TABLE OF CONTENTS

The Simulation: an Introduction | Vision and Corporate Design | Decision Variables | The Contracts Program
The Market Reports | Firm Reports: Credit, Sales & Production | Firm Reports: Financial Statements
The Scent Industry | Plant and Location  | Subsidiaries | Bankruptcy | Forecasting Demand | NPV | Broker

Contracts are entered online just like your main decision set. The contracts program allows your firm to make a host of different types of contracts. All contracts which you write up, whether between firms or within your own firm, are executed prior to the start of the main simulation.

Note: This schedule of events means that your contract decisions will be put into effect prior to the start of the coming quarter.  Money to pay for any contract expenditures will come out of cash (or special loan) prior to the start of a new quarter. Thus, if you enter a contract to buy 10000 units of product 1 in your very first quarter of operations the money will come out before you sell stock or take out a loan. Therefore, a special loan will cover your purchase. This loan will be paid back automatically in your first quarter of operations with interest. Don't order more product then you think you can sell until you have the money going into the quarter to make the purchases. Make sure your sales price takes additional finance charges into account.

Another important note: Shipping from one firm to another is handled within the terms of the contract. The cost of shipping is included in the contract fees which are the burden of the seller.

The key to creating any contract with another firm is, negotiations. Negotiating is not easy, especially since you will be negotiating internationally. You will have to work with time zones, language barriers, and cultural differences. The official language of the Global View Simulation is English, but if you have the ability to speak another language, you may use this to your advantage in working with teams at non U.S. sites.

You should also keep in mind that, because most negotiating is conducted through an on-line chat room, time differences are important. If you want to negotiate with a particular firm it may be best to schedule a meeting ahead of time. If you find it impossible to meet with the other firm, you can conduct negotiations through the bulletin board system or by e-mail.

Be sure that you are clear, in your negotiations as to price, quantities, who is to enter the contract, and other such important details.

Note: Only 1 party to the contract enters the contract. If both parties enter the contract then you will have 2 contracts which are executed.

Do not officially record a contract unless you have proof of acceptance or you may be held accountable for triple damages. Proof consists of a printed copy of a chat room correspondence, a mail message, fax or other written confirmation.

Likewise, keep track of what contracts are being executed. Contract theft has been known to occur. A list of contracts is available after each quarterly run.

Verbal agreements will be difficult, if not impossible, to enforce should anything go wrong. In actual practice, verbal agreements are often used even though legal recourse is not available should a contractual disagreement arise. We do not recommend proceeding on verbal agreements alone. At least do not engage in such contracts until several contracts have been successfully concluded with that firm.

Following are your contract options:

1. Buy/Sell Goods: This option allows you to buy product from or sell product to other firms within the simulation. Use this option also when making contracts with the administratively run Peacock Industries (when working with Peacock, please choose the Peacock firm in your game). Remember there are two different levels to the simulation, Advanced (which is where you are) and Introductory Buyers: goods from a contract purchases come in before the quarter starts and cash to pay for the product goes out. As the seller, money from a contract sale comes in during the quarter with regular sales revenue, which allows it to be included as revenue on your income statement. The seller pays a 6% fee on any contract to sell goods, this includes the cost of shipping which is built into the terms of the contract.

2. Buy/Sell Raw Materials: This contract option allows you to buy or sell raw materials from or to other firms in the simulation. Do not make contracts with Peacock Industries to buy raw materials. If you simply want to order raw material futures, use your main decision set. The seller pays a 5% fee on any contract to sell raw materials. This includes shipping which is built into the terms of the contract.

3. Buy/Sell Plant Hours: This option allows you to buy or sell plant hours from or to other firms in the simulation. If you are the seller you must be aware of two factors: 1. The seller pays a 20% fee on any contract to sell plant hours. Expensive! Also, the seller will have to take any gain or loss from the sale as a miscellaneous expense on the income statement. Thus, if you sell a $7 million dollar plant for $1 million, you've just lost $6 million dollars.

4. Consulting Services: This option allows you to give or receive cash from another firm. This is usually used by those firms that give or receive consulting advice from other firms. It may also be used to make special loan arrangements with another firm or as a way to break up the payment for a finished goods order. The provider of a consulting service must pay 2% on the value of the contract.

5. Transfer Raw Materials: This contract is made within the firm, and allows you to move raw materials from one area to another. The charge to move raw materials is 3%.

6. Transfer Plant Hours: This option allows you to move your own plant hours from one area to another. This is expensive to do. The cost is 20% of the value of the hours being moved.

7. Install High-tech: This option is made within the firm. High-tech improves the productivity of your factory. Adding High-tech will make your production more efficient. For specific benefits of adding High-tech see the Scent Industry Section. The cost to add high tech is $1500000 per plant. You can only make this improvement once.

8. Relocate to Mexico or The Czech Republic: This option is made within the firm. It allows you to locate your plant somewhere besides general area 1 and area 2 confines. There are benefits and risks to locating in either of these two areas. See the chapter on Plant and Location for specific details.  You cannot choose to locate to either of these areas if your plants are already situated (unless you do so with the express permission of AGV administrators) without incurring a charge of 20% relocation fee.

If you wish to use this last option, you should be aware that it requires an accompanying decision in the Firm Decision Set. If you wish to locate a plant in Mexico or the Czech Republic you will also have to order the construction of plant capacity in that area. If, for example, you decide to locate your Area 1 plant in Mexico, you would make a contract to this effect. Furthermore, you would order plant capacity to be constructed in Area 1.  Remember, only one plant per area is allowed.

After creating the contract you will need to choose one of the following options:
 

Remember, only 1 firm enters the contract. Once the contract has been executed it can be canceled by viewing the "review contracts" option and hitting "delete".

If you are simply exploring various options and do not wish to execute the contract, or have made a typo, choose, "Cancel Contract".

If you are creating a valid contract (either with a firm in your own university or one outside) choose, "Execute" and the contract will be executed (legal signature).

Contracts is a powerful tool which allows for multiple layers of strategies. We will discuss a few at this point. Be sure to consider these opportunities in the creation of the team's vision for the firm. The list below is in outline form. Consider all the pros and cons before making a decision.
 

1. Do not build plant, instead, contract for finished goods from other manufactures. If good contracts can be secured, your firm's asset base is minimal and return on equity should be excellent.

2. Build a small plant and contract for finished goods to accommodate growing markets and perhaps market share.

3. Build a large manufacturing center with low costs and great efficiency. Contract the sale of finished goods. This will allow your firm to reach multiple markets rather than being constrained just in your market group.

4. Establishing dependable long-term mutually beneficial contracts is a difficult process. A niche might be available for a firm that wants to be in the information business, that is, bringing buyers and sellers together. This business can flourish as a side business or perhaps, your firm's only business, with profits coming through the Consulting Services options from your clients. Your firm could serve as an agent or actually take title to the goods and operate as a distributor. Large manufacturing firms may find the workload too extensive to provide a quality contract service while operating a large scale plant. Smaller buyers and occasional buyers may not want to go through the search process when all they have to do is contact you.

5. Keep marketing success and plant production capacity in a close relationship. When production exceeds demand or fails to meet demand, turn to contracts for a shorter run solution. Perhaps there will be an agent available to reduce or eliminate the contract search process (see 4 above).

6. Monitor contracts to determine who is doing what in your market group. Contracts can be an early warning system to your competitor's strategy.

7. If you build a plant, it will take two quarters to complete construction. In the first two quarters, do not subcontract but order finished goods direct from Peacock Industries. This strategy should be considered any time plant is built or expanded. Have the market share secured at the time the capacity comes on line.

8. Cruise the contract playing field looking for easy marks. Negotiation skills can be honed to a razor sharp finish.

9. Use contracts as an International learning experience.

10. Use the chat room/ mail system to meet business participants that will be your competitors and partners in real life.

11. Use the consulting services option to sell your team's expertise in playing the game, including spreadsheets etc... This can produce sizable contributions to income.

12. Teams in trouble can contact successful teams for consulting services.

13. A corporation might provide a Broker advisory service and sell it to other corporations for the benefit of their executive staff.

Peacock Industries is a firm in the Scent Industry, Firm 18, which sells product to firms.

Peacock Industries will NOT continue to supply firms throughout the simulation. In early quarters, orders for product will almost always be filled in full, but as the simulation progresses and manufacturing firms appear, Peacock Inc. will withdraw from the wholesale market. Notice of this withdrawal will be published in "The Boss", along with all other pertinent information pertaining to Peacock Inc.

Note: Peacock Industries sells only finished goods. Do not attempt to make other contracts with Peacock Industries without special permission from the Global View Administrators.

It is not necessary to negotiate with Peacock Industries prior to making a contract for finished goods with them (expect in the case of special bids). To order finished goods from Peacock Industries you simply execute a contract with one of the designated Peacock firms. Enter the current asking price, the amount of finished goods you would like to receive and the area goods are to be delivered to and from. Peacock has finished goods available in both A1 and A2.

All firms in any Scent industry should contract with Peacock Industries, Firm 18.

Peacock Industries will fill your requested quarter 1, year 1 contract at the starting price stated within this manual. Peacock prices will change on a quarter by quarter basis, continuing to rise over time. The price at which Peacock is selling will be stated in the quarterly news report, "The Boss". Be careful that you enter the current asking price, or your contract will be canceled. If your university is starting later than the first quarter of the simulation, you will probably be granted a discount by Peacock Industries.

Note that since you have no cash in your new firm until the first run, you are forced to take a special loan to cover your quarter 1, year 1 purchase. This is because Contract decisions run first. A special loan can be hard to recover from if it is too large. However, a smaller loan might be worthwhile, given it will allow your firm to penetrate the market in the very first quarter without having to use expensive subcontracting.

In quarter 1, year 1 the starting Peacock prices are:
 

Scents: Firm 18
Ship from A1,A2
Any amount
P1 cost per unit to be entered is $56
P2 cost per unit to be entered is $ 99

These prices are not meant to indicate industry standards.

  Special Contract Considerations

Contracts Run Time

The Contracts program, as mentioned earlier, runs before the main Global View firm decisions. Therefore, all contract transactions will occur prior to your basic simulation transactions.  With the exception of Finished Goods sales for the seller.  These sales revenues come in during the quarter with consumer sales.

If you purchase product, raw materials, plant hours, etc... the money spent on these items will come out of cash prior to the quarterly run. If you do not have enough cash you will be given a special loan. A special loan carries an interest charge of 9% per quarter. Special loans can become very oppressive and destructive to the firm. All firms ordering product in Quarter 1 of Year 1 will be forced to take out a special loan to cover contract orders. These special loans are repaid automatically during the quarterly run when financially possible.

If you are a seller of raw materials or plant hours, these items will come out of your current inventory before the start of the quarter and the corresponding cash will come in.

Finished Goods, however, are treated differently. They are run through as part of sales for the quarter. This means that money for these contracts arrives in the same manner as money from the rest of your quarterly sales.

Finished goods which you sell through contracts are counted in with last quarter's backorders. These contracts must be filled at the start of the quarter at the averaged contracted price prior to satisfaction of any current retail demand. If, during the quarterly run, you do not manufacture enough units to cover these contracts, they are considered sales lost and cannot be recovered.

Contracts for the sale of finished goods are included in market share. Because finished goods are counted in with last quarter's backorders, they are included in your unit sales figure, just as normal consumer backorders are included.

The implications of this should be immediate. A firm which sells only through contracts to other firms is still able to earn market share. Furthermore, the profit is seen directly on the income statement in the sales figure.

If you are forecasting demand for your industry be sure to consider the effects contract sales have on market share. If you have a large wholesaler in your market group, your market share (in terms of the retail market) may be understated. See chapter 14 "Forecasting Demand" for more details.

There are fees involved in using contracts. The burden of payment lies with the seller. If your firm is the seller in a contract be aware of the added costs when entering into negotiations. There is also a fee when unilaterally transferring raw materials and plant hours.

Seller pays on value of contract:

1. finished goods ............. 6%
2. raw materials................ 5%
3. plant hours .................. 20%
4. consulting ................... 2%
5. plant hours transferred... 20%
6. raw materials transferred. 3%

*Fees include cost of shipping

The sale of plant hours is complex because each hour is depreciated quarterly and hours are sometimes frequently added. To overcome this problem, all hours are assigned an average value determined for that quarter. That is, you cannot elect to sell the earlier hours that have greater depreciation and thus less book value.

All contract fees are reflected in the miscellaneous expense on your income statement.

Note that there are other contract charges which may be found in your miscellaneous expense account each quarter. These will be discussed shortly.

If raw materials or plant hours are sold at the value currently on the balance sheet, only two accounts are affected. The asset decreases and cash increases by the same amount. If the asset is sold for more or less than book value, the following occurs:

1. The asset is treated on the balance sheet as if it were sold for book value.

2. The actual gain or loss from book value is entered in that quarter's income statement in the miscellaneous account. If the firm has multiple contracts with gains and losses, the net value is reported on the income statement as a miscellaneous expense.

The following contract transactions will cause a charge or credit to your miscellaneous expense on the income statement.
 

1. Contract fees paid by the seller, as discussed above, will be recorded as a miscellaneous expense.

2. Seller's gains or losses on the sale of raw materials and/or plant hours is recorded as a miscellaneous expense. The gain or loss from the sale of finished goods is automatically figured on the income statement (sales less the cost of goods sold).

3. Consulting services are reported as income through the miscellaneous account. Since miscellaneous is normally a loss, gains will appear in that account with a negative sign.

Contracts, for all its opportunities, has some specific dangers for all teams, even those that elect not to use it. The problems of misunderstanding and errors in entering contract terms are obvious.

Be sure that you work out all details with the firm you are negotiating with. Be specific. Also keep in mind different time zones will affect exchanges.

Another danger is that both parties to the contract will enter and execute the contract. Thus two valid contracts are created, or both are destroyed.

A not so obvious problem is one that confronts every business establishment, theft. Equipment, cash, raw materials and finished goods are often "lifted" from firms in real life. In this simulation, thieves can create a contract that looks real and use it to obtain your firm's property. It is easy to catch the culprits as they will not have the required documentation when challenged. The only way they can succeed is if your firm is not vigilant in reviewing your assets. Are they all there? If not, why not? Did you check over the list of executed contracts, to ensure that only valid contracts between your firm and others were listed.

If theft is determined, contact the Global View Administrators. They will investigate. Filing a false claim could result in a penalty. If caught, thieves could pay triple damages to the victim(s).