Postponement Case Study

Chapter 12 – Postponement The goal of this case is to get students to understand that the value of postponement is affected by the value of the product, coefficient of variation as well as the correlation of demand. High value products with high coefficient of variation and low correlation provide the biggest gains from postponement while low value products with low coefficient of variation and high correlations provide the least value from postponement. The results for this case are obtained using the accompanying spreadsheet Chapter12-postponement. Status Quo Calculations The status quo has packaging and labeling done in Malaysia before the product is shipped to St. Louis. In this case, all safety inventory has to be held in labeled and packed form and cannot be shared across customers. In other words, PE must hold separate product inventory for each of its customers. The required level of safety inventory is evaluated using Equation 12.9 (the warehouse uses a continuous review system). The required level of safety inventory (and its associated holding cost) is obtained in Cell B19:D24 to be as follows:

Safety Stock With Labeling and Packaging in Malaysia Computers Printers Scanners Target 3,454 4,935 4,935 Best Buy 2,961 3,948 4,441 Office Max 2,961 2,961 3,454 Staples 1,974 2,467 2,467 Total 11,349 14,310 15,297 Holding cost of safety stock $ 5,151,682 The annual holding cost of safety inventory if all labeling and packaging is done in Malaysia is $5,151,682. Impact of Postponement: Labeling and Packaging at DC If labeling and packaging is postponed to the St. Louis DC, all safety inventory of a product can be held in aggregate form to be used for any customer. The aggregate weekly demand and standard deviation are evaluated in Cells B15:G15. For the case when demand across customers is viewed to be independent (Cell D5 = 0), the safety stock with postponement is shown in Cells B28:D28 to be:

Safety Stock with Labeling and Packaging at DC Computers Printers Safety Stock 5,776 7,402

Scanners 7,880

Postponement decreases the holding cost of safety inventory but increases the labeling and packaging costs. The savings in holding costs and the increase in packaging and labeling costs are shown in Cells A30:D36 as follows (for the case when correlation coefficient is 0):

Annual Safety Stock Holding Cost Saving on Postponement Computers Printers Scanners Total $ 1,672,120 $ 621,755 $ 222,518 $2,516,393 Annual Labeling and Packaging Cost Increase on Postponement Computers Printers Scanners Total $ 312,000 $ 582,400 $ 1,237,600 $2,132,000 Observe that while it makes sense to postpone computers and printers, it does not make sense to postpone Scanners which are better labeled and packaged in Malaysia. If correlation coefficient becomes 0.5 (Cell D5 = 0.5), the safety inventory, holding cost savings and increase in labeling and packaging costs are as follows:

Safety Stock with Labeling and Packaging at DC Computers Printers Safety Stock 9,005 11,392

Scanners 12,167

Annual Safety Stock Holding Cost Saving on Postponement Computers Printers Scanners Total $ 703,428 $ 262,612 $ 93,890 $1,059,930 Annual Labeling and Packaging Cost Increase on Postponement Computers Printers Scanners Total $ 312,000 $ 582,400 $ 1,237,600 $2,132,000 Observe that with a higher correlation of 0.5, it only makes sense to postpone computers with both printers and scanners better off being labeled and packaged in Malaysia. The basic decisions stay unchanged (the savings do change) if the increase in cost of labeling and packaging at the DC is only $1 instead of $2.