CapSim Demonstration Notes

1. Save MS Excel file from the www.capsim.com page after you have logged in under the links,
<Decisions> and <Capstone> , or work directly online

2. Login to the Excel file using login created during registration

a. File, Save (different save options)

i. Save “Save to Official Decisions”

b. Undo
i. “To official decisions” means: returns to the official decisions that had previously been saved
ii. “To start of round” means: resets all decisions made for the round

c. Decisions:
i. R&D
1. Performance: Should be within the fine cut, to appeal to customers, should be near the
Positioning ideal spot.
2. Size: Should be within the fine cut, to appeal to customers, should be near the ideal spot.
a. Positioning Reminder: Just beyond fine cut, appeal drops 1%; ½ way between fine
and rough cut appeal drops 50%; Just inside rough cut, appeal drops 99%.
b. When you revise, you can see where the new and old products are on the Perceptual
Map.
c. Time for revisions: The length of time required to revise a sensor (change
positioning) varies. Slight revisions complete in 3-4 months; more extensive changes
are most of a year. Reported under Revision Date. When you have more than one
product under revision, the overall revision time lengthens. Pay attention to this…you
probably do not want to lock up a product for more than a year because they won’t sell
while under revision.
d. Cost of Revisions: R&D revision costs are driven by the time it takes for them to
complete—a 6-month project costs $500K a 12-month project costs $1 mill. Any
revisions costing > $1 mill will spill over a year to complete.
e. Material Costs for Revisions: Early in the Sim (due to technology costs), a product
near the trailing edge cots $1.00; the leading edge a $10.00
f. Automation’s effect on revision time: Products with production lines that have
higher automation require more time to revise than products with lower automation.
3. MTBF (reliability): is measured in the number of hours the product is expected to
function before it fails.
a. MTBF 1,000 hours below segment guideline will lose 20% appeal and products
continue to lose 20% appeal for every 1,000 hours below, up to 5,000 when they will
not be considered for purchase.
b. Increasing MTBFs increases the time to complete the product (revision time);
decreasing MTBF decreases material costs.
c. MTBF Costs: Each hour of reliability adds $0.0003 X hours per unit in material costs.
An increase of 1000 hours adds about $0.30 per unit in material costs.
4. Age: Age profile chart is where age is illustrated.
 a. Age decreases as you reposition your product; products are only perceived as 0 when
they are new.
b. Products age over the year. So, if you create a new product that comes out in June. It
is only perceived as 0 years old in June. In December, it will be perceived as 6-months
old.
5. Inventing new products: inventing a new product takes at least one year to complete.
a. The company can manufacture up to 8 products.
b. “Killing” a product: Once you kill a product you can’t bring it back. So, if you kill a
product, the maximum you can have is 7.
c. Having between 4-6 products is ideal.
d. Each product has its own plant and equipment, so if you are going to invent a new
product, you have to invest in the plant. You must build the plant one year prior to
when you want to introduce the new product. So, when inventing a new product, you
must visit both the R&D (invent the product in R&D) and production screens (buy
capacity in the production screen).
e. Steps for inventing a new product (when you invent a new product that is similar to
an existing product line, the R&D completion time decreases):
i. Enter a name in an available cell beginning with the first letter of your company
name.
ii. Enter a performance value.
iii. Enter a size value.
iv. Enter an MTBF rating.
v. Once you do this, the R&D costs will display.
vi. The product material cost per unit displays (function of MTBF & positioning).
vii. All new products require a manufacturing line, so you will have to visit the
production screen.
viii. Go to the production screen and in the new product’s column, enter a first-shift
capacity (the # of units that an 8-hour shift can produce over the course of a year).
Note that you can produce up to twice this amount by running a second shift, but will
be overtime. Overtime costs 50% more than the first-shift labor costs.
ix. Then, enter an automation rating (higher automation, lower labor costs. However,
higher automation projects take longer to create).
x. The investment row shows the total cost of buying capacity and automation.
xi. Your total cost cannot exceed the dollar amount shown in the “maximum investment”
cell. If your total cost exceeds the maximum investment, relevant cell’s text will turn
red and be crossed out.
f. Steps for discontinuing a new product:
i. Sell all capacity in the production screen.
ii. Remember, when you liquidate, you want to sell all but one unit of capacity so that
the simulation will sell off all inventory at 100% of the price. Then you can see the
last unit of capacity once the inventory is gone.
g. Material Costs (general): MTBF and positioning is what drives material costs.
ii. Production
1. Production Schedule (note these are in thousands): How many products you want to
produce to sell this year. Remember to subtract any inventory remaining from last year.
Note that you cannot schedule more than twice your first shift capacity. When you revise a
product any remaining inventory will be updated at no cost.
a. Production scheduled related to sales forecasts: Be careful with producing too much
because of inventory carrying costs. Ideally you’d like to have 1 unit left over in each
segment.
b. Sales forecasts to help with production scheduling: In general, you can assume (all
else equal) that sales will be the segment growth rate times your # units sold last period.
So, in Traditional, if last year you sold 1,100,000 without stocking out, you can look at
segment growth of 9.2% and multiply them giving you 101,200 additional that you
should produce. This would lead to your next year’s starting forecast at 1,201,200. If
you stocked out (0 inventory left), calculate what you could have sold by looking at
Courier market share report. Multiple your potential by the growth rate to estimate.
i. Note: Keep in mind that products could have sold because competitors stocked out.
Look at Courier Market Share report to see if competitors stocked out. If they did,
you should not assume you will sell this high of an amount next year. Again, use the
market share report (actual versus potential market share) to estimate what you should
have sold if your competitors did not stock out.
2. Capacity (general): First shift capacity (under plant and equipment) is the number of
products that can be produced (w/o a 2nd shift) in a year. Assembly lines can produce twice
their first shift with a 2nd shift.
a. 2ns shift costs: Wages are 50% higher than first shift.
3. Buy Capacity: When you want to buy capacity, you add it either gradually or in the round
before you want it (in the case you are inventing new products or producing significantly
more products).
a. Capacity costs: Each new unit of capacity costs $6.00 for floor space plus $4 times the
automation rating (production sheet shows the exact cost). So, at an automation rating
of 5, 1 unit of capacity costs $26 ($6 + ($4 X 5)) = $26
4. Sell Capacity: This is used to raise capital when you liquidate, you want to sell all but one
unit of capacity so that the simulation will sell off all inventory at 100% of the price. Then
you can sell the last unit of capacity once the inventory is gone.
a. Selling Capacity Returns: Capacity can be sold at the beginning of the year for $0.65
on the dollar of the original investment. If you replace later, it costs the full amount. If
you sell capacity for less than its depreciated value, you lose money (which will reflect
as a write-off on your income statement). If you sell for more than its depreciated
value, you make a gain which will be a negative write-off on your income statement.
5. New Automation Rating: Automation deals with how many robots you have versus
people. Having a high automation rating is not always good because if we want to change
products (revise products a lot) automation will increase the revision time. So, the upshot
is that you will need to consider your strategy and to whom you are trying to appeal when
investing in automation.
a. Automation Ratings and Labor Costs: As automation rating increases, labor costs
decrease. It’s really round specific, but on average you can assume that each unit of
automation = $1.20 in per unit labor costs. So, if your automation rating is 1, then your
per unit labor costs are $12.00. If your automation rating is 10, then your per unit labor
costs are $1.00.
iii. Marketing
1. Price: The price your products will sell this coming year. Remember that overall,
customers prefer lower prices and that price ranges fall by $0.50 each year. Price is used in
proforma income statement to calculate revenue.
2. Promotions budget (awareness): Money towards advertising and public relationships
campaigns. The higher the budget, the higher the awareness. It’s measured as a
percentage. 100% means every customer knows about your product. Awareness is
reported in the Courier in each segment’s report.
a. Each year, 33% of those who were aware of your product forget about it. So, to
calculate your starting awareness for the next year, use the following formula:
Last year’s awareness – (33% X last year’s awareness) = starting awareness
b. Cost of Awareness: Promotions budget increases have diminishing returns—the first
$1.5 mill buys 36% awareness; spending another $1.5 mill (for a total of $3.0 mill)
buys 50%—the 2nd $1.5 mill buys only 14% more awareness. Once your product
achieves 100% awareness, you can scale back the promo budget to about $1.4 mill to
maintain the 100% awareness.
c. December Customer Report: This is related to awareness and tells us what customers
thought about our product. The survey evaluates the product against the buying criteria
for each segment. 0 indicates the product met none of the criteria, a 100 results when
1) the product was priced at the bottom of the expected range; 2) the product was
perfectly positioned (which can only occur once each year b/c of segment drift); 3) had
an MTBF at the top of the range; 4) the product had the ideal age for the segment (can
only happen once per year b/c products age each month); 5) had 100 awareness; 6) had
100% accessibility. AR policy can affect the survey score (more days to pay back
vendors can lead to them holding back parts/supplies). Scores of 50 or greater are
good.
i. Use the survey in competitive analyses (e.g., see how customers perceive your
product versus competitors).
3. Sales budget (accessibility): This is put towards salespeople and distribution channels.
An accessibility of 60% means only 60% of customers have an easy time finding it, talking
to salespeople and taking delivery.
a. Each year, if you drop your accessibility budget to 0, you lose 33% accessibility each
year. Unlike awareness, accessibility applies to the segment, not the product.
b. If you have two or more products in a segment’s fine cut, the sales budget for each
product contributes to the overall segment’s accessibility.
c. If your product leaves a segment, it leaves the old accessibility behind and inherits the
accessibility in its new segment.
d. Cost of Accessibility: 100% accessibility is difficult and requires at least 2 products in
the segment’s fine cut. Each product experiences diminishing returns at a sales budget
of $3.0 mill. Diminishing returns for the overall segment is not reached until the
budgets total $4.5 mill (e.g., two products with $2.25 mill each). Once 100%
accessibility is reached, you can maintain it at $3.5 mill a year. A $2 mill accessibility
expenditure will get you 22% additional accessibility, an additional $2 mill (for a total
of $4 mill) will get you an additional 13% (for a total of 35%).
4. Sales forecast: Covered in production notes.
a. Computer Prediction: This assumes your competition does not update their product
line, which is not a good assumption. If you enter your sales forecast (the green sales
forecast cell) as a 0 the Sim will use the computer prediction in the proforma income
 statement to calculate sales revenue. The computer’s prediction assumes that each
competitor offers only one mediocre product each, which is not good. It’s best to use
your forecast so the proforma income statement can reflect a more accurate estimate.
5. AR lag: Indicates the number of days that customers have to pay you. The more generous
the terms (e.g. greater lag), leads to increases in demand.
a. AR is recorded on the proforma balance sheet as an asset.
b. AR lag impacts sales: if you offer no credit (0 lag), your product’s appeal falls to
60%; at 30 days, appeal is 93%; at 60 days, appeal is 99.3%; at 120 days there is no
increase. Remember: the longer the lag, the more cash that’s tied up in receivables.
c. As a general rule, companies fund short-term assets like AR and inventory with current
debt offered by banks.
6. AP lag: Indicates the number of days that you have to pay your vendors/suppliers. The
more days (e.g., greater lag), then there is a higher likelihood that vendors will withhold
parts/supplies.
a. AP is recorded on the proforma balance sheet as a liability.
b. AP lag impacts production: suppliers become concerned as lag grows and begin
withholding materials for products. At 30 days, they withhold 1%; at 60 days, they
withhold 8%; at 90 days they withhold 26%; at 120 days, they withhold 63%; at 150
days they withhold all material. With materials being withheld; workers stand idle and
per-unit labor costs rise.
i. On the production screen, the row labeled “production after adj.” reflects the number
of units that can be produced due to the percentage of materials withheld.
iv. Finance: This should be the last screen you go to, to see if you can pay for all of the
changes you’ve made.
1. Issue Stock: As a general rule, stock issues are used to fund long-term investments in
capacity and automation.
a. Stock is issued to raise capital (e.g., sell a portion of ownership to investors).
b. Stock issue transactions take place at the current market price.
c. There is a 5% brokerage fee for issuing stock.
d. New issues are limited to 20% of the firm’s outstanding shares in that year.
e. All stock is common stock.
2. Retire Stock: This involves buying back stock.
a. You cannot exceed the lesser of either 1) 5% of your market capitalization (on p. 2 of
the Courier); 2) Your total equity listed on page 3 of the Courier.
b. You are charged a 1.5% brokerage fee to retire stock.
3. Stock Price: Is a function of 1) book value (equity / shares outstanding; equity = common
stock and retained earnings values on balance sheet), 2) EPS (net profit / shares
outstanding) and 3) annual dividend.
a. Emergency loans (e-loans) and stock price: e-loans depress stock prices.
4. E-loans: most often occur b/c of excess inventory due to inaccurate sales forecasts or
when the finance dept. fails to raise funds needed for expenditures like capacity and
automation.
i. E-loans are paid back with a 7.5% premium above the current debt interest rates.
Modest e-loans are no big deal. Those over $10 mill are problematic.
ii. E-loans are paid back in the year following their issue automatically (as your
financial situation allows).
iii. E-loans are reported on the balance sheet under liabilities.
5. Dividend Distribution (dividend per share):
a. Dividends should represent the “excess” profits that are not required for growth in
working capital and new plant.
6. Borrow Current Debt: As a general rule, companies fund short-term assets like AR and
inventory with current debt offered by banks.
a. The bank issues current debt in one-year notes.
b. Amount of current debt loans: Bankers will loan current debt up to about 75% of
your AR (from last year) and 50% of this year’s inventory.
c. There are no brokerage fees for current debt.
d. Interest rates are a function of your debt level—the more debt relative to assets, the
more risk you present and the higher the interest rates.
i. CapSim examines this in terms of the company’s leverage (assets / equity). A
leverage of 1.0 means no debt - every $1 of assets was paid for with $1 of equity.
Leverage of 2.0 means $2 of assets for every $1 of equity. 3.0 means $3 of assets for
every $1 of equity, and therefore that the remaining $2 came from debt. The higher
your leverage, the more likely it is that you will not be able to make the interest
payments and repay the principal. On the other hand, if you have no debt, lenders are
happy to lend money against your assets, even to outsiders. Typical Range: In
CapSim, leverage typically ranges between 1.5 and 3.0.
7. Issue Long-term Debt (take out a Bond): Bonds are long-term debt and, as a general
rule, bond issues are used to fund long-term investments in capacity and automation.
a. All bonds are 10-year notes.
 b. Your firm pays a 5% brokerage fee for issuing bonds (the first 3 digits of the bond, the
series number, reflects the interest rate; the last 4 indicate the year in which the bond is
due; S stands for series).
c. Bondholders will lend total amounts up to 80% of the value of your plant and
equipment (the production department’s capacity and automation).
d. Each bond issue pays a coupon (the annual interest payment) to investors.
e. The bond holder would receive the principal payment at the end of the year when the
bond is due.
f. When issuing new bonds, the interest rate will be 1.4% over the current debt interest
rates (so, if your current debt rate is 12.1%, the bond rate would be 13.5%).
8. Retire Long-term Debt (pay Bond back): You can retire outstanding bonds before their
due date. When you do, a 1.5% brokerage fee applies.
a. Oldest bonds retire first.

d. Capstone Courier:
i. Always the results of the previous round.
ii. You will want to print off the Capstone Couriers because they will not stay there round-over-
round in an easily printable format.
1. To view after a round is over, visit the dashboard, reports, and the Courier.

HR Module
 Production runs can be scheduled in one or two shifts
 Hiring the Needed Complement will always eliminate Overtime
 Management should strive to decrease turnover
 Increasing capacity tends to reduce the number of workers on Second Shift
 Increasing Training hours tends to decrease the Needed complement
 Recruiting costs are incurred when Production runs increase and teams match hiring to
needed complement.
 Assuming the Productivity index in greater than 100%, adding overtime will decrease
the productivity index
 Worker training is entered by the hour
 Teams can eliminate all Recruiting costs if they wish false
 Generally, separation costs will be incurred when production levels decrease and/or
automation levels increase

Inventory should be less than 1/6th of unit sales. Inventory consumes cash, drags down your performance
measures, and in extreme cases drives emergency loans. Inventory carry overheads chew into profits.
Typical problems include:

1. Overly optimistic sales forecasts. Previous year customer demands (and segment growth rates) are
listed for each market segment pages. Compare your sales forecast figures against segment demand.
Were sales expectations unrealistic? For example, if the segment demand ceiling was 3 million units,
and there are six teams with products in the segment, a "fair share" starting point is 500 thousand units
per team. If you have a better than average product, your sales will be higher. Below average products
produce below average demand. But unless your product is dramatically better or worse than the other
products in the segment, you demand will be somewhere between 50% and 150% of average. This is
discussed further in the help files on the website under "How do we develop a unit sales forecast?"

2. Sometimes teams confuse the relationship between sales forecasts, production schedule, and
production capacity.
o Sales Forecasts only affect proformas. They are a tool - not a management "decision." When you
enter a forecast, you force the software to use your number to drive the Income Statement. When
the simulation is processed on the web site, actual sales depend upon the actions of your
competitors.
o Production Schedule (on the Production spreadsheet of the student software) is the actual
production for the year. This is added to the starting inventory. Production occurs in monthly
increments.
o Production Capacity is the size of the factory. If the Capacity is 500 thousand, you can produce up
to one million units by running 100% overtime. All units produced above 500 thousand will be
affected by time-and-a-half overtime charges. You buy or sell capacity, or simply leave it idle and
unused.