Safety Stock and Maximum Lead Time

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Managing Customer Responsiveness at Littlefield Labs
Background
Littlefield Laboratories (LL) has opened another lab. The new lab uses the same process as the lab in the assignment “Capacity Management at Littlefield Labs” — neither the process sequence nor the process time distributions at each machine have changed. On day 0, the lab began operations with three preparers, one tester, and one centrifuge, and an inventory of 160 test kits. This left the lab with $1,000,000 in reserves. Customer demand continues to be random, but the long-run average demand will not change over the product’s 268-day lifetime. At the end of this lifetime, demand will end abruptly and lab operations will be terminated. At this point, all capacity and remaining inventory will be useless, and thus have no value. Management would like to charge the higher prices that customers would pay for dramatically shorter lead times. However, historic lead times often extend into several days, so management has been unwilling to quote the shorter lead times.

Operations Policies at Littlefield
LT uses a Reorder Point / Order Quantity raw material purchase policy. That is, test kits are purchased as soon as the following three criteria are all met: (1) the inventory of test kits is less than or equal to the reorder point, (2) there are no orders for kits currently outstanding, and (3) the lab has sufficient cash to purchase the reorder quantity. No order is placed if any of these three criteria are not met. So, for example, a team could prevent kit orders from being placed at all by setting the order quantity so high that there is insufficient cash to place an order. A reliable supplier delivers exactly the order quantity of kits, four days after the order is placed and paid for. Management considers physical cost of holding kit inventory negligible compared to the financial costs. Other details concerning the purchasing policy can be found in the “Littlefield Labs — Overview” note. The...
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