Decisions on Capacity Purchases/ Sales/Upgrades/Additions Explanations Information on Rules/Procedures Suggestions and Tips This screen is used whenever you want to Acquire added production immediately by purchasing available used plant Sell off some of your existing plant (because your company is struggling to profitably sell all of the pairs it has the plant to produce and is repeatedly having to resort to deeply-discounted inventory clearance sales to get rid of unwanted excess inventories). Institute upgrades at one or more existing plants. Construct new plant either by building a new plant in an area where you have no production capability or by constructing an addition to an existing plant. At the top of the purchases/sales/upgrades/additions screen is a summary of the production available in each geographic region for the upcoming year. There is information about the amount of your company had at the end of the prior year and the construction of new plants and/or additions ordered in the previous year that are available for use in the forthcoming year. The Capacity Purchases line shows the amount of used plant your company has decided to purchase in the current year. At the beginning of each year, the numbers on this line will always be zero. For more information see Decisions to Purchase Used Capacity further down on this Help page. The next line shows the total production your company has available for manufacturing both branded and private-label pairs. If the company has that is not needed for the current or future years, and excess can be sold-off using the Sale of Existing Capacity section of the screen. For more information see Decisions to Sell Existing Capacity further down on this Help page. Then there are two lines show Capacity Available for Production in the current year, Total Branded Production Needed (in pairs) based on your sales forecast entries, and Capacity Available for Private-Label Production (also based on the branded sales forecast and production needed to make branded pairs). Use this information, along with your company s growth targets and the projected market growth in the years to come (see page 4 of the Footwear Industry Report for the 3-year demand forecasts and the present global supply-global demand balance), to decide whether it makes sense to consider adding more plant or selling some existing. Special Note about the Seven Projections at the Left of the Screen: As you move through the decision screens to make decisions for the upcoming year, you should in no way be alarmed/comforted by the numbers for revenue, net profit, EPS, ROE, and credit rating that you see at the left of the screen. This is because the 6 projections of overall company performance for the upcoming year are not a true indication of your company s projected year-end performance until you and your co-managers have entered a complete set of decisions. Since you may have not completed some of the decision entry screens, the sizes of the year-end projections at the left of the sales forecast are irrelevant in effect, they are based on the decision entries which were carried over from the prior year and which remain in the decision entry boxes. Clearly, you will change a number of things when you get to the other decision screens and you may well revise decision entries for the screens you have already visited. However, you can still make good use of the numbers for projected year-end performance at the left of screen by watching the incremental changes (up or down) as you make new decision entries for the upcoming year. The incremental changes indicate whether the number you are entering for your company proposed marketing effort are likely to translate into higher/lower revenues, higher/lower net profits and EPS, a higher/lower ROE, and a better/worse credit rating. Thus while the sizes of the numbers for revenue, net profit, EPS, ROE, and credit rating are not particularly helpful in evaluating the pros and cons of proposed marketing effort entries, the directions of change in the numbers for revenue, net profit, EPS, ROE, and credit rating are very informative and useful in evaluating the merits of your proposed decision entries for this screen and other screens and deciding whether each new decision entry is likely to help or hurt company performance, given the other decision entries. Decisions to Purchase Used Capacity Used plant becomes available when one or more companies in your industry opt to reduce the production at certain plants by selling some (or even all) of their footwear-making equipment to merchants who specialize
in buying used equipment, reconditioning it, and then reselling it to buyers wanting to expand the of an existing athletic footwear plant or open a new production facility to produce athletic footwear. The advantages of buying used are that (1) it is roughly 20% cheaper than constructing new plant and (2) it can be purchased and installed immediately, thus making the purchased available immediately (in the same year that used is purchased). Payments for the purchase of used plant must also be made in the year the used is purchased. Special Note: Your company cannot purchase and sell plant in the same region in the same year. To see if there is any used available for purchase and/or to purchase any available, click the View/Purchase Available Capacity button and the Capacity Purchases screen will appear. For more information on purchasing used plant, click the Help button associated with the Capacity Purchases screen. TIP: If the industry is oversupplied with production and some companies clearly have more than they can utilize, then at the beginning of next year you may be able to pick up used at bargain prices (compared to what you have to pay for self-constructed new ). Thus, rather than rushing to build new (which worsens the industry over situation), you may end up better off by being patient and stepping in quickly to buy used that struggling rivals are likely to be selling off as part of their turnaround strategy. Decisions to Sell Existing Capacity Merchants of used plant stand ready to purchase all or a portion of the in any of your plants at a price equal to your company s net book value of the equipment. Net book value represents the portion of your company s original investment in the plant (including the cost of any upgrades that may have been made) that has not been depreciated; the net book value is reported on the screen immediately below your entries for sale of existing ). You can sell an entire plant if you so desire and abandon production in that geographic area entirely. Or, you can just sell a portion of any plant at any time (always in increments of 100,000-pairs of annual production not including overtime). To sell any of the production at any of your company s plants, simply enter the amount of that you and your co-managers want to sell in the entry box for Sale of Existing Capacity all entries are in thousands. Thus if you want to sell 500,000 pairs of footwear-making at the North American plant, you should enter 500 and not 500,000. Special Note: Your company cannot purchase and sell plant in the same region in the same year. The money from any sale is received immediately (that is, in the year for which the decision entries are made) see the information on the line just below the entry box for Sale of Existing Capacity. You will be able to see the immediate increase in the year-end cash balance projection on the Finance Decisions screen, which confirms that the sale has taken place as soon as you enter the amount to be sold. Just as importantly, the is lost immediately. When you enter a sale number, you will see immediate downward adjustments in the regular time and overtime figures for Capacity Available for Y Production. WARNING: The decision to sell-off part or all of a plant becomes permanent and final when the deadline for the year passes. Capacity sales cannot be undone once the deadline for the decision round has passed, and the you sell-off is gone forever. In following years you may, of course, purchase used or selfconstruct new, but any you sell-off this year does not automatically return next year. TIP-Strong Suggestion: If, as the game progresses, you and your co-managers repeatedly find it necessary to have sizable inventory clearance sales at the beginning of each year whereby you get rid of unwanted pairs at money-losing prices, then you should strongly consider selling some plant for three reasons: Trying to run your company s plants close to full yet being unable to sell what is being produced at regular prices reduces profitability. Your company loses a substantial sum on each and every pair that is sold at the deeply discounted inventory clearance prices. Having to get rid of excess inventory at the beginning of each year is a strong signal that you have too much plant relative to your company s ability to sell the pairs being produced at the regular prices.
Selling a portion of the unneeded or unprofitable production allows you to recover the full book value of the undepreciated investment and thus provides a financially prudent way to escape what is otherwise an unattractive investment at a very attractive price. Selling off excess and redeploying the proceeds to paying down debt (or maybe even buying back shares of stock) will almost certainly act to improve your company s net profits, EPS, credit rating, and ROE. TIP: If your company is struggling to sell all of the pairs you have the plant to produce, you can get a good idea of how much of your present is likely to be unneeded in the upcoming years by consulting the information in the middle on page 4 of the Footwear Industry Report that shows the 3-year forecasts of market demand and indicates the balance between global supply and global demand. For instance, if there is 70 million pairs of footwearmaking in place and market demand is only 55 million pairs, then pretty clearly there is going to be an overabundance of industry for some time to come. Decisions Regarding Plant Upgrade Options There are four options for upgrading existing plants and equipment as shown below: Benefits Capital Investment Requirement Option A Reduces the number of defective pairs by 50% One-time capital outlay of $2.5 million per million pairs of plant Option B Reduces production run set-up costs by 50% One-time capital outlay of $8.0 million per million pairs of plant Option C Boosts S/Q rating by 1-star One-time capital outlay of $7.0 million per million pairs of plant Option D Increases worker productivity by 25% One-time capital outlay of $3.5 million per million pairs of plant Only one option per year may be undertaken at the same plant. A maximum of two upgrades can be chosen for any one plant. Payments to the suppliers of upgrade options are made the year the option is ordered and construction/installation begins. Upgrade options take effect the year after being ordered it takes one year to complete construction/installation of the upgrade. No upgrades may be ordered for a new plant during the year it is being constructed (but an upgrade may be initiated in the same year that an existing plant is being expanded). An upgrade option can be ordered for a new plant the first year the new plant is on line or any year thereafter. The projected annual cost savings for each option at each plant (based on current plant operations) are shown on the screen. The costs of plant upgrades are treated as additional investments and have a 20-year service life depreciated on a straight-line basis at the rate of 5% annually. TIP: You and your co-managers should take time to carefully weigh the pros and cons of each upgrade option because the cost-saving benefits vary quite significantly from plant to plant and also according to the production strategy for each plant. For example, it is far less cost effective to institute plant upgrade option D at plants where compensation per worker and labor costs per pair are already low (i.e., your company s plant in the Asia- Pacific) as compared to plants where compensation per worker and labor costs per pair are much higher (i.e., your company's plant in North America). It is far more cost effective to institute Option B if your company s strategy is to have a wide product line (350-500 models) than if your company s strategy is to have a narrow product line (50-100 models). It will definitely make more economic sense to institute Option A at bigger plants having high reject rates as compared to smaller plants or plants where the reject rates are low. But whether Option A is cost effective also hinges upon your analysis of whether it would be cheaper to try to reduce reject rates via higher incentive payments, best practices training, and so on rather than making a sizable capital investment. Likewise, the merits of investing in Option C depend on your analysis of whether it might be cheaper to boost the S/Q rating 1-star via higher spending for superior materials or features/styling or TQM-Six Sigma programs. It is left up to you and your co-managers to do the analysis and strategic thinking to decide on what plant upgrade options to institute.
TIP: It is highly recommended that you and your co-managers spend 5-10 minutes playing around with the various upgrade options by checking the box for a particular upgrade at a particular plant and then weighing the projected annual cost savings against the capital outlay requirements. Run several scenarios of what if we do this versus what if we do that. Bear in mind, however, that the projected cost savings figures shown on the screen are based on your current production costs and compensation packages since production costs and compensation change annually and since your company s strategy might well change (to include more or fewer models, a higher or lower S/Q rating and so on), you should not interpret the projected cost savings as anything but a decent estimate based on your company s current situation. When you come back to this screen each year, you ll very likely have different values for projected cost savings for each of the available plant upgrade options. Why? Because the circumstances surrounding costs and compensation have changed. Therefore, even if you decide against particular upgrades for particular plants in one year, you should not rule out the merits of undertaking those same upgrades later, should your company s strategy or production cost structure or compensation and productivity levels or plant reject rates be different. Hence, an annual visit to the plant upgrades section of this section, at least for the first several years, is strongly recommended. Self-Construction of New Production Capacity You and your co-managers have the option at any time to expand the of the 2-million pair North American plant and/or the 4-million pair Asia-Pacific plant. You can also establish a production base in the other two geographic areas. New plants in Europe-Africa and Latin America may be constructed in capacities ranging from a minimum of 1 million pairs annually to a maximum of 2 million pairs per year (not counting overtime); new plants can be expanded later as needed. Some important information about constructing additional : Self-construction of a new plant (in an area where your company has no existing plant) can be in amounts ranging from a low of 1 million pairs, ascending in increments of 100,000 pairs to a maximum of 2 million pairs. The company is limited to a maximum of four different plant sites? one in North America, one in Asia-Pacific, one in Europe-Africa, and one in Latin America. All self construction of new plants or plant additions takes 1-year to complete. Thus, a decision to build a new plant or expand an existing plant in Year 11 means the plant or plant expansion will come on line ready for full production at the beginning of Year 12. All expansions of existing plants must be in increments of 100,000 pairs. The maximum amount by which an existing plant can be expanded in any one year is 50% of existing plant. There is no limit on the number of times that an existing plant can be expanded. Plants in any geographic region can be expanded over time to any desired size (up to a limit of 12-million pairs of production (not counting overtime). Thus the maximum plant size in North America, Latin America, Europe-Africa, and Asia-Pacific is 12 million pairs (which translates into 14.4 million pairs of total production capability with the full 20% use of overtime). It is extremely unlikely that you will ever have good business reason for production beyond these limits (since reaching the size limit in all four areas equates to total global production of 57.6 million pairs). If you are expanding a plant that has upgrade options A,B,C or D, then the expansion will automatically be designed to include all existing upgrades at no additional cost. All costs for added newly-constructed plants or plant expansions must be paid for in the same year as the decision to build a new plant or expand an existing plant is made. The cost of new varies according to the year purchased; scale economies and learning/experience curve effects are allowing the makers of new state-of-the-art footwear-making equipment to reduce their prices at the rate of 2.5% annually. The announced price for new footwear production in Year 11 is $5 million per 100,000-pairs of, but the 2.5% annual declines will result in a cost of only $4.4 million per 100,000 pairs of by Year 16. Hence, delaying the purchase of additional new until it is really needed has the advantage of lowering capital investment in new facilities and equipment. New production is considered to have a service life of 20 years and the capital costs are depreciated on a straight-line basis at the rate of 5% annually.
If your company is the first to build a new footwear plant in Europe-Africa or Latin America, then workers can be employed at minimum annual base wages of $15,000 in Europe-Africa and $2,800 in Latin America; the beginning productivity levels for these workers will be 4,000 pairs in Europe-Africa and 2,500 pairs in Latin America. However, if there are already plants in Europe-Africa and/or Latin America when you decide to construct a new plant of your own, then the starting base wage that will appear on the screen is the prior-year all-plant-average wage for the region. However, you will have the option to cut your wages in a new plant by up to 10% below the prevailing average paid by rival companies in the region. If you and your co-managers wish to self-construct additional plant, then click on the Build button. This will take you to a screen where you can prepare revenue-cost-profitability estimates for any new that might be added. Your company s Board of Directors requires that company co-managers prepare revenue-cost-profit estimates for constructing new plant of 500k pairs or more. Moreover, the Board strongly urges that you also prepare such projections for plant additions of 100k to 400k, since each 100k of new typically costs between $4 and $5 million. Spending millions of dollars to add plant with no analysis of the probable impact on profitability is unwise and imprudent. Ccompetently-managed real-world companies always make credible projections of the profits and return on investment which can be expected from investing in additional plant. However, when you click on the Build button you will be able to enter values for constructing new plant in the amounts of 100k to 400k (assuming your company already has a plant in that geographic region) without making any further entries to develop revenue-cost-profit estimates. When you are satisfied that you are ready to decide whether to construct new plant or not, then either click on the Authorization button on the bottom right side of the screen where the revenue-cost-profit projections are made (to go forward with constructing the amount of new you have entered at the top of the screen) or click on the Cancel button (to abandon the decision entry for new plant construction). Clicking on either button will automatically return you to the main decision screen for Capacity Sales/Upgrades/Additions. If you have opted to go forward with constructing some amount of new plant in a given geographic region, you will see the construction amount entry on the line labeled Self-Construction of Additional Capacity. Just below that line, you will see the capital outlay required to construct that amount of all capital outlays are automatically deducted from the Ending Cash Balance number shown at the very bottom right of the screen, which will likely account (at least partially) for why the projection for Ending Cash Balance is negative. When you get to the Finance Decisions screen, you will be able to make entries to borrow the needed money and/or sell additional shares of stock to fund any negative cash balance projections. Later, should company co-managers decide against constructing the new, then just click on the Cancel button that appears just after the entry showing for Self-Construction of Additional Capacity. This will remove the entry. To restore an entry for self-construction of new, you will have to go through the entire process of developing revenue-cost-profit estimates again (unless you are expanding an existing plant by only 100k to 400k of additional. Purchasing Used Plant Capacity Used plant becomes available when one or more companies in your industry opt to reduce the production at certain plants by selling some (or even all) of their footwear-making equipment to merchants who specialize in buying used equipment, reconditioning it, and then reselling it to buyers wanting to expand the of an existing athletic footwear plant or open a new production facility to produce athletic footwear. The advantages of buying used equipment are that (1) it is roughly 20% cheaper than constructing new plant and (2) it can be purchased and installed virtually overnight in a vacant building suitable for footwear manufacturing, thus making the new footwearmaking available immediately (in the same year that used footwear-making equipment is purchased). Payments for the purchase of used footwear-making must also be made in the year the used is purchased. Special Note: Your company cannot purchase and sell used footwear-making equipment in the same region in the same year. Used equipment purchased in one geographic region cannot be shipped to another geographic region; it must remain in the region where it is purchased. If any used footwear-making equipment is currently available for purchase from these merchants, the amounts and the geographic locations will be posted on the Corporate Lobby screen just click on the link in the Plant Capacity for Sale box on the Corporate Lobby screen to see the current price per 100,000 pairs of.
All purchases of used and newly reconditioned equipment occur on the Corporate Lobby screen on a firstcome basis. It remains to be seen how long any used equipment will remain available for sale once the merchants have posted their offerings it may sell out quickly or it may not. Aggressive companies looking to expand their footwear-making immediately may buy up the available used footwear-making quickly because it is significantly cheaper than constructing new. The availability of used plant is posted at the same time as the results for the prior year usually within 20 minutes following each decision deadline. To purchase any available used plant in a given geographic area, simply enter the desired amount of in the indicated box and press the Finalize Purchase button. Once the purchase is finalized, it cannot be canceled. However, you will be able to sell off any unwanted in the following year at a reduced price. When you get to your decision screens, the amount of the newly-purchased footwear-making will be included in the total production available in the upcoming year. Furthermore, the cost of the used purchase will be reflected in your projected year-end cash balance and it will appear as a cash outlay on the Finance and Cash Flows Decisions screen the cost of any used equipment purchased to expand the of an existing plant ( or open a new plant in a region where your company currently has no plant) is shown in the Capital Outlays section of this screen as well. All purchases of used footwear-making equipment to expand an existing plant must be made in increments of 100,000 pairs of (which translates into 120,000 pairs of, before rejects, with maximum use of overtime production). If your company does not already have a plant in the geographic area where you are considering purchasing used footwear-making equipment, then the minimum-size purchase of used equipment is 1,000,000 pairs of footwear-making (not counting overtime), and a surcharge of $1 million will be added to the cost of the used equipment purchase to cover the expanse of obtaining a vacant building and land suitable for manufacturing athletic footwear. This 1 million-pair requirement on buying used equipment to establish a new plant in a region where your company has no plant is because plants smaller than 1,000,000 pairs of annual tend to have prohibitively high production costs per pair and usually cannot be cost competitive against larger-scale plants. Because newly reconditioned production equipment is considered to have a service life of 20 years, the capital costs of used equipment purchases are depreciated on a straight-line basis at the rate of 5% annually. Thus, any used equipment purchased in one year and then later resold will involve a sales price lower than the purchase price because of the intervening years of depreciation. TIP: If the industry is oversupplied with production and some companies clearly have more than they can utilize, then at the beginning of next year you may be able to pick up used footwear-making equipment at bargain prices (compared to what you have to pay for self-constructed new ). Thus, rather than rushing to build new (which worsens the industry over situation), you may end up better off by being patient and stepping in quickly to buy some of the used footwear-making equipment that struggling rivals are likely to be selling off as part of their turnaround strategy. Explanation of the Performance Projections at the Left of Each Screen At the left of every BSG decision screen, there is a box containing projections of the company's overall performance for the upcoming year on six measures: Earnings per share defined as net profit divided by the number of shares outstanding at the end of the year. Earnings per share is one of your company's five annual performance targets. ROE (return on average equity) defined as net profit divided by the average amount of shareholders' equity investment; the average amount of equity investment is equal to the sum of shareholders' equity at the beginning of the year and the end of the year divided by 2. An annual ROE of 15% or higher is one of your company's annual performance targets. Credit rating Your company's credit rating is established by credit analysts using three measures: debt-assets ratio, interest coverage ratio, and the default-risk ratio. The credit rating shown at the left of the screen is the projected credit rating for next year, given the company's projected performance it is not the current credit rating (which is reported in each issue of the Footwear Industry Report). Investors expect that your company will achieve a credit rating of B+ each year. Image rating Your company's image rating is based on (1) its branded S/Q ratings in each geographic region, (2) its market shares for both branded and private-label footwear in each of the four geographic regions a total of 12 factors, and (3) your company s actions to display corporate citizenship and conduct operations in a socially responsible manner over the past 4-5 years. Investors have established a target image rating of 70 or higher for your company to achieve each year.
Revenues defined as worldwide revenues (after taking into account all exchange rate adjustments) from the combined sales of both branded and private-label footwear in all four geographic regions. Revenues are booked at the time of shipment, not when the company receives the cash payments (25% percent of annual revenues are not received in cash until the first quarter of the following year, since payments on shipments to retailers in the fourth quarter of each year are normally not received until the first quarter of the following year). Net profit defined as worldwide profit after all expenses and taxes. Each time you make a new decision entry, all 6 of these companywide performance projections are recalculated, thereby showing you the incremental impacts of that decision entry. This feature of BSG provides you with powerful what-iffing capability that makes it much easier to identify what you and your co-managers consider to be an "optimal" or at least "acceptable" decision entry. Always bear in mind that the 6 projections do not really represent a true indication of your company's projected performance until you and your co-managers have made a complete set of decisions (covering all decision screens) for the upcoming year. Why These On-Screen Projections Are So Important and How to Use Them Properly. Each time you make a new decision entry, all 6 of the above companywide performance projections are instantly recalculated, thereby showing you the incremental impacts of that decision entry. It is easy enough then to simply enter a "trial" decision and determine whether the resulting projections look better or worse than before. By entering several different "trial" decisions, you can quickly and readily compare the projected outcomes of "what if we do this" against "what if we do that." After entering a number of different trial decisions, you'll be able to identify which decision entry seems "best" or "most acceptable," given all the different on-screen calculations that are provided. This BSG feature provides you with powerful capability to explore all kinds of "what if" scenarios and make wise numbers-based decisions. Always bear in mind that the 6 projections do not really represent a "valid" indication of your company's projected performance until you and your co-managers have made a complete set of decisions (covering all decision screens) for the upcoming year. In other words, while you are working your way through the early decision screens the projections will be updated with each entry, but the numbers shown will only be "a rough approximation" and lack finality because the projections are not yet based on all the decision entries you plan to make for the upcoming year. Once you have gone through all the decision screens and entered what you think are reasonable decisions for all the boxes, then it is time to really scrutinize these 6 company performance projections and determine whether the projected outcomes of your strategy and decision-making look acceptable. If not, then you need to tour back through the decision screens, make different trial decisions here and there as seem appropriate, and not stop tweaking and fine-tuning until you arrive at a set of company projections that appears to be the best you can come up with. But even then, then projections are still only projections they do not represent guaranteed outcomes. Why? Because there remain a host of uncertainties about what competitors will actually do (what prices will they charge, how much they will spend on advertising, how many different models and styles they will offer, and so on). These will not be known until the deadline for the decision round arrives, at which time the BSG server will process the decision entries of all companies and determine the actual outcomes of competition in the marketplace for athletic footwear.