Use of analytics for enhancing profits

Owen P. Hall Jr. and Kenneth Ko wrote this case solely to provide material for class discussion. The authors do not intend to illustrate either effective or ineffective handling of a managerial situation. The authors may have disguised certain names and other identifying information to protect confidentiality.

Richard Thornton, senior vintner at Landhills Winery, had been put in charge of developing an optimal blending plan for the upcoming season. This assignment was the result of a recent Landhills board meeting where Sally Peterson, the chief executive officer, had presented her ideas regarding the use of analytics for enhancing profits while at the same time not affecting quality. Specifically, the use of resource optimization could significantly improve Landhills’ profitability. Industry reports indicated that a growing number of the major wineries were using analytics to assist in the wine-blending process. The board meeting had concluded with the CEO tasking Thornton to develop an analysis and report back his findings to the board at next month’s meeting.

BACKGROUND

The United States has become the largest wine market in the world, with sales approaching $40 billion annually. Typically, two types of wines are produced: varietals and blends. Wine blending is the process of combining several grape varieties to achieve a characteristic that is lacking in the original grapes.

There are several reasons why a vintner might want to blend wines, including: 1) enhancing aroma, 2) improving the colour, 3) raising or lowering the acidity level, and 4) raising or lowering alcohol levels.

The process of wine blending contains both objective and subjective components. Alcohol level is an example of an objective standard.

Landhills Winery, located in Santa Barbara, California, was one of the premium wine producers in the state and had recently begun to sell its products on a global basis. The winery produced and distributed a wide range of premium wine, including its flagship — Cabernet Sauvignon. The firm’s management was considering employing prescriptive analytics as a means of improving the wine-blending process.

Typically, wines were produced from a blend of several types of grapes. In producing these blended wines, the vintner had to take into consideration both grape characteristics and government regulations.

Each of the candidate blends was then subject to a series of taste tests. In those cases where the candidate wines were found to be unacceptable by the tasters, a set of new products was often produced. The vintner planned to use prescriptive analytics to help develop an optimal blending strategy and assumed that all bottles produced could be sold. More specifically, the vintner was going to undertake a comparative assessment of Landhills’ premier Cabernet Sauvignon product sector. The three specific production wines from this sector were:? Vintage Cabernet Sauvignon, which wholesaled for $9 per bottle? Non-vintage Cabernet Sauvignon, which wholesaled for $5.50 per bottle? Non-vintage Merlot, which wholesaled for $2.95 per bottle

Listed below are the winery objectives and government regulations.

WINERY OBJECTIVES AND SPECIFICATIONS? Maximize net profit.? The acidity level of Cabernet Sauvignon cannot exceed 0.7 grams per 100 millilitres.? The vintage Cabernet Sauvignon must not contain more than 0.2 per cent sugar.? The non-vintage Cabernet Sauvignon must not contain more than 0.3 per cent sugar.? The acidity level of Merlot cannot exceed 0.3 grams per 100 millilitres.

GOVERNMENT REGULATIONS1? All wines labeled varietal (e.g., Cabernet Sauvignon) must contain at least 75 per cent of the named grape type.? All wines must contain at least a 10 per cent and no more than a 15 per cent alcohol level by volume.? All vintage-dated wines must contain 95 per cent blending grapes from the year on the bottle label.? All vintage-dated wines must also report the viticulture area on the label and must contain at least 85per cent blending grapes from this area.

Presented in Exhibit 1 are the characteristics of the four blending grades along with available quantities and associated costs. Grape Type  Viticulture Vintage-  acidity – sugar(%) Alcohal(%)(gm/100ml)Cabernet Sauvignon- Santa Barbara 2011 0.35 0.12 13.5Cabernet Sauvignon- San Luis obispo 2010 0.75 0.25 15.3Cabernet Sauvignon- San Luis obispo 2011 0.55 0.30 11.5Merlot- Santa Barbara 2010 0.25 0.08 15.7QUANTITY Cost(Bottles) ($/bottle)50,000 2.3560,000 2.6030,000 2.10200,000 1.55The case is entitled ‘Landhills Winery: Developing an Optimal Blending Plan’ written by Owen Hall and Kenneth Ko. The assignment requires answering the four questions listed on the following page of this document. As a part of answering the questions, you will develop an analytical model using Microsoft Excel. This model is also a required part of the submission for grading purposes. REQUIRED You have to submit the following two documents by the assignment due date and time for grading purposes: 1. A case write-up (in Microsoft Word or Adobe PDF format), containing the answers to the assigned questions, including any tables, figures, or summaries from the model; and 2. Supporting analytical model in Microsoft Excel format FORMAT AND SUBMISSION The case write-up ) should be contained in a maximum of six letter sized, single-sided pages, using a standard, single-spaced font. The analytical model has no page limit or other formatting specifications but should be appropriately detailed with adequate documentation. The Microsoft Word/Adobe PDF and Microsoft Excel files are to be emailed to the instructor by the due date and time. No printout is required.

LANDHILLS WINERY: DEVELOPING AN OPTIMAL BLENDING PLAN ?1. How much of each wine should be produced to maximize net profits? 2. How much of each blending grape by type is not used? 3. What is the maximum that the vintner should pay for one more bottle of the 2011 Cabernet Sauvignon harvested in Santa Barbara? 4. What is the impact on the optimal allocation if only 50,000 bottles of vintage Cabernet Sauvignon can be sold?

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