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NOTES:

R&D
Every year, the market segments are gradually
drifting down and to the right across the perceptual
map as customer demands continue to evolve.
Your product will be produced and sold at the old
coordinates prior to the revision date.
If the project took until December 31st of this year it
would cost the company 1 million dollars. A six
month project would cost 500 thousand. A three
month project would cost 250 thousand. etc
New Mean Time Before Failure specification. MTBF
predicts reliability. It indicates the average number of
hours your product will operate before it fails. Higher
reliability implies higher material costs to build your
product.
The Industry Conditions Report has the drift rate for
each market segment in table 1 to help you plan your
R&D decisions. These drift rates are how fast each
market segment is moving across the perceptual
map.
In summary, to reposition a product you would do the
following: Research current customer buying criteria
in the Courier report. Display the R&D worksheet.
Adjust Performance, Size, & MTBF. Observe impacts
upon age, material costs, and R&D completion dates.
Save the decisions.
Marketing:
It is important to remember that each market
segment has a different price range. Remember that
what you see in your reports is last years price range
for each market segment. This years price range will
be 50 cents less than what you see in your reports.
There is a penalty for pricing your product above the
price range for this year. Every dollar above the price
range will lose 20% demand for your product. At
$5.00 above the price range, demand will fall to zero.
Keep in mind that the benchmark prediction is not
accurate, but if the projection increases it does
indicate that this decision would typically result in

selling more units. benchmark

In summary, to market your product you would do


the following: Research the competitive environment
in the Courier. Display the Marketing worksheet.
Enter decisions for Price, Promotion and Sales
Budgets. Observe the decision impact upon the
benchmark forecast. Develop a worst case estimate
for demand. Enter your worst case estimate for in the
sales forecast. Save the decisions.
Production

Production line
Review the production analysis on page 4 of your
reports before making decisions in the production
department during the real simulation. This is also a
great place to keep an eye on what your competitors
are up too.
How much production you can schedule for a product
depends on your production capacity.
A sales forecast has been provided by the marketing
department for each of your products. This forecast
should represent the companys worst-case scenario.
( marketing )
It is okay to produce more units than you are
forecasting to sell. The number of units you produce
for a product should represent your best case
scenario. An extra month or two worth of sales is a
reasonable best case scenario.
For the actual simulation, you need to remember to
factor in any inventory on hand when you are
determining how many units to produce for each
product this year.
The production after adjustment is what you will
actually produce based on your production schedule.
Your companys A/P policy will determine the size of
the adjustment. The longer you make your supplier
wait for payment, the greater the adjustment will
become.

Inventory on hand + Production after adjustment =


The maximum number of units you can sell for a
product this year.
Contribution margin is the percentage of what is left
over for the company after making the sale. In
general, you need a 30% contribution margin or
higher in order to make a nice profit. Remember to
keep an eye on your contribution margins as you
change your prices in marketing.

In summary, to schedule production for your product


you would do the following: Estimate a best case for
demand for each product this year. Display the
Production worksheet. Observe existing inventory.
Schedule production to meet best case demand less
existing inventory. Save the decisions.

There are two forms of production equipment in the


simulation: Capacity and Automation.
Capacity determines quantity. As you just learned,
you can schedule up to double your first shift
capacity for your production schedule. production
schedule = 1st Shift Capacity * 2Remember to
keep an eye on your second shift percentage as you
are scheduling production. A high second shift
percentage is your best indicator that it is time to
start thinking about buying more capacity to keep up
with growing demand.
Entering a positive number on the buy/sell capacity
line will purchase more first shift capacity for a
product. Entering a negative number will sell
capacity.
Automation ratings are used to determine labor
costs. Automation ratings can be anywhere from 1.0
to 10.0. The higher the automation rating; the lower
the labor cost.

It takes one year to add more capacity or automation


to a product line. recalculate
The company will receive 65% of the original
purchase price when you sell capacity.
As with capacity, purchasing more automation for a
production line costs money.
You may need to borrow funds in the finance
department to help fund this plant improvement.
In summary, to modify plant and equipment for this
year you would do the following: Estimate peak
demand for each product for this year and next year.
Examine unit costs and margins. Display the
Production worksheet. Increase or decrease capacity
as required. Increase automation as required.
Observe the net cost of the investment. Display the
Finance worksheet. Fund the investment with a mix
of stock issues, bond issues, and depreciation. Save
the decisions.
Finance
Three ways for your company to borrow money in the
simulation:
o Stock
o Current debt: Current debt will be repaid next
year but has a lower interest rate than longterm debt.
o Long-term debt: issuing long-term debt will
increase your available cash but your company
will have to pay an interest expense for this loan
moving forward.
Cash position: when working on the actual
simulation. Ending the year with a negative cash
position will result in a high interest emergency loan
being issued to bring your cash account back up to
zero.

Issuing more shares increases your available cash


but it will also dilute your stock price. Bonds are sold
as a 10-year note, which are not due until 10 years
from the point you issued them.
Notice the Outstanding bonds section. This area
shows existing bonds that have already been issued.
You can also retire stock or bonds as you see fit.
These activities are typically only done when the
company has excess retained earnings left over at
the end of the year.
You also have the option to issue dividends. These
are entered by how much you want to give to your
shareholders per share that has been sold.
Your maximum bond retire depends on how many
bonds your company currently has outstanding.
Be sure to keep an eye on how your finance decisions
are impacting your proforma balance sheet, income
statement, cash flow statement, and ratios.
In summary, to raise money and pay debt you would
do the following: Examine the Proforma Income
Statement. Examine the Proforma Balance Sheet.
Display the Finance worksheet. Issue or repurchase
stock as required. Issue or repay bonds as required.
Issue short term debt as required. Issue a dividend as
required. Save the decisions.
Inventing a new product
You would research where you wanted to invent a
new product by studying the market segment pages
in your reports
New product will come out of R&D in the middle of
next round. The product has been designed, new
product is going to need some production equipment.
(Transfer to production page, revise capacity & auto,

contribution margin 30%


)
In summary, to invent a new product you would do
the following: Research the opportunity in the
segment in the Courier. Select appropriate product
attributes - Performance, Size, MTBF. Display the R&D
worksheet. Enter the product attributes. Note the
R&D completion date. Display the Production
worksheet. Order capacity and automation
(optionally, wait a year). Display the Finance
worksheet. Fund the plant with stock and bond
issues. Save the decisions.