PenangCase2023 (1)

• • 8 I Chapter 12 Manag in g Un ce rt ainty in a Su pp ly Cha in Safety In ve nt ory 3 53 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 avail- able at the DC (in the form of the basic product), PE could not meet the Best Buy request because the excess inven- tory available was labeled and packed for other custom- ers. The DC had leftover inventory from Target and Staples, which unfortunately could not be used to serve Best Buy. PE had lost business while carrying 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 wh en Best Buy did not get it s ent ir e order could have been a voi ded th rough po stponemen t. If packaging was shifted to the DC, th e lead time of ma nu fac - turing and transporting the bas ic product from Mala ys ia would continue to be about nine we eks. Labe Lin g and p ac k- aging were relatively quick steps a nd th e re sponse time from the DC to the customer was not ex pected to c han ge. The DC management was opposed to th is idea because it would create additional work th at was diffe r- ent from what they had done so far. A deta il ed s tu dy of the production process showed that labeling a nd packa g- ing at the DC cost $2 per unit more th an th e cost of labeling and packaging in Malaysia. DC management believed that this increase in cost would be he ld aga in st them once the process was changed, and they would be under constant pressure to lower cos t. They al so 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 manufac- turing and the DC was set up . The team decided to focus its analysis on three major product categories -comput- ers, printers, and scanners, and four major customers- Target, Best Buy, Staples, and Office Max. Wee kl y 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 devia- tion of weekly demand. All demand was assumed to be normally distributed. PE incurred a total cost of $1,000 per computer, $300 per printer, a nd $ I 00 per scanne r. Given the short life cycle of these products, PE us ed an annual holding cost of 30 percent when making it s inventory decisions. It was assumed that batch sizes and cycle inventories would be unchanged itTe spective of TABLE 12-9 Distribution of Weekly Demand by Product and Customer Computers Printers Scanners Mean SD Mean SD Mean SD Target 1,000 700 2,000 1,000 4,000 1,000 Best Buy 700 600 1,500 800 4,500 900 Office Max 800 600 1,200 600 2,000 700 Staples 500 400 900 500 1,400 50 0 See data and questions in Penang Guideline