Operations Management 40801-88 (XP) Spring 2009 Littlefield Date Submitted: Friday, 28 May 2009 Group 8

Andrew Baker Thurston Cromwell Yilmaz Halac Jim Hayes Allen Melemed Michelle Shwery

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We pledge our honor that we have not violated the Honor Code in completing this assignment

Executive Summary
Group 8 was able to take a moderately successful entity and turn it on its head in less than 9 working days. Our pre-work led us to erroneous conclusions and those contributed to the near collapse of the company. Through a series of decisions and actions, we ended up running with little to no revenue from 100 through 165 days. The good news is that we realized our issues and using leverage starting on day 150; we were able to purchase the assets we needed to maximize capacity and purchase the raw material to support the stranded orders and prime our inventory in order to start generating revenue This experience taught many things, first, use the data, second, employ patience, and third use the data.

Actions -- Day 50-100

The groups early decisions resulted in resulted in massively expanding inventory, loss of revenue due to poor contract execution, and diminishing cash reserves. Our group manually ran a one day simulations using the supplied trial data and calculated the capacity of the different machines and processes prior to assuming control of the company. While the initial data suggested that the optimal lot size was 60, our simulation suggested 12 Unit Lot sizes Lot Process Times (hours) that the competition for resources at Station 2 Run Number Step 1 (Stuffer) Step 2 (Tester) Step 3 (Tuner) Step 4 (Tester) Mean 2.42 0.28 0.46 0.24 might be a problem and the variance of the STDDev 0.00 0.00 0.40 0.00 # Units 3.00 0.50 1.00 0.50 Unit Capacity 4.96 42.35 26.07 50.00 Tuner was an unknown factor that might Hourly Capacity 14.88 21.18 26.07 25.00 Daily Capacity 357.02 508.24 625.60 600.00 impede throughout. Considering these Low #REF! High unknowns, we opted for a lot size 20. In 20 Unit Lot sizes reality, the contention at the Testing Station Mean 3.10 0.47 0.46 0.40 STDDev 0.00 0.00 0.51 0.00 and the Tuner variance proved to not be an # Units 3.00 0.50 1.00 0.50 Unit Capacity 6.45 42.35 43.49 50.00 issue. The result was that our inventory queue Hourly Capacity 19.35 21.18 43.49 25.00 Daily Capacity 464.52 508 1,044 600 at Station One began to grow and we failed to Low 495 High 39,068 recognize the severity of this problem and 30 Unit Lot sizes address it to minimize the impact. Mean 3.95 0.71 0.91 0.60 Early, we recognized the impact of raw material stock outs on the cash flow and planned to address that through better inventory reorder 60 Unit Lot sizes 6.50 1.42 2.35 and reorder quantities. Our analysis confirmed Mean STDDev 0.00 0.00 2.27 # Units 3.00 0.50 1.00 that the holding cost was very low and cash Unit Capacity 9.23 42.35 25.54 Hourly Capacity 27.69 21.18 25.54 permitting it made sense to issue large orders, Daily Capacity 664.62 508.24 612.91 Low 312 provided cash was not needed for equipment, High 18,331 and set a re-order point that would ensure no stock outs. However we determined that equipment investment was of critical importance and we opted to keep Re Orders to 5K-7.2K level with a re-order point at 2.8K.
Figure 1 - Capacity Planning
STDDev # Units Unit Capacity Hourly Capacity Daily Capacity Low High 0.00 3.00 7.59 22.78 546.84 0.00 0.50 42.35 21.18 508.24 0.62 1.00 33.09 33.09 794.20 471 2,621 0.00 0.50 50.00 25.00 600.00

1.20 0.00 0.50 50.00 25.00 600.00

The group also wanted to address bottlenecks. Initial data from days 50 through 57 identified two bottlenecks, the Stuffer and Tuner. There was consistent inventory build up and the optimization at these stations was 100%. We immediately targeted the Tester however, if we had waited another cycle or two, we would have discovered that most important bottleneck was the Stuffer. (See Figure Two, Day 55-57)
Day of Operation 55 56 57 58 59 60 61 62 Station 1 - Station 2 - Station 3 Utilization Utilization Utilization 100% 100% 48% 100% 100% 81% 100% 100% 42% 100% 100% 41% 100% 87% 64% 100% 87% 39% 100% 43% 47% 100% 43% 65%

Station 1 372 439 647 687 579 761 772 773

Station 2 365 256 196 110 33 27 5 4

Station 3 4 65 2 1 18 17 10 15

Figure 2 - Operational Data - day 55 through 62

While we initially adjusted the contract type early, at day 50, in an attempt to capture more profit we vacillated between Contract 1 and 2 in an attempt to capture increased revenue but building backlog at Day Parameter New Value station 1 cancelled this and at one point we ran for 15 50 Lots per order 3 simulated days with declining revenue and corrected 50 Contract number 2 this on day 72 as captured in Figure 3. 50 Reorder point (kits) 96000 We recognized early that it was optimal to prioritize the Testing process to station 4 as a means of driving revenue and increasing our throughput. (See Figure 3, Day 52) Overall, our first 10 days could be characterized as learning experience/near disaster, but helped us build the discipline to look to our data when making key decisions and act with confidence.
50 Reorder point (kits) 50 Reorder quantity (kits) 51 station 2 scheduling rule 52 Contract number 52 station 2 scheduling rule 54 Contract number 59 station 2 machine count 72 Contract number 82 Reorder quantity (kits) 1800 3600 pri4 1 pri4 2 2 1 2400000

Figure 3 - Decision Table

Actions Day 101-200

Due to the errors made in the first 100 days, we entered the first part of this period with building backlog at Station 1, growing number of kits awaiting material, little cash reserve to acquire kits, and little to do except wait for day 150 and the prospect of financing. As the Figure 3 documents, we had 100 orders in our backlog awaiting material on day 114, but we did not have the cash reserve to purchase the material. As a result, from day 114 through 150+; we had no prospect of generating cash to fund our inventory needs. # of Kits Orders waiting Total This pause provided us the opportunity to Day of Order Needing for Raw Reveue Per contemplate our future investments and Operation Arrival Kits Material Inventory Day $ 1,099 112 8 88 5,297 means of returning to a positive cash $ 781 113 7 97 5,799 $ 114 100 6,000 position. This would require us to go deep $ 115 100 6,000 into debt to solve our throughout issues to $ 116 100 6,000 $ 117 100 6,000 address the capacity constraints and acquire $ 118 100 6,000 $ 119 100 6,000 the a cash reserve to clear the existing $ 120 100 6,000 backlog, anticipate the build up of new $ 121 100 6,000 122 123 124 125 126 127 128Figure 100 6,000 4 72 4,334 7 78 4,688 10 87 5,206 7 94 5,652 2 100 5,996 100 Operation Says 6,000 112 1,800 $ $ $ $ $ $ $ through 128 -

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unmet demand, and return to a positive cash position considering a daily finance charge. Thus began the turn-around. Our initial focus was to increase our capacity at the largest bottlenecks, the Stuffers, and subsequently added 2 for a total of 5, increasing our potential capacity to 1211 units as detailed in Figure 4 below. We also added another Tuner to deal with the variability issues that sometimes could make the difference in revenue maximization as we explored the potential of exploiting the largest contract payout possible, less then 0.5 days lead time. The changes in assets increased our ability to handle the largest loads of potential orders to a standard deviation of Z-Score of 1.965 as illustrated by the calculation for our consideration of Contract 2.
Average daily demand (based on days of normal operation): 8.77 Standard deviation: 3.01 Annual demand: 8.77 * 365 = 3,201 Annual St. Dev: 3.01 * 365 = 1,099 Annual holding cost per batch @ 20% interest level: 60 * $10 * 20% = $120 Order cost: $1000 Q*: SQRT((2 * $1000 * 3201) / $120) = $230 Cost of Stockout assuming contract 2 minus variable and fixed cost per unit = $1000 - $660 = $340 Cost of Excess: $120(230/3201) = $8.62 SL*: 340 / (340 + 8.62) = .9753 = Z-score of 1.965 R*: 8.77*4+1.965*3.01*2 = 47

The team then had to address the backlog of unmet orders dating back to day 114. We had to work through the 100 lots, 6K units, in Jobs Completed daily average revenue per job Contract 1 Day of backlog awaiting material. We needed Lead Contract Contract Contract 1 Contract 2 Contract 3 Contract 1 Contract 2 Contract 3 Operation Times 2 3 176 6.55 12 0 0 $ 750.00 $ $ to clear these orders a complete loss as 177 6.26 12 0 0 $ 750.00 $ $ 178 6.33 12 0 0 $ 750.00 $ $ well as plan to purchase material to 179 6.04 13 0 0 $ 750.00 $ $ 180 5.77 13 0 0 $ 750.00 $ $ support new orders that would take time 181 4.91 11 0 0 $ 750.00 $ $ 182 4.44 7 0 0 $ 750.00 $ $ to clear, changing the contract to the 183 5.41 4 0 0 $ 750.00 $ $ 184 5.20 12 0 0 $ 750.00 $ $ longest lead time as part of our plan to 185 5.03 13 0 0 $ 750.00 $ $ 186 4.66 12 0 0 $ 750.00 $ $ 187 4.48 13 0 0 $ 750.00 $ $ start generating cash. In total, we 188 4.64 12 0 0 $ 750.00 $ $ 189 4.45 12 0 0 $ 750.00 $ $ obtained 430K in loans with a daily 190 3.85 12 0 0 $ 750.00 $ $ 191 2.83 13 0 0 $ 750.00 $ $ charge of better than $300. We turned 192 2.00 15 0 0 $ 750.00 $ $ 193 1.30 13 0 0 $ 750.00 $ $ the corner on day 176, as we hit our first 194 0.88 18 0 0 $ 750.00 $ $ full realization of revenue for a 12 lots. Figure 5 - Operational data, Days 176 through 194 We were losing money due to the COGS and finance charge; we were now stable and could plan to increase our contract price. On day 197, with the confidence to hit a 1-2 day lead time, we adjusted our contract to capture our first profit, adjusting the contract to the 1-5 days lead time. The management team also shifted to the lot size of 60 to ensure we had support the maximum throughout of the stations as well as minimizing the variable nature of the Tuners. This option left us with the ability to support up to 16.9 lots per day per day and give us considerable cushion to support the daily mean order rate of 8.77 and the standard deviation of 3.01 orders. We were as optimized as we needed to be.

60 Unit Lot sizes

Mean STDDev # Units Unit Capacity Hourly Capacity Daily Capacity 6.50 0.00 5.00 9.23 46.15 1107.69 1.42 0.00 1.00 42.35 42.35 1016.47 2.35 2.27 2.00 25.54 51.08 1225.83 1.20 0.00 1.00 50.00 50.00 1200.00

Figure 6 - Capacity Calculations with Optimal Configuration

Actions 201-265
As we entered the last 65 days of our day to day management experience, it was our goal to maximize revenue, ensure the process and equipment efficencies could be Day Parameter New Value maintained, customer satisfaction levels were supportable, pay down the 212 Contract number 3 debt, and make ourselves a cash positive entity. On day 212, we increased 215 Decrease Debt 364,000 our contract to level 3 to maximize revenues and on day 215 we started the process of decreasing our debt due to the rising free cash. The last key action, was to reaffirm our decision that 47 lots, or 2,820 units provided us the most optimal re-order point. While we increased our order size until day 265, due to the low inventory carrying cost, we opted to select the order size that would leave us with the least inventory and orders outstanding on day 365 which was an order size of 48 lots, or 2880 kits. During the last 100 days, we maximized cash, minimized inventory exposure, incurred no stock outs, and reduced our cash balance from
Day: 265 To Day: 365 Team ID: group8 Cash Balance: 403,414 Team ID: group8 Cash Balance: (113,171)

Lessons Learned
The lessons our management team took away from this exercise was to trust your data Take what you are given, supplement it when you can, and maintain it patience If you see a trend, make sure it is really a trend before you act it is OK to make mistakes We made some input errors and despite the short-term impacts, we were able to oversome them it is not OK to quit On day 150, we had $4K in cash, 100 lots of backlog, and the only way was to leverage ourselves, optimize, and actively manage the situation and you can working together overcome most obstacles. Our team took the challenge, worked incredible hours to analyze the data, and we moved from a real last position to a respectable end result.

The simulation required us to use the tools from the class, and forced us to be more analytical in making our decision to ensure we where working to the best conlusion.