Supply Chain Strategies- Outsource or Produce at Home

Billy Richardson created the custom manufacturing department of Timberland to offer consumers tile ability to make their own custom three-panel messenger bags. And instead of following the standard strategy of manufacturing in Asia, Billy set up Timberland in Seattle with its own facility. But is this the best strategy? Should Timberland consider moving production to Malaysia?

The image above displays a screenshot from Timberland's online retailing website that allows customers to customize their messenger bag to their own particular tastes. A customer can select one color for each of the three panels and a different color and, if they want, for the Timberland "spiral" logo. The color options change over time to keep things "fresh," but at any one time, Timberland generally offers at least 16 options for each panel and the logo.

Once customized, Timberland manufactures the bag in Seattle and then ships the bag to the customer within two to three days. Timberland sells bags through its online store for about $100 per bag. Although it would love to sell bags only through its website and to sell many more of them, the market for custom bags at this price point is only so big. So Timberland sells bags through other channels as well. For example, retailers such as REI purchase a limited selection of bags to sell in their stores. While Timberland appreciates sales through this wholesale channel, they don't generate the same revenue per bag as the online channel- more like S35 per bag. Even though the wholesale bags generally do not involve nearly the same level of customization as the online bags (i.e., retailers tend to select more conservative color combinations), those bags are made on the same production line as the online bags. However, the promised lead time to wholesale customers is longer, more like two to three weeks.

The decision as to whether to send production to Malaysia involves a number of issues.

Figure 1 provides a cost comparison between production in Seattle and in Malaysia.

Table contain problem data included in problem narrative.

Component Cost	Seattle	Malaysia	Notes:
Hourly Wage	$13.25	$2.25	Includes fringes
Labor Content	49 minutes	63 minutes
Materials	$13	$13
Other Mfg Expenses	$1.50	$/0.75	Incl. Insurance, maintenance, warranty, theft losses
Shipment to Seattle	$0	$1	Ocean Container shipment. Airfreight is $14 per bag
Shipment from Seattle to customers	$3	$3

There is a dramatic difference in labor costs on a per-hour basis, but the workers in Seattle are slightly more productive (they require 49 minutes per bag instead of 63 minutes). Material costs do not differ between the two options because, in both cases, materials are procured in Malaysia. It costs $1 per bag to send it from Malaysia via ocean carrier, but the lead time is probably eight weeks when all of the steps are accounted for (e.g., production, movement to the port, and actual shipping). To get a faster lead time, it would require air shipments, but that is much more expensive at $14 per bag.

Of course, Figure 1 doesn't tell the entire story. There would be costs associated with finding a good supplier and monitoring that supplier. And it isn't clear how Timberland's customers would react to the move- from its start, Timberland emphasized with pride that it was made in Seattle. Does moving production to Malaysia eliminate part of the brand's cache with customers?

Questions:

1. What is the total cost of making a bag in Seattle? What is the total cost of making a bag in Malaysia, including the transportation cost of shipping the bag from Malaysia to the United States?
2. Suppose Timberland does move production of wholesale bags to Malaysia. Let's say it can place orders with its Malaysian supplier every four weeks; that is, one period equals four weeks. Its lead time is two periods; that is, L = The average demand for one type of wholesale bag is 200 bags per period (i.e., they sell, on average, 200 bags every four weeks), with a standard deviation of 100 bags. The holding cost for each bag each period is $1.00, and it would operate with a 2.5 safety factor. How much inventory on average, would it have on order and on hand? What would be the inventory holding cost per bag?
3. Should it move the production of custom bags to Malaysia? Should it move the production of wholesale bags to Malaysia? Make an answer to these two questions, using both quantitative and qualitative reasoning- as appropriate.

This was all the information was given to solve the problems above.