The E-Game Company

Late one Friday afternoon, George Heller was trying to formulate an approach to his job as finished goods warehouse manager for the E-Game Company. As finished goods warehouse manager at the E-Game Company, he had the responsibility for managing the inventories of the company's entire line of computer 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 Mr. Heller was to place replenishment orders for prod- ucts which were getting low in inventory. These orders were given directly to the pro- duction manager, Roger Blake. The E-Game Company's production process was quite simple. The production manager received all replenishment orders at the Monday meeting and forwarded them to a nearby DVD duplication company where the DVDs were prepared during the early part of the week. During the latter part of the week and sometimes on the weekend, the games were assembled and boxed at the E-Game Company plant using part-time help. The completed games were packed in cases and transferred to the finished goods warehouse on Monday morning of the following 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. In his discussion with other 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 back order the shortage, and its customers apparently filled their requirements with competitive products. 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, how- ever, 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. The Big Game Mr. Heller turned his attention to The Big Game as a representative company product. His predecessor had left him no information on the management of the inventories, but there were two years of demand history for The Big Game (see next page). In discussing

The Big Game with the salesmen, Mr. Heller found that it was 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 would not be different from those of past years and 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 DVD duplica- tion company charged a fixed amount of $9 for each order to cover the costs of setting up their duplicating equipment and delivering the finished DVDs 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 per case for each case short on a customer's order. This represented both the loss of profit on that case and some measure of lost goodwill. 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 using a spreadsheet. He devised a spreadsheet on which he could evaluate different alternatives. At the top of page 115 is a printout of one of his evaluations. In compiling this example, Mr. Heller used the sales history as a representative demand sequence. Assignment

1. Replicate Mr. Heller's spreadsheet using Excel. Design the spreadsheet so that the demand and orders can be changed manually.

2. Develop decision logic to aid Mr. Heller in making his Monday morning decision. One suggestion might be to determine the number of units that he would be comfortable with on Monday morning without placing an order. When an order is needed, determine how many cases should be ordered.

3. Program your decision logic into the spreadsheet, so that if demand is changed orders are automatically initiated.

4. Test your logic by using the following demand stream: 18 18 17 25 21 19 18 25 20 19, with a starting inventory of 43 cases. What is the total cumulative cost over the 10 weeks?