CAPSIM

Current Debt

-/short-term is traditionally borrowed for short-term purposes that will allow you to pay it back within a year, for additional working capital to build more inventory, for example. -You are shown the interest rate on your current debt.

Forecast Contribution Margin

-Gross Revenue Forecast less variable costs.

Inventory carrying costs can be managed through close collaboration between ____ and ____.

Marketing and Production, ensuring that sales forecasts are as accurate as possible and integrated into production schedules.

By reducing a product's Service Life...

your product will have a lower material cost. Since Budget customers don't place a heavy demand on Service Life, it may be wise to reduce that figure. -each 1,000 hours of Service Life adds $0.30 to the material cost. Customer prefer products towards the top of the range.

However, in a global economy where margins are thin and choice is at a premium, it is often the investment in _______ that reaps the most rewards.

marketing and sales

Accounts Policy

-A/P = how long you will take to pay your suppliers -A/R = how long you extend credit before your customers must pay you.

Long-Term Debt

-in the form of bonds is traditionally used to finance long-term assets - to purchase a new production line, for example.

R&D Department - provides information on...

-products -customers -competitors -cost of your decisions

Americas

2:1 (Budget: Performance) for foreseeable future

Promotion

Product Promotion makes up 70% of your total Awareness, while Regional Promotion makes up the remaining 30%. -Each year, your Awareness and Accessibility will reduce by 1/3 from the prior year.

Gross Revenues

Worst Case forecast x Price

plan for the ___, but project for the ___, too.

worst, best

A high forecast is used to create the ____.

best case scenario This can be used by production to determine demand for your product and, therefore, the number of products to build - reducing the chance of your company stocking out and handing undeserved demand to a competitor

Inaccurate forecasts -->

can result in having too much or too little inventory, or not achieving the sales necessary to fund investments.

Forcasting: The first step is to...

compare your company's products with other products competing for the same customers. What are the most important characteristics customers are looking for in your products? Are they concerned most about price? Quality? Reliability? On those top buying criteria, are your products better or worse than the competition?

Constant focus on the ______ is a key discipline for any management team

contribution margin Contribution margin is calculated by subtracting *variable costs* (such as labor, materials and inventory carrying costs - all the things that vary depending on how much you sell) from *sales*. Calculating contribution margin on the Income Statement shows what each product or service line is contributing, after all the costs of producing it have been subtracted, towards the fixed costs of the business.

companies need to make very smart business decisions on a ____ basis.

daily With new products coming out each year, customers are willing to switch brands if their needs are not met. As such, companies can no longer rest on their laurels.

Customers in EACH market segment continuously expect...

faster and more accurate products. -Each company must innovate and update products!!

Marketing may offer a third way to improve overall margins:

growing the business into a new market altogether. There are many considerations of course - the cost of tailoring product to local needs, pricing sensitivities, shipping costs, tariffs and currency implications - but it's worth considering whether you'll get more pie simply by making a bigger pie

Labor costs can be lowered through...

increased automation - the more robotics, the less humans you're going to need. Robots are expensive, so the investment needs to be properly funded, but the company's Balance Sheet doesn't take the hit all at once as the costs are amortized over time through depreciation. Automation, however, can slow down new product development as production processes are more complex, so communication with the Research and Development team is critical. Sometimes it's possible to cut variable costs via outsourcing production, but outsourcing may create issues that come in the form of higher labor costs.

Age

modified products cuts age in half -only decisions changed for Speed or Accuracy cut the age in half. Changes to Service Life and Region kits have no impact on the perceived age.

A very low contribution margin tells management...

that the other part of the equation - *the variable costs* - is a problem. Because those costs are variable, however, they can be managed. And because the Income Statement shows which product lines are problematic, you know where to start.

The Forecast Demand is...

the Best Case sales forecast you entered on the Marketing Screen.

Inventory carrying costs are...

the storage and admin costs on unsold product. Zero inventory carrying costs means a company stocked out and might have missed sales. High carrying costs means its sales forecasts and production schedules were unrealistic, and the effects show in each unit that is left sitting in storage throughout the year.

forecasting requires assessing how...

the total market will perform, the attractiveness of your products compared with your competitors products, whether new products are entering the market - it is an important, but inexact, science. Sales forecasts are best developed by the marketing department, because that's the part of the business that is constantly looking outwards - to customers and markets, and what they need and what they want.

A low forecast is used to create your ____.

worst case scenario The worst case numbers are used to predict profits, variable costs and contribution margin so management will know if the company can survive the worst.

In order to ship products abroad,

you must have enough capacity to make enough products to fill demand. -If you don't have enough capacity, you can purchase more or you can outsource to build the remaining units (outsourcing uses automation level of 2.0 that cannot be changed).

Finance Department - Financial statements

*Key Financial Projections* - a dynamic summary of your company's potential cash flow and income breakdown. These numbers will adjust at real-time and are based on your forecasts. They assume that you will sell the number of units that marketing has predicted. Expanded breakdown of projections called "Performas" - include: 1) *Cash-flow statement* - highlighting your operating, investing, and financing activities. 2) *Income statement* - expands on the structure of income and capital. 3) *Balance Sheet* - detailing your company's assets and liabilities.

Asia Pacific

-3:1 with further expansion of the budget market anticipated. -low-income communities, significant demand for improved health care. -zero-tariff policy that makes it an attractive market moving forward.

Balance Sheet

-A snapshot in time (typically at the end of the fiscal year) and looks at 3 areas: 1) *Assets* - what your company owns (current and long-term) 2) *Liabilities* - what your company owes (" ") 3) *Equity* - the company's economic worth (common stock and retained earnings. Assets = Liabilities + Equity The balance sheet will ALWAYS balance because it follows this equation. We look at this sheet to see what the company owns, owes and how much money is invested by our shareholders.

Issuing Dividends to Shareholders

-It is riskier for other owners than money in the bank, but the potential rewards are greater. -Money is returned to investors through dividends. Paying dividends can impact the stock price. *A healthy stock price increases your ability to raise capital for investments (higher profits!)* -However, there will be impacts on your working capital and ability to invest in your long-term strategy if too much is given back.

Finance Department

-Responsible for making sure your company has the funds needed to operate. -Though much of your money will come from sales of your products, you will also have the option to *borrow current debt*, *issue stock*, *issue bonds/long term debt*. These finance decisions will be essential for funding the investments and operational costs of the other 3 departments. -"Accounts Policy" to adjust your accounts payable and accounts receivable (the number of days between transactions and payments). *Accounts Receivable* - affects "customer satisfaction score" *Accounts Payable* - affects production's "fulfillment after adjustment"

Production Department

-Responsible for manufacturing enough products to meet customer demand. -determines capacity and automation. -*Forecasted Demand* is automatically populated with the Best Case forecast set by marketing. To fulfill the forcasted demand, enter the number of units you want your plant to produce in the "Production" box (different for each region).

Variable Costs

-The sum of material, labor, shipping and inventory carry costs multiplied by Unit Sales. Material and Labor costs are found on the production page.

Automation

-While automation optimizes your plant's performance and lowers labor costs, it also adversely affects your ability to create and modify products in the R&D department. -For each automation you add, it becomes increasingly difficult to re-position your products -a project that moves a product 1.0 on the map takes significantly longer at an automation level of 8.0 than at 5.0. Large moves on the perceptual map will be less affected by a higher automation level (it takes more years with a higher automation).

Common Stock

-You can issue stock (to raise more funds), retire stock (to improve your stock price) and determine a dividend policy. -Choose if your earnings are retained to reinvest for future growth or distributed to shareholders in the form of dividends.

Region Kits

-boost demand in an area by 10% compared to the competition, but add 3 months of development time to add/remove and 15% in material cost per unit. -In the case that all six companies offer kits to a specific region, there will be no advantage in customer demand for any team.

Budget Customer?

-considers *price* and *age* above positioning

A/P

-has implications for production. Suppliers become concerned as the lag grows and they start to withhold material for production. -this will lead workers to stand idle and per-unit labor costs will rise.

Income Statement

-helps us see how are company performed in terms of product sales, compared to how many expenses went against making that product. -ultimately, we want to see how our bottom line performance was, or our NET PROFIT.

Capacity

-how many units the plant is capable of producing before outsourcing. -can be distributed across products or allocated to a few and the rest being outsourced. -the cost of additional capacity depends on the current automation level on your line.

Credit Policy

-how much leeway you give people who owe you money and how much leeway you give yourself to pay others you owe. -customer will judge you if you are unfair with this. A bit of give and take goes a long way!

Sales Budgets

-how much you spend on distribution systems and your sales force by product and by region. -Sales budgets impact Accessibility

A/R

-sets the amount of time customers have to pay for their purchases (impacts the willingness to buy your products). -affects CSS

Debt/Equity

-shows the debt to equity position for your company and your competitors -Equity is divided into common stock and retained earnings. -Common stock represents the money received from the sales of shares; retained earnings is the profit that was not distributed back to shareholders as dividends, but reinvested in the company.

Cash Flow Statement

-shows us where are money is moving around in a company. 1) *Cash From Operations* - cash coming from profit, customers, inventory, owed to suppliers. 2) *Cash From Investments* - Cash being spent on buying capacity or automation (plant improvements) or coming back from sale of plant. 3) *Cash From Financing* - Cash being spend or receiving from stocks, dividends, long term debt or short term debt. This statement will show you how much cash your company has when the dust settles at the end of the year. If you ending cash is projected to be negative, check to see which of the 3 sections are causing this (or a combination of them) and open the discussion!

Forecasts: Worst Case vs Worst Case

-used by the Finance department to predict profits, variable costs and contribution margin. -used by Production to determine how many units to produce.

Forecasting

-used by the proformas to calculate financial projections. -Last years sales can be a good starting point for this year's forecasts. EX: if the budget growth rate for the upcoming year is 9.2%, "All things being equal, we can expect to sell 9.2% more units this year than last year." Assume you sold 1.1m units last year without running out of inventory. *Last years Units Sold x (100% + Growth Rate) = Next year's forecast *1,100,000 x 1.092 = 1,201,200* -if your product stocked out, calculate what it could have sold by multiplying the segment demand by your potential sales percentage reported on page 14 of The Globe - the Market Share report. Then perform the same calculation based on that number.

Marketing Department Decisions:

1) *Setting the price* - for each product in each region, marketing must determine the appropriate balance between customer price expectations and your company's margins. *currency exchange rates change each year AND are different from region to region. 2) *Sales Forecasting* - very important. Accurately forecasting your product's sales will have a direct impact on your bottom line. -must submit a *Best Case* and *Worst Case* forecast for each product in each region. -forecast how well *customers* will embrace your products -forecast how your products compare with *competition*.

Finance Department concerned with 5 issues:

1) Acquiring capital you need to expand your assets 2) establishing a dividend policy to maximize the return to shareholders. 3) setting A/P policy and A/R policy 4) driving relationship between debt and equity 5) Selecting and monitoring performance measures that support your strategy. -Decisions should be made after all other departments have entered their decisions. After all decisions, *the finance department determines where and how to find the funds.*

When attempting to fulfill Forecasted Demand, there are a number of variables to consider:

1) Do you have existing inventory remaining from previous rounds? 2) How many units are actually being produced? Look at "Fulfillment after adjustment" - calculates the number of units you will produce after adjusting from the impact of your accounts payable policy. 3) Does your plant have the production capacity to produce the number of units the market demands? Here it is important to consider the option outsourcing production. "Remaining Outsource" = your current capacity, the number of units you can produce by outsourcing. Enter in "Outsource". Keep in mind that the outsource production plant has a fixed automation rating of 2 that will not change. You can enter higher numbers in "Automation". A higher automation rating means lower labor costs, which added to your products material and shipping costs give you your total cost per unit (under "Cost Breakdown"). *Contribution Margin* represents how much the product generates when you factor in how much it costs to produce and ship. 37% means you'll make 37 cents on each dollar from sales of that product.

In any company that prioritizes innovation, a strategy must be laid forth that does two things:

1) creates new products the customer wants and 2) modifies existing offerings to reflect customer needs. EX: it's not like Apple is just putting all their eggs into their yearly release; constant updates are being made, and customers are seeing those changes multiple times each year. So while more and more consumers are pushing for rapid and innovative updates to the products they seek, the market for long-term product development is most definitely still needed. To be a truly innovative company, *companies need time to create groundbreaking products, but also can't forget to take the iterative approach to their existing product line.* If they miss either step, their business strategy will take a hit. Just ask Nokia.

There are two ways to increase contribution margin:

1) raise the price of the product (a Marketing solution), or 2) cut what it costs to make it (R&D and Production solutions). If raising the price results in a lower sales volume, contribution margins drop further, so let's put the Marketing Department's suggestion aside for a moment and focus on Production. The Production department can manage variables such as labor and inventory carrying costs.

R&D Department - 4 product specifications

1) speed 2) accuracy 3) service life 4) age (price is determined by Marketing) For existing products, adjusting accuracy or speed will cut the age of your product in half. The update causes customers to see that it is newer.

Marketing Department Decisions (cont) :

3) *Awareness and Accessibility* - in charge of promo and sales budgets. How much you spend on your promo budget directly affects your customer's awareness of your product. The amount you spend on your sales budget is reflected in how accessible your product is to your customers. 2 ways to invest in this - *Product* and *Regional* -In the products panel you can invest in *Promotion*, which impacts Awareness, and in *Sales*, which impacts Accessibility. 4) *Customer Needs* - Customers in budget and performance sections have different expectations as do customers from region to region. Each product will have a customer satisfaction score (the higher the score, the more likely the customer is to purchase the product).

Fulfillment After Adjustment

= Your production order is adjusted by your Accounts Payable policy, and added to your Outsourcing order. -Adding existing inventory to your fulfillment after adjustment gives you the total units produced for the current year.

Accounts Payable

In Production and Finance, you can adjust your A/P policy, which is the lag between when you receive materials from your suppliers and your payment date. -Default is 30 days, but you can adjust between 0 and 150 days. -The longer you make your suppliers wait for payment, the fewer materials you receive, which results in fewer units being produced.

Forecasts are a corporation-wide necessity!!

Production needs a forecast to know how many products to make. Finance needs a forecast to create the pro forma financial statements, showing management how the company is tracking. The warehouse needs to know how much inventory to store and when it will be shipping. Salespeople need forecasts to set their goals. *The numbers in a sales forecast ripple through the whole organization, so the clearer your crystal ball, the more accurate your picture of the future will be.*

R&D Department

Responsible for creating new products AND managing existing offerings. -Success depends on your ability to understand customer needs and communicate with other departments. -must work closely with the *Marketing* department because they provide info on what your customers really want so that R&D can identify the best product specifications to meet those needs, while coordinating project timelines and managing development costs.

Marketing Department

Responsible for forecasting sales, promoting both the products and brand, as well as pricing and selling your products. -The Production Department uses these forecasts to determine how much of each product line to manufacture, and your Finance Department uses these forecasts to generate your proforma financial statements.

The best product in the world won't sell if no one knows about it. 2 Factors?

You really have two key metrics to worry about. "Customer Awareness" tracks what percentage of the market is aware of your product, and "Customer Accessibility" tracks the percentage of the market that can be effectively supplied by your company.

Qualitative Assessment

*Age* - does the product satisfy customer age demands? *Service Life* - is Service life near the top of the range? *Price* - will price trends continue or will new automation facilitate a price reduction? *Awareness and Accessibility* - are these percentages leading, keeping pace with or falling behind other products? -all these contribute to the monthly CSS

Europe

3:1 but trending towards performance in the next five to ten years. -High-income region -experiencing steady economic growth that your company hopes to capitalize on.

Performas

Do not reflect actual results!! (Because your forecasts will be at least a little wrong)

Shipping per unit

Europe = $3.00 per unit Asia = $2.50 per unit **Only Europe has a tariff per unit.