Club Français du Vin Case study
“The Club Français du Vin” case study
This case study discusses ordering and forecasting process of the wine company Club Français du Vin. As the name suggests, this is a French company that offers French wines to the consumers trough catalog offers. The main catalog is the Etiquette, which includes a selection of 30 to 40 wines that the clients can then choose and order by mail, phone, fax or by internet. The members also receive other two leaflets, La Selection (shows three recommendations for the season) and La Cave (consists of a list of wines and corresponding prices, that are available also – this are mainly leftovers from the ...view middle of the document...
Although if they cannot sell in the appropriate (if they have to sell at discount), they will incur in this cost of capital;
* We assume the cost of capital to be a stated annual rate to facilitate calculations;
* As stated in the guidelines, we also assume that the mean of the demand is equal to the product of the mean of the forecasting error and the forecast itself, and the same for the standard deviation of demand;
* To compute the lost function we use the following formula: UNL(z)=f(z)-z(1-F(z))
Now that we have exposed our assumptions, we can start going into more detail on the case itself. First, as this is an inventory management case study, we are going to determine the optimal order quantity of each type of wine, so that afterwards we can make include a more financial view of the problem and make some recommendations.
Optimal order quantity:
To compute the optimal order quantity of each wine we firstly needed to compute the unit cost per bottle and the salvage value of each. From the description of the case we could easily identify that the unit cost of each bottle was 50% (gross margin) of the price plus the 1,25€ per bottle of the transportation costs. With this we computed the unitary cost of each type of wine.
Afterwards we needed to compute the salvage value. Here the calculations aren’t that simple because we have to account for extra costs of not selling at the appropriate time (cost with storage and associating cost of capital). So the actual salvage value doe not account only the revenue from the discounted price but also those costs. The re-sale value of the bottle depended on whether it is red, white or a mixture, but also the cost do.
Other information (like forecast, retail price and previous forecasting errors) were taken from the tables provided in the case study description.
To illustrate our calculations we are going to analyze the case of Faugeres wine:
* P=6,8 => C=cost=50%*P+1,25=4,65
* Red wine => 15 months in the warehouse => H=holding cost=15*0,1=1,5
* Discount value=30% => R=re-sale value=30%*P=4,76
* Cost of capital=15% => monthly cost of capital=15%/12=1,25%
* CC=total cost of capital=(1,25%*15)*H+15%*C=0,98
* Cost (late)=H+CC=2,48
* V=salvage value=R-Cost(late)=2,28
* Co=overage cost=C-V=2,37
* Cu=underage cost=P-C=2,15
* Critical Ratio=Cu/(Cu+Co)=0,4758 = F(Q)
* F(Q)=0,4758 => z=-0,0607
* E(forecast error)=0,8652 => E(demand)=0,8652*forecast=10383
* Std Dev (forecast error)=0,3927 => Std Dev(demand)=0,3927*forecast=4713
* Z=(Q-mean)/Std Dev => Q=(z*Std Dev)+mean=10097
Doing the same for all the other wines we were able to determine the optimal order quantity that enables the company to yield the higher expected profit possible given the uncertainty about demand (otherwise the optimal order would be simply the forecasted demand which would be equal to the actual demand). With this we come up with the...