Analyzing the simulation report is critical for student success.
This video introduces three fundamental concepts to effectively debrief the report and a step-by-step walkthrough of how to put each one into practice.
Note: While this video features the Capstone 2.0 report, the principles apply to our entire suite of business simulations.
"When running a company, it's critical to evaluate not only your performance but your competitors as well. Analyzing the simulation report every round is the key to that process. Simply put, if you're not diving into the report to debrief, then you're missing out on key information that can improve your company's decisions and results. In this video, I'll walk through three fundamentals of an effective debrief, highlighting key areas and metrics that you'll want to investigate.
These fundamentals are emergency loans, sales, and finally, profits and contribution margins. Each of these metrics will tell a story, but you'll need to dig deeper into the data if you want to understand the story that's being told.
We'll start with emergency loans. When you see an emergency loan for you or for one of your competitors, it's important to evaluate the reasoning. There are two main culprits for emergency loans: lack of financing, making operational investments without properly funding those efforts, and too much inventory, companies producing more than they can sell, resulting in unexpected and expensive inventory carrying costs.
Let me show you what these look like in the report. You're on page one; you can see who received an emergency loan right at the bottom of the selected financial statistics table. If you scroll across, you can see that Andrews has a $27 million emergency loan, and Baldwin took on a $1.7 million emergency loan. We're going to investigate these two, figure out the source of their problems.
First, we'll check out the cash flow statement on page three. The question you're asking here is, did they make plant improvements, and if so, did they finance those improvements? To answer that question, we're looking at this net plant improvements line, where we can see that Andrews invested over 32 million into their plant. Okay, did they finance those improvements? Looking down the cash flow statement, we see that Andrews borrowed zero. On the other hand, Baldwin took on a smaller investment, almost 5 million in plant improvements, but looking down their financing, they effectively financed those decisions by borrowing long-term debt and also some cash from current debt.
So, what that tells us about the emergency loans for Andrews and Baldwin, we discovered that Andrews didn't fund their plant improvements, resulting in a big emergency loan and an expensive lesson. In the future, they should look to borrow to fund their plant projects. Remember, if you see a negative projected cash position on the finance page, that should be a big red flag.
But as for Baldwin, their emergency loan is because of something else, and actually, it's the most common culprit: having too much inventory. You can start to see that story a little lower here on the balance sheet with a big inventory cost for Baldwin. We can investigate further by looking at the plant information on page four.
Now, carrying some inventory is a good thing; that means you avoided a stockout, you didn't run out of the product that your customers wanted to buy. We usually recommend carrying about 10 to 15% of sales as a good benchmark. If we look at Baldwin, you can see that they have a lot of inventory for their product Baker. This inventory line right here shows they have 940 units of inventory sitting for Baker. What this tells me is that they likely expected to sell much more than they actually did. So that means not only did they generate less sales and revenue than they expected, now they have to store all of that extra product. Inventory comes with a 12% carrying cost, and all of that inventory for Baker led them to run out of cash and receive an emergency loan.
If you find yourself in a similar situation, we recommend checking out the forecasting video under help and support, which can help with keeping your inventory numbers low. So there you have it, we looked into two emergency loans and got to the bottom of why and where they came from. If you receive an emergency loan, look for financing and/or inventory issues. Understanding why will help you make better decisions in the following rounds.
The next fundamental to look into when debriefing the report is sales. Are your product sales matching your expectations? When you compare your sales to the industry average, you want to ask the question, are my sales lower or higher than average, and why? When analyzing your sales, there are two main factors to consider: availability and product design. Did we stock out? Did we offer products that were well-matched to our customers' expectations?
Here's how you can investigate your sales in the report. First, let's look at stockouts. This means you didn't produce enough products, and you ran out. Here we are on page four, and you can reference that inventory column to see if you had any stockouts. Any product with the number zero in inventory signifies a stockout. Here we're looking at AFT in the performance segment. Let's head down to page 10. This is the market share report. This report is going to tell us what actually happened, actual market share on the left here versus what should have happened, potential market shares on the right. Potential market shares show us what should have happened if no companies had stocked out. So if we find company Andrews here and we look at their product AFT, which we saw stocked out, we can see that AFT earned 25.2% market share in their primary segment, performance. But when we look over here to the potential market share, AFT performance, we can see that AFT deserved to sell 27.1% if they hadn't stocked out. That's a missed opportunity for sales and a reason why their sales were lower.
This page, especially the potential market share data, can be really helpful when forecasting. Another contributing factor, if your sales are low, can be product design. Did you offer products that the customers were asking for? On pages 5 through 11, you can view each segment's sales and the product information that's sold in the segment. Let's look at the low-end segment and consider the Andrews product, Acre. Here in the top products table, you can see all the products that sold in the segment and tons of useful information about each of them. You can see their price, how much they sold, the specs that went into their design, all the way here on the right is the customer satisfaction score. See, the customers were nice enough to rate all of these products at the end of the year, so we can get an idea on how well each product met their expectations. This is a great opportunity to do some competitive analysis with your product, comparing it to other offerings in the segment.
So we're looking at Andrews' low-end product, Acre, right here, and we can see Acre received an 8 in its customer satisfaction rating, significantly lower than other competitors. Why? Well, this score will be influenced by how well our product met our customer expectations. So, scrolling up the page, we can see the low-end's customer buying criteria. We can see that the most important spec to these customers is price, 53%. We can see that Acre has a price of $21, comparing it to the most popular product, Bead, with a customer satisfaction score of 19, we can see that Bead has a price of $20. So, it's more appealing to the low-end customers than Acre. If we continue going down that list of customer buying criteria, the next is age. These customers prefer an older product with an age of 7. Acre has an age of 3.1 because the company has updated its performance and size, whereas Bead, the most popular product, has an age of 5.6. It's no wonder that Bead sold more than Acre. It's better designed to meet the customer's buying criteria.
So, when you analyze sales, pay attention to the customer satisfaction score. This is going to tell you which product customers prefer. Based on the higher number, product design that meets customer expectations is the core of competitive sales. To summarize, if your sales aren't meeting your expectations, the report will help you uncover potential issues with availability, stockouts, and/or product design.
The next fundamental for analyzing your results is digging into profits and contribution margin. How much were your efforts actually generating in terms of your bottom line? Profits have a direct relationship with contribution margin. If your company has low profits or even a net loss, this is typically due to low margins. It's important to be able to identify what a healthy margin is and to evaluate your pricing and variable costs. When you're looking to improve your contribution margin, here's how you do that in the report.
Let's start back on page one, identifying teams with low profit. Here in the selected financial statistics table, we can look down and see the profit for every company. A quick review shows us that once again, Andrews and Baldwin are the two companies that are struggling the most. Low profits usually mean low contribution margin. Generally, you're looking to have a contribution margin of 30% or higher. If we go down a couple rows to contribution margin, we can see that Andrews and Baldwin don't meet that threshold we're looking for.
To look into contribution margin further, let's go to page four where you can see a breakdown of each product. This will help identify if there are any products that are particularly responsible for dragging the company's margins down. Here is the contribution margin column in the plant information table. Generally, if we look at the Andrews products, most of them are in healthy standing, but AFT here with 11.6% is a really concerning outlier. Contribution margin is driven by price and variable costs, which are shown in the three columns to the left of contribution margin: labor cost, material cost, and price.
Some quick math adding together labor and material costs, we can see AFT's variable costs are roughly $25. That's how much it costs to make one unit, and they're selling AFT for a price of $28. So, 25 to 28, that's not an effective margin. That's not going to help us generate healthy profits. So, how can AFT improve? There are three ways to increase your margins. You can raise price, lower material costs by lowering the product's MTBF, or lower labor costs by investing in automation.
In the case of AFT competing in the performance segment, those customers expect a high MTBF, so cutting material cost is probably off the table. AFT could look to raise its price or increase automation to lower labor costs. A quick look at the other performance segment products shows us that AFT is priced well below the competition, and there's certainly room to improve the margins with a price increase.
In summary, consider your company's overall and product-level contribution margins. Are they over 30%? If not, identifying how you can effectively improve your margins will help you generate better profit numbers going forward.
So, there you have it, three important topics to investigate when debriefing your results in the simulation report. Remember, diving into the report and understanding the what and why of previous rounds will help you make informed, effective decisions going forward. Good luck."