CAPSIM HELP & TIPS:

Meet customer’s top 2 criteria, measured by the top 1/3 of their specs.

Age and MTBF criteria do not change

Price drops $0.50 each year

Positioning changes as the perceptual map moves

 To maximize the value of price to the customer, be in the bottom 1/3 of the expected rice range

(bottom 1/3 good, middle 1/3 fair, top 1/3 poor)

 To maximize the value of reliability to the customer, be within top 1/3 of MTBF spec

(middle 1/3 fair, bottom 1/3 is poor.)

 To maximize the value of age to the customer, be within 0.5 of the ideal age on December 31.

(0.6 - 1 year fair, > 1 year poor)

 To maximize the value of positioning to the customer, be within 0.5 of the segment’s ideal spot.

(0.6-1.5 is Fair, >1.5 away is Poor.)

 To maximize the value of awareness to the customer, be above 80.5%

(50 - 80% is fair, < 50% is poor.)

 To maximize the value of accessibility to the customer, be above 80.5%

(50 - 80% is Fair, <5 0% is Poor.)

 Keep bonds at BB or better

 Leverage = Total Assets/Total Equity. Ideal is 1.81 - 2.80 from shareholder’s perspective

 Customer Survey scores above 50% are good

 To drive stock price up, increase profitability and return excess profits to the stockholders.

 Ideal inventory is 1. Inventory levels should not > 60 days of sales

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 Inventory should be about 4 - 6 weeks of sales (about 10% of sales). Stocks outs are very bad

since they represent loss of pure profit (all SG&A already recovered).

 Most successful firms run 50 - 80% overtime. Much cheaper than adding capacity.

 Plant utilization should be 150 - 180%. At 180% add plant capacity. Don’t ever exceed 200%,

but always run at a minimum of 100%.

 Automation increases are good, but be careful of lengthy R&D times and total costs

 Trailing edge products have substantially lower material costs

 Even great products must have good marketing to keep awareness up

 Don’t set prices more than $4.90 over the customer’s expected range

 Don’t let cash get over 5% of Sales

 Keep employee numbers at what is needed for production—no more. If extra money is spent

on recruiting and training, you can reduce total number of personnel due to productivity

increase

 Production = (Marketing forecast - inventory on hand x 1.12)

 Keep 60 days of working capital on hand

Income Statement Total Variable Costs

Divide Total Variable Costs by 1/6 (60days/365daysin a year) to figure 2 months of

working capital

Use excess $ for R&D, plant, special marketing, paying down debt

Cash position on balance sheet should be 8% or so of total assets

Satisfy the customer’s needs

Create the demand

Meet the demand

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Avoid idle assets. Make all of your assets work hard, including assets that are not obvious such as

cash and R&D

The right time to apply an "end game" mentality is in Round 1, not the last round.

The second shift is more profitable than the first. Make every unit of capacity produce at least one

unit, and preferably two units. Capacity next round should always be equal to one half of the best

case scenario you expect in the next round. Never have less capacity than you need to serve your

demand next year.

Add enough capacity to serve the customers. Demand forecast is imperfect – plan to have enough

capacity to serve best case for demand.

Cut costs first, price cuts second.

Automation levels of 5 to 6 will allow you to keep up with drift rates using only short moves.

Keep ROS > 8%

Keep Turnover > 1.3

Keep Leverage between 1.8 and 2.5

Market share should be > 1.5 average market share

Stock price should be > ($40 + 5 * Round #)

Invest ~ $10 – $25 million in plant improvement each year (add capacity, increase automation)

Sales to current asset ratio between 3.5 - 4.0

Current Ratio between 2.0 - 2.5

Total assets > 100M

Production should be > 1.4 capacity

Automation of Low End products = 10

Automation of Traditional products = 8

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Automation of High Tech products = 6 or 7

Be within 0.5 units of ideal for all products except low end

Often the best strategy is to add 2 - 3 products

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 6 Steps to Evaluate Product Success

Go to each Segment page in the Capstone Courier.

1. Check for stockouts (Middle of right of page, brown and yellow bar chart)

2. Check for Revision date. (Bottom of page in Top Products in Segment)

3. Pay attention to Top 2 buying criteria for the segment. Hit or miss?

4. Check Awareness. (Bottom of page in Top Products in Segment)

5. Check Accessibility. (Top right of page.)

6. Check customer survey to see about predictions for the next year. (Bottom of page in Top

Products in Segment)

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 Top 10 Errors

1. Margins insufficient to sustain the business.

2. Launching a new product in R&D, but failing to purchase plant capacity for production.

3. Setting prices more than $4.90 above the customer’s expected range (results in zero sales – even

in a “seller’s market”).

4. Creating wildly inflated sales forecasts resulting in a ton of inventory (often results in high-

interest Emergency Loan).

5. Ordering plant improvements without securing sufficient funding (results in high interest

Emergency Loan).

6. Failure to account for Customer Buying Criteria (price, age, reliability, positioning) when creating

a new product, or updating an existing product.

7. Finalizing decisions without reviewing pro forma financial statements.

8. Increasing plant capacity on an existing production line before reaching 100% plant utilization.

9. Viewing business loans and finances as if it were personal debt. Business debt is good.

10. Excessive cash (more than 5% of Sales) on the Balance Sheet (wasted resource).

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 Avoid an Emergency Loan

To help avoid an emergency loan, the last thing to do before uploading your final decisions is add

together your Cash and Inventory (from pro forma Balance Sheet). If that sum is less than 16% of

Total Assets (from pro forma Balance Sheet), you are in danger of having to get an Emergency Loan!

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 Advice to Struggling Teams

Each time a round of the game is processed, compare the results of struggling teams to the criteria

listed below.

Low Contribution Margin: Contribution margin is revenue minus direct labor, raw materials—

expressed as a percentage of sales. It is reported on page 1 of the Capstone Courier as an aggregate

average of each team's product portfolio. A good minimum benchmark for Contribution Margin is

30%. If contribution margin is below 30%, the team should consider reducing its cost of goods,

and/or raising its prices. Margins should get as high as 40% or better.

Typical Problems Causing Low Contribution Margins

1. MTBF ratings set too high. MTBF ratings directly affect material costs. Check the MTBF

ratings of each product against the "Customer Buying Criteria" on page 5-9 of the

Capstone Courier. Are they higher than they need to be? If the MTBF range is 12-17,000,

and it is the #4 buying criteria (as in the Low End Segment), there is little benefit in

having MTBF set higher than the minimum.

2. Prices too low. Check the Income Statement in the team's annual company reports (not

the Courier). Compare the price of each product with the cost. Prices must be set high

enough to allow reasonable profit within the current cost structure. If the cost structure

is too high, work on it through MTBF rating reductions, investments in automation and

capacity, and reductions in overtime.

Excessive Emergency Loans: Emergency loans are listed on page 1 of the Capstone Courier. Every

time a cash flow shortfall occurs — Big Al steps in to keep the team afloat: at a 7.5% premium, of

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course. Modest emergency loans are no big deal. Emergency loans in excess of 10 million usually

indicate serious sales forecast mistakes.

Typical Problems Causing Emergency Loans

1. Excessive inventory carry costs. Check the inventory status of each product on page 4 of

the Capstone Courier. If there is excessive inventory — try and determine why. Were

sales forecasts simply too high? Or, was it a matter of having a "lousy" product (in the

minds of the customers from that segment) when compared to the competition? You

can determine this by comparing products on the Market Segment Report (page 5-9 of

the Capstone Courier).

2. Sometimes teams make big investments in plant but forget to raise the money. Check

page 3 of the Capstone Courier (financial analysis). Were there large investments in

plant & equipment? If so, how was the capital raised?

3. Operating losses

Excessive Inventory Amounts: It is very costly to carry large amounts of inventory (total unit cost

multiplied by a penalty of 12%). The ideal year-end inventory position is one unit in each product

line: one would know that every potential sale was made, and the carry cost would be so small as

to be inconsequential. Excessive inventory goes hand-in-hand with less than expected revenue

from sales — a "double-whammy." Not only did the team experienced unanticipated inventory

overhead, it also had substantially less income than planned. Inventory levels should not exceed 60

days (two months) of Sales.

Typical Problems Causing Excess Inventory

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1. Overly optimistic sales forecasts. Previous year customer demands (and segment

growth rates) are listed for each market segment on pages 5-9 of the Capstone Courier.

Compare the team's sales forecast figures against segment demand. Were their 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 sales per team. If you have a better than average product, your sales

will be a little higher. The opposite is true for less than average products. However, you

should understand that every product that tracks within the "rough-cut" parameters will

experience some sales. In other words, customers do not buy all of the "best" product

until it stocks out, then begin buying the second "best" product until it stocks out, etc.

Instead, customers evaluate each product monthly. The "best" products get more sales

than less desirable products, but it is relative. It is possible for a less desirable product

to stock out, while a better product carries inventory. For example, say the Andrews

team produces 250 thousand of a "lousy" product in the size segment, and Baldwin

produces 750 thousand of a great size segment product. In this scenario, it would be

feasible for Andrews to stock out while Baldwin ended up with 150 thousand units in

inventory.

2. Not understanding how the spreadsheets work. Sometimes students get confused

about the relationship between sales forecasts, production schedule, and production

capacity.

a. Sales Forecasts only affect proformas. They are a tool - not a management

"decision."

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 b. Production Schedule (on the Production spreadsheet of the student software) is

the actual production for the year. Students must enter the number of units

they want to produce. The processing "compiler" program will divide the total

production by twelfths and produce (and sell) that amount each month.

c. Production Capacity is the size of the factory. If the Capacity is 500 thousand,

teams may produce up to one million units. But, all units produced above 500

thousand will be affected by second shift charges. Teams may choose to sell

capacity, or simply leave it idle and unused.

Excessive Stock Price Dip: 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.

Also, paying dividends during the same year debt is accumulated has a negative affect on stock

price. This is true even if the debt was a Big Al emergency loan.

Excessive negative profits: Profits are listed on page 1 of the Capstone Courier. Losses are usually

the result of a combination of costs being too high and prices too low. 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.

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 Alternative Approach to Sales Forecasting

1. Go to Decisions, R&D

a. What are the top two things the customer wants in your Segment?

i. You should hit the first one dead on at least once per year, as well as the second

one if you can.

ii. Adjust product via R&D—Pfmn, Size, and MTBF

2. Go to Decisions, Marketing. Adjust price via Price, adjust promotion via Promo Budget, adjust

place via Sales Budget)

a. Decrease price

b. Increase promo budget

c. Increase sales budget

d. Don’t trust or use the resulting computer estimate of Sales Forecast on the marketing

screen.

3. Establish your own unit sales forecast

a. Go to Last Year’s Report, then to your segment

b. See total industry unit demand in the Statistics block

c. Multiply that total industry unit demand by 1+Growth Rate % in the Statistics block

d. Calculate the number of products offered in the segment by looking at the Top Products

in Segment (scroll down)

e. Adjust the number of products by eliminating minor players, reducing any products

apparently moving out of the segment (could be in ½ product increments), add for

potential newcomers (could be in ½ product increments)

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 f. Divide the demand by number of products to get average units per product (if all else

were equal)

g. Go to Top Products in Segment

i. Add up all of the recent Customer Survey numbers

ii. Divide our Survey # by the total to get our % demand

iii. Multiply our % demand by total unit demand to get a most likely forecast for us.

We will apply Kentucky windage in a moment

h. Check our product vs the competitors on the Top 2 customer preferences for that

segment

i. Check our Awareness relative to the competitors

j. Check our Accessibility relative to the competitors

k. Adjust promo budget and sales budget to improve our Awareness and Accessibility

relative to competitors (being in the top 2-3 is best)

l. On the Market Share bar chart, find the spread between the potential demand across

the competitors.

i. Calculate the number of units that represent the low side of demand and the

high side of demand to give us the spread in units if the market was to stay about

the same

m. Calculate our worst case and best case Sales Forecast keeping them inside the spread of

demand and adjusted for what we think the Kentucky windage should be based on what

we think our percent of the market will be based on the above calculations

4. Go to Decisions, Marketing

a. Enter the Worst Sales Forecast

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5. Go to Decisions, Production

a. On the Production Schedule enter the Best Case Sales Forecast (less any inventory on

hand)

6. Go to Pro formas, Income Statement

a. Check Sales and Net Margins. Write down both numbers

b. Go back to Marketing and change the Sales Forecast to Best case

c. Return to Proformas, Income Statement

i. Recheck Sales and Net Margins. Write down both numbers.

d. Go back to Marketing and change the Sales Forecast to Worst case

e. Go to Proformas, Balance Sheet

i. Check Current Assets “Cash” and “Inventory”

1. Cash must be positive in worst case.

This process gives you upside potential if the Best Case happens, but makes sure you don’t have to

get an Emergency Loan if the worst happens. It also allows you to potentially pick up some sales if

competitors stock out.

Note on Inventory: If an R&D revision does not finish until August, what is built between January

and July? The old product design is produced and sold until the revision date. Production then

switches to the new design. Furthermore, all of your old inventory is reworked to match the new

product specifications. This will not affect the historical costs of the old inventory. Also, you do not

have to worry about having both the old and new designs on the market.

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Note on Selling Plant Capacity: Sales are for $0.65 on the dollar and occur at the beginning of the

year. Selling for less than the depreciated value loses money, and selling for more than depreciated

value makes money.

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