Managing customer responsiveness at littlefield technologies

Littlefield Laboratories:[footnoteRef:1] [1: This case note was originally written by Samuel C. Wood and Sunil Kumar, Stanford University Graduate School of Business. Edits were made in 2005-2007 by Gregory Heim, Assistant Professor, Boston College, for use at Boston College. Further edits were made by Drew Prince, Adjunct Professor University of Dayton.]
OPS 301 Fall 17

Assignment 2: 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 current order 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

Step 4

Preparer

Tester

Centrifuge

Tester

5.3 hours

0.5 hours

1.8 hours

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:

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.

2. 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:

3. Inventory Policy. You can change the Reorder Point (initially set to 24) and the Reorder Quantity (initially set to 120).

4. 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 the contract 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.

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