Littlefield Laboratories
Assignment : Customer Responsiveness
Objective
To build on the concepts learned in Game 1 by adding decisions in two areas: inventory management and contract or lead time management.
Background
Littlefield Laboratories (LL) has opened another lab. The new lab uses the same process as the lab in Assignment 1 "Capacity Management at Littlefield Labs" - neither the process sequence nor the process time distributions at each machine have changed. On day 0, the lab began operations with three preparers, one tester, and one centrifuge, and an inventory of 160 test kits. This left the lab with $1,000,000 in reserves. Customer demand continues to be random, but the long-run average demand will not change over the product's 268-day lifetime.At the end of this lifetime, demand will end abruptly and lab operations will be terminated. At this point, all capacity and remaining inventory will be useless, and thus have no value.
Management would like to charge the higher prices that customers would pay for dramatically shorter lead times. However, historic lead times often extend into several days, so management has been unwilling to quote the shorter lead times.
Operations Policies at Littlefield
LT uses a Reorder Point / Order Quantity raw material purchase policy. That is, test kits are purchased as soon as the following three criteria are all met:
(1) the inventory of test kits is less than or equal to the reorder point,
(2) there are no orders for kits currently outstanding, and
(3) the lab has sufficient cash to purchase the reorder quantity.
No order is placed if any of these three criteria are not met. So, for example, a team could prevent kit orders from being placed at all by setting the order quantity so high that there is insufficient cash to place an order.
A reliable supplier delivers exactly the order quantity of kits, four days after the order is placed.
Kits (raw materials) cost $900 each.
Inventory Holding Cost is 30% per year per kit, or $.7397 per Kit per day. ($.7397 x 365 = $270 per year and $270/$900 = 30%).
There is also a fixed cost of $1,500 per shipment of raw kits, independent of the shipment size.
The revenue earned from filled orders increases the cash balance. The balance earns interest (compounded every simulated day) at a compounded rate of 10% per year. There are no taxes. All fixed overhead over which you have no control, such as salaries, rent, utilities, etc. are ignored. To reduce the chance of bankruptcy, you are not allowed to purchase a machine if the resulting cash balance would be too low to purchase an order of raw materials at the currentorder quantity.
The current reorder point and reorder quantity can be changed by clicking on "Edit Data" on the Materials Buffer icon.
When the second simulation begins, Littlefield has 3 Preparer machines, 1 Tester and 1 Centrifuge.
The times to perform each step are:
|
Step 1
|
Step 2
|
Step 3
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Step 4
|
|
Preparer
|
Tester
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Centrifuge
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Tester
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5.3 hours
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0.5 hours
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1.8 hours
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1.4 hours
|
Note: The Tester is used in both Step 2 and Step 4.
In Assignment 2, your team will make decisions in 4 areas.
The first 2 decisions are the same as in Assignment 1:
- Buying and selling machines. You may buy or sell machines, and thereby alter capacity, by clicking on the desired station and then the "edit data" button on the resulting menu. The number of machines you select displays as "Station Count". Sample preparing machines cost $50,000, testing machines cost $40,000 and centrifuges cost $60,000. Any machine can be sold for a retirement price of $15,000, provided there is at least one other machine left at the station.
- Adjust scheduling sequence. At Station 2 only, you can choose from the following 3 scheduling sequencing rules:
Scheduling Rule:
- FIFO
- Priority to step 2
- Priority to step 4
Jobs at the tester are currently scheduled on a First-In-First-Out (FIFO) basis, but you can give priority status either to the short initial tests (Step 2) or the longer final tests (Step 4). If you choose "FIFO", jobs will be processed in their order of arrival. If you choose "Priority to Step 2", any job that needs to be processed next for Step 2 will be processed before other jobs. Choosing "Priority to Step 4" will cause the system to process any job waiting for Step 4 next. Click on the tester station and then "edit data" to change the queue sequencing rule at the tester.
In addition to the two Assignment 1 decision areas (buying and selling machines, and adjusting the scheduling sequence at Station 2), Assignment 2 allows for decision making in two more areas:
- Inventory Policy. You can change the Reorder Point (initially set to 24) and the Reorder Quantity (initially set to 120).
- Contract choice. You can choose between three contracts. Customers are willing to pay a premium for fast lead times, and you now have three pricing contracts to choose from:
price = $1,000; quoted lead time = 7 days; maximum lead time = 14 days. (This is thecontract that the lab starts with).
price = $1,500; quoted lead time = 1 day; maximum lead time = 3 days.
price = $2,000; quoted lead time = 0.5 days; maximum lead time = 1 day.
As before, if a customer order's lead time exceeds the quoted lead time, then the revenue for that order decreases linearly, from the prices above for the quoted lead time to $0 for the maximum lead time. A contract is assigned to a customer order as soon as it arrives at the lab, and that contract cannot be changed subsequently for that order.
Contracts for future orders can be selected by clicking on "Edit Data" on the Customer Order icon.
You will also notice a few days where zero jobs are completed by the lab. On such days, the daily average lead time and daily average revenues are meaningless, so a value of zero will appear in the plots and downloaded data on those days.
Assignment for Game 2
The lab has been running for 50 simulated days, and management has recalled the high-powered operations team (you) to manage the capacity, scheduling, purchasing, and contract quotations to maximize the cash generated by the lab over its lifetime. Management is not providing any operating budget beyond the cash generated by the lab itself. You will have control of the lab from day 50 to day 218. At 1 hour per simulated day, this translates to 7 real days.
At day 218, you lose control of the lab, and the simulation will quickly run another 50 days of simulation. When you lose control of the lab, management expects you to leave the lab parameters set to maximize the lab cash position when the lab shuts down on day 268. All machines and inventory remaining on day 268 have zero value. After the simulation ends on day 268, you can check the status of your lab, but the lab will no longer be running.
Appendix
Optional Suggested questions to answer (Game 2)
1. Did you change the lead-time contract? If so, how did you determine when it would profitable to do so?
2. How did you determine the test kit reorder point? If you included safety stock, how did you determine the safety stock?
3. How did you determine the test kit order quantity?
4. How did you manage the trade-off between getting caught with too much inventory versus stocking out of inventory at the very end of the game
5. Using the data through Day 50 along with other relevant information from the above case, perform an M/M/S queueing analysis of Station 1. Use this queueing analysis to justify your choice of machines that you buy for Station 1. What is the expected queue length (Lq) at Station 1, given your choice of machines? What is the expected waiting time in system (Ws) of an order at Station 1? Try to perform similar analyses for Stations 2 and 3.
6. Calculate an estimate of the economic order quantity (EOQ) and reorder point (ROP) for this product. What are your assumptions that you used in calculating the EOQ and ROP? How closely did you follow these values while you were in charge of the factory, and why?
7. What is your recommended tactic for dealing with the end-of-lifetime inventory restocking at the end of this product's lifecycle? How did you carry this out?
The lead time is 4 days so plan your reorder point accordingly, and safety stock is a good idea given the variability in demand.
Also keep in mind that the goal is to end the game with zero inventory since it will have no value after the game is over.
Assignment Instructions
Team ID : teamflyersPassword : teamflyers
50 days of history transpired and the simulation is paused. Work as a team to review and answer the following questions:
I N V E N T O R Y
In Simulation 2, in addition to capacity, your team will make decisions related to raw materials inventory - or kits - which are purchased from suppliers.
o Click on the Materials Buffer icon and "Plot Inventory". What do you notice? ________________________________
o What is the current Reorder Point? __________
o What is the current Order Quantity? __________
o What is the lead time for inventory, and what does it mean in terms of your planning? ________________________
You can use EOQ to calculate the order quantity that will preserve cash for your team. To do that, you need an estimate of Annual Demand, Ordering Cost and Holding Cost.
o Annual Demand (D) = Avg. Daily Demand X 365 = __________
o Ordering Cost: __________ per order (in guidelines)
o Holding Cost: assume 30% per year and each kit costs $900
Suggestion: Calculate EOQ and compare to the current Order Quantity setting. What do you think?
When you have access to make updates, change the current Order Quantity to reflect your EOQ.
The Reorder Point should be set appropriately to make sure that you don't run out of raw materials. ROP = Demand During LT + Safety Stock.
Note that there is a lot of variation in demand. To calculate safety stock, your team could use the Normal Distribution method. Decide on a service level % (for example, 95% or 98%), and calculate the standard deviation of daily demand (you can download the orders data to Excel to make that easy).
What does your team think you should do about safety stock?
C U S T O M E R L E A D T I M E
Note that when you take control of your factory on Day 50, the contract choice is set at Quoted lead time: 7.0 day(s), Maximum lead time: 14.0 day(s) and Revenue per order: 1,000 dollars. You can choose from a menu of contracts under which new customer orders will be accepted. The more lucrative contracts have shorter lead time requirements and greater penalties for not achieving lead times.
o What are your current actual, demonstrated lead times, during the first 50 days? ________________
o Does your team need to purchase additional machines in Station 1, 2 or 3?________________________