Biz-Czar

Business Simulation – Round 1

Case Conceptualized and created by:

Hamir Chhetariya | Harsh Mehta | Jaydeep Thadeshwar | Rohit Bhura | Sandeep Kapasi
Team Biz-Czar, Perspective 2010, Institute of Management, Nirma University
BIZ-CZAR, Perspective-2010, Round 1

Walking through the wide corridors of the headquarters of Earth Inc., Mr. Neerg’s footsteps echoed in
the wide space. Neerg was in his normal self that day except for the fact that he was a bit excited and
the sound of the footsteps supported the fact. He entered the plush cabin of ‘Willy’. Out on the door
was written ‘Mr. William Retaw, Managing Director’

“Hey Willy, Market survey results are out. We have got the numbers and they are looking good.” said
Neerg just after he entered Retaw’s cabin.

“What is it, Neerg?” enquired Retaw with a curious tone.

“Let’s go to my office. You take your papers with you, we will talk it over a cup of coffee” replied Neerg.

Mr. Bob Neerg, chairman of Earth Inc., is an intelligent, experienced and one of the most revered
entrepreneurs in the industry. Right from his childhood he was fascinated with cars and wheels. He
made his fascination his career when, at a young age of 28, he started with a company - Earth Inc, an
auto parts manufacturing company. He gave his blood and sweat to make his venture a great success
and that paid. Today, merely 15 years after its incorporation, Earth Inc has moved a long way from being
an auto part manufacturer to being a market leader in luxury car segment in the country of
WonderLand.

Mr. William Retaw, Managing Director of Earth Inc and childhood friend of Neerg, is a shrewd and
intelligent man with a strong sense of business and numbers. He joined his friend’s venture seven years
after Earth Inc.’s incorporation. Prior joining Earth Inc., Retaw had been working in automobile industry
for more than a decade. His experience in the industry has been instrumental in making Earth Inc. what
it is today.

WonderLand is a developing country with a steady and promising growth rate of 7-9 %. The currency of
WonderLand is Windis (WD). WonderLand, being a relatively stable economy combined with a high
growth rate, has been focus for the investors across the world. After the country was liberalized a
decade back, it has been a hub for various industries, automobile being one of them. There are about 15
major players in automobile sector competing fiercely in market. About a month back, Neerg and Retaw
were musing over whether to enter the small car segment or not.

Small car segment is becoming the ‘golden’ sector for the automobile manufacturers owing to the large
growing middle class and young population of WonderLand. Five players namely Mercury Inc, Pluto
Auto, Venus Cars Ltd, Mars Inc. and Jupiter Automobiles Ltd are already into the segment, the last being
the market leader. Three players, apart from Earth Inc., namely Saturn Cars, Uranus Inc. and Neptune
Automobiles are on a planning stage to enter in the small car segment in near future.

Neerg and Retaw were in former’s office with papers, loaded with tables and numbers, lying all around
them.

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BIZ-CZAR, Perspective-2010, Round 1

“The research says that CAGR for the segment is 22%. I told you Willy that there is a lot of money in this
segment. Just have a look at the demand for next four years. It’ll throw more light on the fact.” said
Neerg to Retaw.

2010-11 2011-12 2012-13 2013-14

Market Location Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4

Grand Canyon 700,400 360 300 320 500 410 400 410 480 420 500 530 600 620 670 690 700

Sahara Desert -300,900 600 540 550 710 650 600 630 710 670 720 760 770 730 700 680 750

Black Forest 1100,-700 540 470 530 620 590 560 540 640 600 670 650 780 700 660 690 620

Himalayas 0,0 720 550 620 800 770 750 770 900 570 600 620 700 600 650 610 700

TOTAL 2220 1860 2020 2630 2420 2310 2350 2730 2260 2490 2560 2850 2650 2680 2670 2770

The location information is given in the form of X-Y co-ordinates for different markets and is in kilometers.
Himalayas is a city in WonderLand where headquarter of Earth Inc. is situated. The figures are given in ‘Demand for
Number of Cars’ of four quarters for coming four years.

“Yeah! You were right Neerg. The figures really look promising. But what according to you will take us to
diversify from present luxury car segment to this small car segment? I mean it is a whole new market for
us. We, of course, don’t want to hurt our luxury car sales because of this.” said Retaw questioningly.

“Your concern is right Willy. According to me, the major drivers to be in this segment would be Cost and
Technology. We need new technology which provides quality and low cost advantage at the same time.
Our large surplus cash reserves and strong supplier network can help us provide edge on both. As far as
the market is concerned, we can lever on our strong brand image for our cars to be sold.”

“Hmmm…. I think we can move ahead to form a concrete plan. Let us work this plan out. I think we
should hire Moon Consultancy for guiding us through the process. I’ll contact and follow up with them.
By the way I need to leave now. Its Saturday and I need to water my garden!!!”

Both of them met after 2 weeks at the same place to further discuss the plans.

“Neerg. I have got the report from Moon Consultancy. Here it is.” said Retaw to Neerg while passing him
the report.

“Oh! Let me have a look at it.” replied Neerg.

“As we have discussed before, we’ll have an assembly line. All the parts will be outsourced from our
suppliers and would be assembled in our plant. There are four feasible locations in different cities where
in we can set up a plant. One is in our city. The other three are in Nile River, Niagara Falls and Coral
Reef.” said Retaw.

“What about the funding for the land? I think we can approach Ozone Bank Ltd. They have been helpful
to us in the past.” asked Neerg to Retaw.

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BIZ-CZAR, Perspective-2010, Round 1

“Definitely. I had a conversation with Mr. Enozo, the manager of the bank. He has given us the word to
fund us at 12% p.a. Moreover, all the four places are owned by the government of the concerned state. I
had a meet with the government officials of all the places. They are ready to provide us the land at very
attractive terms. According to the terms, we can buy the land at the mentioned cost with an option to
sell them back the land at the same price in future.” said Retaw.

“Hmm… the labour costs at different places are different. What could be the possible reason for the
same?” enquired Neerg.

“The main known reasons for the difference are the availability and quality of the labour we get at the
concerned city, the distance of the plant from the residence areas of the labourers and the standard of
living of the people living there. You can see that the cost of labour per car is very high here in Himalayas
owing to above factors. One more thing we’ll have to consider is that the transportation cost per car
from the plant location to the market will be 10 WD per kilometer” answered Retaw.

“Oh! I see!!!” exclaimed Neerg.

Plant Location Land procurement Cost Labour cost/Car

Nile River -850,200 400,000,000 18500
Niagara Falls 200,700 760,000,000 10500
Coral Reef 700,-200 640,000,000 15000
Himalayas 0,0 500,000,000 15500
The costs given are in Windis (WD)

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BIZ-CZAR, Perspective-2010, Round 1

After analyzing the table and chart given above, Neerg was estimating the expected time in which they
would be able to operate the plant.

“I think that once the plant location is selected, we would be able to operate the plant in its full capacity
in about nine months i.e. in about April -2010.

“About the outsourcing, the main parts about which we should be concerned are Engine, Chassis, Seats,
Tyres, Windshields and Airbags as these are the one which majorly contributes to our cost. Let us have a
look at our potential suppliers. I suppose many of them must be our own suppliers.” said Neerg.

“Right Neerg. Some of them are our present suppliers. This is the list of our suppliers with break-up of
different costs. All the suppliers are centrally located and are almost equi-distant from all the feasible
plant locations. The transportation costs vary with respect to the time of delivery and the lot size. Have
a look at this.” said Retaw.

ENGINE
Max. Limit Lot Size Lead time
Supplier Basic Price Transportation Cost (Per Lot)
(Units) (Units) (Quarter)
Antlia 90000 1000 51000 100 0
Bootes 88500 1200 204000 300 1
Centaurus 88500 800 92500 160 2
Dorado 88000 1500 421000 300 3

CHASSIS
Lot Size Lead time
Supplier Basic Price Max. Limit Transportation Cost (Per Lot)
(Units) (Quarter)
Antlia 43,000 1,700 78,000 340 0
Bootes 42,000 1,350 84,000 135 1
Centaurus 41,500 600 43,700 50 2
Dorado 43,000 900 33,000 90 3

SEATS
Lot Size Lead time
Supplier Basic Price Max. Limit Transportation Cost (Per Lot)
(Units) (Quarter)
Antlia 31,250 750 42,050 250 0
Bootes 30,500 1,250 172,000 250 1
Centaurus 30,000 1,500 189,000 150 2
Dorado 31,000 1,000 81,500 50 3

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BIZ-CZAR, Perspective-2010, Round 1

TYRES (SET OF 5)
Max. Limit Lot Size Lead time
Supplier Basic Price Transportation Cost (Per Lot)
(Units) (Units) (Quarter)
Antlia 31000 1000 118500 250 0
Bootes 29500 1100 196700 220 1
Centaurus 29000 1300 229050 130 2
Dorado 30000 900 126170 180 3

WINDSHIELDS
Max. Limit Lot Size Lead time
Supplier Basic Price Transportation Cost (Per Lot)
(Units) (Units) (Quarter)
Antlia 14500 1200 527500 400 0
Bootes 15250 1400 107000 200 1
Centaurus 16000 900 143200 180 2
Dorado 14250 1100 204100 110 3

AIRBAGS
Max. Limit Lot Size Lead time
Supplier Basic Price Transportation Cost (Per Lot)
(Units) (Units) (Quarter)
Antlia 39000 1500 104000 150 0
Bootes 38000 800 123900 80 1
Centaurus 36560 1000 334500 200 2
Dorado 37500 1250 280725 250 3
The lead time indicates the timing of delivery of material. As for eg: lead time 1 indicates that the order in a certain
quarter will be delivered in the next quarter. If the lead time is 0, it means that the material ordered in a certain
quarter will be delivered in the same quarter and can be used for production in the same quarter.
The transportation costs fixed are per lot irrespective of the number of units ordered. As for eg: If you order 300
units of Airbag from Dorado then the cost incurred would be 280725*2. 250 units for 1 lot and 50 units in another
lot for which full amount needs to be paid irrespective of number of Airbags ordered. In short, the cost cannot be
proportionate.
All the figures, unless specified, are in Windis (WD).

“Apart from the part cost, there is also an estimate of the Inventory carrying cost for each part.” said
Retaw referring to the table in the report.

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BIZ-CZAR, Perspective-2010, Round 1

Carrying Cost
Part
(per Unit per Quarter)
Engine 3,000
Chassis 2,000
Seats 1,400
Tyres 1,500
Windshields 2,000
Air Bags 2,000
` The costs are in Windis (WD)

“What about the shortage cost? The cost we need to incur if we fall short of producing any car due to
unavailability of any of the part with respect to the car’s demand.” inquired Neerg.

“The shortage cost per car is estimated to be about 35000 WDs per car which is excluding the
contribution margin.” answered Retaw.

“Oh! I see. That means that we need to take very good care while planning and ordering of the purchase
of materials as it is going to affect our costs considerably.” said Neerg with a tone of concern and
caution.

“Neerg. There are some more issues also. One of them is that we would start ordering the above parts
once the plant starts operating. But we would also need at least some number of each part to start off
with the production in quarter 1. I think by April-2010, we can arrange these numbers of each part,
which would enable us to start with the production.” said Retaw indicating one of the tables in the
report by Moon Consultancy.

Parts Available for Q1

Engine 1,225
Chassis 550
Seats 1,500
Tyres 1,400
Windshields 1,000
Air Bags 750
Figures in Units

“What do you have to say about it Neerg?” asked Retaw.

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BIZ-CZAR, Perspective-2010, Round 1

“Yes, I think it should be fine. Another factor we need to consider is the operational cash flow so that
we would need to run the operations smoothly so that we could plan the funds accordingly.” answered
Neerg.

Both of them studied the figures for quite a sometime. They discussed pros and cons of various options
considering the cost involved in each option and also the demand for the car in coming four years.

INSTRUCTIONS:

You and your teammate are Neerg and Retaw. You’ll take decisions about the facility location, material
sourcing etc. for the next 4 quarters (1 Year) starting from April-2010 till March-2011 based on the data
given above.

The decisions you need to make for each day will consist of 4 quarters (1 year). As for eg: the Simulation
day Round 2 (10th February, 2010) will require you to take decisions for the year 2011-12.

An Excel sheet is provided to you, where in you need to fill in your decisions. All the data (tables)
presented in the attached Excel sheet for your assistance and reference.
Please make sure that the decisions that you enter are in the allocated cells ONLY. The data entered
anywhere else will not be considered for evaluation. You need to send back the filled up Excel sheet
before 3:00 PM, 10th February, 2010 at biz.czar.imnu@gmail.com.

The next set of PDF and Excel sheet will be mailed to you by 7:00 PM on 10th February, 2010.

The Simulation PDF may be helpful as a reference for taking decisions for the next three days. So, please
save the PDFs.

The ball has started rolling! Time to make some good calculated decisions!!!! So get going!

All the Best Neerg and Retaw!