Supply Chain – JCT2 Task 1
Roy C. Vasel
Student ID 000298533

Business Simulation for OutFront Computers

A. Business financial documents from simulation

| |
|Cumulative industry results for last four quarters ending in quarter: 4 |
| |Minimum |Maximum |Average |OutFront Computers |
|Financial Performance |-47.33 |171.31 |1.98 |44.29 |
|Market Performance |0.00 |0.60 |0.03 |0.58 |
|Marketing Effectiveness |0.00 |0.81 |0.05 |0.75 |
|Investment in Future |0.00 |38.98 |0.17 |1.39 |
|Wealth |-0.57 |4.26 |0.11 |1.74 |
|Human Resource Management |0.00 |0.82 |0.06 |0.78 |
|Asset Management |0.00 |2.10 |0.08 |1.01 |
|Manufacturing Productivity |0.00 |1.00 |0.06 |0.70 |
|Financial Risk |0.00 |1.00 |0.07 |1.00 |

|Top of Form |
| |
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|Income Statement |
| |
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|Quarter 1 |
|Quarter 2 |
|Quarter 3 |
|Quarter 4 |
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|Gross Profit |
| |
| Revenues |
|0 |
|3,313,300 |
|6,880,610 |
|7,500,000 |
| |
|- Rebates |
|0 |
|97,450 |
|229,125 |
|262,000 |
| |
|- Cost of Goods Sold |
|0 |
|1,707,796 |
|3,139,787 |
|3,240,014 |
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|= Gross Profit |
|0 |
|1,508,054 |
|3,511,698 |
|3,997,986 |
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|Expenses |
| |
| Research and Development |
|120,000 |
|0 |
|60,000 |
|0 |
| |
|+ Advertising |
|0 |
|173,258 |
|303,419 |
|347,267 |
| |
|+ Sales Force Expense |
|0 |
|130,357 |
|305,166 |
|588,582 |
| |
|+ Sales Office Expense |
|220,000 |
|370,000 |
|270,000 |
|480,000 |
| |
|+ Marketing Research |
|0 |
|15,000 |
|15,000 |
|15,000 |
| |
|+ Shipping |
|0 |
|35,224 |
|61,935 |
|67,727 |
| |
|+ Inventory Holding Costs |
|0 |
|10,075 |
|8,964 |
|17,012 |
| |
|+ Excess Capacity Cost |
|0 |
|49,917 |
|240,271 |
|804,425 |
| |
|+ Depreciation |
|0 |
|25,000 |
|50,000 |
|95,833 |
| |
|= Total Expenses |
|340,000 |
|808,831 |
|1,314,755 |
|2,415,846 |
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| Operating Profit |
|-340,000 |
|699,223 |
|2,196,943 |
|1,582,140 |
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|Miscellaneous Income and Expenses |
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|+ Other Income |
|0 |
|0 |
|0 |
|0 |
| |
|- Other Expenses |
|0 |
|0 |
|0 |
|0 |
| |
|= Earnings Before Interest and Taxes |
|-340,000 |
|699,223 |
|2,196,943 |
|1,582,140 |
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|+ Interest Income |
|7,500 |
|7,500 |
|22,500 |
|22,500 |
| |
|- Interest Charges |
|0 |
|0 |
|0 |
|0 |
| |
|= Income Before Taxes |
|-332,500 |
|706,723 |
|2,219,443 |
|1,604,640 |
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|- Loss Carry Forward |
|0 |
|332,500 |
|0 |
|0 |
| |
|= Taxable Income |
|0 |
|374,223 |
|2,219,443 |
|1,604,640 |
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|- Income Taxes |
|0 |
|112,267 |
|665,833 |
|481,392 |
| |
|= Net Income |
|-332,500 |
|594,456 |
|1,553,610 |
|1,123,248 |
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|Earnings per Share |
|-17 |
|20 |
|39 |
|28 |
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|Bottom of Form |
|Top of Form |
|[pic][pic][pic][pic][pic][pic][pic][pic][pic][pic] |
|Bottom of Form |

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|Balance Sheet |
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| Cash |567,500 |1,486,205 |2,000,927 |3,139,529 |
|+ 3 Month Certificate of Deposit |500,000 |500,000 |1,500,000 |1,500,000 |
|+ Finished Goods Inventory |0 |100,751 |89,640 |170,119 |
|Long Term Assets |
|+ Net Fixed Assets |600,000 |1,175,000 |2,225,000 |2,129,167 |
| |
|= Total |1,667,500 |3,261,956 |5,815,567 |6,938,815 |
| |
|Debt |
|+ Emergency Loan |0 |0 |0 |0 |
|Equity |
|+ Common Stock |2,000,000 |3,000,000 |4,000,000 |4,000,000 |
|+ Retained Earnings |-332,500 |261,956 |1,815,566 |2,938,815 |
| |
|= Total |1,667,500 |3,261,956 |5,815,567 |6,938,815 |

B. Analysis of results

1. Utilization of budgets and pro-forma statements to plan the funding of the production capacity to achieve business goals:
| |

|Fixed Plant Capacity Increase |
| |Units/Day |
|X |25 |1,625 |600,000 |24,000 |
| |50 |3,250 |1,100,000 |22,000 |
| |100 |6,500 |2,000,000 |20,000 |
| |150 |9,750 |2,800,000 |18,667 |
| |300 |19,500 |6,000,000 |20,000 |
| |500 |32,500 |11,000,000 |22,000 |
| |1,000 |65,000 |24,000,000 |24,000 |

1st QTR – I initially chose 25 units/day plant capacity as a conservative forecast. Below you can see that I increased Common Stock to finance the investment in manufacturing.
| |

|Cash Flow |
| |Quarter 1 |
| Beginning Cash Balance |0 |
|Receipts and Disbursements from Operating Activities |
| Revenues |0 |
|- Rebates |0 |
|- Production |0 |
|- Research and Development |120,000 |
|- Advertising |0 |
|- Sales Force Expense |0 |
|- Sales Office Expense |220,000 |
|- Marketing Research |0 |
|- Shipping |0 |
|- Inventory Holding Costs |0 |
|- Excess Capacity Cost |0 |
|- Income Taxes |0 |
|+ Interest Income |7,500 |
|- Interest Charges |0 |
|+ Other Income |0 |
|- Other Expenses |0 |
|= Net Operating Cash Flow |-332,500 |
| | |
| | |
| | |
|Investing Activities |
| Fixed Plant Capacity |600,000 |
|= Total Investing Activities |600,000 |
| | |
| | |
| | |
|Financing Activities |
| Increase in Common Stock |2,000,000 |
|+ Borrow Emergency Loan |0 |
|- Repay Emergency Loan |0 |
|- Deposit 3 Month Certificate |500,000 |
|+ Withdraw 3 Month Certificate |0 |
|= Total Financing Activities |1,500,000 |
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| | |
| Cash Balance, End of Period |567,500 |

I end the quarter with positive cash flow, looking for positive results from my marketing and sales efforts in the following quarters. I felt that I may have been too aggressive with financing so much stock, but 2nd QTR revenues more than cover my decision.

2nd QTR – sales revenues take off in targeted markets and produce a positive cash flow even after carrying forward the 1st QTR loss.

|Top of Form |
|Pro-Forma Cash Flow |
| |
| |
|Quarter 1 |
|Quarter 2 |
| |
| Beginning Cash Balance |
|0 |
|567,500 |
| |
|Receipts and Disbursements from Operating Activities |
| |
| Revenues |
|0 |
|3,313,300 |
| |
|- Rebates |
|0 |
|97,450 |
| |
|- Production |
|0 |
|1,808,547 |
| |
|- Research and Development |
|120,000 |
|0 |
| |
|- Advertising |
|0 |
|173,258 |
| |
|- Sales Force Expense |
|0 |
|130,357 |
| |
|- Sales Office Expense |
|220,000 |
|370,000 |
| |
|- Marketing Research |
|0 |
|15,000 |
| |
|- Shipping |
|0 |
|35,224 |
| |
|- Inventory Holding Costs |
|0 |
|10,075 |
| |
|- Excess Capacity Cost |
|0 |
|49,917 |
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|- Income Taxes |
|0 |
|112,267 |
| |
|+ Interest Income |
|7,500 |
|7,500 |
| |
|- Interest Charges |
|0 |
|0 |
| |
|+ Other Income |
|0 |
|0 |
| |
|- Other Expenses |
|0 |
|0 |
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|= Net Operating Cash Flow |
|-332,500 |
|518,705 |
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|Investing Activities |
| |
| Fixed Plant Capacity |
|600,000 |
|600,000 |
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|= Total Investing Activities |
|600,000 |
|600,000 |
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|Financing Activities |
| |
| Increase in Common Stock |
|2,000,000 |
|1,000,000 |
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|+ Borrow Emergency Loan |
|0 |
|0 |
| |
|- Repay Emergency Loan |
|0 |
|0 |
| |
|- Deposit 3 Month Certificate |
|500,000 |
|0 |
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|+ Withdraw 3 Month Certificate |
|0 |
|0 |
| |
|= Total Financing Activities |
|1,500,000 |
|1,000,000 |
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| Cash Balance, End of Period |
|567,500 |
|1,486,205 |
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|Cost of Goods Sold |
| |
| Starting Inventory |
|0 |
|0 |
| |
|+ Production |
|0 |
|1,808,547 |
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|= Available Inventory |
|0 |
|1,808,547 |
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|- Cost of Goods Sold |
|0 |
|1,707,796 |
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|= Ending Inventory |
|0 |
|100,751 |
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|Bottom of Form |

Revenues come in at $3.3 MIL giving me a positive net cash flow over $500K. I invest in more production capacity as I look toward more sales growth. My additional common stock offering seems unnecessary at this point. The business is growing well and revenues are covering my expansion without the financing activities.

As seen below, my operating capacity met my demand forecast and left me with only 8% excess unused.

|Operating Capacity Utilization |
|Operating Capacity |
|Scheduled operating capacity [pic] |975 |
|Used operating capacity [pic] |898 |
|Operating capacity utilization [pic] |92% |
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| |
|Excess Capacity |
|Unused operating capacity [pic] |77 |
|Excess operating capacity [pic] |8% |
|Overhead costs and labor charged to excess operating capacity |49,917 |

3rd QTR – Net operating cash flow triples as I invest in additional marketing and production capacity

|Top of Form |
|Pro-Forma Cash Flow |
| |
| |
|Quarter 1 |
|Quarter 2 |
|Quarter 3 |
| |
| Beginning Cash Balance |
|0 |
|567,500 |
|1,486,205 |
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|Receipts and Disbursements from Operating Activities |
| |
| Revenues |
|0 |
|3,313,300 |
|6,880,610 |
| |
|- Rebates |
|0 |
|97,450 |
|229,125 |
| |
|- Production |
|0 |
|1,808,547 |
|3,128,676 |
| |
|- Research and Development |
|120,000 |
|0 |
|60,000 |
| |
|- Advertising |
|0 |
|173,258 |
|303,419 |
| |
|- Sales Force Expense |
|0 |
|130,357 |
|305,166 |
| |
|- Sales Office Expense |
|220,000 |
|370,000 |
|270,000 |
| |
|- Marketing Research |
|0 |
|15,000 |
|15,000 |
| |
|- Shipping |
|0 |
|35,224 |
|61,935 |
| |
|- Inventory Holding Costs |
|0 |
|10,075 |
|8,964 |
| |
|- Excess Capacity Cost |
|0 |
|49,917 |
|240,271 |
| |
|- Income Taxes |
|0 |
|112,267 |
|665,833 |
| |
|+ Interest Income |
|7,500 |
|7,500 |
|22,500 |
| |
|- Interest Charges |
|0 |
|0 |
|0 |
| |
|+ Other Income |
|0 |
|0 |
|0 |
| |
|- Other Expenses |
|0 |
|0 |
|0 |
| |
|= Net Operating Cash Flow |
|-332,500 |
|518,705 |
|1,614,721 |
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|Investing Activities |
| |
| Fixed Plant Capacity |
|600,000 |
|600,000 |
|1,100,000 |
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|= Total Investing Activities |
|600,000 |
|600,000 |
|1,100,000 |
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|Financing Activities |
| |
| Increase in Common Stock |
|2,000,000 |
|1,000,000 |
|1,000,000 |
| |
|+ Borrow Emergency Loan |
|0 |
|0 |
|0 |
| |
|- Repay Emergency Loan |
|0 |
|0 |
|0 |
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|- Deposit 3 Month Certificate |
|500,000 |
|0 |
|1,000,000 |
| |
|+ Withdraw 3 Month Certificate |
|0 |
|0 |
|0 |
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|= Total Financing Activities |
|1,500,000 |
|1,000,000 |
|0 |
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| Cash Balance, End of Period |
|567,500 |
|1,486,205 |
|2,000,927 |
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|Cost of Goods Sold |
| |
| Starting Inventory |
|0 |
|0 |
|100,751 |
| |
|+ Production |
|0 |
|1,808,547 |
|3,128,676 |
| |
|= Available Inventory |
|0 |
|1,808,547 |
|3,229,427 |
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|- Cost of Goods Sold |
|0 |
|1,707,796 |
|3,139,787 |
| |
|= Ending Inventory |
|0 |
|100,751 |
|89,640 |
| |
|Bottom of Form |

Revenues double over last quarter to $6.8 MIL and net operating cash flow triples. Again, I increase common stock but put it all in 3 month certificates.

I am starting to get top heavy in unused production capacity. My excess is now at 26% seen below. I am incurring overhead costs due to this inefficiency and losing money because of it.

|Operating Capacity Utilization |
|Operating Capacity |
|Scheduled operating capacity [pic] |2,340 |
|Used operating capacity [pic] |1,737 |
|Operating capacity utilization [pic] |74% |
| |
| |
|Excess Capacity |
|Unused operating capacity [pic] |603 |
|Excess operating capacity [pic] |26% |
|Overhead costs and labor charged to excess operating capacity |240,271 |

4th QTR – cash flow takes a dip as I invest in sales personnel and office space and begin to feel the losses from increased overhead costs.

|Pro-Forma Cash Flow |
| |Quarter 1 |Quarter 2 |Quarter 3 |Quarter 4 |
|Receipts and Disbursements from Operating Activities |
| Revenues |0 |3,313,300 |6,880,610 |7,500,000 |
|- Rebates |0 |97,450 |229,125 |262,000 |
|- Production |0 |1,808,547 |3,128,676 |3,320,492 |
|- Research and Development |120,000 |0 |60,000 |0 |
|- Advertising |0 |173,258 |303,419 |347,267 |
|- Sales Force Expense |0 |130,357 |305,166 |588,582 |
|- Sales Office Expense |220,000 |370,000 |270,000 |480,000 |
|- Marketing Research |0 |15,000 |15,000 |15,000 |
|- Shipping |0 |35,224 |61,935 |67,727 |
|- Inventory Holding Costs |0 |10,075 |8,964 |17,012 |
|- Excess Capacity Cost |0 |49,917 |240,271 |804,425 |
|- Income Taxes |0 |112,267 |665,833 |481,392 |
|+ Interest Income |7,500 |7,500 |22,500 |22,500 |
|- Interest Charges |0 |0 |0 |0 |
|+ Other Income |0 |0 |0 |0 |
|- Other Expenses |0 |0 |0 |0 |
|= Net Operating Cash Flow |-332,500 |518,705 |1,614,721 |1,138,603 |
| | | | | |
| | | | | |
| | | | | |
|Investing Activities |
| Fixed Plant Capacity |600,000 |600,000 |1,100,000 |0 |
|= Total Investing Activities |600,000 |600,000 |1,100,000 |0 |
| | | | | |
| | | | | |
| | | | | |
|Financing Activities |
| Increase in Common Stock |2,000,000 |1,000,000 |1,000,000 |0 |
|+ Borrow Emergency Loan |0 |0 |0 |0 |
|- Repay Emergency Loan |0 |0 |0 |0 |
|- Deposit 3 Month Certificate |500,000 |0 |1,000,000 |0 |
|+ Withdraw 3 Month Certificate |0 |0 |0 |0 |
|= Total Financing Activities |1,500,000 |1,000,000 |0 |0 |
| | | | | |
| | | | | |
| | | | | |
| Cash Balance, End of Period |567,500 |1,486,205 |2,000,927 |3,139,529 |
| |
|Cost of Goods Sold |
| Starting Inventory |0 |0 |100,751 |89,640 |
|+ Production |0 |1,808,547 |3,128,676 |3,320,492 |
|= Available Inventory |0 |1,808,547 |3,229,427 |3,410,132 |
| | | | | |
| | | | | |
| | | | | |
|- Cost of Goods Sold |0 |1,707,796 |3,139,787 |3,240,014 |
|= Ending Inventory |0 |100,751 |89,640 |170,118 |

At the end of the year, I see my net operating cash flow decrease over last quarter but I still maintain positive cash flow based on forecasts and have adequate funsing for the business operations.

If the simulation had allowed, I may have been more successful with tighter cash flow budgeting using the Regression Analysis outlined by Shim & Siegler (2009). Employing the least-squares method plotting sales revenue and advertising costs on a graph or in Excel could have helped me forecast much more accurately and utilized that cash better.

Overall, I maintained a good grasp of the budget and pro forma statements with growth throughout the year. In the 4th QTR, I got more aggressive with marketing, sales and production capacity to further expand the business in year 2. I was able to ensure that the business had adequate funds to continue operations and invest in growth.

As seen below, I did not take full advantage of my operating capacity – utilizing less than half of available capacity. This could have been used to boost revenues and cash flow even further and given me a positive 3rd to 4th QTR cash flow growth.

|Operating Capacity Utilization |
|Operating Capacity |
|Scheduled operating capacity [pic] |4,550 |
|Used operating capacity [pic] |1,970 |
|Operating capacity utilization [pic] |43% |
| |
| |
|Excess Capacity |
|Unused operating capacity [pic] |2,580 |
|Excess operating capacity [pic] |57% |
|Overhead costs and labor charged to excess operating capacity |804,418 |

2. Possible strategies to improve operating efficiency in Outfront Computer’s manufacturing facilities:

a. Just-in-time (JIT)

By employing JIT, I could have increased efficiency by eliminating waste and overhead costs associated with having additional amounts of parts/components and other goods for production that will not be consumed as part of the days’ run. By maintaining stock onsite, I incurred additional overhead and holding costs. Eliminating this waste would also reduce my required production footprint, therefore, reducing my facility costs.

Third party vendors could maintain the needed goods at their locations on or off site with JIT delivery to the production lines. Implementing a “kanban” or ticket system could notify the vendors of production needs and direct their goods to the processing areas within Outfront’s facility.

b. Lean operations

Operating lean would force production operations to follow the “pull” system enabling our work schedules to be streamlined to handle orders as they arrive. Forecasted production would be calculated on the time required to manufacture/assemble only the product required, eliminating work-in-progress, excess finished product storage and unnecessary payroll costs.

By making the business customer-centric, we would focus on eliminating all the elements of production that don’t add value to the product. All components of the business would have to be analyzed for their contribution to the customer experience.

3. Evaluation of Work cells versus the traditional straight line method in OutFront Computers’ manufacturing facilities.

Cellular manufacturing is a key ingredient of lean manufacturing as it eliminates waste and meets customer demands much more efficiently. The traditional straight line manufacturing method creates a much longer footprint versus the work cell strategy. It also moves slower as sub-assemblies must be completed “on the line.” Work cells can build these sub-assemblies off-line and have them available for insertion into production when needed.

Straight line manufacturing causes more separation between workers at the start and end of production making communication more difficult. Quality control inspections occur later in the process because assembly is ungrouped in a straight line system.

As detailed by Heizer & Render (2010), work cells at Outfront Computers would be a “big step toward manufacturing efficiency. They can make jobs more interesting, save space and cut inventory.” These additional benefits could be realized in the following areas:

Increased efficiencies:

-Deploying work cells adjacent to production lines would greatly reduce or eliminate our work in progress (WIP) inventory as sub-assemblies would be built as needed on the manufacturing floor from components provided JIT.

-Equipment layouts would be arranged to capture most efficient use of product flow from station to station thereby reducing handling/assembly time and floor space required.

-The work cell system gives employees a sense of pride and “buy in” to the quality of their work and loyalty to the company producing better product and less waste.

Reduced costs:

-Reductions in inventory lead to reduced or eliminated overhead costs for materials, WIP, and completed product.

-Labor costs go down due to better production flow and better coordination between team members in the cell.

4. Evaluation of inventory management decisions.

In the business simulation, our manufacturing productivity was a respectable 0.7 out of a maximum of 1.0, but we did maintain a high level of finished goods inventory. Those overhead costs for maintaining the excess product could have been reinvested in the business.

We also did not utilize our production capabilities well as excess capacity costs were over $800K in the 4th quarter. I should have looked harder at the “few critical inventory parts and not the many trivial ones” Heizer & Render (2010).

In the tables below, you can see that demand never exceeded production so I never had any lost sales due to stock outages, but it left me with inventory at the end of the 4th quarter of roughly $170,000 dollars of unsold product. This amount of safety stock was unnecessary as production capacity can easily produce the needed units if demand increased.
Top of Form

|Inventory Position - Number of Units |
|Brand |
|Brand |Units Produced |Direct Materials |+ Direct Labor |+ Total Overhead |= Production Average |
|Hemingway |0 |0 |0 |0 |0 |
|Ponce De Leon |900 |1,247 |271 |40 |1,558 |

Bottom of Form
Top of Form
|Inventory Position - Cost / Unit |
|Brand |Starting Inventory Average Cost |Production Average Cost / |Average Costs / Unit of Goods |Ending Inventory Average Costs /|
| |/ Unit |Unit |Sold |Unit |
|Hemingway |0 |0 |0 |0 |
|Ponce De Leon |1,651 |1,558 |1,560 |1,560 |

Bottom of Form
[pic]

Top of Form
|Operating Capacity Utilization |
|Operating Capacity |
|Scheduled operating capacity [pic] |4,550 |
|Used operating capacity [pic] |1,970 |
|Operating capacity utilization [pic] |43% |
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|Excess Capacity |
|Unused operating capacity [pic] |2,580 |
|Excess operating capacity [pic] |57% |
|Overhead costs and labor charged to excess operating capacity |804,418 |

Bottom of Form

Wasted operating capacity cost me twice – first in overhead costs and secondly in lost sales. Looking back, I could have been much more aggressive in marketing and sales expansion. Opening offices in other markets like South America and Europe were opportunities missed in the first year.

5. Employing a specific continuous improvement program within the manufacturing facility to achieve quality assurance goals.

Incremental improvement or “kaizen” is a term commonplace in lean manufacturing made popular by the world renowned, Toyota Production System (TPS). Carl Wright (2010) has written about “kaizen events” described as “a highly focused continuous improvement event consisting of a team working together for a brief time period to solve a business problem.”

Implementing this program will give us a two pronged approach to achieve the quality assurance goals at Outfront Computers:

- Empowering employees and building morale Give more responsibility to employees on the line Weekly meetings w/supervisors to discuss challenges and solutions Supervisors must be supportive leaders of teams, not taskmasters - Controlling product quality and dazzling our customers Assign employees to quality inspection teams Answer customer complaints immediately, provide resolution within 24 hours

Our specific program would incorporate desired goals resulting from brainstorming among management, production team members, and/or outside consultants. I believe it is essential to morale and motivation to include the team members at the lowest level involved in the process. These team members are in the work cells and on the line daily and most likely have the best perspective on existing waste and possible improvements. Offering an incentive program for solutions that achieve quality assurance gets everyone involved and follows the example of the TPS value of “Respect for People”.

Sources:
Heizer, Jay & Render, Barry (2010), Operations Management, 10th Edition, Ch. 16, pg. 356. New York, NY: Prentice Hall

Heizer, Jay & Render, Barry (2010), Operations Management, 10th Edition, Ch. 12, pg. 469. New York, NY: Prentice Hall
|Shim, Jae K. and Siegel, Joel, (2009), Budgeting Basics and Beyond, Third Edition, Ch 16. Hoboken, NJ: John Wiley & Sons |
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Wright, Carl. (Aug 18, 2010) Kaizen: Lean manufacturing continuous improvement. Retrieved from http://www.reliableplant.com/Read/10818/kaizen-lean-manufacturing