Subassemblies The Americas Business Game

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Subassemblies The Americas Business Game
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Prof. Nathan Globus Shows You How

• Prof. Globus will take you through the factorys
  use of its Subassembly raw materials.
• His examples will use the cost information
  associated with the games first business quarter.

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What Prof. Globus Will Cover

• Ordering Subassemblies
• Grade mix effects on the products physical
  quality
• The production possibilities curve for given
  inventory levels
• Subassembly cost contribution to the units
  manufacturing cost
• Minimizing Subassembly costs
• Targeting the products physical quality
• The accounting ramifications of Subassembly
  operations

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Ordering Subassemblies

• Production raw material needs must be ordered at
  least one quarter in advance.
• Three different A, B and C Grades of
  Subassemblies can be ordered.
• Subassemblies are ordered in lots of 100.
• Each washing machine needs Subassemblies from
  both Groups.
• Production stops when the factory runs out of any
  one of the Grades from any of the two Groups.

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Washing Machine Subassembly Requirements

• Each washer requires a different number of
  components regardless of its grade.
• The Deluxe models require more subassemblies.
• Your firm must anticipate the total number of
  Subassemblies needed for future production needs.

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Subassembly Proportions

• Each washing machines Subassembly component mix.

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A Subassembly Order

• The firm is ordering 31,000 Group 1 Grade A
  Subassemblies to be available in Q2YR02.
• 3,500 Group 2 Grade C Subassemblies have been
  also ordered for the same quarter.
• Prof. Globus is also ordering other Subassemblies
  from Group 1 and Group 2.

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Resulting Grade Proportions

• The proportions of each Grade in his order are
  biased towards Grade B.
• This should result in a middle grade product
  based on the Subassembly mix ordered.

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Grade Mix Effects On Physical Quality

• Each Grade makes a particular contribution to the
  products quality.
• Each Grade has its own price tag or cost which
  may change during the game.

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Drawing Subassembly Inventories

• Prof. Globus calculated the runs Subassembly
  requirements to be the following for his
  production run of 2,500 Basic washers and 4,850
  Deluxe models.

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Group and Grade Proportions Drawn

• The Subassemblies are drawn from inventory in the
  proportions they exist at the quarters
  beginning.
• The amounts shown below would be pulled from the
  Subassembly inventory for the quarters run.

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Quality Resulting From Subassembly Order

• The Subassembly order made by this firm would
  produce Basic washers at a Quality Level of 8.47.

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The Production Possibilities Curve

• Production constraints
• The amount of Subassemblies available at the
  beginning of the quarter.
• The number of workers who show up for work.
• The plants absolute size in labor hour capacity.
• Prof. Globus will deal here only with the
  production possibilities associated with the
  quarters beginning inventory.

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A Linear Programming Problem

• Prof. Globus wants to maximize the absolute
  number of washers that can be made from the
  Subassembly inventory available.
• Trade-offs must be made between the number of
  Basic and Deluxe washers that can be obtained
  from the inventory given the different amount of
  Subassemblies required by each set.
• A production matrix was calculated. This matrix
  indicates the number of each model that could be
  produced from the inventories available.

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Using the Graphic Method

• The plants operation is constrained by the lack
  of Group 1 Subassemblies.
• The Production Possibilities Curve shows that
  about 3,600 Basic models could be made along with
  4,000 Deluxe washers.
• Another possibility would be 5,200 Basic and
  2,700 Deluxe washers.

Group 1 Constraint
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Subassembly Unit Manufacturing Cost

• Subassemblies are purchased in 100-unit lots.
• The shipping charge for the Subassemblies is not
  included in the Subassemblies landed cost.
• Prof. Globus converted the lot prices into unit
  prices for computational convenience.

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Raw Materials Cost for Run

• The inventory Prof. Globus has on hand generated
  the following Subassembly costs per unit.

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Targeting The Products Physical Quality

• The professor wants to have products of different
  quality in his markets.
• He will target a 6.45 Quality Level for Brazil.
• His Quality Level target for the United States is
  9.14.
• Mexican sets will be targeted at 7.80 to insure
  he can enter a competitive bid for Fast Wash
  sales.

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An Algebraic Solution

• Algebra is very helpful here as Prof. Globus is
  solving for x, which is the desired Quality
  Level.
• The question is what proportions of the three
  Grades of each Group of Subassemblies produces
  the desired Quality Level. In this example the
  desired Quality Level is 8.67.
• Given the quality-inducing power of each Grade
  the formula is
• 10.0x 7.5x 5.0x Desired Quality Level
• Example
• 10.0x 7.5x 5.0x 8.67
• 22.5x 8.67
• x .385

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Subassembly Inventory Proportions

• With x now known the proportions and absolute
  number of Subassembly Grades that should be
  ordered to produce the desired Quality Level can
  be calculated. They would be the following for
  the examples Quality Level of 8.67.
• These proportions, however, do not produce the
  least-costly way to obtain product quality within
  the Grades of Subassemblies on the market.

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Least-Costly Subassembly Sets

• Prof. Globus wants to now produce washers at a
  targeted quality level at the lowest possible
  cost.
• He created tables that traded low cost Grade C
  Subassemblies for higher costing B and A Grade
  Subassemblies.

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Choosing the Grade Mix

• If a Quality Index of 7.75 was desired the Grade
  mix for both Groups would be 90.0 Grade B and
  10.0 Grade A.
• The unit cost of this Subassembly mix would be
  39.1275. This is the lowest cost mix for
  delivering a 7.75 Quality Index for Basic models.
• A similar table was created by Prof. Globus for
  his Deluxe washers.

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Quality/Subassembly Cost Trade-Offs

• This graph indicates the relationship between
  Group 1s Subassembly costs and the Quality Index
  level obtained.
• A sharp break in the cost of obtaining higher
  quality occurs when Grade A materials begin to
  replace Grade C materials.
• The linear trend can be defined as
• y 1.0926x - 4.362
• Similar graphs could be created for the three
  remaining Group/Set sizes.

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Achieving Optimality

• Prof. Globus would like to have the perfect
  combination of Subassemblies in his inventory.
  However this is impossible and should not be
  attempted because
• Ideal Quality Levels differ from one country to
  another and between the two products. Unless a
  plant is dedicated to making only one product for
  one country the Quality Level will always be
  imperfect.
• It takes many quarters to significantly change
  the inventory of Subassemblies used each quarter.
• The markets needs for quality change faster than
  the company can change its Subassembly mix.
• The firms product mix can change very quickly
  thereby putting the Subassembly Grade mix out of
  sync with the current, ideal product mix.
• To resolve this problem the Professor tries to
  assemble a Subassembly Grade mix that best serves
  the average long-term product mix needs of the
  firm. This requires Strategic Planning.

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Accounting Ramifications

• Prof. Globus will now trace how his Subassembly
  decision set impacted his firms financial
  operations as reported in the games Income
  Statement, Balance Sheet and Cash Flow
  operations.
• He will show you the accounting results for only
  the decisions immediate quarter.

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The Accounting Changes

• The revenues produced by the Subassembly purchase
  will be realized primarily in the following
  quarter.

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The End