Littlefield Simulation Report

[pic 1]Littlefield Simulation Report: Team A

Ending Cash Balance: $1,915,226 (6th Place)
Return On Investment: 549%

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Analysis of the First 50 Days

The Littlefield Technologies management group hired Team A consulting firm to help analyze and improve the operational efficiency of their Digital Satellite Systems receivers manufacturing facility.  Upon the preliminary meeting with Littlefield management, Team A were presented with all pertinent data from the first 50 days of operations within the facility in order for the firm to analyze and develop an operational strategy to increase Littlefield’s throughput and ultimately profits.  

        With little time to waste, Team A began by analyzing demand over the first 50 days of operations in order to create a linear regression model to predict demand into the future in order to make critical operational decisions; refer to Figure 1.  In Littlefield, total operational costs are comprised of raw material costs, ordering costs and holding costs.  Raw material costs are fixed, therefore the only way to improve the facility’s financial performance without changing contracts is to reduce ordering and holding costs.  As such, the first decision to be made involved inventory management and raw material ordering.  Inventory management is critical to Littlefield’s bottom line and as such Team A decided to employ the Economic Order Quantity (EOQ) model to determine the raw material ordering quantity that minimized the cost of ordering and holding inventory.  The EOQ model was determined to be the appropriate means of calculating the optimal raw material ordering quantity as Littlefield management indicated that both demand and lead time are known and relatively constant, suppliers offer no volume discounts, the holding cost is based on a 10% interest rate, as management deemed physical holding costs negligible.  This model is shown below and the demand data provided by Littlefield management was utilized to extrapolate the annual demand and holding cost (it was discovered later into the consultation that the $10 value utilized for holding cost was incorrect, however this will be discussed later).  This resulted in an optimal ordering quantity of 7,440 kits when rounded to the nearest interval of 60.  [pic 3]

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After determining the optimal ordering quantity, Team A next set out to determine the ideal inventory level at which to reorder raw materials.  This reorder point is critical to the profitability of the factory as it represents the quantity that must satisfy demand while waiting for the arrival of additional raw materials.  As such, an incorrect reorder point could lead to a stock-out which shuts down production thereby directly decreasing overall profitability, while a high reorder point would result in unnecessary holding costs.  The reorder point is governed by the desired probability of not stocking-out prior to order arrival and The Hasbro Brother’s recommended utilizing a 95% probability level.  Given this probability, it was determined that the ideal reorder point is 3,840 kits when rounded to the nearest interval of 60.