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Prior to beginning work on this assignment, review the following through the Growing Your Business simulation, the Strategy video available in the Supplementary Review Materials through the Help section, read through the pop-up screen titled Thoughts as you prepare your Strategy that will show when you go to the SWOT and Strategy tab of the TriCorp simulation, read the Internal Emails, and read the Welcome on Board memos. Additionally, read The U.S. Medical Device Industry: Strengths, Weaknesses, Opportunities, and Threats, The Potential of Medical Device Industry in Technological and Economical Context, and Introduction to the Special Issue.

The final section that must be completed in the Growing Your Business simulation for Week 1 is your SWOT and Strategy. Your Strategy, in particular, should be guiding all of your decisions (in the corporate world one of the primary reasons business commitments are not met is the misalignment between decisions and strategy). This will be your compass when making decisions for your organization.

The SWOT and Strategy assignment,

· Must be completed through the 
Growing Your Business simulation
.

· Must describe Hisco’s Strengths, Weaknesses, Opportunities, and Threats (SWOT Analysis) based on the information you have read.

· In the Strategy section, must describe what your strategy will be for the next two to three years.

· When you are done, click the checkbox at the bottom of the screen, then click Save SWOT and STRATEGY.

· All the inputs have to have at least 50 words.

· After completing the simulation, students must save the provided pdf from the Pdf Report link and submit it through Waypoint. Verify your submission was successful.


Growing Your Business” – A Management Simulation

Our Educational Objectives to Growing a Business,
while not Exhaustive, Necessitates that Future Leaders can:

· Derive a Strategy from an Understanding of SWOT and Porter’s Five Forces in Uncertain, Ambiguous and Complex Global Environments,

· Convert that Strategy into an Executable Plan in the Short Term while Investing and Creating Options for the Long Term,

· Make Decisions under Time Pressure, Scarce Resources, Limited Information and Divergent Opinions,

· Communicate and Negotiate with Internal and External Constituencies for Win-Wins,

· Manage the Interdependencies across Functions,

· Measure, Interpret and Explain the Financial Impact of Decisions in an FP&A Methodology of Variance Analysis

· Have a responsible mindset in Meeting Commitments within an Ethical Framework, and

· Be a Coach and Teacher to everyone within their sphere of influence.

All in the Context of Creating Shareholder Value !

New Management

From:Stanley Sloane

Welcome to Hisco

 

Welcome to the Hisco Corporation! We’re delighted to have you join us. I promise you two things: A lot of hard work to turn this company into a profitable enterprise, and an opportunity to achieve the goals and objectives that you set for yourself.

You can catch up on the history of Hisco when you have time to read the enclosed materials. The important facts are clear. We’ve been in business for 2 years, and we’re not doing well. Losses exceeded $130,000 last year and all our cash is gone. We have used our entire credit line, and we are concerned about our ability to stay in business. We have a good product and a market with tremendous potential. We currently have excessive manufacturing capacity in place; we need to grow sales to stay afloat.

We know engineering; this is probably one of our strengths. We need to develop our skills in manufacturing and marketing to become more competitive and learn where and when to invest our resources for results. Most important, as we face the next year of operation, we need a new business plan. We need a set of goals and objectives, a strategy to get us there, and a system to monitor and measure our progress.

Our two competitors are not sitting still. They are also re-organizing and building their ability to compete in the same market with similar products. Redex has been good in manufacturing, and Matek has an edge in marketing. We need to offset their advantages without losing our own engineering strengths. The business environment is excellent. Our product is in the infancy phase of the life cycle, and we believe that exponential growth is possible. We need to compete with a quality product at an attractive price, and we need to let people know how good we are. We must invest in our future now and continuously. Pricing will be critical for our success, and I do not want you to move price more than +/- 20% per quarter. We cannot afford to sacrifice earnings for market share; I will be watching product margins closely and expect to see significant improvement next year. Do not forget about the product quality. Our products help nurses improve the quality of care at the hospital, and we cannot afford to jeopardize our reputation in the marketplace.

I have assembled some memoranda to fill you in on where we have been and where we are now. The information is mostly historical, yet it gives you a starting point. I am more concerned with where you take the company rather than where it has been. I assume you will share that concern.

The primary reason the prior management team is no longer with us was their inability to plan and budget for growth. The prior management team submitted a plan with approximately $240,000 of Net Income. This target is unacceptable. Your net income commitment for the coming year needs to be between $300,000 and $400,000 to convince me that you can truly grow this business. Executing on this plan is fundamental to our value of meeting commitments.

The Board and I wish you well. We will monitor your progress.

Regards,

Stanley Sloane

Chairman

To:Functional Managers

From:William Sellums (Marketing Manager)

Product & Industry Background

 

We are developing an advertising theme, which will focus on the history of our product, its labor-saving and productivity features, and its high degree of reliability. We will be asking each of you for your input as we develop the advertising plan.

Most of you are aware of the background of our product and our industry. To summarize:

· Three companies entered the Reader technology business in 2019 and began selling products in the first quarter of 2020.  The Reader was developed to satisfy a need to reduce the time hospital nurses devote to paperwork and administration.  Several independent studies revealed that approximately 40% of a nurse’s time was consumed in non-patient activities.  Trial installations of standard computer terminals at nurse’s stations have not solved the problem because data entry and computer training requirements placed resource demands on the hospital staffs that were unattainable.

· Hamada, Ltd., a Japanese electronics producer, developed a pick-up cell constructed as a solid-state magnetic sensor using tunnel diodes and special ceramics.  This pick-up cell detects marks made with magnetic ink and records their position on a predesigned form.  The cell is extremely tolerant of registration errors and allows the remainder of the Reader device to be relatively simple and inexpensive to build using off-the-shelf materials.  The Reader is an input peripheral that can be programmed to work with virtually all hospital computer systems.  Each Reader requires one pick up-cell. 

· When installed, a Reader system includes a Reader, a special pen containing magnetic ink, and preprinted, computer-generated patient forms.  These forms are coated with a special chemical compound similar to that used on heat-sensitive paper for fax machines.  Using the pen provided, a nurse marks the form to indicate procedures, drugs, dosages administered, and other information relating to the patient.  The form is inserted into the Reader, which converts the marks to computer sensible form for transmission to a database.

Like our competitors, we sell Readers to hospital equipment distributors who package the Reader and its ancillary components for sale to some 5,300 hospitals in the United States.  We believe that we make a quality product that will get better. We sell at a competitive price. The industry is healthy and on the verge of tremendous growth. Aggressive advertising, marketing, and pricing strategies will stimulate demand.

Top of Form

Bottom of Form

Contact Us

TO:Functional Managers

FROM:Ferris Futrell (Finance Manager)

Discretionary Operating Plans 2022

(Company Use Only)

During our November 2021 planning meeting, we agreed on the following discretionary budget for 2022:

Quality Engineering: $150,000

R&D: $295,000

Marketing: $219,000

Advertising: $90,000

Lean Six Sigma: $128,000

However, since that time, each functional manager made increases in one or more areas. I have heard from you that we need to increase overall investment to successfully improve the product, the manufacturing process, and our market position. Clearly we have limited cash resources at this time, and although we have a line of credit, we must be sensitive to our cash position so that we do not exceed that credit limit.

I suggest that we revisit the planning decisions for 2022 during our next staff meeting to ensure that our spending is consistent with our competitive strategy and the availability of resources. At that time, we may wish also to continue our discussions on our resource allocation policies. For example, some of you have suggested that discretionary expenditures in your functional area should increase as our sales volume grows. We must come to agreement as to how this should be done.

Product pricing is extremely important to our fiscal strategy and corporate profitability. The market may be receptive to a higher price until demand is satisfied, but we must watch this carefully. Be aware that Stanley Sloane will not approve any price changes exceeding 20% up or down in one quarter. Control of our production costs is essential if we are to be competitive and profitable. Marketing and Manufacturing must address these topics if we are to be profitable.

TO:General Manager

FROM:Ferris Futrell (Finance Manager)

Line of Credit

In response to your question about State Street Bank’s method of determining our adjustable line of credit, I am providing a portion of the most recent bank letter from Loan Manager, Francine Friendly, on the subject.

“. . . Our analysis of your industry reveals consistent, modest growth during the past year with little fluctuation in price or terms.

After discussions with your parent company regarding the prior quarter’s performance and your company’s increased cash needs to align with potential industry growth, we are pleased to extend your credit line to a minimum of $425,000. We will continue to review your position and adjust your credit line every quarter, as we do with all new companies. Your credit line will increase as your company grows, but it will not go below $425,000. In each quarterly review, we will allow:

1. $100,000 for personal collateral now held;

2. Sixty percent of Accounts Receivable;

3. Thirty percent of the value of all finished goods inventories.

Your total line of credit will be either the sum of the above or $425,000, whichever is greater.

An interest rate of 15% per annum (3.75% per quarter) will be charged on money borrowed. Borrowing up to the limit of the credit line will be automatic. As cash is received, repayment will also be automatic. In any quarter, interest will be charged based upon the outstanding loan amount (i.e., your negative cash balance) at the end of the previous quarter. You may, therefore, borrow automatically against your credit line during any quarter, and you will pay no interest until the following quarter. We will inform you of any changes in our policies or interest rates.

When a line of credit is exceeded, dependent upon the severity of the overdraft and the company plan to remediate the issue, the bank will determine the appropriate actions. In the quarter following the overdraw, the current rate of interest will be charged on money borrowed up to the credit line; a loan restructuring fee of $3,500 will be charged, and an interest rate of 21% per annum may be charged at the bank’s discretion on money borrowed in excess of the credit line. If such an incident should occur, the bank and the company will make every effort to resolve the overdraw condition immediately. Should that not happen and should a successive overdraw occur, the bank may invoke additional remedial steps.”

I hope this clarifies any questions you have on the terms of the line of credit. Please note that exceeding the credit line is not acceptable operating procedure. I recognize that certain negative business conditions may be unforeseen, but for the most part, I would recommend appropriate sensitivity analysis to avoid an overdraft situation.

TO:General Manager

FROM:William Sellums (Marketing Manager)

Market Growth

During our first 24 months of operation, we have gone from sales of 422 units in the first quarter to 829 units during the last quarter. That’s nearly 100% growth since we started.

We are convinced there is tremendous potential growth for our product in the market. Growing demand will follow expanding sales, marketing and advertising investment and decreasing prices. To get a major share of that growing market, we need to be price competitive with a quality product, and we must make a major dollar investment to market our product. Even though we have been in business for over a year now, our name is still unknown; it will take the right balance of marketing and advertising monies to build our brand image. The marketing dollars will support our distributor in his efforts to get “air time” with our end-users. Our distributor charges 10% of the selling price to the customer as his margin to cover pre and post sales costs of supporting our products. For example, if our price to the distributor is $630, the price to the customer is $700. The distributor receives 10% of $700 or $70 per unit.

Our expenditures for 2020/2021 were as follows:

2020/2021 EXPENDITURES

ADVERTISING MARKETING*

1st Quarter 2020 $36,000 $31,000

2nd Quarter 2020 $36,000 $31,000

3rd Quarter 2020 $36,000 $31,000

4th Quarter 2020 $39,000 $34,000

1st Quarter 2021 $18,000 $35,000

2nd Quarter 2021 $23,000 $38,000

3rd Quarter 2021 $28,000 $42,000

4th Quarter 2021 $31,000 $46,000

*Includes the cost of the MAA Marketing Report.

We recommend an aggressive marketing program – we should be looking at investing 15% of sales into marketing and 5-10% of sales into advertising each quarter in 2022. This market will not reach its potential without stimulation, and we cannot depend on our competitors to do the stimulating for us.

Of course, there is a downside to this life cycle phenomenon. At some point, the “mature” phase follows the “growth” phase. Demand begins to level off and eventually declines. The marketing challenge is to anticipate when that is going to happen. We must balance our manufacturing and marketing efforts to be able to serve the market when the demand exists and to curb manufacturing before demand declines.

Our manufacturing capacity is of real concern to me. Our projection for major growth must be matched by manufacturing expansion to keep up with that growth. There is more at stake than losing a few sales. An industry that lacks the manufacturing capacity to meet increasing demand often keeps prices high and loses sight of keeping costs low. Such an industry offers a tempting opportunity for a low-cost producer to enter into the market with a significantly lower price.

Whenever we have shortage of capacity to meet the demand, we lose all of the unfulfilled demand. There is no backlog that would roll forward to the next quarter. We cannot afford to allow any unfulfilled demand.

Contact Us

TO:Functional Managers

FROM:William Sellums (Marketing Manager)

Marketing Plan 2022

(Company Use Only)

MARKETING PLAN

2022

ASSUMPTIONS:

1. Demand for the product will increase as the product gains acceptance. The market is stimulated by advertising and marketing expenditures and value pricing.

2. Product quality will become a major factor in product selection. Competing manufacturers will emphasize quality improvements.

3. Costs to produce will be reduced through efficiencies and manufacturing improvements so that cost savings can be passed on to customers through more attractive prices and/or payment terms.

OBJECTIVES:

1. Achieve a 36% market share by year-end 2022.

2. Price the product competitively to gain and maintain share; avoid erratic price shifts regardless of the competition; keep the price consistent with reasonable profit margins.

3. Increase our marketing investment as quickly as possible to 15% of sales, and maintain reasonable levels of investment through year end. Periodically evaluate our investment needs as our product offering evolves.

4. Stimulate market growth by attaining a 7% of sales advertising investment, and maintain reasonable investment through year-end.

5. Position the company to take advantage of an exploding market fed by innovation to drive expanding demand for our product.

Contact Us TO:Functional Managers

FROM:William Sellums (Marketing Manager)

Market Analysis and Quality Surveys

Marketing Analysis Associates (MAA), which covers our industry in depth, has provided us with survey results and forecasting data which we have found useful in the past year. We assume our competitors receive the same data.

MAA estimates that there are approximately 5,349 hospitals in the United States suitable for our product. The nature of the equipment (technical and computer integrated) and the distribution channels available for hospital equipment suggest that we will sell most effectively through equipment distributors. The optimum use of the product is one Reader for every ten hospital beds. Initially we should target hospitals of 100 beds or more because the product requires an existing computer system in place. The following table illustrates demand potential.

# Beds/Hospital # Hospitals Total # Beds* Total # Readers

100-199 2,209 331,425 33,143

200-299 1,155 288,750 28,875

300-399 720 252,000 25,200

400-499 477 214,500 21,450

500 or More 788 472,500 47,250

Total 5,349 1,559,175 155,918

MAA offers quality surveys of our product and those of our competitors. For a small fee, MAA will analyze the product’s technical quality in independent laboratories and survey the product’s perceived quality among current and potential customers and users. In the future, it hopes to also provide demand projections in the service. Whether or when this will happen is not yet certain.

A subscription to the survey reports costs $5,000 per quarter. Once we subscribe, we do not need to request it again each quarter; it will be delivered automatically. To start the subscription service, simply check the “Marketing Report” check box on the “Qtrly Decisions” tab in the quarter in which you want to start the service. Below is a complimentary demand forecast at the end Q4 2021.

I highly recommend subscribing to this service. We will only have access to limited competitive information if we do not subscribe, which will put us at a competitive disadvantage and negatively impact our ability to complete the Quarterly Business Report. I cannot overemphasize the value this survey will add to our understanding of the market.

The graph shows the market forecast as of Q1 2022 with a 90% confidence level. It shows actual total market demand for prior quarters, and expected demand for future quarters based on low, expected, and high estimates. Q3 2021 shows 2,091 units of actual total demand. Q4 2021 shows 2,485 units of actual total demand. For Q1 through Q4 of 2022, the low demand estimate is 2,934, 3,702, 4,743, and 6,166. For Q1 through Q4 of 2022, the expected demand estimate is 3,118, 4,003, 5,330, and 7,088. For Q1 through Q4 of 2022, the high demand estimate is 3,438, 4,638, 6,289, and 8,718.

Contact Us

TO:General Manager

FROM:Mr. Fix-It (Engineering Manager)

Engineering Quality & NPIs

I have reviewed our 2020/2021 performance and our prospects for 2022, and conclude that we need to commit more money to engineering quality. I understand Finance will recommend spending $30,000 to $45,000 per quarter for quality engineering in 2022. We can barely hold our own with that amount. In all of 2021, the company invested only $142,000 in engineering quality, about 9% of net Sales. We have invested $90,000 in Engineering Research which should yield results of the feasibility study shortly.

It costs money to be competitive. We cannot expect customers to accept a product that is inferior in design or quality. The market will not grow if the industry produces an inadequate product. Quality cannot happen without substantial investments in engineering. With a new product, we need to quickly find ways to make it better. If we don’t, a competitor will.

I am convinced that our company will rise or fall on its engineering. Hisco has an engineering edge now, but that can change if we do not have consistent and increasing engineering quality investments.

We began the studies using product development money. Now we need specific research funding to get some results. The prior management team did begin funding project #2 listed below. We still have to complete funding before we can commercialize the product. Any one of these projects could give us a competitive edge. We will need dollars and time. When you arrive at your company headquarters, we will provide you with the project details. (Corporate policy is not to let new product designs out of the control of our headquarters.)

The projects we know of are summarized for your information and support:

#1. A simplification of some of the assemblies in the product – Success in this area could significantly reduce the scrap rate, hazardous waste generation, and the labor content of the product; thereby reducing the cost to produce each unit.

#2. An increase in the speed and amount of throughput of the product – This could result in a major product advantage which would translate into a better market share position. The product would also utilize standard paper forms instead of the current heat-sensitive paper, which is not recyclable. Our Environmental Manager indicates this may have a long-term environmental advantage to the end-user because of possible future legislation restricting the use of non-recyclable papers.

#3. An expansion of the applications of the product – The product is now designed for use at nurses’ stations. Expanding the applications to housekeeping, maintenance, dietary control, etc. would greatly increase the size of the potential market.

Note that proper planning around new R&D projects is essential. Given the long-term nature of R&D, once we start on a project, we must finish it in a reasonable period of time. Starting and stopping and then starting again is a poor process with respect to new product development—negatively impacting productivity and jeopardizing timely commercialization of the product. Once we commit time and resources, we must see the project through to the end as originally planned, even if budgets are tight.

Please see the email from Michael Reasoner regarding the potential impact of Project #3 on the Total Market Demand.

Contact Us TO:General Manager

FROM:Henrietta Peoples (Manager – Human Resources)

Labor Costs and Performance

Hire/Fire Costs: Industrial Opportunities handles our labor requirements for a hiring fee and a discharge fee. Our contract will be in effect through 2022. The hiring fee of $2,000 per hire includes preliminary training costs. The discharge fee of $4,000 per individual includes placement and severance costs.

Pay Rates: The average pay rate (Qtr 4-2020) was $85.02 per day. This increased to $86.30 per day in Q2-2021, an increase of 1.5%. The pay rate will continue to increase at this rate semi-annually for the next three years. (Thus, increases will take place in Q4-2021, Q2-2022, etc.).

Effectiveness: We will end this quarter with a direct labor force of 27 employees. New employees can be added to the payroll as needed; however, Industrial Opportunities cautions that, realistically, hiring more than 40 employees in any given quarter may be difficult to achieve. The hiring cost is as noted above. New hires (first time or former employees) are immediately available, but take about five months on the job to become fully effective. In addition, they require 20 hours of basic health and safety training before they are allowed to work with certain paints, solvents, and solders. The overall impact of new hires and the labor-production balance is revealed in “% Effectiveness” and “Idle Time” shown on the Quarterly Operating Report. Effectiveness is the ratio of the planned days required to build a unit to the actual time used. Idle time is time paid for but not used in production. Effectiveness decreases as new hires are added; it increases as these new hires become fully trained. Idle production time increases when production and labor levels are out of balance. Effectiveness also decreases when new inspection equipment is installed at the factory. Experience indicates that a single line installation will reduce the entire assembler workforce effectiveness by 5%. Multiple lines will have more significant impacts to the workforce.

We achieved our target production of 1166 units, the fourth quarter figures were:

% IDLE PRODUCTION TIME 0.3%

% EFFECTIVENESS 85.4%

PLANNED TIME 1.30 DAYS/UNIT

ACTUAL TIME 1.28 DAYS/UNIT

Our capacity in the quarter was 1,170 units:

27 People X 65 Working Days/Quarter X 85.4% Effectiveness

1.28 Days/Unit

The % IDLE PRODUCTION TIME shown above is computed as follows

% Idle Production Time = 1 – (Actual Production/Maximum Production Capacity) = 1 – (1 – 1,166/1,170) = 0.3%

Potential production bottlenecks are available labor, inspection line capacity, and/or units of raw material.

To better understand estimation of effectiveness, let’s assume that this quarter we will hire 5 new people. Their effectiveness will be 50%. Previously hired employees’ effectiveness would be around 98%. Please keep in mind that we should never assume 100% effectiveness as there are many human, process and business factors that affect actual effectiveness.

Estimated Weighted Average Effectiveness = (27 x 98% + 5 x 50%)/ (27+5) = 91%

If one new line is installed, estimated effectiveness will reduce by 5% to 86%. If two new lines are installed, the effectiveness will reduce by 10% (2 x 5%) to 81%. Please note that with many human, process and business factors, the actual effectiveness may fall in the range of +/- 9% from the estimated effectiveness.

TO:General Manager

FROM:Stall Brick (Manufacturing Manager)

Manufacturing Report

Despite some start-up problems, in our first year, we did not lose any potential sales. We ended the fourth quarter of 2021 with 566 units in finished goods inventory. We are charged 8% on the value of goods and materials in Inventory at the end of each quarter as an Inventory carrying cost. This is not a problem if we manage our inventories and balance our manufacturing output with sales.

Marketing and Manufacturing agree that we need a modest Inventory of finished goods to serve the market and to operate manufacturing efficiently. Furthermore, we need to coordinate a production expansion plan with the marketing sales forecast. For our part, Manufacturing will coordinate the inspection lines, the raw material purchases and the labor required. We have already opened discussions with Purchasing and Human Resources. This will be a priority effort in 2022.

Our current equipment (6 lines) has a rated capacity of 6,000 units/year; that is 1500 units/quarter. The chart compares the quarterly level of production and potential sales for 2020/2021.

The graph shows quarterly units of production and sales from Q1 2020 through Q4 2021. Quarterly unit production from Q1 2020 through Q4 2021 was 427, 452, 566, 602, 600, 636, 700, and 1,166. Quarterly unit sales from Q1 2020 through Q4 2020 was 422, 457, 490, 517, 559, 611, 698, and 829.

We must grow our production capacity, but we must do it in a controlled manner. If we get ahead of demand, we will lose control of our inventories and incur potentially ruinous costs. If we lag the market and sales, we lose sales, market share and revenue. If the market explodes, we need the capacity to serve it. Environmental permits take time to process through the state”s Department of Environmental Protection and the EPA. No matter how much we push the construction of new lines, we will still have to wait up to three months for the permits to construct and operate them. If demand declines or grows slower than our capacity, we may find it necessary to remove inspection lines and labor.

Contact Us

TO:General Manager

FROM:Stall Brick (Manufacturing Manager)

Supplier Report

The manufacturing process for our reader uses a pick-up cell imported from Japan and assorted other materials purchased locally. The pick-up cell is the key component and is ordered for delivery one quarter before requested receipt. All other materials arrive “just-in-time” and are not inventoried. The JIT materials program is stable and unlikely to change for 3-5 years.

The pick-up cells are another problem. Our vendor, Hamada Ltd., holds an exclusive license to produce the pick-up cells for the next three years. It is possible that another supplier could enter the cell market after Hamada’s license expires, but it is too early to speculate. Distance, competition, and changing world conditions give us concern about working with a sole source supplier. For example, our Environmental, Health and Safety Manager has visited the manufacturing operation and reports that a high pressure heat treatment autoclave is used at one key step in the process. Regulations concerning vessels of this type are extremely strict in Japan and the slightest infraction in operating procedure may prompt a mandated shutdown and agency investigation. Shipment delays could result.

If Hamada has insufficient supplies to fill a complete order, its policy is to guarantee shipment equal to the prior quarter’s order, with backlogs ranging up to 50% of the new order’s increase over the previous quarter’s order. Hamada also supplies our competition. If Hamada is unable to supply demand in any period, it will back order all of its customers using the standard policy. To illustrate: Order in Q1 for delivery in Q2 = 1000 units. (No previous back order.) In Q2, 700 units are delivered and 300 are back ordered. Order in Q2 for delivery in Q3 = 1200 units. Guaranteed delivery in Q3 is 300 units (back order) plus 100 units (50% of difference in Q2 vs Q1 orders) plus 1000 (amount of old order (Q1)). In this example, Hamada guarantees a minimum delivery of 1400 units and a maximum delivery of 1500 units. Backorders are not known until delivery.

We have recently signed a contract with Hamada. The first clause of our contract states that Hamada will quote delivery prices for its cells — that is, the price we pay per unit when it is delivered. If we order in one quarter for delivery in the next, we will pay the price in effect at the time of delivery. The same is true for backorders, which are paid for upon delivery at the current delivery price. In Q4-2020 we paid $86.10 per unit. This price was held through Q4-2021. This price increased to $87.39 for Q1-2022 on the chips ordered in Q4-2021. New contracts will be negotiated for Q2-2022 and beyond.

TO:General Manager

FROM:Stall Brick (Manufacturing Manager)

Production Report – Variable Costs

 


VARIABLE COST TO PRODUCE:

The 2020 Lean Six Sigma investment was $68,000; 2021 Lean Six Sigma investment was $121,000. This chart shows how the variable cost per unit has declined in response to that investment and learning about the process.

 

 

 

 

The graph shows the variable cost to produce, per unit, on quarterly basis, from Q1 2020 through Q4 2021. The quarterly unit variable costs to produce over that period of time, starting with Q1 2020, was $307.91, $295.77, $299.49, $264.89, $261.90, $275.74, $265.67, and $225.77.

The learning curve theory suggests significant additional reductions in cost are possible. Increased Lean Six Sigma benefits will be achieved if greater amounts of money are invested. Expect some lag between the spending and reduction in costs, and expect little or no savings if the investment is erratic. At current levels, we will be lucky to hold our own. Most of the money will have to go into cost avoidance efforts. A new item, Planned Time, has been added to the Quarterly Operations Report to make it easier to see what’s happening. Planned Time shows in days/unit how much labor is required to make one unit of product at 100% labor effectiveness.

O:General Manager

FROM:Stall Brick (Manufacturing Manager)

Production Report – Facility Base Costs

 

Facility Base Costs have been increasing about 6% per quarter in 2020/2021, as shown below:

The graph shows facility base costs by quarter, from Q1 2020 through Q4 2021. The facility cost per quarter over that period of time, starting in Q1 2020, were $58,242, $64,650, $67,691, $70,775, $70,951, $75,015, $75,841, and $79,953.

Facility expenses are expected to increase 2 to 5% per quarter through 2022. A major contributor to that expense is our building rent. The lease includes utilities and is pegged to inflation and is also dependent on the number of inspection lines and number of readers produced. In order to accurately estimate the utility costs, plan on $30-$40 of utility costs per production unit. The present facility will accommodate 25 inspection lines. To expand beyond 25 lines will require a one-time expansion cost of $50,000 to build the new facility and obtain the necessary permits.

Expansions beyond 50 lines will necessitate very careful long term planning. Our Environmental Engineer indicates that the total air emissions from the plant will reach a point at which the manufacturing facility will be classified as a major air emission source and will require a Prevention of Significant Deterioration air permit. The facility will also have to be disconnected from the municipal wastewater treatment system and will have to treat and discharge its effluent directly into the Ramsey River. If we expand to 51 or greater lines, it will take one year to obtain the required permits and a one-time expenditure of $250,000.

TO:General Manager

FROM:Stall Brick (Manufacturing Manager)

Inspection Line Policies and Pricing

Diversified Products leases inspection lines to us. It has informed us of several policy revisions to be effective for the next three years.

1. The reader inspection lines can be fabricated, shipped and installed in 30 days; however environmental permits to construct and operate currently take 90 days for final sign off. Hence, we should plan for a three-month delay between placement of an order and start up.

2. Five-year lease agreements (equipment, installation, rental and removal) will be in effect. Quarterly payment terms will be firm price. Prices for new lines will be adjusted once a year.

3. Inspection lines, as presently developed, will have a capacity of 1,000 units per year.

4. Given production constraints at Diversified as well as installation team limitations, a maximum of five lines can be installed in any given quarter.

5. The original two lines are leased at $5,950 per quarter. The third line costs $6,300 per quarter. The next two lines were leased at $7,486 per quarter. The last line was leased at $7,711 per quarter. Next increase of about 3% will be in the 3rd Quarter of 2022.

With line leasing costs increasing, labor rates increasing, and the cost of materials increasing, we urgently need to find means to reduce production costs. The impact of dollars invested in Lean Six Sigma is significant. Engineering and Research efforts to identify product and process changes that will decrease the costs to manufacture deserve support. Without improvement in these costs, we will be under margin pressure.

Staff

FROM:Stall Brick (Manufacturing Manager)

Planning Information – Inventory & Labor

* Note: This calculation does not take into account time needed for warranty repairs

TO:General Manager

FROM:Michael Reasoner (Marketing Analysis Associates)

Project #3 Impact on Total Market Demand

I’ve completed some additional research into the impact that Project #3 is expected to have on Total Market Demand. Project #3 increases the market demand by a one-time 50% increase. Keep in mind that any marketing reports you might have received to date do NOT currently include Project #3 potential demand, as customers do not yet know about Project #3. Once a company launches Project #3 in sales, then the subsequent demand forecasts will include the impact of Project #3; however, remember that only companies with Project #3 capability can sell in the expanded portion of the market.

A simplistic example of how it works:

Assume that current total potential demand in the world equals 3,000 units, and each team has 33% market share with 1,000 unit potential demand.

When a company introduces Project #3, the Project #3 potential demand would be 1,500 units. Therefore, total potential market demand equals 4,500 units. Individual shares depend on how many teams are entering the market at once. Assume all other things are equal (price, quality, marketing spends, etc.) for the following:

If three companies enter at the same time, then each company’s potential demand would be 1/3 of Project #3’s potential market demand (1500/3 or 500 units) + original potential demand (1000 units) = 1500 units

If two companies enter, then each company’s potential demand would be ½ of Project #3’s potential market demand (1500/2 or 750 units) + original potential demand (1000 units) = 1750 units

If one company enters, then the single company’s potential demand would be the entirety of Project #3’s potential market (1500 units) + original potential demand (1000 units) = 2500 units

After Project #3 has been introduced, it will be included on the marketing reports. The initial 50% boost is one time only!

Keep in mind that normal market growth demand will also occur. In the example above, if one company enters into the market with Project #3 in Q3, the market demand would increase by 1,500 units in that quarter due to Project #3, and normal market demand in the original market would probably increase as well. If another company enters into the Project #3 market in Q4, they would share demand based on normal market growth conditions in the original market and those created by Project #3. A company, who does NOT enter into the Project #3 market would share demand based only on normal market growth conditions in the original market.

O:General Manager Hisco

FROM:M. Shinn, Director – Corporate FP&A

New Variance Analysis and Profit Lever Tools

We are introducing two new planning & analysis tools to help you better understand our business and make operational decisions. The first tool is for variance analysis and second is for understanding the profit levers. Both of these tools any business leader must have a working knowledge of. I suggest you review TRI Critical Equations found in the Help Section.


Tool 1 – Variance Analysis

All business leaders need to be able to create and manage a budget given their strategic direction for the long term. Careers have been made or lost because of the ability or inability to understand, communicate and take effective action on how a business is doing relative to its plan or budget. The difference between a budgeted amount and the actual amount over a specified period of time, in either absolute dollars or percentages, is commonly known as a variance. The heart and soul of managing any enterprise and its FP&A (Financial Planning & Analysis) Unit is in understanding the drivers of your business in the form of variances. The primary variances are price, volume, cost and productivity variances from plan for income and cash flow. This tool is often referred to as a floating bar or walk chart and is a graphical portrayal of variances. Samples for Pre-tax Income and Cash Flow are given

Your assiduous attention to the various applications of this tool should position your business to meet the commitments expected from Mr. Sloane. Using this tool thoughtfully will improve your planning and decision process. Remember, you have to come up with a plan. You cannot wish things will get better.


Tool 2 – Profit Levers

This tool shows, in the top section, the impact of a 1% improvement in each of the depicted levers (ceteris paribus) on Operating Margin (OM). For example, a 1% increase in price would increase OM$ by approximately 14%. This is the well-known power of price. The bottom section of the chart indicates the percent improvement at the CM% level required in the depicted lever to offset a 1% price reduction. For example, if price dropped by 1% you would need approximately a 2.5% increase in volume to offset the negative impact of pricing power. This tool is included in your Quarterly Decisions and will be updated quarterly. Please use this tool sagaciously to help you meet commitments, and recognize it holds everything else constant including competitor reaction. The asterisked footnotes are essential to interpretation of this tool.

This tool should prove useful to the sensitivity analyses you will find necessary in making your quarterly decisions/assumptions. This should give you a sense of the vagaries of the business and may be helpful for your forward planning and forecasting. Remember, if you have to forecast, do it often.

Please call if you have any questions.

ALL INDUSTRY SURVEY CUSTOMERS

FROM:MICHAEL REASONER, PRESIDENT OF MAA ASSOCIATES

NEW COMPETITIVE INTELLIGENCE NOW AVAILABLE!!!!!

 

It is more good news for our valued customers. At the request of many industry participants, MAA has been diligently collecting, analyzing and synthesizing very strategically insightful information concerning the producers in the handheld diagnostic imaging & analysis industry. Our intent is that industry participants use this comparative competitive insight to carry their performances to new heights. 

This syndicated report contains excellent comparative information in the form of graphical portrayals of financial and operating data – the raw material for understanding competitive advantage. The report contains analysis around Performance, Costs, and Manufacturing. For example, you will see how you compare, by quarter, with your competition in regards to Sales and Net Income; COGS and Marketing spend as a % of Sales; and Planned Time and Finished Goods Inventory. Keep in mind these are just a few of the metrics we will supply!

The annual cost for this valuable supplement is only one payment of $50,000 (Other Costs) for four quarterly reports. To order, please check the “Business Intelligence Report” in the quarter you’d like to start receiving the report, and from that quarter on, you will automatically receive it. No need to do anything else!

Key business leaders who have seen the report can’t say enough about the value the Dashboard adds to their ability to analyze and understand their industry. Stay ahead of your competition by getting the latest intelligence information hot off the press!

Note that you can order this report at any time during the year. However, the one-time $50,000 cost stays the same. To get all four reports, order now!!!!

R&D

SPEEDY READER

We have found a way to increase the speed of the reader transport mechanism by 100%. This will make the reader 30% faster than it is now. The new system will also use forms printed on standard paper instead of the current heat sensitive paper (similar to that used by most of the old style Rapifax machines). Our Environmental Manager indicates that there is legislative activity to require the phase out of non-recylable office paper, including possibly heat sensitive types. Although this is speculative at this stage, conversion to the new units may position our products advantageously for the future. As you know, primary paper records are stored for three years at which time most hospitals microfilm these and throw out the originals.

I talked to some of our sales representatives and they agree that if we can do it, these features can increase our market share by 15%. (For example, if our market share is now 30% it will jump to 30*1.15=34.5%). However, it will have no effect on the total size of the market.

Given that the prior management team had invested $45,000 to get the new design ready, we need one more $35,000 investment this quarter to have the design ready to implement next quarter.

There will be some rework cost and waste disposal costs for each finished product in stock – about $15 per unit. The labor content of the product will also increase by about 10%.

PROJECT 2

PROJECT 1

PROCESS SIMPLIFICATION

We have been studying the design of several of our major assemblies to see if there is a way to simplify the process and thereby reduce off specification material, hazardous waste emissions and the labor content of the product. We find that we can redesign and simplify two of the assemblies. Positive hits can be made in all three areas, however at this stage we can only definitely count on a cut in the total labor content by 25% (this means that the Planned Time will be reduced by 25% in the implementation quarter).

This redesign will be a major undertaking. We will need $25,000 in each of the next two quarters to get it ready to implement. We can shorten that time to one quarter, but it will cost $60,000. It can not be done any faster than this no matter what the cost, since the required regulatory permits to build the new lines is three months.

At our current production rates this would have a payback of less than one year. I think we should go ahead as soon as possible.

PROJECT 3

MARKET EXPANSION

We have come up with a way to extend the use of the reader to housekeeping, maintenance and dietary control in hospitals. This will involve a significant change to the interpreter, but it should increase the potential market for the readers by 50%.

This will be expensive. We will need to spend $35,000 per quarter for the next three quarters on this project. Any existing finished goods stock will have to be reworked at a cost of $25 per unit. The labor content will also go up by 10%. This will put a lot of strain on our supply chain. Make sure that we are considering these implications as we invest in this project.

We can crash the project and complete it in two quarters but this will cost $70,000 in each quarter. If we really want to beat the competition to market, we can do the project in one quarter, for a cost of $200,000. I think it’s worth it. If we go ahead with this project and beat our competition, we will not only lead in this new segment of the market, but we should enjoy a beneficial “trickle down” effect on our share and value in the current market.