Capsim Report

I. administrator Summary Erie Corpo ration has been founded in 2011 with the mission is to provide both reliable products for starting epoch-technology customers including traditionalistic and woeful subvert segments and premium- technology orientated customers including senior high End, deed and sizing segments. This business plan is written so as to provide the board of directors a dilate picture about the keep corporations strategies as intumesce as the direction how we can implement these strategies. The plan consists of three parts.The primary part is about the incorporate objectives and schema. In detail, at the end of course three, Erie aims to be one of the two buy the farming companies in the merc flipise with a wampum profit of $10,000,000 and 25% of food market sh bes of the whole project. In addition, the companys concern expects to gain at least 30% of contribution margin for each product, to reduce 60% to 70% of total labor apostrophizes and 11. 8% of total material termss. Eries strategies be niche cost leadership and niche specialisation.In particular, while products in conventional and Low End are oriented to operate under the niche cost leader, products in three remaining segments including graduate(prenominal) End, Performance and size are aimed to follow the niche differentiator strategy. This is because while wrong is the near considerable banner of customers in conventional and Low End segments, this does non matter to the opposite three segments consumers as abundant as the products offered are premium-technology.To implement this strategy effectively, Erie should operate under the direction like this, besides revising products to come to customers expectation the company objurgate up a relatively low price for products in Traditional and Low End segments and vice versa for products in the three remaining segments. Simultaneously, the company whollyow for redact on skill and automation gradu e very last(predicate)y for all(a) segments. This allow bring to Erie a competitive advantage over other competitors in terms of farseeing-term cost savings.In addition, level best second transpose might may be run as ofttimes as possible and a significant totality of money result to a fault be fatigued on promotion and sales budgets so as to capture the highest possible percentage of market shares. Further much, Erie is volitioning to make issuees at least in the first two days because in the remaining years of the simulation, when higher capacity and automation are ready as fountainhead as Human Resources and come up Quality Management functions are applied, Erie will flummox much competitive in the market and hence can make profit as the production costs will be minimized.Secondly, specific objectives, key performance indicators and strategy which are followed strictly the corporate objectives of all departments including R&D, Marketing, drudgery, Human Resour ces and come Quality Management will be besides set out. Finally, a back-up plan which might be utilized when there is trouble in the mental process of the companys products is also prepared. Under this plan, the failed product will be remained for two years sooner of stopping its operation immediately so as to sell its remaining inventory and wait for the virgin product to be finished and could be sold to the market.Table of Contents Executive Summary 1 Introduction 4 Corporation Objectives & Strategies 4 1. Corporation Objectives 4 2. Corporation Strategies. 4 R&D surgical incision 5 1. Objectives 5 2. KPIs. 5 3. Strategies. 5 Marketing surgical incision 6 1. Objectives 6 2. KPIs. 6 3. Strategies. 7 Production Department 8 1. Objectives 8 2. KPIs & Strategies. 8 3. Strategies. 9 Human Resource Department 10 1. Objectives 10 2. KPIs & Strategies. 10 TQM Department 11 1. Objectives 11 2. KPIs & Strategies. 11 Finance Department 12 1. Objectives 12 2. KPIs & Strategies. 2 3. Str ategies. 12 Back-up Plan 13 Conclusion 14 Reference 14 concomitant 15 II. Introduction Sensor industry is more likely an oligopoly because the products are high technological including cameras, biometric devices and labs-on-a-chip. In addition, there are only six firms dominating the market and the total demand for the whole industry remains stable which means that new firms cannot enter into the market. Furthermore, year after(prenominal) year, while customers expectations are seemly higher and higher, the products are getting older and price ranges are stricter.This indicates such a challenge for all companies in the market. A critical successful factor which can assist all companies to overcome this bar is that each company should choose an reserve strategy to follow so as to succeed and become more competitive in the market. Recognizing this fact, Erie has chosen two strategies including niche cost leadership and niche differentiation that are appropriate for each types of segments. In this business plan, these strategies will be examined in depth and detailed actions of all Eries departments which are followed these strategies are also sketched out.III. Corporation Objectives and Strategies 1. Corporation Objectives By the end of year 3, Erie will * Be one of the two leading companies in the demodulator industry * Achieve net profit of $10,000,000 * Obtain at least 25% of market shares of the whole industry * Gain at least 30% of Contribution Margin for each product * Reduce at least 70% of the total labor costs and 11. 8% of total material costs 2. Corporation Strategies According to customers acquire criteria of Traditional and Low End segments, prices are deemed to be the most considerable factor.In fact, respectively, the price ranges of Traditional and Low End take up approximately 23% and 53% over other criteria such as horizon and reliability. In other words, customers are willing to purchase low-tech products as long as their prices are relatively low. As a result, Niche Cost Leadership seems to be the most appropriate strategy for these two segments. On the other hand, prices are the most insignificant buying criterion in High End, Performance and surface segments. No matter how high the prices are, customers in these segments are more preferable to high-tech product.In particular, for the High End and Size segments, high-minded position occupies 43% and products ideal age is 29%. Furthermore, reliability is the most important consideration to customers in Performance segment. Hence, Niche distinction is a proper alternative for these three segments. IV. R&D Department 1. Objectives * Meet customers expectations in all segments * Control R&D budgets for products in Traditional and Low End segments as low as possible * Continuously update products positions for High End, Performance and Size segments every year . KPIs * Keep R&D costs for in Traditional and Low End segments maximum at $1,000,000 * Invest token( prenominal) $1, euchre,000 for revising products in High End, Performance and Size segments 3. Strategies a. Traditional and Low End segments For these two segments, Erie decides to invest slightly and per annum in performance and size while decrease the mean time to begin with failure (MTBF) of products in year 1. After that, MTBF will be remained stable during the first three years. waste EBB form 1 division 2 socio-economic class 3 social class 1 form 2 Year 3Performance 5. 7 6. 4 7. 1 3 3 3. 2 Size 14. 3 13. 6 12. 9 17 17 16. 8 MTBF 16000 16000 16000 14000 14000 14000 Table 1 R&D investment for Traditional & Low End segment for the first three years b. High End, Performance and Size segments So as for customers to perceive the differentiation of our products in these three segments, performance, size and MTBF should exactly meet the customers expectations. Therefore, Erie decides not to launch the products in the first year.Since second year, when the products appear in the market, they will be revised annually in hallow to appeal to be younger in customers perception Year 1 Year 2 Year 3 ECHO Performance 8 9. 8 10. 7 Size 12 10. 2 9. 3 MTBF 2 three hundred0 24000 24000 EDGE Performance 9. 4 11. 4 12. 4 Size 15. 5 14. 6 13. 9 MTBF 25000 27000 27000 EGG Performance 4 5 6. 1 Size 11 8. 6 7. 6 MTBF 19000 20000 20000 Table 2 R&D investment for High End, Performance and Size segment for the first three years V. Marketing Department 1. Objectives * Increase sales of 5 segments by 10% each year Increase demand over 10% each year * arrival supra 25% of market shares for Traditional and Low End segments, and above 20% for High End, Performance and Size segments at the end of year 3 * Keep the sales forecast error of 5 segments fluctuate between 5% 10% during three years 2. KPIs * Keep the price of products of Traditional and Low End segments lower than the just price of their price ranges the ones of High End, Performance and Size higher than the come price * Remain the same prices of all products for the first three years, then slightly decrease all prices from $0. to $1 after year 3 * Maintain customer awareness and accessibility of 5 segments from 95% to ascorbic acid% * Keep the forecast errors for 5 segments not higher than 200,000 units for Traditional and Low End segments 50,000 units for High End, Performance and Size segments every year 3. Strategies a. Pricing Strategies * Traditional & Low End In a product life cycle, the introduction stage starts when development is complete and ends when sales indicate that target customers astray accept the products.The marketing strategies are fully implemented during the introduction and should be tightly integrated with the companys competitive advantages and strategic focus (Ferrell & Hartline, p210, 2008). Therefore, during the first three years, in light of cost leadership strategy, Traditional and Low End segments will be followed the penetration pricing approach, w hich is setting relatively low initial prices, so as to maximize sales, gain widespread market acceptance, and capture large market shares quickly.It means that, in order to comply with the low cost strategy, the prices of the segments are set below the fairish of their price ranges. In particular, the price of Eat, which dominates Traditional segment, is established at $21. 5 per unit compared to $25 of the average price, whereas the one of moderate, which takes up majority of sales of Low End segment, is set at $18 compared to $20. (Refer to appurtenance 1b Pricing Forecast for further details) This approach is suitable for these two segments because of two main creators.The first reason is that the segments customers are price sensitive since prices outweigh such other elements as ideal position and reliability. The other one is due to the fact that R&D expenses are relatively low as customers do not pay much attention on the segments characteristics. * High End, Performance & Size Unlike to Traditional and Low End segments, High End, Performance and Size segments are pursued differentiation strategy hence, price skimming approach seems to be an appropriate alternative.The rationale behind price skimming is to intentionally set high prices relative to competitors, thereby skimming the profits of the top of the market, recovering the high R&D and marketing expenses associated with developing new products. In other words, the prices of these three segments will be set above the average of price ranges and should be, at least, obtain the contribution margins of 30%. In detail, the prices of Echo, Edge and testicle is respectively set at $39, $34. 5 and $34. 5 for High End, Performance and Size segments compared to the average prices of $35, $30 and $30 of each price ranges. Refer to appendix 1b Pricing Forecast for further details) b. advancement and gross revenue Strategies component part of products awareness and accessibility, which reflect the numbe r of customers who know the existence of a companys products, and who can substantially interact with the company, are determined respectively by each products promotion and sales budgets. In order to increase demand up to 10%, our company, therefore, initially invests $3,000,000 in promotion budgets during the first two year, and $2,200,000 in sales budget of Eat and Ebb during three years because customer accessibility requires long time investment to execute 100%.Since year 3, when customer awareness achieves over 100%, the investment in the promotion budgets will be scaled back to $1,500,000. For Echo, Edge and globe, since they will be launched in the second year, there are only $1,500,000 invested in promotion budgets, and around $1,100,000 to $1,500,000 spent in sales budgets in the first year. However, when they are ready for sales, their promotion budgets will be increased up to $3,000,000, whereas their sales budgets will be invested up to $2,200,000 in the second year so as to sanction customers demand. (Refer to appendix 1d Promotion and Sales work outs for further details)VI. Production Department 1. Objectives * Achieve a proper seed down utilization * Control production costs effectively 2. KPIs By the end of year three, Production director aims to * Keep congeal utilization ratio from 90% to 130% to minimize machine downtime cost and pricey 2nd transpose charge * Decrease labor costs for all segments by 60% to 70% * Maintain overtime ratio at 0% * Minimize inventory carrying costs at maximum 25% of total production per year 3. Strategies a. Automation Due to the fact that each rate of automation will decrease labor costs by 10%, Erie will increase automation in all segments.Even though the costs of automation are high, this is such a short-term aspect. In long-term, the improvement in automation will bring a greater benefit because costs spent on automation just incurred once while the reduction in labor costs is annual. Therefore, Er ie plans to pilfer automation rating for all segments so as to achieve rate at 7 for Ebb and 6 for all other segments in year 3 as set out in table below Year 1 Year 2 Year 3 Eat +1 - +1 Ebb +2 - - Echo +1 - +2 Edge +2 - +1 fruitcake +2 - +1 Table 3 Production investment in automation level for 5segments the first three years b. CapacityUsing an efficient amount of capacity can help the company to achieve economic of scale as well as to be consistent with the pricing strategy as set out by Marketing department. Furthermore, in order to satisfy higher demands as well as to follow sales forecasts of Marketing department, production manager plans to buy 600 units for Ebb 300 units for each of Edge and junkie in year two. After that, in year three, 500 units of capacity will be purchased for Eat and Ebb. This will also help Erie achieve plant utilization ratio objective as mentioned above. Year 1 Year 2 Year 3 Eat - - 500 Ebb - 600 500 Echo - - - Edge - 300 -Egg - 300 - Table 4 Pro duction investment in capacity for 5segments the first three years Additionally, in suit of clothes that there is a restriction for purchasing capacity like limitation in the maximum investment or upset(prenominal) increase in sales, second shift of capacity will be utilized as much as possible to maximize sales. At the same time, using second shift workers will also be chosen instead of first shift workers with overtime. The main reason is that while second shift workers are paid the same wage rate of addition 50% as first shift workers work on overtime, second shift ones are more efficient as they are not as tired.Moreover, the employee turnover rate is lower which can help Erie to keep talent workers and reduces future recruiting costs. Relying on second shift workers, Erie will also achieve its goal which is to keep overtime ratio at 0%. VII. HUMAN RESOURCE DEPARTMENT 1. Objectives The department intends to * Increase Productivity Index by 5% * Lower Turnover Rate to 7. 5% in year 3 2. KPIs and Strategies Erie plans to invest $4 one gazillion million for Recruiting Spend and 40 training hours in both year 2 and 3 in order to support Production department reducing labor cost.However, 5% turnover rate is un fend offable annually because of retirement, relocation and weeding out poor workers. Year 2 Year 3 Recruiting Spend ($000) $ 4,000 $4,000 cooking Hours 40 40 Table 4 HR investment in recruiting and training for workers the first three years VIII. TQM DEPARTMENT 1. Objectives By the end of year 3, Erie proposes to * Reduce material costs by 11. 8%, labor costs by 14% and administrative costs by 60% * Shorten the length of time required for R&D projects to complete by 40% * Increase demand by 14. 4% for the product line 2. KPIs and StrategiesFor each initiative, Erie is planning to invest $1,500,000 in a 3 year cycle. In particular, in year 3, 4, 6 and 7, $1,500,000 will be invested in each initiative while in year 5 and 8, there is only $1,000,000 b udgeted for each initiative. The firm chooses an investment of $1,500,000 because expenditures beyond $ 4 million over 2 or 3 years in each initiative will lead to the diminishing returns. Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Process Management Budgets CPI Systems $1,500,000 $1,500,000 $1,000,000 Vendor/JIT $1,500,000 $1,500,000 $1,000,000Quality Initiative cultivation $1,500,000 $1,500,000 $1,000,000 Channel Support Systems $1,500,000 $1,500,000 $1,000,000 Concurrent Engineering $1,500,000 $1,500,000 $1,000,000 UNEP Green Programs $1,500,000 $1,500,000 $1,000,000 TQM Budgets Benchmarking $1,500,000 $1,500,000 $1,000,000 Quality Function Deployment Effort $1,500,000 $1,500,000 $1,000,000 CCE/6 Sigma Training $1,500,000 $1,500,000 $1,000,000 GEMI TQEM Sustainability Initiatives $1,500,000 $1,500,000 $1,000,000 Table 5 TQM investment in each initiative during 8 years IX. Finance Department 1. Objective By the end of year three Avoid collar loan * Achieve the accumulative profit between $15,000,000 to $20,000,000 * Utilize debt in investment effectively 2. KPIS * Maintain the leverage between 1. 8 to 2. 8 * Achieve the ROE ratios between 15% to 25% * Maintain closing cash position at around $12,000,000 to $15,000,000 each year * Maintain working capital day from 30 to 90 days 3. Strategies a. Emergency loan In order to finance the maximum investment in the capacity and automation of the first three years, the highest amount of stocks and bonds will be issued in year 1 and delay to be considered issuing since year 2 in case of cash shortage.In addition, to sustain the loss in the first two years for capturing the market shares, a maximum amount of current debt will be borrowed in the first year. This in turn could avoid a 7. 5% of penalty for the emergency loan. After that, our company will strain to borrow a sufficient amount of current debt with the purport to maintain our cash position at around 12,000,000 to $15,000,000. Besides, the credit for account receivable is set at 30 days so as to have a sufficient amount of cash to avoid emergency loan. b. LeverageThe purpose of maintaining the leverage ratio is not to use excessively much hold open earnings for funding the increment and avoiding a high amount of debt which can lead our company to a financial risk because of a significant amount of interest expense. In order to keep an appropriate leverage ratio, the total amount of debt will only be considered in the worst case. However, if the leverage is too high, the production investment needs to be scaled back. c. Cumulative profit So as to achieve the above expected cumulative profit, firstly, the day of working capital needs concerning and maintaining from 30 to 90 days.This in turn can protect our company from a risky position if problems occur as well as help us achieve a higher productive rate. Secondly, the expenditure for HR and TQM will be carefully calculated. Finally, the account payable policy is set at 30 d ays which will minimize significantly suppliers material withholding. Hence, our companys profit can be improved in case of stock out because of lacking materials. X. Back-up plan Most companies have to confront with several surprising and difficult situations during operating period.One of these difficulties could be that some companies might collapse as losing their ability to continue to compete with other competitors in some products. The reason for this would be that they no longer make exuberant sales to cover costs which lead to a decrease in market shares and an extreme financial loss as well. Therefore, in order to avoid this situation, Erie has developed a back-up plan in case that one of our products suffers serious loss. According to the BCG matrix, it is believed that Traditional and Low End segments might be in the glean stage since year 5.This is because these two segments have dominated a large proportion of market shares. Moreover, their growth rates start to dec rease significantly for a long time of being operated in the sensor market. As a result, our company intends to adopt the exiting strategies when these segments begin to make relatively small profits or suffer serious loss. Instead, our company decides to develop and launch a new product which will be followed the differentiation strategy like High End and Performance segment since these segments are just in the hold stage at that time, hence can catch up with other competitors products.XI. Conclusion In conclusion, relying on the application of such strategy, Eries products will be high-recognized in the market as they are revised regularly and efficiently. In addition, through the advantage of an initially significant investment, the company could become more competitive in the market as its production costs are minimized. Furthermore, by accepting a little bit of risky at about the first two years, Erie will gain a competitive advantage over other competitors in terms of long-ter m cost savings and hence could provide cheaper products and increase sales in later years. XII. Reference * Ferrel.O. C. & Hartline. D. M. 2008, Marketing Strategy 4e, South- Western Cengage Learning, the USA. XIII. appendage 1. Marketing Forecast a. Sales Forecast Year 1 Year 2 Year 3 Eat 2,000,000 2,200,000 2,420,000 Ebb 2,200,000 2,420,000 2,665,000 Echo 430,000 475,000 525,000 Edge 350,000 385,000 425,000 Egg 400,000 440,000 485,000 b. Price Forecast Year 1 Year 2 Year 3 Eat $ 21. 5 $ 21. 5 $ 21. 5 Ebb $ 18 $ 18 $ 18 Echo $ 39 $ 39 $ 39 Edge $ 34. 5 $ 34. 5 $ 34. 5 Egg $ 34. 5 $ 34. 5 $ 34. 5 c. Sales Revenue Forecast Year 1 Year 2 Year 3Eat $43,000,000 $47,300,000 $53,030,000 Ebb $39,600,000 $43,560,000 $47,970,000 Echo $16,770,000 $18,525,000 $20,475,000 Edge $12,075,000 $13,282,500 $14,662,500 Egg $13,800,000 $15,180,000 $16,732,500 d. Promotion & Sales Budgets Promotion Budget (000) Sales Budget (000) Year 1 Year 2 Year 3 Year 1 Year 2 Year 3 Eat $3,000 $3,000 $1,500 $ 2,200 $2,200 $2,200 Ebb $3,000 $3,000 $1,500 $2,200 $2,200 $2,200 Echo $1,500 $3,000 $3,000 $1,500 $2,200 $2,200 Edge $1,500 $3,000 $3,000 $1,100 $2,200 $2,200 Egg $1,500 $3,000 $3,000 $1,100 $2,200 $2,200 . Production Plan PROUCTION PLAN Year 1 2011 Eat Ebb Echo Edge Egg NA NA NA Total Units sales forecast 2000 2200 430 350 400 5380 Inventory on hand 189 39 40 78 62 408 Production schedule 1800 2200 400 300 340 5040 Production after Adj. 1782 2178 396 297 337 4990 Margins 2nd shift production % 0% 57. 10% 0% 0% 0% Labour cost/unit $8. 22 $8. 26 $9. 39 $9. 39 $9. 39 Material cost/unit $10. 96 $7. 63 $15. 53 $15. 45 $13. 3 Total unit cost $19. 18 $15. 89 $24. 92 $24. 84 $22. 62 CM 10. 8% 11. 7% 36. 1% 28. 0% 34. 4% Physical plant Total 1st shift capacity 1800 1400 900 600 600 5300 Buy/sell capacity Automation rating 4 5 3 3 3 New automation rating 5 7 4 5 5 Investment $7,200 $11,200 $3,600 $4,800 $4,800 $0 $0 $0 $31,600 Workforce Last year demand This Year 1st shift 2nd shift Overtime Max Invest 32,694 Completement 700 820 820 705 115 0% A/P Lags 30 (days) 3. Proforma Financial Statements a. proportionateness Sheet PROFORMA BALANCE SHEET ASSETS silver 28034 Accounts receivable 10240 Inventory 1055 Total Current Assets 39328 Plant & Equipment 145400 Accumulated Depreciation (47626) Total Fixed Assets 97774 Total Assets 137102 LIABILITIES & OWNERS uprightness Accounts Payable 7699 Current Debt 20341 Long Term Debt 60694 Total Liabilities 88734 Common Stock 32060 Retained Earnings 16308 Total Equity 48368 Total Liabilities and Owners Equity 137102 b. funds Flow Statement PROFORMA CASH FLOW STATEMENT Cash Flows from Operating Activities salary Income (Loss) (13274) Adjustment for non-cash items Depreciation & Writeoff 9693 Change in Current Assets and Liabilities Accounts Payable 1116 Inventory 7562 Accounts receivable (1933) Net cash from operations 3165 Cash Flows From Investing Activities Plant Improvements (31600) Cash Flows from Financing Activities Dividends Paid Sales of Common Stock 13,700Purchase of Common Stock Cash from long term debt 18994 Retirement of long term debt Change in current debt (net) 20341 Net change in cash position 24600 starting time cash position 3,434 Closing cash position 28034 c. Income Statement PROFORMA INCOME STATEMENT Product Name bury EBB ECHO EDGE EGG Total Sales 42385 39600 16770 12075 13757 124587 Variable Costs Direct comprehend 16227 18156 4043 3284 3748 45458 Direct Material 21632 16771 6682 5403 5279 55768 Inventory Carry 0 33 18 75 0 127Total Variable Costs 37859 34960 10743 8761 9028 101352 Contribution Margin 4520 4640 6027 3314 4729 23235 Period Costs Depreciation 3120 3173 1320 1040 1040 9693 SG&A R&D 269 0 1000 1000 1000 3269 Promotions 3000 3000 1500 1500 1500 10500 Sales 2200 2200 1500 1100 1100 8100 Admin 365 341 145 104 119 1074 Total Period Costs 8955 8715 5465 4744 4759 3 2637 Net Margin (4429) (4075) 562 (1431) (29) (9402) Other 1635 EBIT (11037)Interest 9384 Taxes (7147) Profit Sharing 0 Net Profit (13274) d. Cash Budget CASH BUDGET Total Beginning cash balance 3,434 Cash from operations 3,165 Total ready(prenominal) Cash 6,599 Less Capital expenditures (31,600) Interest (9,384) Dividends 0 Debt retirement 0 Other (1,635) Total Disbursements (42,619) Cash Balance (Deficit) (36,020) Add Short-term loans 20,341 Long-term loans 18,994 Capital stock issues 13,700 Total Additions 52,035 Ending Cash Balance 16,015