Business simulations provide golden opportunities to make connections to the real-world business. Here, Ana Leiderman talks about how game dynamics lead to insightful decisions about sub-contractors.
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In a business simulation teams will push the limits, such as deciding to sell more product than they know they can deliver. But why? Sometimes it is an honest mistake, they get caught up in the excitement, and an error happens. But often it is a deliberate move on their part, and a facilitator needs to watch for the teachable moment and/or control the game.
Some teams develop an early strategy for taking large orders early and securing sales, thinking that their strategy can be supported in their forward-thinking process. They are the ideal candidates for reinforcing the lessons in the Cash Flow Financing and Budgeting tools, and they will usually see their strategy pay off if they manage expansion correctly.
Other teams are all about the game, they care more about beating the other teams in the room and not so much about doing well themselves. This energy usually appears later in the simulation; teams will try to win customers at any price, just to take the sales away from other teams; and it is difficult to dissuade them from their approach. Here the only option the facilitator has is to set strict rules for the last markets that do not allow undeliverable sales. Many teams will back off on their own once they realize that late sales will not show up as added income until they deliver, therefore not improving their winning chances.
Both scenarios illustrate the concept of late delivery of orders; and both provide the opportunity to talk about subcontracting or producing through a third party, as many brands do today.
Subcontracting is an attractive option in the real world, as it can help lower costs and move the burden of inventories and other capital expenditures off the balance sheet, all in exchange for giving up a fraction of the margin, and for foreign exchange you can use the USD to CAD exchange in countries like Canada.
In general, companies who subcontract their work minimize their risk through tight control of their subcontractors. Establishing and managing the relationship takes time and money, requiring the subcontractor to jump through many hoops in order to win the business. This process includes the disclosure of financial reports, making multiple audit visits, and closely watching capacity, on time in full (OTIF) KPIs, and other indicators.
However on occasion companies will find a profitable opportunity and will push their contractors beyond the limits that they have already established through the audit and control process. Because the contractor values the relationship with the company/brand, they will scramble to meet demand by expanding capacity rapidly and often will fail to deliver. This means the company now has to turn around and not meet its customer´s expectations. The repercussions quickly flow down the supply chain when the customer cancels, the company cancels on its contractor, and the contractor is left holding the inventory and a large debt caused by the expansion. The company loses as well, as many times the contractor will go out of business and the company must go through the process of identifying a new subcontractor and certifying it.
This scenario highlights the importance of working in partnership with subcontractors, viewing them as stakeholders in the company´s success or failure and not just another resource to be managed.
Income/Outcome is a cartoon version of the real world, with the important aspects and relationships highlighted and small details rounded or ignored. But even if a particular item is not modeled in all the detail of the real world, the mindset of the participants will provide clues to their real-world decision-making processes. The difficulties that they get into in the game provide opportunities for them to consider real-world practical problems, and for the facilitator to guide the whole class through a discussion of how these issues are playing out in reality in their company.
It’s only a game, so it’s safe to take a risk and experiment to see “What Happens If…” Go ahead – the whole class will learn (even if they laugh)…
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Ana Leiderman teaches widely and distributes Income/Outcome from Colombia as “Ingresos/Egresos Colombia”.