2013
FREEMARK ABBEY WINERY CASE ANALYSIS
Subject: Quantitative Techniques III Professor: Prof. Bhavin J. Shah Group No: 3 Date: 6th March, 2013 IIM Indore PGP Mumbai Batch of 2014
Prepared By: Ankur Sinha (03) Arvind Kumar (05) Gunreet Kaur Thind (11) Karri Kartik (14) Pradyoth C John (23) Sandeep Sayal (28) Abhijeet Panwar (35)
Table of Contents 1. INTRODUCTION........................................................................................................ 3 1.1 Situation Analysis………………………………………………………………………………………………………3 1.2 Objective……………………………………………………………………………..……………………………………3 1.3 Problem Statement………………………………………………………………..…………………………………3
2. ANALYSIS ................................................................................................................... 4 2.1 Alternate course of action ............................................................................................. 4 2.2 Decision Tree.................................................................................................................. 4 2.3 EMV – Solving the decision tree .................................................................................... 6 2.4 Cost of Information – Solving the decision tree ............................................................ 6 3. CONCLUSION & RECOMMENDATION .............................................................. 7 4. LIST OF REFERENCES………………………………………………………........7
QT-3 Assignment
Freemark Abbey Winery Case Analysis
Page 2
1. INTRODUCTION 1.1SITUATION ANALYSIS – RELEVANT CASE FACTS
Freemark Abbey winery in Napa Valley, California 1000 Cases (12,000 bottles) of Riesling wine were bottled each year. Grapes harvested when proper balance of sugar and acidity achieved A storm was approaching (50% chance), which might ruin the crop Harvesting immediately will fetch $2.85 per bottle Warm, light rain sometimes causes a mold (40% chance) called botrytis cinerea on the grape skin, that raises the value of the wine to $8 per bottle but reduced volume to 70% If harvesting is not done immediately and storm doesn’t arrive, the ripened grapes will either lead to good wine (0.4 probability and selling price = $3.50), light wine (0.4 probability and selling price = $3) or low acid wine (0.2 probability and selling price = $2.50) If harvesting is not done immediately, storm arrives and mold is not formed, the berries would get diluted leading to light wine, that could be sold in wholesale @ $2 per bottle. If harvesting is not done immediately, storm arrives and mold is not formed, the option of selling the wine in bulk or selling the grapes directly will fetch $1 and will avoid any reputation damage due to bottling of inferior product. William Jaeger, member of the partnership that owned Freemark Abbey was wondering whether to harvest the Riesling grapes immediately or leave them on the vines
1.2 OBJECTIVE To maximise the revenue (Expected monetary value) either by harvesting or not
1.3 PROBLEM STATEMENT To decide whether to harvest the Riesling Grapes immediately or to leave them on the vines in an uncertain weather condition
QT-3 Assignment
Freemark Abbey Winery Case Analysis
Page 3
2. ANALYSIS 2.1
Alternate course of Action
Harvest Now Harvest Later
2.2 Decision Tree Without Information 0.4 Botrytis forms 0 0.5 Storm 0
$
67,200.00
$
24,000.00
$
12,000.00
$
12,000.00
$
42,000.00
$
36,000.00
$
30,000.00
$
34,200.00
$
34,200.00
67200
Bottle 41280
0 0.6 Botrytis doesn't form
24000
Sell in bulk 1
0
24000
0
12000
Sell grapes Do not harvest $
0
39,240.00
0.4 Good wine 0
Do not Harvest 0 1 $
37200
0.5 No Storm
39,240.00
12000
42000
0.4 Light wine 0
36000
0.2 Low acid wine 1
0
37200
0
30000
Havest Immediately 0
34200
Harvest immediately $
QT-3 Assignment
34,200.00
Freemark Abbey Winery Case Analysis
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With Information Do not harvest 0.4 Botrytis will form
$ 67,200.00 0
67200
1 0
67200 Harvest now $ 34,200.00 0
34200
Bottle Collect info on Botrytis formation
$ 24,000.00 0
0
24000
47400 Do not harvest
Sell in bulk 1
0
24000
$ 12,000.00 0
0.6 Botrytis will not form
12000
Sell grapes 2
0
$ 12,000.00
34200
0
0.5
12000
Harvest Immediately
Storm
$ 34,200.00 1
0
34200
0 $ 47,400.00 0.4 Botrytis forms $ 67,200.00 0
67200
Do not harvest
Bottle $ 24,000.00
0
41280
0 0.6 Botrytis doesn't form
24000
Sell in bulk 1
Do not collect info
0
24000
$ 12,000.00 0
12000
1 0
41280
Collect Information about storm
Sell grapes $ 12,000.00
0 $ 42,300.00
0
12000
Harvest Immediately $ 34,200.00 0
34200
0.4 Good wine $ 42,000.00 0
42000
0.4 Light wine
Do not harvest
$ 36,000.00 0
37200
0
0.5
36000
0.2 Low acid wine
No storm 1
$ 30,000.00
0 $ 37,200.00
0
30000
Harvest immediately $ 34,200.00 0
34200 0.4 Botrytis forms
1 $ 42,300.00
$ 67,200.00 0
67200
0.5 Storm
Bottle $ 24,000.00 0
41280
0 0.6 Botrytis doesn't form
24000
Sell in bulk 1
0
$ 12,000.00
24000
0
12000
Sell grapes $ 12,000.00 Do not harvest
0
0 $ 39,240.00
12000
0.4 Good wine $ 42,000.00 0
42000
0.4 Light wine
Do not harvest
$ 36,000.00 0
37200
0
36000
Do not collect information 1
0.5 No Storm
0 $ 39,240.00
0.2 Low acid wine 1
0
$ 30,000.00
37200
0
30000
Harvest Immediately $ 34,200.00 0
34200
Harvest immediately $ 34,200.00 0 $ 34,200.00
QT-3 Assignment
Freemark Abbey Winery Case Analysis
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2.3 Expected Monetary Value – Solving the Decision Tree 1. Harvesting currently ($2.85 per bottle). Total Revenue = 2.85 * 12,000 = $34,200 2. Harvesting at a later stage a) Storm (Probability = 0.5) i) Botrytis formation (Probability = 0.4, Volume = 70%): Revenue = 8*0.7*12,000 = $67,200 ii) No Botrytis (Probability = 0.6, Volume = 100%): Bottle Wine: Revenue = 2*12,000 = $24,000 Do not bottle wine: Revenue = 1*12,000 = $12,000 Hence Expected Monetary Value if storm = (0.4*67200) + (0.6*24000) = $ 41,280 b) No Storm (Probability = 0.5) i) Good wine formed after vinification (40% probability): Revenue = 3.5*12,000 = $ 42,000 ii) Light wine formed after vinification (40% probability): Revenue = 3*12,000 = $ 36,000 iii) Low acid wine formed after vinification (20% probability): Revenue = 2.5*12,000 = $ 30,000 iv) Harvest now: Revenue = 2.85*12,000 = $34,200
Hence Expected Monetary Value if no storm = (0.4*42000) + (0.4*36000) + (0.2*30000) = $ 37,200 Hence, Expected monetary value of harvesting later = $ 0.5*(41280+37200) = $ 39,240 Whereas, Expected monetary value of harvesting now = $ 34,200
2.4 Cost of Information - Solving the Decision Tree Suppose we have the information about the chance of storm (0.5), we then have the decision to make regarding collecting or not collecting the information on botrytis formation. If we collect information and botrytis is formed, we have the option of either harvesting now ($34,200) or harvesting later (EMV = $67,200). If we collect information and botrytis is not formed, we again have the option of harvesting now ($34,200) or harvesting later and either bottling ($24,000) or selling wine in bulk ($12,000) or selling grapes ($12,000). If we do not collect botrytis formation information, we have the option of harvesting now ($34,200) or harvesting later and either bottling ($24,000) or selling wine in bulk ($12,000) or selling grapes ($12,000). QT-3 Assignment
Freemark Abbey Winery Case Analysis
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If we have the information about storm and storm doesn’t come, we have the option of harvesting now ($34,200) or harvesting later. Harvesting later will either lead to selling good wine ($42,000), light wine ($36,000) or low acid wine ($30,000) Solving the decision tree, the EMV with information comes out to be $42,300. Hence the cost of information = EMV with information – EMV without information = $ (42,300-39,240) = $ 3,060
3. CONCLUSION & RECOMMENDATION Expected Monetary Value if storm = (0.4*67200) + (0.6*24000) = $ 20,640 Expected Monetary Value if no storm = (0.4*42000) + (0.4*36000) + (0.2*30000) = $ 37,200 Hence, Expected monetary value of harvesting later = $ 0.5* (41280+37200) = $ 39,240 Whereas, Expected monetary value of harvesting now = $ 34,200 Hence, it’s better to harvest later as the EMV is higher ($39,240) in that case and the objective is to have the highest EMV. EMV with information comes out to be $42,300. Hence the maximum that you should pay for information = EMV with information – EMV without information = $ (42,300-39,240) = $ 3,060
4. LIST OF REFERENCES William Krasker, “Freemark Abbey Winery (Abridged).” Harvard Business School Case 9606-004, 19 July, 2005.
QT-3 Assignment
Freemark Abbey Winery Case Analysis
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