Sunday, March 14, 2010

CAPSIM Tips and Tricks

Earlier this year I completed my Masters of Business Administration at the University of Redlands with a course that included participation in a business simulation from CAPSIM.  What follows is an exert from our team’s final report regarding our strategy and lessons learnt.  Hopefully the information below that allowed us to decimate our human competitors will also help you.

Animated chart showing how each team positioned their products with respect to the the “ideal market” colored with a large light purple circle.  The red dots represent products from our team, whereas the black and blue dots are products from our two human competitors.  Lastly, the greens dots represent products from our nemesis, the computer opponent.

Introduction

In the CAPSIM simulation, five generalized customer sectors are defined: low-end, traditional, size, performance and high-end. For each sector and for every year the simulation tells us the total number of customer, the ideal product specifications and customer preferences. For example, in 2018, the final year of the simulation, there will be 14,477 customers that can be associated with the low-end sector. The ideal product for low-end customers will be a unit with a performance of performance and size of 5.7 and 14.3 respectively. And lastly, low-end customers primarily use product age and price to differentiate between competing products.

Sector Growth

After a few rounds (aka years) it was evident that customer demand in each sector was grew constantly. We established that the five sectors had the following growth rates.

Sector

Growth

Trad

9.2%

Low

11.7%

High

16.2%

Perf

19.8%

Size

18.3%

Even though the Size and Performance sectors had the strongest growth rates, it is the Low-end sector that balloons to almost 15,000 units in the final year of simulation.

Sector

2010

2018

Trad

   4,925.00

     9,958.35

Low

   5,974.00

   14,477.40

High

   1,702.00

     5,657.29

Perf

   1,277.00

     5,418.08

Size

   1,322.00

     5,071.18

During the last few rounds, the market was unable to satisfy customer demand due to insufficient plant capacity of all firms. This, in our opinion, was a lost opportunity for easy sales especially when Chester, our arch-rival, vacated this sector. In retrospect, bulking up on low-end capacity during early round would have been an advantageous strategy in anticipation of sector growth.

Sector Drift

Over time, technological advances allow chip manufacturers to offer smaller and faster units. Market competition and customer expectation result in a “drift” in the ideal specification for each generalized sector. The CAPSIM online documentation states the following drift rates for each sector.

Segment

Performance

Size

Traditional

0.7

-0.7

Low End

0.5

-0.5

High End

0.9

-0.9

Performance

1.0

-0.7

Size

0.7

-1.0

When these drift rates are applied to the initial positions of each sector’s “ideal position” we see the following trend.

image

From the graph were able to ascertain the follow key factors:

  1. The size and performance sectors are diverging. This is significant because a product launched into these sectors will not be able to be repositioned into other sectors.
  2. The low-end, traditional and high-end sectors overlap. For example, an ideal high-end product in year 2010 is equivalent to an ideal traditional product in 5½. Andrews used this strategy to cease R&D on Adam in 2013 so that it could be a traditional product in 2016.
  3. The rate of drift in low-end sector is considerably less than the high-end sector.

The Automation Pitfall

In the simulation, automation refers to an investment to improve the efficiently of assembly line machinery. The investment results in a reduced labor cost and a substantial improvement in product contribution margins. Automation is not without adverse effects, as automation increases the cost of additional plant capacity becomes increasingly more expensive. However, in our opinion, the most damaging effect of high automation is the increased length of time to reposition sensors.

In a few instances we may have automated too much too early. This stifled the responsiveness of some products to annual drift corrections. This dampening effect on R&D resulted in less time in the “ideal position” for each sector, for the high-end sector this is critical for attracting customers.

During later years, the effects of high automation were mitigated when the introduction of the TQM module in the simulation. By funding TQM’s “concurrently engineering” we were able to reduce, to a small degree, the time to reposition products.

The Value of Leverage

Financial leverage takes the form of a loan or other borrowings, the proceeds of which are invested with the intent to earn a greater rate of return than the cost of interest. In the case of our firm, our primary form of capital resulted from issuing debt (both long and short term) and the sale of stock. Leverage allows greater potential returns for a firm that would not have been available. The potential for loss is greater because if the investment becomes worthless then the loan principal and accrued interest on the loan still need to be repaid. Our firm learned this firsthand because we had to take several emergency loans.

The chart below illustrates several important financial ratios: Return on Sales (ROS), Return on Assets (ROA), and Return on Equity (ROE). When you compare our firm’s performance over the course of the simulation relative to the percentage of borrowings as a function of our firm’s total liabilities and owner’s equity, there is no consistent correlation between these performance indicators as evidenced below:

However, what this data does show is the effect of leverage on our long-term success. Notice the significant disparity between the ROS, ROA, and ROE in 2013 versus 2016. Both years our firm borrowed significantly. However, in 2016 the money we borrowed was spent on plant improvements to the tune of over $15 Million, whereas in 2013 our firm actually sold plant capacity and turned a profit from the sales. In other words, early in the competition our firm made the mistake of not (re)investing the money we borrowed to finance our long-term capital goals. This is what resulted in the collapse from years 2014 – 2016 because the money we borrowed wasn’t properly invested in the firm. Consequently our firm’s performance in 2013 is an representation of pseudo-positive performance, when in reality our firm actually suffered from not reinvesting this money back into the firm’s manufacturing business.

Strategy of Competition

In the Capsim simulation we implemented a strategy of broad cost leader with focus on product lifecycle. We continuously updated our products so that they had competitive ages. In addition, we made sure our products fit into the ideal market. As we progressed through the years we changed our strategy to maintain our existing SIZE product and launch a new one, since two of our competitors exited this market. This did not result in immediate profits, as one of our products had to be re-engineered. In addition, we launched several high end products and soon after Chester copied our strategy of launching high end products. Again, we had to re-engineer some of our high end products to compete with two competitors. It is important to have a consistent strategy, but you must respond to competitor actions, otherwise you run the risk of losing out of market share or carrying inventory, both of which will hurt short and long term profit.

Impact of Inventory

Toyota is credited for the invention of Just in time inventory. Under ideal conditions, a company would purchase, produce, and ship product to meet the inventor for one day or one week. As the name states, “just in time” mean that raw materials are received just in time to go into production, manufactured, completed and shipped to customers. Just in time emphasizes producing exactly what is needed, as opposed to keeping everyone busy.

Carrying costs are definitely a lesson that the CAPSIM simulation demonstrated. Over production generally resulted in an emergency loan. When a company overproduces, they generally pay additional production costs, warehouse costs, and potentially product obsolescence. In addition, inventory that does not sell takes up valuable production space that could have been used for other purposes. While inventories act as buffers against unforeseen events, they have a cost. In addition to the money tied up in inventory, the presence of inventories encourages sloppy, inefficient work that may result in defects that dramatically increases total production time.

Good Luck!

Thursday, March 4, 2010

Malaysia & Indonesia – A Comparison

Petronas Towers

(image from Wikipedia)

[Article original published August 2008.]

INTRODUCTION

Malaysia and Indonesia share similarities in geography, culture and cuisine.  However the politics of both countries differ quite significantly.The Federation of Malaya gained independent from the United Kingdom in 1953.  The federation was renamed to Malaysia when the states of Sabah and Sarawak joined in 1963.  The independence from the United Kingdom was amicable but delayed since Second World War until after the communist insurgency was suppressed.

Indonesia declared independence shortly after the Japanese surrendered in 1945.  But unlike Malaysia, Indonesia’s former colonial rules fought unsuccessfully for four years to regain control.  Indonesia’s first leader, Sukarno, maintained tenuous control and relied on support from the Military and the Communist Party of Indonesia (PKI).

MAHATHIR AND SUHARTO

Two politicians stand out for their role in transforming their respective countries into modern emerging economies, former Malaysian Prime Minister Mahathir bin Mohamad and former Indonesian President Suharto.

Mahathir ruled Malaysia for 22 years from 1981 and is credited with the country’s phenomenal economic growth during the late 1980’s and 1990’s.  Mahathir is best known internationally for the large scale projects such as the planned capital city of Putrajaya, the Bakun Dam and the iconic Petronas Towers.  Mahathir believed in the Keynesian economic theory that growth can be achieved in a mixed economy through infrastructure investment.

Suharto, a former military leader, became Indonesia’s second President after purging the country of communist.  Suharto ruled Indonesia for 32 years with the economic and diplomatic support from the West.  Suharto encouraged foreign investment which led to dramatic economic growth.  However the Suharto regime (referred to as the “New Order”) is also synonymous with corruption and anti-Chinese legislation that attempted to suppress Chinese culture and reduce Chinese economic control.

Anti-Chinese policies were not restricted to Indonesia.  In 1971, Malaysia launched the New Economy Policy (NEP) whose goal was to redistribute Malaysia’s wealth from non-Malay, such as Chinese, to Malay.  The policy mandated that all initial public offerings (IPO) reserve 30% share for Malay investors.  Other provisions include quotas at educational institutions and discounted housing.  The policies of the NEP continue today as the National Development Policy (NDP) even though the success of the program is questionable.

The domination of these two regimes took a major blow when the Asian financial crisis occurred in 1997.  It is interesting to compare how Malaysia and Indonesia were affected (and handled) the crisis.  Prior to the crisis Malaysia was progressing towards its vision of achieving developed nation status by 2020.  However this nationalist vision took a step back when the country plunged into a recession following the Asian financial crisis.  In less than a year the ringgit and stock exchange had lost half of its value.  In opposition to the international community and his own finance minister, Mahathir refused IMF aid and instead choose to impose capital controls and fix the ringgit against the US dollar.  This strategy proved successful, by 2005 Malaysia had a budget surplus of US$14 billion however asset values are still to return to the pre-crisis level.

Prior to the crisis, Indonesia had a trade surplus, large foreign exchange reserves and a strong currency.  Following the crisis, the rupiah’s value dropped dramatically and Indonesia was forced to accept economic reforms in exchange for IMF aid.  The rupiah continues to decline from a pre-crisis value of RP 2,400/dollar to RP 17,000/dollar in 1998.  Indonesia’s inflation and the removal of subsidies for food and education caused widespread public unrest.  In May of 1998, protests turned to riots, with Chinese-owned businesses being the target for many looters.  On May 21, Suharto resigned due to public pressure.  Incidentally, there is strong evidence that the protests and riots were engineered by the military to persuade Suharto to resignation.

Many different parties reportedly were involved, including local hoodlums, mass organizations, and elements of the armed forces. The team criticized the armed forces for failing to take preventive action or steps to stop the riots once they began.
(U.S. Department of State, 1999)

POST MAHATHIR AND SUHARTO

In 2003, Mahathir retired from politics and was succeed by his deputy, Abdullah Ahmad bin Badawi.  Abdullah’s commitment to eliminate corruption in government may have contributed to the Barisan Nasional coalition’s landslide victory in 2004.  The Barisan Nasional coalition has led the government since Malaysia’s independence in 1957.

In recent years, the Malaysian opposition parties have gained public support in their campaign for free and fairer elections.  Specific demands include access to government controlled media and reforms to the electoral system which is prone to tampering.  The campaign culminated in the 2007 Bersih rally in which 100,000 protesters demanded reform in the nation’s capital.

Abdullah’s Barisan Nasional coalition won a narrow victory in the 2008 general election.  The Berish rally and resistance to the NEP’s affirmation action policy is thought to have contributed to the opposition’s success.

A disturbing and somewhat distasteful chapter in Malaysian politics is the treatment of Mahathir’s former protégé, Anwar Ibrahim.  Anwar served as Mahathir’s deputy and finance minister but was sacked in 1998 over a disagreement on how to handle the Asian financial crisis.  Following the dismissal, Anwar became a vocal critic of Mahathir and the coalition government.  In 1999, he was convicted and sentenced to 15 years in prison on questionable charges but was released in 2004 after the federal court dismissed one of the changes.  In August 2008, Anwar was admitted as a member of parliament after winning a seat in the constituency of Permatang Pauh.  It is envisioned that Anwar will play a more prominent role in Malaysian politics in the years to come.

Indonesia has experienced considerable political reform following Suharto’s resignation in 1998.  Suharto’s successor and former Vice President, Jusuf Habibie, introduced legislation in 1999 that gave greater freedom to political parties.  In a surprisingly move, Habibie allowed the people of East Timor to vote for their independence from Indonesia.  This decision was very unpopular in Indonesia and ultimately led to his political demise.  Abdurrahman Wahid became Indonesia’s first elected president following Suharto’s departure.  Abdurrahman’s time as president is notable for his amicable resolution of the separatist movements in Aceh and Papua (formerly “Irian Jaya”).  Megawati Sukarnoputri, daughter of the first Indonesian president, replaced Abdurrahman in 2001 for the remainder of the 1999-2004 presidential term.  Megawati continued to implement political reform but her poor public profile ultimately led to her defeat in the 2004 general elections.

In 2004, the constitution was amended so that the President and Vice President could only be elected by popular vote and would be restricted to two five year terms.  Additionally, the House of Representatives would no longer have seats reserved for candidates selected by the armed forces (TNI).

The term of the current president, Susilo Bambang Yudhoyono, has been be plagued with disasters.  The first of which (and most devastating) was 2004 tsunami that killed more than 130,000 people.  In 2006 and 2007 Indonesia experienced volcanic eruptions, mudflows, bird flu and terrorist bombings.

Country Comparison Fact Sheet

 

Malaysia

Indonesia

Type

Constitutional Monarchy

Republic

Legal System

Based on English common law

based on Roman-Dutch law

Head of State

Paramount Ruler Sulltan MIZAN Zainal Abidin
(since 12/13/2006)

Nine of the thirteen Malaysia states have hereditary rulers (or Sultans).  The head of state is chosen by (and from) the Sultans for 5 year term.

President Susilo Bambang YUDHOYONO
(since 20 October 2004)

The President is both head of state and head of government.  Elections are held every 5 years.

Head of Government

Prime Minister ABDULLAH bin Ahmad Badawi
(since 31 October 2003)

The prime minister is selected by MPs of the ruling party.

Executive Branch

Paramount Ruler, Prime Minister and the Cabinet (members of parliament selected by PM)

President and Cabinet (members are selected by the president).

Legislative Branch

Senate
70 seats
(44 appointed by paramount ruler, 26 elected by state legislatures for three year term)

House of Representatives
222 seats
(members selected by popular vote for five year term)

House of Representatives
550 seats
(members are elected by popular vote every 5 years)

Judicial Branch

Civil Courts at Federal and State level.

Sharia Courts deal with religious and family matter for Muslim people.

Supreme Court

Justices are selected by the house of representatives and approved by the president.

Independence

8/31/1957 (from UK)

8/17/1945 (from The Netherlands)

International organization participation

ADB, APEC, APT, ARF, ASEAN, BIS, C, CP, EAS, FAO, G-15, G-77, IAEA, IBRD, ICAO, ICC, ICRM, IDA, IDB, IFAD, IFC, IFRCS, IHO, ILO, IMF, IMO, IMSO, Interpol, IOC, IPU, ISO, ITSO, ITU, ITUC, MIGA, MINURSO, MONUC, NAM, OIC, OPCW, PCA, PIF (partner), UN, UNAMID, UNCTAD, UNESCO, UNIDO, UNIFIL, UNMEE, UNMIL, UNMIS, UNMIT, UNWTO, UPU, WCL, WCO, WFTU, WHO, WIPO, WMO, WTO

ADB, APEC, APT, ARF, ASEAN, BIS, CP, EAS, FAO, G-15, G-77, IAEA, IBRD, ICAO, ICC, ICRM, IDA, IDB, IFAD, IFC, IFRCS, IHO, ILO, IMF, IMO, IMSO, Interpol, IOC, IOM (observer), IPU, ISO, ITSO, ITU, ITUC, MIGA, MONUC, NAM, OIC, OPCW, OPEC, PIF (partner), UN, UN Security Council (temporary), UNCTAD, UNESCO, UNIDO, UNIFIL, UNMIL, UNMIS, UNOMIG, UNWTO, UPU, WCL, WCO, WFTU, WHO, WIPO, WMO, WTO

(CIA, 2008)

REFERENCES