6 RBNA Manual 2010

International Management Game Carnegie Mellon University Tepper School of Business

PLAYERS MANUAL Executive Education

The Management Game Welcome to the Management Game

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Table of Contents

Welcome and overview 4-13

Play within Worlds 5

Factory Design 6

Product Design 7

Market Design 7

Other Start-up Information 8

Things To Think About As You Play 9

Input – Overview 10

Output – Overview 10

Input Description 14-35

MARKETING INPUTS

Prices 17

Contract Description 17

Shipping Preferences 19

Shipping Containers 19

Marketing Budgets 21

Marketing Consultants 22

OPERATIONS INPUTS

Research and Development 23

Production Consultants 24

Existing Operations 24

Factory Relocations 28


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FINANCE INPUTS

Debt Transactions 30

Equity Transactions 30

Dividends 31

Receivables Collection Budget 32

Early Payment Incentive 33

Currency Futures 33

Output Description 36-78

Market Report 37-47

Production Report 48-59

Finance Report 60-69

Cash Flow Report and Description 70-73

Capital Structure / Cost of Capital 74-75


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Welcome to the Management Game!

This manual explains the basic rules of the Management Game

simulation software. It will be your reference guide as you progress

through the Game. The software environment provides a framework

that simulates a competitive business situation. As a Management

Game player, you will run a multi-national company, based in the

United States, that produces a consumer product and sells into six

different countries.

Your success, or rather the success of your company, depends on

your competition, the preferences of your customers, and your skill in

determining and addressing these preferences and the actions of your

competitors.

For this class, your company will produce and market wrist watches.

Competitive Design

To mimic a “real” company, play of the Management Game relies on

teamwork. You and your classmates will be put into a group, or team,

that represents the management personnel for your company. As you

continue through this manual, you will see the terms team and

company used interchangeably.


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Play within Worlds

Your team exists in its own world, named World 1, 2, 3, etc., and

competes against four or five other companies. All companies within

a given world sell their products in the same countries: United

Kingdom, Germany, China, Japan, United States, and Mexico.

The figure below is an example of World 1 for 5 companies.

Assume that you are part of Company 5. As part of that management

team, you are competing with Companies 1 through 4 in the six

countries of the World 1 market. Depending on the size of the class,

there may be one world or there may be many worlds.

Company 1

Company 2

Company 3

Company 4

Company 5

World 1 MarketUnited Kingdom

GermanyChinaJapan

United StatesMexico

World 1


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Class teams cannot interact across worlds, which means you are not

competing with the teams of your classmates outside your world.

When this manual refers to your competition, it means only those

other companies within your world.

Factory Design

When the Management Game begins, each team has one factory.

The starting characteristics of your factory are as follows:

The Game involves six possible countries in which your factory can be located: Japan, China, Mexico, United Kingdom, Germany, and the United States.

Factory location is initially selected for you, but once the Game starts you can relocate the manufacturing facilities to any location within your world.

Initially, your factory is approximately sized to meet current demand; you can make it larger or smaller after the Game begins.

A factory reflects the available labor and material costs typical of the country in which it is located.

The quality of watches produced in any factory will differ depending on the country in which is it located. Some locations will result in higher quality products than others. For example, German and Japanese factories are usually more automated and capital-intensive; therefore they have high fixed costs and costs for building new facilities, but fairly low total labor costs for a very high quality product. Factories in China and Mexico, on the other hand, use more, much less expensive labor and cheaper facilities with less automation; it can be more difficult and more expensive overall to get the same high quality products out of these factories. Research and development spending will also have different efficiencies in each country. A dollar spent on research to produce watches in a German factory will deliver different results compared to the same dollar spent on research to produce watches in a British factory. The differential research spending effectiveness of each country changes each year and will be published separately as the game begins.

At the start of the Game, the economic characteristics of all the worlds are the same. As the Game continues, competitive dynamics drive the outcomes for each world in different directions.

Keep in mind that if you run your company correctly, you can produce a quality product anywhere in the world. The cost of obtaining high quality products is what changes from location to location.


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Product Design

Products have 3 and only 3 attributes that customers care about:

Price

Quality

Brand as measured by marketing spend over time

Customer loyalty builds up over time but is lost when you stockout. When your demand exceeds supply, customers will shop and buy from the next most attractive choices in the market.

Very important: Customers actions in different markets are completely independent of each other. Nothing which happens in Japan will impact sales in China for example.

Customer preferences are complex and vary considerably from country to country. It is not correct to conclude that price is irrelevant in any market or that quality will always dominate the purchase decision for a particular market.

Customer preferences are stable over time so they will not change.

Market Design

At the start of the Management Game, each team is currently

marketing product in all six countries: Japan, China, Mexico, the

United Kingdom, Germany, and the United States. The markets are

approximately the same size as those of the actual countries, and the

behavior of these markets mimics their real-world counterparts in

terms of market demand, cost structure, growth rates, and other

macroeconomic parameters. In addition, any transactions that occur

in a country's local currency are consolidated into US dollars for

financial reporting purposes.

Consumers in these markets have markedly different preferences.

Your intuition about these preferences in each country will hold

generally true. For example, consumers in more affluent countries

tend to be less price sensitive. For your company to thrive your team


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must identify these preferences; for your company to be profitable and

successful, your team also has to address these preferences better

than your competitors.

Other Start-up Information

One year of historical data is available so that you can develop a feel

for consumer preferences, price and quality characteristics, and other

aspects of the economic environment for each market. You will

receive both input and output data for your company, so that you can

determine what actions your predecessors decided to take and what

resulted from their decisions. This historical data is extremely rich in

valuable information. You will also receive current information about

the economic conditions for each country at the start of the Game,

such as tariff rates, transportation rates, currency exchange rates, and

average manufacturing costs. Information about the cost structure of

manufacturing facilities in various locations as well as the

effectiveness of research spending will be published separately from

this manual each year. Using this information and your own

management savvy, your team can choose reasonable strategies,

position your products according to customer needs and determine

the feasibility of relocating a factory or factories. Remember, though,

that you can produce a competitive, quality product anywhere in the

world if you manage efficiently. Therefore, while factory location may

constrain your future flexibility, it has less impact on your team’s

performance than your ability to understand your customer needs and

to serve these needs.

Customer Preferences are fixed for the entire competition and are identical in all worlds. Therefore as you gain insight into how your customers trade-off changes in price against changes in quality, this relationship will remain fixed.


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Things to Think About as You Play

What type of decision and/or support tools will your team need (i.e., tools to manage cash flow or forecast sales, or monitor competitors)?

What type of organizational structure should your team have? You need to design ways to coordinate the work of your team members effectively.

What strategies would you like to implement and what value will these strategies add to your business? How will you defend your advantage?

You are all talented managers, capable of great success. Planning and effective organization will be the key.

Effective teams use all of their assets productively. Remember that your most valuable assets are the time and talents of your people.

How to Play

Your team is responsible for tracking its progress using whatever

means that you choose and using whatever tools that your team

decides to build. The simulation will run periodically using the

variables that you input to produce output data. Your inputs and those

of your direct competitors drive the output data.


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Inputs—Things teams can control in each simulation cycle

First, you have to choose your company’s input variable and enter

them into an interface. Depending on the class size and format, the

input interface will be either an excel file or a web screen. These

inputs record variables such as pricing, marketing budgets, and the

like for each team. The next section discusses these variables in

detail.

Each team must complete a set of input decisions for the company

each period. Each time period represents 3 months of simulated time.

To begin the Management Game, your team must consider the variables that appear as entry fields on the input interface. These

are the things that you control.

Outputs—Results of the simulation using the inputs for a single cycle

Once your input decisions are submitted, the simulation acts upon

your company decisions, as well as the decisions of your competitors

to produce reports (called outputs) that can be printed from a

Microsoft Excel workbook file. The Management Game spans 10 or

12 moves or periods to represent a total cycle of up to three years. A

single move equals three months. You will hear the terms move and

period used interchangeably both in this manual and in the classroom.


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At the end of a given period, teams can access resulting information

using either the pre-formatted output forms provided in the outputs

workbook, or a team can design its own output report using any other

desired tool. Many teams build sophisticated, analytical tools to help

them make future decisions.

The diagram below illustrates what happens during a single move or

period in the Management Game.

Inputs:Variablesthat teamscontrol

Management GameSimulation Software

Outputs:Results of asimulationusing thechosenvariables

Outside DataArrives:

• Board Meetings• Labor Contract

Negotiations• Marketing Plans• Other Information

(Interest RateChanges, TariffChange, etc.)

Analyses ofDecisions and

Results;Teams Take NewInformation into

Account

New Strategies andDecisions Based on Results

from Previous Period

Stock Market Open Stock Market Closed


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The pre-formatted output reports available to Management Game

teams include the following:

The Market Report provides summary information about the company's place and performance within the world market and explains how the company's pricing compares to other companies in that world.

The Production Report describes the activity of a company's two factories, including the unit price and capacity at which the factory is operating.

The Finance Report supplies information about what your competitors are doing, including the size of their facilities, the amounts of their loans, and their retained earnings for the period.

The Cash Flow Report is a simple, single-period cash flow statement that should help each team manage its cash flow.

Where Do You Go from Here?

The remainder of this manual provides detailed explanations of both

the inputs and outputs of the Management Game Simulation.

The first section, Inputs, indicates the name, and description for each

field your team must complete at the beginning of each game cycle.


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The Outputs section of this manual explains the different parts of the

pre-formatted output reports, the information these parts contain, and

how that information is calculated. The pre-formatted outputs for your

company will look identical to the ones shown here. Becoming more

familiar with the layout of these reports will allow you to locate

information more easily in the future; use this manual as a reference

as you continue with the Game. Once you and your teammates are

familiar with these output reports, you can create additional

management tools and models to help you analyze your company's

performance.

The manual also includes an Index of important terms or information

so that you can find what you need quickly and easily. You will find

the Index immediately following the Outputs section.

Good Luck!

The Management Game Inputs

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Inputs

INPUT FOR - TEAM 1 Units Price in Japan, Product 1 Yen Price in Mexico, Product 1 Peso Price in China, Product 1 Yuan Price in U.K., Product 1 Pound Price in Germany, Product 1 Euro Price in U.S., Product 1 USD Contract Price Product 1 USD

Units Marketing Expense in Japan, Product 1 000 Yen Marketing Expense in Mexico, Product 1 000 Peso Marketing Expense in China, Product 1 000 Yuan Marketing Expense in U.K., Product 1 000 Pound Marketing Expense in Germany, Product 1 000 Euro Marketing Expense in U.S., Product 1 000 USD Marketing Consulting, Total USD 000 USD Marketing Consulting, % Allocated to Japan 0 to 100 Marketing Consulting, % Allocated to Mexico 0 to 100 Marketing Consulting, % Allocated to China 0 to 100 Marketing Consulting, % Allocated to U.K. 0 to 100 Marketing Consulting, % Allocated to Germany 0 to 100 Marketing Consulting, % Allocated to U.S. 0 to 100

Units Ship-to First, Product 1 1 to 6 Ship-to Second, Product 1 1 to 6 Ship-to Third, Product 1 1 to 6 Ship-to Fourth, Product 1 1 to 6 Ship-to Fifth, Product 1 1 to 6 Budget To Purchase Containers 000 USD Budget To Rent Containers 000 USD

Marketing Decisions


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INPUT FOR - TEAM 1 Units Research & Development Expense, Product 1 000 USD Consulting Production, Total USD 000 USD Production Budget, Product 1 Factory 000 USD Construction Budget, Product 1 Factory 000 USD Unit Capacity Decrease, Product 1 Factory 000 units Completely Close Product 1 Factory 1=yes, 0=no New Factory Location, Product 1 Factory 1 to 6 Unit Capacity of New Product 1 Factory 000 units

Units Loan Payment (Reduce Debt) 000 USD Additional Loan (Increase Debt) 000 USD Stock Purchase (Reduce Equity) 000 USD Stock Sale (Increase Equity) 000 USD Dividends Paid 000 USD Collection Budget 000 USD

Early Payment Incentive to customers Percent discount

Buy Currency Forward Contract, Yen 000,000 Yen Buy Currency Forward Contract, Peso 000,000 Peso Buy Currency Forward Contract, Yuan 000,000 Yuan Buy Currency Forward Contract, Pound 000,000 Pound Buy Currency Forward Contract, Euro 000,000 Euro Sell Currency Forward Contract, Yen 000,000 Yen Sell Currency Forward Contract, Peso 000,000 Peso Sell Currency Forward Contract, Yuan 000,000 Yuan Sell Currency Forward Contract, Pound 000,000 Pound Sell Currency Forward Contract, Euro 000,000 Euro

Operations Decisions

Finance Decisions


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Variables the teams can control in each simulation cycle

Teams operate their companies by controlling certain variables, called

inputs. The Input decisions are divided into three main sections:

Marketing Inputs, Production Inputs, and Finance Inputs.

This section provides information on the input fields you will have

control over as you attempt to operate your company. The data

appears in the following format:

Field Name or Input Name Description of input decision Units for the decision

Description

A brief description of the field appears here.

Example

A sample entry for the field appears here.


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Product Prices INPUT FOR - TEAM 1 Units Period 1 Period 2 Period 3 Period 4 Price in Japan, Product 1 Yen 4,300.00 4,500.00 4,200.00 4,100.00 Price in Mexico, Product 1 Peso 375.00 400.00 400.00 390.00 Price in China, Product 1 Yuan 400.00 420.00 375.00 360.00 Price in U.K., Product 1 Pound 31.00 32.00 31.00 30.00 Price in Germany, Product 1 Euro 41.00 45.00 45.00 43.00 Price in U.S., Product 1 USD 44.00 49.00 46.00 44.00 Contract Price Product 1 USD 0.00 0.00 0.00 0.00

Description

Your team must set prices for both products in all markets.

Do not leave any price field blank. If you leave this field blank for any country, the system will use the prices from the previous year.

If you don’t want to sell your product(s) in a certain market, enter a price of 0. Do not enter a very high price, as this will distort customer perceptions of your company.

Note that prices are in local currency: Japan = Yen Germany = Euros United Kingdom = Pounds Mexico = Pesos China = Yuan United States = Dollars

Contract Prices

Description

In addition to the six retail markets, there is also an institutional United States government market. One auction is conducted each time period within each world for a fixed volume of units that are pre-announced one period in advance. The volume can be seen at the bottom of the marketing report from the previous time period - see output description. This auction is part of the decisions which you

Description Units Period 1Contract Price Product 1 USD 40

Local currency refers to the type of currency accepted as the national currency of a certain country. Local currencies for this Game are shown here.

Important!


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make each time period and the auction itself is conducted within the simulation.

If you are the low bidder on a contract, then you “win” the contract and the product will be sold, shipped and paid for during that period at your winning bid price. To simplify your shipping decisions, contract units are shipped free of cost and require no shipping containers.

Winning the contract bid often enough allows you to develop a significant advantage in future bidding. This advantage is visible to you as your contract image in the Next Period Data section of your Finance Report (see the Outputs section for more information). Keep in mind that contract image will grow at a decreasing rate eventually leveling off at 4 or 5 dollars per unit. Your company's contract image will fall 1.0 each time that you either fail to bid or you fail to win a bid. However, your company's contract image can never fall below zero. A contract image of 1.5 should be interpreted as $1.5 advantage over other bidders if their contract image is zero.

Your effective bid, when determining who wins the contract, equals your actual bid minus your contract image.

Example

Assume that you bid $40 and your contract image is $3; your effective bid is $37. If $37 is the lowest bid, then you win the contract and will receive $40 as the selling price equal to your bid.

What Happens if Nobody bids for the contract? The winner of the contract will be team "0" implying that nobody bid so nobody won. Any non-zero contract images will fall by 1.0 but will not fall below zero.

What Happens if there is a perfect tie for the contract? The contact will be replicated and awarded to each team that ties. Each winner will receive and fill the entire contract. The winner of the contract will appear in the output as "multi". The contract image of each winning team will increase.


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Shipping Preference Order Ship-to First, Product 1 1 to 6 1 1 1 1 Ship-to Second, Product 1 1 to 6 2 2 2 2 Ship-to Third, Product 1 1 to 6 3 3 3 3 Ship-to Fourth, Product 1 1 to 6 4 4 4 4 Ship-to Fifth, Product 1 1 to 6 5 5 5 5

Budget To Purchase Containers 000 USD 0 0 0 0

Budget To Rent Containers 000 USD 0 0 0 0

Note: The numbers above for shipping preferences represent the number associated with each of the 6 countries:

1=Japan, 2= Mexico, 3= China, 4= U.K., 5=Germany, 6=U.S.

Description

This field indicates the order in which the product will be shipped to meet demand. Order is relevant for determining the distribution of manufacturing costs between inventory layers since inventory is shipped FIFO (first-in, first-out). It is also relevant in situations when demand exceeds supply and your company experiences a stock out. You cannot distribute stock outs equally across all areas. The retail market that you specify as last in your preference will bear the full shortage of a stock out.

Note that if you win any contract sales of product 1, the product will be shipped first to satisfy the contract, and then your retail markets will receive inventory in the order that you specified.

The entire amount (100%) of the demand for each country will be fulfilled in the order that you requested until the product is exhausted.

All contract units are shipped free of all transportation costs, all tariffs, and do not require any containers.

Containers

Description

Your company needs containers to deliver its products. This field indicates how MANY DOLLARS your company wishes to allocate to

To stock out means that your demand exceeded your ability to supply products. Consumers react to a stock out by purchasing products from one of your competitors in the current time period. They also lose loyalty to your product. Their reaction is proportional to the size of your stock out.

Important!


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purchase or rent containers to deliver your product(s). These containers are available immediately following your purchase request and can be used in the period that they are purchased.

You can only buy or rent containers; you cannot sell them. Each container costs $3,000.00 to buy and is capable of transporting 1,000 units per period used. Rental costs are $2,000.00 per period.

Because the containers depreciate slowly, lowering your transport capacity, companies may wish to periodically replace containers to maintain or expand the initial transport capacity. Your company might want to rent containers to increase transport capacity temporarily. Rented containers incur no maintenance costs.

Each period, 5% of the containers wear out and must be replaced. If you do not purchase any containers, then your transportation capacity will slowly decrease. Containers always wear out at the end of the time period; so the transportation capacity of your company is always known from the previous period's output.

Note: If your demand for product exceeds your ability to ship them, your company will automatically rent additional containers for special emergency rates. These rates are $3,000 per container for one period rental, which is very high; so underestimating the need for containers can be expensive.

Example

Assume that your sales forecast indicates that you are likely to sell 450,000 units, and 50,000 units into the government contract market. Also assume that you currently own 400 containers. Therefore, if your sales forecast is good, you will need 50 more containers. If you decide to purchase them, you would enter "150" into the input field for purchases and if you decide to rent them, you would enter "100" into the input field for rentals. You could also rent some containers and buy some containers at the same time, if you choose. Remember that units sold into the government auction market DO NOT REQUIRE CONTAINERS.

Important!

You can buy or rent shipping containers. Approximately 5% of your containers wear out each time period and are discarded at the END OF THE TIME PERIOD

Your company’s transport capacity appears in the Production Report of your output file.


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Marketing Budgets (also called Marketing Expenses)

Marketing Expense in Japan, Product 1 000 Yen 12,000 15,000 9,000 9,000 Marketing Expense in Mexico, Product 1 000 Peso 2,000 900 600 600 Marketing Expense in China, Product 1 000 Yuan 2,000 900 600 600 Marketing Expense in U.K., Product 1 000 Pound 200 100 75 75 Marketing Expense in Germany, Product 1 000 Euro 300 300 200 200 Marketing Expense in U.S., Product 1 000 USD 500 500 300 300 Marketing Consulting, Total USD 000 USD 350 350 400 400 Marketing Consulting, % Allocated to Japan 0 to 100 20 10 10 10 Marketing Consulting, % Allocated to Mexico 0 to 100 10 10 10 10 Marketing Consulting, % Allocated to China 0 to 100 10 10 10 10 Marketing Consulting, % Allocated to U.K. 0 to 100 20 10 10 10 Marketing Consulting, % Allocated to Germany 0 to 100 20 30 30 30 Marketing Consulting, % Allocated to U.S. 0 to 100 20 30 30 30

Description

You indicate your allocated marketing budget for each country in these fields. The effects of your marketing programs change over time in response to your competitors’ actions. Products are marketed in every country, unless you set a price of 0 (see Product Prices section above).

Note Volatile marketing spending is less effective than smooth spending. Marketing dollars have impact on demand partially in the period that they are spent and also in future periods in a diminishing way. Marketing spending in each country has no impact on the demand in other countries.

All marketing budgets are in local currencies. In addition, countries of different sizes require different sized marketing budgets to be effective.

All number entries are in thousands of local currency units.

Example

For instance, if you enter “600” for Mexico you are really allocating 600,000 pesos. This will impact the sales in Mexico in the current period and in the future. This will not impact at all the demand for product in China.

Important!


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Marketing Consultant Fees Description

You may hire consultants each period to help improve the effectiveness of your marketing programs. Payments to consultants are in US dollars.

Expenditures per period that exceed $300,000 face diminishing effectiveness, but the impact of incremental spending is always positive. Sharp, significant decreases in consulting usually diminish marketing spending efficiency. There is a delayed cumulative impact of this spending on the effectiveness of your other marketing programs.

The consulting effort can be directed to any of the 6 countries where your company may be marketing products.

Marketing consultants improve marketing effectiveness. Their effect is multi-period similar to organizational learning


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Operations Inputs

Research & Development (R&D)

Description

You set your company’s R&D budget in this field. You will have a separate R&D budget for each product.

R&D budgets influence the attractiveness of your product to your customers as measured by the Relative Quality Index (see the Outputs section)

Effects of R&D expenditures are cumulative and long lasting, but often with significant lag times.

All research facilities reside in the United States meaning research costs are in US dollars.

Example

The impact of your company’s spending for R&D in Period T is fully reflected in your Relative Quality Index at the end of Period T. Products sold during Period T are perceived by your customers to have the quality indicated at the end of Period T – 1.

For instance, assume that your Period 4 output shows a quality index of 0.90. When you make your decisions for Period 5, you increase your R&D spending, and we will assume that this higher spending level results in a relative quality increase to a level of 1.0. Therefore, this higher spending results in an increase in relative quality index which appears in your Period 5 output.

The products sold in Period 5 have a relative quality index of 0.90 in the minds of your customers. The products sold in Period 6 will have a quality index of 1.0 in the minds of your customers.

Remember - Quality is relative. If you increase research spending and others simultaneously increase spending more than you do,

Your relative quality index refers to the quality of your product when compared to the average quality for your world. The manufacturing cost of your product increases as your quality increases relative to your competitors. This increase is a small one to reflect the higher quality of components in the watch.

Steady research spending is more effective than volatile spending of the same magnitude.


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then your RELATIVE quality will actually fall. Your customers care mostly about relative quality.

Production Consultant Fees

Description

Your company has the ability to hire consultants to improve the efficiency of your manufacturing operations. The impact of these consultants is primarily on the variable manufacturing costs. They can not affect factory capacity and they normally do not impact fixed costs in a significant way. Sharp decreases in production consulting spending can cause variable manufacturing costs to increase. Consultants impact costs in a cumulative, multi-period way. Consulting expenses diminish in effectiveness at higher levels. The impact of additional consulting spending is never zero or negative, but diminishes above $300,000/Quarter

Operations (existing Locations)

INPUT FOR - TEAM 1 Units Period 1 Period 2 Period 3 Period 4 Production Budget, Product 1 Factory 000 USD 8,500 10,000 10,000 10,000

Description

The first field defines your production budget; that is, the money allocated to your factory to manufacture product in the current time period. Your funds automatically go to defray material and labor costs as needed.

If you allocate more money than your factory needs to produce at full capacity, the excess is not used. The amount is also not available to earn the interest it would have had you left your cash in the bank. Because the excess money is also not available for other needs, your company may experience a cash flow problem.


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The production budget appears in US dollars regardless of where your factories are located; the simulation automatically converts the amount into local currency based on the location of your factory.

Example

If you decide that you want to operate your company at less than full capacity, you can accomplish this by reducing the amount of money available for production.

Of course, the lowest possible amount you can enter here would equal your fixed costs. In this case, your factory would produce a very small number of product units at a very high cost per unit.

Consider an example using these simplified numbers:

Unit Capacity = 250,000

Fixed Cost = $1,000,000

Variable Cost = $5,000,000

Fixed Cost/Unit = $4.00/unit

Variable Cost/Unit = $20.00/unit

To operate your company at full capacity under these circumstances, you need to allocate $6,000,000. To operate at 80% of full capacity, you would need to allocate $5,000,000; that is: $1,000,000 + $20 x 0.80 x 250,000 units of capacity = $5,000,000

Your total cost per unit while operating at 80% capacity would then be $25.00, as compared to $24.00 if you were operating at full capacity.

To operate at 60% of full capacity, you would have to reduce your production budget to $4,000,000; that is: $1,000,000 + $20 x 0.60 x 250,000 units of capacity

This reduction would yield a total cost per unit of $26.66.

You can see that as you lower your factory utilization below 100%, your unit costs rise.

If unit costs rise as operation capacity drops, why would you ever want to operate below full capacity?


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You may find that your company has an excess production capacity, excess inventory, or both, as a result of poor decision-making or planning. In this situation, you may wish to tolerate higher unit manufacturing costs to better match your sales to your production levels.

Factory Construction (Also called Expansion)

Construction Budget, Factory 000 USD 1,000 500 0 0

Description

Your company may construct additional production capacity at its existing location any time with an entry in these fields. Companies can expand up to 15% of the previous period’s capacity and can do the same in each upcoming period.

Expansion costs run between 16 and 25 US dollars per unit of capacity, depending on the location of the factory. You must pay for the expansion at the time of the request, but for accounting purposes, the cost is capitalized and expensed over the life of the factory. Factories depreciate at a constant rate of 1.25% per quarter.

Expansion takes time to complete. If you request an expansion in Period X, the additional capacity will be available in Period X + 1.

Example

Construction costs per unit of capacity (in US dollars):

Japan = $25 Mexico = $17 China = $16

United States = $20 United Kingdom = $22 Germany = $24

Presume that you have a 225,000 unit factory in Germany and you find that you can sell more than this amount. You wish to expand to 250,000 units of production capacity.


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25,000 addition units would represent an 11.1% expansion, so it would fall within the 15% maximum limit. This means that you can accomplish the expansion in just one time period. The cost would be 25,000 units x 24$/unit = $600,000. Notice that all construction costs are in US dollars, independent of where the factory is being built. The entry in the input field would be 600, since the input field accepts decisions in thousands of dollars.

Existing Factory Capacity Decrease Unit Capacity Decrease, Factory 000 units 0 0 0 0

Description

You can request the partial sale of your factory for exactly 75% of its purchase price per unit. The number you enter represents thousands of units of capacity for liquidation. You may decide to do this if you discover that your factory is permanently too large relative to the sales that you feel are achievable.

These funds are available immediately.

The amount you enter in this field is thousands of units of capacity—not dollars. Plant capacity takes multiple periods to rebuild. A mistake in this field can be devastating.

For example, if you enter 50 in this field, then 50,000 units of your factory’s capacity will be sold for 75% of its net book value. You will receive this amount in cash. You will also see an expense equal to 25% of the net book value of the sold capacity in the Plant Sale Loss section of your Finance Report (see the Outputs section for more details).

If you enter 200 or 300 in this field, thinking that you are liquidating a few hundred thousand dollars of capacity, you will soon discover that you liquidated most of your plant capacity.

Factory Closure Completely Close Product 1 Factory 1=yes, 0=no 0 0 0 0

Important!

Be Careful!


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You have the ability to completely close a factory. This decision is entered in the fields directly below factory decreases. If you choose to completely close a factory, it is not also necessary to indicate a factory capacity decrease. Closing a factory is equivalent to completely selling all capacity. If you choose to close a factory, it will be closed immediately at the start of the period in which you make this choice. Do not allocate money to operate a closing factory. You can continue selling inventory for multiple periods without a factory but once the inventory is gone, your warehouse will disappear.

After your factory is closed and your inventory is gone, you must set zero prices for the markets in which you are not participating. If you later decide to re-open your factory it is necessary to build a new one using the factory relocation input fields described below.

Factory Relocation New Factory Location, Product 1 Factory 1 to 6 0 0 0 0 Unit Capacity of New Product 1 Factory 000 units 0 0 0 0

Description

Companies have the ability to move their factory. To relocate your factory to another country, you must enter the target destination country of the new factory and the number of units of product that factory will produce at full capacity. If you do not wish to relocate your factory, enter 0 in these fields. Do not leave any fields blank.

A new factory can be no more than 15% larger than the old factory; the new factory can be any amount smaller than the old factory.

To permit the construction of your new factory, relocation takes one period to complete. However, you can (and should) continue production at the old factory until the new one is completed so that there is no interruption in supply of product to sell.

To document when construction on the new facility begins, both you and your competitors will see a notice in the production report of your output file (see Outputs section).

Important!

A full description of the Production Report appears in the Outputs section of this document. Cost structure refers to your fixed and variable manufacturing costs.


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The old and new factories will yield products at the same quality level. Any history of consulting spending will move from the old factory to the new factory

You will not know the exact cost structure of the new factory until it is completed. Because you will not have operating information for the new factory, you should make a conservatively high estimate of the cost structure to set your production budget for the new factory when it is first completed. After the factory has been in operation for one period, you will be able to analyze the new cost structure.

Description (Factory Relocation, Continued)

Because new factories are usually inefficient in their initial stages of operation, spending money on production consultants is an effective way to drive these costs down quickly (see Consultants section).

Newly relocated factories cannot be moved again until one period after completion. The simulation reports no change if you try to relocate a factory before construction is completed or if you try to move it back to its original country.

Example

For instance, if you indicate that you want to move your factory from China to Mexico during period T, you can continue production at the China location until period T +1, when the facility in Mexico is completed.

If you make the request for relocation in period T, you will have to set your production budget for the new facility in period T + 1, without any prior data about the cost structure associated with the new location.

If you make a request for relocation in time period T, and construction ends in period T + 1, then you cannot relocate that factory again until period T + 2.


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Financial input decisions Loan Payment (Reduce Debt) 000 USD 0 0 0 0 Additional Loan (Increase Debt) 000 USD 7,000 0 0 5,000

Debt Transactions

Each company has a limited line of credit that allows it to borrow money for operations costs, as needed. Companies can make payments or increase borrowing as desired. Think of this as a revolving line of credit. The simulation does not make loan payments automatically; you must designate money for this purpose. If you take no action, your loan balance increases each time period by an amount equal to the interest expense. You can only borrow money in US dollars.

Credit limits appear at the bottom of the Finance Report output for each period (see the Outputs section for more information). Interest rates appear in this same location. Initially, all teams pay the same interest rates, but as play continues the rates may fluctuate. The interest rate that you pay depends on your recent past profitability. If you are losing money, your debt will carry a risk premium up to 100% above the rates available to the best companies.

Your credit line and loan repayment costs are in US dollars. In addition, your credit limit is set to 200% of the book value of your equity. Therefore, if you repurchase stock, pay dividends, or lose money, the book value of your equity will fall and your borrowing capacity will also fall. If you sell stock or earn profits, your equity and borrowing capacity will rise together.

Stock Transactions (Buy or Sell) Stock Purchase (Reduce Equity) 000 USD 0 0 0 0 Stock Sale (Increase Equity) 000 USD 0 0 0 0

Description

You can raise needed cash by issuing new stock in your company. You can also return unneeded cash to owners by buying shares of your own company. In these fields, you choose the dollar amount of

In this case, equity refers to the common stock plus retained earnings as they appear in your balance sheet


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the transaction. Stock transactions cost 1% of the amount purchased or sold and appear as miscellaneous fees in your Detailed Income Statement on your Finance Report (see Outputs section for more information).

Companies cannot buy or sell securities of other companies.

Dividends Paid

Dividends Paid 000 USD 1,000 10,000 1,000 1,000

Description

In addition to stock sales, you can also pay cash dividends.

The simulation distributes dividends in the period that you declare them to reduce retained earnings.

Do not pay dividends that drive retained earnings into negative amounts. If retained earnings become negative because your company has been unprofitable, then you will not be permitted to pay dividends until retained earnings are again above zero.


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Collections Budget Collection Budget 000 USD 0 0 0 0

Description

By allocating money to collect receivables, you can accelerate the rate at which your company collects these receivables and you can also influence your company’s bad debt expense rate.

Overly aggressive collection tactics often drive customers away, which causes your sales to suffer. Be cautious in allocating your collections budget.

Collection budgets appear in thousands of dollars.

Example

If your company spends nothing on collections in time period T, that is, you make no entry in this field, the simulation will automatically apply a baseline bad debt rate of 0.7% of the retail sales from time period T – 2.

You can drive this rate below 0.7% by your collections budget choices.

Later in the description of the output, you will find a detailed description of how your receivables are collected. You will also find a description as to how and how much you can accelerate this payment by setting a non-zero collection budget.

See the section in the finance report which describes the timing of cash flows.

Your company's bad debt expense can be negative if you are successful collecting receivables which were previously written off as a bad debt.

Important!


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Early Payment Incentive Early Payment Incentive to customers Percent discount 0.00 0.50 0.00 0.00

Description

You have the ability to offer a discount to customers who pay you quickly. The discount ranges from zero to 2 percent and is entered as an integer, ( so 1 means 1 percent).

30% of your customers pay you in cash without any incentive, and many of your customers will not take advantage of the discount so the real cost of offering the discount can only be estimated. The value of collecting the money faster is obvious. You can improve your asset efficiency sharply by reducing receivables and either using this cash to grow the business or return it to the owners.

Futures Currency Market Buy Currency Forward Contract, Yen 000,000 Yen 0 0 400 400 Buy Currency Forward Contract, Peso 000,000 Peso 0 0 0 0 Buy Currency Forward Contract, Yuan 000,000 Yuan 0 0 0 0 Buy Currency Forward Contract, Pound 000,000 Pound 0 0 0 0 Buy Currency Forward Contract, Euro 000,000 Euro 0 0 0 0 Sell Currency Forward Contract, Yen 000,000 Yen 0 0 0 0 Sell Currency Forward Contract, Peso 000,000 Peso 0 0 10 10 Sell Currency Forward Contract, Yuan 000,000 Yuan 0 0 10 10 Sell Currency Forward Contract, Pound 000,000 Pound 0 0 4 4 Sell Currency Forward Contract, Euro 000,000 Euro 0 0 6 6

Description

This field allows you to buy and sell forward contracts on different blocks of currency. Each period, a spot rate and a forward rate for each currency will be published. You may buy or sell contracts at the current forward rate.

Numbers for this field appear in units of millions of non-dollar currency. You can lose a great deal of money very quickly if you do not use these financial instruments carefully.

When you sell products, you are paid in local currency, not in US dollars. If one or both of your factories are located outside of the US, they will consume local, non-dollar currency.

The spot rate is the current currency exchange rate. The forward rate is the expected or future exchange rate


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Because your factories might reside in different countries around the world, and because you receive payment in many currencies, forward contracts are useful in hedging your exchange rate risk. To reduce this risk, you can buy contracts in the currencies where you pay costs and sell contracts in the currencies where you collect your revenues.

The expected payoff of these contracts is 0 because the contracts are sold at the current forward rate. If the forward rate in Period T and the spot rate in Period T + 1 are equal, then all contracts have no impact. You gain or lose only if the spot rate differs from the previous period’s forward rate.

These contracts allow your company to protect itself from currency fluctuations that may impact your costs as well as the value of your sales outside the United States.

Example

For instance, if you enter 25 in the field labeled "Buy Currency Forward Contract, Yen", you are agreeing to purchase 25 million yen at the current forward rate of exchange. The contract is then settled at the end of the time period.

If you are not familiar with futures contracts, enter 0 or a small number until you understand how and when the contracts pay.

Consider these examples, assuming the following information:

Period T

Spot Rate = 120 yen

Forward Rate = 110 yen

Consider 3 possible scenarios for Period T + 1?

A. spot rate =110 (yen valued as expected)

B. spot rate = 115 (yen less valuable than expected)

C. spot rate = 105 (yen more valuable than expected)


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What would happen if you BOUGHT yen in Period T?

A. Nothing, because the yen is worth exactly what was expected.

B. You lose money because the yen is worth less than expected.

C. You gain money because the yen is worth more than expected.

What would happen if you SOLD yen in Period T?

A. Nothing, because the yen is worth exactly what was expected.

B. You gain money because the yen is worth less than expected.

C. You lose money because the yen is worth more than expected.

The Management Game Outputs

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Outputs

Results of a move in the simulation cycle based on the variable entries made by teams

Teams have four pre-formatted output reports available to them as

the Game finishes each move or period. The pre-formatted outputs

will help you to view the information you need to make decisions for

your company.

The pre-formatted output reports include:

The Market Report provides summary information about the company's place and performance within the world market and explains how the company's pricing compares to other companies in that world.

The Production Report describes the activity of a company's two factories, including the unit price and capacity at which the factory is operating.

The Finance Report supplies information about what your competitors are doing, including the size of their facilities, the amounts of their loans, and their retained earnings for the period.

The Cash Flow report is a simple, single-period inflow/outflow statement that can help teams manage their cash flow.

In addition, competitor comparison data is also presented in both table and graphical format so that you can watch what other teams are doing.

The Management Game Outputs—Market Report

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Market Report

The Market Report contains three main sections that provide specific

information about your company’s performance during a single

period:

Market Statistics section provides information about the climate and condition of the world market. The information is segmented into market-wide data, company specific data, and company profitability data.

Pricing Data section describes your company’s place in the world market by comparing the price and quality of your product(s) with those of other companies in your world.

Contract Marketing Information section offers a description of the activity in the contract market.

The following diagram identifies these

sections for you.


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Market Report—Market Statistics Section

Now take a closer look at the Market Statistics section. The Market

Statistics section contains three subsections that describe the activity

in the market from different perspectives. The information appears in

three subsections so that you can easily identify where your

company is making money and where problems exist.

The first subsection, (see arrow below), indicates the total product

demand, total sales, and total marketing expenses for each country

in both units and percentages. Notice, in this example, the total

demand equals the total sales. This means that for this period there

Marketing Statistics Section. Divided into 3 areas 1.World data 2.Company Data 3. Profitability by country market information

Pricing and Quality Information

Information about activity in the contract market

1

2

3


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were no product shortages and no “stock out” situations. Total sales

that are less than total demand would indicate that a product

shortage had occurred.

The percentages in the Market Statistics section have different

meanings in each subsection. For instance, German consumers

comprise 14% of the world sales; however, the same consumers are

receiving more than 29% of world marketing dollars for this period.

In contrast, Japanese consumers represent 20% of the world

demand, but only 9% of world marketing dollars are spent in Japan.

Once you know the world market totals, you can determine how well

your company did in each market by examining the remaining

subsections directly underneath the world market statistics. First,

consider the company demand statistics, (see arrow below), which

indicates your company’s sales performance in each country.


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Notice the line in the display titled “Additional Sales.” If one of your

competitors stocks out and their customers buy from you, these

sales will appear as Additional Sales for your company. In this

example, however, the company had no additional sales during this

period. It is important that you know how to distinguish between

sales that your company generated and sales that were given to you

by the poor planning of your competitors. Customers will always

behave like this. They will shop around until they buy a product from

some company. So a stockout in any market will send customers to

one of your competitors.

Now consider the last Market Statistics subsection, which outlines

company profitability, see arrow here.


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This last subsection provides a brief profit/loss statement for your

company in each country’s market. The statement attempts to

allocate costs to each market so that you get a picture of your profit

margins separated into country or product markets. This depiction of

your profitability includes an allocation of all of the costs which are

clearly associated with each individual market. Remember, since

these markets act independently, the marketing and pricing

decisions in one market will have no impact at all in any other

market. So, it is correct to allocate the full cost of marketing dollars

spent in Japan to the sales in Japan, since these marketing dollars

have no impact at all outside of Japan.

There are many costs which involve judgment in order to allocate,

like research and development or warehouse costs. To get a total

picture of profitability by individual product market, you will need to

allocate all of your costs to some market, according to your own

judgment.

Important!


42

What is the Contribution Margin? The contribution margin includes all the direct costs of doing

business in each country. It allows your company to pinpoint where

it is making money and where it is losing money. A negative

contribution margin means that your company is not generating any

profits in that particular market. Because the contribution margin

does not take indirect costs, like R&D, into account, a company with

a positive contribution can still be losing money.

The contribution margin makes assumptions about your company’s

cost allocations in terms of country markets that are neither correct

nor incorrect. You and your teammates can either view these results

as an accurate depiction of your profitability, and use them for

decision-making purposes, or you can disagree with the results and

construct your own model of profitability.

Because time is of the essence, it is important that your company

determine ahead of time what constitutes profitability in the product

and country markets. When the simulation generates these

numbers, you can agree or disagree with the outlook provided and

take action based on your models and independent analysis.

Regardless of your choice, make sure you continue to manage your

business. It is probably poor use of your valuable time to try to reproduce these numbers. You should either rely on them or develop your own view of profitability.


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Market Report—Pricing & Quality Data Section Each Market Report contains a Pricing & Quality Data section that

summarizes all the prices throughout the world. For instance, the

Pricing Data section shown below provides the prices and relative

quality data for all the companies within this world.

Pricing summary tables include both average prices and relative

prices, so that you can see at-a-glance how your company is faring

in the global market. Keep in mind that these prices are in local currency.

The Quality Myth— (or “Of course my company makes a high quality product”)

The last column in the table lists the relative quality of Product 1 for

each company. An entry of 100% indicates a product is average. A

relative quality percentage of 112% means that the company makes

a Product that has a quality of 12% above average. An entry of

80% means a company is making a product with 20% less quality

than average.


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You can improve the quality of your products by spending more

money on R&D. However, it is entirely possible to increase your

R&D spending and still experience a drop in relative quality, if your

competitors are improving their products faster than you can improve

yours.

Trends in Consumer Preferences

Customers base their purchasing decisions on the following factors:

Relative Price

Marketing budget

Relative Quality

Availability

History

Company Image

Customers also compare your company’s variables with variables of

other companies to make their final buying decision, and they don’t

forget the past.

One reliable method of predicting future sales and customer

preferences is to analyze historical data carefully. As a rule,

consumer preferences and macroeconomic data that were true when

the historical data was collected, remain true going forward and, in

general, will not change. Therefore, time devoted to “mining past

data” is time well spent.

One word of caution:

It is dangerous to extrapolate conclusions beyond the ranges of the

historical data. For instance, some students build models to obtain

insight into price elasticity. While these are valuable insights, they

Be Careful! Increasing your spending does not insure an increase in quality.

Important!

Even More Important!


45

are only valid within the ranges of price and quality that appear in the

historical data. Once outside the range of the data, these insights

fail and you will have to revisit your analysis and update your

conclusions, as new data becomes available.

Market Report—Contract Market Section The last part of the Market Report, the Contract Market section,

describes any activity that occurred in the contract market for that

period. A sample of this section appears below.

All contract sales involve only Product in the United States. Contract sales incur no transportation costs, no tariff costs and require no containers. All activity in both of the 2 types of contract markets is reported here as a composite transaction.

In the example above, Company 5 won the 50,000 contract and

since there are no revenues reported, we must be looking at the

output for some team different from Company 5. The price that

Company 5 bid was 25.00; assuming that they had a company

image of zero. As a further example, let's presume that your

company wins 3 contracts within the on-line, web-based contract

auction, and then also proceeds to win the single contract within the

auction conducted as part of the simulation. What will appear in the

output report will be a single transaction representing the sum of the

4 contracts.

Important!

Contract Market informationPrice to beat

Contract With zeo Your contract Your Contract Your Contract ContractVolume Contract Sales revenue Sales cost USD / Image for VolumeThis period Winner Advantage This period UNITSThis period UNIT Next Period Next period

50,000 5 25.00 0 0 0 0 0.000 60,000


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For our purposes, you can think of the contract market as being the

government bid market. The US government reacts with hostility

toward a company that tries to sell it a product at above retail prices.

Therefore, your bid should be less than your retail price in the United

states.

The volume of a product that can be sold at any one time is

announced just one period in advance and all contracts are a single-

period arrangement. While it is not necessary for you to enter a bid

price; if you choose to do so, your bid must be lower than your US

retail price and higher than your marginal manufacturing cost.

Otherwise, this would be considered dumping and the US Justice

Department may pay you a visit. The variable cost which applies is

the one which appears in your production report under the column

labeled "next period@ full capacity".

One important thing to remember is that if you bid and win, you

supply the contract first and then you will supply your retail markets.

Be certain that you have enough inventory or production capacity

before you bid, because if not, your company will “stock out” in its

retail markets. This can be very damaging since not only are you

losing sales in what may be some of your most profitable markets,

but also customers won’t wait around for you to restock your

inventory. Instead, they will take their business elsewhere.

Important!


47

Improving Your Company’s Contract Image

By continually winning in the contract market, your company will

develop a positive contract image which is an advantage in future

bidding. Each company’s contract image appears on the bottom of

the Market Report. This number equals the company’s dollar

advantage per unit in the bidding for the next period. Your contract

image can grow approximately 25% to 35% of a normal bid price and

can help you win a bid even if yours is not the absolute lowest.

Contract image drops by 1.0 each time you bid and lose or choose

not to bid, but it will not fall below zero (0.0).

Your company’s contract image is the dollar per unit advantage that your team accumulates from bidding successfully on past contracts. REMEMBER: The advantage applies only to the contract auction conducted within the

The Management Game Outputs—Production Report

48

Production Report

The Production Report constitutes the second type of standardized

output. This report describes activity in your company’s factory. This

dedicated facilities makes only Product 1 and can reside in any

country.

Notice that the Production Report also includes transportation cost

information, factory relocation activity and other miscellaneous

information about your competitors. You will learn more about this

information later in this section.


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Production Report—Product Information

Now shift your focus to the details of the Production Report.

The design of the Production Report simplifies your production

planning and cost accounting so that you can easily see your

production costs. The report separates your production costs so that

you can locate and identify them. The report also provides the figures

in the factory’s local currency and then converts these figures to US

dollars.

This example shows the fixed and variable costs, as well as the unit

costs in Chinese currency (on the left) and US dollars (on the right).

Product 1 warehouse showing the 3 possible inventory layers 1. Very old inventory from a previous period 2. Inventory remaining from current period production 3. Inventory which was purchased for your company at the end of the time period because your ending inventory from current production was less than 10% of demand as required.

1

2

3 If a company relocates a factory, it would appear here

Transportation report shows both capacity and cost information

Inventory and capacity information about competitors


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Three columns in this display describe manufacturing costs:

The “This Period Actual” column indicates what happened during the current period. In the example above, the factory produced 419,093 units at a total cost of 81,539,365 Yuan or $9,592,866 (US). In addition, the factory operated at full capacity this period.

The middle column shows the costs that would apply if the factory were operating at full capacity. These would differ from actual costs whenever the factory was operated below full capacity. For instance, if the production budget had been set at $7,000,000, how much product would have been manufactured?

Answer: 277,080.5 (7,000,000-1,937,739)/18.27 At what unit cost? Answer: $25.26 (7,000,000/277,080.5)

The third column, “Next Period Full Capacity,” predicts the manufacturing costs that are expected in this Chinese factory during the next period. Sometimes annual costs are higher; sometimes they are lower. Sometimes predicted costs match actual costs exactly.

Production Report—Inventory Data The Inventory Data section of the Production Report appears just

below the summary of your manufacturing costs. This section, shown

below, describes your inventory.

Remember that all the costs displayed are in local currency. In this

case, we are still looking at a Chinese factory. Very Important!

INVENTORY PRODUCT 1Inventory is valued Inventory Inventory Inventory Total Months ofin local currency Produced Produced Purchased Inventory Sales

Previously This period This periodUNITS 0 132,952 0 132,952 1.95VALUE 0 23,601,394 0 23,601,394

COST / UNIT 0.00 177.52 0.00 177.52


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Also, the numbers represent end of period balances as you would expect.

If you operate your factory correctly, all of your inventory that remains

unsold at the end of a given time period should have been

manufactured during that period. This type of product is reported in

the middle column, called “Inventory Produced This Period.”

The first and third columns will normally contain zeros, unless you

are having difficulty managing your inventory. Inventory levels may be

too high or too low when compared to your sales.

What if you produce too much?

In this situation, inventory that was manufactured in a previous period will eventually remain unsold at the end of the current period.

The first column to the left in your warehouse report contains this type

of very old inventory.

What if you produce too little?

If the period ends and your total inventory is less than 10% of your demand for the period, then product will be purchased for you

automatically, in sufficient quality to bring your total inventory up to

10% of your demand. The third column from the left reflects this

situation. Non-zero numbers in this column indicate that your

company produced too few (or sold too many—depending on your

perspective) units.

If it becomes necessary to purchase inventory, you will pay $3.00 over

your current period manufacturing cost per unit to buy this product.

You are required to end the period with a buffer of 10% inventory or more. If you do not manufacture enough product, you will be

Important!


52

forced to buy it at the higher, $3.00 premium cost, thus increasing

your costs. Remember, if inventory is purchased for you, it is

purchased at the very end of the time period after all sales are

complete. This purchased product can not be sold until the following

simulation cycle.

Regulating Your Production Capacity

Your team can choose the level of operation for your factories by

allocating a Production Budget in the Input interface. If you scale back

on the amount of funds you allocate to production, your factories, in

turn, will scale back production to remain within the budgeted limit.

Remember that you allocate funds for factory operation in US dollars.

Unless your factory is actually located in the United States, the

simulation converts your production budget into the local currency to

pay workers and buy materials for that factory.

For more information about the Production Budget input, please refer to the Inputs section.

You can calculate exactly how much money is required to operate your factory at full capacity because you know both the fixed costs and the variable costs for a given period.


53

Tips on Factory Expansion

Remember that you can either expand your factories or make them

smaller (refer to the inputs section for more details). Generally, you

should try to operate your factories at or near full capacity. However, you can only expand factory capacity by 15% each time period. Regardless of the scope of your request, all factory expansion stops at

15%.

The overall value of a factory will depreciate over time, and with it,

maximum production capacity. To maintain a fixed production

capacity, your company will need to reinvest additional plant capacity

equal to the amount of depreciation. The financial depreciation rate is

always equal to the real depreciation rate of your factories and so the

book value of your factories, (as well as those belonging to your

competitors) will always equal their replacement cost. This permits

you to monitor the production capacity of your competitors by

watching their balance sheet information.

Remember, too, that if your company decides to relocate one or both

of its factories, the process takes one period to complete. (Please

refer to the Factory Relocation discussion in the Inputs section for

more information.)

Moving factories is an expensive decision. Make sure you analyze the

costs and benefits before you proceed. Make sure you understand the differences between CASH FLOWS and EXPENSES associated with relocating a factory.

Important!


54

For example, assume that you want to move a $5,000,000 factory

from Mexico to China. The cash flow and expenses are determined

as follows:

The $5,000,000 factory would have a capacity of 294,117.65 units

($5,000,000/$17 per unit). When the factory is built in China, you

want it to have a capacity of 250,000 units. If you make the

appropriate inputs for Period 7 for instance, nothing happens in Period 7. But, in Period 8 (at the first moment), the Mexican factory is

closed and sold for $3.75 million (75% of $5 million), which generates

a 1.25 Million Dollar "Plant Sale Loss” that will appear as a pre-tax

expense in Period 8. Your company then receives $3.75 million in

cash.

Your company also must build a new factory in China. The

construction cost in China is $16 per unit capacity; therefore it will cost

$4 million to build ($16 per unit x 250,000 units capacity). Notice that

the $4 million is a cash flow, not an expense.

Beyond these immediate cash flows and expenses, transportation

costs and tariff costs will change, unit manufacturing costs will

change, and the effectiveness of your future research spending will

change. Information about relative manufacturing costs and

differential research efficiencies are published each year separately

from this manual.

Where do you store your products?

All the Management Game companies rent two warehouses for

$50,000 (US) each fixed cost plus a per unit variable storage fee, so


55

that each product stays in its own warehouse. The variable storage

fee depends on the level of ending inventory.

Ending Inventory Variable Unit Holding cost

Up to 25% of quarterly demand $1.00/unit

Between 25% and 50% of

quarterly demand

$2.00/unit

Between 50% and 100% of

quarterly demand

$3.00/unit

Greater than 100% of quarterly

demand

$4.00/unit

The holding cost per unit applies to ALL UNITS IN ENDING

INVENTORY. For example, if your company's demand for product 1

was 250,000 units and your ending inventory is 62,499 units, then

your warehouse cost for product 1 will be 50,000 + 62,499 =

$112,499. However, if your ending inventory were 62,500 units, then

your warehouse expense would be 50,000+2*62,500 = $175,000. At

higher inventory levels, holding costs become prohibitively expensive.


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If you operate your factory at very low capacity and generate inventory

that has a cost per unit greater than the average of all retail prices,

then this inventory will be "written down" to the average retail price

that prevails in the market. This loss appears in the Detailed Income portion of your financial report. This feature forces inventory created

at very high unit cost to impact profits in the period in which it is

manufactured rather than when it is sold to reflect the reality that this

product can never realistically be sold at a profit. This prevents your

company from holding inventory and delaying the loss recognition

beyond the current period.

Consider a situation with the following characteristics:

Fixed Cost = $1,000,000

Variable Cost = $20/unit

You want to make 1,000 units

The unit cost will then be $1,020,000/1,000 or $1,020. Clearly, you

cannot sell your product for more than $1,020 each! It is inappropriate

to “store this loss” in inventory. Therefore, these 1,000 units will be

“written down” and you will see a loss in your income statement

labeled “Inventory Writedown.” This will appear in the period in which

the high cost product is manufactured.


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Production Report—Additional Information Now consider the several small tables at the bottom of the Production

Report.

The Transportation Report

The first describes your transportation costs and capacity. As you

examine this information, make sure that you have adequate shipping

capacity. Remember that emergency rates for renting additional

containers are very high. If you have temporary need to ship product,

you can either purchase or rent containers at more reasonable rates

by placing these requests in the input screen in the appropriate field:

Remember: Each container holds 1,000 units of either product.

The purchase price for new containers is $3,000 (US). These containers last about five years before they wear out; therefore you should replace them from time to time.

The rental price for containers is $2,000 (US) per three-month period—pretty expensive when compared to the purchase price.

The emergency rental rate is $3,000 (US) for a three-month period. This is clearly a punishingly high rate.

Important!


58

A sample Transportation Report appears below.

The variable costs of shipping from country to country are listed in a

table on your finance report. These variable rates may change from

time to time. All transportation costs are in US dollars. In this

example, there are no emergency rentals and no requested voluntary

rentals.

Factory Relocation Activity

If you or one of your competitors decide to move a factory,

documentation of this decision appears at the bottom of your

production report, as shown below.

The actual move occurs as the next period begins. Notice that the

table indicates the new capacity of the relocating factory. This gives

TRANSPORTATION REPORTUSD

Number of shipping containers you have now 486Depreciation cost of your shipping containers in USD $76,720

Fixed cost of maintaining your shipping containers USD $143,210Cost of Renting containers requested by you USD $0

Emergency cost of renting containers NOT requested by you USD $0Variable costs of shipping product -- USD $365,571

TOTAL SHIPPING COSTS - USD $585,501

UNITSNext period shipping capacity (units) if you do not buy any containers 485,892

FACTORY RELOCATION ACTIVITYNEW Company 1 Company 2 Company 3 Company 4 Company 5

Location P1Location P2Capacity P1Capacity P2

1 = Japan 2 = Mexico 3 = China 4 = UK 5=Germany 6=US


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you and your competitors one period to react to any relocation

decision.

If no team is relocating a facility, no Factory Relocation display will

appear on the Production Report. As you can see in the example,

company 1 has decided to move their product 1 factory to the United

States and when this factory becomes operational, it will have a

capacity of 225,000 units.

Competitor Operational Data

Competitor Factory and Inventory Information

Factory Value 6,621,676 6,621,676 6,621,676 6,621,676 6,621,676 Factory Capacity 413,855 413,855 413,855 413,855 413,855 Inventory Value 2,354,194 2,354,194 2,354,194 2,354,194 2,354,194 Est. Unit Inventory 102,850 102,850 102,850 102,850 102,850

There are two additional tables of data at the bottom of your

Production report which help you monitor the capabilities and activities

of your competitors. From these tables, you can see the size of your

competitors' factories as well as their inventory levels.

The Management Game Outputs—The Finance Report

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The Finance Report

The third pre-formatted output report is the Finance Report. As its

name suggests, the Finance Report provides financial data both for

your company and for your competitors. A sample of this document is

shown here.

1

2

3

4

5

6

7


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As you can see, your finance report is divided into seven areas:

1. Balance Sheet Data

2. Income Statement Data

3. Tariff Rates

4. Transport Rates

5. Currency Contracts—rates and your company’s activity

6. Detailed Income Statement—your company only

7. Some miscellaneous data that applies to next period

Finance Report—Balance Sheet Data Of the Finance Report sections, the Balance Sheet Data section may

be the most useful for you in analyzing your competitors’ performance

for a given period. This portion of the output contains the balance

sheets of all of the companies within your world.

These balance sheets provide a wealth of information about your

competitors, including:

Competitors’ inventory levels

Insight into how they may price their products in the future

Whether or not they are building larger factories

Who is borrowing more money

Their return of equity

Their dividend activity

Do not underestimate the amount of information you can gather from

these balance sheets. Important!


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Tracking Your Receivables

Your receivables are collected in a very predictable pattern.

You collect 100% of your contract sales as cash in the period the product is sold.

You collect 30% of your non-contract retail sales in this period as cash.

The remaining 70% of your non-contract retail sales are added to receivables.

In period T+ l, you collect 80% of the retail sales from period T that were not already collected when sold (that is, 0.80 x 0.70 = 0.56). This presumes a zero collection budget in the previous and current time period. If you set a non-zero collection budget, then you have the potential to collect more than 80% of these receivables. The impact of collection spending on receivables can be estimated by analyzing the receivables behavior in response to changes in collection spending in the past. The relationship is deterministic and stable.

In period T+2, you either collect the remaining receivables, or you write them off as bad debt. Unless you wish to spend some money on the collection of your receivable, the bad debt will be 0.7% of the RETAIL sales from 2 periods previous. You can lower your bad debt expense by setting a non-zero collection budget. In some cases, your bad debt expense may be negative, indicating that you have recovered cash from bad debts which were written off in a pervious period.

Remember that as you spend more and more money on collections,

at some point, you will begin to reach diminishing impact and your

money will be wasted.

The calculation you can use to reproduce your receivables in any

given period is as follows:

Important!


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Receivable @ Time (T) = (0.7 * retail sales @Time T)+(0.2*0.7* retail

sales @Time = T -1) NOTE: this assumes no collection spending. If

you set a non-zero collection budget, receivables will be lowered.

As for the other fields in the Balance Sheet Data section, consider the

following information:

Regardless of where in the world your inventory is sitting, the system converts all inventory into US Dollars and lists them in your report.

The report lists your physical assets, including factories and containers that you own as net of all accumulated depreciation, also in US dollars.

Your trade payables are always equal to half the cost of operating your two factories last period, in US dollars. This is very useful to know if you wish to estimate the cost structure of your competitors' factories.

The system combines loans and interest on your balance sheet because you are not required to pay the interest on your debt if you don't want to. However, you must make this choice on the input screen. If you decide not to make payments, the debt on your balance sheet will grow in an amount equal to your interest expense to indicate that you didn't pay.

Your company has 2 equity accounts. The one labeled "Common

Stock" contains the par value of your common stock and for simplicity,

this account balance never changes. The account labeled "Retained

Earnings" is the only active account. All profits, dividends, and stock

sales or purchases are reflected as a change in this retained earnings

account.


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Finance Report—Income Statement Data Below the Balance Sheet Data section are very abbreviated income

statements for all the companies. These figures allow you to

determine all the sales and profits for the period. A sample Income

Statement Data Section appears below.

The Return on Equity information reported here is simply 4 times the

quarterly rate using the book value of your equity, (common stock +

retained earnings).

Finance Report—Tariff and Transport Rates The next two sections of the report list the tariff rates and

transportation rates for the period.

INCOME STATEMENT DATACompany 1 % Company 2 % Company 3 % Company 4 % Company 5 %

Total Sales Revenue 20,655,780 21,241,539 19,331,517 21,341,490 19,988,886Net Income 365,962 2% 545,689 3% 59,269 0% 530,525 2% 354,897 2%

Annualized ROE 6% 10% 1% 9% 6%

From -->>> TARIFF RATES To Japan Mexico China U.K. Germany U.S.

Japan 0.00% 12.00% 12.00% 12.00% 12.00% 12.00%Mexico 6.00% 0.00% 6.00% 6.00% 6.00% 0.00%China 8.00% 8.00% 0.00% 8.00% 8.00% 8.00%

U.K. 10.00% 10.00% 10.00% 0.00% 0.00% 10.00%

Germany 10.00% 10.00% 10.00% 0.00% 0.00% 10.00%

U.S. 5.00% 0.00% 5.00% 5.00% 5.00% 0.00%

From -->>> TRANSPORT RATESTo Japan Mexico China U.K. Germany U.S.

Japan $0.50 $1.00 $0.50 $1.25 $1.25 $1.00Mexico $1.00 $0.50 $1.50 $1.00 $1.00 $0.50China $0.50 $1.50 $0.50 $1.00 $1.00 $1.00

U.K. $1.25 $1.00 $1.00 $0.50 $0.50 $0.75Germany $1.25 $1.00 $1.00 $0.50 $0.50 $0.75

U.S. $1.00 $0.50 $1.00 $0.75 $0.75 $0.50


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As you read these tables, remember that while the rows represent

country of destination, the columns represent countries of origin. In

the table above, the first row displays the rates from various countries

to Japan. Similar logic applies to the transportation rates.

Remember, these transportation rates represent only the marginal unit

cost of transportation. There are fixed transportation costs, as well.

The tariff rates are applied to your company's sales revenues in each

country, not to your manufacturing costs.


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Finance Report—Currency Contracts Because most people are not familiar with how to trade forward contracts, the following explanation discusses the more important

aspects of this table.

The first four columns list the spot and forward rates that were in

place three months ago and are currently in place. You can buy and

sell any of the currencies in million-unit blocks, but only three months

in advance. (Please consult the Inputs section for more information

and a detailed example.) The far right column shows the gain or loss,

if any, on the currency contracts put in place at the start of the period.

In this example, 300 million yen were SOLD at 139. When the new

spot rate was published, the yen was more valuable than expected at

134; so there was a small loss on this particular contract of $80,533.

CURRENCY CONTRACTSLast Period Last Period This Period This Period Buy or Contracts Gain or Settlement

Local Currency per USD Spot Rate Forward Rate Spot Rate Forward Rate Sell Millions Loss US DollarsYEN 137.00 139.00 134.00 139.00 Sell 300.00 Loss (80,533)

PESO 9.30 9.40 9.40 9.50 Sell 10.00 0YUAN 8.70 8.90 8.90 9.00 Buy 10.00 0

POUND 0.69 0.69 0.69 0.68 Sell 3.00 0MARK 0.90 0.90 0.90 0.90 Buy 5.00 0


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Finance Report—Detailed Income Statement

The sixth table on the Finance Report is the Detailed Income

Statement for your company. While most of the entries are self-

explanatory, there are some that need clarification:

The Plant Sale Loss field captures the 25% loss that results from selling factory capacity. This field also captures the cost of moving a factory if you should choose to move one. If neither of these conditions apply, the field will be 0.

The Inventory Writedown field captures the decrease in inventory value that results from operating your factory at low volume. This, too,

DETAILED INCOME STATEMENTSales Revenues 19,331,517 100.26%Interest Income 29,680 0.15%Currency Trading Income (80,533) -0.42%TOTAL REVENUES 19,280,664 100.00%

Cost of goods sold 11,068,159 57.41%Gross Margin 8,212,505 42.59%

OPERATING EXPENSESTransportation Expenses 585,501 3.04%Marketing Expenses 2,675,125 13.87%Warehousing Expenses 255,350 1.32%Research & Development 2,700,000 14.00%Interest Expense 64,835 0.34%Factory Depreciation 110,903 0.58%Factory Sale Loss 0 0.00%Inventory Write Down 0 0.00%Consultants 300,000 1.56%Insurance 160,000 0.83%Admin and Misc Expenses 20,000 0.10%Bad Debt Expenses 77,294 0.40%Import Tariffs 1,173,696 6.09%TOTAL OPERATING EXP 19,190,863 99.53%

PRETAX INCOME 89,801 0.47%TAXES 30,532 0.16%NET INCOME 59,269 0.31%


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is unusual and the field will normally be 0 (see earlier discussion about Inventory Writedown).

The Depreciation rate for factories is 1.25% per quarter. The depreciation rate for containers is 5% per quarter.

The Admin and Misc. Expense field captures 3 expenses: The 1% transaction fee on stock sales or purchase, the change in compensation for management negotiated with your board of directors, and any money that you spend on collecting your receivables.

A Note on Taxes

Taxes—in the name of simplicity, are calculated at a flat tax of 34%

and this one rate applies to all taxable income no matter where in the

world it is earned. While this may be unrealistic, it becomes

cumbersome to track and understand your taxes if you paid them

locally. If you lose money, the loss carries forward and never expires.

The losses will be carried as a negative taxes payable account

balance until they are offset by future profits.

Next Period Data

There are a few pieces of miscellaneous information provided for next

period in order to aid in your planning. The maximum permitted loan

balance as well as the maximum new loan are published. You can

calculate these numbers since the maximum permitted debt level is

capped at an amount equal to 200% of the book value of your equity.

However, the values are published here for convenience. The

maximum permitted debt level is calculated at the end of the quarter. If

NEXT PERIOD DATA

Max Loan 8,056,413 Company Image - Product 1 1.80Max New Loan 2,588,700 Company Image - Product 2 1.80

%/QtrBorrowing Interest Rate 1.20%Rate Earned on Excess Cash 0.70%


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you lose a lot of money, pay big dividends, or buy large amounts of

stock; it is possible to lower your equity book value and temporarily

exceed your maximum permitted debt level. If this happens, the

maximum new loan will be a negative number and this amount of

money will be taken automatically from your starting cash balance the

following time period.

The quarterly interest rates for money that you lend to the bank or

borrow from the bank are also listed. These rates will fluctuate from

time to time but will always be published one period in advance to aid

your planning.

You can see a company image for published for your company. This

is an index which will grow 0.1 each quarter that your company does

not stock out. If your company does stock out, then this image will be

decreased temporarily in proportion to the size of the stockout. This

index is provided to remind you that your demand will be depressed in

the period following a stockout but this negative impact will pass. You

will know that the negative impact is finished when the index returns to

its original trend line. For example, let's say that your company image

at the end of period 8 is equal to 2.0. Assume that you stockout in

period 9 and the index in the output at the end of period 9 is 1.8. You

then know that your demand in period 10 will be depressed about 10%

from what it would have been. Now let's presume that at the end of

period 10, your company image is 2.2, (it has recovered to where it

would have been, absent the stockout). You then know that your

demand in period 11 will be unaffected by the stockout which occurred

in period 9. Effectively, your customers have forgotten about the

stockout. A very large stockout may take longer to be forgotten than a

very small stockout.


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Cash Flow Dynamics

Select Period to View Period Currently Displayed 20 CASH FLOWCompany Number 1 Report

CASH FLOWS FROM OPERATING ACTIVITIESNet profits 113,765Add back non-cash expenses

Depreciation part of transportation expense 60,090Interest expense 198,290

Factory Depreciation 97,486Plant Sale loss 0

Inventory writedowns 0Change in Accounts Receivables (259,727)Changes in Inventory net of any writedowns (182,281)Changes in Trade payables 359,531Changes in Taxes payable 58,606

Net cash from operations 1,329,776(Note: Changes in assets are subtracted while changes in liabilities are added)

CASH FLOW FROM INVESTING ACTIVITIES

Cash Flow From Purchases of Shipping Containers 0Net Cash Flow From Changes In Plant and Equipment (500,000)

Net cash flow from investing activities (500,000)

CASH FLOW FROM FINANCING ACTIVITIES

Debt Payments (negative), or New Borrowing (positive) 0Commons Stock Purchases(negative) or Sales (positive) 0

Dividend payment 0

Net Cash from Financing Activities 0

NET CHANGE IN CASH 829,776BEGINNING CASH BALANCE 3,905,632ENDING CASH BALANCE 4,735,408

Cross check 0

20

It is important for you to understand how cash is disbursed and how it

is collected. A sample Cash Flow Report appears below. This is a

simple, one period cash flow report that uses conventional accounting

to calculate the numbers shown.


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The following lists provide the cash flow dynamics that you need to

know to play the Management Game, in no particular order.

Cash Arriving—Collections

Inflows at the BEGINNING of the Period: New debt

Plant sale proceeds

Stock sale proceeds

Collection of receivables

Cash sales during the period

Inflows at the END of the Period: Interest income

Currency trading activity

Cash Departing—Disbursements

Outflows at the BEGINNING of the Period: Half of production budgets

All payables to suppliers from the previous period

Construction of factories

Purchase or rental of containers

Loan repayments

Stock repurchases

Dividends declared

Taxes

Tariffs

Marketing expenses

Inflows include...

Outflows include...


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Research and development costs

Consultants

Collections budget

Insurance

Administrative and Miscellaneous Fees

Outflows at the END of the Period: Warehouse costs

Transportation costs

Inventory purchases, (this can be a large outflow of cash)

All other disbursements if any

In addition, if your cash at the start of the period plus cash inflows at

the beginning of the period exceed your disbursements, then you earn

interest income on the excess. However, if your disbursements

exceed your cash plus inflows, then you are insolvent and "checks will begin bouncing." When this happens, the system will not

complete requested expenditures.

What happens depends on the size of the shortfall. Loan payments

and stock purchased will be quashed, that is, they won’t register value

at all. If the cash shortage persists, then operating expenses will be

reduced.

Remember, it is the “inter-period cash excess” that cannot fall below

zero. It is possible to have cash at the beginning and cash at the end

of the period and still run out of cash in the middle.

Important!

Important!


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Input Cash Flow vs. Automatic Cash Flow

Keep in mind that some of these cash flows are driven by your inputs,

and some are automatic. For example:

Your taxes are paid automatically every other period (even periods).

Your payables, warehouse costs, transportation, tariffs, and other minor items are also automatically paid each period.

Your marketing and research expenses, as well as your production budgets, dividend, construction, container purchase and many other items are decided by your inputs each period.

These factors mean that you not only control all the really large cash

disbursements but you also know about them in advance.

Notice that many of your cash collections depend on sales. It is

therefore important that you be able to accurately forecast sales so

you have adequate cash supply.

A final note on tax payments

Remember that taxes are incurred every period that you earn profits.

You will see them as a tax expense on your income statement.

However, they are disbursed at the beginning of even-numbered periods only. Therefore, in Period 6 you disburse the taxes incurred

in Periods 4 and 5 (assuming your company was profitable). In period

7, there would be no tax disbursement, although there would be an

expense if you earned profits in period 7.


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Capital Structure and Cost of Capital Information

Information about the distribution and cost of capital deployed within

the business is displayed on your cash flow report. This information

helps you to understand how efficiently you are using assets and

capital to add value for the owners. In the example above, there are

clearly large amounts of low productivity assets that could be removed


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from the business. The amount of capital in the business is too high

and climbing and the mixture of debt and equity is not correct. There

is too little cheap debt and too much expensive equity. This business

is being run badly from an asset productivity and capital efficiency

perspective.


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Index

[m = margin note] auctions, difference between the two types, 23 auctions, on-line government contract, 23,62 bad debt recovery, 43m cash flow dynamics, 89 cash flows and expenses, examples, 71-72 cash flows based on team's input vs. automatic, 92 cash inflows at beginning of period, 5 items, 90 cash inflows at end of period, 2 items, 90 cash outflows at beginning of period, 15 items, 90 cash outflows at end of period, 4 items, 91 collection budget, an example and bad debt rate, 43 collection budget, description, 43 company image , 88 competitor operational data, capacity and inventory, 77 containers, 26 containers, an example, 27 containers, description and key conditions, 27 contract image and its advantage, 22m contract image improvement in contract auction, 61 contract prices, government contracts, 22,61 contract sales, an example and conditions, 61-62 contracts, no containers, shipping costs, tariffs, 25 contracts, sealed bid, 22 contribution margin, 56 countries, 8 customer preferences, fixed and identical, 12m decisions, 15 production , 19 decisions, 44 marketing, 18 decisions, 9+5+5=19 finance decisions, 19 dividends, description, 42 equity refers to common stock and retained earnings, 41m extrapolating beyond ranges of data, a warning on, 60 factory capacity decrease, an example, 36 factory capacity decrease, description, 36 factory closure, 37 factory construction (expansion), description, 35 factory construction, an example, 36 factory depreciation, 35 factory design, 7 key game rules, 10 factory expansion, tips on, 71 factory relocation report, 76-77 factory relocation, an example, 39 factory relocation, cost structure, 39 factory relocation, description, 38 factory relocation, effect of consultants, 39 factory relocation, input, 38, output, 76 field (input) name, 18 finance report, 16, 78 finance report, balance sheet data, 6 key data, 80 finance report, currency contracts, examples, 84 finance report, illustration, 78


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finance report, income statement and key factors 82, 85 finance report, income statement, return on equity, 82 finance report, tariff and transport rates, 83 forecast sales accurately, importance of, 92 forward rate, 46m future currency market, description, 46 future currency market, examples, 47-48 high quality products, cost varies by location, 10, 10m historical data, rich in valuable information, 12 how to play, simulation cycles, 13 inputs, list of 78 inputs, 18 inputs, under team's control, 14,18-19 inputs/outputs sections, 14 insolvency and system's response, 91 insurance summary, property, D&O, product liability, 45, 86 insurance, directors/officers liability insurance, 45 insurance, product liability, 45 insurance, property/casualty, 45 interest income earned on excess cash, 91 inter-period cash excess cannot fall below zero, 91 inventory holding costs illustrated, 72-73 inventory writedown, 74 loans, description, 40 local currency, 21m market design, key rules, 11 market report detailed format and data, 51 market report, 3 sections, 50 market report, additional sales, 54 market report, company profitability 54, 55 market report, contract market section, 61 market report, demand, sales, marketing expenses, 52 market report, market statistics section, 52-55 market report, market statistics, pricing, contract, 50 market report, pricing and quality data section, 58 market report, world performance data, 53 marketing budgets (also called expenses), 28 marketing budgets, an example, 28 marketing budgets, descriptions and conditions, 28 marketing consultant fees, description, 29 next period data, maximum loan, interest rates, 87 on-line contract market, key characteristics, 62-63 outputs in preformatted forms, 16 outputs, market, production, finance, and cash flow, 49 producing too little, 70 producing too much, 69 product design, 3 key rules, 11 product differences between products 1 and 2, 56-57 product prices, 21 production budget at full capacity, 34 production budget, an example of volume and costs, 34 production budget, description, 34 production budget, fixed and variable costs, 34 production capacity regulation, 70 production consultants fees, description, 32 production report, illustrated, 66 production report, introduction, 65 production report, inventory data, 69 production report, product information, examples, 67-68


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quality improvement and cost, 31 quality myth and relative quality, 58-59 R&D relative quality index, 31 receivables, predictable collection patterns, 80-82 relative quality index on R&D, 31m reports, market, production, finance, cash flow, 16 research and development (R&D), key characteristics, 31 shipping preference order, 24 shipping preference order, an example, 25 simulation cycles, 13 spot rate, 46m start-up information, tips for managing the company, 12 stock market shared by the worlds, 9 stock out, 24m stock out, consumer reactions differ, 24m stock out, first-in, first-out, 24 stock out, retail market specified order, 24 stock transactions (buy or sell), description, 41 stock transactions, an example, 41 stock transactions, need for advance announcement, 41m tax payments in even-numbered periods, 92 taxes and tax rate, 86 taxes automatically paid every other month, 92 things to think about as you play, 5 key elements, 13 transportation report, an example, containers, 76 transportation report, key factors, 75 trends in consumer preferences, 6 key items, 60 universe containing 5 worlds, 9 universes, 9 warehousing and variable storage fee, 73 warehousing, 72 worlds driven by competitive dynamics, 9m worlds, 8 worlds, same characteristics at start, 9m wrist watches, 4

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Transcript of 6 RBNA Manual 2010