Case: Local vs. Global

In this scenario, you are operating as a computer distributor on one of three markets: the USA market, the European market, or the Asian market. The continental markets are each divided further into a number of smaller local, regional markets (examples are the North-West US market in the USA, the Scandinavian market in Europe, and the Japanese market in Asia). In each regional market, one or more distributors are located, and you have competition from each of the other distributors in your continental market. Your customers know that you and your competitors are trustworthy, but are generally quite slow given the current speed of businesses in the Internet area. You start to suffer from competition from direct deliveries from manufacturers, and profit margins have dropped from 20-30% which could be reached a few years ago to around 10% right now. Given the gradual loss of business, a profit margin of less than 10% is not enough to sustain your business. As a result, you have been sourcing globally for quite a while to get your purchases for the lowest prices. The downside of global sourcing is longer delivery times or higher transportation costs. You need a new strategy for your business to survive in the next couple of years. Recently, one of the options that came up was to react on spot buy requests from larger global companies, and try global sales in addition to global sourcing. In the scenario, there is a growing number of international requests for quotes, for which distributors can bid world-wide. Another option might be to focus more on your local market and conquer that instead of aiming for the global market. A third option might be product specialization; instead of keeping a limited number of different products in your warehouse, you might keep more products of one or two types on stock, thereby being able to react more swiftly on local and/or global requests. Many other options are possible as well. What is most important is that you develop a strategy and make the strategy work. Please remember that your local and global competitors in the game (the other players) find themselves in the same situation, and will also choose a strategy...

Download the handout

Using the following link, you can download a pdf version of the manual of the Erasmus Distributor Game. This pdf includes the Local vs. Global case, a description of the game flow, and the player application.

Goal of the game

The goal of the game is to show you the trade-offs of global sourcing versus local sourcing in a complex market with products that quickly lose their value. You have to take many decisions, both for purchases and for sales. The behavior of your close competitors makes it even more difficult to choose a good strategy. Both on the local and on the global markets, you are facing the same competitors with similar problems. The game allows you to experience the effects of your decisions very quickly; in a short period of time, you see whether your company is able to improve its position based on the strategy that you have chosen. Even more, during the debriefing of the game, you can immediately compare the results of your strategy with the results that others were able to reach with theirs, and compare the results with expectations derived from theory.

Key Performance Indicators

The results of your company will be evaluated based on several key performance indicators (KPIs). A financially healthy position is of course the major KPI. The market share per product in your region and for the globally sources products is another indicator, but this of course depends on your strategy. These indicators can help you to judge how successful your strategy has been. A number of additional indicators (e.g. monthly financial breakdown, monthly success rate of your quotes, average inventory per product, number of fines you had to pay) will be provided in addition.

Stimulating good behavior of the actors

The game has several incentives for correct behavior built in. This holds both for the suppliers and for you as one of the distributors. The following fines are built into the game for incorrect behavior. When a shipment for an order is delivered after the promised delivery date, the supplier has to pay a fine. The fine is based on an interest rate of 20% per year for the value of the shipment. When you have not delivered after 30 days, you pay 50% of the agreed price for the order. When you do not pay on time, you also pay a fine of 20% interest rate per year. When you have not paid after 14 days, the bill will be charged to your bank account, even if you did not take action, or if you have a negative balance. By the way, the game is symmetric in the sense that you also get the benefits of a fine for suppliers that do not deliver on time or markets that do not pay on time.

Transportation

The computers lose their value rapidly. Therefore, shipping is done by plane. The shipping costs depend on the region of the supplier or market you're dealing with. For inter-regional transport, e.g. between a supplier located in the USA and a customer in the European region, the costs are $250.- per shipment for handling and taxes, plus $0.0007 per kilometer per kilogram of weight. For intra-regional transport the costs are $200.- per shipment for handling and taxes, plus $0.0007 per kilometer per kilogram of weight. Furthermore, depending on the weight of a shipment, a discount may be obtained. For a shipment with a weight >= 100 kg, a 10 % discount on the total transportation costs is given. For a shipment with a weight > = 1000 kg, an additional 10% discount is given. The weight of a laptop is 6.5 kg, the weight of the other three types of computers is 15 kg. The time it takes to transport a shipment is two days for shipping the goods to and from the airport and to handle the shipment, and for the rest a shipping time based on a speed of 800 km/hr is added to the transportation time. This means that you can get your goods to any place of the world within 4 days. Be aware of the costs for transporting to or from a remote location, however!

Finances

For the distributors, there are several costs you make during the course of the game. One of the types of costs is fines, which has been explained above. You can avoid fines by delivering and paying on time. The second type is the depreciation of your inventory. As this amounts to 2% per week, make sure you don't keep the computers too long in your inventory. The third type are the fixed costs for personnel, buildings, equipment, etc. This amounts to $ 500.- per day. This sounds like a small amount, but it has been calculated as a percentage of the total operational costs or the distributor, for that part of the distributor organization that deals with these three products. The final type of costs (or benefits) are the interest rates for your bank account. When you have a positive balance, you receive 3% interest per year, but for a negative balance, you pay 8% per year.

Initial product prices

The initial average market prices of the products in stock, at the manufacturer, before shipping, are as follows:

• DESKTOP: $650.-
• LAPTOP: $1000.-
• MMEDIA: $1200.-

The starting value of your initial stock is as follows:

• DESKTOP value: $40500.0 unit price: $900.-
• LAPTOP value: $48000.0 unit price: $1500.-
• MMEDIA value: $20400.0 unit price: $1700.-

The total value of your initial stock is: $108.900.-.

During the game, product prices change as a result of economic or other developments. After a change, your suppliers will offer computers for different prices, and your customers expect other prices as well. By the way, you can make offers above market price, but be aware that your customer will base its choice on price, distance, and promised delivery date. How the customer weighs these three aspects is unknown to you.

Additional information about prices and finance

Ranking

From a generally accepted accounting perspective, inventory is treated as an asset. Thus, the team rankings which ranks each team by its Equity Position is based on the following equation:

Equity= assets - liabilities

Which we define as:

• assets: the value of on-hand cash + the value of actual stock on hand + the value of incoming payments (if the accompanying shipment is either in transit or has been delivered, i.e. if the products are no longer part of your actual stock on hand)

• liabilities: outgoing payments (if the accompanying shipment has been received, i.e. the products are part of your actual stock on hand)