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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)

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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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

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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

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

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

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

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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 Page 6

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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