TEAM B4: Littlefield Technologies Part 2 – Managing Customer Responsiveness

Executive Summary
Our team implemented a strategy to increase factory capacity early in order to manage demand
and allow for earlier transitions to higher-paying contracts over the 318 day simulation. Machines
were purchased at Stations 1 and 3 very early and all machines were purchased by Day 129. Once
sufficient capacity was obtained, the team shifted its focus toward reducing fixed inventory costs.
The team purchased inventory in increasingly large quantities until the end of the simulation. Prior
to the loan becoming available at Day 150, the team determined that when considering cash-on-
hand, average revenues, and the interest both would accrue, the loan might be utilized to reduce
the effective cost of inventory, but the benefits did not exceed costs and structuring daily interest-
only payments within the simulation’s framework would be too onerous to execute effectively.
The team then focused on conserving capital for a final Newsvendor-style inventory purchase that
would meet all demand through the end of the simulation. Our efforts were successful and we
finished in 2nd place with a balance of $1,658,538.

A. Pre-Game Calculation:
For the second iteration of the Littlefield simulation, our virtual factory ran for 50 days before we
could make adjustments. Upon analyzing the data of first 50 days, we determined the following:
 Average demand was around 12.22 accepted jobs/day, with standard deviation of 3.4.
 Stations 1 and 3 had very high utilization rates (ρ) which needed to be reduced. Station 1 had
an average ρ of 89.6% (median 98.5%), while Station 3 had an average ρ of 90.5% (median
100%). Station 2 only had an average ρ of 47.94%, which we felt warranted only the two
machines we already owned.
 Our goal was to reach Contract #3 ($1,250) early and consistently to maximize revenue. Our
lead time needed to be less than 0.5 days (and could be as high as 0.6 days in order to receive
the same or more than the $1,000 maximum of the next highest contract). Using M/M/s
calculations, we determined that a 4/2/2 model for machines at Stations 1/2/3 would be the
optimal over the long run. (Appendix 1)
 The optimal reorder point is 60, and reorder quantity is 380, according to (r,Q) model. (For
contract #3).

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B. Stage 1: Purchasing a Second Machine at Station 3
With our average lead time above 2.0 days from Day 43 to Day 46, we did not to move to Contract
#2 ($1,000) right away. In order to quickly obtain sufficient cash to purchase a second machine at
Station 3 we reduced the reorder point to 55 batches (3,300 kits), which was larger than the average
demand over a four day period (49 batches) but still risked running out of stock. We also reduced
that reorder quantity to 3,900 kits. We purchased a new machine at Station 3 as soon as we had
sufficient capital ($100,000 machine cost + $40,000 inventory reorder cost = $140,000). This
approach was successful and we purchased the second machine for Station 3 by Day 57. The queue
at Station 3 was largely cleared by Day 59 and that allowed us to move to Contract #2. Though we
did not receive the full $1000 revenue per job in Contract #2 on average, we were already obtaining
more than the maximum $750/job of Contract #1.

C. Stage 2: Purchasing a Fourth Machine at Station 1

To start this stage, we changed the reorder quantity to the maximum amount we could afford at
the time (7,200 kits). After that inventory purchase, we then changed the reorder quantity back to
3,900 kits, with the intention to purchase a fourth machine at Station 1 as soon as our cash position
would allow it (90,000 machine cost + $40,000 reorder cost = $130,000). However, at this stage
we made an error that cost us a significant amount of potential revenue and delayed our machine
purchase. Since our average revenue per job was not reaching its full $1,000, we experimented
with changing the batch size to 30x2 instead of 60x1 on Day 61. Though this did increase average
daily revenue to nearly $1,000 early on, a sudden spike in demand by Day 64 led to a significantly
large queue at Station 1 due to the extra setup time. This happened after midnight in real time, and
we only discovered our mistake in the following morning. We immediately shifted our focus to
recovery, and changed the batch size back to 60x1 and moved back to Contract #1. After those
remedies, it took three simulated days to clear the queue, and from Day 67 to Day 70, we obtained
little revenue. It was another four days before the lead time decreased to under 1.0 days and we
could move back to Contract #2. All in all, the mistake led to $50,750.75 in lost revenue. By Day
77, the queue at Station 1 was around zero and the lead time was below 0.5 days, so we switched
to Contract #3 to maximize revenue. At Day 86, we had the capital to purchase the fourth machine
at Station 1 and thus continued onward with our strategy.

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D. Stage 3: Purchasing the Fifth Machine at Station 1
During this stage, it appeared that four machines might be enough for Station 1 and we again
changed the batch size to 30x2 on Day 91. This proved to be a wise decision, since the average
revenue per job increased from approximately $1,150/job to the maximum $1,250/job after the
change. We also increased the reorder point to 60 batches (3,600 kits), and the reorder quantity to
150 batches (9,000 kits), since we had developed a large enough cash position to do so.

From Days 99 to 101, another spike in the demand caused our average revenue/job to drop steadily
from $1,250 to $990 to $629/job as the queue at Station 1 increased and ρ again reached 100%.
We switched back to Contract #2 for two days to wait for the queue to clear again when demand
stabilized. The team debated whether to buy a fifth machine at Station 1 to avoid this scenario in
the future but ultimately decided to wait longer. We then steadily increased our reorder quantities
as our cash position increased. Our reorder quantity reached 15,000 kits (250 batches) on Day 120.
From Day 123 to Day 127, another period of high demand caused our average revenue/job to drop
to approximately $800/job so the team agreed to purchase the fifth machine at Station 1 on Day
129. We lost approximately $3,475/day during this period. In our purchase of the fifth machine,
the team reasoned that since we cannot control what happen during the final 100 days, we could
potentially lose more than $90,000 if there are 3-4 periods of high demand. The purchase stabilized
our revenue at around the maximum $1,250 level for the remainder of the simulation. During the
following days, we increased our reorder quantity until it reached 370 batches (22,000 kits) on
Day 149. From that point onward, changes would not be needed until the final inventory purchase.

E. Stage 4 – A Bold Idea to Reduce Effective Inventory Cost through the Loan
With a projected $500,000 cash position around Day 150 when the loan would become available,
the team explored whether the loan could be used to reduce the effective cost of inventory until
Day 218 when control of the final 100 days of the simulation would be lost. The team structured a
20% interest-only $396,000 loan to make a large inventory purchase that would be retired just
before factory control was lost. In addition to the standard $1,000 fixed inventory order cost, this
gambit would require an upfront payment of $19,800 (5% of the loan amount) on Day 158 and a
daily payment interest-only debt service of $217 for 50 days, after which time the original
$396,000 loan would be paid off. This approach did not work because the compounding 10%

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interest on our large daily cash position (compared to what we would have if we’d spent our own
money upfront on inventory) plus projected daily revenues would not exceed the cash debits
associated within the loan over the 50 day loan period. Using the loan would result in a ~ $25,000
lower cash position by Day 207 and thus the team did not pursue the tactic (Appendix 2). The
approach, even if it had mathematically worked to reduce inventory cost, it would have required
extensive work and attention to pay the loan interest each simulated day and was thus not
particularly desirable.

F. Stage 5 – Implementing a Newsvendor Inventory Management Strategy to Finish

Since we would lose control for the final 100 simulated days, there was a risk we would make one
large purchase near the last controlled day and waste unused inventories. In order to prevent this,
the team decided to make a large inventory purchase prior to Day 218 that would last long enough
to complete the simulation without reordering. The team considered the interest that would be paid
on our cash position but decided it was less important than saving money on multiple $1,000 fixed
ordering costs and the risk and cost of a needlessly large unused inventory at the end. Based on
the average demand and our inventory on-hand, the team forecasted that a final inventory reorder
could be made at Day 216. At that point, the average order of the last 215 days were 11.75
orders/day. From this we applied an extra three-day buffer and determined we would need to
purchase kits for 1,210 batches (103 days*11.75 jobs/day). We already had 60 batches of inventory
on hand, so we could have considered a reorder quantity of 1,150 batches. However, because we
observed demand spikes earlier in the simulation we decided to use 1,210 as the reorder quantity,
to have a buffer in case the demand spikes. We then changed the reorder point to 0 to prevent any
new reorder. In the end, this strategy paid off even though the team finished with 62 batches in
leftover inventory (which equates to $37,200 lost in unused inventory). The final cash position
was $1,658,538. We did not have any days in which we lacked the inventory to produce revenue.
Nevertheless, if we went with the 1,150 reorder quantity, we would have finished with a higher
cash position, though it may not have been high enough to overtake the winning team.

“On my honor, I have neither given nor received unauthorized aid in completing this academic work.”

Brent Carcamo Eric Olson

Kristen Mezzapelle Tom Weishan
Felix Nguyen

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Appendix 1.1. Service Rate of each Station
Lead time is approximated by M/M/c model for each separate station. Total lead time = Station 1
+ 2*Station 2 + Station 3.
Station 1 Station 2 Station 3
Avg Arrival Rate 12.22 24.44 12.22
Machine 3 1 1
Avg Utilization 0.896 0.4794 0.9044
Service Rate 4.55 25.49 13.51
Lead time 0.55 0.03 0.47
Total Lead Time (forecast) - day 1.12
Average Total Lead time (real) -day 1.3

Appendix 1.2. Optimal Model for Contract 3

Station 1 Station 2 Station 3
Avg Arrival Rate 12.22 24.44 12.22
Machine 4 2 2
Avg Utilization 0.896 0.4794 0.9044
Service Rate 4.55 25.49 13.51
Lead time 0.55 0.05 0.47
Total Lead Time (forecast) - day 0.44