Ricon Corporation Memo - Managerial Decision Making, Management Science

MEMO

TO: Carlos Ocampo y VilasRicon Corporation

From: Francine Carron and Vadim NeumannSubject: Queuing systems

This memorandum is a summary discussion and is limited to the facts and issues described below. The conclusions and recommendations contained in this memorandum are based on our understanding of the facts, assumptions and information provided to us. We assume that all facts, assumptions and information provided to us are accurate and correct. Any changes to the facts, assumptions and information as noted below may potentially alter the analysis and recommendations. If the management believes that certain information or facts are not presented accurately, please contact us as soon as possible for an updated analysis and report.

BACKGROUND

The company needs to develop its high quality service and the efficiency level. According to its current policy the tech rep`s are repairing the machines 75 % of the time (6 hours out of 8 working hours/day). They are able to repair also four machines a day in case they do not do anything else except then repairing. Customer arrivals occur randomly. 1/3 of all tech reps assigned mashines are new products. These machine require service with the same frequency as the other machines. The peak in sales will double the next two years.

After introducing to the market a new all-in-one printer the sales increased rapidly. In turn repairing times also increased, because no new high thechs are hired. The customers are not satisfied with long waiting times. After the management meeting Ricon states that no customer should wait longer than two hours. The president receives four different approaches for the optimal solution in this case:

a) John Phixitt: Hiring new tech reps in order to reduce waiting times. It is important to increase to improve the service.

b) Engineers: Provide new equipment which will reduce the repair time. Although expensive, it may reduce the average waiting time. One time cost is USD 50.000

c) Financials: No hiring of additional staff by establishing teams of tech reps. They can help out each other during the busy times.

d) Marketing: Prioritize customer of the new product. It will raise their satisfaction and keep the satisfaction of other customers adequate.

To do: Evaluation of the present situation and results and recommendations regarding the proposed approaches.

Assumptions:

Nr.1 The waiting time before the tech rep begins the trip to the customer should not exceed two hours.

Nr. 2 The year consists of 230 working days.

Nr.3 Saturday is not a working day for the office. There are five working days in the week.

Nr. 4 We use US American Dollars

Nr.5

W: Average amount of time, in hour, that a customer spends in the system

Wq: Average amount of time, in hour, that a customer spends queueing

Cost: Total annual operating cost in Mio

H: Operating time of the tech rep by the customer, in per cent

C: Number of customers served per day

Ad.Cost: Additional annual cost for new staff or new equipment in Mio.

Wr: The average time for repair

Solution

Option 1: increased number of tech rep`s.

W(hour)

Wq(hour)

Wr H

Ad. One-time cost

Ad.Cost (USD) Average Cost (USD)

4 22(+-2)

50% 0300 900

We need to optimize the high quality service and the efficiency level of our operations. We also need to take a closer look to our operating cost.

In this case we take into account that no customer should wait longer than two hours (Wq). Based on our calculation we found out that there are two customers that will be served in one day. It means that one tech rep is responsible for 100 customers in the year. Before this change the tech rep was responsible for 150 mashines. This decreased number of machines means that tech representative can establish better relationship with the customers, because he can better

memorize the customers individually and can also deal faster with them. It could cause in turn the reduced time of reparations if tech rep already knows the machines and is aware of previous problems with the machine. According to those calculations we need to employ 5.000 additional tech reps. It will cost us additional 300 Mio and the yearly cost equals to 900 MIO USD.

Furthermore we state that according to this policy each customer spends in total in average four hours in the system, as he in average needs two hours to wait for the tech rep and two hours to wait till the tech rep finishes his work. The most repair waiting times will be between 1,2 and 6,8 hours. This time did not change to the original case.

Option 2: New equipment

W(hour) Wq(hour) Wr H Ad. Cost- one time (MIO)

Average Cost (MIO)

4 2,4 1,6 (+- 0,8) 60 % 500 600

The biggest change to the option ist hat we do not hire new staff but we reduce the reparation time. Using the new equipment the tech rep will in average need 1,6 h to finish the machine. It means that the average time fort he repair is between 0,8h and 2,4h. There is a big change in comparison tot he option nr.1. It means that during a busy season he or she can serve 5 machines a day- one machine more than in previous case. In case of the busy season it will raise the customer satisfaction becasue it will reduce their waiting time.

The average time did not change in comparison with the previous case. This is caused because on the one side the time for reparaiton was reduced, but on the other side the queuing time increased. With usage of this system the tech rep spends in average 60 % of his time repairing the machines (way to customers included) and still has 40 % of his time for administrative work.

Additional cost as well as average cost increased by 200 Mio USD in comparison with the option Nr.1. It is caused by relativelly expensive equipment. However, we need to keep in mind that there is one-time cost. We estimate that the tech rep can operate in average for four years with this equipment. It means that average cost for additional three years will be ca. 600 Mio USD (excluding repair cost for this equipment).

Option 3 Teams of tech rep`s


Average Cost (MIO)

4 2 2 75 % 0 600

According to this suggestion from CFO we build teams of tech reps. The rest is remaining unchanged with the current situation. It means that the tech reps work 75% of their time outside and spend 25% fort he administrative work in the office. The waiting time for customers should be two hours. Based on our calculations we pointed out the that average time of client

waiting for service and repair amount to four hours. The repair time remains also unchanged with two hours.

The only change we needed to calculate is: how many tech reps should be in a group in order to meat the above mentioned criteria. Our calculations state that three tech reps should work in one group and cover one region. In this case the waiting time amount to two hours.

The disadvantage of this method ist he increasing number of tech reps serving the same customer. We assume that the customer is being served 4,3 times in the year. In this case he may see three different tech representatives.

Option 4 Not-preemptive average

Assumption: 1 tech rep for his area


Average Cost (MIO)

8 6 2 75 % 0 600

NEW (1/3)


Average Cost (MIO)

4 2 2 75 % 0 600

OLD (2/3)


Average Cost (MIO)

10 8 2 75 % 0 600

In this case we only use non-preemptive model of serving. There are many reasons not to use preemptive model. In the first line the company needs to maintain and etsablish its reputation. As you can see from the table above in case of waiting times for repair of old machines the customes already waited for an average of 8 hours. In addition there are two hours necessary for repair. So sunk cost for customers amount to 10 hours in average. There are two working days. Considering the usage oft he preemptive method the tech rep needs to break up his work and leave the customer in order to fix the new machine. It means that the old machine can stay unrepaired for longer than two days.

As we further know, nowdays 2/3 of customers still have old mashines. We also assume that they one day want to change and buy the new machine. If they are not satisfied with the service and with the Ricon Corporation in general we have a big possibility that they will change suppliers and switch to the competition.

As you can further see from our calculations in the last case the average waiting time for the owners of the old machines will even increase to 9,6 hours plus 2 hours repair time. So if they already wait for such a long period of tim, the company is not providing excellent customer service any longer. In turn it would cause the loss oft he future customers.

The main parameters remained unchanged in all three tables. Tech reps work outside 75% of their time and they need two hours to repair the mashine. There are no additional financial costs as 600 Mio USD. The biggest change occurs in the customers queueng times. The remain in average unchanged with 8 hours. However, there is a big defference between new wand old machines. Customers of new machines wait for two hours and customes of old machines wait for eight hours.

Situation in couple of years


Average Cost (MIO)

8 6 2 75 % 0 600

NEW (1/2)


Average Cost (MIO)

4,4 2,4 2 75 % 0 600

OLD (1/2)


Average Cost (MIO)

11,6 9,6 2 75 % 0 600

In this calculation we calculated the situation in some years when the peak of sales is achieved and we have the half of our customers owing new mashines and another half owing the old mashines. Again, in this case also almost everything is as in the basic scenario. The only difference occurs with the waiting times. For new machines our calculations show the result of 2,4h and for old mashines the time also increased to 9,6 hours.

Conclusion

We think that Nr. 3 is the optimal solution for the case. Using this method we do not raise the costs (no one-time costs, no additional employees needed). However, we achieve the result that 6 persons work in the same area. It means that in the time oft he busy season there are two persons more that can help out. It means that with this case we meet all important management criteria such as

- Customer waiting time not longer than two hours

- Tech reps should work not more than 75% of time outside

We also took a closer look to financial aspects. For this solution we do not need any additional financial afford. We also minimze the risk of raising waiting times in the busy season. The only disadvantage of three different representatives can also be minimized two representatives serving the same customer. With raising fluctuation nowadays we also can not only denpend on the criteria oft he „service from one hand“. The company may introduce all three representatives working together as a team and so minimize the „not-recognize“ risk.

Documents

Ricon Corporation Memo - Managerial Decision Making, Management Science