Capsim Report

I. Executive Summary Erie Corpo equaliseralityn has been founded in 2011 with the mission is to win both reliable merchandises for low-technology customers including tralatitious and commencement intercept sh bes and premium- technology orient customers including senior broad(prenominal)er(prenominal)(prenominal) End, feat and sizing segments. This business see is written so as to provide the board of directors a detailed picture rough the attach tos st come ingies as tumesce as the direction how we put forward implement these strategies. The plan consists of 3 parts.The runner part is about the integrated object lenss and strategy. In detail, at the end of stratum tierce, Erie aims to be nonp beil of the cardinal leading companies in the trade with a net wage of $10,000,000 and 25% of mart sh ars of the whole industry. In addition, the confederacys management expects to recognize at least 30% of contribution margin for from each one product, to snip 6 0% to 70% of come labor be and 11. 8% of total square lives. Eries strategies be corner embody leadership and niche differentiation.In particular, while products in handed-down and Low End be oriented to work out under the niche cost leader, products in triple remaining segments including High End, cognitive process and surface be aimed to discover the niche differentiator strategy. This is beca wont while impairment is the to the highest degree considerable criterion of customers in handed-down and Low End segments, this does not matter to the separate ternion segments consumers as long as the products offered be premium-technology.To implement this strategy in effect, Erie should operate under the direction worry this, besides revising products to meet customers chance the family set up a relatively low expense for products in traditionalistic and Low End segments and vice versa for products in the triplet remaining segments. Simultaneously, the compan y entrust arrange on condenser and mechanisation gradu whollyy for all segments. This entrust fix to Erie a agonistical emolument everywhere other competitors in equipment casualty of long-term cost savings.In addition, utmost secant break of serve expertness may be happen as all over such(prenominal) as possible and a significant tot of money leave too be spent on promotional material and sales budgets so as to capture the superiorest possible percentage of grocery sh bes. Furtherto a greater extent, Erie is willing to make losses at least in the jump two stratums because in the remaining years of the simulation, when higher capableness and mechanisation atomic number 18 ready as well as clement Resources and add Quality Management functions atomic number 18 applied, Erie will become much competitive in the market and hence can make profit as the exertion cost will be denigrated.Secondly, specific objectives, get a line performance indicators and strategy which are followed strictly the corporate objectives of all departments including R&D, marketing, business, Human Resources and Total Quality Management will be withal set out. Finally, a back-up plan which might be utilized when on that point is trouble in the operation of the companys products is also prepared. chthonic this plan, the failed product will be remained for two years instead of fish filet its operation immediately so as to sell its remaining bloodline and wait for the new product to be finished and could be inter alteration to the market. bow of Contents Executive Summary 1 Introduction 4 Corporation targets & 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 segment 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 & Stra tegies. 10 TQM Department 11 1. Objectives 11 2. KPIs & Strategies. 11 Finance Department 12 1. Objectives 12 2. KPIs & Strategies. 2 3. Strategies. 12 Back-up design 13 Conclusion 14 referenceence 14 auxiliary 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, on that point are only six firms predominate the market and the total demand for the whole industry remains abiding which means that new firms cannot enter into the market. Furthermore, year after year, while customers expectations are becoming higher and higher, the products are getting older and scathe ranges are stricter.This manoeuvres such a challenge for all companies in the market. A slender successful factor which can assist all companies to overcome this bother is that each company should choose an stamp down strategy to follow so as to succeed and become more competitive in the m arket. 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 sensor industry * get net profit of $10,000,000 * Obtain at least 25% of market shares of the whole industry * Gain at least 30% of section Margin for each product * Reduce at least 70% of the total labor cost and 11. 8% of total material cost 2. Corporation Strategies According to customers buying criteria of traditional and Low End segments, prices are deemed to be the most considerable factor.In fact, one by one, the price ranges of traditional and Low End take up approximately 23% and 53% over other criteria such as side of meat and reli competency. 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 Size 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, ensample position occupies 43% and products ideal age is 29%. Furthermore, reliability is the most important consideration to customers in Performance segment. Hence, Niche Differentiation is a proper alternative for these terce segments. IV. R&D Department 1. Objectives * stick out customers expectations in all segments * Control R&D budgets for products in Traditional and Low End segments as low as possible * forever update products positions for High End, Performance and Size segments every year . KPIs * book R&D be for in Traditional and Low End segments maximum at $1,000,000 * Invest minimum $1,500,000 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 annually in performance and size while simplification the mean fourth dimension before failure (MTBF) of products in year 1. subsequently that, MTBF will be remained stable during the first three years. cancel out moderate course of instruction 1 division 2 form 3 grade 1 twelvemonth 2 twelvemonth 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 enthronization 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, siz e and MTBF should on the button meet the customers expectations. Therefore, Erie decides not to launch the products in the first year.Since southward year, when the products search in the market, they will be revise annually in collection to appeal to be younger in customers perception course of instruction 1 Year 2 Year 3 ECHO Performance 8 9. 8 10. 7 Size 12 10. 2 9. 3 MTBF 2ccc0 24000 24000 butt a get intost 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 investiture for High End, Performance and Size segment for the first three years V. Marketing Department 1. Objectives * cast up sales of 5 segments by 10% each year Increase demand over 10% each year * Reach above 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 foretell error of 5 segments fluctuate between 5% 10% during three years 2. KPIs * Keep the price of products of Traditional and Low End segments refuse than the average price of their price ranges the ones of High End, Performance and Size higher than the average 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 100% * 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 portray starts when development is complete and ends when sales indicate that target customers widely accept the products.The marketing strategies are fully apply 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 acumen set approach, which 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 companionship to comply with the low cost strategy, the prices of the segments are set below the average of their price ranges. In particular, the price of take in, which dominates Traditional segment, is established at $21. 5 per unit compared to $25 of the average price, whereas the one of ebb out, which takes up majority of sales of Low End segment, is set at $18 compared to $20. (Refer to attachment 1b Pricing Forecast for further details) This approach is sufficient for these two segments because of two main reasons.The first reason is that the segments customers are price sensitive since prices outweigh such other element s 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 pursue 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 network 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 repercussion, limit and orb 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. Promotion and sales Strategies destiny of products awareness and accessibility, which reflect the number of customers who know the existence of a companys products, and who can easily 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 decline during three years because customer accessibility requires long snip investment to procure 100%.Since year 3, when customer awareness achieves over 100%, the investment in the promotion budgets will be scale back to $1,500,000. For Echo, border and Egg, 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 fi rst 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 encourage customers demand. (Refer to appendix 1d Promotion and Sales calculates for further details)VI. Production Department 1. Objectives * strive a proper set out utilization * Control production costs effectively 2. KPIs By the end of year three, Production manager aims to * Keep plant utilization ratio from 90% to 130% to minimize machine downtime cost and expensive 2nd shift 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, Erie plans to raise 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 Egg +2 - +1 Table 3 Production investment in automation level for 5segments the first three years b. CapacityUsing an streamlined measurement of capacity can help the company to achieve sparing 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 three hundred units for each of Edge and Egg 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 Production investment in capacity for 5segments the first three years Additionally, in case that there is a restriction for purchasing capacity like limitation in the maximum investment or unexpected 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 term of enlistmentover rate rate is lower which can help Erie to keep talent workers and reduces prox recruiting costs. Relying on second shift workers, Erie will also achieve its ending which is to keep overtime ratio at 0%. VII. HUMAN mental imagery 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 million for Recruiting Spend and 40 training hours in both year 2 and 3 in order to make Production department reducing labor cost.However, 5% turnover rate is un forfendable annually because of retirement, relocation and weeding out poor workers. Year 2 Year 3 Recruiting Spend ($000) $ 4,000 $4,000 gentility 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 foremost, Erie is readiness 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 budgeted 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 Training $1,500,000 $1,500,000 $1,000,000 Channel Support Systems $1,500,000 $1,500,000 $1,000,000 Con up-to-date 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 fly the coop 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 $1,500,0 00 $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 emergency lend * Achieve the cumulative 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 coin position at around $12,000,000 to $15,000,000 each year * Maintain working(a) capital day from 30 to 90 days 3. Strategies a. Emergency add 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 continue 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 continue to borrow a sufficient amount of current debt with the purpose to maintain our cash position at around 12,000,000 to $15,000,000. Besides, the character reference 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 too much retain earnings for funding the growth and avoiding a high amount of debt which can lead our company to a monetary 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 positi on 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 due policy is set at 30 days 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 unexpected and difficult situations during operate 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 enough 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 harvest stage since year 5.This is because these two segments have dominated a large proportion of market shares. Moreover, their growth rates start to decrease 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 pro duction costs are minimized. Furthermore, by accepting a little present moment of risky at about the first two years, Erie will gain a competitive advantage over other competitors in terms of long-term 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. Appendix 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 $13,28 2,500 $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 fund 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% roil 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 forem ost 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 Needed This Year 1st shift 2nd shift Overtime Max Invest 32,694 Completement 700 820 820 705 cxv 0% A/P Lags 30 (days) 3. Proforma Financial Statements a. Balance winding-clothes PROFORMA BALANCE SHEET ASSETS cash in 28034 Accounts Receivable 10240 Inventory 1055 Total occurrent Assets 39328 Plant & Equipment 145400 Accumulated Depreciation (47626) Total Fixed Assets 97774 Total Assets 137102 LIABILITIES & OWNERS law Accounts collectable 7699 Current Debt 20341 Long Term Debt 60694 Total Liabilities 88734 Common variant 32060 Retained Earnings 16308 Total Equity 48368 Total Liabilities and Owners Equity 137102 b. hard currency Flow Statement PROFORMA CASH FLOW STATEMENT currency Flows from direct Activities Net Income (Loss) (13274) A djustment 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 investment Activities Plant Improvements (31600) Cash Flows from Financing Activities Dividends Paid Sales of Common melodic line 13,700Purchase of Common Stock Cash from long term debt 18994 solitude of long term debt Change in current debt (net) 20341 Net change in cash position 24600 Starting cash position 3,434 shut cash position 28034 c. Income Statement PROFORMA INCOME STATEMENT Product Name EAT EBB ECHO EDGE EGG Total Sales 42385 39600 16770 12075 13757 124587 uncertain Costs Direct Labor 16227 18156 4043 3284 3748 45458 Direct Material 21632 16771 6682 5403 5279 55768 Inventory drive 0 33 18 75 0 127Total inconstant 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 32637 Net Margin (4429) (4075) 562 (1431) (29) (9402) early(a) 1635 EBIT (11037)Interest 9384 Taxes (7147) Profit Sharing 0 Net Profit (13274) d. Cash Budget CASH BUDGET Total Beginning cash ease 3,434 Cash from operations 3,165 Total Available Cash 6,599 Less majuscule 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