Quantitative Management Group Department of Economics & Decision Sciences College of Business

The Gaming Company 1       Late one Friday afternoon, George Heller was trying to formulate an approach to his job as finished goods warehouse manager for the Gaming Company. He had taken the job right after the company's two-week summer vacation. Just prior to that, he had finished his second year in the M.B.A. program at Arkansas State University. While looking for a job during the M.B.A. program, he had specifically sought smaller companies which he felt would provide him greater opportunities to make major contributions and to apply the training he had received. As finished goods warehouse manager at the Gaming Company, he had the responsibility for managing the inventories of the company's entire line of parlor games. He decided to study in detail a representative product, The Big Game, as the basis for his plans. Background       One of the important elements of communication in the company was the Monday morning management meeting. During this time, the key people of the company got together and discussed current problems, production plans, and new product ideas. It was during these meetings that George Heller was to place replenishment orders for products which were getting low in inventory. These orders were given directly to the production manager, Roger Blake.       The Gaming Company's production process was quite simple. The production manager received all replenishment orders at the Monday meeting and forwarded them to a nearby printing company here the game boards were printed during the early part of the week. During the latter part of the week, and sometimes on the weekend, the games were completed, assembled, and boxed at the Gaming Company plant using part-time help from a local junior college. The completed games were packed in cases and transferred to the finished goods warehouse on Monday morning of the following week. Although rare, the assembly operations sometimes continued into the early part of the next week. When this was going to happen, the production manager always finished at least part of the replenishment order for each of the games and made it a point to deliver them on Monday morning. The remainder of the orders were delivered as they were finished during the week.       In discussing the situation with the production manager, Mr. Heller was assured that, at least for the foreseeable future, there would be no limitations on production capacity. Mr. Blake stated that this meant that no replenishment orders would be turned down even though in some weeks this might mean more split deliveries to the finished goods warehouse. He again assured Mr. Heller that at least part of each replenishment order would be in the warehouse on the Monday morning following the management meeting in which the order was placed.       In his discussion with other key people in the company, Mr. Heller found that, when the company didn't have enough inventory to fill a customer's order, the amount by which they were short was lost. That is, the company was not able to backorder the shortage, and its customers apparently filled their requirements with competitive products. The customers would accept partial shipments, however.       In discussing the finished goods inventory with other officers, Mr. Heller found that space was not a critical problem. The finished goods warehouse had been designed with space for expansion into new product lines should the company so desire. Capital, however, was a continual problem for the company because of a rapid growth in the product line. Mr. Heller felt he could use the Friday night inventory balance to determine the inventory level for capital investment purposes. An advantage of this was that the Friday night balance was already available to him, and he wouldn't have to go to the expense of developing more information. The Big Game       Mr. Heller turned his attention to The Big Game as a representative company product. His predecessor had left no information on the management of the inventories, but there were two years of demand history for The Big Game. These data are reproduced in Exhibit 1. (Alternatively, press Shift and click here to download the spreadsheet file containing the data.) In discussing The Big Game with the salesmen, Mr. Heller found that it is a relatively stable item in the company's product line and that it had no seasonal sales peaks. The salesmen were in agreement that conditions in the current year wi11 not be different from those of past years and that past demand would be a good indication of what to expect in the future.       In reviewing the costs of The Big Game, Mr. Heller found that the printing company charged a fixed amount of $9.00 for each order to cover the costs of setting up their presses and delivering the finished game boards to the company. There were no comparable fixed costs for the assembly of the completed games at the plant. The management of the company had estimated that it cost $1.00 per case for each case short on a customer's order. This represented not only the loss of profit on the case, but also some measure of the goodwill that was lost.       An estimate of the opportunity cost of capital and direct costs of carrying inventory had been made, and for The Big Game this amounted to $0.10 per week per case. Since he had decided that the Friday night inventory was the relevant inventory, Mr. Heller decided to use that as the inventory level against which he would assess the $0.10 cost. There was a balance of 43 cases of The Big Game in inventory and he hadn't placed a replenishment order in the last management meeting. He next turned his attention to investigating different methods for managing the inventories and to see if he needed to place an order on the following Monday. Simulation       Mr. Heller thought one approach to the evaluation of different alternatives for managing the inventories would be simulation. He devised a sheet on which he could evaluate different alternatives by hand. An example of one of his evaluations is presented in Exhibit 2. (Additional blank sheets are available in Exhibit 3.) In compiling this example, Mr. Heller used the first ten weeks' sales history from Exhibit 1 as a representative demand sequence. 1 Taken from W.L. Berry and D.C. Whybark, Computer Augmented Cases in Operations and Logistics Management.