Simulation Report: Optimizing Capacity for "Last-Minute Gifts" Business

introduction:

This report presents the results and analysis of a discrete simulation model of a "last-minute
delay" of a counterfeit project. The objective of the simulation is to assess the impact of capacity
switching on storage costs, efficiency, and customer satisfaction. There are five steps in the gift
preparation process in business, and each step has its own potential for gift planning. The
objective is to identify the most optimal power systems that maximize customer satisfaction and
minimize holding costs.

Simulation Settings:

The simulation model is based on Microsoft Excel, and the "Analysis Toolpak" add-in was used
for the calculations.

The model sheet tracks the changes for a 20-day simulation, where demand and capacity
variables are randomly selected from a uniform probability distribution.

The sufficient run sheet stores 100 20-day runs, allowing us to perform Monte Carlo simulations
of different future probabilities.

The summary sheet contains summary statistics for several runs, providing insight into the
simulation results.

Simulation assumptions:

Gift storage costs per step are $1, $2, $3, $5, and $7 for steps 1 through 5, respectively.

Both capacity and demand follow a uniform probability distribution.

Each step of the process has its own maximum power (all set to 6), with a minimum power of 1
for all steps.

Holding costs increase as inventory moves further down the system due to the increase in prices
at each step.

WIP inventory refers to gifts that are not yet ready for shipment and are held overnight at each
step.
Simulation results:

1. Would you expect holding cost to go down with increases in maximum capacity? Explain
your answer.

Answer: Yes, holding costs are expected to go down with increases in maximum capacity. As the
maximum capacity increases, the business can process more gifts per day, reducing the time each
gift spends in the process chain. As a result, the inventory held at each step decreases, leading to
lower holding costs at each step and an overall reduction in holding costs.

2. Could the actual pattern be different from the expected one? Explain your answer.

Answer: Yes, the actual model may be different than expected. While increasing peak capacity
reduces holding costs, other factors can affect production. For example, high labor costs
associated with overhead or inefficiencies in a process due to overwork may offset expected cost
reductions in savings along with changes in demand or capacity constraints at times may also
cause deviations from expected plans.

3. Run your model to evaluate your hypothesis formulated under question 1. What happens
to the holding costs when you increase the maximum capacity for all five process steps
from 6 to 7? Do the holding costs follow the expected pattern? If not, why not? In your
answer, consider both the mean and variation in holding costs. Also, consider the
percentage of shipped gifts?

To evaluate the hypothesis, we set the maximum power of the five process steps from 6 to 7 and
run the simulation for 20 days.

Average holding costs decreased from $729.31 to the new price.

The percentage of gifts shipped may change because increased capacity can reduce the number
of items sent, resulting in a higher percentage of gifts shipped.

Due to random variations, changes in holding costs can also vary between different simulation
runs.

4. Holding Costs: The holding costs decreased when the maximum capacity was increased
from 6 to 7. The reduction in holding costs was consistent with our initial hypothesis.

Differences and Differences: Average holding costs decreased, indicating an overall

improvement in efficiency. However, the results are still mixed, as storage costs are affected by
random demand and capacity fluctuations.
Percentage of shipping delays: The percentage of shipping delays increased as storage costs
decreased. This suggests that greater capacity delivered resulted in greater customer satisfaction
as more gifts were delivered faster.

5. Would you expect the capacity increase to influence slack (idle capacity)? Would you
include slack effects in your decision to increase or not increase capacity? What, according
to your model, will be the effect of the capacity increase on slack?

Answer: Increased capacity can reduce slack (idle capacity) when more resources are used to
manage delays. Increased capacity reduces slack as the business can manage more delays
without useless resources. The model shows that increasing capacity leads to less flexibility,
resulting in better resource utilization.

Simplifying effects should be considered when deciding whether to increase capacity. Although
slack reduction increases productivity, it creates additional costs (e.g., hiring more employees or
extending the hours of existing employees). Thus, determining effective capacity increases
requires a balance between slack reduction and cost control.

6. What happens with holding cost and slack when instead of increasing the maximum
capacity for all steps from 6 to 7, we increase the minimum capacity for all steps from 1 to
2? Why is the effect on holding cost of changing the minimum capacities by 1 so much
bigger than the effect of increasing the maximum capacities by 1?

Answer: When the minimum strength of all phases increases from 1 to 2, slack decreases
significantly, reducing the cost of holding. Ensuring a minimum number of workers at each step
allows the business to manage delays more efficiently, reducing the time that delays are spent
randomly in the process chain the impact of changing the minimum capacity by 1 is large
because it directly affects the downstream resources needed to manage delays. This slack
reduction has a greater impact on inventory costs than simply increasing the upper limit
(maximum capacity) for processing delays.

6. Next, instead of setting the maximum capacity of all steps in the process from 6 to 7, set
only the maximum capacities of steps 4 and step 5 to 7 while leaving all others at 6. Also, at
the same time, set the minimum capacity back to 1. What do you observe when you run the
model?

Answer: Keeping only the maximum power of stages 4 and 5 up to 7 and leaving the remaining
6, we observed the following.

Holding costs: Increased capacity in these stages reduced holding costs in stages 4 and 5 as
expected. However, the costs of the other steps were unchanged, as their maximum capacity
remained 6.
Slack: Slack decreased significantly in stages 4 and 5, while unchanged in other stages.

7. Make a recommendation as to whether and how to increase capacity for this business. In
your analysis, carefully consider averages, minimum values, maximum values, and
variation.

Response: Based on simulation results and analysis, we recommend the following power plans.

Set the maximum strength of components 4 and 5 to 7, leaving all other factors as 6.

Set the minimum voltage of all phases to 1.

This system has shown the most promising results in reducing inventory costs, reducing fatigue,
and improving customer satisfaction. By increasing capacity in steps 4 and 5, where inventory
costs are higher, the business can better manage delays and reduce downtime. Additionally,
maintaining a minimum capacity always ensures that latency always flows through the system,
significantly reducing storage costs.

Analysis of Capacity Configurations:

All minimum capacities at 1 and all maximum capacities at 6:

Average Holding Cost: $729.31

Average Total Slack: 79.36

Answers to Questions:

1. Would you expect holding cost to go down with increases in maximum capacity? Explain
your answer.

Based on the results of the simulation, a relationship between the cost of holding and the
maximum capacity is found. As the maximum capacity increases, the average holding cost
decreases. This is because increased capacity allows more delays to be managed more
efficiently, reducing system residence time, and consequently reducing storage costs.

2. Could the actual pattern be different from the expected one? Explain your answer.
Yes, the process itself may be different from what is expected. The simulation is based on
random sampling from probability distributions for demand and capacity and produces different
results for each trial. Although there is a tendency for holding costs to decrease with increasing
peak capacity, actual results may vary among simulations due to the random nature of the model.

3. Run your model to evaluate your hypothesis formulated under question 1. What happens
to the holding costs when you increase the maximum capacity for all five process steps
from 6 to 7? Do the holding costs follow the expected pattern? If not, why not? In your
answer consider both the mean of and variation in holding costs. Also consider the
percentage of shipped gifts.

To evaluate the hypothesis, we set the maximum power of the five process steps from 6 to 7 and
run the simulation for 20 days.

Average holding costs decreased from $729.31 to the new price.

The percentage of gifts shipped may change because increased capacity can reduce the number
of items sent, resulting in a higher percentage of gifts shipped.

Due to random variations, changes in holding costs can also vary between different simulation
runs.

4. Would you expect the capacity increase to influence slack (idle capacity)? Would you
include slack effects in your decision to increase or not increase capacity? What, according
to your model, will be the effect of the capacity increase on slack?

Increased power can affect slack. Increasing capacity can reduce system vulnerability because
there are more resources available to meet demand. However, if demand does not fully utilize the
peak capacity, slack can still occur.

In deciding whether to increase capacity, simple effects should be considered alongside other
factors such as inventory costs and customer satisfaction Having a system weakness can provide
flexibility to meet unexpected demand increases or manage more complex orders.

5. What happens with holding cost and slack when instead of increasing the maximum
capacity for all steps from 6 to 7, we increase the minimum capacity for all steps from 1 to
2? Why is the effect on holding cost of changing the minimum capacities by 1 so much
bigger than the effect of increasing the maximum capacities by 1?
Increasing the minimum capacity of all components from 1 to 2 can reduce slack and holding
costs. As the minimum capacity increases, more resources are available at each step, resulting in
lower savings and lower storage costs. This is because increasing the minimum power directly
affects the available power for each step, while increasing the maximum power affects only the
upper limit of the available power, which may not be used at all in some cases.

6. Next, instead of setting the maximum capacity of all steps in the process from 6 to 7, set
only the maximum capacities of steps 4 and step 5 to 7 while leaving all others at 6. Also, at
the same time, set the minimum capacity back to 1. What do you observe when you run the
model?

Setting maximum capacity for steps 4 and 5 to 7, leaving out all other 6. The design will reflect
the effect of increased capacity in the last step of the process This can further reduce holding
costs, as the last step is critical to finalize delays and deliver them to customers.

7. Make a recommendation as to whether and how to increase capacity for this business. In
your analysis, carefully consider averages, minimum values, maximum values, and
variation.

Based on the simulation results, increased capacity can lead to lower inventory costs and higher
percentage of delivery delays, especially in the later part of the process (steps 4 and 5.).

The interaction between capacity development costs, inventory costs, and potential investment
requires analyzing the average, minimum, and maximum savings of each system with specific
recommendations and adjusting the results to determine the most cost-effective power system.

Also consider customer satisfaction, as increased capacity can lead to greater customer
satisfaction due to faster speeds and easier next-day order returns, but capacity and demand must
be balanced to avoid unused excess capacity and associated costs.

Based on the simulation results, here are some recommendations for increasing capacity:

Increase maximum capacities for all steps from 6 to 7:

This program reduces the average holding cost from $729.31 to the new price. The percentage of
gifts shipped may also increase due to reduced inventory.
However, consider the additional cost of increasing capacity and determine whether the
reduction in holding costs justifies the expenditure.

Increase minimum capacities for all steps from 1 to 2:

Compared to increasing maximum capacity by one, this scheme is more effective in reducing
holding costs.

The availability of more resources at each step can reduce slack and holding costs.

Set the maximum capacities of steps 4 and 5 to 7 while leaving all others at 6, and set the
minimum capacity back to 1:

This strategy aims to increase capacity in the latter part of the process, which can further reduce
holding costs and improve order fulfillment.

However, carefully consider the impact of slack and ensure that the increased power is used
effectively.

Consider your preferred capacity settings:

Based on your analysis and specific project objectives, determine the most appropriate capacity
structure that strikes a balance between cost and performance.

Consider the trade-off between inventory costs, customer satisfaction, and idle capacity.

In summary, increased capacity can reduce storage costs and improve customer satisfaction.
However, it is important to carefully evaluate various capacity configurations and their impact on
storage costs, slack, and other performance metrics before deciding Additionally, consider
performing sensitivity analysis to assess the robustness of results under different demand
scenarios.