Product Distribution

The Global Business Game

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.

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.

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.

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.

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 Basic Distribution System The industry’s complete distribution system.

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.

S a le s O ffic e s

M e x ic oD istribution C e nte r

S a le s O ff ice

U n ite d S ta te sInde pe nde nt W hole sa le rs

U n ite d S ta te sC ompany-O w ne d W hole sa le r

S a le s O ff ice

U n ite d S ta te sS a le s O ff ice s

U n ite d S ta te sFactory

D is tribution C e nte r

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.

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

From NAFTA EU APEC

NAFTA 2.00$ 9.00$ 12.00$

EU 10.00$ 2.50$ 15.50$ APEC 18.50$ 18.00$ 4.50$

From NAFTA EU APEC

NAFTA 6.20$ 7.48$ 13.50$

EU 27.90$ 30.50$ 52.75$

APEC 36.00$ 48.70$ 53.80$

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.

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.

Expense Amount

Salesrep Hiring 11,000$ Salesrep Moving 4,500$ Salesrep Firing 6,000$ Trainee Salary 9,100$ Trainee Moving 3,000$

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.

US$U.S. Mex$Mexico

Distribution Center Start-Up 45,000 297,000 Distribution Center Shut-Down 56,000 360,000 Sales Office Start-Up 20,000 14,200 Sales Office Shut-Down 15,000 10,600 Company-Owned Wholesaler Start-Up 35,000 24,700 Company-Owned Wholesaler Shut-Down 52,500 37,000

AmountExpense

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.

US$U.S. Mex$Mexico

Distribution Center Overhead 110,000 86,000 Sales Office Overhead 86,000 60,300 Independent Wholesaler Service 11,000 23,650 Company-Owned Wholesaler Lease 3,000 24,400 Company-Owned Wholesaler Salaries 60,000 42,500

Expense Amount

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.

Set Size U.S. Mexico Germany Spain Japan Thailand

25" 1.95 1.35 4.43 18.30 251.55 6.2327" 2.10 1.46 4.81 19.90 270.90 6.75

Tariffs Tariffs serve to protect domestic manufacturers from

foreign competition by making them more expensive. The table below combines each country’s tariff rates.

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.

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.

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 DecisionsEliminated one Sales Office

Added one Distribution Center

Added Sales Reps and Trainees

Cut Base Salaries and increased Commission Rates

Logistics Decisions25” sets are being sent toMexico and Germany

27” TVs are being shipped to Mexico and Germany

Income Statement Effects

Overhead 430,000 Shut-Down 15,000 Sales Rep Hiring 22,000 Sales Rep Moving 9,000

Overhead 220,000 Start-Up 45,000 25" TV Warranty Work 27,840 27" TV Warranty Work 29,389

Service 44,000

Base Salary 48,000 25" TV Commissions 52,641 27" TV Commissions 77,376

Salaries 18,200 Training and Development 5,000

25" TV Charges 63,506 27" TV Charges 63,552

Income StatementExpenses: Sales Offices:

Distribution Centers:

Wholesale Operations:

Sales Force Salaries:

Trainees:

Inventory Charges:

The shipping charges for the TVs being sent to Germany and Mexico appear as accounting transactions in the receiving country’s accounts.

Balance Sheet Effects

Cash -1,111,639

Finished Goods 0

25" TV Transfers 583,095 27" TV Transfers 440,135

Balance SheetAssets:

Inventories:

Goods in Transit:

Accounts Payable 58,865

Liabilities:

Cash Flow Effects

Sales Offices 476,000Distribution Centers 322,229Wholesale Operations 44,000Sales Force Salaries 137,352Training and Development 5,000Inventory Charges 127,058

Cash Flow Out:

The End