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Revenue Management at Littlefield Laboratories: Background

The document discusses a simulation where the participant manages the operations of a blood testing lab over 168 simulated days. The goal is to maximize the final cash position by making decisions around purchasing/selling machines, scheduling, work acceptance limits, and price adjustments. Key levers included capacity, inventory, scheduling policies, work-in-process limits, and price testing.

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400 views

Revenue Management at Littlefield Laboratories: Background

The document discusses a simulation where the participant manages the operations of a blood testing lab over 168 simulated days. The goal is to maximize the final cash position by making decisions around purchasing/selling machines, scheduling, work acceptance limits, and price adjustments. Key levers included capacity, inventory, scheduling policies, work-in-process limits, and price testing.

Uploaded by

SJ
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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Stanford University Graduate School of Business

March 17, 2020


1

Revenue Management at Littlefield Laboratories


Background
Littlefield provides highly specialized blood testing services to hospitals and doctors’
offices. In early January, Littlefield Laboratories (LL) opened a new blood testing
facility. Results are delivered electronically. LL charges premium prices, promising to
deliver results within 24 hours of receiving an order. Although orders arrive randomly
throughout each day expected demand remains stable.
Management’s main concern is capacity planning. Delays resulting from insufficient
capacity could undermine LL’s promised lead times, thereby lowering revenues.
Assignment
It is now late February. Management has just installed a high-powered operations team
(that’s you). For the next 168 simulated days you must: buy or sell machines, prioritize
queueing, limit the work accepted, and adjust contract prices to maximize Littlefield’s
final cash position.
There is currently one sample preparing machine, one tester, and one centrifuge equipped
in the lab. Examination of their production process shows variability in the times required
to fulfill an order. Management did not provide analysis of step-by-step process times,
but they do record daily average utilization rates for each station. Average Utilization is
the fraction of each of each day that machines are processing jobs averaged over the
number of machines provided at a station.
Additional machines may be purchased anytime for $25,000 each. Machines can also be
sold for $10,000 each—provided at least one machine remains at each station.
You may change the way testing is scheduled at Station 2. Littlefield’s process has been
following a first-in-first-out (fifo) policy, but you can give priority status to either shorter
initial tests (pri2) or longer final tests (pri4).
New customer orders arrive randomly throughout each day. Each order consist of a single
patient’s blood sample. Upon arrival, each order is matched with a fresh test kit to
become a job. If an order arrives and there are no kits on hand, that order must wait in a
queue of customer orders pending fresh kits.

*
Based on a document written by Sunil Kumar and Samuel C. Wood, Stanford University Graduate School
of Business. Copyright 2009. No part of this document may be reproduced without permission from
Responsive Learning Technologies, Inc. [email protected]
Littlefield decides whether to take new orders based on how many orders have been
accepted but not yet completed—which is their work-in-process (WIP). Currently
Littlefield only accepts orders when their WIP is less than 100, which means new orders
are only accepted if their current WIP is less than 100 orders. You may change the WIP
limit at any time. If you lower the WIP limit below the number of orders currently in the
system, no new orders will arrive until the current number of orders drops below the WIP
limit. Setting the WIP limit to zero prevents new orders from arriving.
Usage of each day’s test kits is transmitted electronically to a reliable supplier. The
supplier automatically replenishes inventory ASAP to maintain a fixed reserve of 40 test
kits. A fresh test kits costs $600—all shipping and ordering costs are included. You
cannot change this inventory policy.
Management promises turnaround times of less than 1 day. Orders filled within the
quoted lead time earn full revenue. Orders taking more than one day to complete incur
penalties. Specifically, revenue for delayed orders decreases at a constant rate from the
quoted price to zero after three days. Orders taking longer than three days, are delivered
free of charge. For example, if an order with a price of $1,000 is delivered to the
customer 30 simulated hours after being placed the penalty would be:
30 24 ℎ𝑟𝑠.
$1,000 𝑝𝑒𝑟 𝑜𝑟𝑑𝑒𝑟 $125 𝑑𝑖𝑠𝑐𝑜𝑢𝑛𝑡
72 24 ℎ𝑟𝑠.
…that order would earn $1,000 $125 $875 . Contract prices are determined for
each order when it is accepted.
An intern, double majoring in marketing and economics, has completed a study
indicating that lower prices will increase Littlefield’s total revenue. New prices may be
assigned to future orders by clicking the Edit Data button of your Customer Order pop-up
window, and selecting from a menu. Management is currently charging $1200 per order.
You could reduce that price in increments of $150, but they will not let you charge less
than $900 per order. Compared to demand at $1200, demand at $1050 is three times
higher and demand at $900 is five times higher.
Production began with $100,000 operating cash and 40 fresh test kits. Revenue earned
from filled orders will increase the cash balance while capital investments and inventory
purchases reduce the cash balance. Additional machinery cannot be purchased if the
resulting cash balance would prevent inventory replenishment. Cash held earns interest at
an annual rate of 10%. There are no taxes, payrolls, nor fixed overhead costs to consider.
This simulation will run at the rate of 42 simulated day per real hour over 4 real days. At
the dawning of simulated Day 218, you will relinquish control over Littlefield’s lab and
the simulator will quickly run its final 50 simulated days. Management expects that all
lab parameters will be left at values which maximize their final cash position on
simulated Day 268.
After the simulation ends you may review Littlefield’s history and download data, but the
lab will no longer be active.

Revenue Management at Littlefield Laboratories (priceLab) 2


Deliverables
Your team will write a short executive summary of the actions taken during your tenure.
This report will explain your reasoning for the decisions made, provide retrospective
assessments of their effects, and make recommendations that might improve Littlefield’s
future performance. You must show analysis to justify your conclusions.

Revenue Management at Littlefield Laboratories (priceLab) 3

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