CASE STUDY

Should Packing Be Postponed to the DC$?$

Penang Electronics $($PE$)$ is a contract manufacturer that

produces and packages private$-$label products for several

retail chains, including Target, Best Buy, Staples, and

Office Max. In each case, the basic products are identi$-$

cal, with the only difference being the labeling and the

packaging. Thus, the labeled and packed version of the

product destined for Target cannot be sent to Best Buy.

Currently, a production facility in Malaysia is used

to manufacture, label, and pack all products. The manu$-$

facturing facility replenishes a DC in St$.$ Louis, from

which the contract manufacturer fills all customer

orders. The manufacturing and transportation lead time

from Penang to St$.$ Louis is nine weeks. PE uses a con$-$

tinuous review policy to manage inventories at its DC

and aims to provide a cycle service level of $95$ percent

for each product to every customer.

The previous month had been very challenging

because Best Buy requested $5,000$ additional units

beyond what was available at the DC$,$ whereas Target

ordered $3,500$ fewer units and Staples ordered $4,000$

fewer units. Even though there was sufficient product

inventory available at the DC $($in the form of the basic

product$),$ PE could not meet the Best Buy request because

the excess inventory available was labeled and packed for

other customers. The DC had leftover inventory from

Target and Staples, which unfortunately could not be

used to serve Best Buy. PE had lost business and surplus

inventory all because of the wrong labels and packaging.

Labeling and Packaging at the DC

The vice president of supply chain at PE proposed post$-$

poning the final labeling and packaging to the DC$.$ Her

logic was that postponing labeling and packaging to the

DC would allow PE to use all available inventories to serve

any customer. In particular, the situation that arose in the

previous month when Best Buy did not get its entire order

could have been avoided through postponement. If packag$-$

ing was shifted to the DC$,$ the lead time of manufacturing

and transporting the basic product from Malaysia would

continue to be about nine weeks. Labeling and packaging

were relatively quick steps and the response time from the

DC to the customer was not expected to change.

The DC management was opposed to this idea

because it would add additional work that was different

from what they had done so far. A detailed study of the

production process had shown that labeling and packag$-$

ing at the DC cost $$2$ per unit more than the cost of label$-$

ing and packaging in Malaysia. DC management believed

that this increase in cost would be held against them once

the process was changed, and they would be under con$-$

stant pressure to lower cost. They also believed it would

complicate the work they did when filling an order and

could adversely impact customer service.

Evaluating the Two Options

To evaluate the two options, a team from both manufactur$-$

ing and the DC was set up$.$ The team decided to focus its

analysis on three major product categories$-$computers,

printers, and scanners, and four major customers$-$Target,

Best Buy, Staples, and Office Max. Weekly demand for

each product and customer is shown in Table $12-9.$ In each

case, "Mean" indicates the average weekly demand, and

$"$SD$"$ indicates the standard deviation of weekly demand.

All demand was assumed to be normally distributed. PE

incurred a total cost of $$1,000$ per computer, $$300$ per

printer, and $$100$ per scanner. Given the short life cycle of

these products, $PE$ used a holding cost of $30$ percent when

making its inventory decisions. The team analyzed the

impact of postponement on safety inventories before mak$-$

ing a final recommendation.

Questions

What is the annual inventory cost of the current system in

which product is produced, labeled, and packed in Malay$-$

sia before being shipped to the DC$?$

How would the inventory cost change if labeling and pack$-$

aging were moved to the DC$?$ Evaluate the change in

inventory costs as the correlation coefficient of demand

between any pair of customers varies from $0$ to $0\mathrm{.}5$ to $1\mathrm{.}0.$

How should PE set up its production, labeling, and pack$-$

aging processes? Does your answer change if the addi$-$

tional cost of labeling and packaging at the DC is reduced

to $$1($from the current value of $$2)?$