Distribution and Warehouse Report Explanations of Numbers — Suggestions and Tips for Using the Report This report provides a thorough rundown of all aspects of operations at your company's four distribution center during the report year. There are statistics on the numbers of branded pairs that came in from plants, pairs sold, inventories, the S/Q ratings and models available in each warehouse, the costs of branded pairs sold, the costs of warehouse operations, and the results of any inventory clearance sales. All of these merit management's attention each year, since crafting a cost-efficient distribution and warehouse strategy for your company requires having a grip on the numbers reported here. This Help page consists of three sections. The first deals with understanding the ins and outs of all the numbers being reported. The second deals with suggestions and tips for using the information in making decisions on how to run this part of the company's business. The third entails a full explanation of what underlies the exchange rate cost adjustment shown in the section on "Cost of Branded Pairs Sold" and why exchange rate shifts affect branded footwear costs.

Understanding the Numbers on the Distribution and Warehouse Report Most all of the numbers in this report are straightforward and easy to grasp, but the cost calculations often merit discussion and comment so that you can understand exactly where the numbers are coming from and how to interpret them. Otherwise, it is hard for you to know what actions to take to control costs and to operate your distribution centers to maximum effectiveness. Warehouse Operations Information. This bank of data reports the status of branded pair inventories as of the end of the pair year, indicates how many pairs were cleared out at the start of the year via clearance sales, shows how many newly-produced pairs came into each warehouse from each of the company's plants, how many pairs were available for sale, how many branded pairs were sold online and how many were shipped to area retailers, the inventory requirement to meet scheduled delivery times to retailers, any inventory surplus/shortage, and the year-ending inventory. There's nothing mysterious here about any of these numbers. But a couple of comments are in order to just elaborate on how things work at your company:

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The size of the inventory requirement at each distribution center is a function of delivery times, annual sales volume in the region, and the number of models available for sale in the region. The number of pairs required to be in inventory at all times ranges from as low as 1% of annual sales (with 4-week delivery and model availability of 50) to as high as 15% of sales (with 1-week delivery and model availability of 500).

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The inventory requirement number is an absolute minimum. In no instances can the company even temporarily use some of the required pairs in inventory to fill unexpectedly large orders from retailers or individuals buying online. The value of having at least small inventory surpluses is the ability to fill orders higher than the projected sales volumes.

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If the numbers on your report show an inventory shortfall at any one of the distribution centers, then your company lacked sufficient inventory to fill all online and retailer orders that were received during the report year. The size of the inventory shortfall indicates how many pairs of sales were lost.

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If the numbers on your report indicate sizable surplus inventories at one or more distribution centers, you should "flag" this for immediate management action. Allowing surplus inventories to mushroom out of control is costly in two respects:

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Inventory storage costs on carrying surplus inventory over from one-year to the next run $1.00 per pair (handling and storage of required inventory entails annual costs of $0.50 per pair).

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There is a 1-star penalty applied to the S/Q rating of unsold branded pairs carried over to the following year (since they represent last-year's models and styles and are less attractive to buyers. (This 1-star penalty will factored into the S/Q ratings that appear on the Branded Shipping decision screen when you start to make the upcoming year's decisions.)

Cost of Branded pairs Sold. The information in this section shows the production and distribution costs of branded pairs sold at each distribution center. The first column of numbers for each warehouse represent total dollars (in thousands) and the second column of numbers are costs per pair. Several comments are in order regarding these cost figures:

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Cost of Beginning Year Inventory — These cost figures represent the historical costs of branded pairs carried over from the prior year; they include not only the costs to produce and ship the pairs from the plants to the

distribution centers in the prior year but also any tariffs paid, any exchange rate cost adjustments, the costs to carry the inventory over from the prior year to the report year,

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Production Cost of Incoming pairs — These numbers show the costs of all branded pairs shipped from all the company's plants to that distribution center during the report year; the per pair figure for each distribution center is a weighted average of the different production costs at each plant (where the weights are the proportion of the incoming pairs coming from each plant).

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Exchange Rate Cost Adjustment — Producing footwear in one geographic region and exporting it for sale in another region typically entails upward or downward adjustments in the production costs of shipments coming into a particular distribution from a foreign plant due to the effects of shifting exchange rates. Whenever exchange rate changes weaken the currency in which one of your plants is located, then it becomes competitively more attractive to export footwear from that plant to buyers in those foreign markets where the currency has grown stronger. Such a favorable exchange rate change is indicated when the number for the exchange rate cost adjustment is negative because the effect is to lower the per pair costs of incoming shipments. Hence, a negative cost adjustment is "good." Whenever exchange rates strengthen the value of the currency of the region in which one of your plants is located, then it becomes competitively less attractive to export footwear from that plant to buyers in those foreign markets where the currency has grown weaker. Such an unfavorable exchange rate change is indicated when the number for the exchange rate cost adjustment is positive. A positive exchange rate cost adjustment in production costs represents an unfavorable change in the exchange rates because the effect is to raise the per pair costs of incoming shipments. Consequently, a positive cost adjustment is "bad." For more details on how the positive and negative adjustments are calculated and the reasons for such adjustments, see the section at the end of this Help page

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Freight on Incoming Pairs — Freight expenses represent the costs of shipping footwear from plants to distribution centers. Shipment from a plant to a distribution center in the same region average $1.00 per pair; freight on cross region shipments (from a plant to a distribution center in a different part of the world) average $2.00 per pair. These per pair costs are subject to change by your instructor as the game progresses.

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Import Tariffs on Incoming Pairs — All tariffs on pairs imported are paid at the port of entry rather than when orders are filled and the pairs shipped to retailers and online buyers. The total dollar costs of all tariffs paid on branded pairs sold at each distribution center are shown in the first column of costs; the per pair costs for tariffs is simply the total tariff costs on pairs sold divided by the number of branded pairs sold (this number is thus a weighted overall average tariff cost based on the pattern of incoming shipments to the distribution center). Unless you have been notified of any changes, the prevailing tariffs on footwear exported from Asia-Pacific plants and Europe-Africa plants to markets in Latin America are $6 per pair. Tariffs on footwear exported from Asia-Pacific plants, Latin American plants, and North American plants to markets in Europe-Africa are $4 per pair. Tariffs on footwear exported from Europe-Africa plants, Latin American plants, and North American plants to markets in the Asia-Pacific region are $8 per pair. Tariffs on footwear exports from North American plants to Latin America are $0 and are also $0 on exports from any Latin American plants to markets in North America (as per the Free Trade Treaty of the Americas, which allows tariff-free movement of footwear between all the countries of North America and Latin America). North America, endeavoring to promote free trade policies worldwide, currently has no import tariffs on footwear made in either Europe-Africa or Asia-Pacific.

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Cost of Ending Year Inventory — These numbers represent the total and per pair costs of branded footwear that was not sold in the report year. The associated costs and pairs will constitute your company's beginning inventory in each distribution center in the upcoming year.

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Cost of Branded Pairs Sold — These numbers represent the total and per pair costs of branded footwear that were sold in the report year.

Warehouse Operating Expenses. The costs of operating your company's warehouses each year consist of the following:

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Inventory storage costs associated with carrying branded pairs over from one year to the next. Storage costs on carrying surplus inventory over from one-year to the next run $1.00 per pair, while handling and storage of required inventory entails annual costs of $0.50 per pair.

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Packing and shipping fees for orders sent to footwear retailers amount to $2 per pair on the first 1 million pairs shipped out annually; $1.50 per pair on the next 2 million pairs shipped out annually, and $1 on each pair in excess of 3 million pairs shipped annually. There are also order processing, boxing, packaging, handling, and shipping fees of $10 on each pair shipped to online customers.

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There are annual leasing and maintenance fees of $1 million per warehouse. However, when warehouse volume is less than 200,000 pairs annually, leasing fees are 5 times the annual number of pairs available for sale. Should the company abandon a particular geographic region and have no pairs available for sale, leasing costs in that region will fall to $0.

The first column of numbers for each distribution center reports the total dollars of cost associated with each of above three categories of warehouse expenses. The costs per pair are always calculated by dividing the total dollars of expense in each category by the number of branded pairs sold in each geographic region in the report year. Inventory Clearance. This section reports the results of any inventory clearance sales undertaken in the report year.

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Revenues from Clearance Sale Pairs — The numbers here for each distribution center show the total revenues received and the discounted price per pair received. Any inventory clearance sale has to involve 25%, 50%, 75%, or 100% of the pairs in beginning year inventory. The amount of the price discount needed to clear out inventories rises with the percentage and number of pairs in beginning inventory, so the net price per pair is always lower as the percentage of pairs cleared out of inventory rises. The price discount is always off the company's wholesale price in the prior year.

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Direct Costs of Pairs Cleared — Direct costs include all the associated production costs, freight on shipping newly produced pairs from the plants to the regional warehouses, any tariffs paid on such pairs, inventory storage costs, and boxing, packing, and shipping the cleared pairs to the retailers who purchased them.

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Margin over Direct Costs — The per pair margin on pairs cleared out is simply the price received less the direct cost per pair; the total dollar margin is the per pair margin times the number of pairs cleared. A negative margin reflects management's decision to accept a loss on the inventory clearance sale (the size of any such loss was shown on the Branded sales Forecast screen when the inventory clearance decision was entered).

Using the Information on This Report to Enhance Decision-Making The primary value of the information in this report in making decisions for the upcoming year relates to inventories left over at the end of the year and to maintaining a watchful eye over ways to cut warehouse and distribution costs. The following are things to consider.

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Sizable surplus inventories in one or more distribution centers signal a need to consider an inventory clearance sale in your upcoming year's decision.

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Use the Operating Benchmark Data shown on page 6 of each issue of the Footwear Industry Report to see how your company's per pair number for cost of branded pairs sold (as shown in the last line in the Cost of Branded Pairs Sold section) compare with those of rival companies — these comparisons should be done distribution center by distribution center. How your company's production/distribution costs of branded pairs sold stacks up against those of rivals is a good measure of your company's cost competitiveness. A higher than average number for cost of pairs sold signals that your company is spending more to put branded pairs in the warehouse and ship them out to customers than rival companies are spending. While there are legitimate reasons for your company's costs to be higher (due chiefly to offering more models/styles or producing footwear with a higher than average S/Q rating) you should always be leery of having a cost of per pair sold that leaves your company vulnerable to be underpriced by aggressive rival companies.

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Be alert to the fact that you and your co-managers can influence the costs of the pairs available for sale in any distribution warehouse by altering shipping patterns. If the costs in any one distribution center appear out-of-line then, apart form cutting production costs, you may be able to economize on tariff payments or to adjust shipping patterns so as to unfavorable exchange rate cost adjustments and maximize the capture of favorable exchange rate adjustments.

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There are economies of scale in warehouse operations. Boxing and shipping fees for orders sent to footwear retailers amount to $2 per pair on the first 1 million pairs shipped out annually; $1.50 per pair on the next 2 million pairs shipped out annually, and $1 on each pair in excess of 3 million pairs shipped annually. Hence, the bigger the volume of branded sales through each distribution center, the lower the incremental shipping cost as each downward step in shipping costs is reached.

Explanation of the Cost Adjustments Due to Exchange Rate Changes The exchange rate cost adjustments on incoming shipments shown in the middle of the screen merit your attention. Producing footwear in one geographic region and exporting it for sale in another region typically entails upward or downward adjustments in the production costs of shipments coming into a particular distribution from a foreign plant due to the effects of shifting exchange rates. To understand why and how changes in exchange rates entail cost adjustments when footwear produced in one geographic region is exported to distribution centers in a different geographic region, consider the case of a company that has located footwear manufacturing facilities in the Latin America (where the relevant currency is Brazilian reals) and that exports much of the Latin American-made footwear to markets in Europe-Africa (where the relevant currency is euros). To keep the numbers simple, assume that the exchange rate is 4 Brazilian reals for 1 euro and that the footwear

being made in Brazil has a manufacturing cost of 4 Brazilian reals (or 1 euro). Now suppose that during the upcoming year the exchange rate shifts from 4 reals per euro to 5 reals per euro — a change that means the Brazilian real has declined in value (because it now takes 5 reals to purchase a euro) and that the euro has grown stronger in value (because 1 euro will now purchase goods worth 5 reals instead of just 4 reals). Making the footwear in Latin America is now more cost-competitive because branded footwear costing 4 reals per pair to produce and exported to Europe-Africa now carries a cost of only 0.8 euros at the new exchange rate (versus 1 euro at the former exchange rate). A downward adjustment in the cost of the Latin American-made footwear available for sale in the Europe-Africa distribution center is thus in order. On the other hand, if the value of the Brazilian real grows stronger in relation to the euro — resulting in an exchange rate of 3 reals to 1 euro — the same footwear costing 4 reals to produce at the Latin American plant now has a cost of 1.33 euros at the Europe-Africa distribution center, requiring an upward or unfavorable cost adjustment. Clearly, the attraction of manufacturing a footwear in Latin America and selling it in Europe-Africa markets is far greater when the real is weak (an exchange rate of 1 euro for 5 Brazilian reals) than when the real is strong and exchanges for 3 or 4 euros. From this simple example, it follows that:

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Exchange rate shifts that cause the US$ to be weaker versus the euro/real/Sing$ enhance the cost competitiveness of producing footwear in North American plants and exporting footwear to those foreign markets where the local currency is stronger. In such cases, the exchange rate adjustment to the production costs on all pairs shipped from North America will be negative/favorable, thus reflecting the greater cost competitiveness of North American-made footwear in markets where the currency is now stronger versus the US$.

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Exchange rate shifts that cause the Sing$ to be weaker versus the US$/euro/real enhance the cost competitiveness of producing footwear in Asia-Pacific plants and exporting the footwear to those foreign markets where the local currency is stronger. In such cases, the exchange rate adjustment to the production costs on all pairs shipped from the Asia-Pacific will be negative/favorable, thus reflecting the greater cost competitiveness of Asia-Pacific-made footwear in markets where the currency is now stronger versus the Sing$.

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Exchange rate shifts that cause the Brazilian real to be weaker versus the US$/euro/Sing$ enhance the cost competitiveness of producing footwear in Latin American plants and exporting the footwear to those foreign markets where the local currency is stronger. In such cases, the exchange rate adjustment to the production costs on all pairs shipped from Latin America will be negative/favorable, thus reflecting the greater cost competitiveness of Latin American-made footwear in markets where the currency is now stronger versus the Brazilian real.

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Exchange rate shifts that cause the euro to be weaker versus the US$/real/Sing$ enhance the cost competitiveness of producing footwear in Europe-Africa plants and exporting the footwear to those foreign markets where the local currency is stronger. In such cases, the exchange rate adjustment to the production costs on all pairs shipped from Europe-Africa will be negative/favorable, thus reflecting the greater cost competitiveness of Europe-Africa-made footwear in markets where the currency is now stronger versus the euro.

All of this discussion about the exchange rate adjustments to production costs can be summed up in three main points:

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A higher exchange rate of one currency for another means that the currency with the higher exchange rate number is weaker than before, not stronger.

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Whenever exchange rate changes weaken the currency in which one of your plants is located, then it becomes competitively more attractive to export footwear from that plant to buyers in those foreign markets where the currency has grown stronger. Such a favorable exchange rate change is indicated when the number for the exchange rate cost adjustment is negative because the effect is to lower the per pair costs of incoming shipments. Hence, a negative cost adjustment is "good."

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Whenever exchange rates strengthen the value of the currency of the region in which one of your plants is located, then it becomes competitively less attractive to export footwear from that plant to buyers in those foreign markets where the currency has grown weaker. Such an unfavorable exchange rate change is indicated when the number for the exchange rate cost adjustment is positive. A positive exchange rate cost adjustment in production costs represents an unfavorable change in the exchange rates because the effect is to raise the per pair costs of incoming shipments. Consequently, a positive cost adjustment is "bad."

The bigger the year-to-year changes in the exchange rates between the four currencies and thus the bigger the positive/negative cost adjustments, the more that company costs and profitability are affected by how many pairs are exported from which plants to which geographic regions.

TIP: Any time the sizes of the per pair cost adjustments are large, you should experiment with different crossregion shipping patterns to see if you can minimize the cost effects of unfavorable adjustments and maximize the cost effects of favorable adjustments.

While the company bears the risk of exchange rate fluctuations, you and your co-managers can reduce the company's future exposure to adverse exchange rate fluctuations either by: 1.

Building plants in all of the world's branded markets that you want to serve (this strategy also has a potentially big cost advantage of avoiding tariffs, especially when many rivals do not have plants in the region and must pay high tariffs to compete in the region) or

2.

Raising/lowering the amounts exported/imported on an annual basis, depending on whether current year exchange rate adjustments are favorable/unfavorable.

All Exchange Rate Shifts Come from Real-World Changes. All future exchange rate impacts are tied to actual exchange rate fluctuations in the days and weeks ahead (not to artificial changes made up by the BSG Online software). The exchange rates for Year 11 will serve as the beginning rates for the game, there will be no exchange rate change impacts on the Year 11 results; the first round of exchange rate gains and losses will come in Year 12. Cost Adjustments Due to Exchange Rate Changes: Further Explanations of What Is Going On and Why. The cost adjustment for shifting exchange rates occurs when footwear is shipped from a plant in one region to distribution warehouses in a different region (where local currencies are different from that in which the footwear was produced). The production costs of footwear made at Asia-Pacific plants are tied to the Singapore dollar (Sing$); the production costs of footwear made at Europe-Africa plants are tied to the euro (€); the production costs of footwear made at Latin American plants are tied to the to the Brazilian real; and the costs of footwear made in North American plants are tied to the U.S. dollar (US$). Thus, the production cost of footwear that is made at an Asia Pacific plant and then shipped to Latin America has to be adjusted up or down for any exchange rate changes between the Sing$ and the real that occur between the time the goods leave the plant and the time they are sold and shipped from the distribution center in Latin America (a period of 3-6 weeks). Similarly, the manufacturing costs of footwear shipped between North America and Latin America are adjusted up or down for recent exchange rate changes between the US$ and the Brazilian real; the manufacturing costs on pairs shipped between North America and Europe are adjusted up or down based on recent exchange rate fluctuations between the U.S. dollar and the €; the manufacturing costs on pairs shipped between AsiaPacific and Europe-Africa are adjusted for recent fluctuations between the Sing$ and the €; and so on. It is this adjustment that you are seeing on the Distribution and Warehouse Report. A second exchange rate adjustment occurs when the local currency the company receives in payment from retailers and online buyers over the course of a year in Europe-Africa (where all sales transactions are tied to the €), Latin America (where all sales are tied to the Brazilian real), and the Asia-Pacific (where all sales are tied to the Sing$) must be converted to the equivalent of US$ for financial reporting purposes — the company's financial statements are always reported in U.S. dollars. You'll encounter this second adjustment on several decision screens (the Internet Marketing and Wholesale Marketing Screens) and several company reports). BSG Online is programmed to access all the relevant real-world exchanges rates between decision periods, handle the calculation of both types of exchange rate adjustments, and report the size of each year's percentage adjustments on the Corporate Lobby screen, on the pertinent decision screens, and in the various reports on company operations. While you do not have to master the details of how the two types of exchange rate adjustments are calculated, you definitely will need to keep a watchful eye on the sizes of the exchange rate adjustments each year and understand the actions you can take to mitigate the adverse impacts of exchange rate shifts on your company's financial performance and to capitalize on the favorable impacts of shifting exchange rates. The percentage sizes of the actual exchange rate shifts each year are always equal to 5 times the actual period-toperiod percentage change in the real-world exchange rates for U.S dollars, euros, Brazilian reals, and Singapore dollars (multiplying the actual percent change by 5 is done in order to translate actual exchange rate changes over the few days between decision periods into changes that are more representative of a potential full-year change). Thus if the exchange rate of euros (€) per US$ shifts from 0.8010 to 0.8045, the percentage adjustment is calculated as follows: [(Period 2 Rate - Period 1 Rate) ÷ Period 1 Rate] x 5 [(0.8035 - 0.8010) ÷ 0.8010] x 5 = +2.18% Because actual exchange rates are occasionally quite volatile over a several day period, the maximum exchange rate adjustment during any one period is capped at ± 20% (even though bigger changes over a 12-month period are fairly common in the real world).

You and your co-managers always have ready access to the percentage sizes of the cost adjustments on cross-region shipments of newly-produced pairs that stem from the latest shifts in exchange rates — see the Cost Impact column in the Exchange Rates box on your Corporate Lobby screen. Furthermore, because it matters which direction transactions are occurring, you should note from the listing of all the exchange rate changes in the boxed table in your Corporate Lobby, that there are (1) changes in the euro per US$ and changes in the US$ per €, (2) changes in the € per Sing$ and changes in the Sing$ per €, (3) changes in the Brazilian real per € and changes in the € per Brazilian real, and so on. All the various cross-rates come into play. If one knows the exchange rate of euros per US$, then it is a simple calculation to determine the rate for US$ per euro; for example, if the exchange rate is €0.8010 per US$, then the exchange rate of US$ per euro is 1.00 ÷ 0.8010 or 1.2484. Similarly, if the exchange rate of Sing$ per Brazilian real is 0.5725, then the exchange rate of Brazilian real per Sing$ is 1.00 ÷ 0.5725 or 1.7467. Table 1 below summarizes the meaning of all the different exchange rates used in The Business Strategy Game and explains how to interpret the shifts in the exchange rate values from Year 1 to Year 2 (all of the exchange rates shown in the table represent actual exchange rate changes over a 24-hour period in February 2004). Table 1: Representative Exchange Rates, What the Rates Mean, and How to Interpret the Shift between Periods

Exchange Rates Year 1 Year 2 Euros (€) per US$

US$ per Euro (€)

Reals (R) per US$

US$ per Real (R)

Sing$ per US$

US$ per Sing$

Euro (€) per Sing$

Sing $ per Euro (€)

0.7985

1.2523

2.9603

0.3378

1.6949

0.5900

0.4711

2.1225

0.7960

1.2563

2.9656

0.3372

1.6844

0.5937

0.4617

2.1161

Meaning of the Exchange Rate Numbers

Interpretation of the Exchange Rate Shift

The US$ has grown weaker because $1.00 is $1.00 equals €0.7985 in Year equivalent to a smaller amount of euros in Year 2 1 $1.00 equals €0.7960 in Year 2 The euro has grown stronger because €1.00 is €1.00 equals $1.2523 in Year equivalent to more US$ in Year 2 1 €1.00 equals $1.2563 in Year 2 The US$ has grown stronger because $1.00 is $1.00 equals R2.9603 in Year equivalent to more reals in Year 2 1 $1.00 equals R2.9656 in Year 2 The real has grown weaker because R1.00 is R1.00 equals $0.3378 in Year equivalent to fewer US$ in Year 2 1 R1.00 equals $0.3372 in Year 2 The US$ has grown weaker because $1.00 is US$1.00 equals Sing$1.6949 equivalent to fewer Sing$ in Year 2 in Year 1 US$1.00 equals Sing$1.6844 in Year 2 Sing$1.00 equals $0.5900 in Year 1

The Sing$ has grown stronger because Sing$1.00 is equivalent to more US$ in Year 2

Sing$1.00 equals $0.5937 in Year 2 Sing$1.00 equals €0.4711 in Year 1

The Sing$ has grown weaker because Sing$1.00 is equivalent to fewer euros in Year 2

Sing$1.00 equals €0.4617 in Year 2 €1.00 equals Sing$2.1225 in Year 1 €1.00 equals Sing$2.1161 in Year 2

The euro has grown weaker because €1.00 is equivalent to fewer Sing$ in Year 2

Euro (€) per Real (R)

Real (R) per Euro (€)

Sing$ per Real (R)

Real (R) per Sing$

0.2697 0.2684

3.7072 3.7257

0.5725 0.5680

1.7466 1.7606

R1.00 equals €0.2697 in Year 1

The real has grown weaker because R1.00 is equivalent to a smaller amount of euros in Year 2

R1.00 equals €0.2684 in Year 2 €1.00 equals R3.7072 in Year 1

The euro has grown stronger because €1.00 is equivalent to more Brazilian reals in Year 2

€1.00 equals R3.7257 in Year 2 R1.00 equals Sing$0.5727 in Year 1

The real has grown weaker because R1.00 is equivalent to a smaller amount of Sing$ in Year 2

R1.00 equals Sing$0.5680 in Year 2 Sing$1.00 equals R1.7466 in Year 1

The Sing$ h as grown stronger because Sing$1.00 is equivalent to more Brazilian reals in Year 2

Sing$1.00 equals R1.7606 in Year 2

Table 2 below utilizes actual exchange rate shifts over a 24-hour period in early 2004 to illustrate each cross-rate combination that is used in The Business Strategy Game and shows how the size of the corresponding exchange rate adjustment to production costs would be calculated. Even though BSG Online does all the exchange rate cost adjustment calculations for you, you may find that spending a few minutes working your way through part of Table 2 will help you get better command of what is going on with the cost adjustments and why exchange rate shifts can matter in deciding how many pairs to ship from which plants to which distribution centers. It is always up to you and your comanagers to decide what actions to take, once you see the sizes of the cost adjustments in the boxed table on the Corporate Lobby screen and once you see the sizes of the cost adjustments associated with your shipping decisions. Table 2: How the Sizes of the Cost Adjustments Due to Shifting Exchange Rates Are Calculated, and the Implications of the Adjustment

Direction of the Shipments of Newly-Produced Pairs

Exchange Rates

Size of the Exchange Rate Interpretation and Implications of the Cost Adjustment [(Change Adjustment in the Rates) ÷Year 1 Rate] x Year 1 Year 2 5

North America Plants To Latin America (Reals per US$)

2.9603

2.9656 (0.0053 ÷ 2.9603) x 5 = 0.90%

To Asia-Pacific (Sing$ per US$)

1.6949

1.6844 (–0.0105 ÷ 1.6949) x 5 = – 4.43%

To Europe Africa (Euros per US$)

0.7985

0.7960 (–0.0025 ÷ 0.7985) x 5 = – 1.57%

Stronger US$ results in unfavorable cost adjustment—makes exports from North American plants to Latin America are less attractive Weaker US$ results in favorable cost adjustment—makes exports from North American plants to Asia-Pacific more attractive Weaker US$ results in favorable cost adjustment and makes exports from North American plants to Europe-Africa more attractive

Asia-Pacific Plants To Latin America (Reals per Sing$)

1.7466

1.7606 (0.0140 ÷ 1.7466) x 5 = 4.01%

To North America (US$ per Sing$)

0.5900

0.5937 (0.0037 ÷ 0.5900) x 5 = 3.14%

To Europe-Africa (Euros per Sing$)

0.4711

0.4726 (0.0015 ÷ 0.4711) x 5 = 1.59%

Stronger Sing$ results in unfavorable upward cost adjustment--makes exports from Asia-Pacific plants to Latin America less attractive Stronger Sing$ results in unfavorable upward cost adjustment--makes exports from Asia-Pacific plants to North America less attractive Stronger Sing$ results in unfavorable upward cost adjustment--makes exports from Asia-Pacific plants to Europe-Africa less attractive

Latin American Plants To Asia-Pacific (Sing$ per Real)

0.5725

(–0.0045 ÷ 0.5725) x 5 = – 0.5680 3.93%

To North America (US$ per Real)

0.3378

(–0.0006 ÷ 0.3378) x 5 = – 0.3372 0.89%

To Europe Africa (Euros per Real)

0.2697

0.2684 (–0.0013 ÷ 0.2697) x 5 = – 2.41%

Weaker Brazilian real results in favorable downward cost adjustment—makes exports from Latin American plants to Asia-Pacific more attractive Weaker Brazilian real results in favorable downward cost adjustment—makes exports from Latin American plants to North America more attractive Weaker Brazilian real results in favorable downward cost adjustment—makes exports from Latin American plants to Europe-Africa more attractive

Europe-Africa Plants To Latin America (Reals per Euro)

3.7072

To North America (US$ per Euro)

1.2523

To Asia-Pacific (Sing$ per Euro)

2.1225

Stronger euro results in unfavorable upward cost adjustment—makes exports from 3.7257 (0.0185 ÷ 3.7072) x 5 = 2.50% Europe-Africa plants to Latin America less attractive Stronger euro results in unfavorable upward cost adjustment—makes exports from 1.2563 (0.0040 ÷ 1.2523) x 5 = 1.60% Europe-Africa plants to North America less attractive Stronger euro results in unfavorable upward cost adjustment—makes exports from 2.1661 (0.0436 ÷ 2.1225) x 5 = 10.27% Europe-Africa plants to Asia-Pacific less attractive

Note: The size of the cost adjustment is always capped at ±20% to limit the impact of shifting exchange rates on company operations. You have the advantage in The Business Strategy Game of knowing the sizes of the impact in advance of each year's decisions; in the real-world, companies have to adjust on the fly to whatever exchange rates occur over the course of the year.