Rant about a business simulation project.

[fuzzybabybunny]

For class we're running a business simulation.

Background:

There are 6 groups, each group is in the GPS business. Each group started out with equivalent startup companies and are allowed to go their own strategic way. Our markets are the US, EU, and China. Each group has at least a chip plant in the US and a GPS plant in China. We make chips in the US, ship them to China, they use the chips to make a GPS, and we ship the GPS to the US, EU, or China for sale. We can sell things to each other, big name retailers, and consumers.

Three groups are going for the mass producing, compete on low cost type of strategy.
My group decided on being the technology leader. Invest a lot into R&D and perhaps license the technology out to the mass producers. We can upgrade our GPS and Chips. There are 9 levels of upgrades for each. For example, in order to produce a level 4 GPS, we must put one level 4 chip into it, or two level 3 chips, or 3 level 2 chips. If we only have level 1 or level 0 chips, we can't produce level 4 GPSs, even if we already have the technology for it.

Situation:

R&D upgrades are EXPENSIVE. We do not have enough resources to sincerely upgrade both GPS and Chips at the same time, much less mass produce GPSs for sale at the same time. However, the groups who are mass producing do not have enough capital for R&D. Currently, after 3 quarters, every single company is still stuck on Grade 0 chips and GPSs, while we have Grade 2 GPSs but only Grade 0 Chips. We want to be the high tech GPS provider.

I'm working with an accounting and a finance major. I'm a supply chain major. I've been drilled over and over to create win-win relationships with other companies in order to combine our strengths for increased gain. I've argued from day one to partner up with another company, but my group members just want to tackle this project commando style. Whenever I talk about partnering up they just seem to blank out. We've had three quarters to partner with someone and we haven't done so yet. As a result, opportunities have passed us by.

Initially we wanted to be the GPS upgrade leader, and I talked to another group that wanted to be the Chip upgrade leader. Perfect match. We can do a straight technology swap and it would be like we only paid half for the amount of upgrades we get. Then we can work together to license our technology out to the mass producers who are running on thin margins and price competing like crazy with their competitors. But because we never opened up a sincere partnership dialog with the other group, they've since moved on to become just another mass producer. So now there are four mass producers and my company is stuck hemorrhaging money with a high GPS tech upgrade that we can't do anything with because we are missing the prerequisite chip upgrades.

Uggg... why is it so hard for people to partner up with other groups? It's plainly obvious that our resources limit us to either being mediocre in all areas or really really good in one area. I'd rather be really good in one area (ie. focus on core competencies), and partner up with someone with a complementary strength. What in the hell...


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Original post, already answered.

There are options to do Intra-Company and Inter-Company sales. I'm having trouble wrapping my head around this.

There are four types of sales:

Consumer: this is easy to understand, selling to the consumer

Intra-Company: Selling our own chips/GPS to, uh, ourselves? Like our China GPS plant produces 100 GPS units and sells these 100 GPS units to our division in the US... for profit? Is this supposed to act like some sort of value transfer? Like it costs $5000 to make the 100 units, so if we want to transfer these units to the US we "sell" these to the US for $5000? But we're allowed to pick how much we want to sell to ourselves for. If it costs $5000 we have the option to sell to ourselves in the US for $5000, $0, $10,000,000, whatever.

Inter-Company: Selling outside the company... doesn't this include consumer sales? But our income statement says it's not. Is it selling to other GPS/chip companies?

Component: Selling chips to other companies, or selling GPSs to other companies. Doesn't this mix in with inter-company sales? Again, our income statement has this as its own category.

So our income statement shows this:

STANDARD SALES
- Consumer
- Intra-Company
- Inter-Company
- Component
LESS Cost of Goods Sold
Gross Margin = Standard Sales - COGS

So by selling to ourselves... we can increase our sales revenue? WTH? I'm so confused.

 

[KB]

My guess would be that the China plant and US plant are subsidiaries of a larger company. In order to show the separate profitability of each arm of the company the chip plant sells the chips to the GPS plant, then the GPS plant sells to the consumer and intercompany. This way management can have metrics and decide to sell off the GPS company if the chip company is significantly more profitable.

The way I see it (get clarification from your teacher):

- Consumer - selling GPS units to customers
- Intra-Company - selling chips to the GPS wing
- Inter-Company - selling GPS to other companies (like Amazon) for resale
- Component - selling chips to other companies to build GPS units

 

[OdiN]

I'm no expert...but the Intra-Company thing you can infuse money into another division if you want...that's how I'm seeing it. I would imagine there are more reasons.

Inter-Company - selling final product to other companies. HP selling a pallet full of PC's to GM. Same as consumer selling but orders are usually larger/different.

Component - selling components to other companies who use them to make their own product under their own brand. This is like nVidia selling GPU components. You don't buy an nVidia product - you buy a BFG or eVGA.

I don't know all the reasons for separating it all like that.

That's how I see it anyway.

 

[KMc]

Consumer would be finished product sales to end users (or possibly distributors).

Intra-company would be one business unit selling to another. For example, your US chip-making division has to trnasfer the chips to your China GPS-maker. How does the chip-making operations sustain itself? Do they expect to get a check from the GPS-maker when units are sold? What if there is another GPS-making division in your company that also uses the chips? How do the profits trickle back down to the chip maker? What happens is the chip making unit sells the chips to the other divisions at an agreed to inter-company transfer price. They then have a "revenue" and "profit" stream that can be used to sustain its activities.

Inter-company sales could be sales of your assembled GPS units to a third-party OEM (Original Equipment Manufacturer) that may build and private label their own GPS unit for sales.

Component sales would typically consist of sales of unfinished goods, chips, modules, etc. It could be categorized as Inter-company depending on how you categorize it.

 

[MagnusTheBrewer]

The reason you are confused is simple. You're taking a class that is trying to demonstrate accounting principles in the real world.

After 15 credits in accounting, I have learned all accounting principles are designed to get accountants off the clock on time.

There are two types of accountants, those who spend all their time explaining why you can't do what you want to do and those who explain how to do what you want to do. I've never met any of the latter sort but, I believe they exist. 'Course, I also believe in Santa Claus.'

 

[fuzzybabybunny]

Ok, I get it. Inter-company, consumer, and component sales are simple.

Intra-company is basically:

Transfer of Physical Goods + Transfer of Money

I've always just thought of the two as two separate things.

If business unit 1 needs goods from business unit 2, then business unit 2 ships it to business unit 1.
If business unit 2 needs an infusion of cash, and business unit 1 has a lot of it, than business unit 1 wires cash to business unit 2.

What confuses me a little bit still is that we can already instantly wire money to any of our business units anytime we want. Can intra-company sales be partly considered to be just another way to transfer money? Why does transfer of goods and transfer of money have to be lumped together when transferring within the same organization? If we can just wire money to any business unit anytime we want, why do this lumping together? I'm guessing it has something to do with autonomy? To wire money some overseer has to approve and do the wire transfer every time cash is needed, while lumping it together means each unit can automatically get a stream of cash as long as it produces and offloads what it produces, correct?

 

[Ns1]

Originally posted by: fuzzybabybunny
Ok, I get it. Inter-company, consumer, and component sales are simple.

Intra-company is basically:

Transfer of Physical Goods + Transfer of Money

I've always just thought of the two as two separate things.

If business unit 1 needs goods from business unit 2, then business unit 2 ships it to business unit 1.
If business unit 2 needs an infusion of cash, and business unit 1 has a lot of it, than business unit 1 wires cash to business unit 2.

What confuses me a little bit still is that we can already instantly wire money to any of our business units anytime we want. Can intra-company sales be partly considered to be just another way to transfer money?

Not really, cuz you need to book them as sales. In each division's financial statements they will have sales to other divisions (AR - affiliate, or whatever as the case may be), when the financial statements get consolidated they will need to eliminate said sales for the consolidated financial statement.

wooooooo accounting.

my intra-company knowledge is shakey, but for inter-company sales there is an assumption that all transactions need to be performed at arm's length.

 

[Dacalo]

Originally posted by: MagnusTheBrewer
The reason you are confused is simple. You're taking a class that is trying to demonstrate accounting principles in the real world.

After 15 credits in accounting, I have learned all accounting principles are designed to get accountants off the clock on time.

There are two types of accountants, those who spend all their time explaining why you can't do what you want to do and those who explain how to do what you want to do. I've never met any of the latter sort but, I believe they exist. 'Course, I also believe in Santa Claus.'

Well, you are still in college. If you are former in real world, you are not gonna go far; become bookkeeper.

 

[fuzzybabybunny]

Originally posted by: Ns1

Originally posted by: fuzzybabybunny
Ok, I get it. Inter-company, consumer, and component sales are simple.

Intra-company is basically:

Transfer of Physical Goods + Transfer of Money

I've always just thought of the two as two separate things.

If business unit 1 needs goods from business unit 2, then business unit 2 ships it to business unit 1.
If business unit 2 needs an infusion of cash, and business unit 1 has a lot of it, than business unit 1 wires cash to business unit 2.

What confuses me a little bit still is that we can already instantly wire money to any of our business units anytime we want. Can intra-company sales be partly considered to be just another way to transfer money?

Not really, cuz you need to book them as sales. In each division's financial statements they will have sales to other divisions (AR - affiliate, or whatever as the case may be), when the financial statements get consolidated they will need to eliminate said sales for the consolidated financial statement.

wooooooo accounting.

my intra-company knowledge is shakey, but for inter-company sales there is an assumption that all transactions need to be performed at arm's length.

Ok, I gotcha. I'm a Supply Chain major, so I never got any of this stuff in my intro Accounting classes. But now that I get it it seems pretty simple. What ISN'T simple is that I'm working with an accounting major and a finance major as my group members, and they're really not that great at running our little fantasy company and seeing the big strategic picture. They just want to go Rambo on the market with our limited resources... which is only going to get us killed. I've told them time and time again that we should partner up with another company to pool our resources together, but it's like they just don't get it. Grrrr...

 

[KMc]

Intra-company sales is less about transferrring money than it is about transferring value and assigning margin. "Cash" transactions are difficult to account for and difficult to manage. What is the transfer based on? What is it being used for? A transfer sale allows a business unit to manage cost of it's goods and value adds and profit needed for operations, R&D, etc all in one single transaction.

Let's say I make an assembly, and it costs me $75, and I've worked out that I need to make another $25 on top of that to cover capital investments, R&D, personnel, facitlities, etc. So I sell it to the next division for $100. Now, all of the revenue and expenses to cover the supply of that assembly are contained within my division. Nobody needs to "wire me money" later on. If my costs go out of control, I'm going to go in the red on my $100 and I'm going to be held accountable for why I'm not making it on that amount anymore.

 

[Ns1]

Originally posted by: KMc
Intra-company sales is less about transferrring money than it is about transferring value and assigning margin. "Cash" transactions are difficult to account for and difficult to manage. What is the transfer based on? What is it being used for? A transfer sale allows a business unit to manage cost of it's goods and value adds and profit needed for operations, R&D, etc all in one single transaction.

Let's say I make an assembly, and it costs me $75, and I've worked out that I need to make another $25 on top of that to cover capital investments, R&D, personnel, facitlities, etc. So I sell it to the next division for $100. Now, all of the revenue and expenses to cover the supply of that assembly are contained within my division. Nobody needs to "wire me money" later on. If my costs go out of control, I'm going to go in the red on my $100 and I'm going to be held accountable for why I'm not making it on that amount anymore.

woo ++