Assembly-Shipping Decisions for Entry-Level Cameras

Help - Explanations - Information on Rules/Procedures

Entry-level cameras are built within 30 days of the receipt of a retailers order and shipped the day they are
assembled; no entry-level camera models are assembled in advance, warehoused in company facilities, and
then used to fill incoming retailer orders. Retailers place orders for entry-level cameras roughly 90 days in
advance of expected sales, so as to have ample numbers on hand to satisfy camera buyer demand.
The company schedules the number of cameras to be assembled each quarter based on the expected
volume of retailer orders it expects to receive and projected retail demand for the following quarter. The
seasonal pattern of assembly and retail sales is shown below:
Quarter 1 Quarter 2 Quarter 3 Quarter 4
Percentage of annual number of cameras
assembled by camera makers, based on
incoming retailer orders
Percenta e of annual retail unit sales of

g
cameras at retail

~20%

~20%

~40%

~20%

%
%

The costs of boxing, packaging, and shipping cameras to retailers average $3 per camera. Many of the
countries where retailers are located have import duties; import duties in each of the four geographic regions
average $5 for entry-level cameras (unless you have received notification that import duties for entry-level
cameras have changed in one or more geographic regions). The company absorbs the cost of import duties
but passes them along to retailers in the form of higher wholesale prices.
Deciding How Many Entry-Level Cameras to Assemble and Ship
All 16 decision entries for this screen focus on the same question: How many entry-level cameras to
assemble and ship to a particular region each of the four upcoming quarters?
The first line at the top of each assembly screen shows the projected next quarters retail demand for your
companys entry-level cameras (in 000s of units). The numbers shown for each quarter represent
projections of how many of your companys entry-level cameras that retailers expect to sell the following
quarter based on your companys competitive efforts (the prices, advertising, promotions,
performance/quality of your entry-level cameras, warranty periods, number of models, etc. decision entries
on the marketing and product design screens). Retailers need ample numbers on hand to be able to
accommodate expected shopper demand for your companys entry-level cameras the following quarter.
The second line shows the number of your companys entry-level cameras that retailers already have in
inventory (in 000s of units).
The difference between projected retailer demand and the number of units they already have in inventory
equals the projected volume of incoming retailer orders for your companys entry- level cameras. Most
retailers prefer to maintain very low inventories and replenish them as needed with incoming weekly or bimonthly deliveriesso as to avoid the costs associated with overstocking).
Normally, you will simply decide to assemble and ship whatever number of entry-level cameras is shown on
line 3the projected number of cameras ordered by dealers.
But there are a couple of issues to consider:
1. The projections of next quarter retail demand for entry-level cameras shown on line 1 are most
probably
a bit optimistic
(because
the projections are based on the assumption that rival makers
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2009 GLO-BUS
Software,
Inc.
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entry-level cameras will not alter their competitive efforts to any significant degree). There is a

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fairly good chance that rivals will be somewhat more competitively aggressive in going after higher
unit sales and market shares than in the previous year, in which case retail sales projections for your
brand will prove to be on the high side. Admittedly theres also a chance that rival makers of entrylevel cameras will be less competitively aggressive in going after additional unit sales and market
share, in which case the next-quarter projections might prove too low and retailers could run out of
your camerascausing you to lose sales. But the point to be understood here is that there is
always some degree of uncertainty surrounding the projections of retail demand for your
brand because the actions and competitive efforts of rivals to gain sales and market share
cannot be fully and accurately anticipated.
Because of the uncertainty surrounding the retail sales projections and the desirability of avoiding lost
sales should the retail sales projections prove too low, retailers have agreed to give your company
the flexibility to ship as many as 10% more units than the projected incoming order numbers
shown on line 3. Special note: Since the entries for units assembled/shipped are in thousands, entries
rounded to the nearest thousand above the 10% limit are allowed). Over-shipping is an option you may
want to exercise whenever you believe theres a good chance that retailers could run out of your
companys entry-level models in a particular quarter.
But decisions to ship more than the projected volume of incoming orders for entry-level cameras have
two slight disadvantages:
O

One disadvantageif actual retail demand turns out to be close to or below the projected retail
demandis reducing incoming retailer orders for entry-level cameras the following quarters
(because retailers will have some excess inventories left over from the prior quarter to work off). The
bigger the number of entry-level cameras that retailers already have in stock, the fewer they will
need to order to satisfy next quarters expected volume of purchases.

Retailers do not have to pay for the number of entry-level cameras they have in inventory until they
sell them, which increases your companys accounts receivable by the amount of retailer inventories
and reduces cash inflows a corresponding amount until the second quarter following shipment
quarter. Normally, retailers have up to 90 days (1 quarter) to pay for cameras delivered, but in the
case of cameras left over in inventory this extends to 120 days (to give retailers added time to work
off excess inventories).

You and your co-managers are likely to conclude that these disadvantages are tolerable and worth
avoiding the risk of lost sales. So some degree of over-shipping is something you may want to consider.
Because of the uncertainty surrounding the accuracy of the projected retail sales of your entry-level
cameras and the accuracy of the projections of incoming orders from dealers during each of the four
upcoming quarters, the decision of how many units to assemble and ship each quarter to each region
boils down to three basic options:
o

Enter amounts to be assembled and shipped that equal the projected volumes of incoming orders from
retailers.
Decide to assemble and ship a lesser number than the projected volume of incoming orders because of
the fairly high probability that the order projections are overly optimistic.
Decide to assemble and ship a greater number than the projected volume of incoming orders to avoid
the relatively small chance of retailer stockouts and lost sales. Overshipping is limited to 10% of
incoming orders (subject to the exception of rounding up to the nearest thousand above the 10%
limit).

In all three cases, GLO-BUS is programmed to automatically adjust the number of entry- level cameras
to be assembled/shipped downward whenever your decision entry for any quarter turns out to be more
than 10% greater than actual incoming ordersthis prevents an unrealistically excessive build-up of

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retailer inventories (real-world retailers would never keep re-ordering additional cameras to add to
already excessive inventories of unsold cameras).
2. The second issue of some importance relates to the exchange rate adjustment numbers you see
on the screen just under each decision entry box. Exchange rate adjustments result from the fact
that the company assembles, ships, and sells cameras in Taiwan (where the local currency is Taiwan
dollars) to retailers in other parts of the world (where local currencies are different).
o

The net revenues the company receives from sales to retailers in North America are adjusted up
or down for the size of actual real world exchange rate changes between the U.S. dollar and
the Taiwan dollar that have occurred since your decisions for the preceding year.
The exchange rate adjustments shown on the screen for shipments to North America each quarter
indicate whether the net revenue adjustment for the effect of exchange rate fluctuations is upward or
favorable (+) or downward or unfavorable (-). Favorable exchange rate adjustments enhance the
profitability of shipments to North America by the indicated amount of the exchange rate adjustment;
unfavorable exchange rate adjustments reduce your companys profit margins on shipments to North
America by the indicated amount of the exchange rate adjustment.

The net revenues the company receives from sales to retailers in Europe-Africa are adjusted up
or down for the size of actual real world exchange rate changes between the euro and the
Taiwan dollar that have occurred since your decisions for the preceding year.

The exchange rate adjustments shown on the screen for shipments to Europe-Africa each quarter
indicate whether the net revenue adjustment for the effect of exchange rate fluctuations is upward or
favorable (+) or downward or unfavorable (-). Favorable exchange rate adjustments enhance the
profitability of shipments to Europe-Africa by the indicated amount of the exchange rate adjustment;
unfavorable exchange rate
adjustments reduce your companys profit margins on shipments to Europe-Africa by the indicated
amount of the exchange rate adjustment.
o

The net revenues the company receives from sales to retailers in Asia-Pacific are adjusted up or
down for the size of actual real world exchange rate changes between the Singapore dollar and
the Taiwan dollar that have occurred since your decisions for the preceding year.
The exchange rate adjustments shown on the screen for shipments to Asia-Pacific retailers each quarter
indicate whether the net revenue adjustment for the effect of exchange rate fluctuations is upward or
favorable (+) or downward or unfavorable (-). Favorable exchange rate adjustments enhance the
profitability of shipments to Asia- Pacific by the indicated amount of the exchange rate adjustment;
unfavorable exchange rate adjustments reduce your companys profit margins on entry-level shipments
to Asia-Pacific by the indicated amount of the exchange rate adjustment.

The net revenues the company receives from sales to dealers in Latin America are adjusted up or
down for the size of actual real world exchange rate changes between the Brazilian real and the
Taiwan dollar that have occurred since your decisions for the preceding year.
The exchange rate adjustments shown on the screen for shipments to Latin America each quarter
indicate whether the net revenue adjustment for the effect of exchange rate fluctuations is upward or
favorable (+) or downward or unfavorable (-). Favorable exchange rate adjustments enhance the
profitability of shipments to Latin America by the indicated amount of the exchange rate adjustment;
unfavorable exchange rate adjustments reduce your companys profit margins on shipments to Latin
America by the indicated amount of the exchange rate adjustment.

The size of the revenue adjustment is equal to 5 times the actual period-to-period percentage
change in the relevant exchange rates (multiplying the actual % change by 5 is done so as to translate
the exchange rate change over a few days into a change that is more representative of a potential fullperiod change). Thus, if the exchange rate between euros and Taiwan dollars should change by -0.40%

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from one decision period to the next, the size of the exchange rate adjustment shown on the screen will
equate -2.0% (-0.40% x 5 = -2.0%) of the selling price of entry-level cameras. Because actual exchange
rate fluctuations are occasionally quite volatile over a several-day period, GLO-BUS caps the maximum
exchange rate adjustment during any one period to 5%, thus limiting the size of any gains or losses from
exchange rate adjustments.
If the on-screen exchange rate adjustments to a particular region are sizable enough to adversely affect
your companys profitability on entry-level cameras being shipped to a region, there are two actions you can
take:
o

One option is to adjust sales and marketing efforts and shipments to dealers in a manner that results in
added sales in those areas where the exchange rate adjustments in per camera revenues are positive
(favorable) and somewhat smaller sales in the regions where the exchange rate adjustments
For example, suppose shipments to North America involve an unfavorable exchange rate adjustment to
net revenues of -$1.25 (meaning profit per camera is reduced $1.25 because of adverse shifts in the
exchange rate). Further, suppose shipments of entry- level cameras to Latin America involve a favorable
or upward revenue adjustment of $0.80. Then you may want to return to the marketing decisions screen
and adjust your
marketing strategy to try to sell more entry-level cameras in Latin America (where exchange rates
are boosting profit margins by $0.80 per camera sold and try to sell fewer entry-level cameras in
North America where exchange rate effect are penalizing your profits by $1.25 per camera.
O

The second option is to raise the wholesale selling prices in a particular region enough to offset
negative revenue adjustments, realize higher net revenue per camera, and restore the lost profit
margin. Because all digital camera makers have assembly facilities in Taiwan and are experiencing
comparable favorable/unfavorable exchange rate impacts on their camera revenues, they may be
considering offsetting price adjustments as well; to the extent they adjust their prices upward, you
can adjust your price upward without much risk of putting your company at competitive disadvantage
or losing many sales.
Such actions probably are not worthwhile if the sizes of the unfavorable and favorable exchange rate
adjustments are only a few cents either way. But it is likely that in some years in some regions, the
sizes of real-world exchanges rates will be great enough to make such actions worth considering.

You will see no exchange rate adjustments on the screen in Year 6. The real-world exchange rate
values prevailing at the time your instructor starts the industry and the real- world rates prevailing at the
time of the decision deadline for Year 6 will serve as the base for calculating the Year 7 exchange rate
adjustments per camera that are shown on the Entry-Level Assembly Decisions screen. The real-world
changes in the exchange rates between the Year 6 and Year 7 decision deadlines serve as the basis for
exchange rate adjustments in Year 8. And so on through the exercise. Sometimes the real-world
exchange rate fluctuations that occur between decisions are quite small and insignificant, sometimes
they are a bit larger, and occasionally they can be quite sizable. So it is hard to say just what impact they
will have during the course of the exercise.
Understanding More about the Exchange Rate Adjustments
As indicated above, exchange rate adjustments result from producing cameras in Taiwan (where the local
currency is Taiwan dollars) and selling them to retailers in other parts of the world (where local currencies
are different). The local currency payments of retailers have to be converted into Taiwan dollars and
ultimately into U.S. dollars (since the company reports its financial statements in U.S. dollars). Further, the
orders and shipments tend to occur in one quarter (when exchange rates are one value), yet retailers
payments are not due until the following quarter (when exchange rates are likely to be a different value).
Thus the companys business is one with potentially significant foreign exchange risks. To help manage

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these risks, company officials have negotiated a long-term currency exchange agreement with the Global
Community Bank through which the company does most of its business; the agreement calls for the banks
foreign currency department to handle the companys many foreign currency transactions. The agreement is
complex but the essence of the arrangement calls for the net revenues the company actually receives on
cameras assembled and shipped from the Taiwan assembly facility to retail dealers in various parts of the
world to be subject to exchange rate fluctuations in four local currencies (the Singapore dollar, the euro, the
Brazilian real, and the U.S. dollar) against the Taiwan dollar. More specifically:

The net revenues the company receives from sales to retailers in Europe-Africa are adjusted
up or down for exchange rate changes between the euro and the Taiwan dollar.
In making sales to camera retailers in Europe-Africa, the company provides quotes of its wholesale
prices to retailers in terms of both the retailers local currency and in euros. Retailers, while making
payment in their local currency (which can be either euros or some other denomination), agree when the
order is placed to tie the amount of their local currency payment per camera to the local currency
equivalent of that number of euros per camerathe Global Community Bank handles converting the
local currency payments of Europe-Africa retailers into the equivalent of euros and then into Taiwan
dollars at the appropriate exchange rates. Should the exchange rate of euros per Taiwanese dollar fall
from one decision period to the next, say from 0.250 to 0.245 euros per Taiwan dollar, then retailer
payments of the agreed upon number of euros per camera at the time the order was placed equate to
more Taiwanese dollars at the time of payment and an upward adjustment in the companys revenues.
Conversely, when the exchange rate of euros per Taiwanese dollar rises, say from 0.250 to 0.255 euros
per Taiwan dollar (meaning that a specified number of euros equate to fewer Taiwanese dollars), then
the company does not receive as many Taiwan dollars in payment for the cameras sold and shipped to
Europe- Africa retailers and the revenue adjustment is downward.

The net revenues received from sales to Asia-Pacific retailers are adjusted up or down for
exchange rate changes between the Singapore dollar and the Taiwan dollar. In making sales to
camera dealers in the Asian-Pacific, the company provides quotes of its wholesale prices to retailers
in terms of both the retailers local currency and in Singapore dollars. Dealers, while making
payment in their local currency (which can be either Singapore dollars or Indian rupees or Japanese
yen or some other denomination), agree when the order is placed to tie the amount of their local
currency payment per camera to the local currency equivalent of that number of Singapore dollar per
camerathe Global Community Bank handles converting the local currency payments of AsiaPacific retailers into the equivalent of Singapore dollars and then into Taiwan dollars at the
appropriate exchange rates. Should the exchange rate of Singapore dollars per Taiwanese dollar fall
from one decision period to the next, say from 20.40 to 20.35 Singapore dollars per Taiwan dollar,
then retailer payments of the agreed number of Singapore dollars per camera at the time the order
was placed equate to more Taiwanese dollars at the time of payment and an upward adjustment in
the companys revenues. Conversely, when the exchange rate of Singapore dollars per Taiwanese
dollar rises, say from 20.40 to 20.45 Singapore dollars per Taiwan dollar (meaning that a specified
number of Singapore dollars equate to fewer Taiwanese dollars), then the company does not receive
as many Taiwan dollars in payment for the cameras sold and shipped to Asia-Pacific retailers and
the revenue adjustment is downward.

The net revenues received from sales to North American retailers are adjusted up or down for
exchange rate changes between the U.S. dollar and the Taiwan dollar. In making sales to
camera dealers in North America, the company provides quotes of its wholesale prices to retailers in
terms of both the retailers local currency and in U.S. dollars. Dealers, while making payment in their
local currency (which could be Canadian dollars), agree when the order is placed to tie the amount
of their local currency payment per camera to the local currency equivalent of that number of U.S.
dollars per camerathe Global Community Bank handles converting the local currency payments of
North American retailers into the equivalent of U.S. dollars and then into Taiwan dollars at the

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appropriate exchange rates. Should the exchange rate of U.S. dollars per Taiwanese dollar fall from
one decision period to the next, say from 0.250 to 0.245 U.S. dollars per Taiwan dollar, then retailer
payments of the agreed upon number of U.S. dollars per camera at the time the order was placed
equate to more Taiwanese dollars at the time of payment and an upward adjustment in the
companys revenues. Conversely, when the exchange rate of U.S. dollars per Taiwanese dollar rises,
say from 0.250 to 0.255 U.S. dollars per Taiwan dollar (meaning that a specified number of U.S.
dollars equate to fewer Taiwanese dollars), then the company does not receive as many Taiwan
dollars in payment for the cameras sold and shipped to North American retailers and the revenue
adjustment is downward.

The net revenues received from sales to Latin American retailers are adjusted up or down for
exchange rate changes between the Taiwan dollar and the Brazilian real. In making sales to
camera dealers in Latin America, the company provides quotes of its wholesale prices to retailers in
terms of both the retailers local currency and in Brazilian real. Retailers, while making payment in
their local currency (which can be either the real or Argentine pesos or Venezuelan bolivars or some
other denomination), agree when the order is placed to tie the amount of their local currency
payment per camera to the local currency equivalent of that number of Brazilian real per camera
the Global Community Bank handles converting the local currency payments of Latin American
retailers into the equivalent of Brazilian real and then into Taiwan dollars at the appropriate exchange
rates. Should the exchange rate of Brazilian real per Taiwanese dollar fall from one decision period
to the next, say from 10.65 to 10.60 real per Taiwan dollar, then retailer payments of the agreed upon
number of Brazilian real per camera at the time the order was placed equate to more Taiwanese
dollars at the time of payment and an upward adjustment in the companys revenues. Conversely,
when the exchange rate of real per Taiwanese dollar rises, say from 10.65 to 10.70 real per Taiwan
dollar (meaning that a specified number of Brazilian real equate to fewer Taiwanese dollars), then the
company does not receive as many Taiwan dollars in payment for the cameras sold and shipped to
Latin American retailers and the revenue adjustment is downward.

GLO-BUS is programmed to access all the relevant real-world exchanges rates and do all the pertinent
calculations; hence, you and your co-managers do not really have to concern yourselves with the intricacies
of the exchange rate adjustments. But what you do need to concern yourself with is what actions, if any, to
take to mitigate the unfavorable/negative exchange rate impacts and to capitalize on the favorable/positive
exchange rate adjustments shown on the decision screen.
Projections of Companywide Performance (at the middle-left of each decision screen)
On the left side of every GLO-BUS decision screen there is a box containing projections of the companys
overall performance for the upcoming year on the following measures:

Revenuesdefined as worldwide revenues (after taking into account all exchange rate adjustments
and promotional discounts) from the combined sales of both entry-level and multi-featured cameras
in all four geographic regions. Revenues are booked at the time of shipment, not when the company
receives the cash payments from camera retailers (which occurs the quarter following shipment).

Net profitdefined as worldwide profit after all expenses and taxes.

Earnings per sharedefined as net profit divided by the number of shares of common stock
outstanding at the end of the year. Earnings per share is one of your companys five annual
performance targets.
ROEdefined as net profit for the year divided by total shareholders equity investment at the end of
the year. An annual ROE of 15% or higher is one of your companys annual performance targets.

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Credit ratingYour companys credit rating is established by credit analysts using four measures:
the percentages of debt and equity that comprise your companys total capital investment, timesinterest-earned ratio, debt payoff capability (in years), and the % of the line of credit which you have
used (loans outstanding divided by the total line of credit your company has established with its
bank). The credit rating shown at the bottom of the screen is the projected credit rating for next
year, given the companys projected performanceit is not the current credit rating (which is
reported in each issue of the GLO-BUS Statistical Review). The companys Board of Directors and
investors/shareholders expect that your company will achieve a credit rating of B+ each year.

Image ratingYour companys image rating is based on (1) its P/Q ratings for both entry- level
cameras and multi-featured cameras, (2) its market shares for both entry-level and multi-featured
cameras in each of the four geographic regions, and (3) your companys actions to display corporate
citizenship and conduct operations in a socially responsible manner over the past 4-5 years. The
companys Board of Directors and investors/shareholders have established a target image rating of
70 or higher for your company to achieve each year.

Revenuesdefined as worldwide revenues (after taking into account all exchange rate adjustments
and promotional discounts) from the combined sales of both entry-level and multi-featured cameras
in all four geographic regions. Revenues are booked at the time of shipment, not when the company
receives the cash payments from camera retailers (which occurs the quarter following shipment).

Net profitdefined as worldwide profit after all expenses and taxes.

Why These On-Screen Projections Are So Important and How to Use Them Properly.
Each time you make a new decision entry, all of the above companywide performance projections are
instantly recalculated, thereby showing you the incremental impacts of that decision entry. It is easy enough
then to simply enter a trial decision and determine whether the resulting projections look better or worse
than before. By entering several different trial decisions, you can quickly and readily compare the projected
outcomes of what if we do this against what if we do that. After entering a number of different trial
decisions, youll be able to identify which decision entry seems best or most acceptable, given all the
different onscreen calculations that are provided. This GLO-BUS feature provides you with powerful
capability to explore all kinds of what if scenarios and make wise numbers-based decisions.
Always bear in mind that the projections do not represent a valid indication of your companys
projected performance until you and your co-managers have made a complete set of decisions
(covering all decision screens) for the upcoming year. In
other words, while you are working your way through the early decision screens the projections will be
updated with each entry, but the numbers shown will only be a rough approximation and lack finality
because the projections are not yet based on all the decision entries you plan to make for the
upcoming year.
Once you have gone through all the decision screens and entered what you think are reasonable decisions
for all the boxes, then it is time to really scrutinize all the various company performance projections and
determine whether the projected outcomes of your strategy and decision-making look acceptable. If not,
then you need to tour back through the decision screens, make different trial decisions here and there as
seem appropriate, and not stop tweaking and fine-tuning until you arrive at a set of company projections that
appears to be the best you can come up with. But even then, then projections are still only projections
they do not represent guaranteed outcomes. Why? Because there remain a host of uncertainties about
what competitors will actually do (what prices will they charge, how much they will spend on advertising,
how many different camera models they will offer, what warranties they will offer, and so on). These will not
be known until the deadline for the decision round arrives, at which time the GLO-BUS server will process
the decision entries of all companies and determine the actual outcomes of competition in the marketplace
for digital cameras.
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