Littlefield Technologies Simulation Assignment

You have recently taken over the responsibility of managing operations at Littlefield Tech-
nologies (LT). A critical product line under your supervision is the DSS receiver. DSS is a
key component in the main product of your largest customer, Big-Bang Devices (BD). BD
competes in a tough market and its products have short life cycles with significant day-to-
day demand fluctuations. Given high cost of carrying inventory of finished products due to
obsolescence and high cost of capital, BD operates in a just-in-time fashion and LT supplies
components to BD in a make-to-order fashion. Make-to-order production also allows LT to
carry out some customization for each order, which typically takes place in the first step of
production at the board stuffing machine1 .

The main concern facing LT’s management at the moment is to ensure timely supply of Gen
X DSS, the new generation of DSS, to BD. Gen X DSS was launched two months (50 days)
ago and is expected to sell for a year (268 days). LT has already installed new machines
that are required for producing Gen X DSS at all three stations of the production line. All
of BDS’s orders for Gen X DSS are currently being supplied at the default contract2 , but
the delivery performance has not been satisfactory; some of the orders have been delivered
after their due dates, resulting in losses due to penalties imposed by BD on late deliveries3 .
Concerns about late deliveries are high, as the average demand for Gen X DSS is expected
to rise in the future, reaching a peak at day 150. Another concern is the cost associated with
the end of the product’s life: due to vast differences in DSS from generation to generation,
all the investment made in DSS Gen X as well as any leftover inventory (components as well
as work-in-process) would be completely obsolete when the product is discontinued at the
end of the year (268 days).

Criticality of delivery time to BD also presents an opportunity for LT: on several occasions
1
See the Littlefield Technologies: Overview note in the course pack for a description of the production
process and other details
2
See the Littlefield Technologies: Overview note in the course pack for the default contract used for
supplying DSS.
3
The data from the first 50 days of operations for this product line is available from the web interface of
the factory.

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during discussions, BD’s management has indicated that it is willing to sign a lucrative fast
lead time contract with LT. Under the new contract, each order filled within 6 hours earns
LT $1500 of revenue, but BD also imposes a penalty of $250 per hour of delay beyond 6
hours of promised lead time (this penalty is prorated by fractions of an hour). Thus, this
contract also exposes LT to the risk of zero revenue on orders that take longer than 12 hours
to complete. With overall responsibility for the Gen X DSS receiver, you need to manage the
capacity required to produce Gen X DSS and also decide if you want to supply any orders
under the fast lead time contract.

Current Production Process: There is one board stuffing machine, one tester, and one
tuning machine. Jobs at the tester are scheduled First-In-First-Out (FIFO), but you can
give priority status either to the short initial tests or the long final tests. Orders for receivers
arrive in batches of 60, and currently each order travels through the factory in one lot of 60
kits. However, instead of processing an order as a single lot, you may divide each order of
60 kits into 2 lots of 30 receivers, 3 lots of 20 receivers, 4 lots of 15 receivers or 5 lots of 12
receivers if needed. Each lot travels independently through the factory, but the order is not
shipped until all the lots that make up the order are completed. The manufacturing step
on each machine consists of a complex combination of automated and manual tasks such as
loading the group of boards and setting up fixtures.

While most of the process time on any machine is proportional to the size of the lot it
is processing, factory management believes there is a component of process time that is
independent of lot size on at least one of the types of machines. The combination of tasks,
however, is sufficiently complex that the factory has not been able to tease out how much of
the process time is independent of lot size and how much is proportional to lot size at the
various steps. Concerns pertaining to labor relations also make it prohibitive to carry out
any time-and-motion study to determine exact time for jobs at each processing step.

Your Assignment: As the operations manager, you need to submit a proposal that out-
lines what lead time contract to accept and the capacity investments required at the various
stations in the Gen X DSS assembly process to achieve your objectives. Specifically, your

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proposal has to outline how many machines you will buy at the different stations. Because
these machines are expensive, you have to justify why these investments are required to
support the lead time contract you have chosen and how you are going to recover the in-
vestment.4 Keep in mind the short life cycle for the Gen X DSS receiver, which makes all
capacity investments made specifically for the Gen X DSS assembly as well as any leftover
inventory of Gen X DSS and components needed to make it, completely obsolete at the end
of the year (268 days).

Your submission should provide answers to the following questions, but need not be limited
to merely answering these questions.

1. Specify which contract you will sign, and how many machines do you expect to buy at
the different stations. Also specify the times at which you would buy these machines.

(In order to answer this question, you may want to think about what process parame-
ters you would need to estimate and how you would determine these from the available
data.)

2. Justify your investment decision in question 1, by providing an estimate of the maxi-

mum gross operating profit rate you can achieve during the peak demand days? (Gross
operating profit per day includes only cost of components. It does not include cost of
ordering and carrying inventory, and cost of machines.)

3. What is your estimate for the expected or average gross operating profit rate during
peak demand days? Clearly outline the key factor(s) that reduces your gross operating
profit rate potential and how you plan to manage them.

4
See the Littlefield Technologies: Overview note in your coursepack for details on costs of various
machines.