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# Capsim Simulation: Beware of a Recession

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In 2014, James retired from teaching at Georgian Court University, where he taught the Capsim business simulation for four years.

## What Happens When There Is a Recession in Capsim?

Beware of a recession in the Capstone simulation (Capsim). A team that is doing well can really get slammed if they do not check the Capstone Courier and "Next Year’s Segment Growth" for all sensor segments.

During the competitive rounds of the Capstone course, within the Capsim simulation, a recession is most likely programmed for the fourth or fifth round. Teams may get caught in an economic downdraft and overproduce in the individual product segments. Teams must remember that there is a 12% carrying cost for their inventory.

In the Capstone Course at Georgian Court University, Lakewood, NJ in summer session 2012, there are six sensor companies/teams: Andrews, Baldwin, Chester, Digby, Erie, and Ferris (computer), simulating the sensor industry. There are a total of six rounds. This guide will cover the third and fourth rounds.

## Round 3 of Capsim

The modules at the beginning of the third round are:

1. Research and Development
2. Marketing
3. Production
4. Finance
5. Human Resources.

In the Capstone Courier, students must review segment analysis for: Traditional, Low End, High End, Performance, and Size market segments. Teams should also analyze Next Year’s Segment Growth Rate to make a unit sales forecast. Note that we have moderate to high growth rates for all segments in Round 1, Round 2 and Round 3. Therefore, the teams stock-out of products and must make comparisons of the top products in each sensor segment.

## How to Calculate a Sales Forecast in Capsim?

On page 22 of the 2012 Capstone Team Member Guide, the text explains sales forecasts and worst case and best case scenarios. It is up to an individual company to make their sales forecast.

### Conservative Sales Forecast

A conservative method mentioned in a previous lesson is to take the Total Industry Unit Demand or Actual Industry Unit Sales and divide that value by the number of companies in the competition—in this case, six. Here is an example using Andrews:

1. If the "Traditional Segment" has unit sales of 9,000,000, divide this by 6 to get one team's sales forecast. Andrews' sales forecast is 1,500,000.
2. Place this value inside the "Marketing Module Unit Sales Forecast" box [1500]. This [1500] carries over to the "Production Module Unit Sales Forecast" box.
3. If there are 100,000 units or [100] in the "Inventory on Hand" box, subtract 100 from 1500. Your "Production Schedule" box will display [1400], or 1,400,000 Traditional Units, for Andrews' product, Able.

### Aggressive Sales Forecast

A more aggressive method is to take into account Next Year’s Segment Growth Rate. If there is a 10.0% growth rate for the Traditional Segment, Andrews can make the following forecast.

1. Multiply 9,000,000 units by 10% to get 900,000 units.
2. Add this to your original number of units to get next year’s total industry sales demand (9,900,000 units).
3. Divide 9,900,000 by the number of teams (6), and Andrews’ sales forecast for the Traditional product, Able, will be 1,650,000 or [1650] in the "Unit Sales Forecast" box.

Remember, your company must analyze the top products sold in the segment. The other teams may present better products. One team may have a product that has better performance, size, MTBF, or age. Another team may pay more money for the promotional budget, increasing customer awareness. A team may spend money on an increased sales budget, increasing customer accessibility.

## Recommended for You

### Moderate Sales Forecast

Andrews can take an intermediate approach to the sales forecast.

1. Use half of next year's segment growth rate (10%). This would be 5%.
2. Multiply 9,000,000 units by 5% to get 450,000 units.
3. Add the 450,000 units to the original 9,000,000 to get 9,450,000 units.
4. Divide 9,450,000 units by 6 teams, and Andrews’ unit sales forecast for their Traditional product, Able, is 1,575,000 units or [1575] in the "Unit Sales Forecast" box.

Teams must be careful after completing Round 3. Most teams have had stock-outs in various sensor segments because of increased growth within the industry. By the end of Round 3, teams have spent money on increased capacity in certain segments. A few teams may have invested in automation to decrease labor costs. For Round 4, the companies must check "Next Year’s Segment Growth Rate" in the segment analysis pages of the Capstone Courier. This is when a recession may occur.

## Round 4 of Capsim

For the Traditional Segment in Round 4, Next Year’s Segment Growth Rate may be negative—for example, –12% growth rate. Let’s say there were Actual Industry Unit Sales of 9,600,000 units in the Traditional Segment in Round 3.

1. Multiply 9,600,00 by 12.0% to get 1,152,000.
2. Because the growth rate is negative, subtract the 1,152,000 units from 9,600,000 to get 8,448,000 units.
3. Divide 8,448,000 units by 6 teams to get 1,408,000 units, Andrews' sales forecast for Traditional Product, Able.
4. The "Marketing Unit Sales Forecast" box will display [1408], which carries over to the "Production Unit Sales Forecast" box.

A company can make strategic modifications to the sales forecast, depending on the performance of other teams’ top products in an individual segment.

If a team overproduces, they will have decreased profits. Say one team has an inventory of 1,000,000 units. Multiply this by the 12.0% carrying cost to get a \$120,000 cost for carrying the inventory. If the team has inventory in all five sensor segments, their total inventory is 5,000,000 units. Multiply the 5,000,000 units by 12.0%, and the carrying cost will be \$614,400.

James Marion on February 23, 2014:

This is great stuff. If anyone still needs individual help, you should try capsimhelp.com, they charge a fee to help you but its cheap when split between the group and the advice is thorough and specifically for your simulation.

James Cage (author) from Orlando, FL on July 20, 2012:

Thanks for your comment. The Capsim Simulation is a class taught in the Business Department. Each team/company tries to make more money than the others. The simulation tries to fool teams by creating recessions after a few years of good economic growth.

WD Curry 111 from Space Coast on July 19, 2012:

Oh man, this was wasted on me. I am an artist. I need help with economics and business. All I remember of my college economics class (I only had to take one class for one year) is "paradoxical thrift" . . . which basically says that the two page equations that the big boys use don't really work. It is sort of like SEO.

Still, I found it interesting, and was impressed. Maybe a side bar for the remedial to get us up to speed? Never mind, it would just get cluttered.