CAPSIM

What affects R&D project time?

- Length of move on perceptual map - How many projects are in R&D at the same time - Automation levels - If products are moved/created close to existing products time decreases - TQM/Sustainability can also decrease project time

How much can you sell capacity for?

Capacity can be sold at the beginning of the year for $0.65 on the dollar value of the original investment, can be bought back later for full price If you sell capacity for less than its depreciated value, you lose money, which is reflected as a write-off on your income statement. If you sell capacity for more than its depreciated value, you make a gain on the sale. This will be reflected as a negative write-off on the income statement [See 6.3 Income Statement]

How long do projects take to complete?

As short as 3 months or as long as 3 years. Project time increases when 2 or more projects enter R&D at the same time (every project takes longer). Automation levels affect time

How much current debt can you get?

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 They estimate your inventory for the upcoming year by examining last year's income statement. Bankers assume your worst case scenario will leave a three- to four-month inventory and they will loan you up to 50% of that amount.... ....This works out to be about 15% of the combined value of last year's total direct labor and total direct material, which display on the income statement..... ....Bankers also realize your company is growing, so as a final step bankers increase your borrowing limit by 20% to provide you with room for expansion in inventory and accounts receivable

How many bonds can you issue?

Bondholders will lend total amounts up to 80% of the value of your plant and equipment (the Production Department's capacity and automation). 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. If your current debt interest rate is 12.1%, then the bond rate will be 13.5%

Buying Criteria by Segment

Buyers in each segment place different emphasis upon the four buying criteria. Position and price criteria change every year, age and MTBF always remain the same. Buying criteria for previous year reported in courier's segment analysis. Industry conditions report displays the round 0 buying criteria for each segment.

Price Score

Every segment has $10.00 price range, customers prefer towards bottom of range. Correlated with segment position. Price ranges across all segments drop $0.50 annually. Published in Industry Conditions Report & Segment Analysis pages of Courier

First-shift Capacity

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

When do R&D projects begin?

January 1st. However if a previous product project has not been completed by December 31st of the previous year you will not be able to launch a new project

Sales Forecasting

Key element to company success. Manufacture too many units = higher inventory carrying costs; Manufacture too little = Stock Out and Sales Lost [see 10 Forecasting]

Variable Costs

Labor, Material and Inventory Carrying costs subtracted from the Gross Revenue Forecast

Age

Length of time since the product was invented or revised

What is the optimal project time frame?

Less than a year, be sure to verify completion dates. Consider breaking a project up to meet this

How are R&D costs determined?

R&D costs are driven by the amount of time they take to complete: 6 month project costs $500,000 and a one year project costs $1,000,000.

MTBF

Rating of reliability measured in hours

When are sales budgets less effective?

Sales budgets are less effective when products are not completely positioned in the fine cut circle, when prices rise above segment guidelines or when MTBFs fall below segment guidelines

MTBF Rough Cut

Scores fall rapidly for products below MTBF guidelines: Loss of 20% per 1,000 hours up to 4,999 hours where score is reduced 99% and demand falls to 0 at 5,000 hours under.

Seller's Market

Segment demand exceeds the supply of products available. Customers will accept low scoring products if within rough cut (dotted) limit

Price Rough Cut

Sensors priced $5.00 below will not be considered. Every $1.00 above/below range loose 20%, up to $4.99 where 99% is lost, of survey score.

Accounts Receivable

Sets amount of time customers have to pay for their purchases. At 90 days there is no reduction in base score, at 60 days reduce 0.7%, at 30days reduce by 7%. Offering no credit terms (0 days) reduces score by 40%. [see 4.4.5 "Credit Policy"]

How does awareness & accessibility affect score?

Similar products w/ higher awareness and accessibility will score better than those with lower percentages. Some initiatives can increase the customer survey score. [see 4.2 "marketing"] [see 7.2 "TQM/sustainability"]

Fine Cut Circle

Solid inner circle, customers prefer products inside, radius of 2.5 units.

Proformas & Annual Reports

Specific to your company. Proformas are projections for upcoming year, help envision the impacts of your pending decisions and sales forecasts. Annual reports are results from previous, help you analyze last year's results.

"Just in Time Information"

This symbol is an upper square shaded in red (red corner flag). Clicking it will give you detailed information about the area you are viewing.

Perceptual Map

Tracks the position of products (competitors included). Size on vertical (y), performance on horizontal (x). Each axis: 0 - 20 units

MTBF Fine Cut

w/i the range customer survey score increases with MTBF but material costs increase $0.30 for every 1,000 hours capped at the top of the range (no benefit for higher than range MTBF)

What is R&D responsible for in terms of the 4 'P's?

"Product" making R&D essential part of the marketing process

Accessibility

# of customers who can easily interact w/ your company. Built over time by the sales budget, fund salespeople and distribution systems to service customers

How much does each new unit of capacity cost?

$6.00 for the floor space plus $4.00 multiplied by the automation rating (spreadsheet will calculate) & takes a year to take effect

Awarness

% of people who know about your product. Built over time by promotion budget, funds advertising and PR campaigns

Bonds

- All bonds are 10-year notes - 5% brokerage fee for issuing - First three digits of the bond, the series number, reflect the interest rate, the last 4 indicate the year due

Successful managers will.....

- Analyze the market and its competing products - Create and execute a strategy - Coordinate company activities

Automation

- As automation levels increase, the number of labor hours required to produce each unit falls. (1.0 to 10) - Past 1, Each additional point of automation decreases labor costs approximately 10%. At a rating of 10.0, labor costs fall about 90%

How is it best to think about awareness and accessibility?

- Awareness = "before" the sale...The promotion budget drives awareness, which persuades the customer to look at your product (advertising & PR) - Accessibility = "after" the sale.... The sales budget drives accessibility, which governs everything during and after the sale (distribution, order entry, customer service, etc) -The former is about encouraging the customer to choose your product; the latter is about closing the deal via your salespeople and distribution channels.

Computer Forecast Prediction

- Cannot consider what your competitors are doing - Assumes competitors will offer mediocre product (survey score of 20) in each segment - Changes as you make decisions about your product - Your product sales forecast column overrides this, ALWAYS do this[Chapter 10]

Sales Budget

- Contributes to segment accessibility (% indicates # of customers who interact w/ company) - If your sales budget drops to 0 you loose 33% of accessibility (like awareness) - [Unlike awareness] accessibility applies to the segment not just the product - All products in fine cut contribute to accessibility -If you have one product in a segment, there is no additional benefit to spending more than $3,000,000. If you have two or more products in a segment, there is no additional benefit to spending more than a $4,500,000 split between the products, for example, two products with sales budgets of $2,250,000 each -The Courier's Segment Analysis reports (pages 5-9) publish accessibility percentages.

What are the possible ways to acquire capital?

- Current Debt - Stock Issues - Bond Issues (long term debt) - Profits (retained earnings)

Changing Automation

- For each point of change in automation, up or down, the company is charged $4.00 per unit of capacity. For example, if a line has a capacity of 1,000,000 units, the cost of changing the automation level from 5.0 to 6.0 would be $4,000,000 - Reducing automation costs money (retooling cost; spending money to make plant less efficient) - While reducing automation will speed up R&D, it is not wise to reduce automation - Changes take a year to take effect

Current Debt

- One-year notes - Last year's current debt is always paid off on January 1st, can roll this by borrowing the same amount again - No brokerage fees for current debt - The more debt you have relative to your assets, the more risk you present to debt holders and the higher the current debt rates

[Sellers Market] Desperate customers with no better alternatives will buy...

- Product positioned inside rough cut circle - Product priced [max] $4.99 above the price range (@ $5.00 customers reach tolerance limit) - Product with MTBF 4,999 hours below the range (refuse to buy at 5,000 hours below range)

Company Departments

- Research and Development (R&D) - Marketing - Production - Finance - [Optional, if enabled]: Human Resources (HR) & Total Quality Management (TQM)

What does R&D affect or is affected by in Production?

- The cost of material - The purchase of new facilities to build new products - Automation levels (The higher the automation level, the longer it takes to complete an R&D project.)

What does R&D address in marketing?

- The positioning of each product inside a market segment on the Perceptual Map - The number of products in each segment - The age of your products - The reliability (MTBF rating) of each product

Segments (Customers grouped by similar needs):

- Traditional - Low End - High End - Performance - Size

Second-Shift Capacity

- Twice first-shift capacity - Labor costs are 50% higher than first

Promotion Budget

-Determines level of awareness (% reflects of available customers who know about product) - From one year to the next 33% of those who knew about a product forget about it Last Year's Awareness - (33% × Last Year's Awareness) = Starting Awareness - If a product ended last year with an awareness of 50%, this year it will start with an awareness of approximately 33%. This year's promotion budget would build from a starting awareness of approximately 33% Starting Awareness + Additional Awareness from Figure 4.2 = New Awareness - The Courier's Segment Analysis reports (pages 5-9) publish awareness percentages. - New products create 25% awareness at no cost (added to any additional awareness bought)

How should current/short term debt be used?

As a general rule, companies fund short term assets like accounts receivable and inventory with current debt offered by banks

How fast do segment circles move?

0.7 to 1.3 units each year

The finance department is primarily concerned with 5 issues:

1) Acquiring the capital needed to expand assets, particularly plant and equipment. Capital can be acquired through: Current Debt, Stock Issues, Bond Issues (long term debt), Profits (retained earnings) 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

The common tactical mistakes to avoid in sellers market:

1) After completing a capacity analysis, a company decides that industry demand exceeds supply. They price their product $4.99 above last round's published price range, forgetting that price ranges fall by $0.50 each round. Demand for the product becomes zero. They should have priced $4.49 above last year's range. 2)A company disregards products that are in the positioning rough cut. These products normally can be ignored because they have low customer survey scores. However, when the company increases the price, the customer survey score falls below the products in the rough cut areas, which are suddenly more attractive than their product. 3)The company fails to add capacity for the next round. A seller's market sometimes appears because a competitor unexpectedly exits a segment. This creates a windfall opportunity for the remaining companies. (However, a well-run company will always have enough capacity to meet demand from its customers.)

What 2 factors should be considered before raising automation?

1) Automation is expensive: At $4.00 per point of automation, raising automation from 1.0 to 10.0 costs $36.00 per unit of capacity 2) As you raise automation, it becomes increasingly difficult for R&D to reposition products short distances on the Perceptual Map. For example, 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. Long moves are less affected. You can move a product a long distance at any automation level, but the project will take between 2.5 and 3.0 years to complete

MTBF Score

5,000 hour range, customers prefer towards top of range.

[Sales Budget] How hard is it to achieve and maintain 100% accessibility?

Achieving 100% accessibility is difficult. You must have two or more products in the segment's fine cut. Once 100% is reached, you can scale back the combined budgets to around $3,500,000 to maintain 100%.

Positioning Costs

Affects material costs. The more advanced, the more expensive. At the beginning, trailing edge of low-end fine cut has lowest positioning cost of ~$1 leading high end fine cut has highest positioning cost of ~$10 & midpoint is ~$5.50

Why should you issue bonds (LTD)?

As a general rule, bond issues are used to fund long term investments in capacity and automation.

Positioning

Combination of size and performance attributes; coordinates

Less Promotion and Sales

Contribution Margin Forecast minus the product's Promotion Budget and Sales Budget

Rough Cut Circle

Dashed outer limit of segment, radius of 4.0 units, customers will not purchase product outside.

When are your decisions made and how long are they implemented?

Decisions are made every year on January 1st and are carried out by your employees throughout the year

Research and Development (R&D)

Designs your product line. Invents and revises products to appeal to customers.

Production

Determines how many units will be manufactured during the year. Responsible for buying/selling production lines. Production needs to consider the sales forecasts developed by Marketing minus any inventory left unsold from the previous year

Reliability (MTBF) Costs

Each 1000 hours of reliability adds $.30 to the material cost ex...20,000 hours of reliability includes $6 in reliability costs= ($.30 x 20000)/1000 = $6 Improving MTBF will make it more appealing but increase material cost. Material costs displayed in the spreadsheet and reports are the combined positioning and reliability (MTBF) costs.

Price

Each segment has different price expectations

Customer Buying Criteria

Each segment has different standards for products considering: Price, Age, Mean Time Before Failure (MTBF) and Positioning

Market Segment Positions on the Perceptual Map

Each segment has its own preferences. Over time, customers expect products that are smaller and faster causing the segments to 'drift' each month (down & right). Some segments demand greater improvement (faster/farther drift) than others, drifting at different rates. Over time, segmental overlap diminishes. Drift rates are published in the Industry conditions report. Zero customers interested in products positioned outside the dotted lines & segments will not move faster to catch up to products ahead/ above customer expectations. [See "4.1 R&D" for more info]

Segment Movement

Each segment moves across the perceptual map a little each month. Ideally, you position product in front of the ideal spot in January, on top of ideal spot in June, and trail in December. In December you would complete R&D for next year to jump in front of the ideal spot, repeat.

Situation Analysis

Enable you to understand current market conditions and how the industry will evolve in the next few years. It will assist you with your operational planning. SWOT analysis

Finance

Ensures your company has the financial resources to run through the year. Can raise money via one-year bank notes, 10-year bonds or stock issues. Can also issue dividends, buy back stock or retire bonds before their due dates.

Contribution Margin Forecast

Gross Revenue Forecast minus variable costs

Ideal Spot

Heart of segment where demand is highest, all else equal.

Base Scores

Helps you to estimate the customer survey score - begin with buying criteria available in the courier's segment analysis reports (estimate average points). Base score can fall because of poor awareness (promotion), accessibility (place) or credit terms.

Industry Conditions Report

Helps you understand your customers (segments). Lists market sales percentages and projected growth rates unique to your simulation. Published once at the beginning of the sim.

Stock Outs

High demand but runs out on inventory; looses sales as customers turn to competitors. Can happen in any month. Markets Share Report of Courier (Page 10) can help diagnose and asses.

What happens if a project takes more than a year to complete?

If the project length takes more than a year, the revision date will be reported in the next Capstone Courier. However, the new performance, size and MTBF will not appear; old product attributes are reported prior to project completion.

Discontinuing a Sensor

If you sell all the capacity on an assembly line, Capstone interprets this as a liquidation instruction and will sell your remaining inventory for half the average cost of production. Capstone writes off the loss on your income statement. If you want to sell your inventory at full price, sell all but one unit of capacity

What is the minimum and maximum amount of products that you can have?

Minimum 1, maximum 8

Capstone Spreadsheet

Nerve center of your company where you formulate and finalize management decisions for every department

Age Score

No rough cut (will never be too young/old for purchase). Customers demanding cutting-edge prefer newer, generally 1.5 years or less. Other segments may prefer proven technology. Preferences published in Industry Conditions Report and Segment Analysis of Courier

Is it possible to produce new products prior to the revision date?

No, A new product with a revision date of July 1 will be produced in the second half of the year. The capacity and automation will stand idle for the first half of the year.

Can you be sure of a sellers market?

Not unless you can be sure that industry capacity, inc second shift, cannot meet demand for segment

Research and Development (R&D)

Oversees invention and redesign; creates the innovations needed to keep the company ahead of the competition. Invents new products & changes existing product specifications [see 2.1.4 Positioning]

Positioning Score

Perceptual map illustrates with circles. Each segment is described with a dashed outer circle, a solid inner circle and a dot called the ideal spot.

Gross Revenue Forecast

Price multiplied by either the Computer Prediction or, if entered, Your Sales Forecast

Customer Survey Score

Product demand is driven by its monthly customer survey score, reflects how well a product meets buying criteria, company promotion, sales and AR also affect score. Calculated 12 times a year, December survey scores are reported in courier's segment analysis page. It is possible for a product with a good december score to have a much poorer score (poorer sales) in the months prior to R&D revision (age, positioning and MTBF can change quite a bit during the year, price set at beginning of the year will not)

4 Ps

Product, Price, Place, Promotion, [credit terms], [availability] (create price-value relationship)

Positioning Rough Cut

Products in rough cut area are poorly positioned (2.5-4.0 units from center). Just beyond rough cut survey scores drop 1%, halfway 50% and 99% as approach rough edge. Revise in R&D [4.1.1]. Location of rough/fine cut as of Dec 31 published on P.11 of Courier

Marketing

Promotes your products. Interacts w/ customers via its sales force and distribution system. Responsible for sales forecasts. Concerned with the remaining Ps (price, place, and promotion)

Buying Criteria and the Customer Survey Score

Survey evaluates each product against the buying criteria and weighted by importance (perfect score =100). Industry Conditions and Courier's Market Segment analysis break down criteria based on performance. Perfect score requires that the product be: positioned ideally (only possible once a year due to drift), priced at bottom of range, ideal age (unless revised, only possible once a year), MTBF at top of range. Customers want perfection but is impractical, compromise is needed to compete and make a profit.

Inventing Sensors

The Production Department must order production capacity to build the new product one year in advance. Invention projects take at least one year to complete....All new products require capacity and automation, which should be purchased by the Production Department in the year prior to the product's revision (release) date. If you don't buy the assembly line the year prior to its introduction, you cannot manufacture your new product!

Is there a limit to capacity & automation purchases?

The dollar value limit of capacity and automation purchases is largely determined by the maximum amount of capital that can be raised through stock and bond issues plus excess working capital. The decision area displays this amount.

Capstone Courier

The industry newsletter, which is an extensive year-end (backward looking) report of the sensor industry. This report includes: Customers Buying Patterns, Product Positioning, and Public Financial Records. This is where you will analyze your company as well as your competitors.

A Sensor's Age

When a product is moved on the Perceptual Map, customers perceive the repositioned product as newer and improved, but not brand new (cut the age in half). It does not matter how far the product moves, age will half commencing on the revision date.

How should you consider automation and its impact on cost?

When considering automation and its impact on cost, it is useful to consider the production process as a series of 10 tasks. If you were planning on making a cell phone, you could complete all 10 tasks yourself. This equates to an automation level of 1, as you (the labor unit) would be doing all the work, and there would be a very low level of automation (maybe an electric screwdriver). If you bought a machine that automated the first 5 tasks, this is represented by an automation level of 5. The higher your automation level, the longer it takes to retool your plant for product upgrades. This is especially important in high tech segments, where positioning near the cutting edge of technology is critical. Automate too much and the product designs cannot keep up with the evolving market.

Does drift affect positioning costs over time?

While the segments will drift apart and the distance between the leading and trailing edges will increase, the positioning cost range will not change. The leading edge will always be approximately $10.00, the trailing edge will always be approximately $1.00 and the midpoint will always be approximately $5.50.

Positioning Fine Cut

Within 2.5 units of center. Ideal spots may not be in center due to customer future proofing perception. Placing a product in path of ideal spot will return greatest benefit over the year.

Price Fine Cut

Within the price range: As price goes down, demand increases.

Do labor costs increase each year?

Yes, labor costs increase each year because of an Annual Raise in the workers' contract.

Does the longer the positional move affect time to complete the project?

Yes, the longer the move on the perceptual map, the longer it takes the R&D debt to complete

Estimating the Customer Survey Score

Your score / the sum of all the scores including competitor scores = percentage of segment sales. [see "How is the Customer Survey Score Calculated?" in the Online Guide's FAQ|Reports section