Question: O'Brien Chemicals makes three types of products: industrial cleaning, chemical treatment, and some miscellaneous products. Each is sold in 55-gallon drums. The selling price and unit manufacturing cost are shown below:
|
Manufacturing
|
|
|
|
Product Type
|
Selling Price/drum
|
Cost/drum
|
|
Industrial Cleaning
|
|
|
|
Alkaline Cleaner
|
$700.00
|
$275.00
|
|
Acid Cleaner
|
$600.00
|
$225.00
|
|
Neutral Cleaner
|
$450.00
|
$150.00
|
|
Chemical Treatment
|
|
|
|
Iron Phosphate
|
$920.00
|
$400.00
|
|
Zirconium
|
$1,350.00
|
$525.00
|
|
Zinc Phosphate
|
$1,400.00
|
$625.00
|
|
Other
|
|
|
|
Sealant
|
$850.00
|
$350.00
|
|
Rust Prevention
|
$600.00
|
$260.00
|
Fixed costs are assumed normal with a mean of $5 million and a standard deviation of $20,000. Demands are all assumed to be normally distributed with the following means and standard deviations:
|
Product Type
|
Mean
Demand
|
Standard
Deviation
|
|
Industrial Cleaning
|
|
|
|
Alkaline Cleaner
|
5,000
|
100
|
|
Acid Cleaner
|
2,000
|
500
|
|
Neutral Cleaner
|
5,000
|
350
|
|
Chemical Treatment
|
|
|
|
Iron Phosphate
|
5,500
|
250
|
|
Zirconium
|
2,800
|
130
|
|
Zinc Phosphate
|
4,350
|
300
|
|
Other
|
|
|
|
Sealant
|
8,000
|
350
|
|
Rust Prevention
|
4,250
|
250
|
The operations manager has to determine the quantity to produce in the face of uncertain demand. One option is to simply produce the mean demand; depending on the actual demand, this could result in a shortage (lost sales) or excess inventory. Two other options are to produce at a level equal to either 75% or 90% of the demand (i.e., find the value so that 75% or 90% of the area under the normal distribution is to the left). Using Monte Carlo simulation, evaluate and compare these three policies and write a report to the operations manager summarizing your finding.