BSAD 25

Perceptual Map:"rough cut".

", the acceptable but not desired range in size and performance is known as the "rough cut"

• Automation costs

$4.00 per point of automation, raising automation from 1.0 to 10.0 costs $36.00 per unit of capacity (as you add 9 units of automation).

• Closing a plant

- 2 options: 1. If you sell all the capacity on an assembly line, Foundation interprets this as a liquidation instruction and will sell your remaining inventory for half the average cost of production. 2. Sell all but 1 unit of capacity and you may sell the remaining inventory at your set price.

• Industry Conditions Report

- factual information / parameters about the beginning business environment, including customer buying criteria, segment drift rates and ideal spots, and segment demand and growth rates. They are posted herein and are also available by logging into the Capsim website and navigating: Industry Results Reports "Industry Conditions Report"

How much a plant produces compared to its capacity is shown as utilization rate

0% utilization means a plant produced no units (sat idle); 100% utilization = full first shift was used; 200% utilization = both full first and second shifts were used (and plant production reached maximum possible level).

total of # rounds

3 practice and 8 graded

• Second-shift labor costs

50% higher than the first shift.

• Prime Interest Rate Round 1

7.0%

• Production Calculations • A plants maximum production

= 2 * capacity. If plant's capacity is 500, assuming the plant is complete and the product has already been available, the maximum annual production = 1,000; this is 200% utilization. The full range you could produce is: 0 units (no production/ idle plant) to 1,000 units in a year. NOTE: You could only produce the full 1,000 units if AP was set to 0 days.

Product Age Calculations Example 2: If a new product is launched and first enters the market on July 1, 2020 its age on July 1 is 0. How old will it be at the end of 2020?

ANS: At the end 2020 age will = .5 year.

• Product Age Calculations Example 1: If a product is 2 years old at the start of 2020 and no changes are made in size or performance, how old will it be at the end of 2020?

ANS: The product will be 3 years old at the end of the year (2.0 + ages 1 year during 2020 = 3.0 years).

• Accessibility Calculations (Sales budget chart would be provided) Example 1: You have one product in the high tech segment. It ends the year with 30% accessibility. If the promotional budget is set to $0, what will awareness be next year?

Ans: 30% * .67 = 20%

• Age

Age is always perceived age which is cut in half upon any change in the product's size or performance. Each segment has different age expectations, that is, the length of time since the product was invented or revised. High Tech wants new technology while Low Tech prefers proven technology that has been in the market for a few years. The ideal age and range remains constant across the 8 years; see age preferences. In the high tech segment, an age of 0 yields results in 100 satisfaction points for calculating the customer survey score and scores decline with age. In the low tech segment, an age of 3.0 yields 100 satisfaction points for the customer survey score. Ages either higher or lower yield lower scores.

• Product's Market share given CSS Example: There are four products in the low tech segment: Your product Able has a CSS of 10, the other products have CSS scores of 25, 25, and 40. Demand last round was 5,590 units. (1) What market share would you expect Able to have in the coming year? (2) How many units would you expect to sell?

Ans: (1) Market share in the segment = calculate as Able's CSS in the segment / Sum of all product's CSS in the segment; so 10 / (10 + 25 + 25 + 40 = 100) = 10% market share); (2) expect to sell: = 10% of next year's demand; calculate as last year's segment demand of 5,590 + 10% low tech segment growth (559) = 6,149 * expected 10% market share = 615 units.

• Accessibility Calculations (Sales budget chart would be provided) Example 2: You have two products in low tech segment with an accessibility of 45%. What must the total sales budget be to achieve 60% accessibility?

Ans: 45% * .67 = 30% to start the year. To increase to 60%, you would need to spend +/- $3 million (adds 30% to existing 30% yielding 60%).

• Awareness Calculations (Promotion budget chart would be provided) Example 1: A product ends the year with 60% awareness. If the promotional budget is set to $0, what will awareness be next year?

Ans: 60 * x .67 = .402 (40%). You lose 1/3 each year

• Product's material cost given MTBF and position Example: A product positioned at the leading end of the high tech segment in round 1 has an MTBF level of 20,000. What is the approximate total material cost?

Ans: MTBF cost = 20,000 * 0.30 / 1,000 units = $6.00 in MTBF cost + average position cost of $10.00 (cost at the leading edge of high tech segment in round 1) = $16.00 / unit.

• Awareness Calculations (Promotion budget chart would be provided) Example 2: Your firm launches a new product. You set a promo budget of $1 million. What will the products awareness be?

Ans: New products get 25% awareness automatically + $1 million buys 20% awareness for the year, so 25% + 20% = 45%.

approximate labor costs

Automation Level Approximate ST Labor Cost per Unit 1 $12.75 5 $7.64 10 $1.25

• Price

Each segment has different price expectations. Customers always favor lower prices within the expected range. The price range remains constant across the 8 years. Sensors priced above or below the range face significant declines in sales. Those products fail the price rough cut. In calculating the customer survey score, customers give products priced at the low end of the price range 100 satisfaction points; 1 point to those at the high end of the price range.

• Drift Rates

Each year, customers demand increased performance (Pfmn) (i.e., higher values) and decreased (i.e., smaller values) size. This is known as the drift rate. The drift rates are different for each segment, are constant for each of the eight rounds, and are as follows: Pfmn Size Low Tech +0.5 -0.5 High Tech +0.7 -0.7

• High Tech Segment Buying Criteria

Ideal position (33%; leading edge), Age (29%; ideal = 0.0), price (25%; range $25-$45), and reliability (13%; 17,000-23,000)

• Decision Screen Icons

Just in Time Information accessed by right clicking on these in the Decision Screens to release a pop-up with more detailed information about decision factors

Growth Rate

Low Tech 10.0% High Tech 20.0%

• Low Tech Segment Buying Criteria

Low Tech customers seek proven products, are indifferent to technological sophistication and are price motivated.

Ideal Spots-is the size and performance most desired by customers in the segment. The ideal spots are this distance from the center of the segment circle: Low

Pfmn Size Description High Tech +1.4 -1.4 Lower right corner at leading edge

• Ideal Spots-is the size and performance most desired by customers in the segment. The ideal spots are this distance from the center of the segment circle: Low

Pfmn Size Description Low Tech -0.0 +0.0 Segment center

• Low Tech Segment Buying Criteria

Price (41%; $15-$35), Age (29%, ideal = 3.0), reliability (21%; 14,000-20,000), and ideal position (9%; segment center)

• Marketing

Price, promotion (awareness), and sales (accessibility) Accounts receivable (A/R) and accounts payable (A/P) lag, and company's sales forecast.

• Production

Production schedule, buying and selling capacity, setting automation level, A/P lag.

• Decisions are made in four (4) company areas

Research & Development (R&D), Marketing, Production, and Finance.

Low Tech segment centers

Round Pfmn Size 1 5.3 14.7 4 6.8 13.2 8 8.8 11.2

High Tech Segment center

Round Pfmn Size 1 6.7 13.3 4 8.8 11.2 8 11.6 8.4

High Tech- unit demand

Round Unit demand 1 2,160 4 3,732 8 7,740

Low Tech- unit demand

Round unit demand 1 4,620 4 6,149 8 . 9,003

• Position

Sensors vary in their dimensions (size) and the speed/sensitivity with which they respond to changes in physical conditions (performance). Combining size and performance creates a product attribute called positioning. The preferred size and performance changes each year. Satisfaction points for the customer survey score based on position are based on position relative to the ideal spot. In the high tech segment, position at the ideal spot yields 100 satisfaction points with points declining to 1 at the trailing edge. In the low tech segment, 100 satisfaction points are achieved when a product is at the ideal spot in the center of the segment, with points declining to 1 for a product at either the leading or trailing edge of the segment.

• Stock Out

when a product generates high demand but runs out of inventory ("stocks out"). The company loses sales as customers turn to its competitors.

• Accounts Payable

Suppliers become concerned as the lag grows and they start to withhold material for production. At 30 days, they withhold 1%. At 60 days, they withhold 8%. At 90 days, they withhold 26%. At 120 days, they withhold 63%. At 140 days, they withhold all material. If you wish to achieve a 200% plant utilization you must set AP to 0 days.

Foundation FastTrack-• Segment Analysis Reports

The Statistics box in the upper-left corner reports Total Industry Unit Demand, Actual Industry Unit Sales, Segment Percent of Total Industry and Next Year's Growth Rate. The Customer Buying Criteria box ranks the customer criteria within each segment. Actual and potential market share are provided for each company. Products are sorted by the number of units sold in the segment.

• Rough Cut Circle

The dashed outer circle defines the outer limit of the segment. Customers are saying, "I will NOT purchase a product outside this boundary." We call the dashed circle the rough cut boundary; rough cut circles have a radius of 4.0 units.

Spending on promotional budgets has diminishing returns

The first $1,500 buys 36% awareness, an additional $1,500 buys just under 14% additional awareness ($3,000 buys just under 50% total). Key levels and costs are: • 10% awareness costs $550,000 • 20% awareness costs $900,000 • 30% awareness costs $1,250,000 • 40% awareness costs $1,700,000

Perceptual Map: "ideal spot"

The size and performance that customers desire most is known as the "ideal spot"

• Fine Cut Circle

The solid inner circle defines the heart of the segment. Customers prefer products within this circle. We call the inner circle the fine cut because products within it "make the fine cut." Fine cut circles have a radius of 2.5 units.

• The Foundation Spreadsheet (decision screens

where you formulate and finalize management decisions for every department, accessed via an Internet browser.

• The Decision Audit

a complete trail of all team decisions saved. Available on the website by clicking the "Decision Audit" link.

• Annual Report

a report detailing your firm's performance at both the company and product levels. Is the only report that provides detailed breakdown of product-level profits (FastTrack does not show product-level profits!). Print the pdf version by logging into the Capsim website and navigating: Industry Results Reports Annual Reports "Download"

Foundation FastTrack - Front Page

a snapshot of last year's results including sales, profits and cumulative profits for your firm and competitors

Foundation FastTrack-•• Production Analysis

detailed information about each product in the market, including sales and inventory levels, price, material and labor costs, revision dates, ages, capacity, and utilization

• The Market Share Actual vs. Potential Chart

displays two bars per company. The actual bar reports the market percentage each company attained in the segment. The potential bar indicates what the company deserved to sell in the segment. If the potential bar is higher than the actual, the company under produced and missed sales opportunities. If the potential is lower than the actual, the company picked up sales because other companies under produced and stocked out (ran out of inventory).

the simulation round will process

every Friday at 11pm

Production Calculations • Revised product

if a product is being revised, the plant can produce up to 200% of capacity; the plant produces the "old" product up to the date of the R&D completion; then immediately begins producing the new product as of the completion date.

• MTBF (Mean Time Before Failure)

is a rating of reliability (not overall quality!) measured in hours, it is the number of hours a product is expected to operate before it malfunctions. Customers prefer products towards the top of the range. The MTBF range remains constant across the 8 years. In calculating the customer survey score, customers give products with MTBF at the high end of the range 100 satisfaction points; 1 point to those at the lowest acceptable MTBF score.

First-shift capacity

is defined as the number of units that can be produced on an assembly line in a single year with a daily eight-hour shift. An assembly line can produce up to twice (2*) its first-shift capacity by using a second shift. A plant with a capacity of 1,000 units can produce up to 2,000 units each year (if operated for the full year).

• Finance

issue and retire stock, set dividend, borrow current debt, issue and retire long-term debt, and set A/R and A/P lag.

• Forward looking Proformas

projections for the upcoming year; these are estimates of future results based on your saved decisions help you envision the impacts of your pending decisions and sales forecasts. Each is accessed through the "Proforma" tab in the Decision screens. Includes: • Proforma Balance Sheet • Proforma Cash Flow Statement • Proforma Income Statement • Proforma Ratios

• The Top Products in Segment

reports products sold in the segment, sorted in descending order of total sales. Shows: Market Share, Units Sold to Segment, Revision Date, Stock Out indicator, Performance and Size coordinates, Price, MTBF, The product's Age on December 31, promotion and sales budgets, Awareness and Accessibility levels, and Customer Survey Score (for Dec. 31).

the CEO

responsible for coordination across the functions and ensuring all decisions are consistent with the strategy selected

• Research & Development (R&D)

setting and revising position (size & performance), and reliability (Mean Time Between Failure / MTBF) for existing and new products; indirectly sets age with changes to position.

Foundation FastTrack-• Stock & Bond Summaries

stock prices, market capitalization, bond ratings and prime interest rates for all companies

Foundation FastTrack-• Financial Summary

surveys each company's cash flow, balance sheet and income statements. Does not include product level income statement

• Accounts Receivable

the accounts receivable lag impacts the customer survey score. At 90 days there is no reduction to the base score. At 60 days the score is reduced 0.7%. At 30 days the score is reduced 7%. Offering no credit terms (0 days) reduces the score by 40%.

• Poorly positioned products

the customer survey score for products outside the fine cut drops in a linear fashion. Just beyond the fine cut the score drops 1%. Halfway between the fine and rough cut the score drops 50%. The customer survey score drops 99% for products that are just inside the rough cut. A product outside of a segments rough cut will not sell in that segment.

Perceptual Map:"fine cut"

the preferred range in size and performance is the "fine cut",

• Automation & R&D

the time required for a one unit change in size or performance at automation level of ___ requires _____: • 1; < .5 years • 5; .6 years • 10; 1.4 years

• Factual Information

these are forward looking, but are not estimates; they are factual

Operating Cash Flow

you may also fund investments from your company's operating cash flow. See the annual report/cash flow statement for historical performance and view the pro forma financial statements for predicted performance. 2. Establishing a dividend policy that maximizes the return to shareholders. 3. Setting accounts payable policy (which can also be entered in the Production and Marketing areas) and accounts receivable policy (which can also be entered in the Marketing area). 4. Driving the financial structure of the firm and its relationship between debt and equity. 5. Selecting and monitoring performance measures that support your strategy.

• Seller's Market

• A "sellers market" occurs when demand exceeds the # of units available. Under a sellers market, even products with very poor customer surveys will sell more than their potential demand. • In a seller's market, customers will accept low-scoring products as long as they fall within the segment's rough cut limits.

• Sales Budgets -> Accessibility

• Accessibility is the percentage of customers your salesforce reaches regularly. • Accessibility declines by one third (33.3%) each year. • Spending on accessibility has diminishing returns - with one product in a segment, the first $2,000 in sales budget buys 22% accessibility; spending $3,000 buys 32%. With 1 product, key levels and costs are: • 10% accessibility costs $1,250,000 • 20% accessibility costs $1,800,000 • 30% accessibility costs $2,800,000 • Sales budgets are for the segment - having • Sales budgets are for the segment - having more than one product in the segment makes your sales budget more efficient. • The maximum spending for one product's sales budget is $3,000 (buys 32% accessibility). For two or more products a total of $4,500 can be spent (total spending of $4,500 buys 35% accessibility for all products in the segment). • With two products in a segment and 100% accessibility, spending a total of $3,500 maintains 100%. • To reach 100% accessibility you must have at least two products in the same segment

Bond Issues (Long Term Debt)

• All bonds are 10-year notes. • You pay a 5% brokerage fee to issue LT debt. • The first three digits of the bond, the series number, reflect the interest rate. The last four digits indicate the year in which the bond is due. The numbers are separated by the letter S which stands for "series." For example, a bond with the number 12.6S2017 has an interest rate of 12.6% and is due December 31, 2017. • As a general rule, bond issues are used to fund long term investments in capacity and automation. • Bondholders will lend total amounts up to 80% of the value of your plant and equipment • Each bond issue pays a coupon, the annual interest payment, to investors. If the face amount or principal of bond 12.6S2017 were $1,000,000, then the holder of the bond would receive a payment of $126,000 every year for ten years. The holder would also receive the $1,000,000 principal at the end of the tenth year. • When issuing new bonds, the interest rate will be 1.4% over the current debt interest rates • You can buy back outstanding bonds before their due date (incur a 1.5% brokerage fee) • Bonds are retired in the order they were issued. The oldest bonds retire first. There are no brokerage fees for bonds that are allowed to mature to their due date. • If a bond remains on December 31 of the year it becomes due, your banker lends you current debt to pay off the bond principal. This, in effect, converts the bond to current debt. This amount is combined with any other current debt due at the beginning of the next year. • Bonds with a due date after the 8th round of the simulation are never "called" (you do not need to pay them off during the 8 rounds as the principal would be paid in a future year; the simulation operates as a "going concern" not a "liquidation").

• Promotional Budget -> Awareness

• Awareness is the percentage of customers who are familiar with your product; 100% means every customer knew about your product. • Awareness is affected by promotion budgets and time. Awareness declines by one third each year. • Awareness at the start of the year = Last Year's Awareness - (33% x Last Year's Awareness) = Starting Awareness

• Capacity

• Each unit of capacity for a plant costs $6.00 for the floor space plus $4.00 multiplied by the automation rating. Plant cost per unit of capacity = $6 per + (automation rating * $4) • Capacity can be sold at the beginning of the year for $0.65 on the dollar value of the original investment. • To sell capacity, enter negative value into "buy / sell capacity" in the decision screen • Plant and equipment is depreciated using 15-year straight line approach. Any plant or equipment sold which has not been held for at least 5.25 years (depreciated 35%) is sold at a loss.

• Emergency Loans

• If you manage your cash position poorly and run out of cash, the simulation will give you an emergency loan to cover the shortfall • Charge is one year's worth of current debt interest plus a 7.5% penalty fee • Emergency loans depress stock prices, even when you are profitable.

• Material Costs

• Materials costs = MTBF cost + Position Cost • MTBF costs $0.30 per 1,000 units. • Position costs are: • Training edge of low tech = $1.50 / unit • Midway between the trailing edge of low tech and the leading edge of high-tech = $5.75 / unit • Leading edge of the high tech segment approximately $10.00 / unit • We calculate position cost as: Material Cost per unit - MTBF Cost per unit = Average Position Cost per unit.

• Customer Survey Score Components

• Price • MTBF • Age • Position • Awareness • Accessibility • Accounts Receivable

Labor cost is a function of automation and plant utilization and approximated as:

• Straight time labor rate (R0; Utilization 0-100%) ≈ $12.50 - (Automation Level * $1.25) • Overtime labor rate (Utilization 101%-200%) = Straight time labor rate * 1.5

Current Debt

• There are no brokerage fees for current debt. • Interest rates are a function of your debt level. The more debt you have relative to your assets, the more risk you present to debt holders and the higher the current debt rates. • Bankers will loan current debt up to about 75% of your accounts receivable (found on last year's balance sheet) and 50% of this year's inventory (about 15% of the combined value of last year's total direct labor and total direct material) plus 20% (for growth).

Stock Issuances

• You pay a 5% brokerage fee for issuing stock • New stock issues are limited to 20% of your company's outstanding shares in that year. • As a general rule, stock issues are used to fund long term investments in capacity and automation. • Stock price is driven by book value, the last two years' earnings per share (EPS) and the last two years' annual dividend. • Book value is: $ Equity / # shares outstanding • The dividend is the amount of money paid per share to stockholders each year. Stockholders do not respond to dividends beyond the EPS; they consider them unsustainable. For example, if your EPS is $3.50 per share and your dividend is $4.00 per share, stockholders would ignore any portion of the dividend above $3.50 per share as a driver of stock price • You can retire stock (incur 1.5% brokerage fee). The amount cannot exceed the lesser of either: • 5% of your outstanding shares, listed on page 2 of last year's FastTrack; or • Your total equity