Note: (1) Use shipping cost $5,000 each time from Malaysia to DC in St. Louis. (2) Total inventory cost = purchase cost + order cost + holding cost=D*c+ (D/Q)*S+ (SS+Q/2)*h*c, where Q should be the optimal order quantity if you want to have the minimum total inventory cost. 1. What is the annual inventory cost of the current system in which product is produced, labeled, and packed in Malaysia before being shipped to the DC? An Excel setup format for your reference only. Feel free to use any format you desire. Malaysia Safety Inventory Optimal Order Quantity Total Inventory Cost Computers Printers Scanners Computers Printers Scanners Computers Printers Scanners Target Best Buy Office Max Staples Total Total Inventory Cost in Malaysia: $313,601,938 2. How would the inventory cost change if labeling and packing were moved to the DC? Assuming the demands are independent of each other. Solution: S311,653,500 Note that (1) the aggregated demand here is not the same as the one in Chapter 11 (different products in one order), since the basic products are identical, only label and package are different. (2) there is additional cost for labelling and packing in DC 3. How should Penang Electronics set up its production, labeling, and packing processes? Does your answer change if the additional cost of labeling and packaging at the DC is increased to $4 (from the current value of S2)? 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 4,000 Evaluating the Two Options fewer units. Even though there was sufficient product inventory available at the DC (in the form of the basic To evaluate the two options, a team from both manufactur- product), PE could not meet the Best Buy request because ing and the DC was set up. The team decided to focus its the excess inventory available was labeled and packed for analysis on three major product categories-computers, other customers. The DC had leftover inventory from printers, and scanners, and four major customers-Toget, Target and Staples, which unfortunately could not be Best Buy, Staples, and Office Max Weekly demand for used to serve Best Buy, PE had lost business and surplus cach product and customer is shown in Table 12-9. In cach inventory all because of the wrong labels and packaging, cause, "Mean" indicates the average weekly demand, and "SD" indicates the standard deviation of weekly demand Labeling and Packaging at the DC All demand was assumed to be sormally distributed. PE 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 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 12-9 Distribution of Weekly Dunaby Pee Computers Printers Mean SD Mean SD Target 1,000 2,000 1,000 700 500 1,500 800 Office Max 800 600 1,200 600 Staples 500 400 900 500 700 Best Buy Scanners Mean SD 4,000 1,000 4,500 900 2,000 700 1,400 500 Sale Price S Product Trendy Basic Sale Price, P $100 550 Sourcing Cost. Salvage Value. Mean venta Half Season, $42.00 $20 200 $31.50 $20 500 Demand for Half Season, 177 141