Key Elements and Rules

KEY ELEMENTS AND RULES A All brands characteristics Amortisation & depreciation Average price index AwarenessB Brand advertising message & perception changes Base (production) cost Brand salesC Convenience perception of stores Co-operative advertising Cost of capital Cost of capital employed Cost of goods sold Cum.(ulated) previous R&D budgetsD Dropped or discontinued brands costsE Economic Valued Added (EVA) Efficiency Expected perception Experience effects / Economies of scale Extra needed R&D budgetF Final scores EVA Final scores ROI Financial revenue Financial opportunity cost© 1995-2015 Storewars1 Page 1 Foodles live cycle Forecasted values of economic factorsG General expenses Guarantee of unsold stocks buy back by manufacturerH Handling costs HealthinessI Intangibles Inventory holding costJKL Local shoppersM Manufacturer 4 deliveries Manufacturer 4 selling prices Manufacturer production adjustments Market size Market studies discount Master brandingN Net fixed assets© 1995-2015 Storewars1 Page 2 Net sales value Net operating profit after taxes (NOPAT)O Obsolete stock Out-of-stock week number Own sales shareP Packaging Payables Perished goods cost Perished/Sold off Price perception of stores Private Label awareness Private Label changes Private Label cost Production capacity extension Promotional support Promotions costQ Quality perception of stores Quality shoppersQuantity discountsR R&D budget Receivables Retailer 3 buying prices Retailer 3 purchase from Manufacturers 1, 2 & 3 Retailer 3 purchase from Manufacturer 4 Retailer 3 selling prices Retailers prices Returns from trade© 1995-2015 Storewars1 Page 3 S Savour Shoppers behaviour Scent Staff on payrollT Taxes Terms of paymentU Unit costV Value of inventories Value shoppersW , X, Y, Z A Top of the page All brands The composition shown is an amalgam of three elements: characteristics 1. original composition, 2. composition corrections (±10% or ±20% for packaging), 3. averaged out across two countries (composition corrections can be different for Limburg and Oland)Amortisati Calculated on the basis of previous period values of fixed on & assets. Property and land are depreciated over the period of 20 depreciation years (40 periods), equipment over 10 years (20 periods), and intangibles over 5 years (10 periods). Straight-line depreciation method is applied. Average Foodles perception dimension. It’s a ranking. The lowest price index value (10) indicates that a brand is perceived as the cheapest on the market, the highest (100) means that a brand is perceived as the most expensive. The value is a function of actual price, promotions, and shelf space. It is averaged out across all three retailers. Average price index is not explicitly reported for Woodles but its value is© 1995-2015 Storewars1 Page 4 actually used to calculate Efficiency. Awarenes Current brand awareness is determined by: s  previous awareness,  brand advertising,  co-operative advertising,  shelf space allocated to the brand,  awareness of other brands under master brand umbrella. B Top of the page Brand In a perfect situation maximal position change at once would advertising be ±10 (much less/much more) points on the perceptual map. message & Less/more message would be equal to ±5 points. However, the perception actual change is smaller and determined by relative advertising changes budget (share of voice). A small random factor (±2 points) is also applied. In case of Efficiency for Woodles the relative prices changes can completely offset advertising message impact. Base Production cost of the first unit of a new brand. As the (production) cumulated volume grows the average production cost becomes cost lower than the base one. This is a result of economies of scale and learning. On a good brand the difference, after a few periods can reach 25 – 30 %. If two or more brands are produced using the same project the savings are cumulated. Brand … and market share are determined by following factors: sales  awareness,  perception,  net price (after promotions),  point-of-sales activities (if the corresponding option is enabled)  allocated shelf space,  sufficient retailers orders (no out-of-stock),  retailer share of shoppers. All those factors are expressed in relative (to other brands) terms. C Top of the page Convenie The factors determining it, in decreasing importance order nce perception are: of stores  service level,  convenience advertising,  previous convenience perception,  # of items being out-of-stock,  # of locations (usually constant in 4-5 decisions seminar),  # of carried brands vs. # of all existing brands,  co-operative advertising. Co- Has double effect: operative 1. reinforces brand advertising, advertising 2. store advertising. The total budget (spending by manufacturer + spending by© 1995-2015 Storewars1 Page 5 retailer) is allocated twice: 1. proportionally to the actual brand orders by retailer, 2. to each stores perception dimension (15% quality, 25% convenience, 60% price, approximately). Exchange rates vary, but on average it is fair to assume that:  $1 on co-operative advertising = ¢40 on brand advertising  $1 on co-operative advertising = ¢70 on store advertising Cost of Weighted Average Cost of Capital (WACC). Reflects the cost capital of borrowing money from the banks and returns expected by shareholders. The respective weights depend on the financial structure of the company. However, the Storewars teams have not influence on the financial structure and therefore have to accept given values. WACC varies across five teams as follows; M1 = 8%, M2 = 9%, M3 = 7%, R1 = 6%, R2 = 8% Cost of Total net assets value * Cost of capital capital employed Cost of It is calculated on the basis of volume actually sold and not goods sold purchased or produced. The program keeps track of different purchase/production conditions and averages out unitary cost of stocks. Cum. Sum of all previous investment on a given R&D project. This (ulated) value does not include the latest (current period) spending. previous R&D budgets D Top of the page Dropped The discontinued brands are sold off at loss. The difference or discontinued between the purchase value and the sales off value is considered as brands costs charge and diminishes operating profit.  If a manufacturer decides to stop producing a brand, retailers return their stocks to the producer at 85% of the actual purchase price; they get 15% charge. The producer then sells off all stocks (own and returns from trade) at 40% of actual production cost (60% charge).  If a retailer decides to stop listing a brand any existing stocks are sent back to manufacturer at 40% of purchase price (60% charge). The returned stocks increase inventories of manufacturer and, if they are not obsolete, can be sold again. 40% rule (60% charge) applies also if a retailer discontinues private label. E Top of the page Economic Net Operating Profit After Taxes (NOPAT) less Cost of Valued Added Capital Employed (EVA) Efficiency Key driving elements are Detergent content and relative© 1995-2015 Storewars1 Page 6 market price. The impact of Softener is much weaker but still not negligible. Expected Evaluation of the perception based only on the technical perception characteristics of the product. Could be considered as an objective perception of a brand; however, the values are largely approximate, as relative price of a brand – one of the perception determining factors - changes from period to period. It is particularly visible for Woodles Efficiency, where relative price is the driving factor. Experienc See first: Base production cost. e effects / Mixture changes (within ±10%, ±20% on packaging) do not Economies of cancel already achieved savings. scale Extra Additional R&D budget required to complete a pending project needed R&D with 80% success chances. During short seminars (4 periods only) it budget is advised to prompt the teams to inflate the recommended value by 20-25% in order to increase the probability of success. F Top of the page Final  Manufacturers: scores MS for each manufacturer : X  m 100 EVA m max(MSi ) i1..3EVAm Ym  100 max(EVAi ) i1..3 X Y Final Score  m m 2 where MSm is final market share in value terms (both categories combined) and EVAm is the cumulated EVA. Retailers:MSr for each retailer : X r  100 max(MSi ) i1..2EVAr Yr  100 max(EVAi ) i1..2 X Y Final Score  r r 2 where MSr is final market share in value terms (both categories combined) and EVAr is the cumulated EVA.If for one of the groups cumulated EVA is negative, while for© 1995-2015 Storewars1 Page 7 the other the values are still positive. A following transformation is applied:C  max(EVAi )  min(EVAi ) * EVAi  EVAi  C Final  Manufacturers: scores MS for each manufacturer : X  m 100 ROI m max(MSi ) i1..3ROI m Ym  100 max(ROIi ) i1..3 X Y Final Score  m m 2 where MSm is final market share in value terms (both categories combined) and ROI m is the cumulated return on investment. Retailers:MSr for each retailer : X r  100 max(MSi ) i1..2ROI r Yr  100 max(ROIi ) i1..2 X Y Final Score  r r 2 where MSr is final market share in value terms (both categories combined) and ROI r is the cumulated return on investment.A potential problem may rise if one of the groups reaches a negative level of ROI, while for the other these values are still positive. A possible way out is adding the same positive value C to the original values of ROI, as follows:C  max(ROIi )  min(ROIi ) * ROIi  ROIi  CFinancial This is directly linked to the terms of payment. It represents revenue the money that retailer saves by getting free credit from a manufacturer (i.e. not paying the interest to a bank). If the retailer© 1995-2015 Storewars1 Page 8 pays only 60 or 90 days later he doesn't have to borrow money to pay for the delivered goods immediately; he uses revenues from sales instead. Financial As above, the manufacturer doesn't get the money opportunity cost immediately, therefore to finance his operations he has to borrow money from a bank at a rate equal to his cost of capital. The actual calculations are as follows: total value of sales from manufacturer to retailer * number of days / 183 * cost of capital All manufacturer-retailer pairs start with 60 days delay of payment. Foodles A Foodle produced by manufacturer in period T can be sold to live cycle a retailer only in that and the following period T+1. Similarly a brand purchased by a retailer in period T, can only be sold to the consumers in periods T or T+1. For simplification, it is always assumed that retailers buy "fresh" stock, as if it was produced in the same period T. Forecaste … given in the newsletter. They are given per period (6 d values of months). economic factors G Top of the page General  Manufacturers: expenses They correspond to three items: 1. market studies costs, 2. amortisation & depreciation, 3. staff on payroll (see Staff on payroll). They are calculated at the category level and then allocated to brands proportionally to sales value.  Retailers: They correspond to five items: 1. market studies costs, 2. amortisation & depreciation, 3. staff on payroll (see Staff on payroll), 4. store advertising, 5. handling costs (3.0% of sales value in Limburg, 3.2% in Oland). The calculations are firstly done at the country level, and then allocated to product categories proportionally to the sales value. The category share is then allocated to brands proportionally to shelf space occupied. Guarantee Before creating the reports the program allows to enter the of unsold stocks volumes of stocks that retailer(s) return to the producer(s). If the buy back by values entered exceed the actual stocks they will be brought to manufacturer down. Program handles differently current orders and stocks bought previously. In the first case, instead of delivering and taking back© 1995-2015 Storewars1 Page 9 unsold volumes the program sets shipments at the levels lower than initial retailer orders. The reduction is equal to the agreed “return volume” or less than that if there are no stocks at retailer. In the case of previously bought goods, their stocks are actually sent back to the producer and reported as “Returns from trade”. Depending on the agreed “return” the program first reduces the orders, then shifts back obsolete stocks and finally fresh stocks. H Handling They represent 3% of retailer’s sales value. costs Healthine Key driving ingredients: Fat (negative correlation), ss Vegetables. I Intangible Any spending on R&D projects, even those that are not s successful, increases the value of intangible assets. Inventory It represents handling cost (around 2% of stocks value) – holding cost stocks need to be stored in some warehouses. There are some costs linked to that, like electricity, staff, etc. Calculations: stock volume * purchase or production cost * 2% At the same time the inventories increase the value of capital employed and therefore decrease the EVA. J Top of the pageK Top of the pageL Top of the page Local When selecting a retailer these shoppers take into the shoppers consideration mainly the Convenience perception of retailer. The Quality and Price perception are less important.M Top of the page Manufactu In the normal situation there is no sales from Manufacturer 4 rer 4 deliveries to Retailers 1 & 2. It only takes place if the original manufacturer production (plus previous stocks) is not sufficient. In this case Retailers orders are satisfied proportionally and Manufacturer 4 delivers 80% of missing volume. See also pricing conditions. Manufactu All deliveries from Manufacturer 4 are 10% more expensive rer 4 selling than those from original manufacturer. This is to reflect higher prices transportation and delivery costs. Manufactu In a situation when orders by Retailers 1 & 2 (but not R3) of a rer production specific brand exceed manufacturer's production and previous adjustments stocks the model "tries" to adjusts production plans. Firstly the model checks if there is some spare production capacity. If this is the case,© 1995-2015 Storewars1 Page 10 the production of under-produced brand will be increased as much as it is needed to satisfy retailers' orders; of course without exceeding existing production capacity. Secondly, if manufacturer is using 100% of the production capacity, the model looks for some over-produced brands and if there are any brands like that it decreases their production and reallocates thus liberated capacity to the under-produced brand. The de/increases of the planned production per brand cannot exceed 10% of the currently available production capacity. Although this mechanism is very helpful to manufacturers the participants should not rely on it and they should do their best to properly plan the production themselves. The downsides of the adjustments mechanism are: 1. The model does not take into account the profitability of the brands. It reallocates the capacity only in function of the volume required. This may lead to no sales to Retailer 3 situation on brands that are very profitable. 2. The changes are limited and determined by the existing production capacity and previous market performance of the brand. 3. Any retailers' involuntary mistakes in orders can substantially change manufacturer production plan. Market … remains very stable (in volume terms). The growth rate is size close to zero. However, substantial decrease of market prices can result in a higher consumption rate and a certain increase of the market in volume terms. Similarly, important increase of market prices results in a reduction of demand. Overall, in value terms, market growth rate follows the one of inflation. Market If a study is ordered for both countries a 10% discount is studies discount applied. Master A manufacturer can use company leverage by creating a branding family (master brand umbrella) in each product category. They are defined separately for Limburg and Oland; i.e. a brand can be in family in one country and remain a separate brand in the other one. The company umbrella has positive effect on brand awareness; weaker brands take advantage of the strong ones awareness. It also has an effect on brands perception; mastered brands tend to cluster, i.e. they are being attracted to a "gravity centre" – their positions become less distinctive. If a brand has been associated with master brand the association cannot be removed. N Top of the page Net fixed  Retailers: assets Without any investment in building/buying new stores (corresponding option has to be enabled) and without any investment in IT (again, corresponding is by default disabled), the net value of fixed assets remains unchanged as every period© 1995-2015 Storewars1 Page 11 depreciation is offset by maintenance investment of the same amount.  Manufacturers: Similarly as for retailers, without any investment in new production lines, factories or IT, the net value remains constant (maintenance expenses = depreciation). There is no maintenance investment in Intangibles, therefore, provided there is no spending on new R&D projects, the net value is decreasing every period. Net sales  Manufacturers: value Sales volume * list price  Retailers: Sales volume * retailer price – promotions costs + promotional support Net Net contribution less taxes (fixed rate for all companies = operating profit 38%) after taxes (NOPAT) O Top of the page Obsolete Foodles only. This stock cannot be sold in the next period; it stock will be liquidated as obsolete. See Perished goods cost. Out-of- Indicates the week, when the stocks were exhausted. stock week Caution: for instance, values around 13 may suggest that a retailer number could have sold about twice (26/13) as much of a specific brand. Probably true, but at the same time the sales of other brands would be smaller. Due to strong substitution effect this line in retailer’s report is more relevant when many brands are out-of-stock; shown values may be good proxies to determine market demand. If only one or two brands were out-of-stock one may suppose that increased orders of those brands would translate to higher sales volumes but at the same time would also cause higher stocks on some other brands. Own sales It shows what was the share of the original producer in the share total deliveries to the trade. A value lower than 100.0% appears only if the production was not big enough and Manufacturer 4 delivered some missing volumes. P Top of the page Packaging Considered as an ingredient. The actual value should be interpreted as an index of packaging quality. 10 = very poor, 100 = very solid and sophisticated. Packaging slightly improves (positive correlation) perception of brands. Payables  Manufacturers: Production cost * N / 183, where N = 70, 80, 60 for M1, M2, M3 correspondingly  Retailers: With each manufacturer payables are calculated as follows: Purchase value * Agreed delay of payment / 183© 1995-2015 Storewars1 Page 12 Perished Applies only to Foodles, which are perishable and cannot be goods cost sold after one year (2 periods). It's a charge on net profit. The obsolete stocks can only be sold as declassified good (for instance, food for animals). Retailer sells his stocks back to manufacturer at 40% of the actual purchase cost. Manufacturer sells all stocks (his own and those from retailers) at 40% of his current production cost. Actual values for perished goods charges are calculated as follows:  Retailers: brands: stock volume * purchase cost * 60% private label: stock volume * production cost * 60%  Manufacturers: stock volume * production cost * 60% Perished/ Foodles only. Stocks that became obsolete in the previous Sold off period. Price The factors determining it, in decreasing importance order perception of are: stores  average weighted price (shelf space and awareness are used as weights, therefore the big brands have strong impact),  prices of private labels,  promotions associated along with the price advertising,  previous price perception,  service level (in negative way),  co-operative advertising. Unlike Convenience and Quality perceptions, the Price perception improves when its value decreases. Low Price perception means that a retailer is perceived to be cheap. Private Does not depend on the awareness of the copied Label manufacturer brand. By default, retailers cannot advertise their awareness Private Labels but the store advertising they do has positive impact on the store brand awareness. If advanced option: “Private Label Advertising” is enabled then any spending on private label is reinforcing the store advertising effect. Private There are two possible ways of updating Private Label by Label changes changing manufacturer brand it is based on (copying another one). Both have some advantages and downsides: 1. The name of Private Label does not change: (+) the existing stocks can be sold in a normal way, they are progressively replaced by new ones, (+) the awareness remains unchanged, (-) the change in perception is only partial, the lagged effect of previous perception makes that the "new" Private Label is not immediately perceived in the same way as the pattern manufacturer brand. The complete perception change may take two-three periods. 2. The name of Private Label is changed:© 1995-2015 Storewars1 Page 13 (-) the existing stocks have to be sold out at 40% of production cost, (-) the awareness may drop for one period, (+) "New" Private Label is perceived in a very similar way as the manufacturer brand it is based on. In both cases the accumulated experience effects are lost. Private The production/purchase cost is 5% higher than the Label cost production cost of the original base brand. Further differences are due to the economies of scale effect (original manufacturer usually produces bigger volume than the volume of private label). Every time the base brand for the private label is changed all economies of scale are lost. There are no synergies across the two countries, i.e. even if the private labels in both countries are based on the same manufacturer brand they are considered as two separate items produced by different local industrial suppliers. Productio There is an upper limit for capacity increase per period: n capacity  200,000 units (in the normal cycle, i.e. for the following period) extension  400,000 units (combined normal and accelerated cycles, i.e. 200,000 become operational immediately in the current period and another 200,000 in the next period). There is a 50% extra charge for any production capacity increase in the accelerated cycle. Promotion If entered as a total (and not for a specific brand), is assigned al support to brands proportionally to shelf space allocated by retailer. Promotion It’s an approximate value calculated on the basis of s cost promotions length, promotions rate and the volume sold. Q Top of the page Quality The factors determining it, in decreasing importance order perception of are: stores  service level,  quality advertising,  previous quality perception,  # of expensive brands vs. # of all carried brand,  co-operative advertising. Quality When selecting a retailer these shoppers take into the shoppers consideration mainly the Quality perception of retailer. The Convenience and Price perception are less important. Quantity  Retailers: Discount This is the difference between the cost of buying at manufacturer list price and at the actual discounted price. The discount is only applied to the volume delivered by original manufacturer. Any additional volume delivered by Manufacturer 4 is charged at full list price increased by 10%, see Manufacturer 4 selling prices. The value shown in the report refers to the volume sold, the savings on the volume unsold directly decrease the value of inventories.© 1995-2015 Storewars1 Page 14  Manufacturers: The cost of discounts refers to the volume sold to retailers. A default 10% discount is applied to any volume sold to Retailer 3 to reflect higher distribution costs. R Top of the page R&D The required budget for a newly started project depends on budget the ingredients composition as compared with the existing brands or already approved other projects. A substantially different formula costs much more than a "me-too" specification. Receivabl  Manufacturers: es With each retailer the receivables are calculated as follows: Sales value * Agreed days of payment / 183  Retailers: Sales value * N / 183, where N equals 12 for R1 and 9 for R2 Retailer 3 Manufacturers 1, 2 & 3 list prices are discounted by 10% buying prices when delivering to Retailer 3 to cover higher distribution costs. Retailer 3 They are based on previous brand performance and current purchase from market demand. If manufacturer list price minus 10% default Manufacturers discount is higher than 250% of production cost, Retailer 3 does not 1, 2 & 3 purchase any volume. See pricing conditions above. Retailer 3 Retailer 3 buys from Manufacturer 4 only if the original purchase from manufacturer has no stocks left. Manufacturer 4 Retailer 3 They are automatically set on the basis of retailers 1 & 2 selling prices prices. For each brand Retailer 3 price is 15% higher than the highest price across Retailers 1 & 2. If Retailer 3 only lists a brand then the mark-up of 30% is added to the manufacturer's list price. No delay of payment is assumed. Retailers The only constraint is the maximal 100% mark-up, i.e. the net prices retailer price (after promotions) cannot be higher than twice the manufacturer list price. This corresponds to a maximum 50% margin. Same applies to private labels. Returns Total volume of stocks returned by retailers. It refers to: from trade 1. brands discontinued by manufacturers (all three retailers) 2. brands de-listed by retailers (only R1 and R2) 3. perished stocks (only Foodles from R1 and R2) 4. brands covered by sales/return agreement. The volumes reported here refer only to the stocks bought in previous period(s). See Guarantee of unsold stocks buy back by manufacturer for more details. The returns increase stocks at manufacturer and are evaluated depending on situation at:  40% when dropped by retailer,  85% when discontinued by manufacturer or,  100% when covered by sales/return guarantee. of their actual sales prices. Returned stocks (if not obsolete© 1995-2015 Storewars1 Page 15 and not discontinued) can be sold again. Current stocks position is calculated as follows: Current stocks = Previous stocks + Current production + Returns from trade - Sales S Top of the page Savour Key driving ingredients: Meat and Fat Shoppers Market Studies. All values are given in thousands of behaviour households with the exception of the last column. Scent Key driving ingredients: Perfume and Softener Staff on  Manufacturers: payroll Sum of two elements; fixed – proportional to the available production capacity (Foodles - $1.70 per one unit of capacity, Woodles - $0.75. Every period those values are corrected up for inflation). The second, variable element is proportional to sales value. For branded goods it represents 9% of sales value, and covers sales force and distribution costs. For contracted private labels produced by manufacturers it represents 5% of sales value.  Retailers: At Average service level: $290,000 per store in Limburg, $310,000 in Oland. At Low service the values are decreased by 20%, at High service level they are increased by 20%. T Top of the page Taxes Same corporate tax rate for all teams in each country is 38% Terms of The number of days can take any value from 0 to 183, which payment is the length of one simulation period. U Top of the page Unit cost It's actual average production cost taking into account economies of scale. See Base production cost. V Top of the page Value of  Manufacturers: inventories Stocks are in principle evaluated at the current production cost. The exception is made for the goods returned by retailers. In this case the stocks are evaluated at the repurchase price (40%, 85% or 100% of the original wholesale price), see Returns from trade.  Retailers: Stocks of branded goods are evaluated at the actual net purchase cost, i.e. after discounts. Stocks of private label are evaluated at the production cost or purchase cost (if contracted from M1, M2 or M3). Value Quality and Price perception of stores are equally important to shoppers these shoppers when selecting a retailer. W Top of the page© 1995-2015 Storewars1 Page 16 X Top of the pageY Top of the pageZ Top of the page© 1995-2015 Storewars1 Page 17

Key Elements and Rules

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