Rendezvous

Team
Littlefield Simulation
Paula Cern
Luis Montero
INCAE 2014

Alexandra Rogozinski
Luis Rosales

MAIN STRATEGY
Our strategy focused on increasing production flexibility to handle variable demand. We sought to achieve this by lowering machine utilization,
increasing capacity to meet demand, adjust inventory levels to avoid stock-outs, and lower ordering costs by reducing ordering frequency and
requesting high quantities of inventory per order.

FORECAST DEMAND
We used the data from the first 50 days of Littlefields operation to
create a demand forecast for the next 220 days using a statistical
analysis tool (Annex A). The results of this forecast predicted demand
would increase for the next 220 days. This analysis allowed us to
establish an initial strategy to increase capacity to meet the
escalating demand. The results also indicated a high variability in
daily demand orders, for they could range from 0 and 8 orders per
day initially, with a standard deviation of 1.89, and an inclination to
grow over time (Annex A). This high variability would become one of

the most critical considerations when deciding how to adjust

production capacity and inventory policies.
We had difficulty forecasting the plateau demand after day 120,
which could have substantially improved our capacity assignment to
the different stations of our production. As we didnt anticipate this
demand slow-down, our growth-focused strategy wasnt adjusted as
fast as other teams, and thus, we lost the potential to readjust our
capacity and inventory policies.

BOTTLENECK IDENTIFICATION & CAPACITY ASSESSMENT

From Day 0 to Day 50, we identified board stuffing (Station 1) as the
bottleneck of the whole process because it had the lowest capacity
of all tasks in the process. Station 1 had a capacity of 5 orders per
day, we got this number using the utilization of the first day (44%)
and the orders received (2). This capacity defined the throughput of
the entire process, so we focused on increasing the capacity of
Station 1 to improve the throughput of our entire production.

As a team strategy, we selected a machine utilization target of 60%

level to ensure every station was flexible enough to respond to peaks
in demand and demand variability. In the first phase of the
simulation, Station 1s average utilization was reaching dangerous
levels and had an average of 61% and 31% daily order request
variability. This lead Station 1 to exceed 100% of utilization (Annex
xxx), posing a red flag with regards to this stations ability to keep up

with the piling WIP that would begin to accumulate as demand

increased. This capacity setback could lead to our inability to meet
order large orders requested and miss contract deadlines as demand
grew over time. Fortunately, our analysis did not identify a utilization

problem for Stations 2 and 3 in the first days of the simulation, for
they had smaller utilizations, 22% and 23% respectively, and
experienced lower utilization variability, 11% and 17% respectively.

EQUIPMENT AQUISITION
Given these considerations, we determined our first action step was to increase Station 1s capacity and lower its utilization by purchasing an
additional machine on Day 52 (Annex D Machine purchases). We didnt have enough cash on-hand to purchase this machine at the time, so we
financed this purchase with debt. The cost of the debt was inferior to the cost of underage/stock outs (Annex tal). We were imprecise in
calculating the quantity of debt needed for this purchase, so we had to request four separate bank loans on the same day, increasing our
transaction cost for debt financing. However, we expected this new equipments capacity yield would enable us to meet order demands for the
next 30 days. In order to reduce interest payments, we continuously paid off debt as we generated profits. We did not purchase machines for
stations 2 and 3 in the first days, as we already observed they were underutilized, and such a purchase wouldnt add value to the process at that
moment in time.
From day 50 to 81, Station 1 (the bottleneck) reached an average utilization 0f 77% (Annex F). This is because the number orders requested per
day was increasing (as predicted by the forecast) but the addition of the second machine allowed this station to keep utilization from going too
high. Nevertheless, we still needed to lower utilization to fulfill the anticipated growth and variation of order quantity requests to make sure we
capitalized on all order request opportunity. Therefore, we borrowed more money from the bank and acquired a second machine on day 81. The
added value to this station as it improved lead-times, and we were able to meet more orders on a timely fashion. We felt certain that, with this
new capacity, we would meet order requests with contract 2, which would generate higher revenues to compensate for the higher debt levels.
The decision to purchase every additional machine occurred as we adjusted our strategy in a reactive fashion to changes in demand. When a
station reached a 60% or higher utilization, we would add an additional machine with the goal to balance the process flow, control utilization, and
ensure we met order deadlines (Annex X).
DEBT MANAGEMENT
Plis dale un vistazo y decime s te parece esto:

We were too reliant of debt to purchase machines, and miscalculated the purchase of the last two machines, for the timing was off. We should
not have placed any machine purchases on the days we were going to pay for large inventory orders, for the machines caused us to have no cash
on hand to invest in a large inventory order, and this placed us at huge risk of not having inventory to continue manufacturing satellite receivers
just when we had added new machines to improve throughput time. This was a tragic mistake we did on day 173.
INVENTORY MANAGEMENT
During the first 50 days, the inventory reorder point was set at 1,380 units, and 8,589 units were requested per order (Annex X). In order to
optimize our inventory levels, we calculated the optimal reorder point (EOQ) on day 52, and established the following inventory policy:
ANNEX X - CONVERTI ESTO EN UN ANEXO

EOQ
Holding Costs
Average Demand
Ordering Costs
Q(kits)

ROP Service level 81%

$ 0.06 Z (90%)
$ 0.90
$ 180.00 Average Lead Time
$ 0.53
$ 1,000.00 Std. Dev. Demand
$ 113.00
Average Demand
$ 180.00
$ 2,309.00 ROP (kits)
$ 170.00

We recognize we made a mistake with the EOP formula and misinterpreted ROP by multiplying the end result by 60 kits. This made us readjust the
reorder point on day 52 to 2,390 kits instead of using the measure for ROP, which would have been 170 kits. We should not have changed the
quantity order request. This made us lose our competitive edge against the other teams because we were placing huger orders that led our
holding costs to shrink our profit. Ordering such large quantities also made us pay huge sums of money for each order, and this forced us to
borrow debt consistently from the bank, which made our interest increase.
In order to improve our performance ranking relative to the other teams, we readjusted our ROP and EOQ. On day 126, we reduced the reorder
quantity to 7,800, which was still considerably high since we later realized the ideal would have been around 2,300 units. On day 146, we
increased the ROP level because we thought the low economic profit was caused by scarcity of inventory. We now know ROP should have been
adjusted to 170 units. On day 214, we discovered part of our inventory problem was xxx, so we decided to take corrective measures with the goal
to reduce holding costs and finish day 270 with the least amount of inventory possible. To calculate the optimal inventory level prior to the days
we would lose control from day 220 to 270 (Annex X), we selected an EOQ of 3,960 and a ROP of 2,400. These decisions yielded positive results,

for we only had 1,690 units left at the end of the simulation, which was far less that the average inventory levels of 3,650 kits (Annex X). Duda:
Average inventory levels of all the teams, or of our inventory levels during the simulation??

OVERALL ANALYSIS
Our team conducted an exhaustive analysis of the preliminary data from day 0 to 50 of the simulation. We extensively discussed the different
aspects of forecasting and understanding the behavior of demand, we clearly identified our bottleneck, and made our process line more flexible
and balanced by improving machine capacity, adjusting inventory levels, and paying off financial debt in advance whenever it was possible. These
decisions allowed to to be one of the top-performing teams during the first phase of the simulation.
We made a few incorrect decisions along the way that cost us dearly and could have been prevented if we had conducted more thorough analysis.
Excessive debt and poor administration of debt requests cost us dearly, weak contract selectrion criteria didnt allow us always select the best
contrant as specific moments of the simulation, and though some periods allowed us to meet short deadlines of a day or less, and during these
times, we should have utilized contract 3 to increase our profits.
Esta parte no la entend mucho scheduling de production? Lead time? En base a los contracts?
Scheduling policy changes didnt improve lead times significantly, and though we tried to adjust scheduling between day 192 to 208, metrics were
barely affected. The main problem we identified was the inappropriate inventory management. If we could redo this simulation, we would have :

Utilized the ROP and EOQ estimates mentioned above, for we now see we were managing excessively high inventory levels that
considerably reduced our profits
Fine tune our forecast for demand with the goal of predicting the behavior of demand when different demand trends occurred at
different time periods of the simulation, and to adjust capacity and inventory management to these different trends with greater
anticipation.
Calculate the optimal debt level to minimize excessive bank loans and minimize financing transaction costs.
To alternate and select different order contracts based on our capacity constraints: we could have capitalized more on our capacity
improvements that allowed for shorter lead times to be met, and so, fulfill more prompt order requests to maximize our earnings per
order, and also to select contracts with longer lead times when our capacity is limited, and our probability of not meeting contract
conditions was low.
Mantenes niveles bajos de inventario con el fin de reducir los holding costs y mantener compras pequeas que no requirieran tanta
inversin y que pudieran poner en riesgo la liquidez de la empresa.

Maintain inventory levels lower to reduce holding costs of excess inventory, make order request quantities smaller so as to dilute and
spread our inventory purchases, which would improve liquidity in the company, and thus, depend less on debt.
Purchase machines far from reorder points in order to avoid high expense periods that may require us to request additional loans from
the bank in order to ensure we can always purchase our large inventory quantity orders.

Annexes

Demand Statistical Values

Mean
3
Max
8
Min
0
Standard Deviation 1.895

Utilization Statistical Values

St1
St1
St3
Mean
0.613 0.225 0.231
Max
1 0.42 0.69
Min
0
0
0
Standard Dev. 0.318 0.114 0.169

Annex XXX
Utilization of the Station 1 from day 50 to day 81

Day
52
81
145
173
173

Machine Purchases
Parameter
Value
Station 1 machine count
2
Station 1 machine count
3
Station 1 machine count
4
Station 2 machine count
2
Station 3 machine count
2

Day
52
52
52
52
64
77
78
78
80
80
81
81
81
81
81
81
81
173
173

Debt Management
Parameter
Increase Debt
Increase Debt
Increase Debt
Increase Debt
Decrease Debt
Decrease Debt
Decrease Debt
Decrease Debt
Decrease Debt
Decrease Debt
Increase Debt
Increase Debt
Increase Debt
Increase Debt
Increase Debt
Increase Debt
Increase Debt
Increase Debt
Increase Debt

Value
70,000
90,000
110,000
130,000
127,000
117,000
107,000
87,000
67,000
37,000
117,000
117,010
127,000
137,000
147,000
167,000
177,000
234,000
239,000