Penang Electronics (PE) is a contract manufacturer that produces and packages private label products for various retail chains, including Target, Best Buy, Staples, and Office Max. In each case, the commodities are identical, the only difference being labeling and packaging. Therefore, the labeled and packaged version of the product destined for Target cannot be shipped to Best Buy. Currently, a production facility in Malaysia is used to manufacture, label and pack all products. The manufacturing plant restocks a distribution center 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 rolling review policy to manage inventories at its DC and aims to provide a 95 percent cycle service level for each product to each customer. The previous month had been very challenging as Best Buy ordered an additional 5,000 units beyond what was available at the distribution center, while Target ordered 3,500 fewer units and Staples ordered 4,000 fewer units. Although there was sufficient product inventory available at the distribution center (in commodity form), PE was unable to fulfill Best Buy's request because the excess inventory available was labeled and packaged for other customers. The distribution center had surplus inventory from Target and Staples, which unfortunately could not be used to serve Best Buy. PE had lost business and excess inventory due to incorrect labels and packaging. Labeling and Packaging on CD PE VP Supply Chain proposed to postpone final labeling and packaging to CD. His logic was that postponing labeling and packaging at the distribution center would allow PE to use all available inventory to serve any customer. In particular, the situation that arose last month when Best Buy did not receive its entire order could have been avoided through a postponement. If the packaging were to be moved to the distribution center, the lead time for the manufacturing and transportation of the commodity from Malaysia would still be around nine weeks. Labeling and packaging were relatively quick steps and were not expected to change the response time from the distribution center to the customer. DC management opposed this idea because it would add additional work that was different from what they had done thus far. A detailed study of the production process showed that labeling and packaging at the distribution center 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 reduce costs. They also believed that it would complicate their job of completing an order and could have a negative impact on customer service. Evaluation of the two options To evaluate the two options, a manufacturing and distribution center team was formed. The team decided to focus their analysis on three main product categories: computers, printers, and scanners, and four main customers: Target, Best Buy, Staples, and Office Max. The weekly demand for each product and customer is shown in Table below. In each case, "Mean" indicates the average weekly demand and "SD" indicates the standard deviation of the 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 carrying cost of 30 percent when making its inventory decisions.

                 Computers      Printers       Scanners

                      Mean  SD    Mean  SD   Mean   SD

Aim	1000	700	2000	1000	4000	1000
Best Buy	700	600	1500	800	4500	900
office max	800	600	1200	600	2000	700
staples	500	400	900	500	1400	500

Questions

1. What is the current system annual inventory cost on what product is produced, labeled and packed in Malaysia before being shipped to DC?
2. How would the cost of inventory change if labeling and packaging were moved to DC? Evaluate the change in inventory costs as the correlation coefficient of demand between any pair of customers varies from 0 to 0.5 to 1.0.
3. How should the PE set up its production, labeling and packaging? processes? Does your answer change if the add-on reduces the cost of labeling and packaging at the distribution center to $1 (from the current value of $2)?