The business that you control is a small manufacturing company, making three consumer products, and operating in competition with several similar companies.
You are a member of the Board of Directors, which is responsible for overseeing the various functions of the company -
You sell directly to retailers in four geographic areas -
Your factory is situated in the South area.
In order to run a business, you need to know something about the economic, geographic and social background to your market, and of the people who are likely to work for you.
Some information is available from official statistics, but the rest you must pay for, or gather from your knowledge of the industry and your competitors. Most important is information about your company's recent performance.
With this information, you can prepare a company strategy that fits your assessment of the economy and your markets.
Each of the four market areas has a different demographic and social mix (see Table 1).
Normal economic cycles of growth and decline affect all of these markets. However, they do not follow the present-day, real life economic situation; nor do current Government Policies have any bearing on the simulation.
Your economy can be static, grow or decline, depending on the situation presented in the Company History. There is also a strong seasonal pattern of demand for the industry's products, and is the same for all three products in all market areas. The seasonal peak is in the fourth quarter of each year.
Each quarter, official statistics are available to help you understand how the economy is moving -
An analysis of these indicators, combined with a study of the previous results of your company should help you establish a link between the economy and your company's past performance. Your company strategy, however, should allow for possible future trends.
Your marketing department is responsible for creating demand for, and selling your company's products in the face of competition from rival companies.
To do this well you must have a good marketing strategy (Guidance Note).
You sell directly to retailers
in response to demand from the general public.
These retailers are the prime target of your marketing effort.
They, in turn, try to satisfy public demand, which varies
according to the economic climate and the marketing effort of the competing companies.
The retailers and the general public are also the target of rival companies
selling similar products in competition to yours.
You make and sell three distinct products which are not specified except to say that they are consumer products and all three are made of the same basic materials and by the same production process.
Each product has a marketing image (Guidance note) which you are seeking to promote in order to attract sales. This image is formed over time from a number of factors which are of varying importance relative to similar factors for your competitors.
Some of these factors are directly under your control and are decided by you as part of your marketing plan. Others, such as the activities of your competitors, must be taken into account as you prepare the plan.
To help you make forecasts, certain economic and competitive information about your competitors' activities last quarter is available to you, at no cost. This consists of the kind of information that would normally be freely available:
In addition to this free data, your company can purchase other information -
You may commission research about your competitors' activities and products.
This includes:You may also subscribe to 'Audit Research', an organisation which monitors the sales of each product and provides information about how the market is divided between you and your competitors. The information gives market shares by volume of sales for each of the competing companies in each market.
The cost of each of these sources of information is shown in Table 2.
More (technical detail)
Each quarter you must review and decide the price at which you sell your products.
The price that you decide for each product is the amount you charge your retailers for each unit delivered. It is also a guide to the price which retailers charge the public. Each product has two prices; an Export price and a Home Area price.
The products are quite price sensitive, though not equally so, with relatively high prices leading to fewer orders and low prices yielding more. Price reduction, as a means of gaining more orders, only works up to a point - the public become suspicious of very low prices.
Setting the right price in relation to the economy, the competition, your product quality and marketing effort, is going to be critical for competing successfully and profitably.
If you decide not to offer one of your products for sale in a particular market, enter a zero price on your Decision Form. You will then receive no new orders for that product from that market next quarter.
Linked to price, in the minds of retailers is the speed with which they are expected to pay for the products purchased from you. Each quarter you must decide the number of days' credit that you will offer to retailers before payment is due. Thirty days is normal but this may be shortened if you need the money quickly, or it can be extended.
In general, retailers do not like short credit and will tend to buy from companies offering longer terms of trade, all other things being equal. Discounts, lower prices and superior quality can be used to counter this effect. The Central Bank Lending rate, the controlling factor in the cost of money, will also have an effect, since retailers will be more inclined to buy from companies with longer credit when the cost of borrowing is high.
The quality of your products affects your marketing image in two ways:
The time taken to assemble each unit of product in your factory will affect its reliability and finish. There is a minimum time needed to assemble the parts made in your factory into completed products, but you may decide any length of time over this minimum to complete each unit. The longer the time allocated, the greater the care that can be taken, thereby reducing the number of sub-standard products which are returned by the public under your one year guarantee. This will improve your marketing image.Note that the immediate effect of an increase in assembly time will be diminished if you are still holding stocks of inferior products for sale.
One of the main ways in which your company's products hold their share of the market is by keeping up with, or being ahead of, competitors' developments in technology and product design. This is achieved by investment in product development.
Regardless of how much you decide to spend on product development, there is no certainty that your efforts will be immediately successful. Development is cumulative, so that the more you spend the greater the chance of making real improvements in your products. Steady effort is more likely to be effective than sporadic spending.
Each quarter, there are three possible product development outcomes -
Introducing improvements enhances your product image in the eyes of customers, so that your consumer assessment rating - the number of stars awarded by product assessment panels - is likely to increase. If your development effort is small, or has little success, then your products may become obsolescent, with a declining marketing image and a reduction in the number of stars awarded.
More (technical detail)For each product, in each area, you must decide how much to spend on advertising:
You can use three different media:
Long term image advertising is cumulative, needing steady expenditure over a period to be effective. It not only improves your product image but also, together with advertising by your competitors, contributes to the general growth of the market.
There is no precise information about the effects of advertising, except that it affects sales of products differently in different areas.
You must decide how many of your existing salespeople to allocate to each market area.
Each salesperson sells all three products to your retailers in that market area and is rewarded by being paid both a salary and sales commission.
In addition, each salesperson has a quarterly expense allowance (Table 2).
You should also decide how many salespeople you intend to employ in the quarter after next by appropriate recruitment, dismissal and training. (see also Personnel). Note that, depending on your working conditions, recruitment may be unsuccessful and/or some of your existing staff may leave to work for other companies.
The commission paid to your salespeople acts as an incentive for them to perform well. To some extent, the higher the commission the greater the motivation.
Commission is calculated on the value of orders received, not on the actual value of sales made, so that product availability (see below) is key to an efficient sales operation. If you allocate more than one salesperson to a market area, then the total commission is divided equally between them.
Note that, even if you allocate no salespeople to an area, you may obtain some orders, provided that the other marketing factors are satisfactory.
Your company's selling effort has an indirect cost which covers the expense of running a sales office, and of supervising your marketing effort. This is calculated as one percent of the value of orders obtained in each quarter.
Delivery times have an effect on the number of orders received and, the ability of your production department to meet demand for your products is important.
Completed products are sent by hired transport to warehouses in each of the areas, where they are stored ready for delivery to your retailers.
Orders taken by your sales force are for delivery as soon as possible in the same quarter in which they are received. Consequently you should try to keep an adequate stock of products available in all areas so that deliveries can be made promptly. Orders are only converted into sales when the goods are delivered.
Failure to meet demand, through shortage of finished products delivered to the area results in a backlog of orders awaiting delivery, leading to dissatisfaction and lost sales, which adversely affects your marketing image. The greater the number of orders outstanding, the greater this effect.
At the end of each quarter, at least half of any orders which remain outstanding will be cancelled by your potential customers. Those orders remaining will be carried forward as a backlog to be satisfied as soon as products are available.
In the meantime, if you decide to raise your price or reduce the quality of your products, then more of your backlog will be cancelled at the beginning of next quarter and the total number of orders cancelled will then be greater than half.
Should you decide to stop production of a product, any backlog of orders which you may have at that time will remain to be satisfied at last quarter's price.
Cancelled orders don't necessarily go directly to your competitors, but may go to them in future quarters, due to your poor delivery image.
The whole of your marketing effort depends on good management. The amount you decide to allocate to your management budget will therefore have an effect on the quality of your sales and marketing management and on the success of your marketing as a whole.
Your operations department is responsible for manufacturing and distributing the company's products as efficiently as possible within the quality standards defined by your overall strategy.
It includes -The three products which your company sells are manufactured in your own factory.
The products are made in two sequential processes:
Table 3 shows the times and material requirements for each product.
There is no work-in-progress. Therefore, your production capacity is limited by -
Your production department purchases material automatically as it is needed, at a cost shown in last quarter's Management Report. Because of the 'just-in-time' method of supply, no storage space is specifically required for materials, other than your factory warehouse.
Your factory warehouse incurs a fixed quarterly overhead cost. In addition, there is a fixed quarterly purchasing administration cost (see Table 12).
The total capacity of your machine shop in terms of productive hours, depends both on the number of machines you have in the factory, and the shift level which you decide to operate, diminished by the number of hours lost through breakdown and slower machine speeds brought about by ageing (see below).
For each level of shift working that you can decide to work there is a maximum number of hours each quarter available for production from each machine (see Table 5).
The machining times, given in Table 3 are for producing a set of parts ready to be assembled into a finished product. These are the times expected from 100% efficient, new machines. As machines get older, or are used more, they become less efficient, and take longer to make the component parts for each product. Your Management Report shows the level of machine efficiency for last quarter.
This process of deterioration may be slowed or even reversed by preventive maintenance, but eventually each machine may become so inefficient that it may be better to sell it and replace it with a new one. Older machines tend to break down more often, and productive hours will be lost until they can be repaired.
Each quarter you must decide how many hours of maintenance per machine you wish to contract out. There is a fixed cost per contract hour for each machine (see Table 4). This covers labour, spares, materials, tools and supervision.
The first priority of the maintenance effort is to repair broken down machinery, any hours left over within the contract being used for preventive maintenance outside of normal working hours. If these contracted hours are not sufficient to cover basic repairs, then additional, uncontracted, hours are needed and charged at a higher rate (see Table 4).
The more preventative maintenance you are able to do, the fewer breakdowns you will suffer and if a breakdown does occur, the shorter the time before the machine is back in service again. Preventative maintenance will also slow the rate at which machines become less efficient.
As well as being limited by machine capacity, your factory's output also depends on the ability of your assembly workers to assemble the machined components into finished products. There is a minimum time for the assembly of each product (see Table 3). However, the actual time taken will be decided by you as part of your marketing policy. The longer assembly time you allow, the better the quality of your products (up to a point).
The number of assembly workers that you employ (adjusted for absenteeism and industrial unrest) may limit the quantities of each product that you can make.
Assembly workers only work on a single, day shift, up to a maximum number of hours per quarter as shown in Table 16, but there is no limit to the number that you can employ, provided that you can persuade them to work for your company.
For more detail about pay and conditions etc., for assembly workers, see under Personnel.
Your delivery schedule is the key set of decisions for your Production Department each quarter. The total number of units of each product that you plan to deliver determines your production schedule (Guidance).
The total number of each product actually produced are those scheduled for delivery plus those which need to be re-made because the original units were rejected as defective, either at the assembly stage or the inspection stage in quality control.
In addition to labour and material costs, which are discussed elsewhere, there are other production department costs (see Table 8) -
If your planned production schedule exceeds capacity, production is restricted to whatever is possible. After any sub-standard products have been rejected, the remainder are delivered in proportion to the number requested in your original schedule. The affected decisions are starred (*) in the Management Report.
Any unsold stock of product in an area at the end of a quarter is kept in the warehouse to be sold in the next quarter. You can decide, however, to redistribute excess stock from any area to other areas, by specifying an appropriate negative quantity for delivery on the Decision Form.
Rejects found during production are sold as scrap (Table 6), and may reduce the number of product units available for delivery. If you have sufficient capacity, however, extra units are automatically produced, in order to satisfy your schedule.
Your company offers a one-year guarantee with its products. Inevitably, some may develop faults after they have reached the customer and are returned under the terms of the guarantee.
The servicing of products under guarantee is carried out by local service agents, who charge you for the work they do at fixed rates (see Table 7).
The number of products delivered to each market area is normally the same as in your delivery schedule, unless your production capacity is inadequate.
Products are delivered by the company's own vehicle fleet, or by hired transport, to warehouses in each market area. Each of your own vehicles is available for a maximum of 60 days per quarter but this may be reduced depending on the age and condition of the vehicles.
For information about buying your own vehicles, see under Fixed Assets.
There is a fixed charge per quarter for warehouse space (see Table 12). Stocks held in this way can help to reduce delivery times to your customers, with a positive effect on your marketing image. On the other hand, if substantial, they can tie up funds which could be better used elsewhere.
Transport costs depend on the number of vehicles required to satisfy your delivery schedule and the distances (journey times) to the relevant areas (see detail below).
Each vehicle can carry a mixed load of products. Table 9 shows the standard capacity of a vehicle (in product units).
The return journey times to each market area (in days) are shown in Table 10.
The total cost of your delivery schedule is determined by the number of vehicles required for each area (rounded up to a whole number) multiplied by the number of days and the all-in cost per vehicle per day (see Table 11).
Storage costs for your products in the market area warehouses are charged at a cost per unit per quarter (see Table 12). These are calculated using the average quarterly stock, as shown in Table 13.
There is also a quarterly administrative charge for purchasing and warehousing.
All three products use the same basic materials in the quantities shown in table 3.
Materials are stored in covered space in your factory areas up to a maximum quantity per quarter. Anything in excess of this must be stored in commercial warehouse space nearby. Maintaining your own storage area has a quarterly cost regardless of the quantity held. Outside storage, however is charged at rate per unit based on the average quantity held that quarter (see table 12 and table 13).
Materials are ordered next quarter for delivery in the quarter after next, at the basic rate quoted in the Management Report at the end of next quarter. You will therefore need to forecast this price, which will vary according to overall demand and current bank interest rates. Discounts are available depending on the quantity ordered and the supplier used.
There is an administrative charge per quarter for your buying department, plus a further charge for each order placed. This will include any order placed to make up a shortfall as well as an order placed in the normal way (see table 12).
Each order for materials requires three decisions:
The success of your operations depends on good management. The amount you decide to allocate to your total management budget will therefore have an effect on production efficiency and product quality.
Your Personnel Department is responsible for ensuring that the company has sufficient employees to function effectively. New employees must be found in a competitive labour market, within which people can move from company to company seeking the best terms and conditions. The supply of people in the labour market can significantly affect your company's ability to operate efficiently.
The company's labour force can be divided into five sections:
In the simulation, the costs of ancillary employees and senior management are included in the various departmental costs. No specific decisions are required for them.
As part of your task, you need to make decisions to manage your salespeople and assembly workers. There are two important aspects - recruitment and motivation (see Guidance Note).
Your employees may leave because of retirement, sickness or because they have gone to work for rival companies. Employees who leave do so at the end of a quarter.
Senior management is dealt with below.
Experienced salespeople and assembly workers are the product of intensive training and can be difficult to recruit.
You can try to recruit salespeople and assembly workers, either from the pool of unemployed, or from other companies, but you can't assume that you will be totally successful (you may not get any at all!).
Successful recruitment depends not only on current earnings, but also on the quality of goods which you produce, and the ability of your personnel management; all compared with the same factors in other companies.
It also depends on the number of unemployed available in the labour pool. In periods of full employment, recruitment can be very difficult, and trying to tempt people away from other companies may lead to a very unstable labour market.
As an alternative to recruiting experienced salespeople and assembly workers, unemployed people can be trained to the required standard. This is carried out at the company's own training school at the factory. Although training is more expensive than direct recruitment (see table 15.), it does ensure that you get suitable workers who will continue to work for you for at least one quarter after their training is complete. After this they may be tempted away by higher wages or better conditions at other companies.
Every machine you have is manned by four unskilled operators on each shift. Any change in the number of machines you have, or in the level of shift working, means that more or fewer machinists are needed.
As with assembly workers, machinists may leave if they feel that working conditions in your factory are not as good as can be found elsewhere.
Because there are always unskilled workers available in the local pool of unemployed labour, any requirement for new or replacement people is handled automatically at a lower level of management in the company, and does not need active decisions by senior management. When more people are needed the shift supervisor can always find the number required from the pool of unemployed, at the start of next quarter.
More (technical detail)As well as ensuring that you have sufficient employees, you must also manage the cost of the workforce. Although you decide salary and wage rates, the way in which your employees are treated can also have a significant effect not only on motivation, but also earnings. Overtime, and shift payments can be controlled to keep costs down, but these elements can only be managed effectively in the context of current economic conditions, and your marketing and production strategy.
You pay your salespeople a basic salary and commission. There is a minumum salary per quarter (see table 17), but you decide the mix. A high salary and low commission can encourage employee loyalty, but not provide much motivation. Conversely, a low salary and high commission can be very motivating, if other factors are right. If not, your salesforce can be attracted to other companies with better conditions.
You pay assembly workers a basic hourly rate, which you decide each quarter. This basic rate is subject to an agreement with the trade union which does not permit wage rates to be reduced. An increase in the basic rate is implemented at the beginning of next quarter.
You can change the capacity of your machine shop by installing more machines, or selling machines; or by changing shift levels. Changes of these kinds directly affect working conditions and pay.
more technical detail.
The cost of other employees in your company is included in the various costs associated with the departments in which they are employed. These include: clerical and accountancy staff, buyers, warehouse staff, researchers, etc.
Your team assumes the role of the company's Board of Directors and can consist of a Chief Executive, and executives who are responsible for Marketing, Operations, Personnel and Finance. You decide a management budget, which determines your level of spending on outside services and expertise, directors' salaries, and general management expenses.
There is a minimum management budget allowed (see table 17). Any increase is implemented immediately, but a reduction requires one quarter's advance notice and operates in the same way as reductions in salespeople's salaries.
The Finance Department is responsible for ensuring that the company's funds are managed efficiently in line with corporate strategy. This implies a variety of roles which include monitoring profitability, managing the company's investments, borrowings, fixed assets, taxation, and dividend policy. It must work closely with the management team to maximise your company's value, against which performance is judged.
The company is financed by shareholders' capital, consisting of shares with a nominal value of £1 each, to the amount shown on the company's balance sheet.
The company's shares are quoted on the Stock Exchange. The latest share prices for all companies are shown each quarter on the bottom line of the Management Report.
Your share price is determined by many different factors, including -
THE CRITERION BY WHICH YOUR COMPANY'S PERFORMANCE IS JUDGED
You may pay dividends to your shareholders, but only in the first and third quarters of each year. You decide the dividend in terms of pence per share.
Regular (and increasing) payments of dividends enhance your share price, provided that your company is basically sound. Conversely, if your company is not performing well, then paying dividends can reduce its performance.
Dividends are paid at the beginning of next quarter. Note that dividends can only be paid from undistributed reserves, as shown in last quarter's balance sheet.
If, at any time, your company has spare funds, they are placed on deposit automatically, to earn interest at a rate 2% below the current Central Bank Rate (see table 20).
Interest is calculated in the same way as with overdrafts. See detail below.
Finance is available from a bank overdraft (i.e. a short term, secured, but flexible bank loan). Your bank sets an overdraft limit for next quarter, based on your company's assets and liabilities, as shown in your balance sheet for last quarter, and defined in table 19.
You don't have to make any decisions about overdrafts, as your bank supplies funds as needed, up to this limit.
The bank charges interest on your overdraft at a rate 4% per annum above the current Central Bank Rate (see table 20), as announced in last quarter's Management Report.
If your company needs more funds than your overdraft limit allows, the banks continue to supply funds, but without security. Such borrowing is available, however, at an annual interest rate of 10% above the current Central Bank Rate. (see table 20).
In this simulation, bank loans continue to be granted
to your company even though, in normal circumstances,
you might be considered to be insolvent.
No company will be declared bankrupt, even if your shares
become worthless.
More (technical detail)
Your company's fixed assets consist of property (your factory), machines and vehicles. While the value of property has a fixed value (i.e. no depreciation is charged) as specified in your balance sheet, machines can be bought and sold.
You can buy machines, at a cost shown in table 18, but the process is fairly complex, and needs to be planned at least two quarters in advance. You may not be able to place orders for some or all of the machines you require unless your company's financial position is sound.
You can buy vehicles for your company's transport fleet (at a cost shown in Table 18) to match the growth of the company or to replace ageing vehicles. There is no credit restriction on the number of vehicles you can buy. Vehicles can be sold at book value.
Firstly, the machine supplier assesses your ability to pay by calculating your company's credit-worthiness, defined as your overdraft limit, less any overdraft and unsecured loans, all as at the end of last quarter, less payments outstanding on machines already ordered but not yet installed (see below).
If the total cost of the machines you planned to buy is more than this amount, then your supplier takes orders for the greatest possible number (which may be none).
Next quarter, you make a first payment of half of the total purchase price.
In the quarter after next, the supplier delivers and installs machines, at which time a second payment of half of the purchase price is made. Machines only become available for use in the quarter after that. Note that any change in your creditworthiness does not affect the installation of machines already ordered.
Once installed, the value of a machine depreciates, by the decreasing balance method, at a quarterly rate of 2.5% (see table 18).
When you decide to sell a machine, the oldest is sold first at the beginning of next quarter, at its depreciated (book) value last quarter.
The cost of a new vehicle is given in table 18. The decision to buy one or more is acted upon immediately so that they are available for the beginning of next quarter.
The value of a vehicle depreciates by the decreasing balance method at a quarterly rate of 6.25% (see table 18).
When selling vehicles, the oldest is sold first at the start of next quarter at it's depreciated value at the end of the last quarter.
The success of your finance department depends on good management. The amount you decide to allocate to your total management budget will therefore have an effect on debtors, cash flow and share price.