Driving Profitability . . .

1. Driving Profitability . . . The Purdue Farm Supply Business Management Game

2. Objectives • Better understand the language of finance • Learn how to apply some tools of finance to managerial decisions • Better understand how our management decisions affect profitability • HAVE SOME FUN!!!!!

3. Your Job • Ask questions! • Think about how these ideas might fit your job • Cooperate with your team • Keep an open mind • Help others

4. Driving Profitability . . . The Purdue Farm Supply Business Management Game

5. The Situation • 2-6 farm supply stores will compete in your local market • Competing against each other in a large, rural market • You sell four products: • Complete Feed • Concentrate Feed • Commercial Grade Fertilizer • Custom Blend Fertilizer

6. The Situation • You compete for market share based on: • Price • Advertising • Credit Policy • Service/Image • Other Factors • All teams start from an identical position

7. Your Team… • Has just purchased this firm • Is now responsible for all management decision making • Is in direct competition with other firms in your market area • Is PROFIT ORIENTEDAND CUSTOMER DRIVEN

8. You will have… • Operating Statements • Balance Sheets • Sales Records • Key Financial Ratios • Market Share Reports Analyze each carefully as you make the next period’s decision

9. The Purdue Farm Supply Business Management Game • Your job is to PLAN for sales -- and MORE importantly PROFITS • Sales are determined by: Your Prices Advertising Credit Policy Labor “Image” Product Available Other Factors

10. The Purdue Farm Supply Business Management Game • Your job is to PLAN for sales -- and MORE importantly PROFITS • Sales are determined by: Your Competition’s Prices Prices Advertising Advertising Credit Policy Credit Policy Labor “Image” Labor “Image” Product Available Product Available Other Factors Other Factors

11. The Purdue Farm Supply Business Management Game ASSUME... General market conditions are relatively stable

13. Rules • Price • Must be within $4.00/ton of average price of all firms during the previous quarter • Sales response varies with product • Changes in price differentials between products may cause shifts in sales in product lines • Average prices for last quarter are reported on the Market Share Report

14. Orders • All products ordered are delivered in time to meet current demand • Insufficient inventory causes lost sales …the computer reports these • Excess inventory ties up cash at a relatively high rate of interest and increases your storage expense

15. Orders • All firms have same wholesale cost (See Quarter 4 results) • New wholesale prices will be listed for each quarter • You pay your supplier at THE END of the quarter

16. Advertising • Your firm will set an advertising and promotion budget each quarter • Computer will allocate budget to marketing activities – all will be spent

17. Advertising • Advertising affects sales of all products, not necessarily in the same way • Increasing advertising increases sales, rate of increase depends on your amount AND your competitors’ amounts

18. Policy 1: 30 Days 90% collections this quarter Lowest bad debt loss Credit Policies - Three May be Considered

19. Policy 1: Policy 2: 30 Days 90% collections this quarter Lowest bad debt loss 60 Days 70% collections this quarter Moderate bad debt loss Credit Policies - Three May be Considered

20. Policy 1: Policy 2: Policy 3: 30 Days 90% collections this quarter Lowest bad debt loss 60 Days 70% collections this quarter Moderate bad debt loss 90 Days 30% collections this quarter Highest bad debt loss Credit Policies - Three May be Considered

21. Credit Policies ASSUME… Extending credit has a positive impact on sales

22. Storage • Enough storage is needed for total tons handled (beginning inventory + purchases) • All four products may be stored in the same facilities • May be expanded at a cost of $4.25 /sq. ft. • Each ton on hand requires 4.28 sq. ft. of storage space • Expansion then costs $18.19 per ton

23. Storage • Space can be automatically rented at a cost of 25 cents per sq. ft. or $1.07 per ton • Depreciation is on a 15 year basis and is the only fixed cost for storage in the simulation • Variable costs amount to $7.50/ton of SALES

24. Trucks • Additional trucks cost $35,000, paid for at the end of the quarter • Any truck can handle any combination of products • Each truck handles 560 tons of product (sales) per quarter

25. Trucks • Trucks can be automatically rented (as-needed basis) at a cost of $3,640 per quarter for 560 tons • Depreciation is over 5 years and is the only fixed cost for trucks in the simulation • Variable costs are $3.50/ton of product sales

26. Labor • You have complete flexibility in hiring and firing employees • Each employee (excluding the manager) can handle 466 tons of product per quarter • Wage rates are $4,500/quarter • Manager’s salary is $7,000/quarter

27. Labor • Employees are paid time and a half after they’ve handled 466 tons each quarter • Watch your labor utilization figure each quarter • You hire/fire on the basis of your current number of employees (Quarter 4 Results -- 7.0 employees) • Thus, if you need 9 people in Quarter 1, hire 2 on the first decision form

28. Labor • Alternately, if you need 9.2 people, in Quarter 1 -- hire 2.2 people • 9 Full Timers • 1 Full time person who works 20% of quarter • This allows you to manage the labor utilization percent to near 100%

29. Loans/Cash Flow • Interest rates for the simulation are: • 10% D/E < 1.0 • 13% D/E > 1.0 • 18% Emergency Loans i.e. you run out of cash • All bills are paid at the end of the quarter • Loan repayments and investments are made at the beginning of the quarter

30. Loans/Cash Flow • Cash available first day of each quarter is equal to: Cash + 1/2 A.R. Balance • Investments can be called for cash -- you may call any part or all of your investment • You must maintain a minimum cash balance of at least $500

31. Loans/Cash Flow • You must repay short-term debt and refinance emergency loans each quarter • Miscellaneous expenses are equal to $1,100/quarter + 40 cents/ton of SALES

32. Investments • Investments earn 6 percent annually • May be called at any time -- increases cash balance when called • If you need cash and you don’t call investment, the computer will take ALL of this account and put it in your cash balance (check book)

33. Investments • Penalty for “Called Investments” is no interest this quarter • On income statement, the “Other Income” is investment income i.e. Investment X 6%/4 quarters

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39. Table 1.History of Feed and Fertilizer Sales for the Farm Supply Business in the Most Recent Three Years Page 2 Game Manual

40. Table 1.History of Feed and Fertilizer Sales for the Farm Supply Business in the Most Recent Three Years Page 2 Game Manual

41. Table 1.History of Feed and Fertilizer Sales for the Farm Supply Business in the Most Recent Three Years Page 2 Game Manual

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46. Set Strategy • Build Market Plan • Set Prices/Promotion/Etc. • Forecast Sales • Estimate Orders • Estimate Labor • Budget Cash Flow • Revise, if needed

49. Business Strategy Worksheet STAFF General Manager __________________ Controller ______________________ Labor Manager ______________________ Purchasing Manager _________________ Facility/Equip. Manager __________________ Credit Manager __________________

50. Goals 1. ____________________________________ ____________________________________ 2. ____________________________________ ____________________________________ 3. ____________________________________ ____________________________________