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SIMULATION GAME REPORT: TEAM 9

Submitted by
Dipika Berry.
Meenakshi Sundaram Saravanakumar.
Nagalingam Thiyagarajah Sancheev.
Santhosh Kumar Sampangi Ramasetty.

CONTENTS
1. INTRODUCTION ......................................................................................................................................... 1
1.1 ANALYSIS OF ACTIONS TO BE TAKEN: ................................................................................................. 1
1.2 ANALYSIS OF UNPREDICTABLE EVENTS: ............................................................................................. 2
2. MARKET ANALYSIS OF YEAR 1: .................................................................................................................. 3
3.MARKET ANALYSIS OF YEAR 2:................................................................................................................... 4
3. MARKET ANALYSIS OF YEAR 3: .................................................................................................................. 5
4. MARKET ANALYSIS OF YEAR 4: .................................................................................................................. 5
5. MARKET ANALYSIS OF YEAR 5: .................................................................................................................. 6
6. GRAPHS: .................................................................................................................................................... 8
7.CONCLUSION..9
8.CITATIONS......................9

4/4/2014

1. INTRODUCTION
CFC is a Singapore based company with businesses in clothing and fashion industry. It has its customer
base in Europe, US and Asia. Raw materials such as Cotton, Silk, polyester and dyes are obtained from
Southeast Asia and China. CFC has a large factory in Vietnam for mass production.
Strategies adopted for playing the simulation game:First we saw the opportunities and challenges being faced by this industry:n

Large textile supply chain players such as Li&Fung and Esquel have got much larger scale and
global reach.

New competitors are coming into the markets from developing countries in Asia.

High cost of labor in Singapore and Malaysia.

Ensuring quality control of outsourcing process in low cost countries.

Volatility in the price of raw materials such as cotton.

Slowing growth in Europe.

Distribution of its products to new and growing markets in Asia.

R&D for new materials and manufacturing for ethnic fashion.

1.1 ANALYSIS OF ACTIONS TO BE TAKEN:


-

Introducing a new production site to increase the volume of goods produced. Manufacturing
facilities should be shifted to developed countries to promote high technology in clothes
manufacturing line and also to improve quality. Ensuring quality is also necessary to satisfy its
growing customer base in Asia. Increase in quantity as well as quality would help CFC grow its
customer base. Moreover, it will also mitigate the risk of controlling quality of goods processed
in low cost countries by shifting these processes to developed countries.
Actions relevant to the above strategy: 2 and 16

Since cost of the labor is already high, It is not necessary to invest on labor training
Actions not to be taken: 15

Storing more finished goods inventory can help CFC in mitigating risks related to demand
uncertainty and raw material availability. Moreover, going for risk sharing contracts with
customers would be helpful in mitigating the risk due to volatility in prices and demand
uncertainty.
Actions Relevant to the above strategy : 5 & 10

2
-

CFC is supplying to major retail chains in US and Europe. But keeping in mind the slowing growth
in Europe it is necessary that its suppliers should be kept abreast of the demand of its final
customers.
This would help, especially, the raw material supplier to easily allocate required goods to CFC
when demand arises(VMI). This helps in reducing the amplitude of bullwhip effect in the supply
chain.
Actions Relevant to the above strategy: 12
Since CFC is expanding its customer base in Asia, planned and efficient distribution of products
to new and emerging markets is a prerequisite for CFC. Hence it should consider setting up
distribution centers which is closer to its customers. Since the demand is increasing we have
also considered increasing unit sales price for higher revenue generation.
Actions Relevant to the above strategy: 4 & 13
CFC is also trying to develop a new line of clothes and is looking for investing in new materials
and processes, i.e it should invest in R&D to expand its range of products.
Actions Relevant to the above strategy: 7

1.2 ANALYSIS OF UNPREDICTABLE EVENTS:


Secondly we analyzed the event list, on the basis of which we identified the actions we need to take
in order to mitigate the risks due to any future events. Accordingly we divided actions in to 3
categories depending on the probability of events:-Actions that must/must not be taken and the respective profit for events with high probability
(10-14%):
16- Will help if major developed countries introduce import quota for textiles
-If supplier in low cost countries is unable to supply due to labor strike.
-If oil price goes down.
10- If natural disaster causes disruption in cotton supply, then risk sharing contracts with
customers would help.
9- Should not take because if natural disaster causes disruption in cotton supply then
VMI with suppliers would lead to 10% reduction in sales.
1/2-If there is a surge in demand due to economic growth then setting up of a new
production site or introducing new machinery would be profitable investment.
7- If there is a change in consumer taste then investing in R&D would lead to a 7%
increase in sales.
-Actions for events with low/medium probability (4-8%)
4/5/10 If a new competitor enters the market then without this action demand would
drop by 10%.
6- Should not be taken because if the supplier in low cost countries is not able to supply
due to labor strike then sourcing from cheaper suppliers in low cost countries would
reduce sales by 15%.
- Also if the oil prices go up then the logistics cost would increase in this case by 15%.

Hence overall,
Actions to be taken: 1,2, 4,5,7,10,12,13,16
Actions not be taken: 6,9,15

2. MARKET ANALYSIS OF YEAR 1:


Action Number
5
12

13

Action Description
Hold more finished goods
inventory
Share demand information
with suppliers
Increase unit sales price

Impact 1
Sales increase
8%
Raw materials
cost reduce by
20%
Cost increase by
$10

Impact 2
Impact 3
FG
inventory -increases by 5%
--

Sales reduce by -5%

Revenue: 90,640,000
Gross Profit: 63,448,000
Operating Profit: 7,674,248
REASONS FOR THE ACTIONS TAKEN:
-Action 5: Holding more finished goods inventory, as evident leads to an increase in sales of 8%.
Moreover, this action would help in mitigating risks that may occur due to demand uncertainty.
Considering fluctuating price of cotton, silk and other raw materials, holding more inventories would
support increase in sales.
- Action 12: This action reduces the raw material cost by 20% thus increasing the profit. Since CFC has
non-uniform demand across its customers in different countries, sharing demand information with
suppliers is essential to ensure that raw material supply doesnt get affected when there is a huge
demand.
-Action 13: would increase the revenue by increasing the unit sales price.
RESULTS AND OBSERVATION:
1) Overall profit increased from $ 6,920,000 to $ 7,674,248.
2) It is beneficial to take action which leads to increase in revenue. Also considering the rising demand
and inflation each year, it is better to take one action which would increase the unit price or sales.
3) Since CFC has just started its operations, it is good to invest in R&D or new plant. This would have
long term profitability.

3.MARKET ANALYSIS OF YEAR 2:


Action Number
2
7

16

Action Description
Introduce new production
site.
Investing in R& D

Impact 1
Sales
increase
20%
Sales increases by
7% over previous
year from next
year
Reshore manufacturing & FG
inventory
distribution to developed reduces by 15%
countries

Impact 2
Impact 3
SG&A increases -by 3%
R&D
cost -increases by 10%

Logistics reduces SG&A


by 10%
increases by
8%

Revenue: 108,768,000
Gross profit: 76,137,600
Operating Profit: 6,432,239
REASON FOR THE ACTIONS TAKEN:
1) Since CFC is facing competition from many other textile industries, it has to ensure enough
supply of finished products to meet demand. Increasing production capacity would help
meeting demands for growing economy. Although the SG&A increases by 3% but the sales also
increase by 20%. Even though depreciation cost and SG&A expenses increase, sales increases by
20% which eventually increase profit.
2) Since CFC is planning to develop a new clothing line, It is better to invest in R&D in the
beginning. Moreover this action is suitable according to our strategy decided earlier. Although
an increase in R&D cost would be incurred this year, sales would increase by 7% from next year.
3) Action 16 was also one of the most important actions to be taken according to our strategy. This
would mitigate the risk of any disruption due to raw material unavailability in low cost
countries. Moreover, this would lead to an increase in the overall profit through reduction in FG
inventory and logistics cost.
RESULTS and OBSERVATIONS:
There was a reduction in operating profit from 7,674,248 to 6,432,239 due to two major investmentsR&D and setting up of new production site. But these actions would ensure long term profitability and
increase in market share.
Event Card Drawn: 9- This lead to further increase in sales by 10% as we had invested in R&D.
REALTIME EXAMPLES:
Prada , an Italian luxury fashion house ventured into installation of new plants to sustain growing
demands [1]

3. MARKET ANALYSIS OF YEAR 3:


Action Number
5
10

13

Action Description
Hold more finished goods
inventory
Allow
customers
more
flexible ordering and risk
sharing contracts

Impact 1
Sales increase 8%

Impact 2
FG
inventory
increases by 5%
Sales increase by Raw
materials
10%
cost Increase by
10%.

Impact 3
--

Increase unit sales price

Cost increase by Sales reduce by -$10


5%

FG inventory
increases by
5%

Revenue: 154,252,800
Gross profit: 107,976,960
Operating Profit: 8,308,329
REASON FOR THE ACTIONS TAKEN:
4) Actions 5 and 10 were taken for the same reasons as discussed earlier.
5) Though raw materials cost and FG increases, sales also increases by 10%. Hence, by taking
action 10, profit increased considerably. Further, Risk sharing contracts increases relationship
between CFC and its customers which would help in long term sales.
RESULTS and OBSERVATIONS:
Operating profit increased considerably due to actions taken in the previous years and this year.
Event Card Drawn: 10- Since we had already implemented risk sharing contracts strategy, demand was
consistent and didnt drop.
This kind of risk sharing contracts is common in Abercrombie and Fitch, Tommy Hilfiger and Polo Ralph
Lauren Corp.

4. MARKET ANALYSIS OF YEAR 4:


Action Number
4

13

Action Description
Create another distribution
center to be closer to
customers
Implement consignment /
VMI with suppliers
Increase unit sales price

Impact 1
Impact 2
Impact 3
Sales increase Logistics
cost -10%
increase by 10%
Raw materials --cost reduce by
10%
Cost increase by Sales reduce by -$10
5%

6
Revenues

- 175,462,560

Gross Profit - 122,823,792


Operating Profit -8 ,632,242
REASON FOR THE ACTIONS TAKEN:
1. Creating a distribution center closer to the customers increases sales by 10% and decreases
logistics by 10%. Since logistics cost is just a fraction of sales, this action helps us in increasing
profit. Moreover, creating a distribution centers for CFC near customers location in major Asian
countries like India and china has following advantages,
a) Timely delivery to customers .
b) More information about customers demand.
c) Increased ability to meet customers immediate demands.
d) Increased capability to store more inventories to manage market volatility.
2. Implementing VMI results in reduction of raw material cost by 10%. Implement VMI with
suppliers also have following benefits to CFC.
a) CFC would have better response from suppliers in terms of different types of raw material
inventory needs in both quantity and location.
b) Demand uncertainty for textiles can be considerably reduced since suppliers constantly
monitor raw material inventory levels.
c) Long term relationship with supplier.
3. Increasing unit price can yield more revenue even though sales is reduced.
RESULTS AND OBSERVATIONS:
1. Profit has increased from 8,308,328 to 8 ,632,242. Since we have created distribution centers
close to customer location , implemented VMI and increased sale price, positive effects on the
profit is higher than negative effects of the profit.
2. Event card 5: Since we had already taken action 16 in previous years, our sales didnt reduce.

5. MARKET ANALYSIS OF YEAR 5:


Action Number
6

11

14

Action Description
Impact 1
Source
from
cheaper COGS
costs
suppliers in low-cost country Reduce by 10%
over previous
year
Implement MOQ and strict Sales decrease
order cut-off times for by 3%
better coordination
decrease unit sales price
Cost decrease
by $5

Impact 2
FG
inventory
increase
by
10%

Impact 3
Logistics
increases
15%

cost
by

Raw materials FG inventory


cost reduce by decrease by 5%
10%
Sales increase -by 8%

7
Revenues

- 177,149,700

Gross Profit - 129,319,281


Operating Profit -: 11,142,218
Adopting these strategies resulted in the following profitable ways.

SOURCING FROM A CHEAPER SUPPLIER:


This strategy was adopted mainly to bring down the COGS cost. It was identified that sourcing from low
cost countries resulted in a reduction In COGS cost of 10% which would be highly profitable for the
company. This strategy also results in increase in FG inventory and logistics of around 10% and 15%
respectively. But this cost can be borne as the reduction of COGS cost would be the main factor here.
Thus the increase in logistics and FG inventory is counterfeited by the reduction of COGS costs. Many of
the textile and fashion companies like Zara and Benetton adopt this strategy of off shoring from a
cheaper country and have gained significant profits. Low cost countries like India has restructured its
Foreign investment policies , reaffirmed strict labor and environmental laws[4] . Moreover labor wages
are still low in India when compared to china[5]. Hence, Instead of having facilities in low cost countries
like Bangladesh and Myanmar, India can be chosen as a manufacturing destination. This justifies our
move to shift manufacturing facilities from developed countries to low cost countries. Same quality can
be maintained in low cost countries with the use of high skilled manpower and latest technologies.
IMPLEMENTING MOQ AND STRICT ORDER CUT OFF TIME:
MOQ allows the customer to have long production runs so that he can realize the economies of scale,
have a sustainable production and helps maintain lower levels of inventory. Procuring the products in
bulk has many advantages by reducing the costs in shipping, warehousing, taxes and interest. Assuring
the new low cost suppliers that they wont be stuck with any inventory they will be offering good
arrangements for shipping and be competitive in pricing which helps in reducing the cost of the product
and thereby increasing the profit indirectly. This strategy also helps in improving the relationship with
the supplier which is beneficial for both the sides for the following years to come.
DECREASING UNIT SALES PRICE:
As the product was sourced from a cheaper supplier in a low cost country, it was decided to reduce the
unit cost of the product. Taking into account the economies of scale As the cost is reduced the sales are
expected to go higher. The item cost was decreased by 5 dollars as a result the product sales got up by
8% resulting in substantial profits for the company.

6. GRAPHS:

135.00

1,600,000.00

130.00

1,400,000.00
1,200,000.00

125.00

1,000,000.00

120.00

800,000.00

115.00

600,000.00

110.00

400,000.00

105.00

200,000.00

100.00

A .Number of units sold for every year

B. Unit price of products for every year


$140,000,000.00

$200,000,000.00

$120,000,000.00
$150,000,000.00

$100,000,000.00
$80,000,000.00

$100,000,000.00

$60,000,000.00
$40,000,000.00

$50,000,000.00

$20,000,000.00
$-

$1

C. Revenues for every year

D. Gross profit for every year

7. CONCLUSION:
Textile industry adopts push-pull system with the push-pull boundary towards later part of the supply
chain. Considering the entire scenario, we had emerged as a company with highest revenue and gross
profit. But, our profits are not high as compared to some other teams. This is due to high COGS and
SG&A costs. SG&A costs increased considerably due to installation of new production line and shifting
manufacturing facilities to developed countries. But, chances of disruptions that may arise due to
various reasons were avoided. Hence, to high revenues may not actually lead to high profit. This
situation was experienced by e- shopping giant Amazon. For first few years since its inception, Amazon
didnt make much profit even with $1 billion revenue. We have increased product costs in consecutive
years. We have taken this particular action to increase profit in simulation game context. This kind of
continuous price rises can be seen in many textile industries due to various reasons like inflation,
fluctuating exchange rates, black markets, high demand for raw materials etc. Moreover, we had
invested in R&D to increase our product line [2][3]. Moreover, our manufacturing operations are shifted
back to developed countries. Hence, continuous price increase is justifiable. We learnt management
techniques that could reduce bull whip effect and generate more sales. Those are creating distribution

9
center closer to customers, holding more FG inventory, implementing VMI, implementing risk sharing
contracts with customers and sharing demand information with suppliers. As time increases, every
company adopts its own strategy for maximizing profits by overcoming various risks. Finally, Returns
may be low for first few years, but companies have to cross a transition phase to become a market
leader and generate high profits.

7.CITATIONS:
1. http://online.wsj.com/news/articles/SB10001424052702303847804579476881929691764
2. http://www.businessoffashion.com/2013/08/fashion-inflation-why-are-the-prices-of-designergoods-rising-so-fast.html
3. http://www.cnbc.com/id/41575599
4. http://articles.economictimes.indiatimes.com/2014-02-22/news/47581783_1_oecd-pier-carlopadoan-labour
5. http://businesstoday.intoday.in/story/india-benefits-china-begins-to-lose-manufacturingedge/1/203040.html