Should Packing Be Postponed to the DC?

Foxcompany (Fox) Co. Ltd. was founded in 1974 in Taiwan as a manufacturer of electrical components for computers. With strong research and development efforts, by 2011, it had accumulated more than 25,000 patents granted worldwide. Fox is now one of the world’s 500 biggest companies, according to Fortune magazine. Its biggest production operation is located in Shenzhen Longlong Science & Technology Park, which covers more than 3 square km with 15 factories. Not only does Fox have dormitories, a hospital, and a fire brigade, but it also broadcasts its own TV channel within the park.

Fox is highly specialized in producing computer components and produces and packages private-label components for various famous brand names, including Acer, Apple, Dell, and Hewlett-Packard. The compo­nents manufactured are basically identical but are labeled and packaged differently for the various cus­tomers. The Shenzhen manufacturing facility replen­ishes a distribution center (DC) in Taiwan where the lead time is nine weeks. Fox adopts a continuous review policy to manage the inventory at its DC and wants to maintain a cycle service level of 95 percent for all orders.

The previous month had been challenging: Apple asked for 5,000 extra units than were available at the DC, whereas Acer and Dell ordered 3,500 units and 4,000 units fewer, respectively. Although there was sufficient inventory available at the DC in the form of basic prod­uct, Fox was not able to meet Apple’s demand because the excess inventory available was labeled and packaged for Acer and Dell. As a result, Fox lost the extra business opportunity and surplus inventory because of the wrong labels and packaging.

1. Labeling and Packaging at the DC

To allow more flexibility for Fox production to accept such additional orders from customers by simply switching the inventory, the senior logistics supply chain manager pro­poses to postpone the labeling and packaging work to the DC, where the lead time of manufacturing and transporta­tion remains unchanged. As a consequence, Fox would be able to meet Apple’s sudden additional order more readily if other customers (e.g., Acer) placed a smaller order.

However, the management at the DC worried about the additional labeling and packaging work. Moreover, a detailed study revealed that the postponement would cost $1 more per unit. In particular, the DC managers believed that those $1 increases in cost per unit would be held against them once the process was changed and they would be under pressure to lower costs. They also thought the added workload would affect the overall service level of the DC.

2. Evaluating the Two Options

A task force was set up to look into this matter. It would focus its study mainly on three major components—moth­erboards, graphics cards, and chassis—and the four key customers—Acer, Apple, Dell, and HP. Weekly demand is shown in Table 12-9. In each case, the mean denotes the average demand per week, and SD denotes the standard deviation of the demand per week. Furthermore, all demands follow the normal distribution pattern. Fox incurred a total cost of $100 per motherboard, $50 per graphics card, and $30 per chassis. As per the rule of thumb of the industry, Fox used a holding cost of 30 per­cent when making all inventory decisions. The task force studied the impact of postponement on safety inventories before providing its final recommendation.

Source: Chopra Sunil, Meindl Peter (2014), Supply Chain Management: Strategy, Planning, and Operation, Pearson; 6th edition.

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