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MARGA Stories: What do you learn with the business simulation?

After the testround of the MARGA Online Competition 2017/2018 the teams start with the qualification round. Still some questions are not answered yet:

  • Do investments pay off last minute?
  • Other teams have taken high risks and have been lapped by the competitors at the end, is it worth to take the risk?
  • Sometimes those teams with extraordinary high market shares were not the most profitable ones, which strategy is the best?
  • And sometimes the competition was very tough and no competitor was able to achieve high margins at all. Is it possible to gain high margins if the competitors go for low costs strategies?

Here we report on some of these 'MARGA stories':

Stick to your strategy!

Cost leadership, differentiation or focus strategy: No matter which competitive strategy the board teams have chosen, we recommend them to stick to this strategy through all simulation periods. To be successful with a strategy, it is usually necessary to make certain investments, which often will only pay off after some time. A cost leadership for example mostly only works out after initial investments in machines and personnel. It also requires investments in marketing, since the built capacities should be used and the products have to be pushed into the market. Generally, it is possible to win the MARGA business simulation with any strategy. But usually those teams are most successful, which consequently stick to their chosen strategy.

Business Simulation: Generic competitive strategies (Porter)

Vacation period

As usual, the third period of the MARGA business simulation is the vacation period. In this quarter one third of the skilled and unskilled workers are on vacation.  

What is the impact of the vacation period on the result? The costs (salaries and fringe benefits) for the workers on vacation are no longer ‘personnel costs’ but ‘unproductive staff costs’ now. Those are part of the administration costs in the income statement and thus reduce the EBIT (earnings before interest and taxes). Of course, the salaries for the active workers also reduce the EBIT, but in comparison to that, they are part of the cost of sales. That is why the loss, the teams have to deal with during the vacation period, is not caused by the shifting of the personnel costs, but rather by the need for additional resources in order to keep the production level.

Now a strategic management of resources is needed! There are different possibilities to compensate this personnel lack. The three most common ones are presented as follows:

1. Pre-production / Trade goods

The teams can pre-produce products during the second period in order to compensate the lack of the vacation period. Thus, additional products are produced and stored until they will be sold in the third period. By this, additional production costs as well as storage costs are caused in the second period. When these pre-produced products will be sold during the third period, the production costs will be activated as cost of sales. Additionally, the salaries for the workers on vacation have to be paid by means of administration costs. Both costs reduce the EBIT.

Another option is the purchase of trade goods. Trade goods ordered during the second period will be delivered and ready for sale in the third period. However, also the number of available trade goods is limited.

2. Short-term increase of personnel

At least a part of the personnel lack can be compensated short-term by recruiting temporary workers and increasing the overtime of the remaining active workers. However, both the number of temporary workers available at the market and the overtime rates are limited and cause high costs.

3. Reduction of production

Of course, it is also possible just to accept the lack of capacity during the vacation period. To avoid a surplus in demand the MARGA board teams can adapt the marketing decisions (e.g. price increases) in order to purposely decrease the demand. At best the number of sales will be decreased as expected, but there will be no huge break-in of revenues due to increased prices. However, the impact of all board decisions on sales and revenues always depend on the decisions of the competitors, too. It is not possible to forecast the sales exactly.  

Raw material management

Raw material management

In one group, all four companies had completely different approaches: Company 1 installed the supply chain management tool with the respective costs already starting from period 1 onwards. Consequently the prices per unit were somewhere in mid-level and there were no stock costs or capital commitments attached. Companies 3 and 4 both bought a lot of raw material during the first period. Due to the accretion of discount they benefited from extremely low prices per unit and could therefore reduce their variable production costs. The disadvantage: A pre-financing was necessary and the high current assets caused capital costs. Finally in period 4 the raw material stock ran low for both competitors and they then decided on different courses of action: Company 3 again bought a huge amount of raw material – which is an advantage concerning the variable costs, but a disadvantage concerning  the stock and capital costs. Here it was not possible to use up all stock until the end of the last period.  Company 4 in contrast, continued by installing the supply chain management tool in period 4. In this case the advantage was a minimization of risk and a reduction of stock and capital costs. The disadvantage was the costs for the installation of the tool and an increase of the variable costs per unit.

 

Considering all four companies, in the beginning Company 2 had the highest variable costs per unit. This company did not make use of the supply chain management tool, but they only bought a small amount of raw material in the beginning of the round. The disadvantage was a high price per unit and stock as well as capital costs. Luckily the company board promptly identified this mistake and chose to make use of the supply chain management tool from period 2 onwards.

 

Which method is the best? Of course, this depends on the strategy chosen and as concerning all MARGA decisions, it is inevitable to carefully balance all advantages and disadvantages. As a matter of fact, a cost leadership is only possible with low costs for raw materials. This means that in the best case an investment is only necessary once at the beginning and then the stock can be reduced bit by bit up to the end of the round.

Business Simulation: Impact of raw material management on variable production costs

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