Expert Answer :Forecasting and procurement at Le club Français d

  

Solved by verified expert:I need some help to answer the questions (see document attached). More specifically:1) comment on the (quality of) forecast by comparing it with the atual demand data provided in Exhibit 1?2) Conduct the A/F ratio analysis to construct an empirical distribution unction. How does this comparer to the normal distribution?3) How much of each wine listed in exhibit 2 would you order? compare the order quantities of the empirical distribution with the normal distribution. Highlight some important observations about the service level and ordre quantities for some of hte products. 4) How would the analysis differ if the red wines and white wines were treated separately for the analysis? Would the order quantities differ significantly?Many thanks !
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Forecasting and Procurement at Le Club
Français du Vin1
CHRISTIAN TERWIESCH
ANTOINE GOUZE
Stéphane Zanella took a second careful sip from the glass of the 2002 St Emilion in front
of him. He spun the stem of the wine glass slowly, watching the velvet-red liquid swirl, and
reflected upon the rich taste so typical of the French Bordeaux wines. This particular bottle,
produced by the Chateau Les Petites Rangats, presented a delightful combination of high acidity
and an overall complex aroma.
However, as Directeur Général (General Manager) of the Club Français du Vin (The
French Wine Club), a large catalog retailer offering an exciting collection of French wines to the
consumer, he had every reason to be disappointed with the bottle. Zanella and his product
manager in charge of forecasting demand for the wines offered by the Club had ordered 10,000
bottles of the wine for the company’s January 2004 catalog. They had, however, experienced
consumer demand for only 1,704 bottles, and the remaining bottles were now in the company’s
Dijon warehouse, where they were likely to remain for many months. Since consumers favored
lighter wines, such as a Rosé or a fruity white wine, for the upcoming spring season, the
remaining 2002 St Emilion bottles would burden the company’s cash position and potentially
require significant discounts in the future.
Though unpleasant, mismatches between forecasts and customer demand are fairly
commonplace in a catalog retail wine business. Forecasting the demand for wines and placing
orders with the wine growers require constantly balancing the cash constraints inherent in holding
large inventory positions with the goal of sustaining healthy margins (the club typically enjoys
around 50%) while ensuring availability of a broad selection of wines even late in a catalog
season.
Le Club Français du Vin: Company Background
Le Club Français du Vin, founded in 1973, had grown to a 10 million Euro per year
business in 2004 with customers in France, Switzerland, and Germany. The mission of Le Club is
to offer wines of good to very good quality to its members, who receive interesting wines
delivered directly to their homes. Since most consumers in France purchase wine through their
supermarkets (some with outstanding selections) and local specialty stores, Le Club capitalizes on
a niche market. Le Club employs several wine experts and specializes in identifying small and
mid-size growers typically below the radar screen of the big French hyper-markets such as
Carrefour and Champion.
1
This case was written by Christian Terwiesch and Antoine Gouze as the basis for class discussion rather
than to illustrate effective or ineffective handling of an administrative situation. Some numbers in this case
were adjusted to simplify the case analysis and to protect confidential business information. The authors
are grateful to Stephane Zanella, Veronique Gouze, and Gerard Cachon for their help.
Copyright © 2005 by Terwiesch and Gouze, updated March 2009.
Every member of Le Club receives an offer of wine every two months via a catalog
called Etiquette, which includes 30-40 carefully selected wines. Typically, a wine in Etiquette is
featured on a half-page of sumptuous description and photographs of the grower, a chateau, or the
vineyard. Etiquette, mailed to all of Le Club’s 50,000 members, also includes two leaflets, La
Selection and La Cave.
La Selection showcases three wines that are Le Club’s recommendation for the season. If
a member does not place an order from either Etiquette or La Selection, she might automatically
receive a shipment of 12 bottles consisting of the three wines from La Selection (four bottles from
each of the three wines). The customer may return these bottles free of charge (called “option
negative” in France2). As this can be expensive for Le Club (shipping and handling costs are
rather substantial), Le Club only sends unsolicited shipments to its most loyal customers (loyalty
measured in years of membership) as well as to those who have rarely returned shipments from
La Selection.
La Cave, the other leaflet, consists of a cursory list of available wines, their price and
year, but offers none of the detailed descriptions and background material featured in the
Etiquette catalog. Frequently, wines in La Cave are leftover from a previous catalog (some of
them heavily discounted).
The Forecasting Process
True to its name, Le Club Français du Vin largely carries French wines. The French wine
industry still consists primarily of small- to medium-sized growers that harvest their own grapes
and produce their own wines. French wines, especially those from the Bordeaux region, are
known for their idiosyncratic tastes. Given that a typical Bordeaux wine is a mixture of different
grapes carefully crafted and composed by local winemakers, it is possible that two Bordeaux
wines of the same year and from neighboring vineyards can have completely different tastes3.
This taste heterogeneity across growers of French wines differs greatly from the wines of
Australia, South America, or California, where wines are created by large producers (most of
them buying grapes from several growers) and composed to achieve a consistent drinking
experience.
The heterogeneity of French wines makes forecasting consumer demand for a particular
French wine extremely difficult, sharing similarities with the fashion industry. A few comments
from the major wine experts can determine the fate of a particular wine for the season. Most
notably, the American wine-guru Robert Parker is respected─and feared─in the industry for his
wine recommendations and their impact on consumer demand.
At Le Club Français du Vin, a group of professional wine experts visits France’s various
wine regions. They score the wines on a scale from 1 to 20. They then look at sales patterns of
similar past wine offerings of Le Club and create a sales forecast for each wine in the upcoming
catalog. The forecasting process takes into account both taste considerations and the season of the
2
The “option negative” is the idea that a customer places an order by default and needs to act if she does
NOT want to receive a shipment. The option negative is relatively common in various consumer clubs,
including books, magazines, and movies.
3
The mixing of wine and grapes is not done in some other wine growing countries, for example Germany.
Mixing wines and grapes allows the wine maker to create more complex and sophisticated tasting
experiences.
year in which the wine is offered in the catalog. French wine drinkers prefer “heavier,” more
intense wines, such as a dark (red) Bordeaux in the winter season, enjoy champagne over
Christmas and New Year, and favor fruity white wines and mild Rosés in the summer season.

The Ordering Process
Once the forecast of a particular wine is established, Le Club places an order with the
wine grower. Ordering occurs several months before publishing the catalog and at a point when
little information beyond the wine experts’ personal opinions is available. Upon receiving the
order, the grower decorates the bottles with a label unique to Le Club and sends the order to Le
Club’s warehouse in Dijon (some 300km south of Paris). Le Club’s exclusive label prevents
consumers from comparing prices with supermarkets offerings and allows Le Club to enjoy
comfortable gross margins of about 50%. Le Club’s shipping and handling cost of 1.25 Euro per
bottle are not included in the 50% gross margin (i.e., for a bottle with 10 Euro retail price, Le
Club pays about 5 Euro in procurement costs and 1.25 Euro in transportation costs). The Club
pays the wine grower 75 days after having received the shipment4.
If the forecast of a wine coincides with demand─or comes close to it─these payment
conditions are very favorable for Le Club. In many cases, the company is able to collect payments
from the end customer before settling the bill with the wine-grower. However, such desirable
cash flows are not always the case. If Le Club has overforecasted sales for the catalog season,
excess bottles are stored in the warehouse and are likely to be discounted in a future catalog.
As a rule of thumb, Zanella assumes that an overbought white wine needs to be
discounted by 40% of its retail price (i.e. a 10 Euro bottle would be sold for 6 Euro) to liquidate
the inventory, but a red wine on average needs only a 30% discount, as red wine is less perishable
(a white wine typically must be sold within two years or disposed). This liquidation is done via
Le Club’s catalog La Cave (see above). Bottles sold this way will also cost 1.25 Euro per bottle in
shipping and handling. On average, Le Club warehouses white wines eight months and red wines
15 months. In addition to Le Club’s cost of capital, which Zanella estimates at 15%, there are
direct and indirect warehouse operations costs about 0.10 Euro per month per bottle. If, however,
Le Club lacks sufficient supply of a particular wine, it misses almost all of the associated profit
margins. Only rarely is it possible for Zanella to place additional orders for wines that he had
underforecasted.
The Customer Experience
Customers ordering wines from the Etiquette catalog (i.e., those who chose not to receive
La Selection but still wanted to purchase wine from Le Club) place their order by mail, phone,
fax, or over the internet. As a large portion of Le Club’s customers are in their 60s, orders by mail
are rather common. This key customer segment has been with Le Club for many years.
Customers do not have to pay for any shipping and handling costs. A typical customer
order consists of 12 bottles of wine of three different types. While customers placing orders by
phone and online can directly be informed if a particular wine is out of stock, the majority of
4
This is, under French law, the maximum time a firm can wait before settling a procurement bill with a
small or medium sized company.
customers (mail and fax) are not aware of the availability of wines for their order. Thus, typically,
all demand for a wine that remains unfulfilled is lost5. Given the complications associated with
stock-outs, Le Club aims at high availability for its wines throughout the catalog season.
Decision
Zanella thought of the more than 200,000 bottles that Le Club currently held in its
warehouse. Unfortunately, he thought, we cannot ship the leftover St-Emilion bottles to the
customers waiting for a Côtes du Rhône. The Côtes du Rhône (Dne Notre Dame des Pallieres),
another red wine, was also featured in the January 2004 catalog. Forecasted to sell 10,000 bottles,
it ultimately experienced a demand of over 11,000.
Zanella replaced his wine glass with a cup of coffee and opened up his Excel file
containing information on demand, wine characteristics, forecast information and realized
demands (Exhibit 1) that he uses to track the accuracy of his old forecasts. Reviewing the
forecasts for the next catalog season, he set about creating a first draft for the orders he would
place with the growers in the coming week (Exhibit 2). Once again, Le Club would offer an
exciting new collection of wines. However, the task of forecasting and ordering was not an easy
one.
5
For example, a customer who had ordered 4 bottles of type A, 4 of type B, and 4 of type C would, in case
of a stock-out of C, obtain the 4+4 bottles of A and B. Customers almost never cancelled the rest of their
order because of stock-outs.
Appellation
CÔTES DU RHÔNE (6)
BORDEAUX SUP
LIRAC
CORBIERES
CARTON PANACHE
POMEROL
GRAVES
HAUT-MEDOC CB
BORDEAUX
CARTON PANACHE
CHAMBOLLE-MUSIGNY
HAUTES CÔTES DE BEAUNE
MORGON
VDP des Côteaux de L’Ardèche
VDP des Côteaux de L’Ardèche
VDP du Comté Tolosan
Bordeaux
CARTON PANACHEE
IROULEGUY
BERGERAC
VDP D’OC
COTEAUX DU LANGUEDOC
BERGERAC
CHINON
COTEAUX DU GIENNOIS
ROSE DE LOIRE
CHÂTEAUNEUF DU PAPE
CDR VILLAGES CAIRANNE
CÔTES DU VIVARAIS
CARTON PANACHEE
CÔTES DU JURA V. JAUNE
APREMONT
CÔTES DU JURA
SAINT-ESTEPHE
FITOU
CDR
COUR-CHEVERNY
MEDOC
RULLY
MONTAGNE ST-EMILION
Designation
Dne Notre Dame des Pallières
Ch. Tour Petit Puch
Domaine Duseigneur (Frs 19,80)
Ch. des Auzines “Les Garrigues
(4 x 3) Pts Kdo Doublés
Ch. Clos Bel Air
La Grande Cuvée de Dourthe
Ch. Beyzac
Ch. Bordeneuve
4+4+2+2
Bouchard Père et Fils
Clos de la Chaise Dieu
Dne de Gry Sablon – R de Clarisse
La Réserve Rosé du Club
La Réserve Rouge du Club
La Réserve Blanc du Club
Réserve du Club
Les Réserves du Club
Dne Etxegaraya
Ch. De Fumat (6)
Chardonnay-Terret M. Laroche
Dne Péris
Ch. De Fumat
Wilfrid Rousse
Balland-Chapuis
Cave des Perrières
Clos de l’Oratoire des Papes
Dne Croc de Romet
Beaumont des Gras – C. Prestige
(6+4+2)
Fruitière de Voiteur
Le Vigneron Savoyard
Chardonnay bâtonné
Ch. Haut-Corbian
Ch. Lahore-Bergez
Dne de la Présidente
Dne de Montcy
Ch. Haut-Lignan
Dne Briday
Ch. Les Petites Rangats
Year
01
01
00
01
Color
Rouge
Rouge
Rouge
Rouge
01
01
01
01
Rouge
Rouge
Rouge
Rouge
01
02
02
03
02
03
02
Rouge
Blanc
Rouge
Rosé
Rouge
Blanc
Rouge
01
01
02
01
01
02
02
03
00
02
01
Rouge
Rouge
Blanc
Rouge
Rouge
Rouge
Blanc
Rosé
Rouge
Rouge
Rouge
93
02
00
00
00
01
99
00
01
02
Jaune
Blanc
Blanc
Rouge
Rouge
Rouge
Blanc
Rouge
Blanc
rouge
Retail price
(€ per bottle) Forecast Demand
5.90
10,000
11,280
7.20
1,200
252
10.50
900
540
6.90
800
864
8.20
3,000
2,169
22.95
900
1034
9.95
600
384
10.70
400
414
5.95
1800
612
13.74
3960
5436
33.90
600
528
10.90
900
1014
9.50
1200
1500
3.30
2500
2,070
3.25
3000
2,784
3.30
2000
1,974
4.50
2500
4,057
3.59
2600
1,992
11.90
3000
726
5.90
800
402
5.40
2500
1380
6.10
900
612
5.20
1800
1170
7.55
1500
960
7.30
3000
2100
5.50
2300
2934
19.95
300
703
8.90
500
480
4.70
2700
1968
13.73
1800
1356
29.50
300
324
7.50
1200
567
8.90
900
741
12.47
2100
1910
6.83
2000
1176
5.18
2200
1788
6.17
900
834
6.38
2100
2208
9.71
1100
1191
10.40
10000
1704
Exhibit 1: Demand forecasts and actual demand (regular price sales only) for the January 2004
catalog. A carton panache is a mixture of several wines.
Appellation
FAUGERES
GRAVES
GRAVES
PESSAC LEOGNAN
CARTON PANACHE
BORDEAUX CLAIRET
CÔTES DE BOURG
ENTRE DEUX MERS
BORDEAUX
CARTON PANACHE
Bordeaux
VDP des Côteaux de L’Ardèche
VDP des Côteaux de L’Ardèche
VDP du Comté Tolosan
CARTON PANACHEE
CABERNET D’ANJOU
SANCERRE
CHINON
ALOXE CORTON
BOURGOGNE ALIGOTE
GIVRY
COTEAUX DU LYONNAIS
CDR Vill RASTEAU
GIGONDAS
CÔTES DU VENTOUX
CARTON PANACHE
CORBIERES (6)
GAILLAC
MINERVOIS
MADIRAN
Designation
L’enclos des Moulins
Ch. Cabannieux
Ch. Haut Pommarède
Ch. Haut Nouchet
6+2+4
Ch. De Marsan
Ch. Florimond
Ch. La Grande Métairie
Ch. Gillet – FIDELITE
sauf bordeaux
Réserve du Club
La Réserve Rouge du Club
La Réserve Rosé du Club
La Réserve Blanc du Club
Les Réserves du Club
Goulaine
Le Châtillet – Balland Chapuis
Clos des Petites Croix – FIDELITE
Ch. Philippe le Hardi
Dne des Lauriers
La Buxynoise
Pot des Voraces – 50 cl
Domaine Combe Julière
La Payouse
Gabriel Meffre (6)
Ch. La Mondière
Dne de Borie Vieille
Domaine des Arcades – FID
Folie de Roi
Year
02
02
02
01
Color
Rouge
Blanc
Rouge
Rouge
03
02
03
02
Rosé
Rouge
Blanc
Rouge
02
03
03
03
Rouge
Rouge
Rosé
Blanc
03
02
02
02
03
02
03
02
99
03
Rosé
Blanc
Rouge
Rouge
Blanc
Rouge
Rouge
Rouge
Rouge
Rouge
01
03
00
01
Rouge
Rouge
Rouge
Rouge
Retail price
(€ per bottle)
6.80
9.90
8.40
18.90
12.15
5.50
7.20
5.15
4.65
5.95
4.50
3.25
3.30
3.30
3.59
5.60
12.00
5.85
21.90
7.20
12.90
5.35
8.90
13.90
5.60
9.47
5.70
5.80
5.21
9.00
Forecast
12000
750
1000
1300
3200
4000
1300
1500
6000
6000
2900
3500
2900
2300
3000
3000
1800
4500
1200
1100
900
3000
900
1000
1200
3000
1300
2500
4000
12000
Exhibit 2: Wine information about the upcoming catalog season.
The average gross margin is 50% (i.e. a 10 Euro bottle is purchased from the grower for 5 Euro).
A carton panache is a mixture of several wines.
Question for the Case:
Forecasting and Procurement at Le Club Français du Vin
Main Question: Determine the order quantity for the items listed in Exhibit 2 for the
upcoming catalogue season.
Q 1: Comment on the (quality of) forecast by comparing it with the actual demand data provided
in Exhibit 1.
Q 2: Compute the forecast accuracy of the previous season (A/F Ratio) and comment on the
(quality of) forecast. Refer to the plot of the actual demand and forecast shown.
1
Q 3: Conduct the A/F ratio analysis to construct an empirical distribution function. How does this
compare to the normal distribution?
Q 4: Underage and Overage Costs: What are the costs of having one bottle too few in
inventory (underage cost)? What are the costs of having one bottle too many in inventory
(overage cost)?
List these costs qualitatively and then quantify them for the items in the list.
Note that the white wines and red wines will differ in the “overage costs” significantly.
2
Q 4: Determine the critical ratio (i.e. optimal service level) for each of the items in the Exhibit 2.
Q 5: How much of each wine listed in Exhibit 2 would you order? Compare the order quantities
of the empirical distribution with the normal distribution.
Highlight some important observations about the service level and order quantities for some of
the products.
Q 6: [Exercise] How would the analysis differ if the red wines and white wines were
treated separately for the analysis? Would the order quantities differ significantly?
3

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