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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 Analysis3 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

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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 doesnt 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

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Freemark Abbey Winery Case Analysis

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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 41280 0.6 Botrytis doesn't form 1 0 24000 0 12000 67200 67,200.00

Bottle $ 0 24000 24,000.00

Sell in bulk $ 12,000.00

Sell grapes $ Do not harvest $ 39,240.00 0 12000 12,000.00

0.4 Good wine $ 0 42000 42,000.00

Do not Harvest 0 1 $ 39,240.00 0.5 No Storm 1 0 37200 37200

0.4 Light wine $ 0 36000 36,000.00

0.2 Low acid wine $ 0 30000 30,000.00

Havest Immediately $ 0 34200 34,200.00

Harvest immediately $ $ 34,200.00 34,200.00

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Freemark Abbey Winery Case Analysis

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With Information
Do not harvest 0.4 Botrytis will form 1 0 67200 Harvest now $ 34,200.00 0 34200 $ 67,200.00 0 67200

Bottle Collect info on Botrytis formation 0 0 47400 Do not harvest 1 0 0.6 Botrytis will not form 2 0 34200 0 12000 24000 0 12000 Sell in bulk $ 12,000.00 24000 $ 24,000.00

Sell grapes $ 12,000.00

0.5 Storm 1 0 $ 47,400.00

Harvest Immediately $ 34,200.00 0 34200

0.4 Botrytis forms $ 67,200.00 0 67200

Do not harvest 0 41280 0.6 Botrytis doesn't form 1 Do not collect info 1 0 Collect Information about storm 0 $ 42,300.00 41280 0 24000

Bottle $ 24,000.00 0 24000

Sell in bulk $ 12,000.00 0 12000

Sell grapes $ 12,000.00 0 12000

Harvest Immediately $ 34,200.00 0 34200

0.4 Good wine $ 42,000.00 0 42000

Do not harvest 0 0.5 No storm 1 0 $ 37,200.00 37200

0.4 Light wine $ 36,000.00 0 36000

0.2 Low acid wine $ 30,000.00 0 30000

Harvest immediately $ 34,200.00 0 34200 0.4 Botrytis forms $ 67,200.00 0 0.5 Storm 0 41280 0.6 Botrytis doesn't form 1 0 24000 0 12000 Bottle $ 24,000.00 0 24000 67200

1 $ 42,300.00

Sell in bulk $ 12,000.00

Sell grapes $ 12,000.00 Do not harvest 0 $ 39,240.00 0 12000

0.4 Good wine $ 42,000.00 0 42000

Do not harvest 0 Do not collect information 1 0 $ 39,240.00 0.5 No Storm 1 0 37200 37200

0.4 Light wine $ 36,000.00 0 36000

0.2 Low acid wine $ 30,000.00 0 30000

Harvest Immediately $ 34,200.00 0 34200

Harvest immediately $ 34,200.00 0 $ 34,200.00

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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).
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If we have the information about storm and storm doesnt 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, its 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.

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Freemark Abbey Winery Case Analysis

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