Introduction to Operations Management (IDS 532)

Group mamber：
Zijun Shang
Guorui Wu
Huaqing Zhang

Le Club Francais Case (Read the “Group Cases” section of the syllabus for policies related to case
assignments. Also read the “Case Analysis” section of the syllabus for guidelines on how to
approach the case and write-up.)

1. Discuss why the news vendor model may or may not be a reasonable model for computing
order quantities in this case?

12,000

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Forecast Demand ERRO OF FORECAST

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I think this model can predict demand to some extent, but there are big errors. We use the
data in Exhibit 1 to make this figure. The orange line is demand, the blue line is forecast, and the
gray line is error. Through observation, we find that there are errors at almost every point and
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some of them are very large. For example, point 40. But French wine is different from Australia.
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French wines are produced by many small and medium-sized wineries, each of which tastes
different and therefore difficult to predict. Therefore, except for the special case of point 40,
although the error is large, the error is within a certain range. Therefore, we think this is a more
reasonable model.

2. 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 attempt to attach numbers to them for a 10 Euro bottle of white
wine.

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 Underage cost is understocking cost: Cu=price of sale - procurement costs- transportation
cost. For example, selling price=10 euro, and from the article we knew the cost of bottle=5 euro,
the shipping price=1.25 euro. Therefore, the understocking cost=10-5-1.25=3.75 euro. overage
cost is overstocking cost: Co=cost - discount price=holding cost capital+holding storage
cost+shipping and handling cost+procurement cost-discount price. because white wine and red
wine have different storage time and discount rate. Therefore, their overstocking costs are
different, thus we have to calculate their Co separately.

Overstocking cost for white wine: selling price is $10, the cost of bottle=5 euro, the shipping
price=1.25 euro, we knew the cost of capital is 15%, so holding cost capital=procurement
cost*15%*8/12=0.5 euro, holding cost storage=0.1*8=0.8euro, discount is 40%off, discounted
price=10*0.6=6 euro, thus Co=5+1.25+0.5+0.8-6=1.55, then critical ratio of white
wine=Cu/Cu+Co=0.71. Q=NORMINV(0.71,1653.45,1886.03 )=2697.15
Overstocking cost for red wine: holding cost capital=procurement cost*15%*15/12=0.9375 euro,

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holding cost storage=0.1*15=1.5 euro, because discount rate is 30%, so discounted

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price=10*0.7=7 euro, thus Co=5+1.25+0.9375+1.5-7=1.6875 euro, then the critical ratio for red

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wine=Cu/Co+Cu=0.69. Q=NORMINV(0.69,1653.45,1886.03 )=2588.638

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3. Assume the underage cost is 3 Euro and the overage cost is 1 Euro. Based on Le Club’s past
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forecasting performance (Exhibit 1), how many bottles would you order of a wine that is
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forecasted to sell 2000 bottles? (Assume this is the final forecast, i.e., the forecast after any
potential adjustments to ensure that the aggregate forecast across all items matches some
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target.)
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Retail price
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Appellation Designation Year Color (€ per bottle) Forecast Demand A/F r

CÔTES DU RHÔNE (6) Dne Notre Dame des Pallières 01 Rouge 5.90 10,000 11,280

BORDEAUX SUP Ch. Tour Petit Puch 01 Rouge 7.20 1,200 252
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LIRAC Domaine Duseigneur (Frs 19,80) 00 Rouge 10.50 900 540

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CORBIERES Ch. des Auzines "Les Garrigues" 01 Rouge 6.90 800 864

CARTON PANACHE (4 x 3) Pts Kdo Doublés 8.20 3,000 2,169

POMEROL Ch. Clos Bel Air 01 Rouge 22.95 900 1034 1.1
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GRAVES La Grande Cuvée de Dourthe 01 Rouge 9.95 600 384

HAUT-MEDOC CB Ch. Beyzac 01 Rouge 10.70 400 414

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BORDEAUX Ch. Bordeneuve 01 Rouge 5.95 1800 612

CARTON PANACHE 4+4+2+2 13.74 3960 5436 1.3

CHAMBOLLE-MUSIGNY Bouchard Père et Fils 01 Rouge 33.90 600 528

HAUTES CÔTES DE
BEAUNE Clos de la Chaise Dieu 02 Blanc 10.90 900 1014 1.1

MORGON Dne de Gry Sablon - R de Clarisse 02 Rouge 9.50 1200 1500

VDP des Côteaux de

L'Ardèche La Réserve Rosé du Club 03 Rosé 3.30 2500 2,070

VDP des Côteaux de

L'Ardèche La Réserve Rouge du Club 02 Rouge 3.25 3000 2,784

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 VDP du Comté Tolosan La Réserve Blanc du Club 03 Blanc 3.30 2000 1,974

Bordeaux Réserve du Club 02 Rouge 4.50 2500 4,057

CARTON PANACHEE Les Réserves du Club 3.59 2600 1,992 0.7

IROULEGUY Dne Etxegaraya 01 Rouge 11.90 3000 726

BERGERAC Ch. De Fumat (6) 01 Rouge 5.90 800 402

VDP D'OC Chardonnay-Terret M. Laroche 02 Blanc 5.40 2500 1380

COTEAUX DU
LANGUEDOC Dne Péris 01 Rouge 6.10 900 612

BERGERAC Ch. De Fumat 01 Rouge 5.20 1800 1170

CHINON Wilfrid Rousse 02 Rouge 7.55 1500 960

COTEAUX DU GIENNOIS Balland-Chapuis 02 Blanc 7.30 3000 2100

ROSE DE LOIRE Cave des Perrières 03 Rosé 5.50 2300 2934 1.2

CHÂTEAUNEUF DU PAPE Clos de l'Oratoire des Papes 00 Rouge 19.95 300 703 2.3

CDR VILLAGES CAIRANNE Dne Croc de Romet 02 Rouge 8.90 500 480

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CÔTES DU VIVARAIS Beaumont des Gras - C. Prestige 01 Rouge 4.70 2700 1968 0.7

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CARTON PANACHEE (6+4+2) 13.73 1800 1356 0.7

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CÔTES DU JURA V. JAUNE Fruitière de Voiteur 93 Jaune 29.50 300 324

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APREMONT rs e Le Vigneron Savoyard 02 Blanc 7.50 1200 567

CÔTES DU JURA Chardonnay bâtonné 00 Blanc 8.90 900 741 0.8

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SAINT-ESTEPHE Ch. Haut-Corbian 00 Rouge 12.47 2100 1910 0.

FITOU Ch. Lahore-Bergez 00 Rouge 6.83 2000 1176

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CDR Dne de la Présidente 01 Rouge 5.18 2200 1788 0.8

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COUR-CHEVERNY Dne de Montcy 99 Blanc 6.17 900 834 0.9

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MEDOC Ch. Haut-Lignan 00 Rouge 6.38 2100 2208 1.0

RULLY Dne Briday 01 Blanc 9.71 1100 1191 1.0

MONTAGNE ST-EMILION Ch. Les Petites Rangats 02 rouge 10.40 10000 1704
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2069 1653.45 0.8

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1886.0295
2057.82534 42 0.3
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A/F ratio= demand/forecast

Use the data in excel1 mean of A/F ratio=0.87
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the standard deviation of A/F ratio = 0.40. we knew the forecast=2000. therefore, the mean of
demand=0.87*forecast=0.87*2000=1740, the standard deviation of demand=0.4*forecast
=0.4*2000=800.

Because Cu=3, Co=1. Therefore, critical ratio=Cu/Co+Cu=0.75.

Q=NORMINV(0.75,1740,800 )=2279.592

4. Look into trends in the demand and forecast data. Do you see any bias in the forecast? Do you
see any correlations between the price of wine and the forecasting error?

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 PRICE AND ERRO OF FORECAST
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ERRO OF FORECAST PRICE

FORECAST AND DEMAND

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Forecast Demand
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We plot the data in Exhibit 1. From the graph, we can see that the prediction of this model is
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inaccurate, and almost every point has a certain error. If we exclude the special case of Point 40,
we can see that although there is a big difference between the maximum and minimum demand
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for liquor, people's demand for most liquor is relatively close. Because price is much smaller than
forecast. Therefore, in order to better see the price changes in the graph, we expanded the price
value by 100 times. From the comparison of error and price, we find that the prediction error of
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higher price wine is relatively small. In other words, the price is inversely proportional to the
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error.

5.How much of each wine listed in Exhibit 2 would you order? As Zanella’s consultant, think of
how you would convey key findings without presenting calculations for every single wine.

We can use the mean of A/F ratio and the standard deviation of A/F ratio. mean of A/F
ratio*forecast we can know the mean of demand of each wine. the standard deviation of A/F
ratio*forecast, we can know the standard deviation of demand of each wine. Then we have to
calculate Cu=p-c and Co=c-s. critical ratio=Cu/Co+Cu.
Then use excel type Q=NORMINV( critical ratio,mean of demand,standard deviation of demand ).
the Q is the answer of “how much of each wine listed in Exhibit 2 would you order?”

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 6. Discuss patterns and any peculiarities that you find in the order quantities and critical
ratios across different wines.
We use the data to calculate critical ratio and Q. and we plot the data.

ERRO OF critical critical

Forecast Demand A/F ratio FORECAST PRICE Cu Co ratio Q ratio*10000
10,000 11,280 1.128 1280 590 1.7 2.123125 0.444662416 8099.249737 4446.624162

1,200 252 0.21 948 720 2.35 1.985 0.542099193 1088.804892 5420.991926

900 540 0.6 360 1050 4 1.634375 0.709927898 976.7970507 7099.278979

800 864 1.08 64 690 2.2 2.016875 0.521713354 709.5542278 5217.133541

3,000 2,169 0.723 831 820 2.85 1.87875 0.602696273 2906.518944 6026.962728

900 1034 1.148888889 134 2295 10.225 0.3115625 0.970430347 1454.380934 9704.303467

600 384 0.64 216 995 3.725 1.6928125 0.687546865 635.8594624 6875.468651

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400 414 1.035 14 1070 4.1 1.613125 0.717645772 437.7420598 7176.457718

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1800 612 0.34 1188 595 1.725 2.1178125 0.448889973 1465.520905 4488.899732

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1374.166

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3960 5436 1.372727273 1476 667 5.620833333 1.289947917 0.813342679 4828.939228 8133.426786

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600 528 0.88 72 3390 15.7 -0.851875 1.057372564 #NUM! 10573.72564
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900 1014 1.126666667 114 1090 4.2 1.505 0.736196319 1004.897015 7361.96319

1200 1500 1.25 300 950 3.5 1.740625 0.667859273 1245.512718 6678.592725

2500 2,070 0.828 430 330 0.4 2.399375 0.142889038 1101.66361 1428.890377
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3000 2,784 0.928 216 325 0.375 2.4046875 0.134907251 1278.962308 1349.072513
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2000 1,974 0.987 26 330 0.4 1.885 0.175054705 987.1852638 1750.547046

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2500 4,057 1.6228 1557 450 1 2.271875 0.305635148 1657.746531 3056.35148

2600 1,992 0.766153846 608 358.75 0.54375 2.368828125 0.186690271 1329.073977 1866.902712

3000 726 0.242 2274 1190 4.7 1.485625 0.75982621 3438.063447 7598.2621
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800 402 0.5025 398 590 1.7 2.123125 0.444662416 647.9399789 4446.624162
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2500 1380 0.552 1120 540 1.45 1.78 0.448916409 2035.512146 4489.164087

900 612 0.68 288 610 1.8 2.101875 0.461316675 743.9838807 4613.166747

1800 1170 0.65 630 520 1.35 2.1975 0.380549683 1339.80718 3805.496829
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1500 960 0.64 540 755 2.525 1.9478125 0.564521763 1394.850361 5645.217634
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3000 2100 0.7 900 730 2.4 1.685 0.5875153 2859.769167 5875.152999

2300 2934 1.275652174 634 550 1.5 2.165625 0.409207161 1780.094226 4092.071611

300 703 2.343333333 403 1995 8.725 0.6303125 0.93262518 438.0699312 9326.251795

500 480 0.96 20 890 3.2 1.804375 0.63944049 503.6394585 6394.404896

2700 1968 0.728888889 732 470 1.1 2.250625 0.32829696 1858.718629 3282.969595

1800 1356 0.753333333 444 1372.5 5.6125 1.29171875 0.812908774 2193.815697 8129.087741

300 324 1.08 24 2950 13.5 0.575 0.959147425 467.3369747 9591.474245

1200 567 0.4725 633 750 2.5 1.675 0.598802395 1157.794039 5988.023952

900 741 0.823333333 159 890 3.2 1.605 0.665972945 932.2766385 6659.729448

2100 1910 0.90952381 190 1246.5 4.9825 1.42559375 0.77753232 2455.214274 7775.3232

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 2000 1176 0.588 824 682.5 2.1625 2.02484375 0.51643718 1763.351501 5164.371805

2200 1788 0.812727273 412 517.5 1.3375 2.20015625 0.378075173 1631.851431 3780.751734

900 834 0.926666667 66 617.25 1.83625 1.741375 0.513259495 790.654513 5132.594948

2100 2208 1.051428571 108 637.5 1.9375 2.07265625 0.483148256 1781.793483 4831.482564

1100 1191 1.082727273 91 971.25 3.60625 1.564375 0.697449535 1178.0689 6974.495346

10000 1704 0.1704 8296 1040 3.95 1.645 0.705987489 10807.65839 7059.874888

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Q critical ratio

Because critical ratio is far less than Q. Therefore, in order to better see the changes in
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critical ratio in the figure, we expanded the critical ratio by 10,000 times.From the figure we can
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see that Q and critical ratio are inversely proportional. Q goes down when critical ratio goes up.
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7. Explain if the order quantities make sense from a customer service standpoint (e.g. price,
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availability, quality, etc).

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Forecast Q

We plot the data. From the figure we can see that Q is close to forecast, but at many points

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 Q is smaller than forecast. This may lead to a shortage of supply and demand. From the point of
view of serving customers, we think the order quantities don't make sense.

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