FREEMARK ABEEY WINERY Case Memo

Cases in Supply Chain Analytics: BMGT

44530
Dr.Jury Gualandris
I de

I declare that the material contained in this

assignment is the end result of my own work and that
due acknowledgement has been given in the
bibliography to ALL sources, be they printed, electronic
or personal

Abhishek Mishra
Student No-14203717
MSc. in Supply Chain management

FREEMARK ABBEY CASE SOLUTION

Executive summary
The Case analysis will provide with a deep analysis of problem in decision making with Mr.
William Jagger , a member of the partnership which owns Freemark Abbey winery located in
St. Helena, California, in the northern Napa Valley . The winery was first built by Josephine
Marlin Tychson, one of the first women to build and operate a winery in the state. [1] .In the
states Due to geographical circumstances and associated weather, the wine industry is
concentrated in California, with a 90% of U.S. wine production. [1] In this case Mr. William
Jagger has to make a decision to expand the Reisling product line of the company. There
were weather reports forecasting a possibility of a storm , Mr. William confronts a problem
where he needs to decide whether he should harvest the grapes immediately or wait for the
storm leaving the grapes on the vines. He must consider the risk and the estimated revenue
with each of the alternatives and thereafter choose he should wait for the storm or harvest the
grapes immediately. There is a equal probability of storm hitting the valley and not not
striking the valley with the vines. If the storm hits the valley there is a .6 probability that the
grape berries will absorb the rainwater and swell by 5-10 %, which in turn will decrease the
concentration of the sugar. This would lead bottling and selling of thin wines which sell at
$2.00, which is about $.85 per bottle of wine, sold by harvesting the grapes immediately.
There is also a .4 probability that botrytis molds are formed, which results in a premium
quality wine sold at a rate of $8.00 per bottle, but it also decreases the quantity of the juice by
30%, thus the increase in the price of the bottle is partially offset by the decrease in the
quantity.
Summary of the information provided in the case
Freemark abbey manufactures premium quality wines, which are produced from harvesting
various varieties of grapes such as Cabernet Sauvignon, Chardonnay and Riesling etc. They
bottle about 25000 cases of wine each year (one case consists of 12 bottles of wine). About
1000 cases of Reisling are bottled out of the 25000 cases, which implies that 12000 wine
bottles of Riesling are produced each year.

1.Stoneberg, David (2010). "History revealed: Four years makes a difference". Napa Valley
Register/Weekly Calistogan (Napa, CA: Lee Enterprises, Inc.). Retrieved October 8, 2011
The Napa valley is about 30 miles in stretch, which extends from Castoliga in the north to
Napa in the south, the temperature gradually decreases as one moves closer towards the San
Francisco bay and the cold ocean currents in the south. The grapes for the winery came from
the southern and the central part of the Napa valley, which usually have a ideal climate for the
grapes to grow in the vine field. The wine maker harvests the grapes only when there is a
proper balance of the acidity and the sugar concentration in the grapes. A favorable climate is
required to achieve this proper balance or else it may never occur.
Vinification is the process of producing wines from the fermentation of the natural fruit juices
by yeast into equal molar quantities of alcohol and carbon dioxide. The resulting produced is
then stored in various different kinds of barrels for ageing, usually for one or more years. A
variety of wines are produced while changing some steps during the vinification process ,this
usually is decided by the wine maker depending on the market requirements.Riesling is a
light-skinned, aromatic grape of German origin, which is if the majority of top wine critics
are to be believed the world's finest white-wine grape variety. [2]
Many varieties of Reisling wines are available in the market such as Weisser Riesling,
Johannisberg Riesling, Riesling Renano etc. The quality of the wines depends largely on the
concentration of the sugar and the acidity in the grapes at the time of harvesting. Harvesting
of the grapes at the sugar concentration of about 20% and subsequently fermenting them can
lead to produce Dry or Near dry light bodied wine with 10 % alcohol content. Harvesting
the grapes at 25% sugar concentration can produce a full bodied and sweet wine with the
same concentration of alcohol at about 10% and residual sugar of 5%. The botrytised wine
desired by Mr. William Jagger also produced by the Freemark abbey in 1973 vintage is very
rare quality produced from the almost ripen grapes attacked by the botrytis mold. The
concentration of the sugar increases to about 35% or more due to the porous skin of the
grapes, which results in the evaporation of water, leaving behind the sugar. The complexity in
the wine is added by the botrytis mold, alcohol content of wine is 11% and 13% sugar
concentration.
According to the weather forecast there is 50-50 chance that the storm originated in the warm
waters off Mexico will hit the Napa valley and their is 40 % chance that their will be
formation of botrytis mold as the storm had originated in the warm waters while there is also

2.Riesling wine, 2014. [online] Available from: http://www.wine-searcher.com/grape-407riesling. [Accessed 8 February 2015]
a large probability that no molds are formed which could lead to the swelling of the berries
by 5-10% due to the absorption of the rainwater.
This swelling of the berries results in the decrease in the sugar concentration, which affects
the quality of the wine, as the wine produced is thin. The winery sells the wine made out of
the not so quite ripen grapes at 2.85 $ per bottle while those thin wines from the swelled
berries are sold at 2.00 $ per bottle, resulting in a loss of 0.85 $ per bottle. But bottling the
thin or inferior wines considerably increases the risk of damaging the reputation of the
winery, In order to avoid such a situation the winery might have to sell the grapes directly or
sell the wine in bulk, which may adversely decrease the revenue by 50%.
In the scenario where the botrytis molds are formed on the grapes, there is a substantial
increase in the concentration of the sugar but it also leads to the decrease in the quantity of
juice by 30% therein a direct impact of the no of bottles of the wines, which is reduced, from
12,000 to 8400 bottles. Each bottle of this botrytised wine is sold at $8.00 but the cost of
vinifcation of these bottles is almost same when compared with other styles of wines.
On the flip side, if the storm did not strike the Napa valley then the concentration of the sugar
in the grapes left on the vines to ripen depends on the weather. With favorable climate the
concentration may be around 25% which results in the wine sold at 3.50 $ per bottle in
wholesale, while a less favorable climate may lead to ripening of the grapes with 20 % sugar.
The lighter wine made from these grapes is sold at around $3.00 per bottle. The probability of
the above two events was same, but there was also about 0.2 probability of the grapes having
the sugar concentration less than 19 % as the grapes have to be harvested immediately if the
acidity goes below 0.7. The wine from these grapes was sold at around $2.50 per bottle. On
the basis of the above information Mr. Jagger has to come to a decision whether to harvest
immediately or wait for the storm.
Summary of techniques that can be used to solve the problem, pros and cons of the
techniques :
Mr. William Jagger has two possible decision alternatives: options:
1) To harvest the grapes immediately to eliminate the risk of selling thin wines or the grapes
directly
2) To wait for the storm to make land all based on the forecast of the weather department. [3]

3.UK Essays. November 2013. Quantitative Analysis For Managers Mid Term Marketing
Essay. [online]. Available from: http://www.ukessays.com/essays/marketing/quantitativeanalysis-for-managers-mid-term-marketing-essay.php?cref=1 [Accessed 8 February 2015].
If Mr. Jagger goes for the second option it makes the decision process very complicated with
multiple outcomes. Thus, a lot of uncertainty in the decision-making is generated due to
number of outcomes. To overcome come this uncertainty and choose the best option Mr.
Jagger can use a decision tree. A decision tree is a graphic device used to evaluate decisions
under

uncertainty. Decision trees with DCFs can be used to evaluate supply chain design

decisions given uncertainty in prices, demand, exchange rates, and inflation. [4]
The decision tree will help in providing an effective framework that will enable him to
explore the options and also evaluate the EMV (expecting monetary value) of multiple
outcomes in choosing those options.
But there are some disadvantages of using the decision tree technique. Following are some of
them:
a) Instability
A small change in input data can at times, cause large changes in the tree
It may not be possible to plan for all contingencies that arise from a
decision, and such oversights can lead to bad decisions.
b) Complexity
Among the major decision tree disadvantages are its complexity. Decision trees
are easy to use compared to other decision-making models, but preparing decision
trees, especially large ones with many branches, are complex and time-consuming
affairs. [5]
The decision trees can be very unwieldy even though they provide with ease of viewing the
illustrations. The data, which is perfectly divided and is simple, still can lead to large decision
trees. These decision trees have to be drawn manually and sometimes there may be space
constraints to draw them, as it is very difficult to predict the number of outcomes.
The companies usually refrain from using these techniques as it has a significant cost. The
complete analysis of the decision tree requires people with expertise; this raises the
possibility of training programs for the people, which incur extra cost.
4.Chopra, S. & Meindl, P. 2013, Supply chain management: strategy, planning, and operation,
Pearson, Boston; Harlow. [Accessed 7 February 2015]
5. N Nayab 2011, Disadvantages to using decision trees. [online]. Available from:

http://www.brighthubpm.com/project-planning/106005-disadvantages-to-using-decisiontrees/ [Accessed 8 February 2015]

Among the major disadvantages of a decision tree analysis is its inherent limitations. The
major limitations include:

Inadequacy in applying regression and predicting continuous values

Possibility of spurious relationships
Unsuitability for estimation of tasks to predict values of a continuous attribute
Difficulty in representing functions such as parity or exponential size
Possibility of duplication with the same sub-tree on different paths
Limited to one output per attribute, and inability to represent tests those refer to two
or more different objects. [5]

Application of the Decision tree analysis

Thus, to decide whether to harvest the grapes immediately or wait for the storm a decision
tree has to be drawn to calculate the EMV (expected monetary value) of the various outcomes
in an option. The outcome with the highest EMV is selected as the best possible decision.
DECISION TREE:
[.4] MOLD
bottle
A

[.6] NO MOLD

$8.00 per
$2.00 per bottle

Storm hits [.5]

Wait
20 % sugar [.4]

No storm
[.5]

25 % sugar [.4 ]

$3.5 per bottle

$3.0 per bottle

< 19 % sugar [.2]

$2.5 per

bottle

DECISION
Harvest immediately $2.85 per bottle
5. N Nayab 2011, Disadvantages to using decision trees. [online]. Available from:
http://www.brighthubpm.com/project-planning/106005-disadvantages-to-using-decisiontrees/ [Accessed 8 February 2015]
A = Storm hits the valley

B = Storm does not strike the valley

C = Wait for the storm to strike the valley

[ ]=Probability of the event

Waiting for the storm:

Calculating the EMV for each outcomes:
1) EMV (botrytised grapes are produced)= $8 x 8400 = $67,200
2) No. of bottles in this case is 8400 as the formation of molds leads to decrease in the
quantity by 30% ,hence 70% of 12000 is 8400. Price of each bottle is $8.
3) EMV (Storm hit but no mold formed) = $2 x 12000 = $24,000
4) $2 is the price of a bottle.
5) EMV ( no storm , sugar concentration 25 %) = $3.5 x 12000 = $42,000
6) EMV (no storm, sugar concentration 20%) = $3 x 12000 = $36,000
7) EMV (no storm, sugar concentration less than 19%)= $2.5 x 12000 = $30000
8) EMV (Storm) A = (67,200 x .4) + (24000 x.6) = $41280
9) EMV (Wait, no storm) B = (42000 x .4) + (36000 x .4) + (30000 x .2) = $37,200
10) EMV (Wait) C = 41280 x .5 + 37200 x .5 = 39,240
Harvest immediately:
EMV = 2.85 x 12000 =$34,200
Final recommendation based on the application of the decision tree analysis and other
strategic considerations.
Thus, according to the decision tree evaluation of the estimated revenue associated with each
outcome, the EMV when Mr. Jagger waits for the storm is $39,240 and when the grapes are
harvested immediately it is $34,200. Thus, a significant difference of $4,960 is seen. As per
the above shown calculations I have arrived on the conclusion that Mr. Jagger should wait for
the storm as EMV including the worst possible outcomes of selling the grapes directly or the
wines below standard is still more than immediately harvesting the grapes. Further he needs
to take a decision on the basis of what his priority is; the standard quality factor or the cost
factor. He can bottle up the wine unparalleled to his company standards or sell grapes at 50%
lower price to protect the reputation. Riesling totals 1,000 wine cases out of 25,000 cases of
bottles, which accounts to only 4% of Freemark Abbeys total population. Since the decision
affects only 4% of the total production, an EMV approach is appropriate. If the decision
involved a larger percentage of production for an un-established firm, a near risk-averse
approach will make sense.