Contracts

In the globalview simulation, firms are able to make a variety of contracts with one another including the sale/purchase of product.

Peacock Industries has been in the scent industry for a long time. This globalview company operates firm 18. Peacock Industries sells product to firms. Peacock does not buy product or sell raw materials, plant hours, or other assets, unless through a special arrangement, such as the liquidation of a bankrupt firm.

Peacock sells finished goods only in the early quarters of the simulation, before manufacturers are present. They may maintain their presence longer at the Introductory level of the simulation. The prices for Peacock wholesale product change weekly. The current Peacock asking price can always be found in the Dollars and Scents Quarterly Contract News. In quarter 1, year 1 Peacock prices are $56 per unit of p1 and $99 per unit of p2.

Contracts may be made between any firm in any market group. In order to make your firm successful you will need to interact with the businesses around you. You cannot succeed if you cut yourself off from the distribution channel. Even a classical firm should keep tabs on opportunities in the market place. To maintain your place in the chain you will need to form business relationships, learn to negotiate, analyze market trends, and create contracts. There are many means to achieve communication: e-mail, chat room, a website to promote your product or service to other firms.

When communicating with other firms be aware of professionalism and cultural differences. Remember that you are representing your firm in your communications.

In order to conclude a valid contract the following must occur:

  1. There must be an offer made which includes the essential terms of the "deal"
  2. If this offer is accepted unchanged, a contract is made.
  3. If the offer is not accepted unchanged, the counter-offer, a new proposal, must be accepted by the original offeror, before there is a valid contract.
  4. The contract should not be posted until both parties agree on the terms.

Only 1 party to the contract executes the contract in the online recording system.

Under the firm decision menu, there is a window « Current Contracts » where you can check to see that the contracts have been recorded.

All parties should keep written record of negotiations. In the case of chat room deals, you should print the chat session or formalize the agreement with a written confirmation by e-mail.

Contracts are entered online just like your main decision set. The contracts program allows your firm to make a host of different types of contracts. All contracts which you write up, whether between firms or within your own firm, are executed prior to the start of the main simulation.

 

3 important notes:

1. For the buyer of product: contracts go through before other decisions. Money will come out of cash (or generate a special loan) and product will come in before the quarter begins. This means you can sell product in the same quarter you order it (but you need to plan for the $ in advance). If you purchase from Peacock Industries in your very first quarter, you will generate a special loan before you begin operations.

2. For the seller of product: product will go out during the quarter along with regular sales. Money from the contracted sale will arrive as income. You will need to subtract contract sales from your total market sales to determine true retail market sales. The cost of shipping is the burden of the seller and appears as a miscellaneous expense.

3. For the seller of raw materials or plant hours: these items will come out of your current inventory before the start of the quarter and the corresponding cash will come in. The cost of the contracts is the burden of the seller and appears as a miscellaneous expense during the quarter. Losses will also appear as a miscellaneous expense during the quarter.

 

The Options

1. Buy/Sell Goods: This option allows you to buy product from or sell product to other firms within the simulation. Use this option also when making contracts with Peacock Industries (firm 18). Read the Dollars and Scents Quarterly for current Peacock prices. The seller pays a 6% fee on any contract to sell goods, this includes the cost of shipping which is built into the terms of the contract.

2. Buy/Sell Raw Materials: This contract option allows you to buy or sell raw materials from or to other firms in the simulation. Do NOT make contracts with Peacock Industries to buy raw materials. If you simply want to order raw material futures, use your main decision set. The seller pays a 5% fee on any contract to sell raw materials. This includes shipping which is built into the terms of the contract.

3. Buy/Sell Plant Hours: This option allows you to buy or sell plant hours from or to other firms in the simulation. If you are the seller you must be aware of two factors: 1. The seller pays a 20% fee on any contract to sell plant hours. Expensive! Also, the seller will have to take any gain or loss from the sale as a miscellaneous expense on the income statement. Thus, if you sell a $7 million dollar plant for $1 million, you've just lost $6 million dollars.

4. Consulting Services: This option allows you to give or receive cash from another firm. This is usually used by those firms that give or receive consulting advice from other firms. It may also be used to make special loan arrangements with another firm or as a way to break up the payment for a finished goods order. The provider of a consulting service must pay 2% on the value of the contract.

5. Transfer Raw Materials: This contract is made within the firm, and allows you to move raw materials from one area to another. The charge to move raw materials is 3%

6. Transfer Plant Hours: This option allows you to move your own plant hours from one area to another. This is expensive to do. The cost is 20% of the value of the hours being moved.

7. Install High-tech: This option is made within the firm. High-tech improves the productivity of your factory. Adding High-tech will make your production more efficient. A high tech plant reduces the time it takes to produce product 1 and product 2 during stage 2 (packaging) by 20%. The cost to add high tech is $1500000 per plant. High tech takes one full quarter to install. You only make this improvement once, when you build more plant hours they are compatible with your existing high tech.

8. Relocate to Mexico or The Czech Republic: This option is made within the firm. It allows you to locate your plant somewhere besides general area 1 and area 2 confines. There are benefits and risks to locating in either of these two areas. See the chapter on Advanced Topics for specific details.  You cannot choose to locate to either of these areas if your plants are already situated without incurring a charge of 20% relocation fee.

If you wish to use this last option, you should be aware that it requires an accompanying decision in the Firm Decision Set. If you wish to locate a plant in Mexico or the Czech Republic you will also have to order the construction of plant capacity in that area. If, for example, you decide to locate your Area 1 plant in Mexico, you would make a contract to this effect. Furthermore, you would order plant capacity to be constructed in Area 1.  Remember, only one plant per area is allowed.