. Outbound

logistics costs at the suppliers and the inbound logistics costs at the customers were

approximated with average costs of Finnish manufacturers and wholesalers

warehouse activities [34].

Step 2.2 Assess costs of distribution alternativesNext, the costs of the constructed merge-in-transit scenario are compared with those

resulting from current operations. To illustrate the use of the costing model based on

distribution activities, a comparison of direct deliveries, warehouse deliveries, and

merge-in-transit deliveries is presented using the basic delivery chain structures in

Figure 4. When evaluating a specific situation, the activities need to be mapped

according to the scenarios constructed in Step 1.1.

An example customer order for the MRO distributor including products from threesuppliers (5, 3, and 2 order lines respectively) is used to demonstrate the cost

evaluation.

Direct deliveries. The delivery costs are fairly straightforward to evaluate for a direct

delivery. They are the sum of all the individual order-picking, transportation, and

receiving costs needed to fulfil the customer order.

Outbound costs for a shipment can be estimated with a cost driver consisting of two

components: A component for delivery-specific costs and a component for costs

associated with each order line of the shipment. Thus the total order costs are of the


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form: A + B number of order lines. On average in Finnish warehouses A and B have

values of around 10 and 3.00, respectively. [35].

Transportation costs are the charges made by the logistics service provider, and they

usually depend on the weight (or volume) of the shipment and the delivery distance.

Inbound costs can be estimated in the same way as outbound costs. Receiving

activities A and B have values averaging around 15 and 5 in Finnish warehouses

[36]. The figures in Table 1 demonstrate the direct delivery costs by activity for our

example delivery. The costs are calculated with the above cost drivers, e.g. the

outbound costs at Supplier 1 are 10 + 5 3 = 25.

Table 1 Direct delivery costs for the example customer order

Outbound Transportation Inbound

at supplier at customer

Supplier 1 25 14 40

Supplier 2 19 13 30

Supplier 3 16 14 25

Total 60 41 95

TOTAL 196

Deliveries through a warehouse. The costs of deliveries through a warehouse are

evaluated in two phases: The costs of replenishing the warehouse inventory, and the

costs of the customer delivery from the warehouse.

The replenishment costs include outbound logistics costs at the suppliers,

transportation costs, and inbound logistics costs in the warehouse. These all depend

on the replenishment order structure and can be estimated using the same approach as

was taken with the direct deliveries above. However, the allocation of warehouse

replenishment costs to individual customer orders is somewhat problematic. This is

because each replenishment delivery from a supplier may include a different amount

and composition of products. The most straightforward way is to work out a typical

replenishment delivery for a stock-keeping unit and divide its costs by the number of

units in the delivery.

In our example, we assume that the replenishment quantity is fifty times that of the

order, and that each stock-keeping unit is replenished separately. Thus, we calculate

the shipping, transportation, and receiving costs of each replenishment delivery and

divide it by 50 to arrive at the replenishment costs of the individual goods in the


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customer order. In Table 2 calculations for the five stock-keeping units for Supplier 1

in the example customer order are presented.

Table 2 Warehouse replenishment delivery costs for one supplier allocated to one customer order

Outbound Transportation Inbound Total Customer

Supplier 1 at supplier at warehouse for SKU order share

SKU 1 13 45 20 78 1,56

SKU 2 13 55 20 88 1,76

SKU 3 13 33 20 66 1,32

SKU 4 13 48 20 81 1,62

SKU 5 13 59 20 92 1,84

TOTAL 8,1

In addition to the replenishment costs, each stock-keeping unit has individual

warehousing costs allocated to it, such as the fixed costs of the warehouse and the

inventory holding costs. These cost types are discussed in more detail in Appendix 1.

In the example we use an average percentage of value to estimate the warehousing

and inventory holding costs. The ordered goods originating at Supplier 1 are worth

some 1200 in the example order. In Finnish warehouses inventory carrying and

warehousing costs are approximately 2,8% of the value of the goods [37]. Thus, we

evaluate the warehousing costs for these goods to be 34 .

After estimating the replenishment and warehousing costs of each stock item in the

customer order, the delivery costs of the assembled order are evaluated. These are

assessed with the same activities as in the case with the direct deliveries. In the Table

3 below, the replenishment costs for each supplier's products are summarised under

one column, and the warehousing costs are presented in their own column.

Table 3 Warehouse delivery costs for the example customer order

Replenishment Warehousing Outbound Transportation Inbound

to warehouse at distributor at distributor at customer

Supplier 1 8 34

Supplier 2 4 6

Supplier 3 3 26

Total 15 66 40 23 65

TOTAL 209

40 23 65

Merge-in-transit. The costs of merge-in-transit distribution also consist of two

distinct parts: Costs of deliveries from each supplier to the merge point, and costs of

final customer delivery.


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The costs of deliveries to the merge point are calculated separately for each supplier

delivery. They consist of outbound costs at the supplier, transportation costs, and a

potential consolidation fee charged by the terminal operator. In the MRO case study

the LSP had a weight-based fee for each shipment to be consolidated. We use these

prices with our example order.

The transportation to the customer and the inbound costs at the supplier are then

added to evaluate the total costs of the merge-in-transit delivery. In Table 4 below, the

merge-in-transit cost calculation for each activity is illustrated.

Table 4 Merge-in-transit delivery costs for the example customer order

Outbound Transportation Consolidation Transportation Inbound

at supplier at terminal at customer Supplier 1 25 13 3

Supplier 2 19 10 3

Supplier 3 16 10 3

Total 60 33 9 23 65

TOTAL 190

23 65

If the costs of delivering the ordered items with the current distribution structure are

greater than the costs with the merge-in-transit scenario, this type of an order is more

cost efficient to fulfil with a merge-in-transit delivery. Comparing sufficiently large

samples of different types of deliveries provides information on the operational

feasibility of the constructed merge-in-transit scenario as a whole.

The costs of the example delivery alternatives are compared in Figure 5. The

receiving costs at the customer form a notable share of the total delivery costs, which

clearly illustrates the disadvantage of direct deliveries for the customers. For the

example customer order merge-in-transit seems most favourable in terms of total

supply chain costs. If the customer receiving costs are ignored, it can be seen thatdirect deliveries are the most inexpensive to produce. The warehouse delivery

alternative remains the most expensive supply channel for this customer order.

However, it must be noted that the costs are presented here as an example and are

somewhat modified, in order to protect the interests of the case company. Some

average costs were used and assumptions made, as is described in the sections above.

The costs are nonetheless close enough to reality to reliably highlight the differences

in the distribution alternatives.


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Cost comparison

0

50

100

150

200

250

Direct WH MiT

Delivery Model

Costs

Inbound at Customer

Transportation to

customer

Warehouse /

Consolidation

Transportation to

warehouse / merge-point

Outbound at supplier

Figure 5. Cost comparison for the delivery alternatives for the example customer order

Step 2.3 Evaluate merge-in-transit profitability

The most significant benefits when moving from warehousing to merge-in-transit can

be expected to arise from reducing the operational and inventory carrying costs of

warehouses. The trade-off, however, is increased outbound logistics costs at the

supplier since the supplier moves from delivering according to aggregated demand at

the warehouse to shipping individual customer orders (illustrated as batch picking vs.

order picking in Figure 4). The costs resulting from transportation depend on the

locations of warehouses and consolidation centres, and may increase or decrease

when moving from warehouse deliveries to merge-in-transit deliveries. Only customer

receiving costs remain the same in both models.

The potential cost savings when moving from direct deliveries to merge-in-transit

result from reduced transportation costs due to shipment consolidation, and reduced

inbound logistics costs at the customer by reducing the number of deliveries per order.

If these savings outweigh the costs of consolidation operations, merge-in-transit

distribution is worth considering for the situation. The costs of order picking activities

at the suppliers do not differ between these two models, as in both cases the supplier

is shipping to individual customer orders.

After extensively evaluating the operational costs of each potential product category

and supplier, the entire constructed scenario is assessed. If the scenario is deemed to

be attractive, an implementation project for the new distribution channel should be


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considered. However, if the scenario results in higher costs than exist in current

operations, restructuring the scenario may be useful. Thus, the evaluation procedure

should be used to assess the suitability of individual product categories, suppliers, or

logistics service providers for the merge-in-transit distribution.

If no realistic merge-in-transit scenario seems more attractive than the current

operations, the merge-in-transit distribution channel must be discarded as unsuitable

for the current business situation.

MRO example: In the final evaluation for the case business situation, the costs of

merge-in-transit were generally lower than costs of current operations, although for

some of the studied deliveries the opposite was true. Nevertheless, the service benefit

of having only one delivery for one customer order and the opportunity to reduce own

warehousing operations were deemed to be so important that the distributor chose to

continue with the implementation project.

Part 3: Imp lementation o f merge-in-transit

When analysing the feasibility of merge-in-transit implementation, attention has to be

paid to the information system requirements controlling the merging operations. Since

the logistics service provider needs to be able to correctly identify shipments

belonging to the same customer order, independent of their source, this information

needs to be made available to the service provider in an efficient way.

In this section, we first address the requirements for merge-in-transit information

management, and then take a final view on the feasibility of merge-in-transit

implementation.

Step 3.1 Identify requirements for information systemsMerge-in-transit poses new challenges in logistics information management the

availability, accuracy and timeliness of information are essential requirements for

successful operations [38]. Furthermore, to run successful merge-in-transit operations

up-to-date information on the movement of goods has to be at hand, i.e. tracking of

the in-transit goods is a critical enabler of merge-in-transit [39].

Two main ways of communicating logistics information between companies in the

supply chain have been messaging with standard messages and business-to-business

application integration. Both approaches have their distinct strengths and weaknesses.


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21

Perhaps the greatest weaknesses of message-based integration are the batch

processing of message transfer and possible transaction fees associated with the

messages. Batch processing violates the timeliness requirement for information

transfer [40], and transaction fees can increase costs significantly. Although standard

message structures exist, the initializing of a connection between companies typically

takes up a significant amount of time and resources. For example, it took over six

months for our case distributor to establish an EDIFACT connection with one of its

largest suppliers. Emerging data structure standards, e.g. XML based standards such

as ebXML, can significantly alleviate the problems of building new connections.

Business-to-business application integration can offer real time information

processing, and it reduces the transaction costs associated with message transfer [41].In addition, it is much easier to make tracking information available using application

integration, as the information can be accessed directly in the databases, with no need

to send tracking messages proactively. However, by integrating deeply with the

information system of a particular logistics service provider, a company is locked in

to their service. This makes it difficult to replace a service provider, or to use different

logistics service providers in different geographical areas even though it would

otherwise make sense [42]. Furthermore, it is not possible to integrate these systems

with all suppliers if there are more than a few of them.

Regardless of how the merge-in-transit operations are controlled, timely and accurate

information must be available from the whole distribution chain. Information

concerning the whereabouts of component deliveries of an order should be available

to all parties, and especially to the logistics service provider performing the

consolidation.

Step 3.2 Evaluate the feasibility of merge-in-transit implementation

The final evaluation step includes assessment of the implementation costs and their

payback time taking into consideration the operational cost benefits and customer

service benefits attainable with merge-in-transit distribution. If the merge-in-transit

process is deemed attractive, a pilot project should be considered.

The difference in the cost of physical distribution is not the only distinction between

the alternative distribution models. Depending on current operations, merge-in-transit


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22

can affect supply chain processes in a number of other ways. The following

implications were considered important by our case companies:

Wider product assortment for distributors. The utilisation of merge-in-transit

enables a distributor to add products to the assortment offered to customers without

additional investment in warehouses or inventory. This is especially relevant if

customers have been requesting products that are not available in the current

assortment due to inventory related costs.

Point-of-sales data for suppliers. Compared to deliveries through a warehouse, the

separation of order and material flows increases the transparency of the supply chain

for the suppliers. Since the suppliers get their orders based on real demand, they may

experience much more stable demand [43]. This is especially important for slow-

moving goods [44].

Manufacturing postponement. Another benefit for suppliers of merge-in-transit

compared to warehouse deliveries may result from the ability to postpone assembly

activities and thus reduce risks and costs associated with finished goods inventories in

the chain [45] and enable customer configurable products. This could prove valuable

for the industrial electronics company.

Supplier shipment consolidation. An advantage over direct deliveries is that

suppliers may be able to take advantage of the economies of scale offered by merge-

in-transit process. If one logistics service provider takes care of all the merge-in-

transit deliveries, the delivery address for the suppliers can be arranged so that it is

permanently fixed, regardless of where the end-customer is located. The suppliers in

the MRO case company regarded this as a notable benefit.

Increased number of sales transactions. When moving from warehouse deliveries

to merge-in-transit, the number of purchase orders to suppliers increases. If

transaction processing is not automated, moving to merge-in-transit can considerably

increase information processing costs. In the industrial electronics case, sales

transaction costs had a great influence on the relative attractiveness of different

distribution channels.


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Concluding remarks

The evaluation procedure presented helps to assess the applicability of merge-in-

transit operations for a particular distribution situation. The main focus is on

comparing the logistics costs of merge-in-transit distribution with the current

distribution operations using an activity based costing model. The goal is to provide

better decision support for supply chain managers considering merge-in-transit.

The cost structure of the distribution chain changes when moving from warehouse

deliveries to merge-in-transit. In particular, supplier inventory levels may rise, as

merge-in-transit demands nearly perfect availability. Suppliers outbound warehousing

costs usually increase and the greater number of sales transactions also affect the

suppliers costs. Thus, it is important to identify incentives for each supplier to

encourage them to join the development efforts [46]. In this context, it is again

particularly useful to be aware of the degree of changes in cost structure with the new

operations. This is because participants often perceive the cost changes as being

exaggeratedly unfavourable for themselves when functional shifts in the chain are

performed [47]. For suppliers operating with direct deliveries, the changes are smaller

and thus the threshold for joining merge-in-transit is also significantly lower.

One of the biggest obstacles encountered during the implementation project with the

MRO distributor has been the configuration of information exchange. Due to the

industrys tradition of using EDIFACT, it was also chosen as the message standard for

the merge-in-transit implementation. However, the implementation was repeatedly

delayed, as the formation of a new message for merge-in-transit information proved

more complicated than had been expected. This indicates the need for more

sophisticated solutions in information management.

A current research effort of our research group is to analyse the information

management challenges of merge-in-transit in more detail. We are assessing software

packages with functionalities that support merge-in-transit operations, and studying

the possibility of solving the challenges with a multi-agent system utilising the

concept of product centric control [48].

During the industrial electronics case study, we noticed that obsolescence costs have a

significant effect on the relative cost efficiency of merge-in-transit and warehousedistribution. This means that the phase of a products lifecycle can affect its preferable


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24

distribution channel. We have formulated a hypothesis that products nearing the end

of their lifecycle should be transferred to merge-in-transit distribution or direct

supplier deliveries, as the obsolescence costs are likely to increase. The effect of

product lifecycle on the attractiveness of merge-in-transit forms an interesting area

requiring further study.

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[14] Ibid. p. 479.

[15] Krkkinen, Mikko and Timo Ala-Risku, Increasing customer value and

decreasing distribution costs with merge-in-transit, forthcoming in

International Journal of Physical Distribution and Logistics Management,

2002.

[16] Norelius, Hans, Merge in Transit A non-stock distribution structure,

Linkpings Studies in Science and Technology, Thesis No. 935, 2002.

[17] Stalk, George, Philip Evans and Lawrence E. Shulman, Competing on

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[21] Richardson, Helen, Planning for the year 2000, Transportation &


[22] Dawe, Richard L., Move it fasteliminate steps, Transportation &


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[24] Ibid.

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transit yields benefits,Logistics Management and Distribution Report, Vol. 37,

No. 10 (1998), p. 30; GeoLogistics, A summary of: Merge in Transit From

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[26] Cole, Michael H. and Mukundh Parthasarathy, Optimal Design of Merge-in-

transit Distribution Networks, Technical Paper 1998, University of Arkansas,

Available from: http://intra.engr.uark.edu/~mhc/research/mbtc1064.pdf

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[27] Christopher, Martin,Logistics and Supply Chain Management, London: PitmanPublishing, 1992, pp. 75-79.



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[30] Simchi-Levi, David, Philip Kaminsky and Edith Simchi-Levi, Designing andmanaging the supply chain concepts, strategies, and case studies, The

McGraw-Hill Companies, Inc., 2000, pp. 112-116.

[31] Ibid., p.113.

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Creating Value in North American Communications, Council of Logistics

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[35] Aminoff, Anna, Outi Kettunen and Hanna Pajunen-Muhonen, Research on

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Research and Applications, Vol. 5, No. 1 (2002), pp. 45-57.


Manufacturers and Wholesalers, International Journal of Logistics Researchand Applications, Vol. 3, No. 1 (2000), pp. 53-65.

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Factors Affecting Warehousing Efficiency,International Journal of Logistics:

Research and Applications, Vol. 5, No. 1 (2002), pp. 45-57.

[38] Richardson, Helen, Cross Docking: Information Flow Saves Space,

Transportation & Distribution, Vol. 40, No. 11 (1999), pp. 51-54; McLeod,

Marcia, Cutting both ways, Supply Management, Vol. 4, No. 7 (1999), pp. 24-

25; Pedler, Mike, Information Technology in the Supply Chain,Purchasing &

Supply Management, Sep 1994, pp. 15-16.

[39] McLeod, Marcia, Cutting both ways, Supply Management, Vol. 4, No. 7

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obtain for the purposes of evaluation. However, calculations result in more product-

specific figures by using costs per pallet or shelf-metre, and thus give better decision

support.

Inventory holding costs include the main components of capital cost, insurance and

obsolescence [51]. Of these, capital cost is often the most influential component, and

at the same time the hardest to determine. Obsolescence is calculated based on

experience of how products have been marked-down or discontinued. Obsolescence is

often remarkable for high tech products, where technological development rapidly

decreases the value of older products [52]. These costs can be expressed as a

percentage of sales or as a percentage of the inventory average. The individual

percentages are then summed up to assess the total inventory holding costs.

In the formula below, both the storage costs and inventory holding costs are expressed

as percentages of the average inventory for a stock-keeping unit. Using the stock-

keeping unit (SKU) specific percentages enables the differentiation of costs between

separate product types.

Warehousing costs = ( )365

DoSValuePP inventorystorage +

Where

Pstorage = storage costs as percentage of average inventory for the SKU of the

order line

Pinventory = inventory holding costs as percentage of average inventory for the

SKU of the order line

Value = sales value of the order line

DoS = Days of supply of the SKU in the warehouse inventory

According to Manunen [53], for Finnish wholesalers the storage and inventory costs

average at 0,7 and 1,1 percent of sales, respectively. These figures can be used for

very rough approximations of the warehousing cost impact on total distribution costs,

if no case specific data are available. However, using average figures such as these

doesnt provide any real information on the feasibility of warehousing for specific

products.

merge in transit

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