ISDS 7110 – Fall 2010 - HW 5 due 10.14.10

Mattelo* is a U.S. toy merchandising company that orders their products from a manufacturer in China.

We are ISDS Pro, a consulting company, looking to procure a short-term consulting contract with Mattelo to resolve their inventory issues. In the following slides, we present the case to our Director at ISDS Pro to prove feasibility and gain approval to proceed.

* Mattelo is a hypothetical toy sales company having no likeness to any famous company you might know. Just being creative !

Project OverviewMattelo Toy Sales, Inc.

Currently, there is no quantitative system in place to assist Mattelo managers with balancing the needs of customer demand vs. the need to minimize inventory.

The overall goal of this project is analyze Mattelo’s business

practices and determine if we could provide a better way to:

Minimize expected total inventory costswhile

Minimizing or, ideally, eliminating lost sales

Problem Overview Mattelo Toy Sales, Inc.

To avoid shortages at Mattelo, managers often maintain a safety stock. In such situations, it is not clear what order quantities and reorder points will minimize expected total inventory cost.

Current departmental policy is to generally order 250 units whenever the Ending Inventory Position falls below 250.

Managers adjust this “250” number up or down according to their experience level, but are not as accurate as often as Senior Management would like.

Known Constraints and Fixed CostsMattelo Toy Sales, Inc.

Lead time = 2 weeks From the time an order is placed with China and received in the U.S.

Orders are always placed at the end of a week, and received at the beginning of a week, 2 weeks later.

Fee of $50/order placementPlacing just 1 order costs $50. Think of the “order” as the phone call or fax or

web request where hundreds of units could be ordered at one time.

$0.20 holding cost in inventory per unit per week.

$100 profit lost per unit demanded if cannot fulfill demand.

Initial SimulationFull Year of Activity at Mattelo Toy Sales, Inc.

Known: average yearly sales of 5,460 units Uncertain: weekly demand. Weekly demand is Poisson distributed with a mean rate of 105 units/week. Begin with a base inventory of 250 units. Run Simulation with 52 assumptions applied to each week of demand Hold Order Qty and Reorder Point constant at 250 (based on current company policy) Run Forecast to simulate a year’s worth of activity to predict TOTAL ANNUAL COSTS as a function of the HOLDING COSTS, ORDER COSTS, and SHORTAGE COSTS.

Order Quantity 250 units Order Cost 50$

Reorder Point 250 units Holding Cost 0.20$

Initial Inventory 250 units Lost Sales Cost 100$ Total Annual Costs

Lead time 2 weeks 937$ 1,050$ 29,000$ 30,987$

Beg Ending

Inv Beg Order Units End Lost Order Inv Week Hold Order Short Total

Week Pos Inv Rec'd Rec'd Dmd Inv Sales Placed? Pos Due Cost Cost Cost Cost

1 250 250 0 105 145 0 TRUE 395 4 29.00$ 50$ -$ 79$

2 395 145 0 105 40 0 FALSE 290 0 8.00$ -$ -$ 8$

3 290 40 FALSE 0 105 0 65 TRUE 500 6 -$ 50$ 6,500$ 6,550$

4 500 0 TRUE 250 105 145 0 FALSE 395 0 29.00$ -$ -$ 29$

5 395 145 FALSE 0 105 40 0 FALSE 290 0 8.00$ -$ -$ 8$

6 290 40 TRUE 250 105 185 0 TRUE 435 9 37.00$ 50$ -$ 87$

51 290 40 TRUE 250 105 185 0 TRUE 435 54 37.00$ 50$ -$ 87$

52 435 185 FALSE 0 105 80 0 FALSE 330 0 16.00$ -$ -$ 16$

Forecast Results – Chart IMattelo Toy Sales, Inc.

Criteria: Current Operating PoliciesMEAN

Very high certaintyof spending >= $31K

Mama!!! $$$

Forecast Results – Chart IIMattelo Toy Sales, Inc.

Criteria: Current Operating Policies

Findings and Recommendations Eye-balling it, the base case of $30,987 seemed low. The simulated

mean is around ~ $37K. See orange arrow on Chart I. The Goodness-of-Fit report confirms the above. The Chi-Square value

is 78.50 which is very high. This means that the base case is very “off” compared to the simulation as shown in Chart II, aqua arrow.

~ 85% of the time the company will incur costs greater than $30,987 annually (see yellow areas on Chart I).

We believe that the base case underestimates the risk greatly because it assumes a constant rate of 105 units per week only, with no variation, whereas real demand varies from week-to-week.

If we change both the Reorder Qty 300 and the Reorder Point to 300 units, the total cost drops to around $8K (the mean) with a 65% chance of spending between $8K to $15K.

With a Reorder Qty = 315 and the Reorder Point =350 units, the total cost drops to $2,939 with 87% certainty to not exceed $5K.

We recommend pursuing a contract with Matello where we provide a final product of an optimized modeling tool and training to their managers.