7HDP 0HPEHU *XLGH  ® Capsim Management Simulations, Inc. 1 Introduction 1 1. 1 TheIndustryConditionsReport 1 1. 2 ManagementTools1 1. 3 CompanyDepartments 2 1. 4 Inter-DepartmentCoordination 3 1. 5 PracticeandCompetitionRounds 3 1. 6 CompanySuccess 3 8 Plug-Ins 21 8. 1 CorporateResponsibilityandEthics 21 9 Situation Analysis 21 10 Forecasting 22 10. 1 10. 2 10. 3 10. 4 BasicForecastingMethod22 QualitativeAssessment 22 Forecasts,Proformasandthe WorstCase/BestCase23 2 Industry Conditions 3 2. 1 BuyingCriteria 3 2. 2 BuyingCriteriabySegment 5 3 The Customer Survey Score 5 3. BuyingCriteriaandtheCustomerSurvey Score 6 3. 2EstimatingtheCustomerSurveyScore 8 3. 3 StockOutsandSeller’sMarket 9 December31CashPosition23 11 Balanced Scorecard 23 11. 1 uidingYourCompany G 23 4 Managing Your Company 9 4. 1 Research&Development(R&D) 10 4. 2Marketing 4. 4 Finance 15 11 4. 3 Production 13 12 Six Basic Strategies 24 BroadCostLeader 24 BroadDifferentiation 24 NicheCostLeader(LowTechnology)24 NicheDifferentiation(HighTechnology)24 CostLeaderwithProductLifecycleFocus 24 24 DifferentiationwithProductLifecycleFocus 5 The Capstone Courier 17 5. 1 FrontPage 17 5. Stock&BondSummaries 17 5. 3 FinancialStatements 17 5. 4 ProductionAnalysis 17 5. 5 SegmentAnalysisReports 8 1 5. 6 MarketShareReport 19 5. 7 PerceptualMap 19 5. 8 OtherReports 19 SupportTickets Ifyouneedassistance,please submitasupportticket. Loginatcapsim. com,click Foundationthen,intheleftmenu, selectHelp>Support. Ifyouhaveproblemsregistering, sendanemailto [email protected] com. 6 Proformas and Annual Reports 19 6. 1 BalanceSheet 19 6. 2CashFlowStatement 20 6. 3IncomeStatement 20 7 Additional Modules 20 7. 1 TQM/Sustainability20 7. 2 HR(HumanResources)20 1 Management Tools Introduction Congratulations, you are now in charge of a sensor manufacturing company. Your firm was created when the government split a monopoly into identical competitors. When the company was a monopoly, operating inefficiencies and poor product offerings were not addressed because: 1. 1 The Industry Conditions Report Each simulation industry is unique. The Industry Conditions Report describes, in detail, the business environment specific to your simulation, including customer buying criteria. ToviewtheIndustryConditionsReport,logintoyour simulationandclicktheReportslink. Increasing costs could be passed onto customers; and •Mediocre products would sell because customers had no other choices. Although last year’s financial results were decent, your products are getting old, your marketing efforts are falling short, your production lines need revamping and your financial management is almost nonexistent. Competition in the post-monopoly era means you can no longer ignore these issues. If you do, competitors with better products and/ or lower prices will take your market share. 1. 2 Management Tools Here are the tools you need to run your company. 1. 2. The Rehearsal Tutorial Think of the Rehearsal Tutorial as a driving school for the simulation. The tutorial will show you ways to steer the company, including how to: Sensorsareeverywhere… •Invent and revise products; •Make marketing decisions; •Schedule production and buy/sell equipment; •Ensure your company has the financial resources it needs for the upcoming year. The sample resources used for the Rehearsal, including its Capstone Courier and Industry Conditions Report, mirror those used in the actual simulation. ToaccesstheRehearsal,loginattheCapsimwebsiteandgo totheGettingStartedarea. . 2. 2 The Capstone Courier Sensorsaredevicesthatobservephysicalconditions. For example,theaveragecellphonecontainsdozensofsensors thatallowittointerprettouch,spatialorientation,and signalstrength. Newsensorbusinessesarecreatedeverydayinareasas diverseassecurity,aeronauticsandbiomedical engineering. Youareinabusiness-to-businessmarket,nota direct-to-consumermarket;thesensorsyourcompany manufacturesareincorporatedintotheproductsyour customerssell. You and your competitors have access to the industry newspaper, the Capstone Courier.

The Courier, described in Chapter 5, is a complete year-end report on the sensor industry including customer buying patterns, product positioning, manufacturing capacity and public financial information. Knowledge is power. If you have a question about your company, your customer or a competitor, start with the Capstone Courier. The Courier’s Segment Analysis pages report Customer Survey Scores (detailed in Chapter 3) which play a large part in determining sales distributions. In general, the higher the score, the greater the sales. TheCourierdisplays“LastYear’sResults. TheCourier availableatthestartofRound1displayslastyear’sresultsfor Round0,whenallcompanieswereequaljustafterthe monopoly’sbreakup. TheCourieravailableatthestartof Round2willdisplaytheresultsforRound1. Asthesimulation progressesandstrategiesareimplemented,resultsamong thecompetingcompanieswillbegintovary. Team Member Guide 1 Company Departments TheCourierisavailablefromtwolocations: •romtheCapstoneSpreadsheet,clickReportsinthe F • nthewebsite,logintoyoursimulationandclickthe O Reportslink. menubar; 1. 3 Company Departments The Rehearsal Tutorial and Chapter 4 discuss company activities.

You have four main departments or functional areas: 1. 2. 3 The Situation Analysis Completing the Situation Analysis will 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. The Situation Analysis comes in two versions: •Research & Development, or R&D •Marketing •Production •Finance Many simulations also utilize modules such as Human Resources and TQM (Total Quality Management)/Sustainability. Modules require additional management decisions. Your simulation Dashboard will tell you if any modules are included.

Companies use the Capstone Spreadsheet to enter departmental decisions. 1. 3. 1 Research & Development (R&D) •Online interactive •Downloadable PDF (pen and paper) ToaccesstheSituationAnalysis,logintoyoursimulationand gototheGettingStartedarea. 1. 2. 4 Proformas & Annual Reports Proformas and annual reports are specific to your company. Proformas are projections for the upcoming year. Annual reports are the results from the previous year. The proformas will help you envision the impacts of your pending decisions and sales forecasts. The annual reports will help you analyze last year’s results.

ProformasareonlyavailablefromtheCapstone Spreadsheet’sProformasmenu. Toaccesstheannualreports: Your R&D Department designs your product line. The department needs to invent and revise products that appeal to your customers’ changing needs. 1. 3. 2 Marketing Your Marketing Department prices and promotes your products. It interacts with your customers via its sales force and distribution system. Marketing is also responsible for sales forecasts. 1. 3. 3 Production •romtheCapstoneSpreadsheet,clickReportsinthemenu F • nthewebsite,logintoyoursimulationthenclickthe O Reportslink. bar;and

Your Production Department determines how many units will be manufactured during the year. It is also responsible for buying and selling production lines. 1. 3. 4 Finance 1. 2. 5 The Capstone Spreadsheet Your Finance Department makes sure your company has the resources it needs to run through the year. The department can raise money via one year bank notes, 10 year bonds or stock issues. The department can also issue stock dividends, buy back stock or retire bonds before their due dates. 1. 3. 5 Plug-Ins The Capstone Spreadsheet is the nerve center of your company where you formulate and finalize management decisions for every department.

The spreadsheet comes in two versions: •A Web Version that allows you to work via any Internet browser; and •An XLS Version that runs via Microsoft® Excel®. Plug-ins are different than modules. Plug-ins and their decisions have a greater overall impact on your organization. For example, the simulation might include the Corporate Responsibility and Ethics plug-in, which presents you with an unexpected ethical dilemma. Group discussion and consensus is imperative because your decisions will affect your financial results. Your simulation Dashboard will notify you if your simulation includes a plug-in.

Afteryoulogintoyoursimulation,thespreadsheetis availablefromtheDecisionslink. 1. 2. 6 Just in Time Information In the spreadsheet decision areas, look for the flag symbol shown to the right. Clicking it will give you detailed information about the area you are viewing. 2 Buying Criteria 1. 4 Inter-Department Coordination 1. 4. 1 R&D and Marketing to success! Companies compete for up to eight rounds, with each round simulating one year in the life of your company. 1. 5. 1 Decision Audits R&D works with Marketing to make sure your product line meets customer expectations. 1. 4. R&D and Production The Decision Audit is a complete trail of all team decisions. It will help you identify your decision-making strengths and weaknesses. Theauditisavailablefromtwolocations: R&D works with Production to ensure assembly lines are purchased for new products. If Production discontinues a product, it should notify R&D. 1. 4. 3 Marketing and Production •romtheCapstoneSpreadsheet,clickHelpinthemenu F • nthewebsite,logintoyoursimulationthenclickthe O DecisionAuditlink. bar;and Marketing works with Production to make sure manufacturing quantities are in line with forecasts.

Marketing’s market growth projections also help Production determine appropriate levels of capacity. If Marketing decides to discontinue a product, it tells Production to sell the product’s production line. 1. 4. 4 Marketing and Finance 1. 6 Company Success The board of directors, shareholders and other stakeholders expect you to make the company a market leader. Successful managers will: Marketing works with Finance to project revenues for each product and to set the Accounts Receivable policy, which is the amount of time customers can take to pay for their purchases. . 4. 5 Finance and Production •Analyze the market and its competing products; •Create and execute a strategy; and •Coordinate company activities. Best of luck in running a profitable and sustainable company! Production tells Finance if it needs money for additional equipment. If Finance cannot raise enough money, it can tell Production to scale back its requests or perhaps sell idle capacity. 1. 4. 6 Finance and All Departments 2 Industry Conditions The information reported in your Industry Conditions Report will help you understand your customers.

Your customers fall into different groups which are represented by market segments. A market segment is a group of customers that has similar needs. The segments are named for the customer’s primary requirements such as: The Finance Department acts as a watchdog over company expenditures. Finance should review Marketing and Production decisions. Finance should crosscheck Marketing’s forecasts and pricing. Are forecasts too high or too low? Will customers be willing to pay the prices Marketing has set? Is Production manufacturing too many or too few units? Does Production need additional capacity?

Has Production considered lowering labor costs by purchasing automation? 1. 5 Practice and Competition Rounds Practice Rounds allow you to organize workflow among the members of your company. You will begin to compete against the other companies in your simulation, or, if you are in a Footrace competition, against a common set of computer-run companies. Don’tconfusetheRehearsalTutorialwiththePractice Rounds! DuringtheRehearsalTutorial,youareshownhowto makedecisionsinascriptedenvironment. Duringthe PracticeRounds,youcanexperimentwithyourdecisionsina competitiveenvironment. Traditional •Low End •High End •Performance •Size The Industry Conditions Report lists market segment sales percentages and projected growth rates unique to your simulation. TheIndustryConditionsReportisavailablefromthewebsite. LogintoyoursimulationthenclicktheReportslink. 2. 1 Buying Criteria Customers within each market segment employ different standards as they evaluate products. They consider four buying criteria: Price, Age, MTBF (Mean Time Before Failure) and Positioning. After the conclusion of the Practice Rounds, the simulation is reset and the real competition begins.

Now it’s time to drive your company Team Member Guide 3 Buying Criteria 2. 1. 1 Price Aproductwitha performanceof8 andasizeof12is positionedhere Each segment has different price expectations. One segment might want inexpensive products while another, seeking advanced technology, might be willing to pay higher prices. 2. 1. 2 Age Each segment has different age expectations, that is, the length of time since the product was invented or revised. One segment might want brand new technology while another might prefer proven technology that has been in the market for a few years. 2. 1. MTBF (Mean Time Before Failure) or Reliability MTBF (Mean Time Before Failure) is a rating of reliability measured in hours. Segments have different MTBF criteria. Some might prefer higher MTBF ratings while others are satisfied with lower ratings. 2. 1. 4 Positioning Figure2. 1ThePerceptualMapUsedinthe Simulation:ThePerceptualMapplotsproduct sizeandperformancecharacteristics. 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 Perceptual Map 2. 1. 5 Market Segment Positions on the Perceptual Map Positioning is such an important concept that marketers developed a tool to track the position of their products and those of their competitors. This tool is called a Perceptual Map. Note the Perceptual Map in Figure 2. 1. You will see this map quite often through the course of the simulation. The map measures size on the vertical axis and performance on the horizontal axis. Each axis extends from 0 to 20 units. The arrow in Figure 2. 1 points to a product called Able with a performance measurement of 8. 0 and a size of 12. . Customers within each market segment have different positioning preferences. For example, a segment might be satisfied with inexpensive products that are slow performing and large in size. That segment would want products that fall inside the upper left set of dashed and solid circles in Figure 2. 2. A segment that wants products that are fast performing and small in size would want products that fall within the lower right set of dashed and solid circles. Over time, your customers expect products that are smaller and faster. This causes the segments to move or drift a little each month.

As the years progress the locations of the circles significantly change. The example in Figure 2. 3 shows the location of the market segments at the end of the fourth year. Figure 2. 4 shows the segments at the end of the eighth year. Example! SeeyourIndustryConditionsReportforexactsegmentlocations. Figure2. 2BeginningSegmentPositions:At thebeginningofthesimulation,segment positionsareclusteredintheupperleft portionoftheperceptualmap. Figure2. 3SegmentPositionsattheEnd ofYear4:TheoverlapbetweenthesegmentsdecreasesbecausetheLowEnd andTraditionalsegmentsmoveat slowerspeeds.

Figure2. 4SegmentPositionsattheEndof Year8:Thesegmentshavemovedtothe lowerright;verylittleoverlapremains. 4 Buying Criteria by Segment Each year, some market segments demand greater improvement than others. Therefore segments drift at different rates. Segments demanding greater improvement will move faster and farther than others. As time goes by, the overlap between the segments diminishes. DriftratesarepublishedintheIndustryConditionsReport. Inthesimulation,therearezerocustomersinterestedin productspositionedoutsideofthedashedcircles.

Your R&D and Marketing Departments have to make sure your products keep up with changing customer preferences. To do this, R&D must reposition products, keeping them within the moving segment circles. See “4. 1 Research & Development (R&D)” for more information. Market segments will not move faster to catch up with products that are better than customer expectations. Customers will refuse to buy a product positioned outside the circles. Customers are only interested in products that satisfy their needs. This includes being within the circles on the Perceptual Map! PerceptualMapsCanBeUsedforMany TypesofProducts…

PerceptualMapscanbeusedtoplotanytwoproduct characteristics. Forexample,cerealmanufacturerscouldplot nutritionandtaste. Thedotsinthefigurebelowrepresent salesofbreakfastcerealsbasedonratingsoftasteand nutrition. Therearefewsalesinthelowerleftcorner–not manyconsumerswantproductsthathavepoortasteand poornutrition. 2. 2 Buying Criteria by Segment Buyers in each segment place a different emphasis upon the four buying criteria. For example, some customers are more interested in price, while others are more interested in positioning. Positioningandpricecriteriachangeeveryyear. Ageand MTBFcriteriaalwaysremainthesame.

Buying Criteria for the previous year are reported in the Capstone Courier’s Segment Analysis pages. As you take over the company to make decisions for Round 1, your reports reflect customer expectations as of December 31, Round 0 (yesterday). The Industry Conditions Report displays the Round 0 buying criteria for each market segment. Here are two example segments. Example 1 customers seek proven products at a modest price. Astheyreviewproductsales,marketerswouldnoticethree distinctclusters. Theclustertotheupperleftindicatesa groupofcustomersthatismoreinterestedinnutritionthan taste.

Theclustertothelowerrightindicatesagroupthatis moreinterestedintastethannutrition. Theclustertothe upperrightindicatesagroupthatwantsbothgoodtasteand goodnutrition. •Age, 2 years– importance: 47% •Price, $20. 00-$30. 00– importance: 23% •Ideal Position, performance 5. 0 size 15. 0– importance: 21% •MTBF, 14,000-19,000– importance: 9% Example 2 customers seek cutting-edge technology in size/ performance and new designs. •Ideal Position, performance 8. 9 size 11. 1– importance: 43% •Age, 0 years– importance: 29% •MTBF, 20,000-25,000– importance: 19% •Price, $30. 00-$40. 00– importance: 9% The Customer Survey Score In any month, a product’s demand is driven by its monthly customer survey score. Assuming it does not run out of inventory, a product with a higher score will outsell a product with a lower score. Theclusters,ormarketsegments,couldthenbenamed “Taste,”“Nutrition”and“Taste/Nutrition. ”Thesimulationuses asimilarpositioningmethodtonameitsmarketsegments. Team Member Guide 5 Buying Criteria and the Customer Survey Score Customersurveyscoresarecalculated12timesayear. The Decembercustomersurveyscoresarereportedinthe CapstoneCourier’sSegmentAnalysispages. 3. 1. 1 Positioning Score

A customer survey score reflects how well a product meets its segment’s buying criteria. Company promotion, sales and accounts receivable policies also affect the survey score. Scores are calculated once each month because a product’s age and positioning change a little each month. If during the year a product is revised by Research and Development, the product’s age, positioning and MTBF characteristics can change quite a bit. As a result, it is possible for a product with a very good December customer survey score to have had a much poorer score – and therefore poorer sales – in the months prior to an R&D revision.

Prices, set by Marketing at the beginning of the year, will not change during the year. Marketers must understand both what customers want and their boundaries. In terms of a product’s size and performance (as discussed in “Section 2. 1. 5”), the Perceptual Map illustrates these ideas with circles. Each segment is described with a dashed outer circle, a solid inner circle and a dot we call the ideal spot. 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 because any product outside of it “fails the rough cut” and is dropped from consideration. Rough cut circles have a radius of 4. 0 units. 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. Ideal Spot 3. 1 Buying Criteria and the Customer Survey Score The customer survey starts by evaluating each product against the buying criteria.

Next, these assessments are weighted by the criteria’s level of importance. For example, some segments assign a higher importance to positioning than others. A well-positioned product in a segment where positioning is important will have a greater overall impact on its survey score than a well-positioned product in a segment where positioning is not important. TheIndustryConditionsReportandtheCourier’sMarket SegmentAnalysispagesbreakdowneachsegment’scriteria inorderofimportance. The ideal spot is that point in the heart of the segment where, all other things being equal, demand is highest. Segment Movement

Each segment moves across the Perceptual Map a little each month. In a perfect world your product would be positioned in front of the ideal spot in January, on top of the ideal spot in June and trail the A perfect customer survey score of 100 requires that the product: Be positioned at the ideal spot (the segment drifts each month, so this can occur only one month per year); be priced at the bottom of the expected range; have the ideal age for that segment (unless they are revised, products grow older each month, so this can occur only one month per year); and have an MTBF specification at the top of the expected range.

Yourcustomerswantperfection,butitisimpracticalto have“perfect”products. Inmanycasesyouwillhaveto settlefor“great”products,butthebettertheproducts,the higherthecosts. Yourtaskistogivecustomersgreat productswhilestillmakingaprofit. Yourcompetitorsface thesamedilemma. Example! SeeyourIndustryConditionsReportforexactinformation. Figure3. 1 PositioningScores:Theouteredgeoftheorangeroughcutmeasures 4. 0unitsfromthecenterofthecircle;theedgeofthegreenfinecutmeasures 2. 5unitsfromthecenter. Segmentidealspotsarerepresentedbytheblackdots.

Theexampleontheleftdisplaysapositioningscoreforasegmentthatprefers productswithslowerperformanceandlargersize. Theexampleontheright displaysascoreforasegmentthatdemandscuttingedgeproductswithhigh performanceandsmallsize. Theorangeareasrepresentthesegmentroughcuts, wherescoresrapidlydecreasetowardszero. 6 Buying Criteria and the Customer Survey Score ideal spot in December. In December it would complete an R&D project to jump in front of the ideal spot for next year. Positioning Rough Cut Segment price expectations correlate with the segment’s position on the Perceptual Map.

Segments that demand higher performance and smaller sizes are willing to pay higher prices. PricerangesforRound0(theyearpriortoRound1)are publishedintheIndustryConditionsReportandtheSegment AnalysispagesoftheCapstoneCourier. Products inside the rough cut but outside of the fine cut (orange areas, Figure 3. 1) are badly positioned. They are between 2. 5 and 4. 0 units from the center of the circle. Customers will consider them but they are at a significant disadvantage to products inside the fine cut. Specifically, products in the rough cut have reduced customer survey scores.

Their score 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. Sensorsthatareabouttoentertheroughcutcanberevised byResearch&Development(see“4. 1. 1Changing Performance,SizeandMTBF”). Thelocationofeachsegment’sroughcutandfinecutcircles asofDecember31ofthepreviousyearappearsonpage11of theCourier. Price Rough Cut Sensors priced $5. 00 above or below the segment guidelines will not be considered for purchase. Those products fail the price rough cut.

Sensors priced $1. 00 above or below the segment guidelines lose about 20% of their customer survey score (orange lines, Figure 3. 2). Sensors continue to lose approximately 20% of their customer survey score for each dollar above or below the guideline, on up to $4. 99, where the score is reduced by approximately 99%. At $5. 00 outside the range, demand for the product is zero. Price Fine Cut Within each segment’s price range, price scores follow a classic economic demand curve (green curve, Figure 3. 2): As price goes down, the price score goes up. 3. 1. 3 MTBF Score Positioning Fine Cut

Products inside the fine cut (green areas, Figure 3. 1,) are within 2. 5 units of the center of the circle. Ideal spots for each segment are illustrated by the black dots. The example on the left illustrates a segment that prefers proven, inexpensive technology. The ideal spot is to the upper left of the segment center, where material costs are lower. The example on the right illustrates a segment that prefers cutting-edge technology. The ideal spot is to the lower right of the segment center, where material costs are higher (see Figure 4. 1 for an illustration of material positioning costs).

Participantsoftenask,“Whyaresomeidealspotsaheadof thesegmentcenters? ”Thesegmentsaremoving. Froma customer’sperspective,iftheybuyaproductattheideal spot,itwillstillbeacuttingedgeproductwhenitwearsout. Forcontrast,iftheybuyaproductatthetrailingedge,itwill notbeinsidethesegmentwhenitwearsout. Each segment sets a 5,000 hour range for MTBF (Mean Time Before Failure), the number of hours a product is expected to operate before it malfunctions. MTBF Rough Cut Demand scores fall rapidly for products with MTBFs beneath the segment’s guidelines. Products with an MTBF 1,000 hours below the

A product’s positioning score changes each month because segments and ideal spots drift a little each month. Placing a product in the path of the ideal spot will return the greatest benefit through the course of a year. 3. 1. 2 Price Score Every segment has a $10. 00 price range. Price ranges in all segments drop $0. 50 per year. Figure3. 2 ClassicPrice/Demand Curve(GreenBow):Aspricedrops demand(pricescore)rises. Scores dropaboveandbelowthepricerange (orangelines). Figure3. 3 MeanTimeBeforeFailure (MTBF)Score:AsMTBFincreasesthe scoreincreases. Customersare indifferenttoMTBFsabovethe segmentrange. Team Member Guide 7

Estimating the Customer Survey Score segment guideline lose 20% of their customer survey score. Products continue to lose approximately 20% of their customer survey score for every 1,000 hours below the guideline, on down to 4,999 hours, where the customer survey score is reduced by approximately 99%. At 5,000 hours below the range, demand for the product falls to zero. MTBF Fine Cut 20 and your competitors’ scores are 27, 19, 21 and 3, then your product’s April demand is: 20/(20+27+19+21+3) = 22% Assuming you had enough inventory to meet demand, you would receive 22% of segment sales for April. What generates the score itself?

Marketers speak of “the 4 P’s” – price, product, promotion and place. Price and product are found in the buying criteria. Together they present a price-value relationship. Your promotion budget builds “awareness,” the number of customers who know about your product before sourcing. Your sales budget (place) builds “accessibility,” the ease with which customers can work with you after they begin sourcing. To the 4 P’s we can add two additional elements– credit terms and availability. Credit terms are expressed by your accounts receivable (A/R) policy. Availability addresses inventory shortages. 3. 2. 1 Base Scores

Within the segment’s MTBF range, the customer survey score improves as MTBF increases (Figure 3. 3). However, material costs increase $0. 30 for every additional 1000 hours of reliability. Customers ignore reliability above the expected range– demand plateaus at the top of the range. 3. 1. 4 Age Score The age criteria does not have a rough cut; a product will never be too young or too old to be considered for purchase. Customers demanding cutting-edge technology prefer newer products. The ideal ages for these market segments are generally one and a half years or less. Other segments prefer proven technology.

These segments seek older designs. Each month, customers assess a product’s age and award a score based upon their preferences. Examples of age preferences are illustrated in Figure 3. 4. To estimate the customer survey score, begin with the buying criteria available in the Courier’s Segment Analysis reports. For example, suppose the buying criteria are: •Age, 2 years– importance: 47% •Price, $20. 00-$30. 00– importance: 23% •Ideal Position, performance 5. 0 size 15. 0– importance: 21% •MTBF, 14,000-19,000– importance: 9% A perfect score of 100 requires that the product have an age of 2. years, a price of $20. 00, a position at the ideal spot (5. 0 and 15. 0) and an MTBF of 19,000 hours. The segment weighs the criteria at: Age 47%, Price 23%, Positioning 21% and MTBF 9%. You can convert these percentages into points then use these numbers to estimate a base score for your product. For example, price is worth 23 points. The perfect Round 0 price of $20. 00 would get 23 points, but at the opposite end of the price range, a price of $30. 00 would only get one point. Youcanusetheageandpositioningchartsinyour Example! SeeyourIndustryConditionsReportforexactinformation.

Figure3. 4 AgeScores:Theexampleontheleftdisplaysanagescorefora segmentthatprefersproductsthathaveanageofoneyear. Theexampleonthe rightdisplaysascoreforasegmentthatprefersproductsthataretwoyearsold. IndustryConditionsReporttoestimateaveragepointsfor thosecriteria. Agepreferencesforeachsegmentarepublishedinthe IndustryConditionsReportandtheSegmentAnalysispages oftheCapstoneCourier. However, the base score can fall because of poor awareness (promotion), accessibility (place) or the credit terms you extend to your customers. 3. 2. 2 Accounts Receivable 3. 2 Estimating the Customer Survey Score

The customer survey score drives demand for your product in a segment. Your demand in any given month is your score divided by the sum of the scores. For example, if your product’s score in April is A company’s accounts receivable policy sets the amount of time customers have to pay for their purchases. 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% (see “4. 4. 5 Credit Policy”). 8 Stock Outs and Seller’s Market 3. 2. 3 Awareness and Accessibility

After your product leaves the factory and enters the marketplace, the calculations for its score become less exact. The score will be affected by the level of the product’s awareness (the percentage of people who know about your product) and its segment’s accessibility (the number of customers who can easily interact with your company). Awareness is built over time by the product’s promotion budget. Promotion budgets fund advertising and public relations campaigns. Accessibility is built over time by the product’s sales budget. Sales budgets fund salespeople and distribution systems to service customers within the product’s market segment.

Similar products with higher awareness and accessibility will score better than those with lower percentages (see “4. 2 Marketing” for more information on awareness and accessibility). IftheTQM/Sustainabilitymoduleisenabled,someinitiatives canincreasethecustomersurveyscore(see“7. 1TQM/ Sustainability”). 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. ) How can you be sure of a seller’s market? You can’t, unless you are certain that industry capacity, including a second shift, cannot meet demand for the segment.

In that case, even very poor products will stock out as customers search for anything that will meet their needs. Considerthequestion,“Whathappenstopriceifevery 3. 3 Stock Outs and Seller’s Market What happens when a product generates high demand but runs out of inventory (stocks out)? The company loses sales as customers turn to its competitors. This can happen in any month. TheMarketShareReportoftheCapstoneCourier(page10) canhelpyoudiagnosestockoutsandtheirimpacts. competitorhasjustenoughcapacitytomeetdemandfrom itscustomers? ” Usually, a product with a low customer survey score has low sales.

However, if a segment’s demand exceeds the supply of products available for sale, a seller’s market emerges. In a seller’s market, customers will accept low scoring products as long as they fall within the segment’s rough cut limits. For example, desperate customers with no better alternatives will buy: 4 Managing Your Company It’s time to unlock the doors and turn on the lights. Welcome to your company. The Rehearsal Tutorial (described in Section 1. 2. 1) shows you the mechanics of the company departments described below. Remember, entering decisions is the easy part, determining what decisions to enter requires some thought.

This chapter and the Rehearsal Tutorial will help you get started. Every company starts the simulation with five products. Your company has one product for each segment. You have one assembly line per product. Products can be terminated or added. Your company must have at least one product and cannot have more than eight. Your decisions, made every year on January 1, are carried out by your employees throughout the year. Yoursimulationmightalsoincludeadditionalmodules andplug-ins. YoursimulationDashboardwillnotifyyouif thesedecisionsarescheduled. •A product positioned just inside the rough cut circle on he Perceptual Map– outside the circle they say “no” to the product; •A product priced $4. 99 above the price range– at $5. 00 customers reach their tolerance limit and refuse to buy the product; •A product with an MTBF 4,999 hours below the range– at 5,000 hours below the range customers refuse to buy the product. Watch out for three common tactical mistakes in a seller’s 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

Team Member Guide 9 Research & Development (R&D) 4. 1 Research & Development (R&D) The Research and Development (R&D) department oversees invention and redesign. It develops the innovations needed to keep the company ahead of the competition. R&D is responsible for the “product” portion of the 4 P’s of Marketing (“product, price, place and promotion”). This makes R&D an essential part of any marketing process. Your R&D Department invents new products and changes specifications for existing products. Changing size and/or performance repositions a product on the Perceptual Map.

Improving performance and shrinking size moves the product towards the lower right on the map (see “2. 1. 4 Positioning”). Your R&D decisions are fundamental to your Marketing and Production plans. In Marketing, R&D addresses: Reliability (MTBF) Costs The reliability rating, or MTBF, for existing products can be adjusted up or down. Each 1,000 hours of reliability (MTBF) adds $0. 30 to the material cost. A product with 20,000 hours reliability includes $6. 00 in reliability costs: ($0. 30 * 20,000) / 1,000 = $6. 00 Improving positioning and reliability will make a product more appealing to customers, but doing so increases material costs.

Materialcostsdisplayedinthespreadsheetandreportsare thecombinedpositioningandreliability(MTBF)costs. Inventing Sensors •The positioning of each product inside a market segment on •The number of products in each segment •The age of your products •The reliability (MTBF rating) of each product In Production, R&D affects or is affected by: the Perceptual Map New products are assigned a name (click in the first cell that reads NA in the name column), performance, size and MTBF. Of course, these specifications should conform to the criteria of the intended market segment.

The name of all new products must have the same first letter of the company name. 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. •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. ) All R&D projects begin on January 1. If a product does not have a project already underway, you can launch a new project for that product.

However, if a project begun in a previous year has not finished by December 31 of last year, you will not be able to launch a new project for that product (the decision entry cells in the R&D area of the Capstone Spreadsheet will be locked). 4. 1. 1 Changing Performance, Size and MTBF $1 . 0 0 $5 . 5 0 Figure4. 1 ApproximateMaterialPositioningCosts:Materialcosts aredrivenbytwofactors,reliability(MTBF)andpositioning. Positioningcostsvarydependingontheproduct’slocationonthe PerceptualMap. Productsplacedatthetrailingedgeofthesegmentshaveapositioningcostofapproximately$1. 0;products placedonthearcoftheleadingedgehaveapositioningcostof approximately$10. 00. Productsplacedonthearchalfwaybetween thetrailingandleadingedgeshaveapositioningmaterialcostof approximately$5. 50. Whilethesegmentswilldriftapart,andthedistancebetweenthe leadingandtrailingedgeswillincrease,thepositioningcostrange willnotchange. Theleadingedgewillalwaysbeapproximately $10. 00,thetrailingedgewillalwaysbeapproximately$1. 00and themidpointwillalwaysbeapproximately$5. 50. A repositioning project moves an existing product from one location on the Perceptual Map to a new location, generally (but not always) down and to the right.

Repositioning requires a new size attribute and/or a new performance attribute. To keep up with segment drift, a product must be made smaller (that is, decrease its size) and better performing (that is, increase its performance). Positioning Costs Positioning affects material costs (Figure 4. 1). The more advanced the positioning, the higher the cost. At the beginning of the simulation, the trailing edge of the Low End fine cut has the lowest positioning cost of approximately $1. 00; the leading edge of the High End fine cut has the highest positioning cost of approximately $10. 00. 10 $1 0. 00 Marketing

Allnewproductsrequirecapacityandautomation,which shouldbepurchasedbytheProductionDepartmentinthe yearpriortotheproduct’srevision(release)date. Ifyoudon’t buytheassemblylinetheyearpriortoitsintroduction,you cannotmanufactureyournewproduct! the product’s age is 4 years old, on the day it is repositioned, its age becomes 2 years old. Therefore, you can manage the age of a product by repositioning the product. It does not matter how far the product moves. Aging commences from the revision date. ChangingMTBFalonewillnotaffectaproduct’sage. It is not possible to produce new products prior to the revision date.

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. 4. 1. 2 Project Management Age criteria vary from segment to segment. For example, if a segment prefers an age of two years and the product’s age approaches 3 years, customers will lose interest (see Figure 3. 4). Repositioning the product drops the age from 3 to 1. 5 years and customers will become interested again. LogintotheCapstoneSpreadsheetandclicktheDecisions menu. SelectResearch&Development.

Tochangeaproduct’s performance,enteranumberintheNewPfmncell;tochange itssize,enteranumberintheNewSizecell. Tochangethe reliabilityrating,enteranumberintheMTBFcell. Asyouvary thespecifications,observetheeffectupontherevisiondate, projectcost,materialcostandage. Segment circles on the Perceptual Map move at speeds ranging from 0. 7 to 1. 3 units each year. You must plan to move your products (or retire them) as the simulation progresses. Generally, the longer the move on the Perceptual Map, the longer it takes the R&D Department to complete the project. Project lengths can be as short as three months or as long as three years.

Project lengths will increase when the company puts two or more products into R&D at the same time. When this happens each R&D project takes longer. Assembly line automation levels also affect project lengths. R&D project costs are driven by the amount of time they take to complete. A six-month project costs $500,000; a one-year project costs $1,000,000. Sensors will continue to produce and sell at the old performance, size and MTBF specifications up until the day the project completes, shown on the spreadsheet as the revision date. Unsold units built prior to the revision date are reworked free of charge to match the new specifications.

Iftheprojectlengthtakesmorethanayear,therevisiondate willbereportedinthenextCapstoneCourier. However,the newperformance,sizeandMTBFwillnotappear;oldproduct attributesarereportedpriortoprojectcompletion. TheRehearsalTutorial’sR&DTacticsshowyouhowtorunthe department. LoginattheCapsimwebsiteandgotoGetting StartedforinformationabouttheRehearsal. 4. 2 Marketing Marketing functions vary widely depending on the industry and company. In general, the department drums up interest in the company’s products or services through a mix of activities. These can include advertising, public relations and good old fashioned salesmanship.

Your Marketing Department is concerned with the remaining P’s (beyond R&D’s product): Price, place and promotion. Your Marketing Department is also in charge of sales forecasting. 4. 2. 1 Pricing Sensors When products are created or moved close to existing products, R&D completion times diminish. This is because your R&D Department can take advantage of existing technology. If the module is active, TQM/Sustainability investments can also decrease R&D times (see “7. 1 TQM/Sustainability”). It is important to verify completion dates after all decisions have been entered.

Usually you want repositioning projects to finish in less than a year. For example, consider breaking an 18 month project into two separate projects, with the first stage ending just before the end of the current year and the second ending halfway through the following year. 4. 1. 3 A Sensor’s Age Price was discussed in 3. 1. 2. To review, appeal falls to zero when prices go $5. 00 above or below the expected price range. Price drives the product’s contribution to profit margin. Dropping the price increases appeal but reduces profit per unit. Segment price ranges fall at a rate of $0. 50 per year.

For example, if in Round 0, Traditional customers expect a price between $20. 00 and $30. 00, then in Round 1, the Traditional price range will be $19. 50$29. 50; Round 2, $19. 00-$29. 00, etc. This puts pressure on companies to improve their cost structures. It is possible for a product to go from an age of 4 years to 2 years. How can that be? When a product is moved on the Perceptual Map, customers perceive the repositioned product as newer and improved, but not brand new. As a compromise, customers cut the age in half. If Team Member Guide 11 Marketing 4. 2. 2 Promotion and Sales Budgets

Promotion and sales budgets affect product appeal. See “3. 2 Estimating the Customer Survey Score” for more information. Promotion New products are newsworthy events. The buzz creates 25% awareness at no cost. The 25% is added to any additional awareness you create with your promotion budget. Sales Each product’s promotion budget determines its level of awareness. A product’s awareness percentage reflects the number of customers who know about the product. An awareness of 50% indicates half of the potential customers know it exists. From one year to the next, a third (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 Each product’s sales budget contributes to segment accessibility. A segment’s accessibility percentage indicates the number of customers who can easily interact with your company via salespeople, customer support, delivery, etc.

Like awareness, if your sales budgets drop to zero, you lose one third of your accessibility each year. Unlike awareness, accessibility applies to the segment, not the product. If your product exits a segment, it leaves the old accessibility behind. When it enters a different segment, it gets that segment’s accessibility. If you have two or more products that meet a segment’s fine cut criteria, the sales budget for each product contributes to that segment’s accessibility. The more products you have in the segment’s fine cut, the stronger your distribution channels, support systems, etc.

This is because each product’s sales budget contributes to the segment’s 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 (see Figure 4. 3). Salesbudgetsarelesseffectivewhenproductsarenot completelypositionedinthefinecutcircle,whenpricesrise abovesegmentguidelinesorwhenMTBFsfallbelowsegment guidelines. Figure 4. indicates a $1,500,000 promotion budget would add 36% to the starting awareness, for a total awareness of 69% (33 + 36 = 69). Figure 4. 2 indicates a $3,000,000 budget would add just under 50% to the starting awareness, roughly 14% more than the $1,500,000 expenditure (33 + 50 = 83). This is because further expenditures tend to reach customers who already know about the product. Once your product achieves 100% awareness, you can scale back the product’s promotion budget to around $1,400,000. This will maintain 100% awareness year after year. TheCourier’sSegmentAnalysisreports(pages5-9) publishawareness. Figure4. PromotionBudget:Increasesinpromotionbudgets havediminishingreturns. Thefirst$1,500,000buys36%awareness;spendinganother$1,500,000(foratotalof$3,000,000) buysjustunder50%. Thesecond$1,500,000buyslessthan 14%moreawareness. Figure4. 3 SalesBudget:Forbudgetsabove$3,000,000,thedottedredlineindicatesthere arenoadditionalreturnsforcompaniesthathaveonlyoneproductinasegmentandthe dashedredlineindicatesreturnsforcompanieswithtwoormoreproductsinasegment. Increasesinsalesbudgetshavediminishingreturns. Thefirst$2,000,000buys22%accessibility. Forcompanieswithtwoormoreproductsinasegment,spending$4,000,000buys justunder35%.

Thesecond$2,000,000buyslessthan13%additionalaccessibility. 12 Production 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%. Theremainingcellsdisplaythefinancialimpactsofyour decisions: • rossRevenueForecast(Pricemultipliedbyeitherthe G • ariableCosts(Labor,MaterialandInventoryCarrying V • ontributionMarginForecast(GrossRevenueminus C •essPromotionandSales(ContributionMarginForecast L minustheproduct’sPromotionBudgetandSalesBudget. ) variablecosts. costssubtractedfromtheGrossRevenueForecast. ) ComputerPredictionor,ifentered,YourSalesForecast. ) TheCourier’sSegmentAnalysisreports(pages5-9) publishaccessibility. Awareness and Accessibility Think of awareness and accessibility as “before” and “after” the sale. The promotion budget drives awareness, which persuades the customer to look at your product. The sales budget drives accessibility, which governs everything during and after the sale. The promotion budget is spent on advertising and public relations. The sales budget is spent on distribution, order entry, customer service, etc.

Awareness and accessibility go hand and hand in making the sale. The former is about encouraging the customer to choose your product; the latter is about closing the deal via your salespeople and distribution channels. 4. 2. 3 Sales Forecasting TheRehearsalTutorial’sMarketingTacticsshowyouhowto runthedepartment. LoginattheCapsimwebsiteandgoto GettingStartedforinformationabouttheRehearsal. 4. 3 Production For manufacturers, production literally puts everything together. The department coordinates and plans manufacturing runs, making sure that products get out the door.

In your Production Department, each product has its own assembly line. You cannot move a product from one line to another because automation levels vary and each product requires special tooling. As it determines the number of units to produce for the upcoming year, Production needs to consider the sales forecasts developed by Marketing minus any inventory left unsold from the previous year. 4. 3. 1 Capacity Accurate sales forecasting is a key element to company success. Manufacturing too many units results in higher inventory carrying costs.

Manufacturing too few units results in stock outs and lost sales opportunities, which can cost even more (see “10 Forecasting”). LogintotheCapstoneSpreadsheetandclicktheDecisions menu. SelectMarketing. Usethisareatodetermineeach product’sPrice,PromotionBudget,SalesBudgetandSales Forecast. What’sthedifferencebetweentheComputer PredictionandYourSalesForecast? TheComputerPrediction cannotconsiderwhatyourcompetitorsareactuallydoing. It doesnotknow. Instead,itassumeseachofyourcompetitors willofferonemediocreproduct(withacustomersurvey scoreof20)ineachsegment.

Itbenchmarkshowyour productwoulddoagainstthismediocreplayingfield. TheComputerPrediction,expressedasunitsdemanded, changesasyoumakedecisionsaboutyourproduct. YouusetheComputerPredictiontoevaluatetheimpactyour decisionswillhaveuponyourproduct’sappeal. Forexample, youcanestimatetheimpactapricechangewillhaveupon demand. TheYourSalesForecastcolumnoverridesthe ComputerPredictionwithyourownprediction(see“10 Forecasting”). Untilyouprovideasalesforecast,the computerusesitsmediocreComputerPredictiontopredict yourproformafinancialstatements. Alwaysoverridethe ComputerPredictionwithyourownforecast.

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 its first shift capacity with a second shift. An assembly line with a capacity of 2,000,000 units per year could produce 4,000,000 units with a second shift. However, second shift labor costs are 50% higher than the first shift. Each new unit of capacity costs $6. 00 for the floor space plus $4. 00 multiplied by the automation rating. The Production spreadsheet will calculate the cost and display it for you.

Increases in capacity require a full year to take effect– increase it this year, use it next year. Capacity can be sold at the beginning of the year for $0. 65 on the dollar value of the original investment. You can replace the capacity in later years, but you have to pay 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. Income Statement”). Team Member Guide 13 Production Thedollarvaluelimitofcapacityandautomationpurchases islargelydeterminedbythemaximumamountofcapitalthat canberaisedthroughstockandbondissuesplusexcess workingcapital(see“4. 4Finance”). 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 (Figure 4. 4). 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. Changing Automation 4. 3. 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. 4. 3. 3 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. to 6. 0 would be $4,000,000. Reducing automation costs money. If you reduce automation, you will be billed for a retooling cost. The net result is you will be spending money to make your plant less efficient. While reduced automation will speed R&D redesigns, by and large it is not wise to reduce an automation level. Whenyoubuyautomation,youmightwanttodeterminethe returnoninvestment(ROI). Onyourincomestatement,find lastyear’slaborcostfortheproductyouareautomating. Yourlaborcostsavingswillbeapproximately10%foreach newpointofautomation.

Multiplythesavingsbythenumber ofroundsremaininginyoursimulationthendivideitbythe totalcostoftheautomation. As automation levels increase, the number of labor hours required to produce each unit falls. The lowest automation rating is 1. 0; the highest rating is 10. 0. At an automation rating of 1. 0, labor costs are highest. Each additional point of automation decreases labor costs approximately 10%. At a rating of 10. 0, labor costs fall about 90%. LaborcostsincreaseeachyearbecauseoftheAnnualRaisein labor’scontract. Despite its attractiveness, two 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 (Savings * Remaining Rounds) / Automation Cost = ROI IfyourplantishighlyutilizedyourROIwillbehigherthanif yourplantisonlypartiallyutilized(ifyourplantisunderutilizedyoumightconsidersellingexcesscapacity). Clearly,thegreatertheROI,thebettertheinvestment. Changes in automation require a full year to take effect– change it this year, use it next year.

LogintotheCapstoneSpreadsheetandclicktheDecisions menu. SelectProduction. Usethisareatoenterforeach product: • ProductionSchedule A •ncreasesinfirstshiftcapacity(Putapositivenumberin I • ecreasesinfirstshiftcapacity(Putanegativenumberin D • hangesinautomationlevel(EnteranumberinNew C AutomationRating. ) Figure4. 4 TimeRequiredtoMoveaSensoronthePerceptualMap 1. 0UnitatAutomationLevels1Through10 Buy/SellCapacity. ) Buy/SellCapacity. ) TheRehearsalTutorial’sProductionTacticsshowyouhowto runthedepartment. LoginattheCapsimwebsiteandgoto GettingStartedforinformationabouttheRehearsal. 4 Finance 4. 4 Finance Corporate finance functions differ from company to company. Duties can include managing financial risk, determining borrowing levels or even simple check writing. In general, the department monitors the company’s flow of money, the life blood of any business. Your Finance Department is primarily concerned with five issues: 1. Acquiring the capital needed to expand assets, particularly plant and equipment. Capital can be acquired through: Asageneralrule,companiesfundshorttermassetslike accountsreceivableandinventorywithcurrentdebtoffered bybanks. Current Debt •Stock Issues •Bond Issues (Long Term Debt) •Profits 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. Finance decisions should be made after all other departments enter their decisions.

After the management team decides what resources the company needs, the Finance Department addresses funding issues and financial structure. One of the Finance Department’s fiduciary duties is to verify that sales forecasts and prices are realistic. Unrealistic prices and forecasts will predict unrealistic cash flows in the proformas. Finance can determine a range of possible outcomes for the year by changing (but not saving) Marketing’s forecasts then rechecking the proformas. Lowering forecasts decreases revenue and increases inventory (worst case); raising forecasts increases revenue and decreases inventory (best case).

Financecanprinttheworstcaseandbestcaseproformas, thencomparethemtonextyear’sannualreports. 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. 4. 4. 2 Bonds All bonds are ten year notes. Your company pays a 5% brokerage fee for issuing bonds. 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. 6S2014 has an interest rate of 12. 6% and is due December 31, 2014.

Asageneralrule,bondissuesareusedtofundlongterm investmentsincapacityandautomation. 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. 6S2014 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. Each year your company is given a credit rating that ranges from AAA (best) to D (worst).

In Capstone, ratings are evaluated by comparing current debt interest rates with the prime rate. 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%. You can buy back outstanding bonds before their due date. A 1. 5% brokerage fee applies. These bonds are repurchased at their market value or street price on January 1 of the current year. The street price is determined by the amount of interest the bond pays and your credit worthiness. It is therefore different from the face amount of the bond.

If you buy back bonds with a street price that is less than its face amount, you make a gain on the repurchase. This will be reflected as a negative write-off on the income statement (see “6. 3 Income Statement”). 4. 4. 1 Current Debt Your bank issues current debt in one year notes. The Finance area in the Capstone Spreadsheet displays the amount of current debt due from the previous year. Last year’s current debt is always paid off on January 1. The company can “roll” that debt by simply borrowing the same amount again. 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. Team Member Guide 15 Finance 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.

When Bonds Are Retired Early A bond with a face amount of $10,000,000 could cost $11,000,000 to repurchase because of fluctuations in interest rates and your credit worthiness. A 1. 5% brokerage fee applies. The difference between the face value and the repurchase price will reflect as a gain or loss in the income statement’s fees and write-offs. When Bonds Come Due 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 $1. 50 per share and your dividend is $2. 0 per share, stockholders would ignore anything above $1. 50 per share as a driver of stock price. In general, dividends have little effect upon stock price. However, Capstone is unlike the real world in one important aspect– there are no external investment opportunities. If you cannot use profits to grow the company, idle assets will accumulate. Capstone is designed such that in later rounds your company is likely to become a cash cow, spinning off excess cash. How you manage that spin off is an important consideration in the end game and dividends are an important tool at your disposal.

You can retire stock. The amount cannot exceed the lesser of either: •5% of your outstanding shares, listed on page 2 of last year’s •Your total equity listed on page 3 of last year’s Courier. You are charged a 1. 5% brokerage fee to retire stock. 4. 4. 4 Emergency Loans Assume the face amount of bond 12. 6S2014 is $1,000,000. The $1,000,000 repayment is acknowledged in your reports and spreadsheets in the following manner: Your annual reports from December 31, 2014 would reflect an increase in current debt of $1,000,000 offset by a decrease in long term debt of $1,000,000.

The 2014 spreadsheet will list the bond because you are making decisions on January 1, 2014, when the bond still exists. Your 2015 spreadsheet would show a $1,000,000 increase in current debt and the bond no longer appears. Bond Ratings Courier; or If your company has no debt at all, your company is awarded a AAA bond rating. As your debt-to-assets ratio increases, your current debt interest rates increase. Your bond rating slips one category for each additional 0. 5% in current debt interest. For example, if the prime rate is 10% and your current debt interest rate is 10. %, then you would be given a AA bond rating instead of a AAA rating. 4. 4. 3 Stock Financial transactions are carried on throughout the year directly from your cash account. If you manage your cash position poorly and run out of cash, the simulation will give you an emergency loan to cover the shortfall. The loan comes from a gentleman named Big Al, who arrives at your door with a checkbook and a smile. Big Al lends you the exact amount of your shortfall. You pay one year’s worth of current debt interest on the loan and Big Al adds a 7. 5% pen