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Homework answers / question archive / Team H Create a 4 - 6 pages report that summarizes and discusses your performance in the six rounds of play in the ERPSim Extended Manufacturing Game on April 29 and May 4
Team H
Create a 4 - 6 pages report that summarizes and discusses your performance in the six rounds of play in the ERPSim Extended Manufacturing Game on April 29 and May 4. The report should be structured to include an introduction, a body, and a conclusion. Like an executive summary, the report should act as a concise version of a larger report.
The Management Team Roles & Responsibilities Pricing Manager Pricing Manager The Pricing Manager is responsible for maintaining the prices of finished goods for sale in each distribution center. Pricing Decisions • At the start of the game, all products are priced at cost + $3. • Prices can be adjusted, and must be maintained, at the DC level. • Understand the factors affecting the buying decisions of each type of store. Contribution Margin Pricing Sales & Market Analysts Sales & Market Analysts The Sales and Market Analysts are responsible for analyzing data from the game in order to help their team make data-driven decisions regarding production and pricing. Sales & Market Analysts • The Sales Manager focuses on sales generated by their team. • The Market Analyst focuses on sales generated by all teams (the market). • Both managers analyze data using SAP Cloud Analytics and reports generated by the system. Summary Sales Report Detailed Sales Report Market Report Inventory Report Production Manager Production Manager The Production Manager is responsible for running the commands that create forecasts, order raw materials, and complete the manufacturing process to create finished goods. Production Manager Production Managers rely on analysis from their market and sales analysts to decide which products to manufacture, and how long each production runs should be. Production Cycle 1. Create a forecast 2. Run MRP 3. Create purchase orders • Track purchase orders 4. Convert planned orders • Check Production Schedule Report Create Forecast The first step in the production cycle is to create a forecast. Creating Forecasts • Make sure you understand production lot sizing. • Forecasted amounts ALWAYS go in the second column. • If you think there’s no sales data available when you make your initial forecast, you’re right. MRP Step 2 is to run Material Requirements Planning (MRP). MRP Calculation This is the same MRP you learned about in BA 360. Running MRP • MRP is a calculation. It takes what you forecasted, subtracts what you already have in stock, and creates a PO based on the difference. • Every time you run MRP, you erase the one you previously ran. • Click “Execute” and then hit Enter (3X). Create Purchase Order Step 3 is to create purchase orders. Muesli Cereal When you create purchase orders, the system automatically orders all the necessary raw materials from the vendors. Purchase Orders • Remember, the quantities that get ordered are based on the MRP calculation, not your forecast. • If you get an error message saying, “No suitable requisition found”, that generally means you already have the quantity you forecasted in stock. Track Purchase Orders Not a required step, but highly recommended. Tracking Purchase Orders • • • The raw materials from your first PO will arrive the very next day, but after that, they can take anywhere from 1-5 days. The ingredients needed to make your cereal, and the boxes/bags used to package it, are ordered from two different vendors. They don’t always arrive the same day. The status of ALL raw materials from BOTH vendors must say “Delivered” before you can convert planned orders. Convert Planned Orders The fourth and final step is to convert planned orders. Converting Planned Orders • This command matches the invoices from the vendors, with the purchase orders created in the previous step. • Clicking “Select all” will convert orders numerically based on their PO number. • To avoid additional setup charges, convert like products separately. Production Schedule Report The PSR can be used to track the start/finish dates for the planned orders you just converted. Production Calendar To avoid production delays, have a system for mapping out future orders, including when to order raw materials. Scenario #1 You order raw materials for 24,000 of each flavor (either size) on Day 1. Your first production run will run Days 4?11. In order to have raw materials on Day 12 for your second production run, you need to place your second order by Day 7. Remember, all orders after the first one will take 1?5 days (it's randomized). This gives you three days, which is equivalent to 3 minutes, to evaluate sales for the three products you produced (Nut, Blueberry, Strawberry) and the six products you did not produce (the other size). Scenario #1 Place Order ↓ Day 1 RM Arrive ↓ Day 2 Prod. Starts ↓ Day 3 Day 11 Set?up Day Day 12 Day 13 Day 4 Nut 24,000 Day 14 Day 5 Blue 24,000 Day 15 Day 6 Straw 24,000 Day 16 Day 7 Set?up Day Day 17 Day 8 Raisin 24,000 Day 18 Day 9 Orig. 24,000 Day 19 Day 10 Mixed 24,000 Day 20 Scenario #2 You order raw materials for 48,000 of each flavor (either size) on Day 1. Your first production run will run Days 4?17. In order to have raw materials on Day 18 for your second production run, you need to place your second order by Day 13. This gives you nine days, which is equivalent to 9 minutes, to evaluate sales for the four products you produced (Nut, Blueberry, Strawberry, Raisin) and the six products you did not produce (the other size). Scenario #2 Place Order ↓ Day 1 RM Arrive ↓ Day 2 Prod. Starts ↓ Day 3 Day 11 Raisin 24,000 Day 12 Raisin 24,000 Day 13 Orig. 24,000 Day 4 Nut 24,000 Day 14 Orig. 24,000 Day 5 Nut 24,000 Day 15 Mixed 24,000 Day 6 Blue 24,000 Day 16 Mixed 24,000 Day 7 Blue 24,000 Day 17 Set?up Day Day 8 Straw 24,000 Day 18 Day 9 Straw 24,000 Day 19 Day 10 Set?up Day Day 20 2018-2019 EDITION Manufacturing Game Powered by ERPsim Compatible with SAP™ ERP & SAP S/4HANA 1709 Pierre-Majorique LÉGER Jacques ROBERT Gilbert BABIN Derick LYLE Robert PELLERIN Bret WAGNER http://erpsim.hec.ca © Léger et al. 2004-2018. ERPsim Lab, HEC Montréal © Léger et al. (2018) ERPsim Lab, HEC Montréal. All rights reserved, including the right to reproduce this book or portions thereof in any form. Copying or distributing in print or electronic forms without written permission of HEC Montréal is prohibited. For information contact ERPsim Lab, HEC Montréal, 3000 Chemin de la Côte Sainte-Catherine, Montréal (Québec), Canada, H3T 2A7. Please visit http://erpsim.hec.ca for more details. For academic use only. For information about commercial use, please visit http://batonsimulations.com/ This book contains references to the products of SAP SE, Dietmar-Hopp-Allee 16, 69190 Walldorf, Germany. The names of these products are registered and/or unregistered trademarks of SAP SE. SAP SE is neither the author nor the publisher of this book and is not responsible for its content. Proudly made in Québec, Canada ISBN : 978-0-9866653-2-5 Table of Content Introduction7 Welcome to Your New Job 10 Enterprise Overview 11 Muesli Cereals: Products and Composition 11 Customer Markets 13 Business Process 17 Physical Layout and Logistics 19 Suppliers12 Product Recipes 13 Marketing14 Product Price 15 Product Availability 15 Retail Store Types 15 Production Lines Warehousing and storage costs Finance and Accounting 20 21 21 Banks21 Company Performance: Profit and Value 22 Accounting Policies 22 Management Responsibilities 24 Product Mix 24 Forecasting and Procurement 24 Productivity Decisions 25 Pricing25 Marketing26 The Simulation and Associated Rules 26 Elements of a Winning Strategy 29 Manufacturing Scenarios 32 Company Performance: Profit and Value 33 Company Valuation 35 Manufacturing Introduction 36 Round 1 – Sales and Marketing 38 Round 2 - Production 42 Round 3 – Planning and Procurement 46 Conclusion 50 Instructional Aids Credit Ratings Extended and Advanced Scenarios Game specifics 32 33 35 37 Reports40 Pricing41 Marketing42 Planning Ahead 42 Production Capacity and Setup Time 44 Reports45 Material Requirements Planning 46 Sales Forecasting 46 Warehouse Capacity and Storage Costs 47 Running Material Requirements Planning 48 Reports50 Review and Planning Ahead 50 Manufacturing Extended Game Specifics Customer Markets Product Design and Product Mix Finance and Investment Production Lot Sizing Fixed Costs Market Forces Conclusion Manufacturing Advanced Game Specifics Customer Markets Warehouse Capacity and Storage Costs Transportation Planning and Shipping Costs Conclusion 51 52 52 53 55 59 59 60 60 61 61 62 62 62 64 Getting Around in the SAP System 67 Toolbars and Options 68 Selection Screens 69 User Menus Transactions Used During the Simulation Sales and Marketing Change Price List Marketing Expense Planning Inventory Report Summary Sales Order Report Detailed Sales Order Report Price Market Report 67 70 71 71 72 73 75 76 77 Logistics 78 Production 79 Planning and Procurement 81 Stock Transfer Planning Convert Planned Orders Production Schedule Validated Bill of Material Change Create Planned Independent Requirements MRP Run Create Purchase Orders Purchase Order Tracking Procurement Sourcing Accounting General Ledger Account Posting (Investments, Consulting Expenses and Loans) Financial Statements Product Cost Planning Liquidity Planning 78 79 80 81 82 83 84 85 86 87 87 88 89 91 Appendix A 92 Afterword by Pierre-Majorique Léger 93 List of General ledger accounts 92 CHAPTER 1 Introduction Teaching the concepts underlying an Enterprise Resource Planning (ERP) system is a difficult task. Many students have very little IT experience to which they can relate these concepts. They may have acquired business experience in one or two functional areas, but many of them have only a limited understanding of the operational aspects supporting the value creation process in modern firms. Moreover, they usually have had no firsthand experience with the functional non-integrated software that the ERP system was designed to replace. For these students, the horizontal integration of the firm, one of the greatest benefits of implementing an ERP system, can be very abstract due to their lack of hands-on experience with legacy systems. Yet business students are very computer-literate these days. Born after the first personal computers came onto the market, many of them have never experienced life without a keyboard or a mouse. Therefore, if they get hands-on experience with an ERP system, undergraduate and graduate students can learn the system and its core concepts very quickly. The ERP Simulation game is an innovative “learning-by-doing” approach to teaching ERP concepts. During this game, students have to run a business with a real-life ERP (SAP®). Groups of five to six students each operate a firm in a make-to-stock manufacturing supply chain context, and must interact with suppliers and customers by sending and receiving orders, delivering their products, and completing the whole end-to-end business cycle. A simulation software program automates the sales process such that each firm receives a large number of orders every round of the simulation. Several administrative functions in SAP® are automated too, so that students can focus on making business decisions, rather than mastery of the many transactions of a complex ERP system. Using a mix of the ERP system’s standard transactions and customized reports, students must analyze information and make business decisions to ensure the profitability of their operations. The learning objectives of this game are fivefold: (i) to develop a hands-on understanding of the concepts underlying enterprise systems, (ii) to experience the benefits of enterprise integration firsthand, (iii) to develop technical skills using ERP software, (iv) to learn how to work in a team, and (v) to learn how to develop, execute and refine strategy in a real-time business environment. © Léger et al. (2018) ERPsim Lab, HEC Montréal. PARTICIPANT’S GUIDE: MANUFACTURING GAME 7 The manufacturing context of the game is designed in many separate parts, scaling in complexity so that separate learning goals can be emphasized and achieved and then all brought together. The 3 scenarios – Introduction, Extended and Advanced scale in level of business difficulty – factors that must be managed in order for firms to be profitable. The simulation software also divides time into a series of rounds, with opportunity for reflection and debrief after each. The Introduction scenario in particular, exploits the round-by-round nature of the simulation to ease the students into the different aspects of the business process and associated transactions they must learn in order to operate their companies. In Round 1, teams only have to focus on selling their stock of finished product. In Round 2, we add production – teams transform their available stock of raw materials into finished product and keep on selling. Finally, in Round 3, procurement and planning are added, with teams adjusting their sales forecasts, and buying raw materials to keep on producing and selling. By the end of Round 3, teams will have learned the basic operational transactions of the entire manufacturing game. The Extended scenario adds product design, finance and investment strategy to the scope of the Introduction scenario. The difficulty is also increased with the introduction of multiple customer markets exhibiting variations in behaviour, as well as fluctuating raw material prices. The emphasis here is on developing and executing business strategy – the operational process and transactional complexity in the ERP system are relatively unchanged. The Advanced scenario adds transportation logistics to the scope. Teams need to produce the correct quantities of the desired products and price them correctly, as before, but must now also manage stock levels in regional distribution centers to have the correct quantities of product close to the customers that desire them. Part I of this book introduces the business context and process of the manufacturing scenarios. It does not discuss these with direct reference to the SAP system, or even specific parameter values of the 3 simulation scenarios. It is meant to be a conceptual overview. In Part II we discuss the specifics of each of the 3 manufacturing scenarios. In Part III we cover using the SAP software – how it is used to support the business decisions and operations of our fictitious manufacturing firm. These include all the transactions covering the full business process, whether they are automated in the simulation or performed by students. The section highlights how all the different elements of the business process are integrated together into the system. The final chapter reviews the decisions required in order to run the company, in context with the ERP system. © Léger et al. (2018) ERPsim Lab, HEC Montréal. PARTICIPANT’S GUIDE: MANUFACTURING GAME 8 PART 1 Welcome to Your New Job! http://erpsim.hec.ca © Léger et al. (2018) ERPsim Lab, HEC Montréal. Welcome to Your New Job As a participant in the HEC Montréal ERP Simulation game, you’ve just accepted a new job in the industry of pre-packaged breakfast cereals at Muesli AG. Muesli is a popular breakfast dish. Dry muesli is primarily a mixture of rolled oats and wheat flakes, with nuts and pieces of dried fruit. According to Wikipedia, “Muesli was invented in 1900 by Swiss doctor Maximilian Bircher-Benner for patients in his hospital”. Muesli was first popularized in Germany and Switzerland. In the late 1980s, the company Kellogg® introduced muesli to North America when it launched its brand Mueslix®. Today, dry muesli is widely available in the form of pre-packaged mixes. It can be stored for many months and served mixed with yogurt or milk, and pieces of fresh fruit. Some like it with hot milk. Muesli provides an excellent source of essential nutrients as it is rich in fiber and essential trace elements. Your new company produces a range of these pre-packaged muesli cereals at a factory in Germany, and makes them for sale to the local German market. On average you operate your firm for twenty working days out of each month, not working weekends nor holidays. For reporting purposes, you also group each consecutive 5 days into a working “week”. © Léger et al. (2018) ERPsim Lab, HEC Montréal. PARTICIPANT’S GUIDE: MANUFACTURING GAME 10 CHAPTER 2 Enterprise Overview MUESLI CEREALS: PRODUCTS AND COMPOSITION To produce a box of muesli cereal, you can use up to six different ingredients: wheat, oats, nuts, raisins, strawberries, and blueberries. It is customary in the muesli industry © Copyright 2004-2018, Léger et al., HEC Montréal. All rights reserved. to classify muesli cereal into six different categories depending on the composition of Product Design Last Update: August 24th 2018 the product: original, raisin, nut, blueberry, strawberry, and mixed fruit muesli. Blueberry Nut $$-F01 $$-F11 500g 1kg $$-F02 $$-F12 Strawberry 500g 1kg $$-F03 $$-F13 Raisin 500g 1kg $$-F04 $$-F14 Original 500g 1kg Mixed $$-F05 $$-F15 500g 1kg Figure 2.1: Muesli Manufacturers Association Product Categories 20% wheat* 20% wheat* 20% wheat* 20% wheat* 20% wheat* 30% oat* 20% nut* 1 box / 1 bag* 30% oat* 20% blueberry* 1 box / 1 bag* 30% oat* 20% strawberry* 1 box / 1 bag* 30% oat* 20% raisins* 1 box / 1 bag* 30% oat* 1 box / 1 bag* $$-F06 $$-F16 500g 1kg 20% wheat* 30% oat* 30% fruits & nuts** 1 box / 1 bag* The industry is self-regulated by the Muesli Manufacturers Association (MMA) which *minimum *minimum *minimum *minimum *minimum **At least some of all fruits/nut has developed a set of product categories with recipe regulations (Table 2.1). Since consumers areS looking for products specific ingredients, thePRODUCTION regulations require CUSTOMER STOR AGE with CAPACIT Y AND COSTS CAPACIT Y Cost percontent. that products are labelled appropriately based on their For(units/day) example, a product DC 10: Hypermarkets Capacity 24,000 Product type Current space additional Time : 20 50,000 units* referredPayment to as “Blueberry Muesli” may only contain blueberries, wheat and oats and no Additional Capacity Approximate Market Size 1 000 000** (€ per 1,000 units) Finished product 250,000 boxes €500/day €90 000 per team per week DC10 other ingredients. Products labeled as “Original Muesli” must contain only oats and Raw materials 250,000 kg €1 000/day 12: Grocery Chains wheat. DC Any product containing a mix of all the ingredients must be labeled “Mixed Payment Time : 10-20 Packaging SETUP TIME 750,000 units €100/day (bags and boxes) Approximate Market Size Fruit Muesli” regardless of the proportion of ingredients contained therein. Within Setup time (hours) Investment (€) €220 000 per team per week DC12 each of the labeling categories, there are rules as to the minimum and maximum 8 DC 14: Independant Grocers (€ FIXED COSTS paid each 5 days)* quantities ofTimeeach ingredient that is allowed. “Blueberry Muesli” 7for example, must Payment : 1-20 50 000 Direct labor 20 000 Market Size containApproximate at minimum, 20% blueberries by weight.15As a member of the MMA, your125firm €130 000 per team per week 6 000 DC14 Factory overhead 000 must follow the MMA labeling regulations. 5 250 000 S, G & A 40 000 *minimum **Investing in additional capacity will increase equipment depreciation costs *Billed automatically SUPPLIER S 1 250 1-5 The MMA has also standardized product sizing, and regulates that products must be 3 1 250 000 Depreciation (Equipment) 50 000** Payment time (days) 20 sold by weight, not volume, and that only two size variants may be produced and sold: 500 g (small) and 1 kg (large). The two sizes and six flavour categories make for a total of twelve products that can be sold in the market. All muesli cereals must be sold in standardized packaging comprising two components: an inner, sealed plastic bag and an outside cardboard box. Given the two standard sizes, packing components also come in two sizes. Lead time (days) Depreciation (Building) 4 500 000 *Billed automatically © Léger et al. (2018) ERPsim Lab, HEC Montréal. PARTICIPANT’S GUIDE: MANUFACTURING GAME 11 Table 2.1: Muesli Manufacturing Association Label Regulation REQUIRED INGREDIENTS QUANTITIES LABEL WHEAT OATS NUTS BLUEBERRIES STRAWBERRIES RAISINS Nuts Min. 20% Min. 30% Min. 20% N/A N/A N/A Blueberry Min. 20% Min. 30% N/A Min. 20% N/A N/A Strawberry Min. 20% Min. 30% N/A N/A Min. 20% N/A Raisin Min. 20% Min. 30% N/A N/A N/A Min. 20% Original Min. 20% Min. 30% N/A N/A N/A N/A Mixed Min. 20% Min. 30% Minimum 30% (at least some of all fruit/nut) Suppliers All the ingredients going into the production of muesli cereals are produced within highly competitive markets. Wheat, oats, raisins, strawberries, blueberries, and nuts are all commodities whose prices are determined by the Global Commodities Market. Blueberries and strawberries are typically the most expensive ingredients, raisins and nuts less so, while wheat and oats are fairly cheap. Prices of these commodities vary with market conditions, the quality of the harvests and the seasons. Prices for strawberries and blueberries are particularly seasonal. The prices during the off season periods may be much higher than what they are shortly after the harvest season. Specialized preparation and distribution of these commodities for the muesli industry in Germany is provided by a single firm: Food Brokers Inc. With only a single supplier of these materials, your firm has little influence on commodity prices. You must simply accept the prices quoted by Food Brokers at any moment. Similarly, there is only one supplier of the standard size packaging materials to the industry: Continental Printing Co. Prices for cardboard, plastic and printing services are very stable, typically adjusted only once or twice a year. Even though there are only two suppliers, they are very reliable. Each guarantees delivery of ordered products within 5 days, sometimes even delivering as early as the following day. Both suppliers offer the same payment terms – 20 days after delivery. © Léger et al. (2018) ERPsim Lab, HEC Montréal. PARTICIPANT’S GUIDE: MANUFACTURING GAME 12 CUSTOMER MARKETS As a manufacturer, you do not sell directly to the end consumer but rather to a variety of retail stores. Competition and margins in the breakfast cereals market is very tight. While the total demand for ready-to-eat cereal is relatively stable throughout the year the net sale of local brands of muesli cereal was not. Traditional ready-to-eat cereal seems to offer genuine competition to the local muesli brands. Recently, a strike in one of the local muesli plants substantially reduced the supply of muesli cereal. As a result many consumers switched to ready-to-eat cereal, and a significant proportion of these customers have not yet returned to muesli cereal. There are four key decision areas that each firm can use to influence the sale of their specific muesli cereals – product recipes, marketing, price and product availability. Product Recipes Each firm can influence the desirability of their products, by adjusting the recipe of each product – the percentage of each ingredient inside each box – in conformance with the MMA regulations. Consumers are willing to pay more for products that contain extra fruits and nuts. However, consumers have recipe preferences affecting the desirability of each product. A consumer might prefer strawberries to blueberries, and would therefore prefer to buy products that contain strawberries. Even though a box of Blueberry Muesli might contain extra fruit, and the consumer feel that a premium price for the product is fair because of that, they still may not prefer it if they simply don’t like blueberries. Be aware that a preference for an ingredient doesn’t imply that more is always better. Some consumers like more fruit and nuts in their muesli than others, so in the end, a “perfect” recipe for one consumer may simply be the one that has “just the right amount” of nuts. Wheat % % % % Nuts Oats Raisins % + % Plastic bag + Blueberries Cardboard box Figure 2.2: Mixed Muesli Cereals Composition © Léger et al. (2018) ERPsim Lab, HEC Montréal. Strawberries PARTICIPANT’S GUIDE: MANUFACTURING GAME 13 Deciding on product recipes is a very strategic decision, and one that should be thought through carefully as part of the strategy of the company as a whole. The MMA has strict guidelines on recipe changes. It is forbidden to sell products from different batches with different recipes at the same time. So while a firm may choose to change the recipe of one of its products, it must be careful not to mix inventory with two different recipes. Muesli AG has adopted a very simple policy to meet this requirement – inventory with the old product recipe must be sold before any production with a new recipe can begin. Marketing Each firm can set a daily marketing budget for each product. In the Muesli industry, marketing is persuasive and largely based on direct financial incentives to end consumers. It seeks to convince consumers that your product is the one they should buy, right at the moment that they are making the purchase. Schleswig Holstein Hamburg Lower Saxony Bremen Mecklenbourg Western North Saxony Anhalt Berlin Brandenbourg For marketing purposes, the German North market is divided into three areas, loosely Rhine-Westphalia defined as the “North” (Saxony, Saxony West Saxony Thuringia Anhalt, Brandenburg, Berlin, Mecklenburg Hesse Western, Schleswig Holstein, Hamburg, Lower Saxony and Bremen), “South” Rhineland Palatinate (Bavaria, Baden Wurttemberg, Hesse, and South Saarland Thuringia) and “West” (North Rhine-Westfalia, Rhineland Palatinate, and Saarland). Using local flyers, newspapers or the stores Baden themselves firms can promote specific Bavaria Wurttemberg products. This is particularly effective in the short term, as consumers do not have significant long term brand preferences or loyalty. Figure 2.3: The 3 marketing areas for the German market You share your marketing budget intent with your customers. Knowing that you are promoting specific products to end consumers will influence their likelihood of buying those products, since they expect consumers to be incentivized to buy them. Since stores know the marketing budgets of all firms, their decision to buy is influenced by the proportion of spending between products. A marketing budget of twice the amount for one product over another has twice the influence on the buy decision for any given store. Be aware that this is also true for two of your own products – marketing for one product in a region may be ineffective if you are spending more on marketing for another product in the same region. © Léger et al. (2018) ERPsim Lab, HEC Montréal. PARTICIPANT’S GUIDE: MANUFACTURING GAME 14 Globally, it is like a zero-sum game. If a firm increases advertising for one of its products, it attracts consumers away from other products in the same area, including your own. You do not need to concern yourself with the details of how the various marketing activities are performed. Your role is to set the budget for each product in each region – your marketing department will take care of the rest. Remember – you sell to retail stores and not directly to consumers. While consumer preferences are important to your customers and will influence their buying decisions, they are not as important as your product price and availability which are the primary factors affecting the buying decisions of retail stores. Product Price The price of your products is very important to your customers. The prices they can charge to end consumers is highly competitive, so your price has a big impact on their sales margins. Product Availability The biggest factor that will affect your sales revenue, is product availability. The last thing any retail store wants to have is empty shelves. Even at high prices, retailers would rather pass along the cost to the end consumer than have empty shelves. None of your customers will ever order product from you that is not immediately available for delivery. Ordering different products or from a different firm, even at higher prices, is always the better option than running the risk of empty shelves. On the one hand, this works to your advantage. Regardless of consumer preferences, your customers will always buy whatever you have available, if they cannot get the desired product elsewhere or for a reasonable price. It is very important to have something for sale at all times, at fair prices. On the other hand, this is a distinct disadvantage. If your competitors are much better than you at keeping a range of products in stock and always available for sale, they will earn a lot more revenue than you. Retail Store Types Stores that carry breakfast cereals in Germany can be roughly classified into three types, largely based on their size. Each type of store has similar buying behaviour. The consumers that shop of each type of store also share some characteristics, at least with regard to the purchase and consumption of muesli. Your firm maintains 3 standard price-lists for all your products, one for each type of store. It will be your responsibility to maintain these 3 price lists. Understanding the importance of various factors affecting the buying decisions of each type of store is essential to pricing effectively. © Léger et al. (2018) ERPsim Lab, HEC Montréal. PARTICIPANT’S GUIDE: MANUFACTURING GAME 15 GROCERY CHAINS Grocery stores are the main distribution channel for the muesli industry. Grocery stores offer their customers more variety than the other types of stores. A typical store would carry several different flavours and sizes of muesli on their shelves. If a grocery store is to carry an individual firm’s brand, they will want to buy more than just one type of muesli. Grocery stores typically buy 4 different products at a time from each individual firm. Which firm they buy from depends on the overall “best deal” of 4 products, considering availability, price, recipe and consumer product preferences. There are currently 59 grocery stores carrying muesli in the local market. Estimated revenues are €220 000 per manufacturing firm per week, approximately 50% of total revenue. Although you offer payment terms of up to 20 days, many groceries stores may pay early, and you can typically expect to see payment for orders within 10 to 20 days of sale. INDEPENDENT GROCERS Independent grocers or convenience stores are small proximity stores. They sell a small variety of products: beverages, beer, dairy products, snacks, newspapers and magazines, and some everyday non-perishable food products including muesli cereals. Convenience stores have limited shelf space, and will only carry a few types of muesli, whether that be different brands or different flavours. They only carry the 500g size boxes. Given the lack of variety, shelf space, and volume in sales they will want to carry the flavours and recipes preferred by their consumers, and typically place orders for a limited quantity of just one product at time. Consumers buying muesli at convenience stores are typically not looking for a good price, and so it is much easier for these retailers to pass on any price changes you make. Prices are on average 15% to 20% higher in convenience stores than in traditional grocery stores. However, these consumers are relatively easy to influence with in store promotions (marketing). There are currently 123 convenience stores carrying muesli in the local market for estimated weekly revenues of around €130 000 per firm, approximately 30% of total revenue. Because their internal process is mainly manual, the time before you receive payment can vary greatly – from cash on delivery (1 day) right up to the full 20 days your payment terms allow. HYPERMARKETS Large discount stores or hypermarkets are a growing phenomenon. They not only sell food, they also sell books, CDs, clothing, and electronic appliances. These stores have managed to attract a large number of consumers looking for cheaper prices. Hypermarkets are a high volume, low margin business and are very sensitive to price changes. If a hypermarket is to carry an individual firm’s brand, they will want to buy more than just one type of muesli, typically buying large quantities of 3 different products at a time from each individual firm. They only carry the 1kg boxes, and the products are sold at prices 5% to 10% lower than in traditional grocery stores. © Léger et al. (2018) ERPsim Lab, HEC Montréal. PARTICIPANT’S GUIDE: MANUFACTURING GAME 16 Currently there are only 12 outlets in the local market, but these account for approximately 20% of total revenues – an estimated €90 000 in revenue per firm per week. Hypermarkets always take full advantage of your payment terms, paying you exactly 20 days after sale. BUSINESS PROCESS Your muesli company, Muesli AG, is a make-to-stock manufacturer. Given that your customers demand immediate delivery, you can only sell products that are held in inventory, and therefore you must anticipate demand and manufacture in advance. This determines some of the business processes that your company performs. You and your team will need to forecast the number of products the firm intends to sell in each planning cycle. Based on this forecast, production is planned. Material requirements are met by purchasing raw materials from the appropriate supplier. Production is done in long batches; several thousand boxes at a time. By the time you have received the raw materials and begun to produce and sell, you will find yourself needing to pay for those materials. It is unlikely that you will have collected enough cash from your sales to customers to cover the payment, so part of your planning needs to consider your cash flow. If you choose to forecast and produce a large number of boxes in long cycles, you will have to ensure you have the necessary cash to fund your operation. There are several other expenses that you will need to pay – salaries and wages, factory overheads such as electricity, and administrative expenses. To be successful you will need to establish a sustainable cycle of procurement, production and sales that generates enough cash to cover your fixed costs. In addition, non-cash costs such as depreciation will also affect your bottom line – generating sufficient, sustainable sales revenues is essential to being profitable. Table 2.2 describes each part of the full business process, organized by functional role. Because this is a small company, your team will have to supervise many of the operations of the company and take an active part in some of the day-to-day processes. This is in addition to the managerial and strategic activities that you will have to undertake – setting the prices and marketing budgets for each product, choosing the recipes for your products, forecasting sales, managing cash flow. Occasionally you will even make investment and financing decisions. This is hard and challenging work but this is why you accepted the job. © Léger et al. (2018) ERPsim Lab, HEC Montréal. PARTICIPANT’S GUIDE: MANUFACTURING GAME 17 Table 2.2:??Activities involved in integrated business processes ACTIVITIES DESCRIPTION Forecasting All firms in the simulation are using a make-to-stock approach. Therefore, the sales manager needs to forecast demand each period. Production Planning Based on the forecasted sales units for the next period, the planner then performs materials requirements planning, generating a production plan and a purchasing plan. Purchase Order From the purchasing plan, the purchasing manager contacts Creation the suppliers of the products required. A formal purchase order is created and sent to the relevant suppliers. Goods Receipt Some time after each purchase order is sent, the materials will arrive at the factory. The receiving clerk checks that the goods delivered correspond to the purchase order and records a goods receipt, letting the warehouse know that the items can be put into storage and the rest of the company know that they are available for use. Invoice Receipt An invoice for the ordered materials is sent to accounting and checked against both the purchase order and the goods receipt by an accounting clerk. The clerk then records the invoice in the accounts payable ledger, so that it can be paid by the due date. Outgoing Payment Since the goods are payable upon an agreed term of payment, the accounting clerk carries out the transaction required to pay the supplier when it is time. A payment for the amount owed is made to the supplier. Production Order Once all raw materials required for production are available, Creation and the production plan can be put into action. The production Release controller reviews the plan, along with other information such as available inventory and decides what quantity of which product will be produced next. They create and release a production order to signal to the factory shop floor what to produce. Production The raw materials required for production are transferred Execution and from the warehouse to the production line, and a goods issue Confirmation is recorded to update inventory figures. Once the physical production run is complete, the production order is confirmed and the finished products are transferred from the production line to the warehouse. Once again to update inventory figures, a goods receipt is recorded. This lets the sales team know that this new inventory is now available for sale. © Léger et al. (2018) ERPsim Lab, HEC Montréal. PARTICIPANT’S GUIDE: MANUFACTURING GAME 18 ACTIVITIES DESCRIPTION Sales Order Creation Each day, several retailers will call your firm to confirm pricing and availability. The firm whose products best meet the needs of each store will secure the sale. If it is your firm, then one of your sales representatives will record a sales order. Picking and Shipping In response to seeing the new sales order, the warehouse will transfer the finished products to the shipping staging area where they will be prepared for transport, loaded and sent to the customer. Another goods issue is recorded to update inventory totals, and the sales order is updated as well. Invoicing After shipment, accounting will prepare and send an invoice to the customer. The clerk then records the invoice in the accounts payable ledger, so that it can be tracked to ensure payment by the due date. Incoming Payment Some time after the invoice is received, the customer will transfer funds to pay for their order. Upon receipt of payment from the customer, the accounting clerk clears the customer account and records the deposit of the payment. Considering all your responsibilities, your team will be kept pretty busy. There are many job functions, with a lot of data and documents that need to be created and tracked. Fortunately, the company has acquired a new ERP system: SAPTM. This system will make it significantly easier to coordinate the activities of your firm, monitor its performance and collect and analyse information to inform your managerial and strategic decisions. PHYSICAL LAYOUT AND LOGISTICS On your first day at your new job, the administrative assistant, Ms. Christie, kindly proposes a tour of the factory. The main entrance leads to the reception area and to the offices of the executive team, which in turn, leads you to a large shop floor. As you enter the shop floor, you begin to get a better understanding of your new business. Mr. Jack, the production manager, comes to greet you and begins to explain how the machines work. You listen carefully. On the shop floor, the production machines are lined up. On the right of the shop floor, a door leads to the raw material warehouse. The raw materials are mixed by a calibrated machine that processes the programmed recipe. Another machine takes plastic bags, fills them with muesli, and seals the boxes. A final machine packs the boxes into cardboard shipping cases. Each case is identified with the product name and stored in the finished product warehouse, which can be accessed at the left of the shop. Adjacent to the shop floor are more offices. These offices belong to the salespeople, who are in charge of receiving and processing the sales orders, billing and payments. © Léger et al. (2018) ERPsim Lab, HEC Montréal. PARTICIPANT’S GUIDE: MANUFACTURING GAME 19 Further in the back, you visit the two warehouses. The one at the right is the raw materials warehouse – a specialized facility for storing foodstuffs such as grains, nuts, and dried fruits. It is important that these materials are kept dry, clean and free of vermin. The delivery trucks stop at the reception dock located at the back of the factory, where they unload the raw materials. On the left side is the finished product warehouse. Cases of finished cereal are stored in this warehouse. A smaller space is also set aside for storing the bags and boxes that the mixed muesli cereal is packaged in. When an order is received from a customer, the salespeople prepare a shipment order and a delivery truck comes to the loading dock to load the cases of finished product. “Clearly,” Mr. Jack says, “you do not want to have a delivery truck come in when there is no product in stock, so as a rule we never take an order if the desired product is out of stock. It happens from time to time. When it does, we lose a sale. Once, an employee had forgotten to enter the latest production run of finished products in the computer system and we lost a lot of sales, even though we had product for sale. We missed out on a lot of money - the boss was not very happy.” Production Lines Muesli AG produces muesli on a single production line, and can only make one product at a time. This line can operate 24 hours a day, and the number of boxes that can be made per hour depends on how many machines and which models are installed. The staff working the assembly line will process production orders in the sequence that they were released by the production controller. Whenever a new production order is started for a different product than the one before, the machines must be reconfigured and an allergen cleanup is required, which takes several hours. “I understand that one of the mandates you have been given is to evaluate our installed machinery and equipment” says Mr. Jack. “We can purchase extra processing units, or upgrade existing ones to increase our throughput. The machines are very expensive though. We can also hire consultants to evaluate our workflow and factory layout. They can make recommendations for our work practices and machine placement that can improve our efficiency, reducing the number of hours it takes to change over production runs. Before that however, you should consider the length of our production runs. If we don’t make too many products, and run the production lines for several days each time we produce a product, then we will only do changeovers once or twice a week. I’ve been trying to get the sales team to understand this, but they fear losing sales if we don’t have the right products available for sale at any given moment.” A critical strategic decision is how long to make production campaigns. A campaign corresponds to a series of consecutive production orders of the same product. Long production campaigns will reduce the average setup time (there is no setup time between production orders of the same product). On the other hand, producing in small campaigns will allow a wider offering to the customer but reduce total output © Léger et al. (2018) ERPsim Lab, HEC Montréal. PARTICIPANT’S GUIDE: MANUFACTURING GAME 20 because of the capacity lost to machine setup. Finding the right balance between small production campaigns that allow you to respond to changing markets and long production campaigns that increase productivity is a key element of the game. Warehousing and storage costs The company has two warehouses. The finished products and packaging warehouse is a fairly spacious facility with enough room to store 250,000 boxes of finished product. A smaller space is set aside for packaging materials and has room for 750,000 boxes and 500,000 bags. The other warehouse is the raw food materials warehouse, and it has enough room for 250,000 kg of raw materials. There are some other warehouses in the area that can also be used to store any excess inventory. Renting short term space is not cheap, but at least it’s better than having to throw excess items away because they cannot be safely protected from weather, thieves and vermin. HERE IS A TIP: Storage costs can be onerous and quickly drain cash reserves. While it is generally better to keep the production lines going, accumulating a lot of inventory is a sign that your sales strategy needs adjustment. Make sure that you win enough sales to keep these costs under control. It may be tempting to order a lot of raw materials when prices are low, to improve your profit margins. If you buy too much however, you may lose a lot of the margin gained to storage costs while you wait for the production line to transform those materials into finished product. FINANCE AND ACCOUNTING It may not come as a surprise to you, but your company needs money to make money. You have to purchase and hold inventory of raw materials and produce finished goods ahead of demand. To pay for the raw materials and production you will need cash. Muesli AG was started by a small group of investors who collectively pooled €20m. The land and the factory was purchased for €2m, and €16m was used to buy and install the current factory machinery and equipment. Banks The company has a good relationship with the Weizen Bank. The Bank extends a sufficiently large credit line, should you need it to temporarily fund operations or make additional investments in the firm’s capital infrastructure. Your banker, a smart but rigid fellow named Mathias, does not like amateurs and risktakers. Your banker will continue to extend you favorable credit only if your company makes interest payments on time. He does not like companies that take too many risks and have excessive unsold merchandise. He dislikes managers that fail to pay bills on time – to their bank or suppliers. But most of all, he dislikes managers that © Léger et al. (2018) ERPsim Lab, HEC Montréal. PARTICIPANT’S GUIDE: MANUFACTURING GAME 21 do not respect the law or fail to respect elementary ethical rules. He will not hesitate to reduce credit ratings, refuse to increase credit lines or simply recall any debt. As your boss often says: “I have worked hard to build my company’s reputation, do not damage it by bad management.” Your credit line bears a flexible interest rate. The Weizen Bank has a strict system for assessing the risk of all firms in the industry. The process is fairly simple. Each month, every company must submit their balance sheet to the bank. Amounts owing, such as the balance of the credit line and accounts payable owed to suppliers is compared with liquid assets available, such as cash and accounts receivable yet to be paid by customers, to pay those amounts. If a firm has more liquid assets than debt, it is awarded the best credit rating – AAA+. If a firm has more debt than assets, this is not necessarily a bad thing, but increased debt levels is an indicator of risk, and companies are assigned a credit rating by the bank directly linked to the net amount of monies owing. The prime interest rate has been relatively stable during the last decade. A sound monetary and fiscal policy has kept inflation down and the interest rates (namely, the business prime rates of the chartered banks) were between 5% – 6%. For most companies what really matters is their credit rating. The difference between a good credit rating and a bad one can lead to as much as a 12-point difference in the interest rate charged by the bank. Company Performance: Profit and Value Your credit rating is very important for another reason. The investors use it to measure the performance of the company, and the management team. These shareholders in the company rely on the bank to assess the risk profile of the firm, and by association the riskiness of the decisions taken by the management team. Generating a healthy profit is very important, but not if it exposes the company to unnecessary risks. Because the company is privately held, the value of the company is very important to its shareholders. Two important factors determine the value of the company – its annual profit and its credit rating. The higher the annual profit the higher the value of the company. Conversely, the lower the credit rating, the lower the value of the company. Accounting Policies Muesli AG has fairly simple accounting practices, but adheres to international accounting principles. It uses a perpetual inventory management system for tracking costs, value of inventory on hand, and cost of good sold. This is advantageous because at any given moment, draft financial statements can be retrieved from the system. For preparing annual financial statements for it’s investors, the accounting team will first audit the accounts and then perform various financial year closing procedures to produce the final statements. © Léger et al. (2018) ERPsim Lab, HEC Montréal. PARTICIPANT’S GUIDE: MANUFACTURING GAME 22 For a perpetual inventory management system to be effective, both the quantity and value of inventory needs to be tracked at all times. Since all movements in and out of the warehouses are recorded with goods receipt and goods issue documents, knowing the quantity on hand of each material is straightforward. Calculating the value of items, is a little more involved. For raw materials, the value of inventory on hand is determined by the purchase price paid. Every time items are received into the warehouse, the total value on hand is increased by the total amount paid for those items. A new average cost per unit is then calculated: value of stock on hand divided by amount of stock on hand. When items are used by production, the value of stock is reduced based on the average cost: quantity consumed multiplied by current average cost. Only purchases can affect the average cost, and over time, this measure becomes very useful as it captures the moving average of actual costs paid for raw materials. For finished goods, valuation is more difficult. There is no purchase cost, since the items are produced rather than bought. The accounting department uses a technique called standard costing to determine the unit value of finished goods inventory. The standard cost is calculated by considering the raw material moving average costs and recipes of each individual product. All inventory movements – production confirmation and sales – are entered in the system using the standard cost: change in inventory value is the standard cost multiplied by the change in quantity. Of course, this implies that the standard cost must be recalculated any time the recipe for a product changes. This is another reason why Muesli AG has adopted the policy to sell all stock of a product before changing its recipe. “There are rules governing inventory revaluation” your boss told you, “and there is no need to be changing recipes all the time. Consumer tastes are stable – people don’t suddenly crave an extra scoop of raisins in their bowls one morning.” The standard cost is very helpful when setting product prices. So long as the sales price is more than the standard cost, you are earning a margin. Of course, the company also has overheads and a marketing budget, and the combined margin of all sales needs to cover those overheads before we make any actual profit. To be profitable you will need good margins and to sell sufficient quantity. © Léger et al. (2018) ERPsim Lab, HEC Montréal. PARTICIPANT’S GUIDE: MANUFACTURING GAME 23 MANAGEMENT RESPONSIBILITIES Product Mix In the simulation game, firms can produce up to twelve different products (six types of muesli cereal in two sizes). For each of these products, the firm must specify its recipe (composition). Each team must define, according to its own strategy, the recipes that it wishes to produce and market. One of the strategic objectives is to try to find niches, i.e. recipes that are unique in the market and which are desired by a sufficiently large number of consumers. Another objective is to appropriately target the various types of stores. One must recall that small boxes are only ordered by convenience stores and grocery chains while large boxes are sold only to hypermarkets and grocery stores. Most importantly, pricing and marketing must be carefully considered, given the different sensitivities of the 3 markets. Forecasting and Procurement Recall that you can only sell products that are in inventory. Your executive team will need to forecast the number of units of each product you plan to sell each period. Muesli production is done in batches, but before producing a batch you need to have all of the required raw materials in inventory. Recall that your executive team has many operational responsibilities: you must forecast demand and develop production plans, create purchase orders for raw materials, wait for delivery, and finally release the production orders. Further, purchasing raw materials requires liquidity. If you choose to produce a large number of boxes in advance, you may have to borrow the necessary funds from the bank on which you will have to pay interest; and if you exceed your warehouse capacity you will have to pay storage costs while those materials sit unused. All this requires careful planning. As mentioned previously, the price of some raw materials (in particular, blueberries and strawberries) is highly seasonal. For those products it may be advantageous to buy the raw materials for future production when the price is low. As part of your procurement strategy, you may want to consider not only strategic purchases that minimize procurement costs, but also advance purchases that will allow production of a new order to begin immediately. In other words, you may want to maintain a sufficient stock of raw materials so that any of your products can be produced at any time. Planning becomes even more important in these cases. Also, don’t forget delivery time: It can take up to 5 days to receive raw materials. Make sure you plan early enough and place raw material orders with suppliers – well before you run out of finished products to sell or the raw materials to produce more. © Léger et al. (2018) ERPsim Lab, HEC Montréal. PARTICIPANT’S GUIDE: MANUFACTURING GAME 24 Productivity Decisions Once again, be reminded that sales will not occur unless your product is in stock. This critical constraint to your success cannot be overstressed. Therefore, it is critical that production provides the correct products at the correct time to support your business strategy. It is critical to size production campaigns so that you have the correct balance between flexibility and production efficiency. It is not very useful to efficiently produce products that no one wants, but it is also not very useful to try to be flexible to the point that too much of your production time is spent on changeovers and you have very low quantities available for sale. Of course, it is equally important that your business strategy is consistent with your production capabilities. The number of products you decide to make available to the market has a big impact on finding this balance – the more products you want to sell, the more often you will need to do production changeovers or you will be out of stock of those products for longer periods. Finally, production throughput may be your strategic weapon. If you think there is untapped demand in the market, you will need to consider investing in your production facilities by buying additional equipment to increase capacity or hiring consultants to improve your efficiency. Pricing A firm may choose to change its selling price whenever it desires. Pricing is a key element of your strategy. If your prices are too high, demand will be low and your production will sit as inventory; if your prices are too low, you will not make enough money to cover your expenses. Recall that you have three pricing sheets – one for each type of store. Because convenience store customers are less price sensitive, it is smart to charge these stores a higher price than traditional grocery stores. Calculating the optimal price for each product and customer type is a complex task. Factor in that the pricing, marketing, recipes and availability of stock for your competitors will impact your sales at all times. Your “optimal” price may well shift over time due to these factors that are outside of your control. Business acumen is required to make the correct pricing decisions, by considering your own situation and learning to detect the trends that indicate your competitors’ situations. Remember that muesli consumption accounts for a small proportion of ready-to-eat cereal consumption. Consumers have other options. They can buy something else if muesli cereal is out of their price range. Remember also that you have advertising expenditures, interest payments, operating overheads and payments for the raw materials; you must price your products so that you do not lose money. As your boss often says, “We do not run a charity down here.” You must make a profit. Optimal pricing depends on many things: (i) the prices charged by competitors; (ii) the size and cost of the product; (iii) the customer type; (iv) the level of inventory on hand and (v) ultimately the strategy of the firm including its advertising strategy. © Léger et al. (2018) ERPsim Lab, HEC Montréal. PARTICIPANT’S GUIDE: MANUFACTURING GAME 25 Marketing You must decide on how much to invest in marketing. You must determine the daily advertising budget for each of your products (up to 12) and each of the 3 regional areas. Because the preferences of consumers might differ from one area to the other, it may be optimal to target expenditures differently from one area to the other. The difficulty, of course, is to know how much should be spent for marketing each product in each area. The effects of marketing are short term; in the breakfast cereals market there is little brand loyalty among consumers. It is foolish to waste money marketing products that you do not have available. Breakfast cereals are not like consumer electronics – large marketing budgets and limited availability does not inspire people to go hungry and wait in anticipation of your product to hit the shelves. You may change your daily marketing budget at any time. HERE IS A TIP: Advertising is good but not always necessary, especially if your product has the desired recipe. It is easy to aggressively overspend on advertising and not see a sufficient return; you will end up losing money. Set yourself a budget based on the expected revenues from your sales forecasts. Monitor your performance and adjust often and according to your situation and strategy. HERE IS A TIP: Try to avoid spending a lot of advertising money for two different products in the same geographic area. One euro spent on a product hurts the sale of the other and vice versa. THE SIMULATION AND ASSOCIATED RULES In this section we will provide several important tips to help you as you start to learn the simulation game. While we’ve attempted to embed the game in a rich context and backstory, and make it sufficiently challenging and fast-paced so that you will not be bored, it is none-the-less a simulation game, and therefore a vast simplification of reality. There are some important characteristics that are specific to the simulation, which may not immediately resonate with your perception of what can or can’t be done in real life. The rules proposed below have two main objectives. The first and most important one is fairness. The second objective is to make the game challenging and instructive, without being overly complicated. First, we wish to introduce you to some of the important detail and rules of the game. Second, we will provide strategy tips to additionally prepare you for the simulation. © Léger et al. (2018) ERPsim Lab, HEC Montréal. PARTICIPANT’S GUIDE: MANUFACTURING GAME 26 You may not change the recipe of a product if you are still carrying more than 1,000 units in inventory In the simulation game, changing a recipe is equivalent to changing the label on the box. If you change the recipe of a product for which you still have inventory, it is similar to changing the recipe on the labels of those boxes. Effectively you could make one product, and then sell it as if it were another. It is simply not done! You can only change the quantities of the existing raw materials, not add or remove materials. In other words, you cannot design your own products, such as “BlueberryNut Muesli”. Changing the bill of material will revise the standard cost (inventory value per unit) for that product, and revalue any inventory. This rule prevents recipe changes except when stocks are almost gone. It also prevents the inventory revaluation having any significant impact on company financials. The algorithms in the simulation can lead to small amounts of inventory in stock that can never be sold, even at very low prices. For this reason, the rule allows for recipe changes at low stock, rather than zero. Interest payment and credit line renegotiation Interest is accrued daily and will be charged automatically at the end of every week (5 days). Consequently, you will not have to do it during the game. You should aim to have a positive cash balance at all times during the game. If you don’t, your credit line will automatically be extended to cover any shortfall. You can repay your credit line with the bank at any time. In principle, as you accumulate profits, you should be able to begin paying back any amounts owed and you should not need to borrow additional funds. You can easily do this yourself during the game. Being able to pay back your credit line also opens the possibility to borrow more. Your instructor will act as the banker, and you should ask them if your “loan request” is approved before making any changes in the system. Your instructor has sole discretion to grant or approve your request. Consumers do not change throughout the game, hence you may learn from their past behaviour At the beginning of the simulation, the simulator randomly creates a large population of consumers, each endowed with a “preferred recipe”. These preferences influence the orders retailers place with team companies. As the game progresses, you may infer the “preferences” of these consumers using your transactional data and adapt your plans accordingly. However, stock availability always overrides preferences, so you should keep that in mind when making any analysis. © Léger et al. (2018) ERPsim Lab, HEC Montréal. PARTICIPANT’S GUIDE: MANUFACTURING GAME 27 The company with the highest company value at the end of the simulation wins the game We compare the performance of the teams by simply using the company valuation of each company at the end. Company valuation is determined by profit and credit rating. Be aware that the investments in marketing as well as investments to reduce your production changeover time are recorded as direct expenses. Although they have value in increasing productivity, and potentially sales, their immediate impact on profit is negative. Investment in machinery and equipment to increase capacity increases the fixed assets of the company. Hence, the impact to profit is only reflected over time in the increase in depreciation. It also decreases the liquid assets of the company, or increases the debt depending on whether financed by cash or extending credit with the bank. This significant commitment of resources with uncertain outcome (sales of extra production at good margins are not guaranteed), represents additional risk to the shareholders. Large investments will immediately reduce credit ratings and therefore company valuation. Over time, if the additional production is converted to profitable sales, both profits and liquid assets will rise, increasing the company value. You must behave ethically at all times The simulation game is fun when it is played competitively. As in real-life, cheating may prove to be an easy way to get a head start, but it should never be an option. We ask participants of the simulation game to act as they would in real life, with the highest ethical standards. Cheating in this game includes the use of any transaction not explicitly permitted in this book, or by your instructor, and that is used for the sole purpose of increasing the firm’s profit or credit rating, or to bypass time delays such as those with production and supplier delivery. There are several ways to cheat in this game, but be advised that the ERP system and the simulation software keeps track of all transactions. Your instructor is highly likely to punish those who feel the need to play unfairly! © Léger et al. (2018) ERPsim Lab, HEC Montréal. PARTICIPANT’S GUIDE: MANUFACTURING GAME 28 ELEMENTS OF A WINNING STRATEGY Do not run out of stock One of the most importxzant tips for the game is “do not run out of stock”. Even if you have the best sales strategy, if you do not have products to sell, it will not matter. This is particularly important at the beginning of the more difficult scenarios of the game, where you start without any products to sell. Before you manage to have finished products in inventory, you must perform a series of tasks. If you are too slow to perform these tasks you will miss lucrative opportunities to sell. You need to learn quickly how to perform the operational transactions to create finished product inventories. One of your objectives should be to hold inventories of a large range of products. To do so is harder than you think. Your popular brand may sell quickly and unexpectedly; unless you react quickly to this information you may run out of stock before you realize it. There are three actions you can take to avoid running out of stock: reduce demand by increasing the price (short term solution), increase supply by initiating production (medium term solution, depending on whether you have the correct raw materials and production plan, and production backlog of other products) and increasing the supply by increasing the forecast for that product (long term solution). Managing inventories of popular brands requires operational excellence and is a key element in a winning strategy. Delays, production capacities and liquidity constraints are important elements of the game Delays and capacity constraints are built into the simulation. These features are important because they limit your ability to react quickly to changes in the marketplace. To have a product available for the customer, you will have to account for the delay in delivery of raw materials and production capacity limitations. This means that you will need to plan in advance and build and maintain the inventories of raw materials and finished products to sustain your production and sales strategy. However, this will require some liquidity. You must be careful not to buy too much raw material or hold too much finished goods inventory. The challenge is to be able to find the right balance between low inventory levels and readiness to respond to market demand. Exploration and exploitation Beginning the game with a precise strategy is a little presumptuous. You must accept that the simulated marketplace is full of surprises. Learning and adapting should be your motto. Use your data to learn and use the system to adapt to the market. © Léger et al. (2018) ERPsim Lab, HEC Montréal. PARTICIPANT’S GUIDE: MANUFACTURING GAME 29 Most members of your team have the misfortune of having little experience. Fortunately for you, it is the same amongst your competitors. To fully exploit the full potential of your business, you will need to learn more about the market and industry. You should use a strategy of “exploration and exploitation”. The initial part of the game should be devoted to exploration. You should experiment with different recipes and advertising and pricing strategies with the objective of learning more about the market and what works and what does not. Once you have identified a profitable niche (or niches), you should design your strategy around these niches and exploit and defend them as much as possible. In the face of too much competition, you may have to abandon a previously lucrative niche. Identify a new one before your competitors. It is often easy to follow, but to win you must lead! Organization may be the most important factor in your team’s success. A large number of tasks need to be coordinated. Your team needs to (i) keep track of market and sales information, (ii) follow the evolution of stocks of goods and cash, (iii) select the right recipes, (iv) produce goods in a timely fashion, etc. Good team work is essential. If your team members do not communicate and coordinate their activities, you will undoubtedly fail. You cannot do this if the roles and the information flow within the team is not well adapted to the requirements of this fast-paced game. You are faced with the challenge of organization and must learn how to delegate roles within your team. Finding the perfect division of responsibilities is not as important as identifying and agreeing who will do what, even if chosen arbitrarily. There are many possibilities for innovation that will make your team more efficient. This innovation may ultimately make the difference. Have fun! This is only a game! So enjoy being a manager using a real-life ERP system. Ultimately, this is about learning not winning. The business simulation presented in this book is an obvious simplification of reality. There are numerous elements of running a business that have not been included. Yet the game remains a complex affair. You must be able to extract the information necessary to make timely decisions from a large set of transactional data. You need to operate this virtual enterprise in an accelerated time frame. We have taken the point of view that if there is no challenge then it’s no fun, and if the simulation is no fun and unchallenging then one does not learn as much. You are asked to run a company at an accelerated pace with a real-life highly complex ERP system. You are bound at one point or another in the game to make errors and find yourself in trouble. Cursing the computer will generally not help. Ask your friends or the instructor for help and keep smiling. Ultimately, what matters is what you learn from the experience – we hope you learn a lot. © Léger et al. (2018) ERPsim Lab, HEC Montréal. PARTICIPANT’S GUIDE: MANUFACTURING GAME 30 PART 2 http://erpsim.hec.ca © Léger et al. (2018) ERPsim Lab, HEC Montréal. Manufacturing Scenarios The Manufacturing simulation game comes with three scenarios, increasing in the level of difficulty – Introduction, Extended, and Advanced. Many of the concepts introduced in Part 1 of this book are explored in further detail in this section, in the context of each scenario. In this section we begin to refer to the ERP system (SAP), however we will not cover the transactions in detail until Part 3. Many parts of the business process that someone would normally complete in the SAP system, are automated by the simulator. These administrative tasks are not business decisions, so you are free of distraction by not having to worry about completing them. Note that the chapters in this section assume that your instructor runs the simulation game with the default settings. There are options that allow your instructor to change these settings. Before committing to a strategy or decision in the game, check with your instructor if any settings will be changed that would affect your decisions. This text assumes that the three scenarios will be played in order. Rather than repeat, a concept is discussed in the scenario where it first appears. If your instructor does not start with the Introduction scenario, you should still review the next chapter as the majority of core elements in the manufacturing simulation are discussed within. INSTRUCTIONAL AIDS This text should be used in conjunction with the companion presentation slides and job aids that are provided. Each of the three scenarios have a presentation deck of slides to assist with introducing the concepts and business processes and how to use the associated SAP functionality. Each scenario also has a 2-page job aid that you will find very valuable to remember key information about the scenario, and how to use the SAP software. Both are available from the ERPsim Learning Portal (website) hosted by HEC Montreal, where you downloaded this book. If you received this book from your instructor directly, and do not yet have access to the ERPsim Learning Portal, ask your instructor if you can get a copy of the job aid or slides to refer to as you read through this book. © Léger et al. (2018) ERPsim Lab, HEC Montréal. PARTICIPANT’S GUIDE: MANUFACTURING GAME 32 CHAPTER 3 Company Performance: Profit and Value All the simulation scenarios use Company Valuation as the metric to measure performance. This is also used by the simulator to provide a default ranking of all the companies competing against one another in the same simulation. Your instructor may use this in combination with other metrics, or use something else entirely. Verify with them how the performance of each team will be assessed. In Part 1, we introduced the concept of company value and linked it to profit and credit ratings. We will now go into more detail regarding how credit ratings are determined, and the exact formula for calculating Company Valuation. CREDIT RATINGS Your company credit rating, as determined by your bank, is entirely based on your balance sheet. The bank is interested in how much you owe to third parties (liabilities), including themselves, and your ability to pay off those debts (assets). The less able you are to pay your debts, and the more debt you have, the lower your credit rating. For Muesli AG, there are only four accounts in the general ledger of accounts that are relevant, as listed in table 3.1. Table 3.1: General ledger accounts for determining credit rating ACCOUNT NUMBER ACCOUNT NAME CLASSIFICATION 113300 Bank Cash Account Current Assets 140000 Customers – Domestic Receivables Current Assets 160000 Accounts Payable - Domestic Current Liabilities 113101 Bank Loan Current Liabilities Your net debt is therefore: (Loan + Payables) – (Cash + Receivables) © Léger et al. (2018) ERPsim Lab, HEC Montréal. PARTICIPANT’S GUIDE: MANUFACTURING GAME 33 A simple table, with tiers, is then consulted by the bank to determine your credit rating. If you can pay all your debts, you get the best credit rating AAA+. If you have less than €1m net owing, your credit rating is AA+. Between €1m and €2m net owing, it’s AA and so on. Consult table 3.2 for the all the possible credit ratings and tiers. As mentioned previously, your credit rating determines both your interest rate and company value. The interest rate on your line of credit is the prime rate (typically 5%) plus your interest premium. The risk premium is added to a market risk rate of 7% (the long term historical average rate of return of the stock market), to give your overall discounting risk rate for determining company value. Table 3.2: Credit Ratings, Interest and Risk Premiums CREDIT RATINGS NET DEBT FROM (≥) TO (
Most of you have played this game enough times that this report should write itself. Look at the KPI. What was your goal? Where did you end up? Why your actual performance deviated from your expectations? How did the teams ahead of you do? Create visualizations to support your explanations or arguments. Do that for each of the KPI that is relevant.
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