Ch 2 - Supply Chain Costs Flashcards
Supply Chain Costs
What is a supply chain and what is the goal?
What is capital and what are capital costs?
What are operating costs?
○ Supply chain - orgs and processes required from creating a product to distrib to end consumer with a goal of delivering at acceptable price while covering costs and providing π margin
○ Capital - money invested in bus to generate income
○ Capital costs - money spent to acquire, improve and maint long term assets (land, buildings and equip)
○ **Operating costs **- day-to-day costs to produce and package wine
Supply Chain Costs
What are 8 key buckets of supply chain costs?
Summary question
- Grapegrowing - vineyard establishment and management
- Winemaking - winery establishment and winemaking
- Transportation - in bottle, bulk
- Importation costs - customs/duties, distributor margin
- Sales costs
- Marketing costs
- Legislative impact
- FX fluctuation impact
Supply Chain Costs
What are 4 main buckets of grape-growing and wine making costs?
- vineyard estab
- vy management
- winery estab
- winemaking
Grapegrowing costs
What is first cost to consider in grapegrowing?
What are 3 factors that influence it?
Cost of land
1. potential to grow high qual grapes
2. Scarcity of land - GI limitatiuons, esp in prestigious regions
Land in Napa 10x central valley; medoc 100x generic Bordeaux
Grapegrowing costs
What are main costs of vineyard estab?
How are capital costs funded and considerations?
-
Land cost - reflect site ability to produce high-qual fruit and the name of appellation (reputation) + scarcity of the land (limited by Gis)
§ Napa 10x more than central valley; Bordeaux 100x generic AOC -
Land prep - getting site operational
§ Surveys to det suitability for viti and which var - satellite imaging, soil tests
§ Site clearance
§ Roads/access
§ Buy and plant vines, trellis
§ Drainage/irrigation - reservoirs, pumps, drip, etc
§ Weather protection - windbreaks, hail protection, frost protection
§ Machinery/equip - tractors, harvesters, etc - can also be rented vs purch -
Funding
§ own wealth
§ loans - factor in interest/repay
§ investors - expect ROI/share in profits and maybe business involvement
§ Govn’t incentives via tax or grants
Grapegrowing costs
What are costs assoc with vineyard management?
What factors drive labor and vineyard treatment costs?
-
Labor - amount and timing varies by size, topog, season and other factors
§ Mosel - steep means no mech = more labor
§ Org/biodynamic take more labor
§ Balance labor costs and capital cost for machinery - if labor costs low (Chile), less incent to invest in machines vs opposite (Coonawarra)
§ Type of labor - varies through yr - harvest = less skilled, other parts of yr - less labor but more expensive = machines can reduce labor need, but some still needed to operate - Machinery/fuel
- Supplies - repair trellis, gloves/shears for workers
-
VY treatments
§ Conventional - large amt of agro-chems herbicide, fungicide, insecticide
§ IPM - reduce chem use - but need weather info - weather station or buy data from govn’t station
§ Org/bio dynamic - still have costs of some trad treatments -
Water
§ Right to extract water if irrigated or buy elsewhere
§ Dry years - cost of water ↑ -> can make grape growing un-π - Electricity - irrigation, frost protection, bird scarers
- Insurance/depreciation - need to replace fixed assets requires reducing value over expected life
- depreciation - reduction of value of asset over its useful life
Winemaking costs
What are 3 buckets of capital costs associated with winemaking?
- Land
- building - winery establishment
- Equipment - tanks, pipes, filters, presses, refrigeration, maturation vessels, bottling line
Funding - can be own money, investors or borrowed
winemaking costs
What are opex costs of winemaking?
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Grape provisioning - grow or buy
§ If buying, P of fruit signif cost - vary by Q of grapes, var and vintage
§ If winery making low P wine, can buy less exp var and blend (Airen, Trebbiano, Colombard, Sem) - Labor - small number of skilled, full time staff; some casual labor during harvest
- Machinery/running costs
- Winery supplies - yeast, sugar, de-acid agents, acid, CO2, SO2, fining/filter agents
- Water - wineries use large amt; if H2O expensive - can invest in water treatment plant to re-use as much as poss
- Electricity - use a lot, can install solar
- Maturation (see next card)
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Packaging - bottles, closures, labels, cartons, pallets + labor
§ Bottling line - some rent/borrow, others own - very expensive
§ Labor to run
§ Design of labels - Depreciation - replacement cost of equip
winemaking costs
What are 3 cost components and dynamics of maturation?
○ Storage space
○ Vessels - new oak very expensive, cheaper to buy second hand - but give less/no flavor char; oak alt least expensive + labor to monitor
○ Cashflow cost of time - large amt of $ tied up in maturing stock - Brunello req 5yrs min - can’t generate rev until released
winemaking costs
What is included in cellar overhead?
Non production-related costs
○ Wine prod overhead - depreciation, water, electricity, insurance
○ Non-wine prod overhead - buildings, labor
○ Transportation/distribution
○ Sales/marketing
○ Taxes/duties
Supply chain costs
What are econmies of scale?
How to scale economies apply to high vol/inexp vs small vol/prem wines?
○ Advantage a winery gets from increased production volume - spread fixed costs over larger produced volume, lowering avg cost per unit
○ Producing more units becomes cheaper, leading to greater efficiency and profitability
High Vol/inexp ○ High vol - sell at low price w/ low margin - sell high quantity -> signif invest in expensive equip which drives unit cost down w/inc volume and inc efficiency = very low P § Centrifuge, cross-flow filtration
Low vol/prem
- sell at high P w/high margin - high P and margin recoups high cost of equip and storage - minimal econ of scale = high P
Supply chain costs
What are main GRAPE GROWING cost diffs for low vol producers vs high vol?
Opex Chard vs CS producers in book p21
○ Labor - most signif cost difference is labor cost for low vol CS due to no econs of scale - hand prune/harvest, cover crops, canopy mgt (leaf removal, disbudding, green harvest)
○ RE tax on expensive land
○ Depreciation - higher replacement costs for more expensive vineyard systems - drainage, irrigation, frost protection
Supply chain costs
What are main WINEMAKING cost diffs for low vol producers vs high vol?
Opex Chard vs CS producers in book p21
○ Both cases - grape grow/buy ~70% of unit cost
○ Biggest diff - cost of oak
§ CS - high % of new barrels; replace when 3-4 yo
§ Chard - oak alt + use of s/s (reusable)
○ Overhead - difference in cost of maturation time (equip, space, water, elect, winery depreciation)
○ Smaller items - quality of materials (bottles, closures) and one-off costs (label design)
○ High vol gets econ of scale from buying at large qtys
Supply chain costs - transportation
What are options and considerations for in-bottle transport?
Pros and cons of each option and who best suited for?
4 main options from most to least exp
- Freight-forwarders - specialists in wine transport - more expensive but know how to transport fragile/perishable prod - breakage/spoilage
- Air - very expensive due to fuel cost from weight of bottles - only used in special circumstances - high value wines, beau nouveau
-
Road - mostly for short distance at beginning and end of transport
§ Efficient for short journeys - winery to point of delivery
§ Long distances - too expensive
§ Ports - truck on ferry most efficient way, but can be too expensive -
Rail - cost varies by distance and how prod is loaded onto train
§ Ind pallets - expensive load/unload
§ Containerization - prod put in standard container - much more efficient;
§ Generally more efficient than road, but depends on route -
Sea - by far cheapest method for long distance transport (cost/km)
§ Containerization essential
§ Downside - slow -> importers need to factor transport time in
Supply chain costs - transportation
How does bulk shipping work?
What are key trends/data?
Adv/Disadv?
- How done - plastic flexitank (24K L) or ISO tank (26K L)
- Adv - much cheaper and more environ-friendly -> less fuel to ship same amt of wine
§ Wine in tank much lighter than in bottle - 2x wine in bulk vs in bottle for same weight
§ Shipping containers more efficient - can hold 9-10K bottles, but 24K L in bulk (ISO tanks - 26K L) - Disadv - only good for large vol of wine -> only good for large producers/retailers (supermarkets); not viable for small producers
Trends/data
○ 2018 - world wine exports - 43% by volume shipped bulk - mainly cheap wine (accts for only 8% of value)
§ Major growth from new world - doubled bet 2001-2010
§ Spain, USA, SA, Chile all exported 40%+ in bulk
§ Current trend - historically cheap wines, inc more expensive wines using too
Supply chain costs - transportation
How does insurance factor in to transportation?
○ Party taking out the ins should be the one who bears the risk of loss/damage - generally the one sending the goods at each step (winery and then distributor)
○ Specialist freight forwarders can reduce risk - but cost more
Supply chain - importation costs
What are key cost drivers related to importations?
What are pros/cons related to using distributors?
○ Custom duties/taxes
○ Labelling requirements vary - e.g. ABV variances, health warning by country = more countries imported - adds cost due to multiple labels ○ Expertise/distributor - expensive for winery to hire/learn -> hire distributors w/expertise in foreign markets -> § Pro - benefit from knowledge of market and estab clients § Con - adds cost as they charge a fee - margin - usually calc as % of fee/revenue *100 □ Usually ranges from 5-25% - hosp sector charge most (higher costs and staff) vs retail □ Dist fee $1 per bottle that cost $10 to buy = 1/11 = 9.09% ○ Can avoid fee if buy direct from producers, but logistics efficiency often worth it
Supply chain - Sales costs
What are main sales cost buckets for retailers
○ Property cost
§ Retail locations expensive; can buy or lease; lease cheaper initially but pay rent/other expenses and when lease ends need to move
§ Rest/bar - tend to be in prime locations - most expensive to buy/lease
§ Need to invest in décor/furnishings + ongoing costs of running- maint, security, water/power, insurance
§ Property costs lower for online retail - outside city centers
○ Labor cost - vary by type of outlet - more skill = more $ + training costs § Some countries req min wage § Supermarkets - costs low - less skilled; Specialty wine sellers - more expensive § Bars/restaurants - much more expensive due to more staff (clean, serve, etc). Casual dining costs lower/fine dining - expertise/advice is expensive ○ Equip/materials - varies by type of outlet § Specialty - register/POS system, fridge, shelving, store room, displays § Restaurant - needs much more esp w/kitchen/bar - wine preservation systems expensive; π from food can offset costs ○ Storage costs § Individual shops/rest/bar - expensive wine fridges or offsite storage (cost of storage and transport) § Large chains - centralized warehouses - wine stored in cheaper out of town site then distributed; still have transport costs ○ Delivery costs to end consumer § One of most expensive parts of supply chain -> wine heavy and fragile -> more expensive than other items; risk of spoilage during transit § End consumer usually pays delivery fee, cost can vary by distance - sometimes subsidized by retailer or fixed fee § Free delivery - give cust discount w/o discounting wine itself ○ POS margin § Profit margin for retailer § Varies by country/type of retailer - specialty wine retail usually 30-50% § Bars/rest - margin much higher - up to 66.6% - cover higher costs of operation; wine BTG higher margins - spoil/unfinished
Supply chain - Marketing costs
What are the 4 main Marketing costs?
○ Labor - large prod have staff, others hire agencies
○ Industry associations (VDP) - market member wines collectively; membership fee usually based on sales
○ Design and production of bottles/labels
○ Campaigns - advert/promo materials, samples/tastings; price promotions (esp larger retailers) - producer usually bears cost
Supply chain - legislative impact
What are main legislative impacts that affect bottle price?
What are options for producers to manage these costs?
What is a bonded warehouse and how used?
○ Taxes/duties, trade barriers, subsidies, min pricing, labelling laws
Options to manage costs 1. use bonded warehouse - UK - storing imported wine in bonded warehouse can pay when someone wants to buy, who then covers cost of taking out of bond -> still pay storage cost but avoid outlay for duties until prod is sold 2. Decide whether to enter certain markets - High duty - may not be able to operate profitably there; e.g. few mid-price USA wines in EU due to tariffs and can't compete with SA/Chile wines which have trade agree - Labelling laws - may deter entrants
Supply chain - currecny fluctuation
What are 7 choices for managing currency fluctuations?
- Options
§ Reserve certain amt of product at agreed price -> producer sets aside agreed vol and at agreed time importer decides whether to take it - infl by exch rate and market cond
§ Can also do an option based on an amt of currency at an agreed price
§ Producer has risk distrib won’t buy - so charges higher P than normal
§ Larger importers have clout to negotiate these options - Fix price in currency of importer at time of ordering
§ Prices usually fixed in currency of producers - certainty of knowing how much they will get for selling wine
□ If producer does agree to this, charge a premium for accepting FX risk
§ Many importers prefer to operate in own currency - certainty of knowing how much they are paying and can det retail price based on that - Buying currency to cover specific orders - mostly only larger companies have in-house skills to manage
- Enter a contract to fix exchange rate (not an Option)
§ Importers doing a lot of business in certain currencies can hedge by contracting w/ bank or other for a given amt of currency at a defined price at a certain date
§ Importer legally bound to buy currency - importer has certainty of fixed exch rate regardless of what curr is doing
5.Trade in USD/EUR - producers in countries w/ unstable curr trade in more stable currencies
§ Importers like this too -> more certainty about price of wine
§ Producers may also buy vineyard/winery materials in USD/EUR - reduces # times need to convert
- Buyer opens FX acct in local bank
§ Payment for goods can be made directly to seller in sellers currency; still need to buy currency
§ Keeping large amt of currency in bank act might not be best use
§ Best when whole chain operates on same curr (likely across multiple countries); not suitable when goods bought in one curr and sold in another - Open acct in overseas bank
§ Same risks as opening FX acct at local bank PLUS added complexity of banking regulations - need to understand and follow all rules
