Report #1: Distribution Case
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Analysis of Distribution Game with ERP Simulation
Turned in to
Dr. Chin-Sheng Chen
Dr. Qiansan Shen
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Team HH:
Table of Contents
I. Initial Strategy 3
a. Daily Inventory per product 4
b. Daily Sales Quantity per Sales Area 6
c. Daily Value Amount per Sales Area: 9
d. Daily Price changes per Product per Plant 12
e. Daily Market Investment per Product by Sales Area 14
II. Correlations 16
a. Inventory to Profits 16
b. Price and Sales/Profits 20
c. Market investment and Sales/Profits 26
III. Strategies by Plants 28
IV. Conclusion 28
Initial Strategy
We employed a strategy where we invested in marketing and used different markups on the various products. We used knowledge gained in the practice simulation as our historical data. We were able to predict which items would sell and the volume of sale that they would generate. With this data we were able to design a MS Excel sheet to project our net profit based on the profit margin and the predicted sales volumes.
For the first period we invested more in the marketing the clear pure water we estimated that this way we would sell the entire stock of this item. Our sales took off and we gradually increased our sale price for the clear pure product. With this increased profit margin we were able to generate a larger net profit than our competitors. We invested less in the other items and made a slightly lower profit margin because these items sold at a much slower rate than the clear pure product.
For the second period we changed our strategy to dominate the market. In the first period we all had the same level of stock and we were not allowed to replenish. Since in the second period we are allowed to replenish our stock we more than doubled our investment in marketing and used a moderate profit margin. We significantly increased our investment in the ClearPure water and only invested in Spritz and Lemon water once. We decided to leave our plan unchanged for the first couple of days until we can decipher a trend in the market. After the 5th day we had sufficient data to do our analysis of the market and know how we needed to approach the market. We were able to access the sales volumes in the different regions and the average sale prices. With this information we able to constantly make minor adjustments in the prices and profit margins and vary our marketing by product and region to achieve our objectives.
By the third period we had developed a significant lead. We realized that anyone who wanted to catch up to us would have to invest significantly in marketing and increase their profit margin. So we decided to increase our marketing so that we can keep our pace. We floated the price close to the market average in some instances. This way we were able to maintain the larger market share that we had achieved. Based on the information provided in the sales report data at one point we had about 38% of the total sales for 1L ClearPure water and 500 ml. (H Group sold 19,824 units of the total market 50.920).List and graphs
Daily Inventory per product
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We can see in these graphics that the product that was the most popular was the ClearPure in its 2 packaging configurations (500ml and 1 L). In the first Quarter, when it was not permitted to replenish the inventory the team who was able to manage better their inventory had the potential to make a better profit. The only moment in the simulation when the other products started to sell was when the ClearPure was sold-out, after that the sales of the other products were almost non-existent.
Daily Sales Quantity per Sales Area
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From this graph we can see that the best market in the simulation was the north followed by the south and in the last position was the west.
In other order of ideas, we can see how gradually the number of products sold by the team HH increments in every quarter, this is product of incrementing the marketing expenses every Quarter and maintaining a competitive price (in relation with the market report).
Daily Value Amount per Sales Area:
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After review these graphs we can conclude that the first that the main source of income in the market is ClearPure water in its two packaging configurations (1 L and 500ml). This product was the responsible for the majority of our profit (this information was obtained in the practice simulation) and because of this we focus the marketing and our research of the markets reports on them. The only moment when the other products were contributing in the earnings of all the companies was in the second half of the 1st quarter, when ClearPure was sold-out the market shift to other products to satisfy its needs.
Daily Price changes per Product per Plant
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It was difficult to decipher the pricing plan for Team GG, they fluctuated a lot and never seem to find a pricing plan that was suitable to them, the price for the 1L Spritz product fluctuated between $15.00-$17.65. Although sporadic the pricing for the 1L product seem to be more stable than the pricing for the 500ml product. Instead of focusing on their strongest market they seem to be trying to focus on all of their products at the same time.
Team HH on the other hand had a more stable pricing scheme. Some products experienced gradual increases in prices while some experienced gradual decreases. On our 1L sprits product the price variation was at $22.00 for the entire period. There was one short period when it was at $21.50.
Daily Market Investment per Product by Sales Area
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For all products HH was more aggressive with its marketing while GG was very conservative marketing wise. Company H invested more in the products that had the highest sales rate and will generate the most profit instead of the products that were slow sellers and did not offer as attractive a profit margin. Company G on the other hand remained very conservative until the end where the made large investments in their marketing effort.
Correlations
a. Inventory to Profits
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b. Price and Sales/Profits
Correlation:0.289 [pic]
Correlation:0.206[pic]
Correlation:0.505[pic]
Correlation:0.309 [pic]
Correlation:0.193[pic]
Correlation:0.126[pic]
Correlation:-0.325
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Correlation:-0.037
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Correlation:0.185[pic]
Correlation:-0.4
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Correlation:0.388[pic] Correlation:0.072[pic]
c. Market investment and Sales/Profits
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After review the correlation we can determine that the correct use of marketing can influence the total sales of a company, with a steady and incremental us of marketing accompanied with a sound pricing strategy will help you increment your market share. In the other hand, team G they didn’t use any marketing in the beginning of the he simulation, and try to catch up at the end expending a great amount of money, but without the intended result.
Strategies by Plants
From our analysis of plant G they did not take advantage of the marketing aspect of the simulation, without it they were in disadvantage against the other teams, they realized their mistake and tried to fix it at the end expending a great amount of money, but instead of increasing their profits, they got the opposite result.
Because of this mistake plus their inconsistence in their pricing policy they got stuck in sales. It is probable that they were not checking the market report were the average price of the products per zone were display every 5 days.
They also didn’t have a lower limit on their margin because sat some points they were making a penny on the product. This may have made sense if there was an inventory carrying cost, or a limit on the inventory to be held, but it wasn’t the case for them.
Conclusion
We were able to be successful in the first period because we invested in marketing and used a pricing strategy that allowed us to generate more profit on the products that are in higher demand and a lower profit margin on the items that are in less demand. Although the high profit margins didn’t work the way we wanted to, extending the life of our inventory throughout Q1, the fact that we had higher margins made us more profitable than our competitor that ran out of stock at the same time.
This strategy gave us a $ 2000 advantage in the first Quarter, and because of this we decided to increase the marketing expenses, this and understanding that with purchasing was now permitted, we decided to drop the prices to around $14 (a considerable cut in prices) and this every 5 days we would check the Market summary report, and adjust our prices. With this we could control the market price of the ClearPure products. Since there was no inventory carrying cost in this case, we made sure to keep a healthy inventory and avoid any stock outs.
For the next game we plan to start slowly and decipher the consumption ratio of the products in the various markets. With this information we can them develop a proper operations plan where we can buy and distribute by region and demand while maintaining operating costs at a minimum.
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