Managing Responsiveness at Littlefield Labs
(Group Assignment 3)
Please read “Littlefield Labs: Overview” and “Capacity Management at Littlefield Labs (Group
Assignment 1)” to review the background of Littlefield Laboratories.
After the successful launch last year, Littlefield Labs (LL) is opening another lab (with the same
process as the lab in the previous assignment, “Capacity Management at Littlefield Labs”).
According to the observations of the previous lab, the new lab began operations with two sample-
preparing machines, three testing machines, two centrifuges, and $1,000,000 in reserves on day
0. Also, LL obtains the information about the processing time of each step:
Step 1 Step 2 Step 3 Step 4
Machine Preparing Testing Centrifuges Testing
Average processing time 2.8 hours 1.6 hours 2.9 hours 2.6 hours
Distribution? Exponential Constant Constant Constant
Different from the processing times in group assignment 1, the processing time of the sample
preparation (step 1) is not constant; it is exponentially distributed instead. The processing times
of steps 2, 3, and 4 are constant. LL can still decide whether to purchase/sell machines, and the
prices of the machines are the same as those in the previous assignment.
Because LL is a well-known company now, the demand for the new lab is expected to be stable
(i.e., the long-run average demand is constant, while the demand each day still fluctuates). The
new lab plans to operate for 274 days (around 9 months). At the end of this lifetime, demand will
end a
uptly, and lab operations will be terminated.
LL will receive samples from local hospitals and clinics and will process those samples with
disposable test kits. Therefore, LL needs to purchase the test kits from a supplier frequently. LL
has an inventory of 160 test kits on day 0, and it considers a reorder-point policy to manage the
ordering of test kits. The test kits are purchased immediately once 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 cu
ently outstanding.
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, LL could prevent kit
orders from being placed at all by setting the order quantity so high that there is no sufficient cash
to place an order.
The supplier is reliable and delivers the order quantity of kits four days after the order is placed
and paid for. The test kits cost $600 per kit, and there exists a fixed cost of $1,000 per shipment of
the test kits. The management team considers the physical cost of holding kit inventory negligible
compared to the financial costs (i.e., the team only considers the financial impacts on holding
inventory). In the beginning, the management team has little idea about how to control the
2
inventory. Thus, the team a
itrarily sets the reorder point to be 40 units and the order quantity to
e 150 units, and it observes the result in the first 50 days.
LL earns revenue by completing jobs on time, and the revenue per completed job depends on the
pricing contract. There are three options for the pricing contract:
Price Quoted Lead Time Maximum Lead Time
Contract 1 (cu
ent) $750 7 days 14 days
Contract 2 $1000 1 day 3 days
Contract 3 $ XXXXXXXXXXdays 1 day
Once an order a
ives at the lab, a contract is immediately assigned to that order, and the contract
cannot be revised or discarded. LL can only change the contract for future orders. 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. For
example, if LL chooses contract 2, and the lead time of an order is 1.5 days, the revenue of this
order would be $1,000 − $250 = $750. The team chooses contract 1 in the first 50 days.
After 50 days, the management team is not satisfied with the cu
ent performance. As a result, you
are asked to help the management team obtain a better profit by making the following decisions:
• Capacity decisions: purchasing/selling machines
• Priority decisions of machine 2: FIFO, step 2 first, or step 4 first?
• Inventory decisions: reorder point and order quantity
• Pricing contract: contract 1, 2, or 3?
When the assignment begins, there will already be 50 days of history available for your review.
The simulator will run at a rate of 4 simulated days per 1 real hour (i.e., one simulated day per 15
minutes) for two days. Therefore, you will control 4 × 24 × 2 = 192 simulated days in total, and
you will lose control after day 242. After the assignment window ends, an additional 32 days of
simulation will be executed at once. Thus, there will be a total of 274 days of simulation. After
this simulation is over, you can check the status of your lab, but the lab will no longer be running.
Once the assignment ends, any remaining machines and inventory will have zero value.
The other settings in this simulation round keep the same as in simulation round #1 without further
notice. The following are some useful hints and clarification:
1. Please keep updating the demand estimation based on the latest data.
2. The “lead time” in a contract represents the flow time of a job. It is different from the lead
time of an order from the supplier to LL (i.e., 4 days).
3. The balance still earns interest (compounded every simulated day) at a compounded rate
of 10% per year. Think about how the interest affects your decisions.
4. Use the EOQ model to decide the optimal order quantity for “frequent ordering” and be
careful of the time unit. The other inventory models might also be helpful.
5. You have to choose your target service level to decide on the safety stock.
6. You can use the queueing model to estimate the total average flow time, but you need to
think about applying the formulae you learned to this more complicated problem. For
simplicity, you can assume ?????? = 1.
3
Similar to group assignment 1, the grade is based on the following criteria:
• The absolute and relative performance of the final cash position
• The history of your decisions
• A 2-page write-up after the simulation (due on 5/01 at 11:59 pm)
Your write-up should be submitted as a Word file with no more than two pages (single-spaced,
12-point font). Please answer the following questions in your write-up:
1. How did you estimate each parameter to decide the reorder point and the optimal order
quantity? You may provide your answer on a table. For example:
Optimal Order Quantity
Parameters/decisions Value How to get it?
Fixed ordering cost ?? $1,000 Shipment fee per order
Unit holding cost ℎ
Annual demand ??
Optimal order quantity EOQ = …
Reorder Point
(Complete this part by yourselves!)
2. Given the initial number of the machines in each station, what was the estimated average
flow time of the process? (Hint: you need to calculate the average waiting time for each
station first.) Which station did you add the machine first? Why?
3. Have you changed your pricing contract? If so, how did you evaluate the benefits of
changing the contract? What other decisions you have made to support the change of
contract?
4. Did you change your inventory policy or the other decisions over 192 simulated days? If
so, why did you change?
5. If you are not satisfied with your performance, what would you do if you could play the
game again?
In addition to answering the above questions, please include a paragraph describing each group
member’s responsibility/work in playing the game.
Managing Responsiveness at Littlefield Labs
(Group Assignment 3)