Kilgore Manufacturing, Inc. - Vanessa Leong

1 Kilgore manufacturing , Inc. Team 1 Ann Bomba Amit Kapil Vanessa Leong Glen Roe Yu Chen Executive Summary In order to win a defense contract with Avionics, Kilgore manufacturing , Inc. must produce a minimum of 600 R-7 switches a day. For every day that the vendor falls short, it will pay a $5000 fine. Under its current manufacturing process, Kilgore is able to meet this quota most of the time, although it experiences a high rate of variability the production volume ranges from 494 to 768. In order to win the contract, Kilgore wants to bid as high a production level as possible while still turning a profit of $1000 each day. It has analyzed the data and determined that it can afford to bid 612 units a day. However, an employee has suggested a new manufacturing process that might help the company put in a higher bid for this important contract. After a 60-day analysis of the new process, we recommend that Kilgore use this new manufacturing process for the contract.

2 With a new process, Kilgore will be able to place a bid at 662 R-7 chips per day and lower the variability with a standard deviation of 28, down from 40 in the original process. However, Kilgore will miss its quota about 30% of the time, whereas it would have missed quota 28% of the time with the old process. It should be noted that our analysis is based solely on the last 31 days of the trial period to allow for a learning bias among employees in the first half of the trial. We also recommend that Kilgore examine and prioritize its criteria, in light of its competition and company image. If Kilgore expects its competitors to bid above 662, it can bid higher, but that decision will yield a lower profit and increase its fail rate. For example, bidding at 673 chips per day will lower profit expectations to $800 per day and raise the fail rate to 34%. But if winning the contract is the most important objective, then this alternative might be the most beneficial to Kilgore .

3 On the other hand, reputation and fail rate may be very important to win this contract. In this case, Kilgore can bid lower, achieve a higher success rate and higher profits. For example, if Kilgore wants to miss quota only 10% of the time, it can place a bid at 626 chips per day and will earn profits of about $2016 each day. This alternative will protect the company reputation but may be too low to win the contract. Kilgore has a number of alternatives to determine its bid and must factor in all of them and weigh them appropriately. Regardless of its final decision, our recommendation is to use the new manufacturing process for the Avionics contract. Analysis To analyze the new manufacturing process, we examined the data gathered over the 60-day trial period. On average, the new process made about 634 chips per day, with a standard deviation of 49. Unfortunately, these numbers do not show an improvement upon the old process, which had an average output of 635 chips and standard deviation of 40 (Exhibit 1).

4 Exhibit 1. Output Distribution: New Process However, a time series analysis of this data indicates a learning bias; in other words, the employees needed some time to understand the new process and work out the kinks. If we examine the production levels on a time plot, we can see that they become more consistent over time (Exhibit 2). Exhibit 2. Output Levels by Time Mean Dev 60 500550600650700750500550600650700750 Units010203040506070 RowTo more accurately examine the data, we wanted to see a more normal distribution among output levels. If we take a slice of data, analyzing just the last 31 days of the trial period, we get a more normal distribution curve and more consistent data (Exhibit 3). Although this curve is not perfectly normal, we assumed that future production levels will more closely match this data and used this information to estimate a revised bid for Kilgore . It may be useful for the company to continue testing the new process and gather more data to possibly attain a more perfectly distributed curve.

5 Exhibit 3. Output Distribution: Last 31 Days of Trial Period Now, the new manufacturing process yields an average output of 662 chips per day and a lower standard deviation of 28. With these numbers, we then calculated how Kilgore could revise its bid (Exhibit 4). Assuming that the profit margin of $ remains constant and the company wants to make a profit of $1000 per day, we determined that Kilgore can raise its bid to 647 chips per day. The net profit equation was developed under the assumption that the expected value of the missed quota fines is equal to the probability of failure multiplied by the fine amount of $5000. Mean Std Dev N 31 600625650675700725750 Exhibit 4. Revised Bid Price Calculations Revised profit = 662 * = $2516 Revised net profit equation: 2516 5000[P[Y<y)] = 1000 1516 = 5000[P[Y<y)] P(Y<y) = P(y>Y<mean) = .5 - .3032 = Using the Z table, Z = With a normal distribution curve we know that Z = (X ) /.]]

6 Therefore: = y 662 / 28 y = Revised bid While this new process allows Kilgore to enter a higher bid than with the old process, we are concerned about the rate at which the company will miss its quota. In the new process, Kilgore s fail rate will be about 30%, or 10 days every month. The prime contractor will not likely be pleased about its subcontractor missing so many quotas. Additionally, we do not have any estimates for the competitor s bids and even a bid at 647 might not beat out the competition. In light of these questions, we have calculated two different alternatives for Kilgore . Option 1. The Consistency Alternative The prime contractor, Avionics, may be willing to sacrifice quantity for consistency in its subcontractor s production. In this case, Kilgore can bid lower to ensure a higher success rate. For example, if the competition will only meet quota 30% of the time, Kilgore can set its fail rate at 10%, which would mean a bid of 626 chips per day with the new process (Exhibit 5).

7 Its reputation for high quality and dependability may be very valuable to Jim Kilgore and the executive team. While this alternative will also yield a higher profit of $2016 per day for the company, it may be too low to win the contract. Exhibit 5. Calculations for Consistency Alternative Bid. Profit = 662 * = $2516 P(Y<y) = P(y>Y<mean) = = Using the Z table, Z = Since Z = (X ) / : = y 662 / 28 y = 626 Revised bid Net profit equation: 2516 5000[P[Y<y)] = X 2516 5000( ) = X X = $2016 Option 2. The Quantity Alternative If Kilgore expects its competitors to bid above 662, it can afford to bid higher, although it will yield a lower profit and increase its fail rate. For example, by lowering profit expectations to $800, Kilgore can bid at 673 chips per day but raise the fail rate to 34%. Although that fail rate is worse than before, this alternative might be the most beneficial to Kilgore if the competition is outbidding it.]

8 Exhibit 6. Calculations for Quantity Alternative Bid. Profit = 662 * = $2516 Net Profit = $800 Net profit equation: 2516 5000[P[Y<y)] = 800 1716 = 5000[P[Y<y)] P(Y<y) = P(y>Y<mean) = = Using the Z table, Z = Since Z = (X ) / : = y 662 / 28 y = 673 Revised bid Conclusion At face value, Kilgore should use the new manufacturing process in order to submit a bid of 647 R-7 chips a day. The new process has less variability than the old one, but has a slightly higher fail rate of 30%. While we can definitively recommend the new manufacturing process to Kilgore , there are a number of different alternatives that the company can use to tweak its bid. Kilgore could choose to lower profit expectations in order to raise its bid number. It could also lower the bid amount in order to secure a higher success rate. Since we have no information about Kilgore s reputation or its competitors bid, we recommend that Kilgore examine these alternatives to best position its bid.]]

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