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5/26/2018 siib_c1
1/38
In the Capstone competition rounds, hope you have paid due attention to: Have you sat and brainstormed as a company (team) what is your companyspassion, what is your companys DNA, what excites you, what does your company want todo? Remember, your company reflects you your thoughts, fears, aspirations, predilections,caution, risk,etc. Now....
Given your passions and given the resources and capabilities that you possess, whatis your companys vision. Your vision is simply an expression of a desired end state (eightyears from now) that you wish to accomplish. Try and visualize it as accurately as possible. Nowgiven your vision and your strengths (capabilities and resources) what is the best for you to dogiven a competitive environment. Thus you now...
Perform a Market Analysis,i.e market segments, market sizes, their growths and what isthe share you intend to capture. Remember, analysis of the market sizes, growths and yourshare are a foundational part of your strategy.
Now formulate your strategy company and segment wide. Your strategy is nothing butintegrated and coordinated set of actions taken to exploit core competencies and gaincompetitive advantage. Securing a competitive advantage is vital; else you will get whateverybody else gets.
And remember, the heart of business lies in the execution. Wonderful strategy, but poorexecution will let you down.
Please read the note on Outlining Your Strategy (at the end of this debrief): this was sentto you during the practice rounds as well.
Please read the note (at the end of the debrief) on Outlining Your Strategy Competitive Advantage. Please read these notes carefully. Think about how
you will generate competitive advantage for your company onCapstone.
IMP: Some of you were curious about the individual graded examination (CompXM) after youfinish the competition rounds. The Comp-XM is similar to Capstone. Here you would run abusiness (far simpler and miniaturized as compared to Capstone) of yourown, INDIVIDUALLY as CEO. You would also be asked theoretical questions in the context ofyour team. Each exam is similar yet unique. It is a 6-8 hour, single session, open book,online exam. You will be given eight hours (to cater to breaks/meals), for the exam. The bestpreparation for the exam is working on Capstone.Passing the exam (50% is the pass bar) is mandatory for the Capstone certification.
5/26/2018 siib_c1
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Industry and Team Specific Points
C58754
General: An interesting start to the competition round. Observe how the business and
financial results of the teams have changed in the very first year of business. All teams
started on a perfectly level playfield. Run your businesses deliberately; losing customersand profits weakens you and strengthens your competitors. The gap widens faster than
one anticipates. Remember the objective: profit maximization; therefore its not only
growth but profitable growth that is of significance. Think long term. Please make those
growth investments now. But in the bargain, do not bleed so unsustainably that you
become bankrupt in the short and mid-term..
Chester and Ferris made losses this year. Low sales for Ferris. The reasons for your low
sales are given below in the sales paragraph. The top-line for Digby has shown good
growth in the last financial year. Contribution margins are low for Andrews, Chester,
Digby and Ferris. You will find it hard to make a profit with contribution margins below
30%. Emergency loans were seen for Ferris. You are experienced managers now. Pleasestay away from these cash flow crises. Please read the paragraph on emergency loans
below.
Stock Price and Market Cap: Eriehad a rise in stock price of $3.5/share. Andrews, Baldwin,
Chester, Digby and Ferris had a fall in stock price $0.5/share, $0.8/share, $5.6/share,
$3.1/share and $33.3/share. Ferriss stock price took a massive tumble of $33.3 caused by
losses and emergency loans. Erieis the most valuable company with a market capitalization of
$75M.
The impact of Dividends:
Remember, dividends are averaged over the past two rounds. Second, stockholders will ignoredividend amounts above either:
This year's EPS, or Or if EPS is falling, the average EPS over the past two years
One other factor drives stock price Book Value. If you pay out more than the EPS, it followsthat book value must fall and with it the stock price.
Sales: Baldwin, Chester, Digby and Erie had a rise in market share of 1.4%, 0.5%, 2.2% and
1% respectively. Andrews and Ferris had a fallin market share of 0.1% and 5% respectively
Each 1% market share in this round was worth almost $10M. Large losses in market share
often mean some high profile firings: think of the consequences in the real world. Your sales
should have been in the region of $115 M if you were retaining market share.
Low sales forFerris. This was caused by:
5/26/2018 siib_c1
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Poor product specifications (performance and size); look at the ideal spot on the
perceptual map. Look at your product specifications. If you do not offer the customers
the specifications they desire, sales will suffer.
Low customers awareness levels for your products due to low promo budgets.
Poor distribution reach and accessibility for your product caused by low sales budget.
Please pay more attention to the 4Ps of marketing: improve your sales.
Chester, Erie and Ferris have introduced new products in the market. Each team can
launch up to three new products. More products help you capture more market share.
Profits: Chester and Ferrishad bottom lines in red. The reasons for your lower profits are
easy to see now. Lets us not repeat mistakes:
Low Contribution Margin
High unnecessary depreciation of plant and machinery due to low plant usage. Why
keep a plant that only gathers dust.
High Unsold Inventory and the attendant carrying cost for Ferris.
High interest expense for highly leverage companies like Ferris. However, they could be
gearing for higher growth here.
Profits are important: Thats our raison dtre for running the company.
Contribution Margin: Andrews, Chester, Digby and Ferris have low contribution margins.
Please maintain your margins above 30%. Please automate your plants to bring down your
labor bill. Please price better.
Once again to jog your memory:
Contribution margin is defined as:
Sales - (Direct Labour + Direct Materials + Inventory Carry)
Sales
It is reported on Page 1 of the Capstone Courier 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.
Margins are driven by both price and cost. Check to see which of these problems you have:
Are your prices too low?"Variable Margin" is the margin that you make on each unit. It
is defined as:
5/26/2018 siib_c1
4/38
o Price - (Direct Labour + Direct Materials)
Price
o
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 Capstone software.
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 5-9 of
the Courier. Are they higher than they need to be? Example: If the MTBF range is
12,000-17,000, and it is the 4th buying criteria (as it is in the Low End segment), there is
little benefit in having MTBF set higher than the minimum. The Low End customer is
saying to you that given a choice between reliability and price, they prefer price.
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.
Is your labour content too high?Labour content is the percentage of Cost of Goods(COG) consumed by labour expense. For example, if COG is $10, and labour costs are
$4, your labour content is 40%. You can reduce labour content with automation. To a
lesser degree, you can also limit labour content by eliminating overtime and by
negotiating for a more favourable labour contract. A good benchmark for labour content
in Capstone is 30%.
Are you dropping price to increase market share? If so, recognize that Capstone
customers have no loyalty based upon past purchases, and they endure no switching
costs. Customer behaviour is driven by product attributes, awareness, and accessibility.
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 thetemptation 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.
Emergency Loans: Ferris has an emergency loan. As experienced managers now, you
should avoid emergency loans at all cost.Your company will get pummel on the bourses if
you cannot manage your cash. The reasons for your emergency loans are
Ferris - For plant improvements of $12.9M, you raised $8M from long term debt. You
also have high unsold inventory worth $42M. Raise funds from long term and current
debt to repay this emergency loan.
5/26/2018 siib_c1
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Please remember: emergency loan is current debt: you have to repay it in the next year.
Please err on the side of caution when it comes to managing cash. Get rid of your
emergency loan ASAP.
This is the growth phase for your company. A small loss could be understood as youve had to
make tough decisions considering a long term perspective. But, an emergency loan is neveracceptable.Cash flow mgmt is foundational.
Plant Size and Utilization: Andrews, Baldwin, Erie and Ferrishave not even used the first
shift capacity of the plant (the plant has 2 shifts). This has lead to an unnecessary depreciation
burden. For example: Erie could have produced the same 4.2M units with a capacity of 2.1M
units instead of the current capacity of 4.5M units. By this they would have a depreciation
expense of only of $3.3M instead of the $7.1M they currently have. This means $3.8M more in
EBIT.Interesting!
Asset Turnover: Ferris have an asset turnover of below one. Please work your assets
harder. Your assets have to justify their place on their balance sheet. Make them generate more
sales per unit of asset.
Forecasting and Inventory: Ferris has high levels of unsold inventory. Please restrict your
production in the next round so that you may reduce this inventory level. Inventory levels create
an excess burden in terms of carrying costs on profits and block cash. Remember, producing
more does not mean selling more. On the other hand, stocking out means huge opportunity
cost. Ideally, inventory levels should be one unit for every product. But this is quite difficult
(impossible) to achieve. Forecast better and try to reduce inventory to the minimum possible
level without stocking out.
Inventory Reserves
Inventory expansions are the number one cause of emergency loans. This can be further
broken down into two root causes forecasting, and inadequate inventory reserves.
By inventory reserves we mean, How much inventory are we willing to accumulate during the
year in our worst case? We express this as days of inventory.
Suppose the gross margin is 30%. If so, then the cost of inventory consumes 70% of every
sales dollar. If sales are $100 million, over the course of a year the company spends $70 million
on inventory. In one day it spends $191 thousand. In 30 days it spends $5.7 million. In 90 days
$17.3 million.
We are interested in how many days of inventory the company planned to be able to absorb,
because if inventory expanded beyond this, it would see Big Al for an emergency loan.
To find inventory reserves we determine cash and inventory positions on January 2nd, after all
the dust has settled from borrowing, stock issues, bond issues, debt retirement, etc.
5/26/2018 siib_c1
6/38
Inventory reserves in days = ((Starting Cash + Starting Inventory)/COG) * 365. For example, if
starting cash and inventory totalled 30 million on January 2nd, and annual cost of goods is
expected to be $120 million, then days of inventory was $30/$120 * 365 or 91 days.
If the company sells its entire inventory, it converts it all to cash. The more inventory
accumulated, the more that cash is crystallized as inventory. Eventually the company runs outof cash and turns to Big Al to pay for the inventory that has accumulated in the warehouse.
Companies can develop an inventory reserves policy by considering their worst case forecast
for sales. If the inventory policy is 90 days, they can plan the production schedule so that they
will have (1 + 90/365) = 125% of their worst case forecast, including any starting inventory.
Companies cannot predict what competitors will do in detail. Therefore, companies plan for the
worst and hope for the best.
Trouble is highly likely to occur when inventory reserves are less than 30 days. The company
may get away with it, but that requires both precise forecasting and predictable competitors or,
more likely, lots of luck.
Trouble appears in a different form when inventory reserves exceed five months. Now the
company has idle assets, which should either have been put to work or given back to the
stockholders.
Segment Wise Product Analysis:
Traditional Segment: Digbyleads the industry.
Low End Segment: Andrewsleads the industry.
High End Segment: Digby leads the industry. Cid is overpriced (outside the price
range). Performance Segment: Erieleads the industry. Coat is overpriced.
Size Segment: Digbyleads the industry. Cure is overpriced (outside the price range).
Financial Management: Erieis low on leverage. ROA time leverage is ROE. Remember?
Plant Purchases Funded
Failure to fully fund plant purchase is another cause of emergency loans. The error occurs
because companies often count on profits or perhaps inventory reductions that do not
materialize.
Funding sources include:
1. Depreciation
2. Stock issue
3. Bond issues
4. Excess current assets
5/26/2018 siib_c1
7/38
Depreciation often confuses participants as a source of funding. While we do pay cash for
expenses like promotion or inventory, we never actually pay cash for depreciation. And yet
governments allow businesses to deduct depreciation as an expense, thereby reducing profits
and taxes. Why?
Governments want businesses to continue to pay taxes, and they agree that equipment wearsout and must be replaced. The purpose of depreciation is to set aside a guaranteed cash
flow that can be usedfor the purchase of new plant and equipment. Teams can successfully
argue that cash from depreciation is a valid source of funding.
Stock and bond issues raise long term funds for any investment in the company.
Excess current assets can be defined as anything greater than the current assets required to
operate in our worst case scenario. For our purposes, we assume that teams need a minimum
of 90 days of inventory, 30 days of accounts receivable, and $1 of cash. Of course, teams might
want to have deeper reserves, but in applying the rubric to Plant Purchases, we allow
companies to apply anything above this minimum to plant purchases. We use the January 1st
balance sheet (same as the December 31st balance sheet from last years reports) to discover
starting current assets.
If the sum of the companys funding sources is greater than its plant purchases, the company
fully funded the purchase. If the shortfall is less than $4 million, it is plausible that its intention
was to reduce the current asset base by $4 million. If the funding shortfall is $8 million, it is
conceivable albeit unlikely that the shortfall was planned. Anything more than $8 million is
cutting deeply into current assets, and will likely result in an emergency loan.
C58755
General: Good start. Observe how the business and financial results of the teams have
changed in the very first year of business. All teams started on a perfectly level playfield.
Run your businesses deliberately; losing customers and profits weakens you and
strengthens your competitors. The gap widens faster than one anticipates. Remember
the objective: profit maximization; therefore its not only growth but profitable growth
that is of significance. Think long term. Please make those growth investments now. But
in the bargain, do not bleed so unsustainably that you become bankrupt in the short and
mid-term..
Baldwin and Erie made losses this year. Low sales for Baldwin. The reasons for your lowsales are given below in the sales paragraph. The top-line for Andrews has shown good
growth in the last financial year. Contribution margins are low for Andrews, Baldwin,
Chester and Erie. You will find it hard to make a profit with contribution margins below
30%. Emergency loans were seen for Andrews, Baldwin, Erie and Ferris. You are
experienced managers now. Please stay away from these cash flow crises. Please read
the paragraph on emergency loans below.
5/26/2018 siib_c1
8/38
Stock Price and Market Cap: Chester and Digbyhad a rise in stock price of $2.1/share and
$10.4/share. Andrews, Baldwin, Erie and Ferris had a fall in stock price of $9.8/share,
$24.6/share, $9.6/share and $1/share. Baldwinsstock price took a massive tumble of $24.6
caused by losses and emergency loans. Digby is the most valuable company with a market
capitalization of $89M.
The impact of Dividends:
Remember, dividends are averaged over the past two rounds. Second, stockholders will ignoredividend amounts above either:
This year's EPS, or Or if EPS is falling, the average EPS over the past two years
One other factor drives stock price Book Value. If you pay out more than the EPS, it followsthat book value must fall and with it the stock price.
Sales: Andrews, Chester, Digby, Erie and Ferris had a rise in market share of 1.5%, 1.5%,0.4%, 1.1% and 1.2% respectively. Baldwin had a fallin market share of 5.7%.
Each 1% market share in this round was worth almost $10M. Large losses in market share
often mean some high profile firings: think of the consequences in the real world. Your sales
should have been in the region of $115 M if you were retaining market share.
Low sales forBaldwin. This was caused by:
Poor product specifications (performance and size); look at the ideal spot on the
perceptual map. Look at your product specifications. If you do not offer the customers
the specifications they desire, sales will suffer. Low customers awareness levels for your products due to low promo budgets.
Poor distribution reach and accessibility for your product caused by low sales budget.
Please pay more attention to the 4Ps of marketing: improve your sales.
Baldwin and Chesterhave introduced new products in the market. Each team can launch
up to three new products. More products help you capture more market share.
Profits: Baldwin and Eriehad bottom lines in red. The reasons for your lower profits are
easy to see now. Lets us not repeat mistakes:
Low Contribution Margin High unnecessary depreciation of plant and machinery due to low plant usage. Why
keep a plant that only gathers dust.
High Unsold Inventory and the attendant carrying cost.
Profits are important: Thats our raison dtre for running the company.
5/26/2018 siib_c1
9/38
Contribution Margin: Andrews, Baldwin, Chester and Erie have low contribution margins.
Please maintain your margins above 30%. Please automate your plants to bring down your
labor bill. Please price better.
Once again to jog your memory:
Contribution margin is defined as:
Sales - (Direct Labour + Direct Materials + Inventory Carry)
Sales
It is reported on Page 1 of the Capstone Courier 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.
Margins are driven by both price and cost. Check to see which of these problems you have:
Are your prices too low?"Variable Margin" is the margin that you make on each unit. It
is defined as:
o Price - (Direct Labour + Direct Materials)
Price
o
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 Capstone software. 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 5-9 of
the Courier. Are they higher than they need to be? Example: If the MTBF range is
12,000-17,000, and it is the 4th buying criteria (as it is in the Low End segment), there is
little benefit in having MTBF set higher than the minimum. The Low End customer is
saying to you that given a choice between reliability and price, they prefer price.
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.
Is your labour content too high?Labour content is the percentage of Cost of Goods(COG) consumed by labour expense. For example, if COG is $10, and labour costs are
$4, your labour content is 40%. You can reduce labour content with automation. To a
lesser degree, you can also limit labour content by eliminating overtime and by
negotiating for a more favourable labour contract. A good benchmark for labour content
in Capstone is 30%.
5/26/2018 siib_c1
10/38
Are you dropping price to increase market share? If so, recognize that Capstone
customers have no loyalty based upon past purchases, and they endure no switching
costs. Customer behaviour is driven by product attributes, awareness, and accessibility.
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 stayprofitable. 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.
Emergency Loans: Andrews, Baldwin, Erie and Ferris have emergency loans. As
experienced managers now, you should avoid emergency loans at all cost. Your company
will get pummel on the bourses if you cannot manage your cash. The reasons for your
emergency loans are
Andrews - For plant improvements of $19.4M, you raised $3.5M from long term debt.
You also have high unsold inventory worth $24.6M. Raise funds from long term and
current debt to repay this emergency loan.
Baldwin You have high unsold inventory worth $29.3M. Raise funds from long term
and current debt to repay this emergency loan.
Erie You had high unsold inventory worth $29.2M. Raise funds from long term and
current debt to repay this emergency loan.
Ferris For plant improvements of $10.4M, you raised $8M from current debt. Do you
buy a house using a credit card? Raise funds from long term sources for long terminvestments. You also have high unsold inventory worth $24.6M. Raise funds from long
term and current debt to repay this emergency loan.
Please remember: emergency loan is current debt: you have to repay it in the next year.
Please err on the side of caution when it comes to managing cash. Get rid of your
emergency loan ASAP.
This is the growth phase for your company. A small loss could be understood as youve had to
make tough decisions considering a long term perspective. But, an emergency loan is never
acceptable.Cash flow mgmt is foundational.
Plant Size and Utilization: Ferrishas not even used the first shift capacity of the plant (theplant has 2 shifts). This has lead to an unnecessary depreciation burden.
Asset Turnover:Baldwin has an asset turnover of below one. Please work your assets
harder. Your assets have to justify their place on their balance sheet. Make them generate more
sales per unit of asset.
5/26/2018 siib_c1
11/38
Forecasting and Inventory: Andrews, Baldwin, Erie and Ferrishave high levels of unsold
inventory. Please restrict your production in the next round so that you may reduce this
inventory level. Inventory levels create an excess burden in terms of carrying costs on profits
and block cash. Remember, producing more does not mean selling more. On the other hand,
stocking out means huge opportunity cost. Ideally, inventory levels should be one unit for every
product. But this is quite difficult (impossible) to achieve. Forecast better and try to reduceinventory to the minimum possible level without stocking out.
Inventory Reserves
Inventory expansions are the number one cause of emergency loans. This can be further
broken down into two root causes forecasting, and inadequate inventory reserves.
By inventory reserves we mean, How much inventory are we willing to accumulate during the
year in our worst case? We express this as days of inventory.
Suppose the gross margin is 30%. If so, then the cost of inventory consumes 70% of every
sales dollar. If sales are $100 million, over the course of a year the company spends $70 millionon inventory. In one day it spends $191 thousand. In 30 days it spends $5.7 million. In 90 days
$17.3 million.
We are interested in how many days of inventory the company planned to be able to absorb,
because if inventory expanded beyond this, it would see Big Al for an emergency loan.
To find inventory reserves we determine cash and inventory positions on January 2nd, after all
the dust has settled from borrowing, stock issues, bond issues, debt retirement, etc.
Inventory reserves in days = ((Starting Cash + Starting Inventory)/COG) * 365. For example, if
starting cash and inventory totalled 30 million on January 2nd, and annual cost of goods isexpected to be $120 million, then days of inventory was $30/$120 * 365 or 91 days.
If the company sells its entire inventory, it converts it all to cash. The more inventory
accumulated, the more that cash is crystallized as inventory. Eventually the company runs out
of cash and turns to Big Al to pay for the inventory that has accumulated in the warehouse.
Companies can develop an inventory reserves policy by considering their worst case forecast
for sales. If the inventory policy is 90 days, they can plan the production schedule so that they
will have (1 + 90/365) = 125% of their worst case forecast, including any starting inventory.
Companies cannot predict what competitors will do in detail. Therefore, companies plan for the
worst and hope for the best.
Trouble is highly likely to occur when inventory reserves are less than 30 days. The company
may get away with it, but that requires both precise forecasting and predictable competitors or,
more likely, lots of luck.
5/26/2018 siib_c1
12/38
Trouble appears in a different form when inventory reserves exceed five months. Now the
company has idle assets, which should either have been put to work or given back to the
stockholders.
Segment Wise Product Analysis:
Traditional Segment: Digby leads the industry.
Low End Segment: Chester leads the industry. Dell and Bead do not have the ideal
age for this segment.
High End Segment: Erieleads the industry. Bid needs improvement in its spec.
Performance Segment: Baldwinleads the industry. Foam and Aft are overpriced.
Size Segment: Baldwinleads the industry. Agape and Cure are overpriced (outside the
price range).
Financial Management: Digbyis low on leverage. ROA time leverage is ROE. Remember?
Plant Purchases Funded
Failure to fully fund plant purchase is another cause of emergency loans. The error occurs
because companies often count on profits or perhaps inventory reductions that do not
materialize.
Funding sources include:
1. Depreciation
2. Stock issue
3. Bond issues
4. Excess current assets
Depreciation often confuses participants as a source of funding. While we do pay cash for
expenses like promotion or inventory, we never actually pay cash for depreciation. And yet
governments allow businesses to deduct depreciation as an expense, thereby reducing profits
and taxes. Why?
Governments want businesses to continue to pay taxes, and they agree that equipment wears
out and must be replaced. The purpose of depreciation is to set aside a guaranteed cash
flow that can be usedfor the purchase of new plant and equipment. Teams can successfully
argue that cash from depreciation is a valid source of funding.
Stock and bond issues raise long term funds for any investment in the company.
Excess current assets can be defined as anything greater than the current assets required to
operate in our worst case scenario. For our purposes, we assume that teams need a minimum
of 90 days of inventory, 30 days of accounts receivable, and $1 of cash. Of course, teams might
want to have deeper reserves, but in applying the rubric to Plant Purchases, we allow
5/26/2018 siib_c1
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companies to apply anything above this minimum to plant purchases. We use the January 1st
balance sheet (same as the December 31st balance sheet from last years reports) to discover
starting current assets.
If the sum of the companys funding sources is greater than its plant purchases, the company
fully funded the purchase. If the shortfall is less than $4 million, it is plausible that its intentionwas to reduce the current asset base by $4 million. If the funding shortfall is $8 million, it is
conceivable albeit unlikely that the shortfall was planned. Anything more than $8 million is
cutting deeply into current assets, and will likely result in an emergency loan.
C58756
General: Well done! Observe how the business and financial results of the teams have
changed in the very first year of business. All teams started on a perfectly level playfield.
Run your businesses deliberately; losing customers and profits weakens you and
strengthens your competitors. The gap widens faster than one anticipates. Remember
the objective: profit maximization; therefore its not only growth but profitable growth
that is of significance. Think long term. Please make those growth investments now. But
in the bargain, do not bleed so unsustainably that you become bankrupt in the short and
mid-term..
Digby and Erie made losses this year. The top-line for Digby has shown good growth in
the last financial year. Contribution margins are low for Chester and Erie. You will find it
hard to make a profit with contribution margins below 30%. Emergency loans were seen
for Digby and Erie. You are experienced managers now. Please stay away from these
cash flow crises. Please read the paragraph on emergency loans below.
Stock Price and Market Cap: Andrews had a rise in stock price of $2/share. Baldwin,
Chester, Digby, Erie and Ferris had a fall in stock price $2.7/share, $1.4/share, $7.7/share,
$33.2/share and $0.8/share. Eries stock price took a massive tumble of $33.2 caused by
losses and emergency loans. Ferrisis the most valuable company with a market capitalization
of $80M.
The impact of Dividends:
Remember, dividends are averaged over the past two rounds. Second, stockholders will ignoredividend amounts above either:
This year's EPS, or Or if EPS is falling, the average EPS over the past two years
One other factor drives stock price Book Value. If you pay out more than the EPS, it followsthat book value must fall and with it the stock price.
5/26/2018 siib_c1
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Sales: Andrewss market share remained constant. Baldwin, Digby and Ferris had a rise in
market share of 0.1%, 1.6% and 1.1% respectively. Chester and Erie had a fall in market
share of 0.6% and 2.2% respectively
Each 1% market share in this round was worth almost $10M. Large losses in market share
often mean some high profile firings: think of the consequences in the real world. Your salesshould have been in the region of $115 M if you were retaining market share.
Please pay more attention to the 4Ps of marketing: improve your sales.
Baldwin and Chesterhave introduced new products in the market. Each team can launch
up to three new products. More products help you capture more market share.
Profits: Digby and Eriehad bottom lines in red. The reasons for your lower profits are easy
to see now. Lets us not repeat mistakes:
Low Contribution Margin for Erie
High unnecessary depreciation of plant and machinery due to low plant usage. Whykeep a plant that only gathers dust.
High Unsold Inventory and the attendant carrying cost for Erie.
High interest expense for highly leverage companies for Erie. However, they could be
gearing for higher growth here.
Profits are important: Thats our raison dtre for running the company.
Contribution Margin: Chester and Erie have low contribution margins. Please maintain
your margins above 30%. Please automate your plants to bring down your labor bill. Please
price better.
Once again to jog your memory:
Contribution margin is defined as:
Sales - (Direct Labour + Direct Materials + Inventory Carry)
Sales
It is reported on Page 1 of the Capstone Courier 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 annualreports.
Margins are driven by both price and cost. Check to see which of these problems you have:
Are your prices too low?"Variable Margin" is the margin that you make on each unit. It
is defined as:
5/26/2018 siib_c1
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o Price - (Direct Labour + Direct Materials)
Price
o
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 Capstone software.
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 5-9 of
the Courier. Are they higher than they need to be? Example: If the MTBF range is
12,000-17,000, and it is the 4th buying criteria (as it is in the Low End segment), there is
little benefit in having MTBF set higher than the minimum. The Low End customer is
saying to you that given a choice between reliability and price, they prefer price.
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.
Is your labour content too high?Labour content is the percentage of Cost of Goods(COG) consumed by labour expense. For example, if COG is $10, and labour costs are
$4, your labour content is 40%. You can reduce labour content with automation. To a
lesser degree, you can also limit labour content by eliminating overtime and by
negotiating for a more favourable labour contract. A good benchmark for labour content
in Capstone is 30%.
Are you dropping price to increase market share? If so, recognize that Capstone
customers have no loyalty based upon past purchases, and they endure no switching
costs. Customer behaviour is driven by product attributes, awareness, and accessibility.
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 thetemptation 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.
Emergency Loans: Digby and Erie have emergency loans. As experienced managers
now, you should avoid emergency loans at all cost.Your company will get pummel on the
bourses if you cannot manage your cash. The reasons for your emergency loans are
Andrews- For a cash outflow of $22.6M (plant improvements + dividends + retirement
of current debt), you raised $0.1M from sale of stock. You also have high unsold
inventory worth $37M. Raise funds from long term and current debt to repay this
emergency loan.
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Baldwin For a cash outflow of $20M (plant improvements + dividends), you did not
raise a penny. You also have high unsold inventory worth $23M. Raise funds from long
term and current debt to repay this emergency loan.
Chester For a cash outflow of $43M (plant improvements + dividends + purchase of
stock + retirement of long term debt), you raised $9M from long term debt. Raise funds
from long term and current debt to repay this emergency loan. Digby For a cash outflow of $46M (plant improvement + dividends), you raised $40M
(sale of stock + long term debt + current debt). You also have high unsold inventory
worth $37M. Raise funds from long term and current debt to repay this emergency loan.
Please remember: emergency loan is current debt: you have to repay it in the next year.
Please err on the side of caution when it comes to managing cash. Get rid of your
emergency loan ASAP.
This is the growth phase for your company. A small loss could be understood as youve had to
make tough decisions considering a long term perspective. But, an emergency loan is never
acceptable.Cash flow mgmt is foundational.
Plant Size and Utilization: All teamshave not even used the first shift capacity of the plant
(the plant has 2 shifts). This has lead to an unnecessary depreciation burden.
Asset Turnover: Baldwin and Erie have asset turnover of below one. Please work your
assets harder. Your assets have to justify their place on their balance sheet. Make them
generate more sales per unit of asset.
Forecasting and Inventory: Erie has high levels of unsold inventory. Please restrict your
production in the next round so that you may reduce this inventory level. Inventory levels create
an excess burden in terms of carrying costs on profits and block cash. Remember, producing
more does not mean selling more. On the other hand, stocking out means huge opportunity
cost. Ideally, inventory levels should be one unit for every product. But this is quite difficult
(impossible) to achieve. Forecast better and try to reduce inventory to the minimum possible
level without stocking out.
Inventory Reserves
Inventory expansions are the number one cause of emergency loans. This can be further
broken down into two root causes forecasting, and inadequate inventory reserves.
By inventory reserves we mean, How much inventory are we willing to accumulate during the
year in our worst case? We express this as days of inventory.
Suppose the gross margin is 30%. If so, then the cost of inventory consumes 70% of every
sales dollar. If sales are $100 million, over the course of a year the company spends $70 million
on inventory. In one day it spends $191 thousand. In 30 days it spends $5.7 million. In 90 days
$17.3 million.
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We are interested in how many days of inventory the company planned to be able to absorb,
because if inventory expanded beyond this, it would see Big Al for an emergency loan.
To find inventory reserves we determine cash and inventory positions on January 2nd, after all
the dust has settled from borrowing, stock issues, bond issues, debt retirement, etc.
Inventory reserves in days = ((Starting Cash + Starting Inventory)/COG) * 365. For example, if
starting cash and inventory totalled 30 million on January 2nd, and annual cost of goods is
expected to be $120 million, then days of inventory was $30/$120 * 365 or 91 days.
If the company sells its entire inventory, it converts it all to cash. The more inventory
accumulated, the more that cash is crystallized as inventory. Eventually the company runs out
of cash and turns to Big Al to pay for the inventory that has accumulated in the warehouse.
Companies can develop an inventory reserves policy by considering their worst case forecast
for sales. If the inventory policy is 90 days, they can plan the production schedule so that they
will have (1 + 90/365) = 125% of their worst case forecast, including any starting inventory.
Companies cannot predict what competitors will do in detail. Therefore, companies plan for the
worst and hope for the best.
Trouble is highly likely to occur when inventory reserves are less than 30 days. The company
may get away with it, but that requires both precise forecasting and predictable competitors or,
more likely, lots of luck.
Trouble appears in a different form when inventory reserves exceed five months. Now the
company has idle assets, which should either have been put to work or given back to the
stockholders.
Segment Wise Product Analysis:
Traditional Segment: Digbyleads the industry.
Low End Segment: Chester leads the industry. Ebb does not have the ideal age for
this segment.
High End Segment: Baldwin leads the industry. Echo is overpriced (outside the price
range).
Performance Segment: Digbyleads the industry.
Size Segment: Digbyleads the industry. Egg is overpriced (outside the price range).
Financial Management: Chester and Ferrisare low on leverage. ROA time leverage is ROE.Remember?
Plant Purchases Funded
Failure to fully fund plant purchase is another cause of emergency loans. The error occurs
because companies often count on profits or perhaps inventory reductions that do not
materialize.
5/26/2018 siib_c1
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Funding sources include:
1. Depreciation
2. Stock issue
3. Bond issues
4. Excess current assets
Depreciation often confuses participants as a source of funding. While we do pay cash for
expenses like promotion or inventory, we never actually pay cash for depreciation. And yet
governments allow businesses to deduct depreciation as an expense, thereby reducing profits
and taxes. Why?
Governments want businesses to continue to pay taxes, and they agree that equipment wears
out and must be replaced. The purpose of depreciation is to set aside a guaranteed cash
flow that can be usedfor the purchase of new plant and equipment. Teams can successfully
argue that cash from depreciation is a valid source of funding.
Stock and bond issues raise long term funds for any investment in the company.
Excess current assets can be defined as anything greater than the current assets required to
operate in our worst case scenario. For our purposes, we assume that teams need a minimum
of 90 days of inventory, 30 days of accounts receivable, and $1 of cash. Of course, teams might
want to have deeper reserves, but in applying the rubric to Plant Purchases, we allow
companies to apply anything above this minimum to plant purchases. We use the January 1st
balance sheet (same as the December 31st balance sheet from last years reports) to discover
starting current assets.
If the sum of the companys funding sources is greater than its plant purchases, the company
fully funded the purchase. If the shortfall is less than $4 million, it is plausible that its intention
was to reduce the current asset base by $4 million. If the funding shortfall is $8 million, it is
conceivable albeit unlikely that the shortfall was planned. Anything more than $8 million is
cutting deeply into current assets, and will likely result in an emergency loan.
C58757
General: An interesting start to the competition round. Observe how the business andfinancial results of the teams have changed in the very first year of business. All teams
started on a perfectly level playfield. Run your businesses deliberately; losing customers
and profits weakens you and strengthens your competitors. The gap widens faster than
one anticipates. Remember the objective: profit maximization; therefore its not only
growth but profitable growth that is of significance. Think long term. Please make those
growth investments now. But in the bargain, do not bleed so unsustainably that you
become bankrupt in the short and mid-term..
5/26/2018 siib_c1
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Baldwin, Chester and Digby made losses this year. Low sales for Baldwin. The reasons
for your low sales are given below in the sales paragraph. The top-line for Andrews has
shown good growth in the last financial year. Contribution margins are low for Ferris and
Erie. You will find it hard to make a profit with contribution margins below 30%.
Emergency loans were seen for Baldwin, Chester and Digby. You are experienced
managers now. Please stay away from these cash flow crises. Please read the paragraphon emergency loans below.
Stock Price and Market Cap: Except Erie, all teams had a fall instock price. Eriehad a rise
in stock price of $4/share. Chesters stock price took a massive tumble of $24.7 caused by
losses and emergency loans. Erieis the most valuable company with a market capitalization of
$77M.
The impact of Dividends:
Remember, dividends are averaged over the past two rounds. Second, stockholders will ignore
dividend amounts above either:
This year's EPS, or Or if EPS is falling, the average EPS over the past two years
One other factor drives stock price Book Value. If you pay out more than the EPS, it followsthat book value must fall and with it the stock price.
Sales: Andrews, Erie and Ferris had a rise in market share of 1.8%, 1% and 0.5%
respectively. Baldwin, Chester and Digby had a fall in market share of 2.1%, 0.3% and 1%
respectively
Each 1% market share in this round was worth almost $10M. Large losses in market shareoften mean some high profile firings: think of the consequences in the real world. Your sales
should have been in the region of $115 M if you were retaining market share.
Please pay more attention to the 4Ps of marketing: improve your sales.
Baldwin, Digby and Erie have introduced new products in the market. Each team can
launch up to three new products. More products help you capture more market share.
Profits: Baldwin, Chester and Digbyhad bottom lines in red. The reasons for your lower
profits are easy to see now. Lets us not repeat mistakes:
High unnecessary depreciation of plant and machinery due to low plant usage. Whykeep a plant that only gathers dust.
High Unsold Inventory and the attendant carrying cost for Chester and Digby.
Profits are important: Thats our raison dtre for running the company.
5/26/2018 siib_c1
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Contribution Margin: Erie and Ferris have low contribution margins.Please maintain your
margins above 30%. Please automate your plants to bring down your labor bill. Please price
better.
Once again to jog your memory:
Contribution margin is defined as:
Sales - (Direct Labour + Direct Materials + Inventory Carry)
Sales
It is reported on Page 1 of the Capstone Courier 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.
Margins are driven by both price and cost. Check to see which of these problems you have:
Are your prices too low?"Variable Margin" is the margin that you make on each unit. It
is defined as:
o Price - (Direct Labour + Direct Materials)
Price
o
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 Capstone software. 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 5-9 of
the Courier. Are they higher than they need to be? Example: If the MTBF range is
12,000-17,000, and it is the 4th buying criteria (as it is in the Low End segment), there is
little benefit in having MTBF set higher than the minimum. The Low End customer is
saying to you that given a choice between reliability and price, they prefer price.
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.
Is your labour content too high?Labour content is the percentage of Cost of Goods(COG) consumed by labour expense. For example, if COG is $10, and labour costs are
$4, your labour content is 40%. You can reduce labour content with automation. To a
lesser degree, you can also limit labour content by eliminating overtime and by
negotiating for a more favourable labour contract. A good benchmark for labour content
in Capstone is 30%.
5/26/2018 siib_c1
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Are you dropping price to increase market share? If so, recognize that Capstone
customers have no loyalty based upon past purchases, and they endure no switching
costs. Customer behaviour is driven by product attributes, awareness, and accessibility.
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 stayprofitable. 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.
Emergency Loans: Baldwin, Chester, Digby and Ferris have emergency loans. As
experienced managers now, you should avoid emergency loans at all cost. Your company
will get pummel on the bourses if you cannot manage your cash. The reasons for your
emergency loans are
Baldwin - For plant improvements of $21.8M, you did not raise a penny. Raise funds
from long term and current debt to repay this emergency loan.
Chester For plant improvements of $15.5M, you raised $5M from long term debt. You
also have high unsold inventory worth $26.8M. Raise funds from long term and current
debt to repay this emergency loan.
Digby You raised sufficient funds but had high unsold inventory worth $26.1M. Raise
funds from long term and current debt to repay this emergency loan.
Ferris For plant improvements of $2.8M, you did not raise a penny. You also have
high unsold inventory worth $21.8M. Raise funds from long term and current debt torepay this emergency loan.
Please remember: emergency loan is current debt: you have to repay it in the next year.
Please err on the side of caution when it comes to managing cash. Get rid of your
emergency loan ASAP.
This is the growth phase for your company. A small loss could be understood as youve had to
make tough decisions considering a long term perspective. But, an emergency loan is never
acceptable.Cash flow mgmt is foundational.
Plant Size and Utilization: Baldwin, Chester, Digby, Erie and Ferrishave not even used the
first shift capacity of the plant (the plant has 2 shifts). This has lead to an unnecessarydepreciation burden.
Asset Turnover: Baldwin, Chester and Digby have asset turnover of below one. Please
work your assets harder. Your assets have to justify their place on their balance sheet. Make
them generate more sales per unit of asset.
5/26/2018 siib_c1
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Forecasting and Inventory: Chester, Digby and Ferrishave high levels of unsold inventory.
Please restrict your production in the next round so that you may reduce this inventory level.
Inventory levels create an excess burden in terms of carrying costs on profits and block cash.
Remember, producing more does not mean selling more. On the other hand, stocking out
means huge opportunity cost. Ideally, inventory levels should be one unit for every product. But
this is quite difficult (impossible) to achieve. Forecast better and try to reduce inventory to theminimum possible level without stocking out.
Inventory Reserves
Inventory expansions are the number one cause of emergency loans. This can be further
broken down into two root causes forecasting, and inadequate inventory reserves.
By inventory reserves we mean, How much inventory are we willing to accumulate during the
year in our worst case? We express this as days of inventory.
Suppose the gross margin is 30%. If so, then the cost of inventory consumes 70% of every
sales dollar. If sales are $100 million, over the course of a year the company spends $70 millionon inventory. In one day it spends $191 thousand. In 30 days it spends $5.7 million. In 90 days
$17.3 million.
We are interested in how many days of inventory the company planned to be able to absorb,
because if inventory expanded beyond this, it would see Big Al for an emergency loan.
To find inventory reserves we determine cash and inventory positions on January 2nd, after all
the dust has settled from borrowing, stock issues, bond issues, debt retirement, etc.
Inventory reserves in days = ((Starting Cash + Starting Inventory)/COG) * 365. For example, if
starting cash and inventory totalled 30 million on January 2nd, and annual cost of goods isexpected to be $120 million, then days of inventory was $30/$120 * 365 or 91 days.
If the company sells its entire inventory, it converts it all to cash. The more inventory
accumulated, the more that cash is crystallized as inventory. Eventually the company runs out
of cash and turns to Big Al to pay for the inventory that has accumulated in the warehouse.
Companies can develop an inventory reserves policy by considering their worst case forecast
for sales. If the inventory policy is 90 days, they can plan the production schedule so that they
will have (1 + 90/365) = 125% of their worst case forecast, including any starting inventory.
Companies cannot predict what competitors will do in detail. Therefore, companies plan for the
worst and hope for the best.
Trouble is highly likely to occur when inventory reserves are less than 30 days. The company
may get away with it, but that requires both precise forecasting and predictable competitors or,
more likely, lots of luck.
5/26/2018 siib_c1
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Trouble appears in a different form when inventory reserves exceed five months. Now the
company has idle assets, which should either have been put to work or given back to the
stockholders.
Segment Wise Product Analysis:
Traditional Segment: Ferrisleads the industry.
Low End Segment: Erie leads the industry. Dell does not have the ideal age for this
segment.
High End Segment: Chester leads the industry.
Performance Segment: Andrewsleads the industry.
Size Segment: Chesterleads the industry.
Financial Management: Erieis low on leverage. ROA time leverage is ROE. Remember?
Plant Purchases Funded
Failure to fully fund plant purchase is another cause of emergency loans. The error occursbecause companies often count on profits or perhaps inventory reductions that do not
materialize.
Funding sources include:
1. Depreciation
2. Stock issue
3. Bond issues
4. Excess current assets
Depreciation often confuses participants as a source of funding. While we do pay cash for
expenses like promotion or inventory, we never actually pay cash for depreciation. And yet
governments allow businesses to deduct depreciation as an expense, thereby reducing profits
and taxes. Why?
Governments want businesses to continue to pay taxes, and they agree that equipment wears
out and must be replaced. The purpose of depreciation is to set aside a guaranteed cash
flow that can be usedfor the purchase of new plant and equipment. Teams can successfully
argue that cash from depreciation is a valid source of funding.
Stock and bond issues raise long term funds for any investment in the company.
Excess current assets can be defined as anything greater than the current assets required to
operate in our worst case scenario. For our purposes, we assume that teams need a minimum
of 90 days of inventory, 30 days of accounts receivable, and $1 of cash. Of course, teams might
want to have deeper reserves, but in applying the rubric to Plant Purchases, we allow
companies to apply anything above this minimum to plant purchases. We use the January 1st
5/26/2018 siib_c1
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balance sheet (same as the December 31st balance sheet from last years reports) to discover
starting current assets.
If the sum of the companys funding sources is greater than its plant purchases, the company
fully funded the purchase. If the shortfall is less than $4 million, it is plausible that its intention
was to reduce the current asset base by $4 million. If the funding shortfall is $8 million, it isconceivable albeit unlikely that the shortfall was planned. Anything more than $8 million is
cutting deeply into current assets, and will likely result in an emergency loan.
C58758
General: Observe how the business and financial results of the teams have changed in
the very first year of business. All teams started on a perfectly level playfield. Run your
businesses deliberately; losing customers and profits weakens you and strengthens
your competitors. The gap widens faster than one anticipates. Remember the objective:
profit maximization; therefore its not only growth but profitable growth that is of
significance. Think long term. Please make those growth investments now. But in the
bargain, do not bleed so unsustainably that you become bankrupt in the short and mid-
term..
Andrews and Chester made losses this year. Low sales for Chester. The reasons for your
low sales are given below in the sales paragraph. The top-line for Baldwin has shown
good growth in the last financial year. Contribution margins are low for all teams except
for Baldwin. You will find it hard to make a profit with contribution margins below 30%.
Emergency loans were seen for Andrews, Chester, Digby and Ferris. You are
experienced managers now. Please stay away from these cash flow crises. Please read
the paragraph on emergency loans below.
Stock Price and Market Cap: Baldwin, Digby and Eriehad a rise in stock price of $13/share,
$4/share and $12/share respectively. Andrews, Chester and Ferris had a fall in stock price of
$33/share, $8/share and $7/share respectively. Andrewssstock price took a massive tumble
of $33 caused by losses and emergency loans. Baldwinis the most valuable company with a
market capitalization of $95M.
The impact of Dividends:
Remember, dividends are averaged over the past two rounds. Second, stockholders will ignoredividend amounts above either:
This year's EPS, or Or if EPS is falling, the average EPS over the past two years
One other factor drives stock price Book Value. If you pay out more than the EPS, it followsthat book value must fall and with it the stock price.
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Sales: Baldwin, Erie and Ferris had a rise in market share of 3.5%, 2% and 2.1% respectively.
Digbys market share remained constant. Andrews and Chester had a fallin market share of
3% and 4.8% respectively
Each 1% market share in this round was worth almost $10M. Large losses in market share
often mean some high profile firings: think of the consequences in the real world. Your salesshould have been in the region of $115 M if you were retaining market share.
Low sales forChester. This was caused by:
Poor product specifications (performance and size); look at the ideal spot on the
perceptual map. Look at your product specifications. If you do not offer the customers
the specifications they desire, sales will suffer.
Low customers awareness levels for your products due to low promo budgets.
Poor distribution reach and accessibility for your product caused by low sales budget.
Please pay more attention to the 4Ps of marketing: improve your sales.
Except Andrews, none of the teams have introduced new products in the market. Each
team can launch up to three new products. More products help you capture more market share.
Profits: Andrews and Chesterhad bottom lines in red. The reasons for your lower profits
are easy to see now. Lets us not repeat mistakes:
Low Contribution Margin
High unnecessary depreciation of plant and machinery due to low plant usage. Why
keep a plant that only gathers dust.
High Unsold Inventory and the attendant carrying cost.
High interest expense for highly leverage companies for Andrews. However, they couldbe gearing for higher growth here.
Profits are important: Thats our raison dtre for running the company.
Contribution Margin: Andrews, Chester, Digby, Erie and Ferris have low contribution
margins.Please maintain your margins above 30%. Please automate your plants to bring down
your labor bill. Please price better.
Once again to jog your memory:
Contribution margin is defined as:
Sales - (Direct Labor + Direct Materials + Inventory Carry)
Sales
It is reported on Page 1 of the Capstone Courier as an aggregate average of each team's
product portfolio. A good benchmark for contribution margin is 30%. A product-by-product
5/26/2018 siib_c1
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margin computation is available on the Income Statement portion of your company's annual
reports.
Margins are driven by both price and cost. Check to see which of these problems you have:
Are your prices too low?"Variable Margin" is the margin that you make on each unit. It
is defined as:
o Price - (Direct Labor + Direct Materials)
Price
o
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 Capstone software.
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 5-9 of
the Courier. Are they higher than they need to be? Example: If the MTBF range is
12,000-17,000, and it is the 4th buying criteria (as it is in the Low End segment), there is
little benefit in having MTBF set higher than the minimum. The Low End customer is
saying to you that given a choice between reliability and price, they prefer price.
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.
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 amore favorable labor contract. A good benchmark for labor content in Capstone is 30%.
Are you dropping price to increase market share? If so, recognize that Capstone
customers have no loyalty based upon past purchases, and they endure no switching
costs. Customer behavior is driven by product attributes, awareness, and accessibility.
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 theyare 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.
Emergency Loans: Andrews, Chester, Digby and Ferris have emergency loans. As
experienced managers now, you should avoid emergency loans at all cost. Your company
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will get pummel on the bourses if you cannot manage your cash. The reasons for your
emergency loans are
Andrews- For plant improvements of $32.2M, you did not raise a penny. You also have
high unsold inventory worth $54.7M. Raise funds from long term and current debt to
repay this emergency loan. ChesterYou have high unsold inventory worth $28M. Raise funds from long term and
current debt to repay this emergency loan.
Digby You have high unsold inventory worth $30.7M. Roll over your current debt in the
next round.
Ferris For plant improvements of $11.6M, did not raise a penny. You also have high
unsold inventory worth $31M. Raise funds from long term and current debt to repay this
emergency loan.
Please remember: emergency loan is current debt: you have to repay it in the next year.
Please err on the side of caution when it comes to managing cash. Get rid of your
emergency loan ASAP.
This is the growth phase for your company. A small loss could be understood as youve had to
make tough decisions considering a long term perspective. But, an emergency loan is never
acceptable.Cash flow mgmt is foundational.
Plant Size and Utilization: Baldwin and Chesterhave not even used the first shift capacity of
the plant (the plant has 2 shifts). This has lead to an unnecessary depreciation burden.
Asset Turnover: Andrews and Chester have an asset turnover of below one. Please work
your assets harder. Your assets have to justify their place on their balance sheet. Make them
generate more sales per unit of asset.
Forecasting and Inventory: Andrews, Chester, Digby and Ferrishave high levels of unsold
inventory. Please restrict your production in the next round so that you may reduce this
inventory level. Inventory levels create an excess burden in terms of carrying costs on profits
and block cash. Remember, producing more does not mean selling more. On the other hand,
stocking out means huge opportunity cost. Ideally, inventory levels should be one unit for every
product. But this is quite difficult (impossible) to achieve. Forecast better and try to reduce
inventory to the minimum possible level without stocking out.
Inventory Reserves
Inventory expansions are the number one cause of emergency loans. This can be furtherbroken down into two root causes forecasting, and inadequate inventory reserves.
By inventory reserves we mean, How much inventory are we willing to accumulate during the
year in our worst case? We express this as days of inventory.
Suppose the gross margin is 30%. If so, then the cost of inventory consumes 70% of every
sales dollar. If sales are $100 million, over the course of a year the company spends $70 million
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on inventory. In one day it spends $191 thousand. In 30 days it spends $5.7 million. In 90 days
$17.3 million.
We are interested in how many days of inventory the company planned to be able to absorb,
because if inventory expanded beyond this, it would see Big Al for an emergency loan.
To find inventory reserves we determine cash and inventory positions on January 2nd, after all
the dust has settled from borrowing, stock issues, bond issues, debt retirement, etc.
Inventory reserves in days = ((Starting Cash + Starting Inventory)/COG) * 365. For example, if
starting cash and inventory totalled 30 million on January 2nd, and annual cost of goods is
expected to be $120 million, then days of inventory was $30/$120 * 365 or 91 days.
If the company sells its entire inventory, it converts it all to cash. The more inventory
accumulated, the more that cash is crystallized as inventory. Eventually the company runs out
of cash and turns to Big Al to pay for the inventory that has accumulated in the warehouse.
Companies can develop an inventory reserves policy by considering their worst case forecastfor sales. If the inventory policy is 90 days, they can plan the production schedule so that they
will have (1 + 90/365) = 125% of their worst case forecast, including any starting inventory.
Companies cannot predict what competitors will do in detail. Therefore, companies plan for the
worst and hope for the best.
Trouble is highly likely to occur when inventory reserves are less than 30 days. The company
may get away with it, but that requires both precise forecasting and predictable competitors or,
more likely, lots of luck.
Trouble appears in a different form when inventory reserves exceed five months. Now the
company has idle assets, which should either have been put to work or given back to the
stockholders.
Segment Wise Product Analysis:
Traditional Segment: Ferris leads the industry.
Low End Segment: Digby leads the industry. Ebb and Feat do not have the ideal age
for this segment.
High End Segment: Baldwin leads the industry. Echo and Cid need improvement in
their specs. Bid, Adam and Dixie are overpriced (outside the price range).
Performance Segment: Baldwin leads the industry. Foam needs improvement in its
spec. Dot is overpriced (outside the price range).
Size Segment: Baldwin leads the industry. Agape and Cure need improvement in their
specs. Agape and Dune are overpriced (outside the price range).
Financial Management: Baldwin, Digby and Erieare low on leverage. ROA time leverage is
ROE. Remember?
Plant Purchases Funded
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Failure to fully fund plant purchase is another cause of emergency loans. The error occurs
because companies often count on profits or perhaps inventory reductions that do not
materialize.
Funding sources include:
1. Depreciation
2. Stock issue
3. Bond issues
4. Excess current assets
Depreciation often confuses participants as a source of funding. While we do pay cash for
expenses like promotion or inventory, we never actually pay cash for depreciation. And yet
governments allow businesses to deduct depreciation as an expense, thereby reducing profits
and taxes. Why?
Governments want businesses to continue to pay taxes, and they agree that equipment wears
out and must be replaced. The purpose of depreciation is to set aside a guaranteed cash
flow that can be usedfor the purchase of new plant and equipment. Teams can successfully
argue that cash from depreciation is a valid source of funding.
Stock and bond issues raise long term funds for any investment in the company.
Excess current assets can be defined as anything greater than the current assets required to
operate in our worst case scenario. For our purposes, we assume that teams need a minimum
of 90 days of inventory, 30 days of accounts receivable, and $1 of cash. Of course, teams might
want to have deeper reserves, but in applying the rubric to Plant Purchases, we allowcompanies to apply anything above this minimum to plant purchases. We use the January 1st
balance sheet (same as the December 31st balance sheet from last years reports) to discover
starting current assets.
If the sum of the companys funding sources is greater than its plant purchases, the company
fully funded the purchase. If the shortfall is less than $4 million, it is plausible that its intention
was to reduce the current asset base by $4 million. If the funding shortfall is $8 million, it is
conceivable albeit unlikely that the shortfall was planned. Anything more than $8 million is
cutting deeply into current assets, and will likely result in an emergency loan.
C58759
General:. Observe how the business and financial results of the teams have changed in
the very first year of business. All teams started on a perfectly level playfield. Run your
businesses deliberately; losing customers and profits weakens you and strengthens
your competitors. The gap widens faster than one anticipates. Remember the objective:
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profit maximization; therefore its not only growth but profitable growth that is of
significance. Think long term. Please make those growth investments now. But in the
bargain, do not bleed so unsustainably that you become bankrupt in the short and mid-
term..
Chester and Digby made losses this year. Low sales for Chester. The reasons for yourlow sales are given below in the sales paragraph. The top-line for Baldwin has shown
good growth in the last financial year. Contribution margins are low for Baldwin, Chester
and Erie. You will find it hard to make a profit with contribution margins below 30%.
Emergency loans were seen for Baldwin. You are experienced managers now. Please
stay away from these cash flow crises. Please read the paragraph on emergency loans
below.
Stock Price and Market Cap: All the teams had a fall in stock price. Andrews is the most
valuable company with a market capitalization of $66M.
The impact of Dividends:
Remember, dividends are averaged over the past two rounds. Second, stockholders will ignoredividend amounts above either:
This year's EPS, or Or if EPS is falling, the average EPS over the past two years
One other factor drives stock price Book Value. If you pay out more than the EPS, it followsthat book value must fall and with it the stock price.
Sales: Andrews, Baldwin, Chester and Erie had a rise in market share of 2.1%, 3%, 0.1%
and 1.9% respectively. Digby and Ferris had a fall in market share of 3.4% and 3.6%respectively
Each 1% market share in this round was worth almost $10M. Large losses in market share
often mean some high profile firings: think of the consequences in the real world. Your sales
should have been in the region of $115 M if you were retaining market share.
Low sales forFerris. This was caused by:
Poor product specifications (performance and size); look at the ideal spot on the
perceptual map. Look at your product specifications. If you do not offer the customers
the specifications they desire, sales will suffer.
Low customers awareness levels for your products due to low promo budgets.
Poor distribution reach and accessibility for your product caused by low sales budget.
Please pay more attention to the 4Ps of marketing: improve your sales.
None of the teams have introduced new products in the market. Each team can launch up to
three new products. More products help you capture more market share.
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Profits: Chester and Digbyhad bottom lines in red. The reasons for your lower profits are
easy to see now. Lets us not repeat mistakes:
Low Contribution Margin for Chester
High unnecessary depreciation of plant and machinery due to low plant usage. Why
keep a plant that only gathers dust. High Unsold Inventory and the attendant carrying cost for Chester.
High interest expense for highly leverage companies. However, they could be gearing
for higher growth here.
Profits are important: Thats our raison dtre for running the company.
Contribution Margin: Baldwin, Chester and Erie have low contribution margins. Please
maintain your margins above 30%. Please automate your plants to bring down your labor bill.
Please price better.
Once again to jog your memory:
Contribution margin is defined as:
Sales - (Direct Labor + Direct Materials + Inventory Carry)
Sales
It is reported on Page 1 of the Capstone Courier 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.Margins are driven by both price and cost. Check to see which of these problems you have:
Are your prices too low?"Variable Margin" is the margin that you make on each unit. It
is defined as:
o Price - (Direct Labor + Direct Materials)
Price
o
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 findContribution Margins on the Production Sheet in your Capstone software.
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 5-9 of
the Courier. Are they higher than they need to be? Example: If the MTBF range is
12,000-17,000, and it is the 4th buying criteria (as it is in the Low End segment), there is
little benefit in having MTBF set higher than the minimum. The Low End customer is
saying to you that given a choice between reliability and price, they prefer price.
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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.
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 lesserdegree, 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 Capstone is 30%.
Are you dropping price to increase market share? If so, recognize that Capstone
customers have no loyalty based upon past purchases, and they endure no switching
costs. Customer behavior is driven by product attributes, awareness, and accessibility.
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.
Emergency Loans: Baldwin has emergency loan. As experienced managers now, you
should avoid emergency loans at all cost.Your company will get pummel on the bourses if
you cannot manage your cash. The reasons for your emergency loans are
Baldwin- For plant improvements of $17.7M, you raised $1M from sale of stock. Raise
funds from long term and current debt to repay this emergency loan.
Please remember: emergency loan is current debt: you have to repay it in the next year.
Please err on the side of caution when it comes to managing cash. Get rid of your
emergency loan ASAP.
This is the growth phase for your company. A small loss could be understood as youve had to
make tough decisions considering a long term perspective. But, an emergency loan is never
acceptable.Cash flow mgmt is foundational.
Plant Size and Utilization: Andrews, Digby, Erie and Ferrishave not even used the first shift
capacity of the plant (the plant has 2 shifts). This has lead to an unnecessary depreciation
burden.
Asset Turnover: Digby has asset turnover of below one. Please work your assets harder.
Your assets have to justify their place on their balance sheet. Make them generate more sales
per unit of asset.
Forecasting and Inventory: Chesterhas high levels of unsold inventory. Please restrict your
production in the next round so that you may reduce this inventory level. Inventory levels create
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an excess burden in terms of carrying costs on profits and block cash. Remember, producing
more does not mean selling more. On the other hand, stocking out means huge opportunity
cost. Ideally, inventory levels should be one unit for every product. But this is quite difficult
(impossible) to achieve. Forecast better and try to reduce inventory to the minimum possible
level without stocking out.
Inventory Reserves
Inventory expansions are the number one cause of emergency loans. This can be further
broken down into two root causes forecasting, and inadequate inventory reserves.
By inventory reserves we mean, How much inventory are we willing to accumulate during the
year in our worst case? We express this as days of inventory.
Suppose the gross margin is 30%. If so, then the cost of inventory consumes 70% of every
sales dollar. If sales are $100 million, over the course of a year the company spends $70 million
on inventory. In one day it spends $191 thousand. In 30 days it spends $5.7 million. In 90 days
$17.3 million.
We are interested in how many days of inventory the company planned to be able to absorb,
because if inventory expanded beyond this, it would see Big Al for an emergency loan.
To find inventory reserves we determine cash and inventory positions on January 2nd, after all
the dust has settled from borrowing, stock issues, bond issues, debt retirement, etc.
Inventory reserves in days = ((Starting Cash + Starting Inventory)/COG) * 365. For example, if
starting cash and inventory totalled 30 million on January 2nd, and annual cost of goods is
expected to be $120 million, then days of inventory was $30/$120 * 365 or 91 days.
If the company sells its entire inventory, it converts it all to cash. The more inventory
accumulated, the more that cash is crystallized as inventory. Eventually the company runs out
of cash and turns to Big Al to pay for the inventory that has accumulated in the warehouse.
Companies can develop an inventory reserves policy by considering their worst case forecast
for sales. If the inventory policy is 90 days, they can plan the production schedule so that they
will have (1 + 90/365) = 125% of their worst case forecast, including any starting inventory.
Companies cannot predict what competitors will do in detail. Therefore, companies plan for the
worst and hope for the best.
Trouble is highly likely to occur when inventory reserves are less than 30 days. The companymay get away with it, but that requires both precise forecasting and predictable competitors or,
more likely, lots of luck.
Trouble appears in a different form when inventory reserves exceed five months. Now the
company has idle assets, which should either have been put to work or given back to the
stockholders.