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RISK MANAGEMENT
FREEMARK ABBEY
WINERY
Submitted by Group 12
Table of Contents
Introduction
Case Analysis .................................................................................................................................................. 3
Problem statement ........................................................................................................................................ 4
Objective ........................................................................................................................................................ 4
Analysis
Decision Tree.................................................................................................................................................. 5
Sensitivity Analysis ......................................................................................................................................... 6
Decision Tree Analysis.................................................................................................................................... 9
Cost of Information ...................................................................................................................................... 12
Recommendation & Conclusion .................................................................................................................. 13
3|Page
Case Analysis
Freemark Abbey Winery is positioned as the producer of Premium Wines made out of the best grape
varieties.
It produces 25000 cases of wine, which equates to 3,00,000 bottles of wine each year.
1000 cases (12000 bottles) of Riesling wine are bottled in a year.
The current situation is as follows:
A storm which might be detrimental to the crop is approaching.
But, it could also have some positive effect as a warm, light rain could sometimes cause a beneficial
mold to form on the grape skin which would result in a richer wine.
Mr. Jaeger has the following options to decide from:
1.a) If Mr Jaeger harvests the grapes now, he will avoid the rainstorm altogether, and have a respectable
type of grape that would get him a good return of $2.85 per bottle on his decision.
2.a) However, if he waits and the storm arrives, and the mold is also present in the storm, then he can
triple his return as the mold allows the grapes to retain 35% sugar, thereby producing a much higher quality
wine. This will fetch him $8 per bottle but the quantity of the wine will be reduced by 30%.
2.b)But, if he waits & the storm arrives & no mold is present in the storm then he would run the risk of
over-saturating the grapes, which would then result in a thin, lower quality wine that could be sold for $2
per bottle in wholesale. 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.
2.c) On the other hand, if he doesn’t harvest the grapes & the storm doesn’t come, Mr. Jaeger will have 3
more possibilities open to him.
2.c.i) There is a probability of 0.4 that the grapes will retain 25% of sugar content & produce a high-quality
wine which will fetch $3.50 per bottle.
2.c.ii) There is also the probability of 0.4 those grapes retaining 20% of sugar content and produce lighter
wine that could be sold at $3 per bottle which would still be above what he would have if he had harvested
the grapes earlier.
2.c.iii) Also, there is a small probability of 0.2 that the grapes would retain less than 19% of sugar content,
which would result in a thinner wine It would produce less of a return than what it would had he harvested
the grapes earlier.
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Problem statement
Mr. Jaeger has to decide on whether to
1) Harvest the grapes now or
2) Wait for the rainstorm.
Freemark
Abbey Winery
Harvest Wait
Storm No storm
Objective
To maximize the revenue (Expected Monetary Value) by either harvesting now or waiting for some time.
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Decision Tree
Fig. 1: Decision tree when Jaeger decides to go ahead with bottling even when Botrytis mold doesn’t form
after the rainstorm.
Fig. 2: Decision tree when Jaeger decides to go ahead with wholesale or grape harvest sale when Botrytis
mold doesn’t form after rainstorm.
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Sensitivity Analysis
41000
40500
40000
39500
39000
38500
38000
37500
37000
36500
0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9 1
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3. With respect to probability of grapes reaching 25% sugar level in case of acceptable acidity levels.
40500
40000
39500
39000
38500
38000
37500
0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9 1
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55000
50000
45000
40000
35000
30000
0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9 1
Since payoffs for cases 1,2 and 3 is greater than 34200 (harvest now) for all possible values of
probability, best decision (harvest later) is independent of values of probabilities.
Now for case 4, let’s assume the decision changes at probability “p”, We can calculate “p” using
following equations. (derived from decision tree)
P Decision
Less than 0.167 Harvest Now
More than 0.167 Harvest Later
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b. No Storm (Probability=0.5)
Good wine formed after vinification: Revenue = 3.5*12,000
= $ 42,000 (Probability=0.5)
(6)
Light wine formed after vinification: Revenue = 3*12,000
= $ 36,000 (Probability=0.5)
(7)
Hence, EMV of wine with acceptable acidity= 0.5*42,000 + 0.5*36,000
= 39,000 (Probability=0.8) …(from (6) and (7))
(8)
Low acid wine formed after vinification: Revenue = 2.5*12,000
= $ 30,000 (Probability=0.2)
(9)
Hence, EMV if no storm occurs= 0.8*39,000 + 0.2*30,000 = 37,200 …(from (8) and (9))
(10)
Fig. 3: Decision tree with information about the rainstorm when Jaeger decides to go ahead with bottling
even when Botrytis mold doesn’t form after the rainstorm.
11 | P a g e
Fig. 4: Decision tree with information about the rainstorm when Jaeger decides to go ahead with wholesale
or grape harvest sale even when Botrytis mold doesn’t form after the rainstorm.
12 | P a g e
Cost of Information
Suppose we have information about the chances of storm (which is currently 50%), we will then
have to decide whether to collect or not collect the information on botrytis formation.
If we collect information and
o Botrytis is formed, we have the option of
Harvesting now (EMV=$34,200)
Harvesting later (EMV=$67,200).
o Botrytis is not formed, we again have the option of
Harvesting now (EMV=$34,200)
Harvesting later and
Bottling (EMV=$24,000)
Selling wine in bulk (EMV=$12,000)
Selling grapes (EMV=$12,000).
If we do not collect botrytis formation information, we have the option of
o Harvesting now (EMV=$34,200)
o Harvesting later and
Bottling (EMV=$24,000)
Selling wine in bulk (EMV=$12,000)
Selling grapes (EMV=$12,000).
If we have the information about storm and storm doesn’t come, we have the option of
o Harvesting now (EMV=$34,200)
o Harvesting later which will lead to
Selling good wine (EMV=$42,000)
Light wine (EMV=$36,000)
Low acid wine (EMV=$30,000)
Solving the decision tree, the EMV with information comes out to be $42,300.
(12)
Hence the cost of information = EMV with information – EMV without information = $ (42,300-39,240)
= $ 3,060 …(from (11 and (12))
13 | P a g e