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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
Firm Reports : Credit, Sales and Production Reports
This chapter will cover the first elements of the Firm Reports, The Credit, Sales and Production Reports, which deal primarily with sales, marketing and production data. The next chapter will cover the firm's financial statements.
Figures shown in various reports are not actual numbers, nor are they related to previous reports shown.
| Credit Rating | 1.783 | |
| Short Term Rate | 13.363 | |
| Debt to Equity Ratio | .1794 |
Short
Term Rate
Your short term rate is your short term borrowing rate. For example,
your firm's credit rating of 1.783 influenced a S.T. (short term) borrowing
rate of 13.363%. If your firm borrows $100,000 in short term for Q4,
the collection in Q1, Year 2 will be at 13.363% (3.34% per quarter).
Debt-to-Equity
Debt-to-Equity is a
measure of financial risk undertaken by the firm. 0.0 to 1.0 is ultra
conservative and may restrict the growth in the stock price of a successful
firm. 1.0 to 1.5 starts to worry both stock investors and bankers.
Above the 1.5 ratio you will find two types of firms: high risk firms
pushing financial leverage to its maximum and firms that have lost
a great deal of equity and are in financial difficulty.
Report for Firm 8
Quarter 3, 2000
| Area 1 NAFTA | Area 2 EU | ||||
| Product 1 | Product 2 | Product 1 | Product 2 | ||
| Total Unit Sales |
3000
|
0
|
0
|
0
|
|
| Backorders |
1975
|
0
|
0
|
0
|
|
| Returns |
224
|
0
|
0
|
0
|
|
| Sales Lost |
659
|
0
|
0
|
0
|
|
| Market Share |
12.5%
|
0.0%
|
0.0%
|
0.0%
|
|
| Trainees |
5
|
||||
| Sales Reps |
4
|
||||
| Base Salary |
3000
|
0
|
0
|
0
|
|
| Sales Commissions |
0
|
0
|
0
|
0
|
|
| Product Prices |
84.000
|
0.000
|
0.000
|
0.000
|
|
| Advertising Budget |
10000.000
|
0.000
|
0.000
|
0.000
|
Total Unit Sales
This figure shows your firm's total unit sales per product by area. If
you are a wholesaler or have sold units through contracts then this figure
would include those sales.
If you have backorders in a quarter, be sure to add those backorders to your next quarter's forecasted demand. Production will need to meet both your new forecasted demand plus backorders. If you cannot fill your previous quarter's backorders with the current quarter's production, you will loose these sales altogether.
Returns
Returns are products
that failed on initial use or shortly thereafter. Perhaps an irate
customer came storming into the retail store and demanded satisfaction.
Returns are due mainly to poor quality control. The failed product
is often returned via the sales rep as they make their calls on
individual stores. The units are reprocessed and resold in the
same quarter or, if not sold, are included in the finished goods
inventory. The cost of reworking returns is approximately 30%
of the unit's sales price (RETURNS X PRICE X .30). The reprocessing
cost will show up as an expense on the income statement for that
quarter.
Additional expenditures in quality control will help eliminate the return problem. However, a careful analysis between cost of returns (including poor image) and cost of quality control should be done, so that the desired product image can be achieved with the least cost. Also, be aware that even your best quality control might allow some returns. Because you have suppliers of raw materials including component parts, random product failings may occur. Only good field assignment work over time can track returns to separate random events from a need to invest more funds into a product quality improvement program.
Expenditures on quality control should correspond with units manufactured or purchased. However, damage may occur while in the warehouse. Therefore, units are again inspected at the time of shipment, as well as at the time of manufacturing. If a situation develops where you do not manufacture but sell only out of finished goods inventory, the firm will still need a quality control budget. The same is true if finished goods are purchased through Contracts. Set up a quality control budget per unit sold, even if you did not manufacture the units.
The quality conscious firm should budget on a per unit sold basis. Do not use the total quality control budget of a competitor as a comparison to your budget. It is better to use the ratio dollars for quality control/total sales than just the gross budget numbers.
The percentage of sales, in dollars, spent on quality control can be calculated to determine if your relative quality matches the competition. Even if your firm has no returns, competitors can enjoy a better quality reputation. Money spent in excess of zero returns, for example, can be used to insure that labels are on straight; an expense that has little value except to a firm trying to differentiate its products through quality reputation.
Sales
Lost
Sales Lost assumes that
your inability to supply demand led retail buyers to seek product
from another firm in your market group. A safety stock might keep
sales from being lost.
Market
Share
Market Share is by product
and area. It represents your share of what the firms in your market
group sold. If there are five firms in your market group, then your
"fair share" of the market would be 20%. Given 8 firms (the maximum
in any one market group), a "fair share" would be 12.5%. Note
that large wholesalers may upset market share figures by creating
a larger total sales figure (with sales outside of the retail market
of the market group).Ending Sales
Lost for the market group (Industry Report) are not calculated into
the market share figure, nor are current backorders nor sales lost.
Sales
Trainees
Sales Trainees can
be recruited in any quarter and trained at a cost of $3,000. It
takes 1 quarter to fully train a sales trainee. Once the trainee
is ready he/she can be assigned to a territory for $3,000. The
$3,000 is a moving and location allowance. Therefore, you should
still consider paying a salary and/or commission as soon as the
trainee is assigned to an area.
If you do not assign your trainee to a sales area, he/she will be kept on hold in the trainee pool and will earn 3,000 per quarter until you do fire or assign him/her.
Training in one quarter and assigning to an area the next will total $6,000. Cheaper than hiring a proven sales rep to start work immediately for a total recruiting bonus and moving fee of $12,000.
Sales
Reps
This is the number of sales representatives still with you at the
end of the quarter. If you notice that the number is smaller than
it should be this means that some sales reps have quit. You will have
to decide whether to hire more reps for the coming quarter.
The cost to hire a new sales rep is $12000.00. Base salary paid is
your decision. Remember sales reps carry more than just your product
line. If you find that you are loosing a large number of reps review
your salary and commission structure in relation to the rest of the
firms in your market group. Perhaps you are underpaying your sales
reps.
Base Salary
Base salary is dollars
paid to each sales rep, each quarter, regardless of the number of
units sold. The salary of $3,000 (in this example) may seem low for
a quarter, but most of the reps carry complementary product lines
for other non-competing firms. They are not your employees, but independent
contractors. The number of sales representatives that have stayed
with your product line and are ready to start the next quarter is
public information and found on the Industry Report. Yes, sales reps
sometimes do quit. Sales reps compare the base salary and commissions
you pay to the salary and commission paid by your competitors. The
less relative pay, the less motivated the sales reps are and the greater
their incentive to quit. You will most often receive a notice should
a rep quit. As a backup, in case the Sales Rep Quit report is not
sent directly to your firm, always check the Industry Report to see
how many sales reps are ready to start the next quarter.
Remember this is a change variable. When entering data for base salary changes be careful to monitor the final number.
Commissions
Commissions are stated in actual dollars and cents per unit, NOT
as a percentage of the selling price. Commissions are paid
per unit sold (this includes previous quarter backorders but excludes
contract sales for the quarter). Remember that P1 = product one and
P2 = product two; A1 = Area 1 or NAFTA, A2 = Area 2 or the EU. In
this example, Handy Tools did not pay commissions to their 4 sales
reps in Area 1. Don't
forget that the commission entry is a change variable. Be sure to
watch your commissions to make sure they are not growing excessively
.
Product Prices
This reports your prices per product per area
Advertising Budget
This reports your advertising budget per product per area
| Area 1 NAFTA | Area 2 EU | |||
| Product 1 | Product 2 | Product 1 | Product 2 | |
| Production Shift 1 |
3000
|
0
|
0
|
0
|
| Production Shift 2 |
0
|
0
|
0
|
0
|
| Finished Goods Inventory |
0
|
0
|
0
|
0
|
| Inventory Unit Cost | ||||
| Production Unit Cost | ||||
| Type 1 | Type 2 | Type 1 | Type 2 | |
| Raw Mtls Inv |
0
|
0
|
0
|
0
|
| RM units/FGU P1 |
5.000
|
11.000
|
5.000
|
11.000
|
| RM units/FGU P2 |
7.000
|
4.000
|
7.000
|
4.000
|
| Stage 1 | Stage 2 | Stage 1 | Stage 2 | |
| Labor Hours Shift 1 |
6986
|
9980
|
0
|
0
|
| Second Shift | ||||
| Labor hrs/FGU Product 1 |
2.500
|
0.600
|
2.500
|
0.600
|
| Labor hrs/FGU Product 2 |
0.700
|
0.300
|
0.700
|
0.300
|
| New Construction (hours) |
0
|
0
|
0
|
0
|
Production - Shift 1 is the actual number of units manufactured for the stated quarter. Production is broken down by product, area and shift. There is a day shift (shift 1) which exists as soon as the plants hours are available for operation. The second shift, or night shift must be set up through the capacity decision menu.
In this example, firm 8 has one plant located in Area 1. They produced 3,000 units of Product 1 in this plant during the day shift.
You will need to compare the actual production to the production schedule you set up in your decisions. Some variance is to be expected. Variations from scheduled to actual production are usually negative. In general, less is produced than scheduled, although on occasion, actual quarterly production is higher than scheduled. The negative variance rarely drops as low as 15% and the positive variance rarely exceeds 5%. In countries with less dependable infrastructures (such as Mexico or The Czech Republic) the range is between 40% to 125%.
Remember, if you schedule more production than your plant can handle, these units will be manufactured through expensive subcontracting.
If you schedule beyond the hours available for a shift, that shift will continue production at time and one half labor cost. Production on either shift, beyond 125% will go to subcontractors at 2.2, 4.4, then 6.6 times the standard labor cost.
Remember that if you do not have a second shift in place, all second shift production which you schedule will be subcontracted.
Finished
Goods Inv.
Finished Goods Inventory are units on hand ready for sale in
the coming quarter. There is a carrying cost per unit which can be
found in the Scent Industry section.
Inventory
Unit Cost
Inventory Unit Cost
averages the production unit costs of old inventory from previous
quarters and the new units manufactured or purchased through Contracts.
The result is the cost of units in your inventory that will be charged
to the income statement as cost of goods sold when those units are
actually sold (perhaps in the coming quarter).
Production
Unit Cost
Production Unit Cost includes the labor and raw material cost
components of the product - see the example below RM
units/FGU and Labor Hours /FGU if you
are having trouble calculating this for yourself. If you find you
have excessive production costs, check to see if you are subcontracting
the units you are manufacturing (scheduling production beyond capacity).
Remember also that if you wait for the program to order your raw
material units at market, you loose 2 weeks of production.
The production unit cost is used to adjust finished goods inventory unit cost if the units are not sold.
On the balance sheet the same units are shown in dollar values. In your first Q1 decision, if you order raw materials, they will be delivered the last day of Q1 for use the first day of Q2. The firm cannot place an order for raw materials at market price. The model is designed to order at market automatically, any time during the quarter when production runs out of raw materials.
Remember, if your firm has no raw material inventory, the program automatically orders raw materials at the market price. It will take two weeks for these materials to arrive at your plant. Thus, with two of the thirteen weeks lost, production is limited to 11/13 of normal for the quarter.
The production schedule does not change. The units you ask for will be produced, except some of it will now slip into overtime and/or subcontracting. There is a per unit charge on raw materials held in inventory.
RM
Units/ FGU P1 and P2
Raw Material Units/ Finished Goods Unit, specifies how many units
of raw material are required to make one finished goods unit.
In this example, to clarify, it takes 5 units of type 1 raw material
to produce 1 unit of product 1 in the area 1 plant. It takes 11 units
of type 2 raw material to complete product 1. It is rare that raw material
requirements would vary between area 1 and area 2.
Each team member must understand the raw materials contribute to production cost.
Raw Material Cost for Product = (units of Type 1 required X unit cost) + (units of Type 2 required X unit cost)
Plant
Size: Labor Hrs/ Shift 1
Labor Hours/Shift 1 measures
the physical plant in terms of labor hours available for production.
The figures are stated for shift 1 by Area and by Stage.
Assume the firm started the quarter with 7,000 hours in stage one and 10,000 hours in stage 2. The 6,986 Stage 1 and 9,980 Stage 2 on the production report is what is now available for production in the coming quarter. The decrease from the 7,000 and 10,000 figures is due to wear and tear on the equipment. Always confirm plant size after each run. Poor maintenance budgets can cause considerable loss of hours. If lost, hours cannot be recovered and new hours of plant must be built.
The hours lost, in this example, is the actual or real depreciation of the plant and equipment. The accountant, at the same time, is reporting a depreciation for tax purposes at the rate of 2.5% per quarter.
The 6,986 hours of Stage 1 plant represents the standard number of stage 1 hours possible on a full normal shift in one quarter (a quarter is 3 months or 13 weeks).
If you divide the 6,986 maximum standard hours available on the day shift, by the standard hours required to produce P1, you can determine the maximum number of P1 units that can be pushed through that stage of manufacturing. That assumes you are utilizing 100% of the day shift (shift one) for the full quarter and that you are using this shift exclusively to make P1. Thus 6,986 standard hours of Stage 1, fully dedicated to producing P1, can produce (6,986/2.5) = 2,794 P1 units.
The P1 units are then sent over to the packaging area called Stage 2. Divide the 9,980 standard hours available in stage two by the standard P1 packaging time of .6 hours and you find that (9,980/.6) = 16,633 units can be assembled.
Why did this firm build a factory that can mold only 2,794 product 1 units in a full quarter shift, yet assemble 16,633? Be careful as you expand your capacity that you configure the plant to minimize unusable hours as product moves from Stage 1 through Stage 2.
Worse yet, the labor union contract calls for fairness in overtime scheduling. You cannot schedule one stage for overtime without scheduling the other also. This creates a constraint such that, if you produce anything over 2,794 units, each unit thereafter will fall into time and one half in both stages. It means that even though you have plant space to add more workers to Stage 2 assembly, you cannot do so if Stage 1 workers are earning overtime pay.
In terms of long range strategy, if there is considerable variation in the hours it takes to make P1 versus P2 in a stage, it might pay to design a factory specifically for only one product. That will lower manufacturing cost for that product and should increase profits and/or sales. However, it will also cause some inflexibility to alter production from one product to another.
Second
Shift
The Second Shift is a
night shift. The union contract requires a 5% wage premium be paid.
You decide if you want a night shift on call. Because of difficulties
in setting up the production line, you must set up a night shift in
increments equal to 10% of a day shift. Thus, you can only enter in
multiples of 10 such as 30 or 70. The entry will be added to the percentage
already on file in the firm's history. The program will not let the
percentage exceed 100 at any time.
A second shift is ready to go in the same quarter you set it up, but you must enter a decision to initiate it - go to your capacity menu and add in 10% increments up to 100% of the day shift.
There is a one time cost to having an "on-call" night shift. The personnel department must interview workers and give those selected a training program. The cost of recruiting and training is $2,000 for every 10% portion you decide to set up. To set up a night production process that equals the size of the day shift, you would need a 100% second shift. That would cost $20,000 to get started.
Once a second shift is set up, there are some minor personnel costs to keep the second shift on call. It takes constant contact to make sure the trained workers are still willing to work. That overhead cost is $350 per 10% portion. A full second shift (equal to 100% of the day shift) will create overhead costs of $3,500 per quarter.
It takes $20,000 to get a full second shift started (a one time expense) and $3,500 per quarter in extra overhead costs to maintain. Should you decide to reduce the second shift, the union contract requires you notify each person to that effect. Eliminating the night shift will create a one time personnel charge of $1,000 per 10% or $10,000 if a full second shift is shut down.
It should be obvious that the firm doesn't want to crank up and then shut down a second shift in an effort to match production to sales on a quarter by quarter basis. The sales forecast, in coordination with production, should anticipate frequent use of the second shift over the next set of quarters before the money is spent to set it up.
As a strategy to meet an infrequent surge in demand, management can run the first shift at 125% of normal. Anything over 100% of normal, however, bumps the wages up to time and one half. After 125% of full is used, production is shifted automatically to subcontractors who are always available. They use your raw materials, until those are gone and then begin to use their own raw materials, charging your firm market price. In addition, they charge labor at 2.2 times your firm's normal rate. For all subcontracted hours above 100% of regular + overtime hours, the labor rate shifts upward to 4.4 times the normal labor rate. For all subcontracted hours above 200% of regular + overtime hours, the labor rate becomes 6.6 times the normal labor rate. Check the subcontracted unit manufacturing cost with your calculator before you schedule more than 125% on your first or second shift! Perhaps 2.2 times labor, plus raw materials at market, costs more than your firm's selling price.
If you have no plant, but use subcontracting, the program will assume 5,000 hours per stage at the 2.2 rate before moving up to 4.4. A very expensive prospect.
Labor
Hours/ FGU
Labor Hours/ Finished
Goods Unit is the number of labor hours required to manufacture one
unit of finished goods. The formula to measure cost is:
Labor Cost = (stage 1 hours required X wage per hour) + (stage 2 hours required X wage per hour)The wage rate per hour can be found in the Scent Industry Section.
New
Construction (Hours)
New Construction (Hrs)
is stated in hundreds of hours. You will have an entry if you ordered
a plant expansion or started a new facility. The figures are broken
down by area and by stage.
Remember Area 1 is the North American Free Trade Area and Area 2 is the European Union.
Stage 1 is the first stage your product passes through in the production process. Stage 2 is the second stage your product passes through in the production process. See the Scent Industry Section for more detailed information on plant.
Construction orders are in lots of 100 hours. Thus, an entry of 10 would mean you ordered 1000 hours.
Half the cost is paid in the quarter ordered and the other half is paid in the second quarter. An $80000 site fee is also paid in the first quarter construction is ordered.
Be careful to remove the expansion decision in the following quarter or another expansion will be initiated.