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.