CASE 4 Lamson Corporation In this game you will have the chance to try your skill at inventory and operations planning using the information similar in type to that available to Mr. Marino, the operations manager of Lamson Corporation, 2 large multi-plant manufacturer of sewer pipes. Every two weeks in the summer sales period, Mr. Marino had to decide how many tiles of each type and size should he produced during the coming two weeks, In doing this planning, he took into account sales trends, the time of the yeor, the capacity of Lamson’s tile making machinery, the stock of the various sing tiles on hand, the cost of overtime production and the cost of missed deliveries. In this game you will be able to make similar decisions, although the game vall he a simplified version of the actual situation. The most important feature of this simplification is that you will be dealing with only two sizes of sewer tile—the 18" diameter size and the 36” diameter size. Mr. Marino, in contrast, had to decide on production levels for 13 different sizes of tile and which plants would produce what mix, SALES PATTERNS Company sales, and industry sales in general, were very much influenced by general economic and seasonal factors. Since weather affected tile laying conditions and the number of construction starts, sales of sewer tiles exhibited a yearly sales trend of the following general shape (Figure 1). Sales were low for 6 months, from October 1 to April 1, and rose rapidly in the spring to a summer peak and then tapered off again, About ¥4 of all annual seles were made in the two middle months of the year, while about %4 were made in the summer sales season However, there was not necessarily 2 smooth rise and fll in sales in any particular year. The curve shown is only the average of the experiences of many years. In any given year, biweekly sales might vary 225% from levels they would assume fa smooth sales curve existed. Last year, the maximum numiber of 18” tiles sold in any two-week period between April and October vas 4,550. The similar Agure for 36" tiles was 2,000. Major ductuations in annual sales and mix levels were caused by economic conditionsFIGURE T In the game you are about to play, Period J refers to the Srst two weeks in April. Thus, company sales are just leaving the low part of the annual swing. The game culminates in Period 12, the last two weeks in September, when sales are seentering the low winter period, Between Periods 1 and 12, sales follow the general shape of the curve shown in Figure 1 ‘All sales made by Lamson are booked for delivery within the period being considered. That is, there ig no advance ordering. Mr. Marino has no idea what the sales for any coming period will be other than from judgement of the sales level of prior periods and from consideration of the general shape of the sales trend curve. PRODUCTION CONSTRAINTS - The most popular sizes of concrete tile sold by Lamson were the 18” diameter and the 36° diameter sizes. Mr. Marino had found that together, these tiles ac- counted for a large part of tile sales; in fact, roughly one half of each period's production was devoted to one or other of these sizes. The other half of each period's production was used to manufacture the other sizes of tile produced by Lamson. In order to simplify the game, it hes been assumed that Mr. Marino will continue to schedule the production of the less popular eleven tile sizes and that he will use half the production time each period for these sizes. Each participating group will be asked to schedule the number of 18" and 36" tiles to be produced during each period. Thus, each group will, in fact, schedule the production of a summer season's supply of 16” and 36” diameter tiles. There were nine possible volume combinations of 18° and 36" tiles. Four of these output values were based on the normal capacity output of the plants. The other Sve values represented the maximum output possible at Lamson, which required 50% overtime. The nine production levels possible for 18" and 36" tiles in each two-week period are shown in Exhibit 1EXHIBIT T ‘The Nine Possible Production Choices Open to Mr. Marino (each two week period) “\ Normal capacity 50% Overtime 15° Ties 36° Tiles 35° Tiles 6.000 o 3,000 ~ 0 4,000 600 7,003 600 2,000 3,200 5,000 1,200 ° 1500 3000 1,800 7,000 2,400 Please notice that trade-offs are involved in choosing a production level for a period. If the number of 18" tiles to be produced is increesed, the number of 36° tiles that can be produced wil] necessarily decrease unless overtime is used. COST INVOLVED inventory Costs tockout Costs In deciding on production alternatives, Mr. Marine bore in mind several costs which he knew were fairly accurate. For instance, storage costs of an 18" tile for ‘one period were an average of $2.00. This amount took inta account interest on tied-up capital, insurance against breakege and direct handling expense. The inventory carrying costs of each 36" tile were higher and averaged $6.00 per tile per period. Mr. Marino had found that, over the period of a season, inventory carrying charges could be reasonably calculated on the basis of inventory on hand at the end of each period. Stockout costs also ‘had to be considered by Mr. Marino, A stockout occurred whenever a sale in 2 particular period could not be filled because there were insuificient tiles of the required diameter on hand or in production during that period. For instance, if 100 tiles were on haid at the beginning of a period, 2,000 tiles were produced during the period, and sales during the period totalled 2,200, then a stockout of 106 tiles would occur. When such 2 stockout occurred, there was a chance that a future customer of Lamson would be lost. Furthermore, Lamson lost the profit potential on the missed order. Mr. Marino had assessed the risks and costs involved and thought that a stockout cost Lamson $20 for each 18” tile and $60 for each 36" tle, These figures took into account the fact that the larger the number of tiles that could not be delivered, the more apt the customer was to take future business elsewhere. Stockouts could not be made up in sub- sequent periods. If stockout occusred, the sale was lost forever io'the firm and the above costs were incurred.Overtime Costs Iovertime wus used in any period, a fixed charge of $20,000 was incurred, mainly to pay extra wages to the employees. The amount was fixed because the employees had been guaranteed a minimum amount cach period overtime was used HOW TO PLAY THE GAME RESULT FORM ams will make the production decisions In the actual conduct of this game, normally made hy Mr. Marino regarding the.18" and 36" diameter tiles, Before cach period, each team will be required to decide on the production level that will be used in the plant, This decision will be made by the team by whatever means it chooses. Thus, a prediction from a plot of past period sales might be used by some teams, a pare guess by others. In making the decision, texms should consider both the possibilities of future sales and the inventories of tiles now on hand. ‘After each team has decided on the production level it desires for the coming period, the instructor wil announce the actual sues levels for this period. Given this information, teams will then be able to caleulate inventory on hand, and inventory stockout and overtime costs. These costs will be added to a total period cost which will then be added to @ cumulative total of casts The objective of the gune is to keep the tolal costs ineurted over 12 periods to a minimum. This objective means that teams will have to decide whether it would be cheaper in the long run to incur overtime costs, inventory corrying costs, or stockovt costs. It is impossible to avoid all three, At the end of the twelfth period the gume will be stopped end final costs calculated. Your team’s results will be compared to those of other teams, During subsequent discussions the merits of various inventory and production policies can be evaluated. Teams will probably find it advantageous to split the work of making sales estimates calevlating costs, and keeping records among the various members. USED : To make the keeping of results easier for all teams, Exhibit 2 will be used. The enact steps in using this form are 1, Decide on the production level to be used in the forthcoming period. 2. Enter number of tiles to be produced in Columns A (18°) and J (36%. 3, Fill in stock on hand at start of period in Columns B (18°) and K (86°) These figures come from Columns E-(18") and N (36") of the previous period. Enter total stock available for sale in the period in Columns C and L. 4 Entry in Column C (8° tiles) = Entry in Column A + Entry in Col- umn B. Entry in Column L (Q6" tiles) = Entry in Column J + Entryin Columa K. 5. Obtain actual sales in period from Instructor. Enter in Columns D (18°) and M (8).EXHIBIT 2 Torus mney Benepe aeseren 15 poy es osm 19) voorars 09 MENARD pewns 1509 nO-DeIs res ota- 09 bovwinut ye i i 3 E © $0,100 7.0001 a ‘8200 ees — @ 3x 095 =D Pap moses pee end ano“ 015 J sm px 95 169 suits Lendees ps pmsayo pose povea Hes xefa yas soy Seeyey poting Joums ve puerto eas pasapne saguens v0 s6o00| a 00700 te0 a ‘00 800709 a9 « Deon e v3 noses sarang = O™ 9 S Saospers open 3x 2s 809, shar oreo to = unum! 0-3 ‘i000 a 000 ramasemse [8/8 poanors 18/8 ssveows |g) g Z Srenewmer | 2/2 pazasouns |g) g Z pomaswen | 2/8 oma snow (2 /2/£/) 2/2/12 2) 2/2/2EXAMPLE i 12, 13 4 Compute inventory remaining at the end of the period Enter in Columns £ and N. Entry in Column E (18" tiles) = Entry in Column C - Entry in Col- ump D. Entry in Column N (36 tiles) = Entry in Column L - Entry in Cole umn M. Enter zero if any entry is calculated as negative. There can be ao negative inventory on hand. Compute inventory carrying costs and enter in Columns F and 0. Entry in Columnn F (18* tiles) = $2.00 X No. in Column E. Entry in Column © (36" tiles) = $8.00 x No. in Column N. Compute stockouts incurred in period, enter in Columns G and P if zero or a positive number. Enter zero if an entry is calculated as negative: there ean be av negative stockouts Entry in Column G (18" tiles) = Entry in Column D = Entry in Col- vin C Entry in Column P (36° tiles) = Entry in Column M ~ Entry in Col- umn L. Compute steckout costs, enter in Columns H and Q. Compute total period inventory cost, enter in Column R. Entry in Column R = Entry in Column F (18" tiles} + Entry in Column Q (26" tiles), Compute total period stockout costs, enter in Column Entry in Column $ = Entry in Column Hf (18" tiles) + Entry in Column Q (36° tiles). If overtime was used, enter $20,000 in Column T, If no overtime was used, enter zero. Compute total period cost and enter in Column U. Entry in Column U = Entry in Column R (totel period inventory cost) + Entry in Columa § (total period stockout cost) + Entry in Column T (overtime cost). Compute cumulative total to date, enter in Column V. Entry in Column V = Entry in Column U for current period + Entry in Column V for last period. Each team member should carefully trace the proceedings as outlined in the following example to understand fully all of the steps involved in playing and recording the game. Mr. Marina has already used the form to record the operating results of the two periods prior to the frst period for which you wall be required to decide the production level (Period 1), Lamson started Period 1 with four hundred 18" tiles (Column B) and one hundred 36° tiles on hand (Column XK). Because he knew that a special, large order for 18” tiles would be placed in Period —1 fa mostLemson Corporation 741 unusual size of order at this time of year), Mr. Marino decided to go to overtime and to produce seven thousand four hundred 18" tiles (Column A) and six hundred 36" tiles (Column J). Thus, seven thousand four hundred 18” tiles (Column-C)-and seven hundred 36" tiles (Column L) were available for sales during Period 1 In actual fact, the special order was smaller than Mr. Maring had anticipated and total sales turned out to the 6,000 for the 18" tiles (Column D) and 800 for the 36” tiles (Column M). Because 16" inventory available for sule exceeded sales, Mr. Marine entered 1,400 in Column E to show there was inventory remaining at the end of the period, and then entered zero in Column G.to show that there had been no stockout of 16” tiles. Column F then shows the inventory cost incurred by having one thousand four hundred 18" tiles on hand at the end of the period ($2.00 x 1,400 = $2,800.00), Column HH shows that no stockovt cost was in- curred. Because demand for the 98” tiles (600) exceeded the total avaslable for sale (700), a stockout of 100 occurred and no tiles were left in inventory at the end of Period — 1. To show this occurrence, zero was entered in Column N and 300 was entered in Colum O while a stockout cost of $6,000 was entered in Column Q ($60 x 100 = $6,0100). ‘The total inventory carrying cost was entered in Column R ($2,800 + 0 = $2,800) and the total stockout cost in Column $ (@ + $6,000 = $6,000). $20,000 was entered in Column T heciuse overtime was used. The total period eost was calculated to he $2,800 + $6,000 + $20,000 = $28,800. This amount was then entered in Column U and also Column ¥, Lamgon begin Period 0 with one thousand four hundred 16" tiles (Column B) and zero 36° tiles on hand (Column K). These totals had bee» brought down from Columns E and N, respectively, of Period — 1. At the beginning of Period 0, Mr. Marino elected to produce two thousand 18" tiles (Column A) and one thousand two hundred 36” tiles (Column J). No overtime was called for. Thus there were three thousand four hundred 18" tiles (Column C) and one thousand two hundred 36° tiles (Column L) available for sale ia Period 0. In Feriod 0, sales totalled one thousand four hundred 18” tiles (Column D) and five hundred 36” tiles (Column M), Thus, the inventory remaining at the end of the period was two thousand 16" tiles (Column E) and seven hundred 36” tiles {Column N). There were zero stockouts (Columns G and F). Inventory carrying costs were computed to be $2.00 x 2,000 = $4,000 (Column F) and $6.00 x 70 = 4,200 (Column 0). There were no stockout costs (Coluina H and Q) because stockouts equalled zero in this period. “The total inventory carrying cost for Period 0 was $8,200 ($4,009 + $4,200). ‘This amount was entered in Column R, while zero was entered in Column § since been no stockouts in the period. There was no overtime used. cons: ‘entry shows that the there ha quently a zero was entered in Column T. The Columa U total period costs incurred were $8,200. The Column V entry was $28,000 + 36,200 = §37,000. Since your team did not incur these costs we will wipe them off the slate and have you start with 2 zero cost at the beginning of Period 1 in Column V.A FEW OPERATING RULES DURING THE GAME L 2 START OF GAME The only production combinations your team may choose are those given in Exhibit 1 If your team makes a calculition ‘mistake, 9 penalty of $25,000 will be assessed and all figures will be corrected Tf your team is unable to reach a decision by the end called for by the instructor, it will aatomatically he decided that you produce 2,000 18" tiles and 1,200 36” tiles. Normally, at the.beginning of the game, each team will have approximately 10 minutes to make a decision. This tine will decrease as the game pro- gresses. The zame proper starts in Period 1. At the beginning of the game there are two thousand 18° tiles on hand (brought down from Column E of Period 0) and seven imundred 36" tiles on hand (Irought down from Column N of Period 0). it is now up to each team to pick the praduetion Jevel most appropriate for Period 1 and thns start the playing of the game