Product Distribution The Global Business Game Those in The Global Business Game do not directly deal with the consumers of their television sets—They sell their products to Wholesalers who then deal with their own retail customers.

Prof. Nathan Globus Shows You How Prof. Globus would like to explain to you how the distribution system works for a typical firm in The Global Business Game. His explanation will use the costs associated with the game’s starting Q4YR00 quarter. All data will come from the game’s start-up quarter.

Building A Distribution System Every company starts the game with a Factory in the Economic Zone associated with its Home Country. The Zone’s other country unit can be commercialized. If this is done a Distribution System must be established in that country. Every Factory has one Distribution Center. Companies can lease commercial space for additional Free-Standing Distribution Centers. These added centers provide better service to the Wholesalers they supply. No products can be sold without a complete Distribution System in place. A key component in the system is the use of Distribution Centers.

More Distribution System Participants Every Distribution Center has a Sales Office. Commercial space for additional Free-Standing Sales Offices can be leased. Sales Representatives work out of these offices. They take orders, calls on Wholesalers in their territories and provide sales support to independent retailers stocking the company’s television sets. The industry’s retailers are supplied by Wholesalers. Each Distribution Center automatically has its own Sales Office. Additional Free-Standing Sales Offices can be leased. Players often overlook the costs involved with a Distribution Center’s Sales Office. Wholesalers operate between the firm’s Distribution Center and the retailers who sell the firm’s sets.

Wholesalers There are two types of Wholesalers in your industry. Company-Owned Wholesalers are those owned and operated by your company. They are totally dedicated to selling your TVs. The industry’s other Wholesalers are Independent Wholesalers. These are independent merchants who sell your company’s products as well as those of your direct competitors. A Company-Owned Wholesaler is totally dedicated to the selling of the firm’s television sets. Company-Owned Wholesalers are more-costly to operate but they generate a higher profit margin for the manufacturer. Independent Wholesalers are inexpensive to maintain but more are required to obtain the same sales effort as that provided by a Company-Owned Wholesaler.

Retailers Your company can manufacture Privately-Branded TV sets sold by the Home Electronics King chain. These sales are won on a bids basis as Factory-direct sales. Most of the industry’s sales are made by Wholesalers to the country’s numerous small retail establishments. The Home Electronics King operation may or may not be profitable. All sales are reported at the Wholesaler level by type.

The Basic Distribution System The industry’s complete distribution system. The arrows in Orange trace the firm’s Company-Owned channel. The Blue arrows traces channel that uses Independently-Owned Wholesalers.

A Typical Distribution System A Home Country selling its own branded TVs through Independent and Company-Owned Wholesalers and private labeled sets directly to Home Electronics King. Foreign Country Units with either a Distribution Center or a factory to receive television set shipments. Sales cannot be made in foreign countries without the availability of a Distribution Center. Players are warned if they are trying to ship Finished Goods into a country when it does not have some type of Distribution Center in place.

Shipping Methods Surface transportation-- Deliveries are completed during the quarter within a country and the following quarter across national borders. XAir-- Deliveries arrive during the same quarter. This is the most expensive way to ship. It takes one quarter for all Surface shipments to be completed. Al ExAir shipments are available for sale in the same quarter they are shipped.

Shipping Costs The shipping costs associated with Surface and ExAir vary between the industry’s three major economic spheres. The shipping rate cross tables shown assumes the United States is the Home Country. Surface Shipping Air Express Shipping When markups are high, ExAir shipping from low labor-cost countries to nearby country units can be feasible.

Sales Promotion Effort Sales Representatives work out of Sales Offices. They are motivated by Base Salaries and product Commission Rates. The sales effort is further supported by the company’s product Advertising Budgets, Sales Rep training programs, reasonable product quality and product prices and reliable product deliveries. There should be no more than one Sales Rep per Sales Office—Players are warned when they are causing Sales Reps to get in each other’s way in the same sales territory. Sales Reps quit if they cannot earn their Commissions. A good sales promotion effort makes the Sales Rep’s job much easier.

Sales Force Costs Some Sales Representatives inevitably quit over time. They must receive “fair” compensation to remain loyal. Others quit just to change the scenery. Training Programs make them more effective. Various costs are associated with developing and retaining a sales force in the United States. Sales Reps quit at a frequency that is greater than normal when their wages fall below their salary expectations. Merlin Studies can be purchased which indicate the approximate salaries earned by the Sales Reps employed by the competition. The sales staff’s expenses are charged to the firm’s Sales Office account.

Channel Start-Up and Shut-Down Expenses The industry’s competitive demands may require the firm to modify its number of channel participants. The table below summarizes various costs associated with setting-up or shutting down channel participants in the NAFTA Economic Zone in local currency values. Adding and subtracting to and from the firm’s Distribution System is costly and confusing to its Wholesale customers.

Channel Maintenance Expenses Various expenditures are needed to maintain the level of service in any of the country’s Distribution Channel. This table summarizes the Channel maintenance expenses within NAFTA. High overhead expenses are associated with Company-Owned operations of any type. Independent Wholesalers are very inexpensive to service.

Warehouse Handling Costs All units sold by your company are physically handled somewhere in the Distribution Chain. There are no Shipping and Handling charges on units sold to Home Electronics King. The table below summarizes all Shipping and Handling charges associated with an American factory in local currency values. All units sold within the industry’s Distribution Channels are physically handled by some party—The question is one of who pays for the physical handling. Home Electronics King pays for all shipping and handling. The firm’s Company-Owned Wholesalers pay for the shipping and handling of all goods they sell. Independent Wholesalers pay all shipping and handling charges. The receiving country unit pays for the shipping and handling of any goods it purchases from the shipping country unit.

Tariffs Tariffs serve to protect domestic manufacturers from foreign competition by making them more expensive. The table below combines each country’s tariff rates. Firms merely collect the tariffs assigned to the products to which they have added value—Amounts collected do not go into the firm’s cashflow for the period. The high tariffs associated with the EU and APEC can be easily compensated for if goods are shipped in from a low labor-cost country such as Mexico or Thailand.

Shipping Decisions The factory’s Shipping Department tries to ship orders as directed. When forced to “ship short” the Department ships goods in the proportions directed as to method and destination. All goods would be shipped under the decision and output conditions shown here for Q2YR02. Players usually get into a “ship short” situation when their production targets are not realized. In this case there are 32,567 25” TVs available with 7,500 being shipped Surface. 30,263 27” sets are available with only 5,100 being shipped Surface.

ExAir and Short Shipments Goods shipped ExAir do not appear as “Goods In Transit” because they are received in the same quarter. Companies “ship short” if the firm does not have enough products to meet all current quarter sales. The Shipping Department fills all Contract orders first. Finished Goods transfers to Country Units are shipped next. Product shortages appear as Back Orders and Lost Sales. In a “ship short” situation a rationing system must be used by the plant’s Distribution Manager. The shipping or is: Contract Bids with Home Electronics King. Inter-firm Contracts. Shipments to the firm’s own County Units.

Channel Accounting Operations Prof. Globus will now show you how various Channel activities are reported in the Company’s Income Statement and Balance Sheet as well as their Cash Flow effects. Here are his channel-related decisions for the quarter being demonstrated.

Channel and Sales Rep Decisions Eliminated one Sales Office Added one Distribution Center Added Sales Reps and Trainees Cut Base Salaries and increased Commission Rates

Logistics Decisions 25” sets are being sent to Mexico and Germany 27” TVs are being shipped to Mexico and Germany The sets sent via Surface to Mexico and Germany will take one quarter to get there. The sets sent ExAir will be available for sale almost immediately.

Income Statement Effects The shipping charges for the TVs being sent to Germany and Mexico appear as accounting transactions in the receiving country’s accounts. This is a breakdown of where the shipping country unit’s expenses were accounted for.

Balance Sheet Effects

Cash Flow Effects

The End