Reference no: EM131370512

Electron, a manufacturer of electrical components for computers, produces and packages private-label components for various famous brand names. The components manufactured are basically identical, but are labeled and packaged differently for the various customers. The manufacturing facility replenishes a distribution center in another country where the lead time is nine weeks. Electron uses a continuous review policy to manage inventory at the DC and the desired cycle service level is 95 percent. A month ago, Electron faced a tremendous challenge to satisfy upcoming orders which resulted in Electron losing an extra business opportunity to a major customer because of the wrong labels and packaging. To allow for more flexibility to accept additional orders from customers, senior supply chain manager is proposing to postpone labeling and packaging work to the Distribution center. However, a detailed study at the DC revealed that the postponement strategy would increase production cost by OR 1 per unit. In order to examine the cost and benefits of the proposed strategy one representative component was selected for analysis; RAM- with four key customers. Weekly demand is as shown in the following table. Electron incurred a total cost of OR 100 per unit of RAM. Annual holding cost is 30 percent. Customer Mean (units per week) Standard Deviation (units per week) 1 1,000 700 2 700 600 3 800 600 4 500 400 a. How much saving in annual safety inventory holding cost can be achieved if postponement strategy was applied? b. Should Electron postpone its labeling and packaging process to the DC? Justify your answer quantitatively.