AD680 Global Supply Chains
Problem Set #3: Inventory Aggregation
Consider the information and data presented in the textbook case study “Should Packing Be Postponed to the DC
[Distribution Center]?” (Page 353 - 354 in the textbook), that concerns inventory management at Penang
Electronics, where orders are placed weekly, and the lead time for receiving orders is 9 weeks. Pay close
attention to the details of the case study, but ignore the list of questions posed on Page 354.
For this assignment, do the following:
Compare the two alternatives under consideration for final labeling and packaging:
1. At the production faculty in Malaysia before being shipped to the DC (the current approach) and
2. At the DC in St. Louis (i.e., postponing labeling and packaging until just before shipment).
The comparison should consider the savings in annual holding cost with aggregation compared to the increased
production costs of aggregation. When determining if aggregation is warranted, note that how inventory is
managed does not need to be consistent across the three products (computers, printers, scanners). That is,
aggregation may be worthwhile for only one or two of the three products, and this approach can be
implemented.
When analyzing the two alternatives, use a target product fill rate of 99%. Assume that the demand across the
four customers is independent but that demand variation is perfectly correlated across weeks.
The assessment of this work will be based on the accuracy and clarity of your spreadsheet.
E-mail one Excel file, using a file name Lastname_3.
AD680 Global Supply Chains
Problem Set #3: Inventory Aggregation
Consider the information and data presented in the textbook case study “Should Packing Be Postponed to the DC
[Distribution Center]?” (Page 356 in the textbook), that concerns inventory management at Penang Electronics,
where orders are placed weekly, and the lead time for receiving orders is 9 weeks. Pay close attention to the
details of the case study, but ignore the list of questions posed on Page 357.
For this assignment, do the following:
Compare the two alternatives under consideration for final labeling and packaging:
1. At the production faculty in Malaysia before being shipped to the DC (the current approach) and
2. At the DC in St. Louis (i.e., postponing labeling and packaging until just before shipment).
The comparison should consider the savings in annual holding cost with aggregation compared to the increased
production costs of aggregation. When determining if aggregation is warranted, note that how inventory is
managed does not need to be consistent across the three products (computers, printers, scanners). That is,
aggregation may be worthwhile for only one or two of the three products, and this approach can be
implemented.
When analyzing the two alternatives, use a target product fill rate of 99%. Assume that the demand across the
four customers is independent but that demand variation is perfectly correlated across weeks.
The assessment of this work will be based on the accuracy and clarity of your spreadsheet.
E-mail one Excel file, using a file name Lastname_3.
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 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
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—Target,
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 each
inventory all because of the wrong labels and packaging.
case, "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 normally 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
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 12-9
Target
Best Buy
Office Max
Staples
Distribution of Weekly Demand by Product and Customer
Computers
Printers
Scanners
Mean SD Mean SD Mean SD
1,000 700 2,000 1,000 4,000 1,000
700 600 1,500
800 4,500 900
800 600 1,200 600 2,000 700
500 400 900 500 1,400 500
DI
XL
K
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