Analysis of Daniel Renicks Practice Round Six Results

Authorized by: Dr. Miceli Prepared by: Michael C. Jewell Submission Date: May 2, 2010

May 2, 2010 Dr. Miceli PO Box 1000 Athens, WV 24712-1000 Dear Dr. Miceli: I am pleased to submit this analytical report on Daniel Renicks practice round six results. The report systematically reviews the decisions made my Mr. Renick within each of the seven decision modules that are available in the simulation. The areas that are dissected in this analysis are Research and Development, Marketing, Production, Finance, Human Resources, Total Quality Management, and Labor Negotiations. Following the analysis of these sections, recommendations for improvement follow. The analysis found that Mr. Renicks company is experiencing some financial shortfalls that are a result of products not being positioned well in relation to the competition and overspending on plant improvements. These two factors have led to large amounts of debt and emergency loans. I thank you for your review of this analytical report and have found that through its preparation I have a better understanding of the material that exists within the Capsim Capstone Simulation. Sincerely,

Michael C. Jewell

Table of Contents
Executive Summary .................................................... 1 Highlights ......................................................... 1 Conclusions ........................................................ 1 Recommendations .................................................... 2 Introduction ......................................................... 3 Limitations and Delimitations ...................................... 3 Assumptions ........................................................ 4 Methods and Procedures ............................................. 4 Research and Development ............................................. 4 Traditional Market Segment ......................................... 4 Low Tech Market Segment ............................................ 5 High Tech Market Segment ........................................... 5 Performance Market Segment ......................................... 6 Size Market Segment ................................................ 6 Marketing ............................................................ 7 Traditional Market Segment ......................................... 7 Low Tech Market Segment ............................................ 7 High Tech Market Segment ........................................... 8 Performance Market Segment ......................................... 8 Size Market Segment ................................................ 9 Production ........................................................... 9 Traditional Market Segment ......................................... 9 Low Tech Market Segment ........................................... 10 High Tech Market Segment .......................................... 10 Performance Market Segment ........................................ 10 Size Market Segment ............................................... 11 Finance ............................................................. 11 pg. i

Cash Flow Statement ............................................... 11 Balance Sheet ..................................................... 11 Income Statement .................................................. 12 Financial Ratios .................................................. 12 Human Resources ..................................................... 13 Total Quality Management ............................................ 14 Labor Negotiations .................................................. 15 Summary ............................................................. 15 Conclusion .......................................................... 16 Recommendations ..................................................... 16 Research and Development .......................................... 16 Marketing ......................................................... 16 Production ........................................................ 17 Finance ........................................................... 18 Human Resources ................................................... 19 Total Quality Management .......................................... 19 Labor Negotiations ................................................ 20

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Executive Summary
The purpose of this paper is to analyze, draw conclusions, and offer recommendations after reviewing my classmate Daniel Renicks practice round six results. This analysis follows a systematic approach similar to making decisions within the Capsim Capstone Simulation Program. The problem to be investigated within this analysis is to highlight decisions made by Mr. Renick that need improvement in order help his company become more profitable. By completing this analysis and offering recommendations, both my and Mr. Renicks understanding of business operations within a company should be improved.

Highlights
During this round, Mr. Renick was attempting to catch up with his competitors because his market share had fallen to 14.46% and he was trying to gain it back. His strategy of broad differentiation fell short with four out of the five products his company offers falling to last place in sales within their respective segments. This led to a loss of $13,108,602 when combined with excessive spending on plant improvements and having to pay off large amounts of current debt.

Conclusions
Although attempting to regain lost market share, the prices for Mr. Renicks products were too high and his positioning of products relative to the competition was substandard. Also, automation levels for production were too low and labor costs were too high on half of his products to create a substantial enough contribution margin to go

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toward earnings. These occurrences combined with overspending on plant improvements led to the inevitable necessity of a large emergency loan to keep the company operational.

Recommendations
Recommendations for Research and Development include positioning products more closely with the top selling competition. On half of the products Mr. Renick offers, the revision date was in the middle of the year and could have been further improved during the year to better meet the competitions standards and achieve more sales. Marketing recommendations include lowering the prices on four out of the five products offered because they were higher than competing products with better performance and size coordinates. Production recommendations encompass increasing the automation levels on products with contribution margins below 30% to reduce the effect of increasing labor costs and increase earnings. Finance recommendations include improving earnings through increased sales as a result of better product placement and pricing. Also, spending on plant improvements should be funded through long term debt and should take a gradual approach toward improvement. Human Resources recommendations are such that recruiting spending and training hours be increased to improve the productivity index. Total Quality Management recommendations include focusing more on reducing material, labor, and administrative costs. Labor Negotiations recommendations include positioning the starting and ceiling negotiation positions with the labor demands in between them to avoid the strike days that were incurred. pg. 2

Introduction
The Capsim Capstone Simulation Program is a great tool for students to put their acquired business knowledge to work. This program presents real world challenges that reveal the strengths and weaknesses within business students and get them ready for workplace situations after graduation. The purpose of this report is to analyze the results of my classmate Daniel Renicks round six practice decisions for the Capsim Business Simulation and offer potential recommendations for improvement. The scope of this analysis will include and discuss the Capsim Simulation decision areas of Research and Development, Marketing, Production, Finance, Human Resources, Total Quality Management, and Labor Negotiations. Upon completing the analysis of these decision sections within the simulation, recommendations for improvement within the listed decision areas will follow.

Limitations and Delimitations

Limitations within this report include interpreting the decisions made by Mr. Renick in an objective manner. Also, these interpretations should offer constructive criticism for improvement in the form of recommendations and not ridicule. The delimitations of this report are constrained to the analysis and interpretation of the main decision modules listed above and the outcomes that are a result of Mr. Renicks decisions within each module.

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Assumptions
Within this report it is assumed that Mr. Renick is attempting to accomplish what is best for his company. This includes profitability, a contribution margin above thirty percent, and having enough production capacity and suitable products to please customers.

Methods and Procedures

With this business simulation program students must make decisions each round within the seven decision modules listed previously by analyzing the results of the previous round. Each module has its own series of decision possibilities ranging from Research and Development revision dates to financing activities such as issuing stocks or bonds. This report will follow a similar systematic approach to analyzing Mr. Renicks round six results as if potential decisions for round seven were to be made. Each module will be dissected in order to arrive at recommendations for improved results.

Research and Development

Traditional Market Segment
The positioning of the product Able is set at 9.5 performance and 10.6 size. This positioning is above the target position within the segment of 9.2 and 10.8, but competing top products have their positioning placed at 10.1 and 9.9. Furthermore, the revision date on Able is 8/30/2016. This shows that there was available time to make Able more competitive. Ables mean time before failure is where it should be comparative to the top selling products at 18,000 hours.

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Mr. Renicks placement of Able below the specifications of his better selling competitors caused him to become fifth in sales within the traditional segment, but third in December customer surveys. This placement within December customer surveys shows that there may be an increase in sales next round.

Low Tech Market Segment

The positioning of Acre within this segment is 4.4 performance and 16.2 size. It is below the target of 4.7 and 15.3, but this is a good approach within this segment due to the importance of age perception by customers purchasing low tech products. This has made Acre the top selling product within this segment and has gained the most favorable December customer surveys as well. The mean time before failure is at 12,000 hours where it should be to be competitive within this segment. Overall, Mr. Renicks decisions for Research and Development pertaining to Acre have garnered desirable results.

High Tech Market Segment

Mr. Renicks positioning of his high tech product Adam is at 14 performance and 6.2 size. This positioning is close to the target of 14.3 and 5.7. However, the top selling products in the segment are positioned at 14.7 and 5.4. This has caused Adam to fall to sixth in both sales and December customer surveys. The mean time before failure is in line with the competition at 25,000 hours. With Adam, Mr. Renick fell behind the curve for improvements of this product in earlier rounds and is now not able to keep up. This is evidenced by his late revision date of 11/1/2016 that could have been

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extended another month, but still most likely would not have made a significant increase in sales.

Performance Market Segment

Mr. Renicks positioning of the product Aft is at 14.4 performance and 12.4 size. This is well below the target of 15.4 and 11.8. The top products in the segment are positioned at 15.7 and 11.5 and are much closer to the target coordinates. Similar to the results for the high tech segment, Aft came in sixth in both sales and December customer surveys. Also, the mean time before failure on Aft is well placed with the competition at 27,000 hours. The revision date for Aft is 5/11/2016. This shows that almost seven months of time for revisions were available to improve the product more during this round. Failure to take advantage of this has let Aft fall behind the curve in development and ability to compete with other products in the segment.

Size Market Segment

As with Adam and Aft within their respective segments, the positioning of Agape within the size segment is below the competition. Agapes 8.5 performance is above the target of 8.2, but its 5.0 size is behind the target of 4.6. Furthermore, the competitions positioning is ahead of the curve in both performance and size. The positioning of Agape behind the competition has also caused it to become sixth in both sales and December customer surveys. The mean time before failure is in line at 19,000 hours, but is not enough to create more sales.

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Mr. Renicks positioning of Agape and results are most likely due to falling behind in Research and Development in earlier rounds. The 11/22/2016 revision date for this product shows that not much time was available for further product improvement and is a direct result of falling behind early.

Marketing
Traditional Market Segment
The price of Able within this segment is $28 while the top competing products are at $27. These two prices are close, but reduction to the top products pricing could improve sales with the moderately price conscious customers within the traditional segment. Also, a reduction in price should be considered for Able because its positioning is not up to par with the top products. The promotion budget for Able at $1,300,000 has created a competitive accessibility rating of 78%. The sales budget of $2,142,000 resulted in an 86% customer awareness rating, but may be a little excessive during these later rounds. Forecasting for Able was well done with 15,000 units left in inventory. Overall, the forecasting has helped this product create income.

Low Tech Market Segment

The price for Acre is at $19 and is the top product in this segment. Mr. Renicks promotion budget for this product is good at $1,300,000 and yields the second best customer awareness rating of 79%. Acres sales budget at $2,053,000 has created an accessibility

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rating of 72%, but could be reduced a little during these later rounds. Forecasting for Acre during this round was good, but it stocked out. This is not such a bad result for this product though because it still was the top selling product within the low tech market segment.

High Tech Market Segment

Pricing for Adam within this segment is set at $38 while the top products are at $37. Reductions in price could have helped sales not only just to keep up with the competition, but because Adams positioning is not as good as the top products. The promotion budget is at $850,000, yet still yields the highest customer awareness in this segment at 84%. It was smart to leave the promotion budget low because customer awareness was already high. Mr. Renicks sales budget for Adam was also well placed at $1,607,000 and created a comparable accessibility rating of 70%. Forecasting for Adam was off the mark and resulted in 206,000 units left in inventory. However, some of this excess inventory could be a result of the bad economy variable that is placed within the circumstances of round six.

Performance Market Segment

The pricing for Aft is $33. As with Adam, lowering the price of Aft should be considered because the competitions price is at $32 and Afts positioning is worse than the competition. Afts promotion budget is in line with the competition at $1,100,000 and resulted in the third best customer awareness rating of

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77%. The sales budget is set at $1,428,000 and only yields an accessibility rating of 61%. Mr. Renicks forecasting for Aft was good with only 47,000 units remaining in inventory at the end of the year.

Size Market Segment

The pricing of Agape is at $34 and should be lowered to compete with the top products priced at $32 and $31. Lowering the price should also be considered because Agape is positioned below the competition. Agapes promotion budget is well set at $1,000,000 because it has the highest customer awareness rating of 79%. The sales budget is also well placed at $1,696,000 because it yields a competitive accessibility rating within the segment at 70%. The forecasting for Agape was well off the mark with 560,000 units left over in inventory. Some of this excess inventory can be attributed to the poor economy in round six, but most of it is probably a result of not taking into account the reductions in sales that occur with a bad economy.

Production
Traditional Market Segment
The capacity for Able is 2,285,000 units and 1,670,000 units sold during this round. This capacity is a little high when compared to what actually sold, but will soon be used during the normal economy rounds of seven and eight. Overall, keeping the capacity for Able where it is should be sufficient for the next round.

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Automation for Able is at 5.0 and resulted in a contribution margin of 35% for the product. This is good, but could be increased to 6.0 when funding allows.

Low Tech Market Segment

The capacity for Acre is at 3,950,000 units for the next round because Mr. Renick purchased more due to the threat of stocking out. This new capacity amount should be sufficient for the next rounds production. Acres automation rating is 5.0 and only results in a contribution margin of 21%. Consideration should be placed on increasing this to 6.0 or 7.0 in the future to increase the contribution margin overall.

High Tech Market Segment

Adams capacity is 900,000 units for this round and the next round. 678,000 units sold during this round, so leaving the capacity where it is was a good move by Mr. Renick. The automation rating for Adam is at 5.0 and results in a 34% contribution margin. This is acceptable for this round, but increasing it to 6.0 may be necessary to help increase the contribution margin when material costs rise as improvements are made.

Performance Market Segment

Capacity for Aft within this segment is 1,000,000 units for the next round with 748,000 units selling this round. This amount of capacity should be enough for the next round. However, more capacity may need to be purchased for round eight.

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The automation rating for Aft is at 3.0. This automation rating is insufficient and only results in a contribution margin of 20% for the product because of increased labor costs. The automation rating should potentially be placed at 5.0 or 6.0 to alleviate this problem.

Size Market Segment

The capacity for Agape is 1,190,000 for the next round. This amount of capacity is a little excessive due to the fact that only 496,000 units sold during round six. Therefore, keeping the capacity at this level through the end of the simulation should be considered. Agapes automation rating is at 5.0, but only helps to produce a contribution margin of 27%. Increasing the automation rating to 6.0 would help this by reducing labor costs associated with this product.

Finance
Cash Flow Statement
This statement shows that Mr. Renicks company incurred an overall loss of $13,109,000 during this round. This can be attributed to the $64,760,000 spent on plant improvements during the bad economy round. Also, within this round $48,406,000 worth of current debt had to be paid off. All of this spending without enough income led to the $111,224,000 emergency loan that was required to break even.

Balance Sheet
Mr. Renicks cash being at $0 is a direct result of incurring too much debt and having to take out an excessive emergency loan. Also as a result of having no cash on hand, total assets are $67,000,000 below the average of the competition. The excessive amount of current debt

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that Mr. Renicks company is carrying at $132,074,000 is dangerous and will still have to be paid off very soon even though funds will most likely not be available.

Income Statement
Sales for this round are low when compared to the competition. Mr. Renicks sales were only at $180,000,000 while four out of the five competing companies were well above $200,000,000 in sales. This low figure has also contributed to the necessity of excessive debt and emergency loans to stay afloat.

Financial Ratios
ROS = Net Income/Net Sales The return on sales was very low at -7.3%. This is attributed to the lack of income that Mr. Renicks company is experiencing due to decreased sales, increased costs, and an overall loss. ROA = (Net Income + Interest Expense)/Average Total Assets Return on assets was equally low at -7.7%. The extremely low value of this ratio is directly related to a lack of overall earnings and operating income. Because the company experienced a loss and not a profit, the ratio is extremely low. INV Turnover = COGS/INV The value of the inventory turnover ratio for this round was 1.06. This value is just barely above being equal and is a result of having excessive inventory on hand for the products Adam and Agape. Leverage Mr. Renicks leverage rating was 6.2. This is not very good and is a result of carrying too much debt. This essentially means that the pg. 12

amount of debt in comparison to assets is much too high. This of course comes from the excessive emergency loans and other current debt items that have been incurred. ROE = Earnings Available to Common Stockholders Common Stock Equity The return on equity is extremely low at -48.1%. This means that for every dollar invested in this company, 48.1 cents will be lost. This is a direct result of sales, earnings, and net income being severely insufficient to maintain the operations of the company without having to take out excessive amounts of debt. SGA/Sales The value for this ratio is 11.5% and is not too far out of line with the competition. It is a little higher than the competition, but is not enough to cause the major cash deficiencies that Mr. Renicks company is experiencing. Contribution Margin% = Contribution Margin$/Sales Revenue$ Mr. Renicks overall contribution margin is 26.8%. This is not terribly bad, but should be improved to be above 30%. With this percentage being below 30% it does not leave a large amount of money earned from products sold to pay for fixed costs or contribute to operating income after all variable costs are paid for. Overall, this contribution margin below 30% has slightly played a role in the financial woes that occurred in round six.

Human Resources
The Human Resources module was set to where the number of employees matched the needed complement for the round. This number

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came to 1,163 employees with 900 working on the first shift and 263 on the second shift. Therefore, no overtime was incurred. The training hours per employee per year are thirty and the recruiting spending per new employee is set at $2,000 for the round. Although these numbers seem relatively suitable, the productivity index of Mr. Renicks company is still only 100.00%. This appears to be a result of increasing training hours and recruiting spending to the current levels recently within later rounds instead of doing so early to achieve a more efficient productivity index.

Total Quality Management

During round six Mr. Renick spent a total of $9,000,000 on TQM. The cumulative impacts of this rounds and previous spending resulted in a material cost reduction of 2.69%. Other companies within the simulation were experiencing material cost reductions of around 5%. Increasing this percentage could be beneficial to Mr. Renicks company when money allows. Labor cost reduction cumulative impacts were at 3.44% for the round. This figure is close to the majority of the competition, which had labor cost reduction figures of 4%. Improving this percentage would also be beneficial to Mr. Renicks company. Reductions in research and development cycle time were right in line with the competition at 21.43%, showing that some emphasis has been placed on trying to catch products up with the competition. However, this may be too little too late for Mr. Renick as the majority of his products are still positioned behind the competition.

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Reductions in administrative costs of 15.16% were far below the competitions reduction of 29%. This percentage could easily be increased to help improve the bottom line of Mr. Renicks company. The demand increase for round six was 8.09% and was the highest among the companies within the simulation. This figure helps Mr. Renicks company achieve more sales, but still is not enough to overcome the massive amounts of debt it is carrying.

Labor Negotiations
Mr. Renick has lower labor wages per hour than the competition at $28.83, a higher benefits package at $2,818, equal profit sharing at 2.2%, and a higher annual raise of 5.7%. These numbers were achieved through a twenty five day strike though. Although this strike length is relatively short, it is still a months worth of time with no employee production. Therefore, in future rounds Mr. Renick should concentrate more on placing the starting and ceiling negotiating positions with the labor demands in between them to avoid potential strikes that are more significant.

Summary
In an attempt to catch up with the competition, Mr. Renick has lost the edge in competing with the other companies in the simulation. Four out of his five products are behind the development curve in comparison to competing products and poor sales and customer perception are the result. Furthermore, poor financing activities have placed the company in severe debt and have made it necessary to take out emergency loans that only add to the total amount of debt.

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Conclusion
Mr. Renicks decisions in the areas of Research and Development, Marketing, Production, Finance, Human Resources, Total Quality Management, and Labor Negotiations have some good reasoning and thought behind them. However, lackluster positioning of products, low automation ratings, and excessive debt has caused his company to produce a loss instead of a profit. Correction of these problems is advised in order achieve improved results during competition rounds.

Recommendations
Research and Development
The main problem for Mr. Renick in the Research and Development department is that four out of his five products are positioned behind the competition. Emphasis needs to be placed on keeping product performance and size in coordination with the target numbers in early rounds so products will not fall behind. This is one of the most important aspects of product development and should be emphasized. Also, attention needs to be given to what the actual revision dates are for the products. Both Able and Aft had multiple months available for revisions because their revision dates were in the middle of the year. This action left useful time to keep product positioning up with the competition on the table and ultimately caused these products to fall behind in sales.

Marketing
The pricing on every product except for Acre is too high to be competitive with rival products within specific segments. Each of pg. 16

these products is one to two dollars above the top selling products. To go along with this, these four products are all positioned with lower performance and size coordinates than the competition, thus making them less desirable to customers. To correct this problem, pricing on each of these products must be reduced to at or below what the competitions prices are. This must be done because the positioning of each product is too low. Lowering the prices should help in gaining more sales in intended and possibly other market segments even though the positioning is off target. Some forecasting corrections need to occur as well. For the most part the forecasting was well done if this round were a normal economy round. However, some scaling back on forecasting numbers should have occurred due to the knowledge that round six is a bad economy round. Interpretation of potential factors such as this on forecasting in the future will help to alleviate excess inventory levels for Adam and Agape. All sales budgets above $2,000,000 should be cut back some as well. During these later rounds spending excess amounts within the sales budgets will have diminishing returns. Therefore, reductions within this expenditure would help save Mr. Renicks company some much needed funding.

Production
The main problem in the Production department is that automation levels are too low to help reduce labor costs and improve the overall contribution margin. This is especially prevalent with the products Acre, Aft, and Agape. Each of these products has a contribution margin pg. 17

below 30% and is dragging down the overall contribution margin of the company. These three product lines need increases in automation of 2.0 points or 20% in order to help Mr. Renicks company. Doing this would reduce the labor costs of each of these products and boost their contribution margins as well. Ultimately, this would be a step in the right direction toward helping the company become more profitable.

Finance
Virtually all the financial ratios and debt levels of Mr. Renicks company need improvement. The three main areas that must be emphasized to improve the financial status of Mr. Renicks company are selling more inventories, reducing liabilities, and improving overall earnings. In order to sell more inventories or reduce the amount of inventory left over at the end of the year, forecasting and correct product positioning must occur. More emphasis must be placed on being aware of potential forecasting hardships such as poor economy rounds. Along with this the product placement has to be close or equal to the competitions in order to be competitive and get more inventories out of the warehouse and into the customers hands. This includes comparable pricing of products as well. Reductions and better management of the companys liabilities must be completed. For example, spending on plant improvements should not be so extravagant during a poor economy round. Also, current debt should be avoided unless completely necessary. The excessively high level of current debt that exists within Mr. Renicks company is the pg. 18

main contributing factor to why the company incurred a major loss instead of a profit this round. By completing the tasks of selling more inventory and managing liabilities in a more responsible manner, it becomes easier to focus on improving overall earnings for the company. If these three things are focused on from the beginning of the simulation, such large losses and emergency loans can be avoided.

Human Resources
As stated earlier, the productivity index of Mr. Renicks company remains at 100.00% even though 30 training hours per employee per year and $2,000 recruiting costs are set within the module. In order to boost this productivity index and become a more efficient workforce, the training hours per employee per year should be increased to 40. Also, the recruiting spending on each new employee should be raised to $3,000 so more productive talent can be brought into the workforce and improve the overall productivity index.

Total Quality Management

In order to receive better cumulative impacts from TQM, more emphasis should be placed on reducing material costs, labor costs, and administrative costs. Increasing the reductions in these areas would help improve the overall contribution margin of Mr. Renicks company and would help to improve earnings as well. Overall, this would be a good start at trying to catch up with the competition in terms of lowering expenses.

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Labor Negotiations
Mr. Renick had twenty five strike days at the end of this round that were a result of unsatisfied workers during the negotiation of their labor contract. Their dissatisfaction was a direct result of the starting and ceiling negotiations being too low. To correct this problem and avoid labor strikes in future rounds, consideration should be placed on positioning the starting and ceiling negotiating levels with the labor demands being more directly in between them. This would better satisfy the labor demands and reduce overall strike days or even eliminate them. This will also help to reduce the turnover rate of 9.9% to a more manageable level.

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