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

This chapter will detail the specifics of the Scent Industry. The numbers presented here are crucial to the operations of your firm. You will find market information for both the NAFTA and the EU markets, the seasonal sales patterns for both Product 1 and Product 2, and the patterns for product backorders. This chapter will also provide specific numbers concerning production, cost to build plant hours as well as information on High-tech, shipping and storage costs.
 

In both markets, simulated retail buyers are used to get the product into retail outlets.

The starting retail demand, as predetermined by the simulation administrators, is influenced by factors within each separate market group, such as: total of all firms regarding advertising expenditures, number of sales reps working the territory, average product price, sales rep compensation, quality of the products offered on average and several more minor variables.

Participants attempting long run forecasting at the beginning of the game are often shocked by the variance in actual demand compared to that estimated in the market research report. The assumed set of industry characteristics might not be what actually develops.

Thus, one scent market group can create a demand for units far in excess of another, despite game administrators starting them with exactly the same parameters. Low average price in one market group, for example, may skyrocket the number of units sold as compared to a market group that has a high average price.

It is helpful to remain flexible with forecasting early in the simulation, as it will take your firm time to determine how demand in your market group is developing. You should use the market research reports only as a guide, not as a final and absolute rule.

Also keep in mind that the starting demand may not be filled immediately. It often takes three quarters for advertising and quality factors to reach their full impact. Thus, what looks like rapid, industry wide growth in the early quarters may be the cumulative effect of advertising and quality control expenditures.

The starting demand may also be slow to materialize if firms do not have sufficient product available. How can a forecaster determine if the market is small or if firms are simply under producing to a larger demand? You can check your own backorder and sales lost data and make a bold assumption that other firms have similar experiences. Large backorders and sales lost suggest demand is much larger than the sales figures indicate.
 

Research has indicated a large and untapped market for quality aftershaves. Currently, professional store buyers must turn to expensive, well defined global brands or less desirable imports. An opportunity exists for a group of firms to position themselves between the expensive, globally recognized aftershaves and the nameless product supplied by importers.

The aftershave market in both the NAFTA and EU markets, has a per case price expectation of $110. A case is considered one unit in the simulation. As long as the pricing, on average, stays within the $150 to $200 price range, demand is expected to be substantial and stable.

As the market group average price pushes over $200 per case, men start to conserve on the amount of aftershave applied. The market decreases as price increases. However, there is still a retail demand for quality aftershave over the $200 per unit wholesale figure. It is doubtful, however, that there is room for more than a couple of firms in that niche.

If the price moves into the $110 to $120 range, consumption is forecasted to pick up sharply. The cause of the increased consumption in the low price range is not fully understood. Research is inconclusive but the following additional uses have been noted:

1. Increased quantity applied to the face as price decreases

2. Used on other body parts as the price decreases

3. In the very low price ranges, aftershave is used as a deodorizer in shoes, under arms, and splashed into air conditioning vents

4. At the extreme low end of the price range, the quantity sharply increases but the use has not been determined.

The market in the NAFTA area is thought to be in the range of 100,000 to 150,000 cases annually. In the EU it is assumed to be about 20% less. Be aware that average price, sales rep energy expended, number of sales reps working within the market group, average product quality and advertising quality can radically influence the number of aftershave cases demanded.

The initial grab-for-market should be easy with no resistance. After the 100,000 case range is achieved, growth will continue at an estimated rate of 5% (all other things - such as average price - remaining stable).

There is a sharp seasonal demand for men's aftershave. Quarter 1 (January, February and March) demand is very low. Most stores are living off stock left over from the Christmas holidays. Quarter 2 demand is double that of Q1. Quarter 3 is slow and equal to Q1. Quarter 4 is gigantic, at least four times Q3.

Firms have a high backorder rate for men's aftershave in Q1, Q2 and Q3. About 75% of orders not filled in these 3 quarters will be kept and filled in the following quarter, while 25% will be sales lost. In Q4, however, if a firm cannot ship enough product to cover sales, they will lose the sale and possibly the client. In Q4 only 1% of orders not filled will be backordered, 99% of orders not filled will be sales lost.

Firms participating in the aftershave market, as you can see, are presented with an interesting challenge. The high demand in Quarter 4 creates a major demand/supply problem that can only be solved through careful strategy design and implementation. That strategy needs to be designed by and coordinated with production, financing and marketing executives.
 

The EU and NAFTA appear ready for new entrants to the ladies' perfume market. Professional store buyers have been looking for quality products at a price that would undercut the world famous name brands. The product must be supported through advertising and a sales force (something the imports have not done).

A market group average price for a case (considered 1 unit in the simulation) in the range of $140 to $300 would seem ideal. There is a demand for product above the $300 case price and below the $140 price. Individual firms should set their own strategies accordingly.

For individual firms, higher prices mean less demand in a linear relationship. However, it appears that for the market group as a whole, if the average price rises too high, demand will fall at an increasing rate (non-linear). This indicates an market wide price barrier at the upper end. The reason for the barrier is that consumers will switch over to world famous brands as the price differential narrows. If the average market group price is too low, consumers will attach the import image to the product in that market group and buy the imports instead.

Thus, in this unique situation, firms should compete on price as normal. However, as a market group, there is some concern that everyone will suffer if the average price moves out of its optimum range.

Initial demand for ladies' perfume is large - maybe gigantic! Response from buyers would indicate a demand on the low side of 100,000 cases (units) annually for the EU and 100,000 cases (units) annually for the NAFTA market; up to a high side of 250,000 units for the EU market and 250,000 units for the NAFTA market. Initial surveys have indicated a serious problem exists in maintaining a market over time in the 150,000 to 250,000 unit range.

The reason is that men purchase most of the ladies' perfume. When faced with a choice between expressing some degree of affection, most men will tend to buy on the safe and more expensive name brand side. A sizeable percentage of this new industry's consumers are very familiar with world famous, name brand scents and can be expected to gravitate back to buying those world famous brands. Some will return to the lower priced imports.

The amount of leakage back to world class brands is dependent, in large part, on the reception women give to the men's original purchase of a new and less expensive brand. Even though the brand is just as good in a quality sense, it must carry an image that is acceptable. If not acceptable, the male is less likely to purchase perfume on the basis of price anytime soon.

How the communication of acceptance or rejection about the gift takes place between the female recipient and the male buyer is not well understood. While males do make most of the perfume purchases, it seems that women, in some fashion, exert influence on those purchases. Some of this influence is assumed to take place prior to the purchase and some of it after the purchase -- so as not to have a bad decision repeated. This entire process takes place over time and is a most difficult area of market research.

With that said, we return to the topic of sales leaking back to name brands. Research to-date indicates that the leakage can be stemmed, in part, by aggressive marketing. Most firms in the market group must be aggressive in all aspects of marketing, but particularly in advertising, in order to hold retail sales to the initial level. One firm alone cannot expend the resources required to maintain the initial demand. Several firms riding the advertising coattails of other firms, could cause a sizeable loss of sales to the name brands.

In the worst case, as much as 40% of the original demand might revert back to imports or name brands. The leakage would start to occur immediately but a sharp noticeable impact would start sometime late in year 2 and continue into year 3. By the end of year 3, in the worst case, demand could slide to 90,000 cases in either area.

Seasonal patterns do exist. Stores place orders and sell large quantities in January, February and March (Q1). Quarter 1 is about 30% of annual sales. The winter quarter, Q4, is also large. Quarter 4 is about 40% of annual sales. Q2 and Q3 each have about 15% of annual sales.

Stores have historically been agreeable to backorders in the following pattern:

Q1 = 5%
Q2 = 75%
Q3 = 75%
Q4 = 20%

Product 1 raw material requirements include the ingredients, called Type 1 raw material, and the packaging called Type 2 raw material.

Aftershave requires 6 units ingredients (Type 1 raw materials) to produce 1 case (or unit) of product.

Aftershave requires 12 units of packaging (Type 2 raw materials ) to produce 1 case (or unit) of product.

Type 1 unit charge in Q1, Year 1 will be $1.33.

Type 2 unit charge in Q1, Year 1 will be $.96.

The number of raw material units required to produce 1 unit of product is not likely to change during the simulation. You can easily refer to this number on Page 2 of your Firm Report as you make calculations.

Labor requirements are measured in labor hours needed to mix and process one case (or unit) in Stage 1 of the plant; and hours needed to bottle and package one case (or unit) in Stage 2 of the plant.

One case (or unit) of product can be mixed in 1.7 hours in Stage 1.

One case (or unit) of product can be bottled/packed in 2 hours in Stage 2.

** High-tech costs $1,500,000 to install. You must use the Contracts program to order High-tech. High-tech takes only 1 quarter to install.

Stage 1 workers receive $12.00 per hour, including benefits.

Stage 2 workers receive $5.50 per hour, including benefits.

• Overtime is at 1.5 times the regular rate.
• Subcontracting labor charge is at 2.2, 4.4, or 6.6 times the regular rate.

Product 2 raw material requirements include the ingredients, called Type 1 raw materials and packaging, called Type 2 raw materials. Type 1 and Type 2 raw materials are the same for both the aftershave and the perfume. Thus, you may use raw materials on hand to produce either Product 1 and/or Product 2.

Perfume requires 12 units of ingredients (Type 1 raw materials) to produce 1 case (or unit) of product.

Perfume requires 25 units of packaging (Type 2 raw materials) to produce 1 case (or unit) of product.

Type 1 unit charge in Q1, Year 1 will be $1.33

Type 2 unit charge in Q1, Year 1 will be $.96

Labor requirements are measured in labor hours needed to mix and process one case (or unit) in Stage 1 of the plant; and hours needed to bottle and package one case (or unit) in Stage 2 of the plant.

Note: Product 1 and Product 2 must share available plant hours. Keep this in mind when scheduling production.

One case (or unit) can be mixed in 3 hours in Stage 1.

One case can be packaged in 2.5 hours in the Stage 2.

Note: A high tech plant can reduce Stage 2 packaging by 20% for Product 2 (Ladies' Perfume).

**High tech costs $1,500,000 to install. You must order this installation through the Contracts Program. High tech takes only 1 quarter to install.

Stage 1 workers receive $12.00 per hour, including benefits.

Stage 2 workers receive $ 5.50 per hour, including benefits.
 

• Overtime is at 1.5 times the regular rate.
• Subcontracting labor charge is at 2.2, 4.4, or 6.6 times the regular rate.

As discussed in Part 2 of the manual, the Decision Guide, you must order plant hours in blocks of 100 hours. Enter 50 for Stage 1 and 5,000 hours of Stage 1 will be built. Also keep in mind this is a very important change variable. You must set the decision entry to zero in the following quarter or your Stage 1 will be expanded to a 10,000 hour capacity , then 15,000 hours and so on.
 

Cost to build and set-up new plants, and to expand existing plants, is priced in terms of plant hours. The cost to build 1 hour of production capacity is listed below.

Stage 1: building cost = $50.00 per hour

Stage 2: building cost = $45.00 per hour

Note: In the first quarter of construction there will be a one time site charge of $80,000.

Note: High-tech is a one time charge only (per plant) of $1,500,000. Additional capacity is compatible with High-tech and is at the normal charge. High-tech takes 1 quarter to install.
 

The hours which you order will take two quarters to construct. If you order plant in quarter 1, year 1, then your factory will come on line and be ready to produce in quarter 3 of year 1. Any plant additions which you make in future quarters will also take 2 quarters to construct. High-tech will take 1 quarter to install and will be ready for use in the following quarter. A second shift, as discussed in the Decision Guide will be ready to produce in the same quarter in which it is ordered.

Your firm will pay for ordered capacity over 2 quarters. Half of the cost will be paid for in the quarter construction begins and half in the following quarter.

The $80,000 dollar site fee must be paid in full in the first quarter.

The High-tech installation fee of $1,500,000 is payable in the same quarter it is ordered.
 

The plant will have ample raw material receiving and storage. It will also have a shipping dock capable of inventorying large amounts of finished goods. The charges to the firm, should raw material storage and/or finished goods storage be used, is as follows:

Raw Materials cost $.005 per unit to carry to the next quarter for either Type 1 or Type 2.

Finished Goods, Product 1 costs $.60 per unit per quarter to store.

Finished Goods, Product 2 costs $.90 per unit per quarter to store.

Shipping of the finished goods within the plant's market area is FOB. Thus, the firm has no shipping charge. To ship the product overseas between NAFTA and the EU, however, will cost your firm.

Product 1 shipping = $2.25 per unit. Minimum shipment is 1000 units.

Product 2 shipping = $6.25 per unit. Minimum shipment is 1000 units.

Air shipment (or just in time shipping) on a guaranteed, sale only basis is always 30% higher than regular shipping costs.

Shipping raw materials is handled through the Contracts program. The charge on a transfer of raw materials from one area to another is 3%.
 

The cost to retrieve, credit the client's account and replace or salvage a returned unit is 30% of that unit's sales price.
 

Maintenance is entered as an absolute budget and NOT as a per unit nor a per hour figure.

Maintenance is higher per plant hour for Stage 1 versus Stage 2. One might expect about $.30 per hour for Stage 2 if the normal shift is run. Overtime will increase the need for maintenance to some degree. If the plant is shut down, considerable maintenance is required although some reduction in budget can be achieved. Machines will rust and corrode, belts rot and deterioration continue even if the plant is idle for an entire quarter. Hourly losses each quarter will occur at the rate of .001, regardless of how much is budgeted for maintenance.

Stage 1 could be 75% higher in maintenance costs due to the machinery used in the complex mixing process.

Monitor "Labor Hours" on page 2 of the Firm Report from one quarter to the next. If the loss in hours is too large and/or is increasing, immediately increase the maintenance budget in one or both stages.