Little Field 2 Summary and Solution(1)

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LT Game 2 – Managing Customer Responsiveness

DSC 335Zhibin Yang, Assistant Professor

Decision Sciences

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The Factory and Three Decisions

Board stuffing

BufferTesting

Tuning

Buffer

Buffer

Orders arrive

Station 1 Station 2

Station 3

Raw kits

Set lead time target

Inventory management

Capacity management

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Key Issue 1: Minimize Delay and Penalty

Meet delivery time requirement

Set ROP to avoid stockout

Choose right capacity

“Sufficient capacity” is not sufficient for meeting delivery time targetHigh utilization leads to long production lead time

Stockout causes waiting and increases production lead time

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Key Issue 2: Minimize Inventory Costs

Two costs Holding (carrying) cost Ordering cost

Choose your inventory policy Demand is stationary Set reorder quantity to be EOQ

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Demand Analysis

Daily demand is stationary over the planning horizon Average daily demand = 12 batches; Standard dev. = 3.37

0 5 10 15 20 25 30 35 40 45 500

5

10

15

20

25

Daily demand

Mean 12.24Standard Error 0.477715653Median 13Mode 15Standard Deviation 3.377959776Sample Variance 11.41061224Kurtosis -0.273834815Skewness -0.056949681Range 15Minimum 5Maximum 20Sum 612Count 50

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Optimal Strategy – Race for Shortest Lead TimeChoose contract 3 – shortest lead time requirement and

highest revenue

Timing of the decision – immediately after you get the capacity and inventory policy right Because demand is stationary over time

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Optimal Capacity (12 hour time-to-delivery)

Use M/M/s queueing model to calculate W, the average time spend at each of 3 station, then add them up

System parameters (see game 1 analysis) Demand rate λ = 12 batches Capacity rate of board stuffing machine = 5 Capacity rate of testing machine = 32 Capacity rate of tuning machine = 17

Production lead time with different configurations 3-1-1: average lead time = 20.8 hours 4-1-1: average lead time = 16.5 hours 4-2-2: average lead time = 9.15 hours

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Optimal Inventory Policy

Set your reorder quantity to be EOQ

Model parameters Interest rate: i=10%/year Unit cost c=600 per batch; annual holding cost = i*c / batch Daily demand, d =12; Annual demand, D = 4,380 Ordering cost, S=$1,000 per order to the supplier

EOQ = 382 batches = 22,920 kits

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Safety Stock and Reorder Point

Assume the daily demand has normal distributionSS = z σdLT = z*sqr(L)*σ = 11

For the service level of 95%, z = 1.64 L= 4 days Standard deviation, σ = 3.38

Reorder point, ROP = d L + SS = 59 batches = 3,540 kits

Common mistake: ROP = d L, not using a safety stock.

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Summary – Common Mistakes

Start without knowledge about demand

Make capacity decision solely based on utilization

Not realizing low ROP is causing long delay

Do not use EOQ to minimize inventory costs

ROP does not include a safety stock

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Summary – Analytical Skills to Master

Estimate lead time using queueing model

Calculate safety stock using history demand date

Calculate EOQ using parameters from the context