INTRODUCING THE MARKETING CHANNEL LABORATORY Developments in Business Simulation & Experiential Exercises, Volume 11, 1984 20 INTRODUCING THE MARKETING CHANNEL LABORATORY David J. Fritzsche, University of Nevada-Reno ABSTRACT The Marketing Channels Laboratory is a marketing channels simulation designed to be run on microcomputers. The simulation contains a data entry program which enables the student teams to enter their decisions directly into the computer. INTRODUCTION As you can tell from the title, this is a subfunctional area simulation dealing with the channel aspect of marketing. Marketing channel operations tend to be somewhat difficult for students to understand because most students have never had the opportunity to see a channel in operation. When one takes a field trip to one or more members of a marketing channel, only a portion of channel operations is visible and the dynamics of the channel are not readily evident. Even though one spends a great deal of time in the classroom discussing channel dynamics, students do not fully grasp the conflict and pressures that exist within marketing channels. Simulations dealing with the marketing discipline provide very little insight into the nature of channels. Most simply acknowledge the existence of channels and focus upon the other variables of the marketing mix (see 2,5,6). This tends to give short shrift to an area which is the least known to the student. Several simulations have been developed which focus primarily upon marketing channels. Several of these are noncomputerized and thus lack some of the complexities which can be designed into a computer simulation. The Marketing Channel Laboratory is based upon a noncomputerized channel simulation developed by Burns [1). It has also benefited from some of the work done by Gentry and Pickett (4). The Marketing Channel Laboratory is designed to provide the student with a working knowledge of marketing channels and how they function. This is accomplished in a simulated environment which provides a laboratory for the marketing instructor to use in a channels course. The simulation makes the channel come alive by creating the pressures and conflict similar to those which exist in a real marketing channel. The Marketing Channel Laboratory is different from most other simulations in that most of the action takes place outside of the computer. The students playing the simulation are assigned to teams which operate firms; this is similar to the procedure used by other simulations. However, in the Marketing Channel Laboratory simulation there is a great deal of overt interaction among the teams which one does not find in most other simulations. The teams represent firms at different levels of the channel, specifically retailers, wholesalers and manufacturers. Each of the firms negotiates with firms at the other levels for the purpose of providing sufficient stock to satisfy the demands of the consumers while making a profit. The computer plays no part in the agreements reached. It is used to record the agreements after they have been consummated. In this sense, the computer acts as the accountant for each of the simulated firms. It keeps track of all the revenues generated and expenses incurred by each firm and it provides reports of each firm’s operations. The computer also generates the demand for the product based upon the marketing actions taken by the members of the channel as well as upon last period’s sales. The firms are free to form vertical linkages if they so desire, or the channel may remain a traditional fragmented channel depending upon the desires of the channel members. The channel members are free to act as they see fit so long as their action does not violate the law. Firms which do violate the law are subject to administrative hearings and may be subject to significant fines. The competition is directly between firms rather than between firms via the computer as in most educational simulations. This provides an advantage in that the students can directly see this competition and tend to think of the competition as being between themselves and other firms rather than between themselves and the computer. A channel simulation lends itself to this approach because the firms in a channel interact in an overt manner among themselves and not simply with the computer. As the focus of this simulation is upon marketing channels, the variables of interest deal with the movement of goods through the channel. The product sold in this simulation is microcomputers. The firms at each level of the channel negotiate with firms at other levels to buy and sell microcomputers for the purpose of making a profit. Volume of goods sold or purchased, prices terms of sale, transportation costs, and the level of participation in cooperative advertising programs are all variables which are open for negotiation. The floor for price tends to be the production costs of the two manufacturers in the simulation. The cost of production varies depending upon the size of the manufacturer’s production facility and the volume of goods produced. Each firm in the channel is responsible for establishing a price that will move product while still remaining competitive in the channel. The sale can be made for cash, or credit may be extended for 30, 60, or 90 days. The volume of the sale becomes important in determining the transportation costs Developments in Business Simulation & Experiential Exercises, Volume 11, 1984 21 for the shipment. Transportation costs are based upon distance shipped and volume shipped. Transportation costs may be paid by either of the participants in the negotiation, or the transportation costs may be shared on an agreed upon ratio among the two firms. The firms have the option of engaging in cooperative advertising which requires them to agree upon the amount each of the firms will contribute toward the promotion effort. In addition, each of the firms may decide to advertise on a noncooperative basis. The cost of operations of a firm depends upon its facility size and volume of throughput. Larger facilities handle large volumes of throughput more efficiently than smaller facilities. Conversely, it is inefficient to field a large facility with a small volume of throughput. Any firm may contract to enlarge its facility. The construction period takes three months. If a firm finds that it has built too large a facility, it may decrease the facility size by selling part of it. However, the selling price will be less than the construction cost. Each firm is responsible for managing its finances in a profitable manner. If a firm encounters a cash flow problem, a short term loan will automatically be arranged at a “reasonable” high interest rate. The roan will run for one month with the loan automatically being repaid at the end of the month if cash is available. If cash flow problems continue, a new loan will be taken out for the shortfall with part of the proceeds being used to discharge the previous month’s loan. The major problem the firms face is controlling inventory. This of course is not significantly different from a number of other simulations. Insufficient inventory results in lost sales. Sales that are lost will be filled by foreign competitors. A surplus of inventory will result in an excess of inventory charges. Thus each firm must learn to forecast demand accurately. This becomes quite difficult because all firms except the manufacturers are dependent upon other firms for their supply of microcomputers. A firm is not allowed to sell more computers than it has in stock. If a firm oversells its inventory, the decrease in shipments below what was ordered is shared by all buyers equally. DECISION ENTRY Once decisions are made, the firms must enter their decisions into the computer which for the most part consists of recording their agreements with other firms. The decision entry program is similar to the one described by the author in an earlier paper (3c. The firm must have access to a microcomputer and the disk containing its decisions. In order to enter the decision, the firm must first type RUN DECIDE. This loads and runs the decision entry program. The firm will be asked to identify itself as being a manufacturer, Ml or M2, a wholesaler, WI, W2 or W3, or a retailer, RI, R2, R3, R4 or R5. Then it is asked whether it has entered a decision this semester. If the answer is yes, the program reads the previous decision. If the answer is no, the decision values are set to zero prior to any data entry. The firm is next asked whether it would like to look at its decision. If the response is yes, a menu for the four pages containing the decision is listed as shown in Figure 1. It should be noted that there are only three pages for the retailers as they do not sell to themselves. If Page 1 is selected, the sales made to retailers are listed. It should be noted that for every variable there is both a variable number and a variable value. The variable number is used to reference the variable value. The variable values are stored in an array. The variable number references the array location where the variable value is stored. For example, the volume of product P1 sold to R2 is referenced by the variable number 34 (see Figure 1). The actual value of variable number 34 is shown as the number at the intersection of the row following P2 and the column R2. The “sales to retailers” page indicates the volume of sales a wholesaler or manufacturer sold to one of the five retailers. It also shows the price of the transaction and the terms of sale. The example in Figure 1 indicates the retailer agreed to pay $700 for each microcomputer. The microcomputers were to be paid for in 30 days. Figure 2 shows Page 2 of the decision. It includes purchases or sales made from or to wholesalers and/or manufacturers. The variable values are of the same type as shown in Figure 1. It should be noted that a manufacturer can sell only one product, the one it produces. Thus Ml sells P1 and M2 sells P2. Wholesalers and retailers can sell either P1 or P2. (Insert Figure 2 about here.) Shared promotion and transportation variables are shown in Figure 3. The shared promotion values represent the amount of money the firm has agreed to spend on shared promotion with another firm for product P1 or P2. For example, in Figure 3 firm M2 agrees to spend $10,000 as its portion of a shared promotion agreement with retailer W1. The variable value of $10,000 is entered for variable number 68 on Page 3. The transportation entries on Page 3 represent the percentage of the transportation costs which the firm has agreed to cover. In this case, the manufacturer has agreed to pay 70 percent of the cost of transporting the goods to W1. Developments in Business Simulation & Experiential Exercises, Volume 11, 1984 22 FIGURE 1 ]RUN ENTER YOUR FIRM’S IDENTIFICATION (E,G, M1,W2,R4)?M2 HAS YOUR TEAM ENTERED A DECISION THIS SEMESTER (Y OR N)??Y DO YOU WISH TO LOOK AT YOUR DECISION FILE (Y OR N)??Y YOUR DECISION IS DIVIDED INTO FOUR PAGES. 1 - SALES TO RETAILERS 2 - SALES TO/PURCHASES FROM MFGRS. AND WHOLESALERS 3 - SHARED PROMOTION AND TRANSPORTATION 4 - ADVERTISING, FACILITY SIZE, SCHEDULED PRODUCTION ENTER NUMBER OF PAGE DESIRED OR ‘E’?l THE FOLLOWING DECISION VALUES ARE CURRENTLY IN PAGE 1 (31) (32) (33) (34) (35) (36) (37) (38) (36) (40) (41) (42) (43) (44) (45) FIRM R1 R2 R3 R4 R5 P1 PRICE TERMS 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 (46) (47) (48) (49) (50) (51) (52) (53) (54) (55) (56) (57) (58) (59) (60) P2 PRICE TERMS 0 0 0 500 700 30 0 0 0 0 0 0 0 0 0 PRESS ANY KEY TO CONTINUE FIGURE 2 1 - SALES TO RETAILERS 2 - SALES TO/PURCHASES FROM MFGRS. AND WHOLESALERS 3 - SHARED PROMOTION AND TRANSPORTATION 4 - ADVERTISING, FACILITY SIZE, SCHEDULED PRODUCTION ENTER NUMBER OF PAGE DESIRED OR ‘E’?2 THE FOLLOWING DECISION VALUES ARE CURRENTLY IN PAGE 2 (1) (2) (3) (4) (5) (6) (7) (8) (9) (10) (11) (12) (13) (14) (15) FIRM M1 M2 W1 W2 W3 P1 PRICE TERMS 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 (16) (17) (18) (19) (20) (21) (22) (23) (24) (25) (26) (27) (28) (29) (30) P2 PRICE TERMS 0 0 0 0 0 0 0 0 0 2000 450 30 2000 450 30 PRESS ANY KEY TO CONTINUE Developments in Business Simulation & Experiential Exercises, Volume 11, 1984 23 FIGURE 3 1 - SALES TO RETAILERS 2 - SALES TO/PURCHASES FROM MFGRS. AND WHOLESALERS 3 - SHARED PROMOTION AND TRANSPORTATION 4 - ADVERTISING, FACILITY SIZE, SCHEDULED PRODUCTION ENTER NUMBER OF PAGE DESIRED OR ‘E’?3 THE FOLLOWING DECISION VALUES ARE CURRENTLY IN PAGE 3 (61) (62) (63) (64) (65) (66) (67) (68) (6?) (70) (71) (72) (73) (74) (75) FIRM Ml M2 W1 W2 W3 P1 P2 TRANS 0 0 0 0 0 0 0 0 0 0 0 70 0 0 70 (76) (77) (78) (79) (80) (81) (82) (83) (84) (85) (86) (87) (88) (89) (90) FIRM R1 R2 R3 R4 R5 P1 P2 TRANS 0 0 0 0 0 0 0 10000 50 0 0 0 0 0 0 PRESS ANY KEY TO CONTINUE FIGURE 4 1 - SALES TO RETAILERS 2 - SALES TO/PURCHASES FROM MFGRS. AND WHOLESALERS 3 - SHARED PROMOTION AND TRANSPORTATION 4 - ADVERTISING, FACILITY SIZE, SCHEDULED PRODUCTION ENTER NUMBER OF PAGE DESIRED OR ‘E’?4 THE FOLLOWING DECISION VALUES ~RE CURRENTLY IN PAGE 4 (91) (92) (93) (94) (95) ADV EXP FAC SIZE SCHED PROD P1 P2 0 100000 0 0 6000 PRESS ANY KEY TO CONTINUE 1 - SALES TO RETAILERS 2 - SALES TO/PURCHASES FROM MFGRS. AND WHOLESALERS 3 - SHARED PROMOTION AND TRANSPORTATION 4 - F~DVERTISING, FACILITY SIZE, SCHEDULED PRODUCTION ENTER NUMBER OF PF~GE DESIRED OR ‘E’2E DO YOU WISH TO CHANGE DECISION VALUES (Y OR N)? ? Page 4, shown in Figure 4, changes depending upon whether the firm is a manufacturer, a wholesaler or a retailer. All firms record decisions regarding the amount spent on noncooperative advertising. If a decision is made to alter a firm’s facility size, it is entered here. A reduction in the facility size is indicated by a minus figure. For manufacturers, the volume of goods to be produced is entered on this page as either variable number 94 or 95. For retailers, the retail price is set using these variables. Wholesalers do not have a variable 94 or 95 on their Page 4. If a firm desires to alter its decision, which is usually done each period, it should respond with Y when asked whether it wishes to change decision values. The program then responds with: “How many values do you wish to change?” The number of values the firm wants to alter is then entered. The program responds with instructions to enter the variable number and then the variable value for each variable which the firm wishes to update. After the firm has entered all of its changes, it gets a chance to change additional values or to examine the revised decision values if it so desires. It is strongly recommended that the firm review its changes prior to terminating the program. This provides an opportunity to discover and correct errors in Developments in Business Simulation & Experiential Exercises, Volume 11, 1984 24 data entry prior to any damage being done. When the firm is satisfied that the decision currently in the computer is as desired, the firm indicates that it does not wish to make any more changes and the program writes the current decision to disk. The firm is provided with a message that its decision has been updated which indicates the decision is stored safely on disk. The Marketing Channel Laboratory is run at a time specified by the instructor. Each firm is responsible for inputing its current decision prior to the designated time. If a decision is not recorded on time, the previous period’s decision is run. To run the simulation, the instructor types RUN CHANNEL. The simulation is loaded and run with the simulation providing messages informing the instructor what it is doing at each stage of the run. After the simulated has been initialized, the instructor is asked to provide the current date. This date will be printed on the output for the teams. The instructor is then asked for the period number. If period one is entered, additional variables will be initialized. If any other period is entered, the history from the past period’s operation is loaded. Later in the simulation processing, the instructor is asked whether hard copy printout is desired. If so, which will be the case when actual play is taking place, the instructor is requested to turn the printer on. The output for the teams is printed which includes an income statement and balance sheet for each firm, the status of a firm’s facility size, and a record of purchases made if the firm is a wholesaler or retailer. An example of the printout for a wholesaler is shown in Figure 5. Finally an instructor’s summary is printed which provides data for the instructor to track the progress of the firms. AVAILABILITY The simulation is currently developed to run on an Apple 11/11+ or an Apple IIe. Current plans are to adapt the simulation to the CP/M operating system and then to create versions for the IBM PC and for the Radio Shack computers. It has undergone field tests during the past fall and hopefully will be available from the publisher in time for next fall’s classes. Running a simulation on a microcomputer has several advantages compared to a mainframe. The simulation does not have to be adapted to a local operating system. When one receives a copy of the program on disk, the program will run simply by loading and executing the program. The simulation is much more portable in that a microcomputer can be carried to any location desired and the simulation is ready to run. As microcomputers are becoming readily available in most universities, the decision was made to develop the simulation for the microcomputers which appear to be the most popular in higher education. FIGURE 5 INCOME STATEMENT FOR FIRM M2 FOR PERIOD 1 6 JANUARY 1984 -SALES- CUSTOMER PROD UNITS PRICE TOTAL W2 P2 2000 450 900000 W3 P2 2000 450 900000 TOTAL REVENUE 1800000 COST OF GOODS SOLD 1200000 NET REVENUE 600000 -EXPENSES- MARKETING COSTS 1000 OVERHEAD 30000 TRANSPORT COST W2 2000 UNITS 2799 W3 2000 UNITS 2799 NONSHARED PROMOTION 100000 SHARED PROMOTION 10000 INTEREST 0 INVENTORY COSTS 28000 PENALTY COSTS 0 TOTAL EXPENSES 174598 PROFIT BEFORE TAXES 425402 TAXES 212701 PROFIT AFTER TAXES 212701 BALANCE SHEET AS OF PERIOD 1 -ASSETS- CASH 1000 ACCOUNTS RECEIVABLE W2—30 DAYS 900000 W3—30 DAYS 900000 R2—30 DAYS 350000 TOTAL 2150000 INVENTORY 1000 UNITS—P2 300/UNIT 300000 6000 UNITS—P2 320/UNIT 1920000 FACILITY 6000000 TOTAL ASSETS 10371000 —EQUITIES— BANK LOAN 2558299 TAX CREDIT 0 CAPITOL STOCK 6000000 RETAINED EARNING 1812701 TOTAL EQUITIES 10371000 YOUR FACILITY SIZE FOR THE NEXT PERIOD IS 30 THOUSAND SQUARE FEET Developments in Business Simulation & Experiential Exercises, Volume 11, 1984 25 [1] Burns, Alvin., “A Simplified, Noncomputerized Marketing Channels Game,” New Horizons in Simulation Games and Experiential Learning, Proceedings of the Fourth National ABSEL Conference, Wichita, Kansas, 1977, pp. 301-308. [2] Faria, A. J., R. 0. Nulsen, and J. L. Woznick, Compete: A Dynamic Marketing Simulation, Revised Edition, (Dallas: Business Publications, Inc., 1979). [3] Fritzsche, David J., “A Data Entry and Retrieval System for a Computer Simulation (DERS),” Insights into Experiential Pedagogy, Proceedings of the Sixth National ABSEL Conference, New Orleans, 1979, pp. 291—294. [4] Gentry, James W. and Gregory M. Pickett, “A Review of Channels Exercises and the Description of a New Alternative,” Developments in Business Simulation & Experiential Exercises, Volume 9, Proceedings of the Ninth National ABSEL Conference, Phoenix, 1982, pp. 117-119. [5] Hinkle, Charles L. and Russel C. Koza, Marketing Dynamics: Decision and Control, (New York: McGraw-Hill, 1975). [6] Ness, Thomas E. and Ralph L. Day, Marketing in Action: A Decision Game, 4th ed. (Homewood: Richard D. Irwin, 1978). Table of Contents Volume 11, 1984 Simulation Gaming as a Means of Researching Substantive Issues: Another Look A Further Test of the Group Formation and its Impacts in a Simulated Business Environment Impact of Economic Patterns on Student Performance in Computer Business Simulation Games Majority Fallacy Game with Independent Student Simulation and a Case Introducing the Marketing Channel Laboratory A Comparative Evaluation of a Marketing Game A Study of Comparative Effectiveness of Problem-Solving Technologies The Impact of Hierarchical and Egalitarian Organization Structure on Group Decision Making and Attitudes Risk-Free Decision Making The EX-STRA Export Strategy Game Computer Education for Management Students Developing a Computer Game/Job Simulation to Teach Functional Literacy Skills Experiencing Socialization First Hand: An Experiential Exercise in Organizational Socialization Networking Distributive Versus Integrative Approaches to Negotiation: Experiential learning Through a Negotiation Simulation Managerial Education and the Real World: Foudations for Designing Educational Tools Diagnosing Group Climate to Improve Supervisory Effectiveness Student background as a Factor in Simulation Outcomes: The Collective bargaining Example The Use of Pre-Plays in Management Education Experiencing the Process Debrief: A Workshop ABSEL Megatrend Roots MEGATRENDS for Business Simulation and Experiential Learning The Effects and Consequences of the Megatrends on Simulation Gaming: One View Opportunities for the Future: ABSEL's Role Experiential Learning-Based Discussion vs. Lecture Based Discussion: A Comparative Analysis in a Classroom Setting An Evaluation of the Minitab Package in Teaching Business Statistics Concepts A Path Analytic Study of the Effects of Alternative Pedagogies Developing and Using Weighted Application Blanks: An Experiential Exercise Building Airplanes Individual vs. Group Grade: An Exercise in Decision making A Marketing Plan Exercise: Development of Interteam Cooperation Using a Coordinated Experiential Approach Using Student Experience as the Basis for a Consumer Behavior Learning Exercise Student Evaluations of Instructors: What do Students Believe? A Description of the SOFTCAT Computer Assisted Teaching System Comparisons of Practitioners' and Professors' Perceptions of Business Policy Content and Learning Methods The Perceived Relationship Between Pedagogies and Attaining Course Objectives in the Business Policy Course The Use of Simulation in the Teaching of Business Policy A Research Study on Strategic Decisions in a Business Simulation Strategic Management Decision Making Researched Via Simulation Gaming Using Simulation to Investigate Factors in Competitive Bidding Combining Experiential Learning and management Assistance A Model for Teaching Management Skills Putting Experience Back into Experiential Learning: A Demonstration The Teaching and Behavioral Measurement of Managerial/Organizational Competencies: Developing Experiential Exercises and Simulations A Simulation Game Model for Conglomerates QCLAB - A Microcomputer Laboratory in Quality Control CTSS: A Commodity Trading Simulation System Problem Solving: An Exercise on Learning, Coaching, and Operant Conditioning A Demonstration of the Effects of Feedback as a Category of Reinforcement The Assessment of Feedback and Disclosure in Interpersonal Relations: An Experiential Exercise A Study to Determine Whether the Teaching of Basic Grammar Skills in Business Communication Classes Improves Students' Business Letter Writing Corporate Maladies Through the Eyes of the Memo Writer: A Seldom Used Experiential Tool Executive Bailout at Shake & Spear, Inc. The H.E./L&P Merger Intercultural Nonverbal Communications: An Experiential Exercise The Evolving Business Policies Course - Is Management Gaming the Logical Pedagogy? The Use of Decision Simulations in Management Training Programs: Current Perspectives Humanizing the Business of Medicine: The Use of Simulated Patients to Train medical Students Systematic Integration of Simulation Methods in a Graduate Management Curriculum Modeling Non-Price Factors in the Demand Functions of Computerized Business Using Spacial Relationships to Estimate Demand in Business Simulations Two Algorithms For Redistribution Of Stockouts In Computerized Business Simulations Leadership And Strategic Behavior A Comparison Of Two Business Strategy Simulations For Microcomputers Incorporating Decision Support Systems Into Management Simulation Games: A Model And Methodology Using Micro-Computers To Support The Analysis Of Complex Cases: It's As Easy As 1-2-3 Strategic Formulation Consistent With Pims: A Micro-Computer Application