Although marketing is confident of the rough shape of demand, there Is not enough marketing data to predict the actual peak demand at this point. It will depend on how fast demand starts growing after day 60. Management’s main concern is managing the capacity of the lab in response to the complex demand pattern predicted. Delays resulting from insufficient capacity would undermine L’s promised lead times and ultimately force AL turn away orders.
Based on an assignment written by Sunnis Kumar and Samuel C. Wood, Stanford university Graduate School of Business. Copyright 2009. No part of this document ay be reproduced without permission from Responsive Learning Technologies, Inc. [email protected] Net Operations at Littered Labs Littered Labs uses one kit per blood sample and disposes of the kit after the processing of the sample is completed After matching the sample to a kit, AL then processes the sample on a four step process on three machines as shown in Figure 2.
Figure 2 OUT Step 1 Sample Preparing $25,000 per machine step 2 & 4 Testing $75,000 per machine step 3 Centrifuging The purchase price of each machine is shown above as well. The retirement price of each machine is $10,000 if the machine is retired before day 360. Although management has not performed any stopwatch studies of the four different process steps, it knows there is virtually no variability in a given step’s process time from Job to Job. Earlier steps are longer than later steps, so Step 1 is longer than Step 2, which is longer than Step 3.
Step 4 is the shortest step. One raw kit costs $100. A reliable supplier delivers exactly the order quantity of batches, two weeks after the order is placed and paid for. Placing an order costs $1000 plus the cost of the kits. Management considers physical cost of holding inventory negligible compared to the opportunity cost of lost interest on money sunk n inventory. The interest is 10% per year, compounded daily. AL uses a Reorder Point / Order Quantity raw material purchase policy.
That is, raw kits are purchased as soon as the following three criteria are all met: (1) the inventory of raw kits is less than the reorder point, (2) there are no orders for raw kits currently outstanding, and (3) the lab has sufficient cash to purchase the reorder quantity. No order is placed if any of these three criteria are not met. So, for example, a team could prevent orders from being placed at all by setting the order quantity so high that there is insufficient cash to place an order.
Customers are willing to pay a premium for fast lead times, and you now have three pricing contracts to choose from. The price is per sample. Price = $200; quoted lead time = 7 days; maximum lead time = 14 days. (This is the contract that the lab starts with. ) price = $225; quoted lead time = 1 day; maximum lead time = 7 days. Managing a Short Product Life Cycle at Littered Labs 2 If an order’s lead time exceeds the quoted lead time, then the revenue for that order decreases linearly from the prices above for the quoted lead time to $0 at the maximum lead time.
A contract is assigned to an order as soon as it arrives at the lab, ND that order’s contract cannot be changed subsequently. Assignment It is now early February and AL has installed a high-powered health operations management team (you) to manage the lab’s capacity. For the next 330 simulated days you must buy or sell machines, set inventory policies, and quote lead times to maximize the lab’s overall cash position. Currently there is one preparer, one tester, and one centrifuge. You may also change the way testing is scheduled.