In early January, Littlefield opened a new factory to produce DSS receivers. Expert advisors predict demand for

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Question:

In early January, Littlefield opened a new factory to produce DSS receivers. Expert advisors predict demand for this new product will grow at a constant rate over the next four months (120 days) before stabilizing. Daily customer demand has a random component but expected daily demand should follow the predicted trend. Management knows the factory will no longer be required on Day 268 when demand ceases abruptly. Any remaining machinery or inventory on hand after Day 268 will become useless and thus have no residual value. Management’s main concern is purchasing capacity to serve the predicted demand pattern within contracted lead times. They would like to increase revenue while also minimizing costs. They trust a more responsive factory will increase revenue and they understand a well-balanced inventory policy should help to minimize costs.

The Process:

Littlefield assembles its DSS receivers from kits of electronic components obtained from a reliable supplier. The assembly process consists of four steps carried out at three stations called the board stuffing, testing, and tuning stations. A graphic representation of the process appears in Figure 1. The first step consists of mounting and soldering electronic components onto PC boards at the board stuffing station. The second step collects test data on each receiver that is transmitted to tuning for the third step. The third step tunes the DSS units to receive satellite signals at the tuning station. The final step returns boards to the testing station for a final burn-in and certification required by customers. There is no loss or rework at the Testing station. All stations are composed of fully automated machines. The process time on Step 3 is random. The other steps’ process times never change. The factory runs for 24 hours each day. You will have some cash on hand when the assignment begins. This amount is depleted by both capacity and inventory purchases. Revenues earned from filled orders increase the cash balance. Cash held earns interest, compounded every simulated day, at an effective annual rate of 10%. There are no taxes, salaries, nor fixed overhead costs.

Operations Policy:

It is now late February, and LT has started to notice lead times are on the rise as demand grows. Delays, resulting from insufficient capacity or poor inventory management, could undermine LT's contractual lead times and ultimately affect their reputation. Daily data from their first 50-day operations has been collected. It represents the period from early January to late February. Management has just employed a high-powered operations team (that’s you!) to optimize factory performance. There is only one metric for success: total cash in hand on Day 268. They trust you will be able to whip this factory into shape before it obsolesces. For the next 168 simulated days, you will adjust the inventory policy and buy or sell machines to maximize their final cash position. Littlefield’s factory is currently equipped with one machine in each station. Examination of their production process shows some variability in the time required to fulfill an order. Management has not done any analysis of step-by-step process times, but they do record daily average utilization rates at each station. Average Utilization is the fraction of each day that machines are processing jobs averaged over the number of machines provided at a station. Additional machines may be purchased anytime. Board stuffing machines cost $90,000 each, testing machines cost $80,000 each, and tuners cost $100,000 each. Selling machines, while the factory is still operational, will net a salvage value of $10,000— provided at least one machine remains at each station.

New customer orders arrive randomly throughout each day. Each order is for 60 new DSS receivers. Upon arrival, an order is matched with 60 kits to become a job. If an order arrives and there are no kits on hand, that order must wait in a queue of customer orders requiring raw materials inventory. The factory can accommodate no more than 100 jobs in the process and/or waiting. Arriving orders in excess of this limit will be turned away.

Littlefield uses an automated Reorder Point and Order Quantity mechanism to replenish inventory. Fresh kits are purchased from a single supplier at a cost of $10 per kit and a fixed order cost of $1000 per shipment. The supplier is very reliable, delivering the exact order quantity precisely four days after receiving payment. Orders for new inventory are placed only when the following three mutually dependent criteria are all met: • the inventory of kits is less than or equal to the materials Reorder Point, • there are no outstanding orders for kits in transit, • there is sufficient cash-on-hand to purchase the specified order quantity.

Inventory reorder points and reorder quantities may be changed by clicking the Edit Data button found on your Materials Buffer pop-up window; you may edit only one parameter at a time. There is no holding cost associated with inventory—other than the opportunity cost of the purchase price. Littlefield’s customers will pay premium prices for shorter lead times. Management has prepared three pricing contracts for you to choose from: 1. quoted lead time = 7 days; maximum lead time = 14 days; price = $750 2. quoted lead time = 24 hours; maximum lead time = 72 hours; price = $1000 3. quoted lead time = 12 hours; maximum lead time = 24 hours; price = $1250.

During the first 50 days, management has only accepted jobs under Contract 1. They doubt you will ever be able to deliver 100% on time for the most lucrative contract but believe it may be worth pursuing. Contracts are assigned to each order upon arrival. The assigned contract for that order may not be subsequently changed. Contracts may be assigned to future orders by clicking the Edit Data button on your Customer Order pop-up window and selecting from the resulting menu. Littlefield’s lead time pricing contracts have quoted lead times and maximum lead times. Orders filled within the quoted lead time earn full revenue. Orders filled after the quoted lead time incur penalties. Specifically, pro-rated revenue decreases—at a constant rate—from the quoted price to zero once the stated maximum lead time is surpassed. All orders taking longer than the maximum time are delivered free of charge. For example, consider a contract paying $1,000 per order with a quoted lead time of 24 hours and a maximum lead time of 72 hours delivered to the customer 30 hours after the order was placed. That order’s rebate penalty would be: and that order would earn $1,000−$125=$875

Production began with $1,000,000 in operating cash and raw materials inventories of 9600 kits. Revenue earned from filled orders increases your cash balance while capital investments and inventory purchases reduce your cash balance. Capacity purchases are never allowed when the resulting cash balance would prevent your next planned inventory order. Cash held earns interest at an annual rate of 10%. There are no taxes, payrolls, nor fixed overhead costs to consider. Littlefield’s factory simulation will run at the rate of one simulated day per real hour for the next seven real days. On simulated Day 218, you will relinquish control of Littlefield’s factory and the simulator will run its final 50 simulated days at an accelerated rate. Management expects that you will leave all factory parameters set to values that maximize their final cash position on simulated Day 268. You may review the final status of your factory and download historic data after this simulation ends, but your factory will no longer be active.

INFORMATION AVAILABLE for 50 days data:

ORDER QUEUE:

• Number of new customer orders by day • Average number of orders waiting for kits by day • Current pricing contract for arriving orders • Lot size

Material Buffer

• Kit inventory in the buffer at the end of each day, whenever inventory hits zero, and whenever a new inventory shipment arrives. • Inventory costs • Reorder Point and Order Quantity • Time until the next shipment arrives

Station Queues

The average number of receivers in a process that are waiting while machines in the station are busy, by day

Stations:

Number of machines at each station • Scheduling Policy used (for tester only) • Historical utilization of the station by day (i.e., the average fraction of time a machine was busy at that station during that day)

Completed Jobs :

Numbers of orders completed by day (by pricing contract) • Average order lead time by day (by pricing contract) • Average revenue per order by day (by pricing contract)

QUESTIONS:

What information and formula will you use to calculate the inventory holding cost, in dollars per kit per year? Explain in detail how to calculate it.