How to forecast production in capsim

Round Analysis for Year 2025 Round 8 - F84781_017.

http://ww3.capsim.com/assets/images/smallstar.gifEach Team can earn a maximum of 5 stars. Stars represent an overall performance evaluation, much like the stars in the Morningstar ratings.

One star is issued for each of the following:

· Contribution margin over 30%

· Zero emergency loan

· For total units across entire product line: satisfy at least 95% of demand for their products and can not carry more than 90 days of inventory.

· Increase in stock price over last year

· Profit greater than zero

Company

Profit

Margin

Emer Loan

Inventory

Stock Price

Total

Grand

Andrews

0

7

Baldwin

http://ww3.capsim.com/assets/images/smallstar.gif

http://ww3.capsim.com/assets/images/smallstar.gif

http://ww3.capsim.com/assets/images/smallstar.gif

http://ww3.capsim.com/assets/images/smallstar.gif

http://ww3.capsim.com/assets/images/smallstar.gif

5

35

Chester

http://ww3.capsim.com/assets/images/smallstar.gif

http://ww3.capsim.com/assets/images/smallstar.gif

http://ww3.capsim.com/assets/images/smallstar.gif

http://ww3.capsim.com/assets/images/smallstar.gif

4

36

Digby

http://ww3.capsim.com/assets/images/smallstar.gif

http://ww3.capsim.com/assets/images/smallstar.gif

http://ww3.capsim.com/assets/images/smallstar.gif

http://ww3.capsim.com/assets/images/smallstar.gif

http://ww3.capsim.com/assets/images/smallstar.gif

5

37

Erie

http://ww3.capsim.com/assets/images/smallstar.gif

http://ww3.capsim.com/assets/images/smallstar.gif

http://ww3.capsim.com/assets/images/smallstar.gif

http://ww3.capsim.com/assets/images/smallstar.gif

http://ww3.capsim.com/assets/images/smallstar.gif

5

36

Ferris

http://ww3.capsim.com/assets/images/smallstar.gif

http://ww3.capsim.com/assets/images/smallstar.gif

http://ww3.capsim.com/assets/images/smallstar.gif

http://ww3.capsim.com/assets/images/smallstar.gif

4

36

Hello Andrews Team! For Round 8 you earned a total of

PROFITS : You earned no stars because your profits were negative at $- 45,678,553. Profits are listed on page 1 of the Foundation FastTrack . Losses are usually the result of insufficient margin caused by a high cost structure and too low prices. Profit can also suffer from excessive expenditures in selling and advertising, heavy interest payments on debt, and losses on liquidation (scrapping) of inventory when retiring a product line.

ANALYSIS - You may need to raise prices or reduce costs - or both. Watch your production schedule. Is it matched to a good sales forecast for each product?

CONTRIBUTION MARGIN: You earned no stars because your corporate contribution margin is 0.0%. Contribution margin is defined as:

Sales - (Direct Labor + Direct Materials + Inventory Carry) Sales

It is reported on Page 1 of the Foundation FastTrack as an aggregate average of each team's product portfolio. A good benchmark for contribution margin is 30%. A product-by-product margin computation is available on the Income Statement portion of your company's annual reports.

ANALYSIS - Your contribution margins are inadequate. Margins are driven by both price and cost. Check to see which of these problems you have:

1. Are your prices too low? "Variable Margin" is the margin that you make on each unit. It is defined as:

Price - (Direct Labor + Direct Materials)Price

From your variable margin you pay for depreciation, R&D, promotion, sales, admin costs, etc. A good benchmark for variable margin is 38%. You will find Contribution Margins on the Production Sheet in your Foundation software.

2. Are your MTBF ratings set too high? MTBF ratings affect material costs. Check the MTBF ratings of each product against the "Customer Buying Criteria" on pages 5-6 of the FastTrack. Are they higher than they need to be? Example: If the MTBF range is 14,000-20,000, and it is the 3rd buying criteria (as it is in the Low Tech segment), there is little benefit in having MTBF set higher than the minimum. The Low Tech customer is saying to you that given a choice between reliability and price, they prefer price.

3. Is your positioning too advanced? Material costs at the leading edge of a segment are $4 higher than at the trailing edge. If the customer values price more than positioning, sacrifice positioning.

4. Is your labor content too high? Labor content is the percentage of Cost of Goods (COG) consumed by labor expense. For example, if COG is $10, and labor costs are $4, your labor content is 40%. You can reduce labor content with automation. To a lesser degree, you can also limit labor content by eliminating overtime and by negotiating for a more favorable labor contract. A good benchmark for labor content in Foundation is 30%.

5. Are you dropping price to increase market share? If so, recognize that Foundation customers have no loyalty based upon past purchases, and they endure no switching costs. Customer behavior is driven by product attributes, awareness, and accessibility.

6. Are you dropping price to respond to competition? Check your competitor's margins. Are they making money? Losing money? If they are losing money, resist the temptation to follow them. While your unit volume will fall, it is more important to stay profitable. Thank your competitor for losing money. They will soon discover that they cannot sustain the losses and will want to raise their price. If you have lowered yours, the industry will be trapped in a price war. On the other hand, if you discover that they are making money because they have attacked their cost structure and are passing along savings to customers, you have a serious problem. Address your costs, differentiate so you can maintain your price, or get out of the segment.

7.

EMERGENCY LOANS: You earned no stars, because you had an emergency loan of $ 281,828,350. Emergency loans are listed on Page 1 of the Foundation FastTrack. The simulation gives you every benefit of a doubt, but if you are out of cash at the end of the year, "Big Al" arrives to give you just enough cash to bail you out -- at a 7.5 percentage point premium, of course. In the real world we often refer to emergency loans as "a liquidity crisis", "Chapter 11", or simply "Bankruptcy."

ANALYSIS - You have an excessive emergency loan. Check to see which of the following problems you have:

1. When you saved your decisions, did your Proforma Balance Sheet project negative cash? If so, your emergency loan was unnecessary. In Foundation you can always raise adequate cash via stock issues, new bonds, or short term debt. Of course, this is not true in the real world, but it is a necessary aspect of our simulated environment. Your task is to learn how to dig your way out of this hole. Here are some guidelines:

a. Raise all the money via stock issues that the spreadsheet will allow. Note that the spreadsheet presents a ceiling called "Max Issue". Do not exceed the number in "Max Issue". (You can enter a bigger number and the spreadsheet will accept it, but when your decisions are processed on the website you will actually receive the value in "Max Issue.")

b. Raise all the money via bond issues that the spreadsheet will allow, or enough to make your Proforma Cash balance positive. Do not exceed the number labeled "Maximum Issue This Year". (Like the stock "Max Issue," you can enter a bigger number, and the spreadsheet will accept it, but when your decisions are processed you will get "Maximum Issue This Year.")

c. If your Proforma Cash balance is still negative, borrow sufficient Current Debt to bring Cash into the black. Current Debt is your last choice because it is your most expensive money, but even it is less expensive than an emergency loan. Note that the Current Debt principal is due at the start of every year, but you have the option of reborrowing or "rolling" the debt.

d. If you have large quantities of inventory on any product, identify which segment it falls within on the Perceptual Map. Find the price guidelines for that segment. Price to sell within those guidelines. You need to convert that inventory back into cash. Cut back on production as appropriate.

e. Take a critical look at your plant capacity. If your product lines are running at less than 100% utilization, sell the excess capacity.

f. If you are planning to retire a product line, now is the time. Sell the capacity. If you have inventory, however, and think you can sell it, keep one unit of capacity. This makes it possible to sell the inventory instead of liquidating it at 50% of its value.

g. In the Help files in your software or on the website, find the item "How do we develop a unit sales forecast?". Follow the guidelines to prepare a realistic sales forecast and enter it on the Marketing spreadsheet.

h. Examine your Proforma Income Statement. If any product shows a negative "Net Margin", you must address the problem. If necessary, do not make or sell the product. Do not sell a product at a loss.

2. If your Proforma Balance sheet showed a positive cash balance when you saved your decisions, check the following:

a. Was there a very large increase in inventory? Check your Annual Report's Cash Flow statement. Did inventory increase dramatically? If so, turn to the Production Analysis (page 4). Was it one product, or are you carrying moderately large inventories on several products? If it is a single product, you have a serious but short term problem. The solution is to cut back on production until the inventory is sold. This may take several years depending upon the cause of the problem. On the other hand, if you are carrying moderately large inventories on several product, the root problem is overly optimistic forecasting. In the Help files in your software or on the website, find the item "How do we develop a unit sales forecast?". Follow the guidelines to prepare a realistic sales forecast and enter it on the Marketing spreadsheet.

b. Did you buy plant and equipment and forget to fund it? If so, fund it now by matching the investment with a combination of stock and bond issues. Your emergency loan has been classified as Current Debt and is due on January 1st. If you do not fund your investment, you could get another emergency loan to pay for the previous emergency loan.

To diagnose your emergency loan, examine your Cash Flow statement. It represents the net flow of money into and out of your checking account. A positive number indicates an inflow, a negative number an outflow. For example, find the "Inventory" line. If your inventory position increased compared to last year, you had to pay for the additional inventory, and that resulted in a cash outflow. On the other hand, if you sold all of your old inventory, that represented a cash inflow.

INVENTORY: You earned no stars for your year-end inventory position. The ideal year-end inventory position is one unit in each product line. In that case you would know that every potential sale was made, and that inventory carrying cost was minimized. This is the goal of "Just In Time" inventory systems. In the simulation, however, you cannot adjust production during the year to meet demand. Therefore, you must balance the risk of losing sales to competitors because of stock outs against the cost of carrying additional inventory should your demand exceed your expectations. At some point inventories become excessive. A good benchmark would be, "inventory levels should not exceed 60 days (two months) of Sales." For example, if your product's sales are $12 million, inventories should not exceed $2 million. To earn a star of your inventory management, each product must satisfy two conditions:

1. Teams must satisfy at least 95% of the demand they generate across the entire product line. Actual Total Industry Unit Sales/Potential Industry Unit Sales >= 95%.(on a per team basis)

2. Teams cannot carry more than 90 days of inventory defined as Total Unit Inventory/Total Units Sold<=25%.

ANALYSIS -CHECK FOR STOCK OUTS. You may have under-produced and turned away customers. Examine the ACTUAL VS. POTENTIAL graphs for each segment analysis in the simulation reports. This will indicate how badly your stock out hurt you.

ANALYSIS -CHECK FOR EXCESSIVE INVENTORY LEVELS. On the Production Analysis (page 4), compare "Units Sold" with "Units in Inventory". Inventory should be less than 1/6th of unit sales. Inventory consumes cash, drags down your performance measures, and in extreme cases drives emergency loans. Inventory carry overheads chew into profits. Typical problems include:

1. Overly optimistic sales forecasts. Previous year customer demands (and segment growth rates) are listed for each market segment pages. Compare your sales forecast figures against segment demand. Were sales expectations unrealistic? For example, if the segment demand ceiling was 3 million units, and there are six teams with products in the segment, a "fair share" starting point is 500 thousand units per team. If you have a better than average product, your sales will be higher. Below average products produce below average demand. But unless your product is dramatically better or worse than the other products in the segment, you demand will be somewhere between 50% and 150% of average. This is discussed further in the help files on the website under "How do we develop a unit sales forecast?"

2. Sometimes teams confuse the relationship between sales forecasts, production schedule, and production capacity.

· Sales Forecasts only affect proformas. They are a tool - not a management "decision." When you enter a forecast, you force the software to use your number to drive the Income Statement. When the simulation is processed on the web site, actual sales depend upon the actions of your competitors.

· Production Schedule (on the Production spreadsheet of the student software) is the actual production for the year. This is added to the starting inventory. Production occurs in monthly increments.

· Production Capacity is the size of the factory. If the Capacity is 500 thousand, you can produce up to one million units by running 100% overtime. All units produced above 500 thousand will be affected by time-and-a-half overtime charges. You buy or sell capacity, or simply leave it idle and unused.

·

STOCK PRICE: You earned no stars because your stock price fell last year by $ 0.00. Stock price is affected by performance, asset base, debt, dividend policy, and number of shares outstanding. In a year of aggressive investment in plant expansion and automation, you would expect that the necessary debt load would cause some uneasiness on the part of shareholders. But, if the stock price dips more than $15.00, it may be a warning sign of too much debt. The stock price can also suffer in profitable years. For example, liquidation of plant brings in cash, but makes shareholders wonder about the long term competitive ramifications. Paying dividends in excess of profits, or obtaining a Big Al emergency loan, will have a negative effect on stock price.

ANALYSIS - Your shareholders may riot at your annual meeting!