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 identical, 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 manufacturing 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 continuous 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 postponing 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 packaging 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 packaging at the DC cost $2 per unit more than the cost of labeling 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 constant 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 manufacturing 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 making a final recommendation.

QUESTION:

• Carefully analyzing the case (problem statement, current situation, objective, case study

solutions…)

• Giving some ideas for improvement in this case and clearly analyzing the pros and cons

(Note: Group can find ideas through papers or lecture notes)

• Verify your ideas through computational work.

This case study is taken in Chapter 12 – “Supply Chain Management – Strategy, Planning and

Operation – 6th edition” – Sunnil Chopra, Peter Meindl