True to its name, Le Club Franais 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 respectedand fearedin the industry for his wine recommendations and their impact on consumer demand. At Le Club Franais du Vin, a group of professional wine experts visits Frances 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 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 Ross 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 Clubs warehouse in Dijon (some 300km south of Paris). Le Clubs exclusive label prevents consumers from comparing prices with supermarkets offerings and allows Le Club to enjoy comfortable gross margins of about 50%. Le Clubs 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 demandor comes close to itthese 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 Clubs 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 for 15 months. In addition to Le Clubs 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 under forecasted. 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 Clubs customers is 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 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 Ctes du Rhne. The Ctes du Rhne (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 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.

1. Discuss why the news vendor model may or may not be a reasonable model for computing order quantities in this case? 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. 3. Assume the underage cost is 3 Euro and the overage cost is 1 Euro. Based on Le Clubs past forecasting performance (Exhibit 1), how many bottles would you order of a wine that is 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 target.) 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? 5. How much of each wine listed in Exhibit 2 would you order? As Zanellas consultant, think of how you would convey key findings without presenting calculations for every single wine. 6. Discuss patterns and any peculiarities that you find in the order quantities and critical ratios across different wines. 7. Explain if the order quantities make sense from a customer service standpoint (e.g. price, availability, quality, etc).

Year 01 Color Rouge Rouge Rouge Rouge Rouge Rouge Rouge Rouge Rouge Blanc Rouge Ros Rouge Blanc Rouge Appellation CTES DU RHNE (6) BORDEAUX SUP LIRAC CORBIERES CARTON PANACHE POMEROL GRAVES HAUT-MEDOC CB BORDEAUX CARTON PANACHE CHAMBOLLE-MUSIGNY HAUTES CTES DE BEAUNE MORGON VDP des Cteaux de L'Ardche VDP des Cteaux de L'Ardche VDP du Comt Tolosan Bordeaux CARTON PANACHEE IROULEGUY BERGERAC VDP D'OC COTEAUX DU LANGUEDOC BERGERAC CHINON COTEAUX DU GIENNOIS ROSE DE LOIRE CHATEAUNEUF DU PAPE CDR VILLAGES CAIRANNE CTES DU VIVARAIS CARTON PANACHEE CTES DU JURA V. JAUNE APREMONT CTES DU JURA SAINT-ESTEPHE FITOU CDR COUR-CHEVERNY MEDOC RULLY MONTAGNE ST-EMILION Designation Dne Notre Dame des Pallires Ch. Tour Petit Puch Domaine Duseigneur (Frs 19,80) Ch. des Auzines "Les Garrigues" (4 x 3) Pts Kdo Doubls Ch. Clos Bel Air La Grande Cuve de Dourthe Ch. Beyzac Ch. Bordeneuve 4+4+2+2 Bouchard Pre et Fils Clos de la Chaise Dieu Dne de Gry Sablon - R de Clarisse La Rserve Ros du Club La Rserve Rouge du Club La Rserve Blanc du Club Rserve du Club Les Rserves du Club Dne Etxegaraya Ch. De Fumat (6) Chardonnay-Terret M. Laroche Dne Pris Ch. De Fumat Wilfrid Rousse Balland-Chapuis Cave des Perrires Clos de l'Oratoire des Papes Dne Croc de Romet Beaumont des Gras - C. Prestige (6+4+2) Fruitire de Voiteur Le Vigneron Savoyard Chardonnay btonn Ch. Haut-Corbian Ch. Lahore-Bergez Dne de la Prsidente Dne de Montey Ch. Haut-Lignan Dne Briday Ch. Les Petites Rangats Rouge Rouge Blanc Rouge Rouge Rouge Blanc Ros Rouge Rouge 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 19.95 703 8.90 480 4.70 2700 1968 13.73 1800 1356 29.50 7.50 1200 567 8.90 900 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 300 500 300 324 741 00 01 Jaune Blanc Blanc Rouge Rouge Rouge Blanc Rouge Blanc rouge 99 00 01 02 Year 02 02 Color Rouge Blanc Rouge Rouge 01 03 02 Ros Rouge Blanc Rouge 03 Designation L'enclos des Moulins Ch. Cabannieux Ch. Haut Pommarde Ch. Haut Nouchet 6+2+4 Ch. De Marsan Ch. Florimond Ch. La Grande Mtairie Ch. Gillet - FIDELITE sauf bordeaux Rserve du Club La Rserve Rouge du Club La Rserve Ros du Club La Rserve Blanc du Club Les Rserves du Club Goulaine Le Chtillet - Balland Chapuis Clos des Petites Croix - FIDELITE Ch. Philippe le Hardi Dne des Lauriers La Buxynoise Pot des Voraces - 50 cl Domaine Combe Julire La Payouse Gabriel Meffre (6) Rouge Rouge Ros Blanc Appellation FAUGERES GRAVES GRAVES PESSAC LEOGNAN CARTON PANACHE BORDEAUX CLAIRET CTES DE BOURG ENTRE DEUX MERS BORDEAUX CARTON PANACHE Bordeaux VDP des Cteaux de L'Ardche VDP des Cteaux de L'Ardche VDP du Comt Tolosan CARTON PANACHEE CABERNET D'ANJOU SANCERRE CHINON ALOXE CORTON BOURGOGNE ALIGOTE GIVRY COTEAUX DU LYONNAIS CDR Vill RASTEAU GIGONDAS COTES DU VENTOUX CARTON PANACHE CORBIERES (6) GAILLAC MINERVOIS MADIRAN 03 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 03 02 02 02 03 02 Ros Blanc Rouge Rouge Blanc Rouge Rouge Rouge Rouge Rouge 03 Ch. La Mondire Dne de Borie Vieille Domaine des Arcades - FID Folie de Roi 01 03 00 01 Rouge Rouge Rouge Rouge Exhibit 2: Wine information about the upcoming catalog season. Year 01 Color Rouge Rouge Rouge Rouge Rouge Rouge Rouge Rouge Rouge Blanc Rouge Ros Rouge Blanc Rouge Appellation CTES DU RHNE (6) BORDEAUX SUP LIRAC CORBIERES CARTON PANACHE POMEROL GRAVES HAUT-MEDOC CB BORDEAUX CARTON PANACHE CHAMBOLLE-MUSIGNY HAUTES CTES DE BEAUNE MORGON VDP des Cteaux de L'Ardche VDP des Cteaux de L'Ardche VDP du Comt Tolosan Bordeaux CARTON PANACHEE IROULEGUY BERGERAC VDP D'OC COTEAUX DU LANGUEDOC BERGERAC CHINON COTEAUX DU GIENNOIS ROSE DE LOIRE CHATEAUNEUF DU PAPE CDR VILLAGES CAIRANNE CTES DU VIVARAIS CARTON PANACHEE CTES DU JURA V. JAUNE APREMONT CTES DU JURA SAINT-ESTEPHE FITOU CDR COUR-CHEVERNY MEDOC RULLY MONTAGNE ST-EMILION Designation Dne Notre Dame des Pallires Ch. Tour Petit Puch Domaine Duseigneur (Frs 19,80) Ch. des Auzines "Les Garrigues" (4 x 3) Pts Kdo Doubls Ch. Clos Bel Air La Grande Cuve de Dourthe Ch. Beyzac Ch. Bordeneuve 4+4+2+2 Bouchard Pre et Fils Clos de la Chaise Dieu Dne de Gry Sablon - R de Clarisse La Rserve Ros du Club La Rserve Rouge du Club La Rserve Blanc du Club Rserve du Club Les Rserves du Club Dne Etxegaraya Ch. De Fumat (6) Chardonnay-Terret M. Laroche Dne Pris Ch. De Fumat Wilfrid Rousse Balland-Chapuis Cave des Perrires Clos de l'Oratoire des Papes Dne Croc de Romet Beaumont des Gras - C. Prestige (6+4+2) Fruitire de Voiteur Le Vigneron Savoyard Chardonnay btonn Ch. Haut-Corbian Ch. Lahore-Bergez Dne de la Prsidente Dne de Montey Ch. Haut-Lignan Dne Briday Ch. Les Petites Rangats Rouge Rouge Blanc Rouge Rouge Rouge Blanc Ros Rouge Rouge 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 19.95 703 8.90 480 4.70 2700 1968 13.73 1800 1356 29.50 7.50 1200 567 8.90 900 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 300 500 300 324 741 00 01 Jaune Blanc Blanc Rouge Rouge Rouge Blanc Rouge Blanc rouge 99 00 01 02 Year 02 02 Color Rouge Blanc Rouge Rouge 01 03 02 Ros Rouge Blanc Rouge 03 Designation L'enclos des Moulins Ch. Cabannieux Ch. Haut Pommarde Ch. Haut Nouchet 6+2+4 Ch. De Marsan Ch. Florimond Ch. La Grande Mtairie Ch. Gillet - FIDELITE sauf bordeaux Rserve du Club La Rserve Rouge du Club La Rserve Ros du Club La Rserve Blanc du Club Les Rserves du Club Goulaine Le Chtillet - Balland Chapuis Clos des Petites Croix - FIDELITE Ch. Philippe le Hardi Dne des Lauriers La Buxynoise Pot des Voraces - 50 cl Domaine Combe Julire La Payouse Gabriel Meffre (6) Rouge Rouge Ros Blanc Appellation FAUGERES GRAVES GRAVES PESSAC LEOGNAN CARTON PANACHE BORDEAUX CLAIRET CTES DE BOURG ENTRE DEUX MERS BORDEAUX CARTON PANACHE Bordeaux VDP des Cteaux de L'Ardche VDP des Cteaux de L'Ardche VDP du Comt Tolosan CARTON PANACHEE CABERNET D'ANJOU SANCERRE CHINON ALOXE CORTON BOURGOGNE ALIGOTE GIVRY COTEAUX DU LYONNAIS CDR Vill RASTEAU GIGONDAS COTES DU VENTOUX CARTON PANACHE CORBIERES (6) GAILLAC MINERVOIS MADIRAN 03 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 03 02 02 02 03 02 Ros Blanc Rouge Rouge Blanc Rouge Rouge Rouge Rouge Rouge 03 Ch. La Mondire Dne de Borie Vieille Domaine des Arcades - FID Folie de Roi 01 03 00 01 Rouge Rouge Rouge Rouge Exhibit 2: Wine information about the upcoming catalog season