A factory efficiency of around 70%-80% is very good. However, if you have a factory efficiency lower than this, then continue reading to identify what the issue is and how you can resolve it.
There are several factors as to why your factory has low efficiency. Check the following:
1. Raw Materials Stockout
Consider increasing your raw materials inventory or improve your relationships with your suppliers.
Raw Materials Inventory is the number of weeks worth of raw materials you wish to keep on hand. A higher inventory will help to avoid lost capacity through raw material stock outs. This does come at a price however, as each unit of raw materials incurs a holding charge.
Supplier Relations are expenditure that could be directed at negotiating single source contracts, providing suppliers with demand forecasts and educating suppliers in Just-In-Time and Total Quality Management techniques. It may also extend to paying incentives to suppliers who provide quality products, consulting suppliers when designing new products and paying increased transport costs to enable more frequent deliveries.
The benefits of investing in supplier relations include reducing line stoppages due to reduced unavailability and/or inadequate quality of materials. Current relationships with suppliers are only about half as good as they could be. It will require a significant investment to improve supplier relations, but once improved it will require a lower level to maintain this improvement as the level of accumulated supplier relations deteriorates over time.
2. Setup Time
You may want to consider increasing your batch size or spend more on reducing setup times.
Setup Time Reduction Expenditure includes expenditure on analyzing set up procedures and developing and documenting new statements of procedure. It also includes expenditure on plant modifications to facilitate quick changeovers.
Investment in set up time reduction will reduce the amount of time spent setting machines up and hence increase effective capacity (provided batch size remains constant). Other factors affecting the capacity lost to setups are: batch size, number of products, and product complexity.
We assume that there is a standard setup time of about 4 hours per setup. By investing in setup time reduction we can reduce this. Over the last 5 years setup times have been reduced by 5%. With the present batch sizes and number of products, each firm is losing about 10% of theoretical factory capacity on setups.
3. Rework Time
You may want to look at improving the skills of your staff through training, increasing expenditure on the maintenance expenditure of your factory and increasing your supplier relations expenditure.
Idle Time is an inefficient use of resources causing higher average manufacturing costs per bike. You need some idle time to cater if there is higher demand in your products than expected, however having too much Idle Time is costly. To reduce this, you may look at selling some of your excess factory capacity and/or firing some of your workers to reduce your factory capacity.
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This article will be a three-part series introducing the market segments in Music2Go Marketing Business Simulation. In this article, we’ll be talking about the Standard Segment.
Market Segments in Music2Go Marketing
There are three market segments in Music2Go – Standard, Youth, and Sports (Multi-Player only).
These segments have different sizes, projected growth, sensitivity to price, advertising, distribution, and product specs.
You start with a single MP3 Player product in the Standard market segment. Starting in Year 3 (after 2nd rollover) you may improve your existing product and/or launch additional products into new market segments (up to a maximum of 4 products by Year 6). Part of the challenge of Music2Go is in being able to balance the needs of your products within your limited marketing budget.
Standard Segment
Consumers in this segment tend to be less active than those in the Sports segment and thus do not require the high level of technological specifications inherent in sports designs. While young adults in this segment share the purchasing ability of their sports counterparts, they are more price conscious, which is reflected in the relative pricing between these two segments.
Medium priced ($85 – $100) with high price sensitivity
Price range is $40 to $120, but the recommended range is $85 to $100.
Medium sensitivity to advertising
High sensitivity to distribution coverage
Low sensitivity to product specifications
Consumer style / tech spec preferences change slowly, so segment moves
slowly on perceptual map.
Since consumers in this segment are highly price sensitive, you can expect some price competition. Plan for this with cost reduction projects to maintain acceptable unit margins. However, be careful of engaging in a price war. No one wins a war. This is the slowest moving segment and has low sensitivity to product specs. So you may only require a single product spec improvement project midway through the simulation to remain competitive. It is the largest of the three segments but has minimal underlying growth.
You will be selling a single Standard Segment music player in the first two years of the simulation. After the 2nd rollover you may launch additional products into the Youth and Sports segments (Multi-Player only).
You want to get product development projects right the first time as this can be a costly mistake. It can mean either your Unit Prime Cost is higher than you want and/or your specifications are not as you wanted resulting in a lower demand for your product if they are wrong.
There could be two reasons why your project failed:
1. The project/budget expenditure was too low and/or 2. The requested unit prime cost was unrealistically low
As in real life, you do not want to commit to a product development project without checking that it was appropriately funded and that it would be able to provide an acceptable return on investment.
In addition, you have to be careful that the specifications you enter for your new product actually fall close to the ideal point of the segment you are targeting. Look under Key Reports for Perceptual Map of Market Segments to check this. Products outside the radius of influence (i.e. outside the circles) will not sell at all.
How do we conduct successful development projects?
We will walk you through an example where we develop the design for a racers bike. While the specifics and calculations may change, the steps you follow will be the same:
1. View the Indicative Values for Market Segments within the Product Development Scenario Information report to view the ideal product attribute levels desired by each segment.
(Note: These desired product attributes by each market segment change slightly from year to year so be sure to keep monitoring for the changes.)
2. Take the current Style/Tech Specs of your closest existing Design Project and calculate the required change in Style/Design and Technical Specs.
In our example, the closest existing Design Project is our Adventurer Bike. You can view the Product Development Project Results Report to view your closest existing design paying attention to the Style/Design and Technical Specs:
3. Calculate the difference in Style and Technical Specifications between the desired design and the closest existing design.
As you can see, in this example, our only and closest existing design project is our Adventurer product. This features specifications of 50 Style and 60 Technical. Our desired design project has targeted specifications of 20 Style and 86 Technical.
So the difference is 30 Style and 26 Technical.
We can see on the Product Development Scenario Information report that each unit of Style development costs $1000 and each unit of Technical development costs $20,000.
Our example calculation will be:
30 x $1,000 added to 26 x $20,000 = $550,000
Therefore, our design cost would be $550,000 on the new design to achieve 20 Style and 86 echnical.
4. Calculate your prime cost.
From the table above we can see that the prime cost will be calculated at roughly $0.1 to $0.15 per design and $4.50 to $5.00 per technical specification. We want a racers bike with 20 style/design and 86 technical specifications.
A conservative calculation would therefore be:
0.15 x 20 added to 5.00 x 86 = $433
If we enter any additional expenditure on to our design cost this will be used to further reduce the Prime Cost.
Note:This does NOT mean you should always aim super low with target Prime Cost. If you aim too low, then your project won’t have enough money to achieve its objectives and you will miss your style / tech spec targets as well as your prime cost target.
How do I correct a failed product design?
A failed product design is a design that shows anything less than 100% success rate within the Product Development Results Report. Unfortunately this means you will need to design the design again. However! The failed design is likely to be a lot closer to your desired specifications than the previous closest design, thus it means it is likely to be cheaper to invest in. Simply follow the process above again working off the new closest existing design (even if the closest existing design is a failure).
Three periods into the simulation and you will be given control of your firm’s Customer Relationship Management strategy.
Customer Relationship Management or CRM is an approach to manage a company’s interaction with current and potential customers.
Retention of Existing Customers is a key part of how to win AdSim and this is your main decision for keeping them satisfied with your Customer Service Level.
Purpose of CRM
The purpose of a Customer Relationship Management strategy in AdSim is to decide which policies you will implement to try and keep Existing Customers loyal to your Digital Camera brand.
You will be able to measure the effectiveness of your Customer Relationship Management strategy through two market research reports:
The Customer Relationship Management Evaluation report.
Showing your adverts to a focus group of New and Existing customers and asking them to rate your current strategy’s appeal.
A comparison of your product’s Customer Relationship Management Options with its competition.
CRM Decisions In AdSim
In AdSim you are required to make decisions about four elements of your Customer Relationship Management strategy:
CRM SYSTEM
Decide whether or not you want to invest in a Customer Relationship Management database system? And if so what type? e.g. Entry level, Mid-Level or Custom Built.
WARRANTY
What length of Warranty that you want to offer your customers? E.g. 90 Days, 180 Days, One Year or Two Years.
SUPPORT
What level of a customer service do you want to provide? E.g. A manual, a website too, an e-mail helpdesk, or a telephone helpdesk too.
LOYALTY
What type of customer loyalty program do you want to administer? E.g. nothing at all, a regular newsletter, a regular photo contest or even a photo school.
On each tab of the decision screen, i.e. CRM System, Warranty, Support and Loyalty you are required to choose which option you think best targets your customers within your budgetary constraints.
Note that each option has a cost associated with it and that amount will be deducted from your Promotion Budget if you select that option. Generally the greater the cost of the option, the more appeal it will have to your market.
Your objective is to create wealth for shareholders and so you will be evaluated on the cumulative change in Shareholder Value that your firm generates.
Being evaluated on shareholder wealth is significantly different from evaluation based on net profit, market share, or earnings per share.
Your Aim
You should aim to:
Maximize net profit
Minimize shareholder investment
Minimize risk (associated with high levels of debt)
Due to these multiple objectives, a small niche marketer consistently earning good margins and without much debt may outperform a large heavily-indebted firm with earnings several times greater.
Firms will need to carefully consider these objectives when developing their overall strategy, their marketing, operational and financial plans. Simply increasing in size will not necessarily lead to an increase in shareholder value. You should only invest money (for example in new plant, new product development, or on factory improvements) if you believe that the return on these investments will be greater than what shareholders could achieve elsewhere at the same level of risk (e.g. shareholders can earn returns of 8% by investing in a term deposit). If not, you should instead consider repaying debt, paying a dividend, or repurchasing issued shares.
The Perceptual Map is a convenient way of visualizing the differences between the different market segments in terms of the different level of Style / Design and Technical Specifications that each of the market segments desire. The center of these circles represents an “ideal” product for each market segment. So demand for your products will be higher if they are closer to the center of these circles.
Segment Movement Over Time
The style/tech preferences of the market segments will change over time. The Standard Segment moves relatively slowly, the Youth Segment moves at a moderate rate and the Sports Segment moves quickly on the perceptual map.
Not sufficiently investing in training your staff, poorly paid workers and/or firing workers due to inaccurate capacity calculation will often result in a low skill and motivation index. In addition, another negative outcome of this is an increase in staff turnover rate, which means your products’ quality will also suffer.
So what should you do to ensure that your staff are highly motivated?
1. Pay your staff well
Workers are more motivated when they are paid well.
The average salary level you set will affect not only your bottom line, but also worker motivation and effectiveness. Factory workers are paid (on average) the rate you select. Administration staff are paid (on average) twice the rate. For comparison purposes, the average industry salary is $25,000 per year.
The graph below shows the motivation index achieved by changing the firm’s average salary from $25,000. The effect would be increased by sustaining the salary changes across succeeding years.
2. Train your staff
You need to think carefully about the relationship between your overall strategy and how employee motivation and employee skill levels relate to that, especially if your strategy is to be a low cost, high volume manufacturer.
In general, well trained and motivated workers are more productive than poorly trained workers, so you need to employ fewer workers to achieve a given level of worker capacity. If your workers are well trained and motivated you need fewer Administration staff.
Well trained workers are a significant factor in improving your internal quality. Workers are more motivated when they are paid more and when they are well trained. They are less motivated when you fire other workers as their feeling of job security decreases.
The graph below shows the effect of job cuts on morale and staff turnover rate.
Poorly motivated and poorly trained workers can contribute to significant staff
turnover (sometimes as high as 40% to 50% per year). That gets expensive because each worker than is replaced costs $4,000 to replace. Also each new worker arrives with a minimum level of training, so your average employee skill level is reduced which lowers your internal quality. So remember to maintain an appropriate balance in managing your workforce rather than using a ‘slave labor’ model even if your overall strategy is to be a low cost manufacturer.
3. Pay close attention to your workforce
Keep track of your staff’s Skill Index, Motivation Index and the Staff Turnover Rate by referring to the Manufacturing Quality Report every rollover. You can find this report in the Manufacturing menu > Reports tab and navigate down to the report.
When you repeat a mistake, it’s not a mistake anymore. It’s a decision.
-Paulo Coehlo
Over the years, we have noticed a few common mistakes that students make in the simulation that will be reflected in real-life if not learned from. We want you to learn from these mistakes and know how to resolve them.
Here are three of the common mistakes we see AdSim users make:
Mistake #1: Not getting the Message Strategy right
Getting the Message Strategy is message strategy is vital. This will be used to position your brand using your advertisements and therefore has a large bearing on your Advertising.
The purpose of a Message Strategy in AdSm is to establish your brand position to ensure that you are effectively targeting your customers through media advertising with a message that they will respond to. You will be able to measure the effectiveness of your Message Strategy decision through two market research reports:
The Advertising Evaluation Report – this shows your adverts to a focus group from your market segment and asking them to rate your campaign’s appeal.
The Tracking Study Report – shows a comparison of your product’s top of mind brand awareness versus its unaided brand awareness. The better your brand position, the higher your top of mind brand awareness will be.
Mistake #2: Not making Customer Relationship Management (CRM) decisions based on market research
Retention of Existing Customers is a key part of how to win AdSim and this is your main decision for keeping them satisfied with your Customer Service Level.
The purpose of a Customer Relationship Management strategy in AdSim is to decide which policies you will implement to try and keep Existing Customers loyal to your Digital Camera brand. Each option has an associated cost. Generally, the greater the cost of the option, the more appeal it will have to your market.
You will be able to measure the effectiveness of your Customer Relationship Management strategy through two market research reports:
Mistake #3: Not spending all your Marketing Plan Budget and not purchasing Market Research Reports
You need to ensure that you spend all your marketing budget as funds do not carryover on to the next year if left unspent.
You can look at investing it in activities where you think the return will more than cover the cost. In addition, you can also allocate it towards purchasing additional market research reports.
Information has value and by investing on these reports, you are making more informed decisions.
Adrian Cenon is a Master’s student and MikesBikes Mentor from The University of Auckland. He was also recently invited by Audrea Warner, professor at the Graduate School of Management to share his experience using MikesBikes Advanced in the Managing People and Organizations course. We thought it would be a great idea for Adrian to share his experience with all of you.
Get to know Adrian more in our interview below as he shares his MikesBikes experience, the challenges and lessons he learned from the simulation.
Tell us about yourself
Adrian: I’m currently a Master of Management, major in International Business student at The University of Auckland. I have finished a degree in Economics and Education, major in History at De La Salle University.
I have worked in Singapore as an Organizational Development Analyst and as a Global Learning Support Executive. In addition, I was also a Training and Research Officer.
What was your first impression about using a business simulation in the course?
Adrian: I was impressed that my first course in University of Auckland recognized that learning is enhanced by connecting the management theories discussed in class with the dynamic interactions within a team. As well as how they respond to real-life challenges and scenarios incorporated in MikesBikes. Through my previous work experience, I have been an advocate of the 70-20-10 model (by Eichenger and Lombardo) that has been widely used by management consultants and talent development professionals.
Furthermore, I heard a lot of feedback from the previous Cohort that the MikesBikes experience will be a challenging, fun and effective way to enhance my business acumen and leadership skills.
Did your impression of the simulation change as the course progressed?
Adrian: Yes, the whole learning journey was more immersive and challenging than what I expected. The level of competition among teams was intense and it required a lot of effort and focus to adapt our strategies based on market trends so we could gain an edge. I also didn’t expect that it would elicit extreme levels of happiness, excitement and sometimes disappointment as you view the results after each rollover.
How was your experience working on the simulation on your own and eventually with a team?
Adrian: I would say that MikesBikes engaged my team on a level where we felt that we were running our own company and were accountable for our roles. When I reflect on the experience, I am extremely proud of how our team performed because of four reasons:
We were genuinely passionate about our brand – WindChaser, and how it stood for “Chasing the Right Things” – identifying what is important and chasing it with the best of our abilities. Everyone participated in formulating our Team Goals and Key Performance Indicators (KPIs) and strategies.
We had a great team culture and believed in the capabilities of one another. The rigor of analysing various reports (eg. Marketing, Finance, Manufacturing, Research and Development and Human Resources), making decisions, and competing with other teams strengthened our realization that we could only achieve our goals if we functioned as a high performing team. We learned to foster interdependence by aligning our actions with our core values of Passion, Accountability, Respect and Trust.
Third, we dealt with conflicting priorities the right way and demonstrated integrity in how we competed with the other teams. Our team was aware of numerous “strategies” that we could pursue to get ahead and maximise our Shareholder Value (SHV) at all costs. But just like in the real world, you are sometimes faced with a choice to focus on the bottom line or preserve your reputation and relationship with others.
For example, heading to the final rollover, we had the option of extracting as much capital from our partner firm/ subsidiary. The problem was that applying this tactic would hurt their final SHV. Instead of taking full advantage, our team agreed to a reasonable rate with our subsidiary to ensure a sustainable SHV growth for both teams. In the end, this decision came at the expense of our team losing the European market by a narrow margin. However, we didn’t treat this as a setback because we stayed true to our values and enhanced our reputation and credibility among our peers.
4. Even though we didn’t win our market, we believed that the MikesBikes experience brought out the best in each one of us. As the CEO, I learned the importance of empowering your team members to perform their roles but at the same time providing guidance and support when they experience challenging situations. I am grateful to my team for believing in my capabilities and trusting me that we would become better individuals as a result of this learning journey.
Please share your experience in the course as a whole and how the simulation added value and impacted your learning.
Adrian: I consider MikesBikes as an effective platform that maximised the learning from the “Managing People and Organisations” course. The different scenarios and complexities provided various opportunities. I was able to utilise my previous work experience and theories I learned in class, and apply them in a simulated business environment.
The experience took me out of my comfort zone as it brought a lot of high and low points which required me to reflect and adapt to changes to effectively lead my team. I consider the lessons learned from the simulation and the course as vital “Deep Smarts” which I would be able to leverage when I continue my career in Organizational Development and Talent Management.
What advice would you give your past self (go back to the time when you were still doing the course and the simulation)? What do you wish you knew back then when you were doing the simulation?
Adrian: I would prefer not to give my past self any advice about the course and the simulation. I believe that the process of dealing with uncertainty provided the best opportunity to learn and more importantly, build character. There were several instances where our team spent a lot of time in figuring out how to drive our strategies because we recognized that a wrong move can have significant consequences. Ultimately, the ability to handle pressure, evaluate the effectiveness of decisions, and manage our mindset proved to be excellent learning points which are applicable in the real world.
