CASE STUDY Should Packing Be Postponed to the DC$?$ Penang Electronics $($PE$)$ is a contract manufacturer that previous month when Best Buy did not get its entire order produces and packages private$-$label products for several could have been avoided through postponement. If packag$-$ retail chains, including Target, Best Buy, Staples, and ing was shifted to the DC$,$ the lead time of manufacturing Office Max. In each case, the basic products are identi$-$ and transporting the basic product from Malaysia would cal, with the only difference being the labeling and the continue to be about nine weeks. Labeling and packaging packaging. Thus, the labeled and packed version of the were relatively quick steps and the response time from the product destined for Target cannot be sent to Best Buy. DC to the customer was not expected to change. Currently, a production facility in Malaysia is used The DC management was opposed to this idea to manufacture, label, and pack all products. The manu$-$ because it would add additional work that was different facturing facility replenishes a DC in St$.$ Louis, from from what they had done so far. A detailed study of the which the contract manufacturer fills all customer production process had shown that labeling and packag$-$ orders. The manufacturing and transportation lead time ing at the DC cost $$2$ per unit more than the cost of label$-$ from Penang to St$.$ Louis is nine weeks, PE uses a con$-$ ing and packaging in Malaysia. DC management believed tinuous review policy to manage inventories at its DC that this increase in cost would be held against them once and aims to provide a cycle service level of $95$ percent the process was changed, and they would be under con$-$ for each product to every customer. stant pressure to lower cost. They also believed it would The previous month had been very challenging complicate the work they did when filling an order and because Best Buy requested $5,000$ additional units could adversely impact customer service. beyond what was available at the DC$,$ whereas Target ordered $3,500$ fewer units and Staples ordered $4\mathrm{.}000$ Evaluating the Two Options fewer units. Even though there was sufficient product To evaluate the two options, a team from both manufactur$-$ inventory available at the DC $($in the form of the basic product$),$ PE could not meet the Best Buy request because ing and the DC was set up$.$ The team decided to focus its analysis on three major product categories computers, the excess inventory available was labeled and packed for printers, and scanners, and four major customers$-$Target, other customers. The DC had leftover inventory from Best Buy, Staples, and Office Max. Weekly demand for Target and Staples, which unfortunately could not be cach product and customer is shown in Table $12-9.$ In each used to serve Best Buy PE had lost business and surplus case, "Mean" indicates the average weekly demand, and inventory all because of the wrong labels and packaging. $"$SD$"$ indicates the standard deviation of weekly demand. All demand was assumed to be normally distributed. PE Labeling and Packaging at the DC incurred a total cost of $$1,000$ per computer, $$300$ per The vice president of supply chain at PE proposed post$-$ printer, and $$100$ per scanner. Given the short life cycle of poning the final labeling and packaging to the DC$.$ Her these products, PE used a holding cost of $30$ percent when logic was that postponing labeling and packaging to the making its inventory decisions. The team analyzed the DC would allow PE to use all available inventories to serve impact of postponement on safety inventories before mak$-$ any customer. In particular, the situation that arose in the ing a final recommendation TABLE $12\mathrm{.}9$ Target Best Buy Office Max Staples Distribution of Weekly Demand by Product and Customer Printers Scanners Mean SD M ean SD Mean SD $1,0007002,0001,0004,0001,0007006001,5008004,5009008006001,2006002\mathrm{.}0007005004009005001,400500$ e con Soci a l mirole Questions $1.$ 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$?2.$ How would the inventory cost change if labeling and pack$-$ aging were moved to the DC$?3.$ 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)?$