SYCOPS

Systems Company Operations Simulation

INTRODUCTION
This brief covers the following:

  • INTRODUCTION
  • DESCRIPTION OF THE SIMULATION
  • THE BUSINESS SITUATION
  • DESCRIPTION OF THE DECISIONS
  • DESCRIPTION OF THE RESULTS
  • RECENT TRADING HISTORY

This simulation is designed to allow participants to manage the development of a business. A business model will simulate the operation of your business. Your decisions and those of your competitors will influence the responses to this model. These decisions cover pricing, support effort, engineering resources, design process improvement and bank loans. Based on these sales demand will be generated and several reports produced.

Your objective will be to make your business successful.

THE SIMULATION

The simulation consists of the following:

  • PREPARATION
  • DECISION MAKING
  • REVIEW

PREPARATION

Preparation involves becoming familiar with the basic business situation, defining individual responsibilities, considering objectives and strategies and deciding how to measure and control the business. While doing this it is important to recognise that it will take some time before you fully understand the response of the market and all the facets of the business that you are managing. It is probable that you will only fully understand the business after you have made several decisions and analysed their results. Thus your understanding and the effectiveness of decision making will improve throughout the simulation.

DECISION MAKING

Once the initial preparation is complete the operation of the business will be simulated for several periods each representing one trading year. (The first decision period is year 1). Each period involves the following:

  • SUBMISSION OF DECISIONS
  • SIMULATION OF THE BUSINESS
  • ANALYSIS OF THE RESULTS

Decision Submission - the decisions (as described later) must be submitted to the simulation control centre at or before the time set. You must keep to the decision making schedule for, if decisions are not submitted on time, the previous decisions will be used in their place. The decisions must be submitted on the forms provided and should be complete and legible!

Simulation - the decisions are evaluated and their impact calculated. This evaluation will take some time and this time should be used to reflect on your objectives and strategies and to update your business control systems.

Results - the sales demand figures will be returned to each team. From these you may be used to calculate a profit and loss statement and balance sheet (a set of work sheets is available to help). Alternatively, you will be provided with a full set of accounts.

REVIEW

At the end of the simulation there will be a review of the results and you may be asked to give a formal presentation.
THE BUSINESS SITUATION

The business you are to manage has been operating for some time. The company produces high technology systems consisting of software and an element of hardware. It is a wholly owned subsidiary of another company.

SYSTEMS

The products sold consist of upgraded versions of existing systems (Level 3) through new, simple systems using conventional technology (Level 2) to complex systems using advanced technology (Level 1).

These systems are provided using two types of engineering resource (UnitA and Unit B). These units provide design and production for software, hardware and firmware.

CUSTOMERS

Customers for the systems are businesses that purchase complete systems that consist of hardware and a software licence to provide a solution to their needs.

Like many businesses, customers consist of those who have been using the product for some time (existing) and those who have not (new). The proportion of the existing customers remaining with the company, the number of new customers and the amount they buy during a year will depend on:

  • RELATIVE PRICE
  • SUPPORT EFFORT
  • QUALITY
  • CAPACITY
  • MARKET TRENDS

Relative Price - because of their relationship existing customers seem less sensitive to price than new customers.

Support Effort - this is pre-sales technical support and marketing effort. Existing users have a good understanding of the product and the company's capabilities and require little support. But, support effort is particularly important to attract new customers.

Quality - is influenced by the quality improvement decision (as described later). Quality is particularly important for existing customers and reduces their need to try other suppliers.

Capacity - influences the company's ability to meet demand. If the company cannot meet demand then some customers will buy from the competitors and some of these may continue to buy from them. The situation is complicated by the fact that during periods of overload Unit A can be used in place of Unit B (but not visa versa).

Market Trends - over time the mix of demand for the various systems will change with some growing and others declining.

ENGINEERING UNITS

Unit A is the higher quality and costs twice as much as Unit B. The Level 1 system must be supplied using Unit A. In contrast, the Level 3 system may be supplied just using Unit B. Supplying the Level 2 system requires an equal mix of the two Units. Each unit consists of both human and technical elements.

The work done by the units (as illustrated in the accompanying trading history) is calculated on each unit being able to produce 200 systems each year.

PRICES AND COSTS

Note: All prices and costs are measured in a universal currency the "Account Unit" (AU).

Price - up to the start of the simulation all firms have charged the same price. However, once the simulation starts competitors are free to change the price for their systems. The current pricing levels are shown in the accompanying history.

Engineering Costs cover all the direct costs associated with an engineering unit. Each Unit A costs 3000 AUs a year and each Unit B costs 1500 AUs a year.

Material Costs are the cost of the hardware and consumables elements of the system. For Level 1 systems this is 5.00 AUs/system; for Level 2 systems 3.75 AUs/system and for Level 3 systems 2.50 AUs/system

Depreciation - each engineering unit requires capital equipment. These fixed assets depreciate at twenty percent per year. Thus if the value of the fixed assets at the start of the year is 1000 AUs the depreciation is 200 AUs for the year (this is further illustrated in the history).

The team decides quality Improvement. Half this expenditure is an expense and the other half is capital expenditure. It involves upgrading workstations and the provision of more advanced software development tools.

The prime purpose of the quality improvement is to improve compliance, ability to design for current platforms, delivery etc. Therefore the improvement makes the product more attractive and will not change work effort or costs.

Support Effort is an expenditure and a decision.

General Overheads are 50,000 AUs each year.

Financing Charges - financing charges consist of bank interest and dividends paid to the parent company. Interest on overdrafts is 20% per annum and on term loans is 16% per annum. Interest earned on any cash balances is 12% per annum. Interest on overdrafts or cash are calculated on the average cash balance and are paid in the current year. If the company's capital gearing (ratio of term loan plus overdraft to equity) exceeds 50% all loans and overdrafts will incur an additional charge of between 50% and 100% (depending on gearing).

The parent company requires the payment of a 10% dividend on opening equity (share capital plus reserves) each year. This will be paid in the following year.

Taxation - Corporation tax equal to fifty percent of the net profit after interest is paid in the following year. (If losses are made the parent company can set these off against group profits.)

USES OF FUNDS

It is necessary to finance:

  • INVENTORIES
  • DEBTORS
  • FIXED ASSETS

Inventories - The company operates on a Just-In-Time basis and thus inventories are minimal and only amount to 10,000 AUs. And this is unlikely to be affected by changes in sales activity.

Debtors - Customers do not pay immediately and the delay is currently 70 days (which means that some 19% of the year's sales revenue will be outstanding at year-end).

Fixed Assets - The engineering units will need an amount of fixed assets to support them that must be financed. The two types need different amounts of fixed assets. Every increase in the level of Unit A involves buying 15000 AUs of fixed assets per unit and increases in Unit B involve buying 5000 AUs of fixed assets per unit. Additionally, as discussed in the quality improvement section, half the quality improvement is on fixed assets.

SOURCE OF FUNDS

The finance for the company is available from:

  • PARENT COMPANY EQUITY
  • TERM LOANS & OVERDRAFTS

Equity - The parent company has funded the initial development of the company. This initial equity funding amounts to 125,000 AUs and no further equity is available.

Loans (which must be decided upon) and overdrafts that will be supplied automatically can finance future expansion of the company.

DECISIONS

The decisions that are made each year are as follows:

  • PRICE
  • SUPPORT EFFORT
  • ADDITIONAL UNITS
  • QUALITY IMPROVEMENT
  • NEW TERM LOANS

Price - you must set a price for each type of system.

Support Effort - you must set a level of support effort expenditure.

Additional Units - you must decide whether you wish to increase (+ve number) or decrease (-ve number) the number of engineering units. If you decrease engineering units you reduce staff and dispose of fixed assets (at current average book value). If you increase an engineering unit you will hire the staff and purchase assets.

Quality Improvement - you must decide, for each engineering unit, how much to spend (in Account Units) to improving the quality performance of the engineering unit.

New Term Loans - you must enter the additional amount that you wish to borrow from the bank (or to repay if negative).

RESULTS

You will receive your results in three stages:

  • PRELIMINARY RESULTS
  • COMPANY REPORTS
  • BUSINESS RESEARCH

Preliminary Results supply information about demand (in days) and sales income for each service separately and total sales income, operating profit, overdraft and cash.

Company Reports is provided a little later and shows for each service how your sales were arrived at, how resources were used, the Profit & Loss Account, Balance Sheet and several key ratios. (Optionally, before you receive these reports, you may be asked to calculate these from your interim results.)

Business Research shows for all teams, prices, market shares, key financial results and, possibly, an editorial commenting on the results.

You will be informed of the total number of existing customers who remained with you, the number of new customers who bought from you, the demand/customer, the sales/customer, the total sales demand and the total sales made for each system type. (Provided there is enough capacity the demand/customer will be the same as the sales/customer. Otherwise, sales/customer will be less.)

The demand and sales are expressed in terms of system sold (each engineering unit can produce 200 systems each year). The demand is based on the total of existing and new customers and the average demand per customer. Provided there is sufficient capacity the demand will be the same as the actual sales. However, if there is insufficient capacity the actual sales per customer will be less.

Based on this you may be asked to calculate a profit and loss account and balance sheet. Examples of the calculations involved are shown in the attached trading history.

TRADING HISTORY

The last three years of trading history are shown on the following pages. Period -2 is the earliest year, -1 the middle year and 0 the most recent year.

You should analyse these results to ensure that you are familiar with the decision forms and see how the company has been performing.

Decisions / Year 2 / Year 2 / Year 0
Price / Level 1 / 70 / 75 / 70
Level 2 / 50 / 50 / 50
Level 3 / 35 / 32 / 30
Support Effort / Level 1 / 20000 / 20000 / 20000
Level 2 / 15000 / 15000 / 15000
Level 3 / 15000 / 20000 / 20000
Engineering Unit A
Additional Units / 0 / 0 / 0
Quality Improvement / 20000 / 20000 / 20000
Engineering Unit B
Additional Units / 0 / 0 / 0
Quality Improvement / 5000 / 5000 / 10000
New Term Loans / 0 / 0 / 0
Customer Changes
Level 1 / Year 2 / Year 1 / Year 0
Existing Customers / 88 / 81 / 87
New Customers / 35 / 39 / 55
Total Customers / 123 / 120 / 142
Level 2 / Year 2 / Year 1 / Year 0
Existing Customers / 119 / 108 / 98
New Customers / 57 / 51 / 43
Total Customers / 176 / 169 / 141
Level 3 / Year 2 / Year 1 / Year 0
Existing Customers / 178 / 177 / 192
New Customers / 41 / 36 / 24
Total Customers / 219 / 213 / 216
Engineering Units / Year 2 / Year 2 / Year 0
Unit A / Total Units / 15 / 15 / 15
Quality Cost / 10000 / 10000 / 10000
Unit B / Total Units / 20 / 20 / 20
Quality Cost / 2500 / 2500 / 5000
Resource Need & Use / Year 2 / Year 2 / Year 0
Unit A / Resource Need / 2892 / 2898 / 3230
Capacity / 3000 / 3000 / 3000
Unit B / Resource Need / 3830 / 3820 / 4087
Capacity / 4000 / 4000 / 4000
Customer Requirements
Level 1 / Year 2 / Year 1 / Year 0
Demand/Customer / 14.06 / 14.90 / 15.39
Sales/ Customer / 14.06 / 14.90 / 14.30
Level 2 / Year 2 / Year 1 / Year 0
Demand/Customer / 13.22 / 13.96 / 14.80
Sales/ Customer / 13.22 / 13.96 / 13.75
Level 3 / Year 2 / Year 1 / Year 0
Demand/Customer / 12.18 / 12.72 / 14.09
Sales/ Customer / 12.18 / 12.72 / 13.79
Sales Results / Year 2 / Year 1 / Year 0
Total Customers / Level 1 / 123 / 120 / 142
Level 2 / 176 / 169 / 141
Level 3 / 219 / 213 / 216
Sales/Customer / Level 1 / 14.06 / 14.90 / 14.30
Level 2 / 13.22 / 13.96 / 13.75
Level 3 / 12.18 / 12.72 / 13.79
Sales Income / Level 1 / 121030 / 134100 / 142100
Level 2 / 116300 / 111000 / 96900
Level 3 / 93345 / 86720 / 89300
Cash Flow Summary / Year 2 / Year 2 / Year 0
Cash Sources / 338049 / 331600 / 337826
Cash Uses / 372244 / 32045 / 288057
Net Cash Balance / -34195 / 11124 / 49769
Opening Balance / -88427 / -45999 / 8818
Average Balance / -61311 / -17438 / 29294
Overdraft Interest / 11150 / 2307 / 0
Interest Earned / 0 / 0 / -3654
Gearing Premium / 654 / 0 / 0
Ending Balance / -45999 / 8818 / 53422
Profit & Loss / Year 2 / Year 2 / Year 0
Sales Income / 330675 / 331820 / 328340
Cost of Sales / 155135 / 146420 / 140766
Gross Profit / 175540 / 185400 / 187574
Operating Expenses / 112500 / 117500 / 120000
Operating Profit / 63040 / 67900 / 67574
Financial Expenses / 21404 / 11907 / 5946
Net Profit / 41636 / 55993 / 61627
Taxation / 20818 / 27996 / 30814
Earnings / 20818 / 27996 / 30814
Dividend / 15018 / 15598 / 16838
Retained Profits / 5800 / 12398 / 13976
Balance Sheet / Year 2 / Year 2 / Year 0
Issued Shares / 125000 / 125000 / 125000
Reserves / 30982 / 43380 / 57356
Total Equity / 155982 / 168380 / 182356
Term Loans / 60000 / 60000 / 60000
Net Assets / 215982 / 288380 / 242356
Fixed Assets / 224400 / 189520 / 163616
Debtors / 63417 / 63637 / 62969
Inventories / 12500 / 12500 / 12500
Cash / 0 / 8818 / 53422
Current Assets / 75917 / 84955 / 128891
Total Assets / 300317 / 274475 / 292507
Overdrafts / 45999 / 0 / 0
Taxation / 20818 / 27996 / 30814
Dividend / 15018 / 15598 / 16838
Creditors / 2500 / 2500 / 2500
Current Assets / 84335 / 46094 / 50151
Key Measures / Year 2 / Year 2 / Year 0
Gross Profit % / 53 / 59 / 57
Operating Profit % / 19 / 20 / 21
Return on Net Assets / 29 / 30 / 28
Return on Equity / 13 / 17 / 17
Capital Gearing / 68 / 36 / 33
Capacity Use - Unit A / 96 / 97 / 100
Capacity Use - Unit B / 96 / 97 / 100

This simulation is one of a comprehensive range of Computer Aided Management Education simulations developed by Hall Marketing, Studio 11, Colman's Wharf, 45 Morris Road, London E14 6PA.

Phone & Fax +44 (0)20 7537 2982

E-mail

Web

© 1994 & 2000 Hall Marketing SYCOPS Page 1