LT Game 2 Managing Customer Responsiveness

DSC 335 Zhibin Yang, Assistant Professor

Decision Sciences

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The Factory and Three Decisions

Inventory management

Raw kits

Station 1
Buffer

Station 2
Buffer

Board stuffing

Testing

Orders arrive
Set lead time target Capacity management
Buffer

Tuning

Station 3

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Key Issue 1: Minimize Delay and Penalty

Choose right capacity
Sufficient capacity is not sufficient for meeting delivery time target High utilization leads to long production lead time

Meet delivery time requirement

Set ROP to avoid stockout

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

Daily demand

25

20

15

10

0 0 10 20 30 40 50

Mean Standard Error Median Mode Standard Deviation Sample Variance Kurtosis Skewness Range Minimum Maximum Sum Count
5

12.24 0.477715653 13 15 3.377959776 11.41061224 -0.273834815 -0.056949681 15 5 20 612 50

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Optimal Strategy Race for Shortest Lead Time

Choose 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 = 12 batches Capacity rate of board stuffing machine = 5 Capacity rate of testing machine = 32 Capacity rate of tuning machine = 17 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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Production lead time with different configurations

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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 distribution SS = z dLT = z*sqr(L)* = 11

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

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