MBAD 6510-L1 – GLOBAL OPERATIONS AND SUPPLY CHAIN MANAGEMENT
Spring 2019 Course Project
The course project is based upon a case written by Drs. Clinton and Park. It is designed to be an integrative exercise that looks at both the management operations of manufacturing as well as the marketing-oriented logistics channel functions – all aimed at providing a desirable value proposition to the end consumer. It is loosely based on a December 18, 2017 Wall Street Journal article (identified in the “References” of the case materials) about the Greek olive oil business.1
The project is designed to be completed in stages – or milestones. This will enable students to utilize course concepts in an immediately practical manner while building toward a final analytical assessment. This approach also allows for sufficient time to engage in outside research to build a richer understanding of the business under discussion.
Milestone #1 – Conceptual Development of the Supply Chain
Due: Sunday, February 10th – 11:59 PM – Submit via submission link on BlackBoard.
Value: 25 points
Deliverable: Outline the entire supply chain – describing which costs are incurred at each stage. No numbers are necessary in this milestone, but you should clearly indicate how the product is developed from olive grove to delivery in Newark, New Jersey. This may be done as a drawing, in an Excel spreadsheet, etc. – whatever works best for your way of envisioning a supply chain.
Milestone #2 – Operational Process
Due: Sunday, February 24th – 11:59 PM – Submit via submission link on BlackBoard.
Value: 75 points
Deliverable: In an Excel spreadsheet, you need to create Excel tables, develop production and delivery schedules, and analyze the costs for the Ano Amfia Cooperative. First, list operational process options (i.e., product types between bottles of 250ml or 500ml, choice of bottle and label, packaging, etc.). Second, list and calculate all the costs that will be incurred in the upstream supply chain (i.e., from olive grove to the Cooperative). Third, devise a plan for shipment and calculate its costs (i.e., from the Cooperative to Hiram). In short, explain your plan and strategy to maximize profit and minimize costs for the Ano Amfia Cooperative. This is to be written as an initial report. It does not have to be a final or complete result. Do not include Hiram’s operations and costs in the report. Focus on the Cooperative. To summarize and explain what you have done, create a text box in the Excel spreadsheet and write. Do not submit a Word file.
Milestone #3 – Critical Assessment of the Overall Supply Chain
Due: Friday, March 8th – 11:59 PM – Submit via submission link on BlackBoard.
Value: 80 points
Deliverable: Written analysis of the entire supply chain through retail shelf price. This is to be written as a report to the investors. As such, it will describe the expected 2019 results for the Ano Amfia Cooperative and the Cooperative’s prospects moving forward. The format of this analysis is as follows:
ANO AMFIA COOPERATIVE
Report to Investors – Year 1 Results and Future Prospects
Overview of Ano Amfia Operations:
(This section should provide a high-level overview of the how Ano Amfia Cooperative operates, its product, etc.)
Detailed Description of Ano Amfia Cooperative’s Supply Chain:
(This section should describe – in detail – the operational and cost structure of Ano Amfia Cooperative’s supply chain. It should be supported by attachments (e.g., spreadsheets, graphics) that provide the reader with additional details. It should also discuss the retail positioning of the product and its shelf price.)
Analysis of Ano Amfia Cooperative’s Supply Chain in Years 2-5:
(This section should utilize a mixture of your analysis as well as outside research to offer insights into what you believe to be the opportunities and threats to this supply chain as it moves forward. As this report is written to investors it should also offer a frank assessment of the Cooperative’s prospects to succeed.)
Paper Details:
– Use the headings provided above to set up your paper
– Use Times New Roman, 12 pt. font
– Use one-inch margins on all sides
– Line spacing should be 1.5
– Page limit is a maximum of five (5) pages
– Attachments do not count towards the page limit; any number of attachments are acceptable
– No cover or title page or is necessary as they will be identified via the submission link on Blackboard
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Note: Drs. Clinton and Park have made every effort to make this scenario as realistic as possible. However, as they have relied upon publicly available information they may lack precise costs, production rates, etc. Recognizing this limitation, certain information in the case is crafted to enable students to perform a thorough assessment. But Drs. Clinton and Park recognize that during your research – or through personal contacts – you may find conflicting information. If so, stick to the information in the case in terms of completing the assignment but feel free to share the information with Drs. Clinton and Park so they might integrate that into future iterations of the assignment.
ANO AMFIA RESERVE
“Launching a Branded Greek Extra Virgin Olive Oil”
Nicolas Kokkinis paused briefly to inspect the stainless-steel storage tanks at the newly operational Ano Amfia Cooperative’s olive mill. The recently concluded olive harvest had provided the first opportunity to test the new olive mill’s production processes. With the processing completed the extra virgin olive oil was now being stored until bottling. While this initial year’s run would be sold locally, next year’s production would be sold to the American market.
Kokkinis grew up on a family olive farm near Ano Amfia, Greece. Located in the Peloponnese region – famed for its high-quality olives – such family farms are typically small and situated on rugged terrain. While the climate and terrain produce the prized olives, such farms are labor intensive as the uneven land does not lend itself to mechanized farming.
At an early age Kokkinis demonstrated an aptitude for academics. This enabled him to attend the Athens University of Economics and Business where he studied international economics. Following three years with a Greek shipping company, Kokkinis attended the prestigious “Institut Européen d’Administration des Affaires” (more commonly known as INSEAD) MBA program in Fontainebleau, France. Upon graduation he embarked on a career in the food industry with Nestlé S.A. (14 years) and Groupe Dannon S.A. (11 years). During his time with these two companies, Kokkinis spent considerable time living and working in the US and Europe.
His ties to Greece remained strong – returning to the Peloponnese region every summer to visit family and friends. Given his line of work and background, he also developed a keen interest in the world’s olive oil markets. On trips back to Greece he always visited the local farms and olive mills. Increasingly, he found himself wondering why the Greeks remained committed to the bulk olive oil market.
In 2010 Greece’s debt crisis plunged the country into economic chaos. The European Union (EU) demanded further austerity measures while the Greek population protested the reforms. The debt problems rippled through the olive industry. Financing for upgrades was virtually non-existent. To turn over quick returns the olive farmers remained in the bulk olive oil market – sending the majority of their “liquid gold” to Italy where it was blended with Italian olive oil and sold as a premium Italian olive oil.
Amidst this economic turmoil, Kokkinis found himself closely following the Terra Creta olive oil company located in Crete, Greece. Founded in the early 2000’s, Terra Creta devoted its efforts to the branded export market from its inception. In 2009 – as the debt crisis was building – Terra Creta opened a new production facility. This facility was necessitated by the expanding demand for Terra Creta’s branded extra virgin olive oil line. Even as the debt crisis persisted, Kokkinis noted that Terra Creta continued to prosper by exporting primarily to Western European countries.2
He also noted, while living in the US, that Americans had a growing appetite for organic and premium foods. He reasoned that given Terra Creta’s success and Americans’ willingness to pay five dollars for a coffee, there would be a market for a pure 100% Greek extra virgin olive oil. With that in mind he laid the groundwork for the Ano Amfia Cooperative.
Financing was the first step. With the Greek banking system in shambles, Kokkinis knew he would have to find funding elsewhere. Using his business and INSEAD contacts – as well as his own money – he assembled financing. The next step was to convince the conservative Greek olive farmers to forego the established bulk business in favor of a branded product. To generate a sufficient quantity of oil, more than one small family farm was needed. Kokkinis convinced eight farms in the Ano Amfia area to join his cooperative. He then secured property for a state-of-the-art olive mill and began construction. In 2014 he left his corporate position with Groupe Dannon S.A. and returned to Greece to assume leadership of the cooperative.
The Olive Oil Industry
The International Olive Oil Council has established the following classifications:
Extra Virgin
Extra-virgin olive oil comes from virgin oil production only. Extra virgin olive oil is valued for its perfect balance in terms of flavour, aroma, colour, and acidity level which does not exceed 0.8g per 100g.
Olive Oil
Usually described as “pure” or “100 percent pure,” Olive Oil is a blend of refined olive oil and extra virgin or virgin olive oil. Because the refined oil is neutral, it must be blended with extra virgin or virgin olive oil to enhance its flavor. Olive oil has an acidity level of less than 1.5 percent. It has good resistance to high temperatures and is better suited for heavy-duty, high-heat cooking.
Olive Pomace Oil
Olive-Pomace Oil is a blend of refined olive pomace oil and virgin olive oil. Pomace is the crushed olive material that remains after pressing. Oil is extracted with the use of solvents. After refining, the oil is blended with virgin olive oil to produce olive-pomace oil. It has a more neutral flavor than pure olive oil and it is suitable for use only in high-heat cooking.3
Historically, the three leading olive oil producing countries are Spain, Italy, and Greece. Generally-speaking, Italy leads in high quality branded olive oil production. Ironically, much of this derives from the importation of Greek olive oil which is then blended with Italian (and other) olive oils and sold as Italian. Such mixed olive oils are referred to as adulterated. Spain produces an extremely high volume of olive oil but much of it cannot be classified as extra virgin.
According to data provided by the Federation of Olive Oil Packaging and Labelling Industries, Greece is the third largest olive oil producer in the world and more than 70% of the total Greek olive oil production is of extra-virgin quality. Despite this fact, a 2015 National Bank of Greece report indicates that only 4% of branded olive oil sold worldwide is Greek.4 Attachment #1 provides worldwide production for the period of 2012-2017.
Harvesting generally takes place from November through early February depending upon regional climatic differences. There is also an early harvest of unripe olives that starts in October. This olive oil is known as “agourelio” and captures a higher price as the product is
richer in healthy polyphenols and typically is produced in smaller quantities.
Most olive harvesting is labor intensive. Plastic sheets are draped on the ground underneath a tree and then implements (e.g., tree rakes) are used to knock the olives to the ground. Hand-picking is also used in some cases. The olives are then placed in transport sacks and moved to the olive mill.
Olives can be processed into olive oil using the cold press method or the hot press method. Only the cold press method can be used if the resulting product is to be extra virgin olive oil. One thousand kilos of olives yield 200 kilos of extra virgin olive oil.5 Depending on the density of the oil, 200 kilos will yield between 180-210 liters. The hot press method will yield substantially more oil but at a lower quality.
The cold press method involves several steps: (1) Sort the olives by quality. (2) Rinse the olives several times with water to ensure cleanliness. (3) Crush the olives into a paste. (4) The paste is slowly heated to 27 degrees Celsius. Historically, at this stage the olives would then be “cold pressed” to produce the olive oil. However, most modern olive mills now use centrifuges to separate out the oil – but the “cold press” moniker remains in usage. (5) The resulting oil typically has a small amount of water in it at this point, so the water is removed and the pure oil is transferred to storage tanks to await bottling or bulk shipment. Modern olive mills can complete this entire process in approximately one hour.6
The olive mill storage tanks come in a variety of sizes between 500-2000 liters with 500 liters, 1000 liters, and 2000 liters being the most common. Olive oil can be safely stored in these tanks for 3-8 months, depending on the type of olives used, etc.
If the olive oil is to be bottled, one finds a wide variety of choices. The industry standard for extra virgin olive oil is a dark glass (to protect the contents) bottle. The most common sizes are 250ml, 500ml, 750ml, and 1 liter. Larger amounts are typically packaged in tins of 1 or 5-liter sizes. Round and rectangular bottles are common. However, more decorative bottles are entering the marketplace.
Ano Amfia Cooperative
Starting with his family’s farm, Kokkinis estimated he would need seven similar farms to achieve a viable level of olive oil. He needed to overcome the conservative nature of rural Greek traditional olive farmers and the allure of the quicker return on bulk olive oil. Ironically, the debt crisis that still haunted Greece in 2014 helped his efforts. With many small farmers struggling to survive, Kokkinis was able to offer a “better tomorrow” bridged by his investors’ money.
By mid-2014 Kokkinis had agreed to work with seven other farms in the immediate Ano Amfia area. Ano Amfia is situated in the EU-designated Protected Geographical Indication (PGI) of Lakonia. Such designation is designed to assure consumers that the olive oil has originated from a specific region of a country. While their target market is not the EU, Kokkinis felt it prudent to meet the EU standards. This required the farms to begin working with EU scientists that perform soil tests, suggest management techniques, etc. The goal was to have each of the eight farms meet the EU standards by the 2017 harvest.
During this transition period, Kokkinis acquired land for the cooperative’s olive mill. Construction began in March 2017 and was completed in June 2017. The cooperative’s 2017 harvest served as the process testing for the new facility. All product was sold locally this first year. At full capacity the mill can process two metric tons of olives per hour. Kokkinis estimates processing cost per liter of extra virgin olive oil at $0.78. The mill is equipped with two 1,000-liter stainless steel storage tanks. In all likelihood, the Cooperative will immediately bottle all processed extra virgin olive oil and only use the storage tanks for temporary storage.
As these various improvements took place, Kokkinis traveled to the US to meet with premium food importers. He is personally acquainted with several such individuals due to his time spent in the food industry. Eventually, he agreed to an initial one-year trial contract with Hiriam Importers, Inc. in New Jersey. Hiriam sells to specialty food retailers that operate small stores stocked with hard-to-find or premium products.
The contract calls for Ano Amfia Cooperative to provide a total of 30,000 liters of Extra Virgin Ano Amfia Reserve Olive Oil in 2018. Specifically, the Cooperative will supply 60,000 bottles of 250ml and 30,000 bottles of 500ml. Equal shipments are due to Hiriam the first of the month, beginning in February 2019 and concluding with September 2019. The terms of sale require the Cooperative to deliver the product to a transport facility in Newark, New Jersey. The Cooperative owns the product until cleared through U.S. Customs in Newark. In return, Hiriam will pay $3.40 per 250ml bottle and $6.40 per 500ml bottle. Attachment #2 provides additional information relevant to Hiriam’s additional cost considerations. As a guideline, the Cooperative has suggested a manufacturer’s suggested retail price (MSRP) of $6.99 for the 250ml bottle and $12.99 for the 500ml bottle.
Hiriam will accept larger shipments (e.g., two months’ worth of product in one shipment) in return for a 2% price discount. However, the maximum amount Hiriam will accept in a single shipment is three months’ worth of product. Should the Cooperative elect to send more than one month’s allotment, the next shipment must meet the original schedule. For example, if the Cooperative sends three months’ worth of product for the February delivery, the next shipment must be timed for May. Kokkinis feels that other than the monthly shipment option the Cooperative might consider four shipments of two months’ worth of product or three total shipments containing three-three-two months’ worth of product.
To fulfill the contract, the participating farms must provide a combined 150,000 kilograms of olives. The typical harvest for the Cooperative’s farms runs from November through the third week of December. Based on previous harvests, Kokkinis expects the farms to provide the necessary olive volume as follows: Nov-1st Week: 6%; Nov.-2nd Week: 9%; Nov.-3rd Week: 17%; Nov.-4th Week: 26%; Dec.-1st Week: 22%; Dec.-2nd Week: 15%; Dec.-3rd Week: 5%. The Cooperative buys the olives at an average price of $1.43/kilogram.
The choice of bottle and label is the Cooperative’s decision. Kokkinis has decided that from a marketing perspective, square bottles connote higher quality in the consumer’s mind as opposed to round bottles. He has received the following quotes from bottle and label manufacturers:
Square shape: (1) 250ml Quadra Antique Green Bar Top – $7 per dozen on orders of 9600 or fewer bottles; $6.60 per dozen for orders greater than 9600 bottles; (2) 500ml Quadra Antique Green Bar Top – $10.50 per dozen on orders of 9600 or fewer bottles; $9.95 per dozen on orders greater than 9600 bottles. Delivery is thirty (30) days after placement of order.[i]
Color labels are $0.10 per label up to 10,000 labels and $0.07 per label for quantities greater than 10,000. Black and white labels are $0.04 per label up to 10,000 labels and $0.03 per label for quantities greater than 10,000. Labels must be ordered in quantities of one thousand (e.g., 10,000 or 11,000). Delivery is twenty-one (21) days after placement of order.
The mill’s bottling line is fully automated and designed to handle a maximum of 1,500 bottles per hour. The bottling process includes the filling of the bottles, insertion of the cap, a shrink wrap fitting over the cap, and labeling. The bottling line is designed to handle bottles of various shapes and sizes from 250ml to 2 liters. Bottling line processing is estimated at $0.43 per liter.
The Cooperative plans to package twenty-four (24) 250ml bottles per shipping box. Each box will measure 12.25” x 8.25” x 9” and weigh 25.5 pounds. The 500ml bottles will be packaged twelve (12) to a box. Each of these shipping boxes will measure 10” x 7.5” x 11” and weigh 23 pounds.
Per the terms of the contract the Cooperative will be responsible for shipping costs from Greece to a terminal in Newark, New Jersey. All-inclusive ocean rates from the Cooperative’s warehouse to the Newark terminal total $1,240.00 per monthly shipment.[ii] If two months’ worth of product are shipped in one shipment there is an 8% cost savings; if three months’ worth of product are shipped in one shipment there is an 11% cost savings (e.g., $1,240 x 3 = $3,720 less ($3,720 x 11%) = $3,310.80). Air freight has been quoted at an average all-inclusive cost of $2.93 per box of 250ml product and $2.85 per box of 500ml product. Transit time is eighteen (18) days from pick-up at the olive mill to off-loading at the Newark terminal. Hiriam typically clears goods through U.S. Customs within three (3) days of arrival in Newark.
Due to the nature of olive oil processing (i.e., within twenty-four (24) hours of picking the olives), inventory storage is a concern. The Cooperative will have to process and bottle the entire harvest before the first shipment date in February. Light degrades olive oil. Therefore, dark bottles help prevent degradation but storage in a dim, cool area is also desirable. The mill has adequate storage for Hiriam’s entire order if necessary. Kokkinis estimates inventory holding costs to be $3,500 from the beginning of the harvest right before the first shipment. Additional holding costs will depend upon the shipment schedule. Holding costs will work out to $0.02 per 250ml bottle and $0.03 per 500ml bottle. He further estimates ordering costs at a total of $400 until all the shipments are delivered to Hiram.
Kokkinis knows the mill will generate ancillary income from by-products (primarily from olive pomace) and processing other farms’ olives for local or bulk distribution. A limited amount of these activities were undertaken in the first year of operation but did not materially contribute to the Cooperative’s bottom line. Kokkinis expects that to change but lacking hard figures at this time for these activities, he will not include them in the Cooperative’s 2019 projections related to the branded extra virgin olive oil contract.
| World Production 5-Year Average |
Attachment #1
| Source: IOC Forecast Reports November 2016 |
Attachment #2
Hiriam Importers – Additional Cost Considerations
Under the terms of sale, Ano Amfia Cooperative is obligated to deliver its extra virgin olive oil to either an air carrier’s Newark International Airport cargo terminal or to an ocean carrier’s Newark terminal. Hiriam Importers will therefore be responsible for: (a) carrier terminal fees; (b) customhouse brokerage fees to clear the shipment through U.S. Customs; (c) U.S. duty on extra virgin olive oil; and (d) cartage to its warehouse from the ocean carrier’s terminal. Hiriam Importers will then incur some inventory holding costs from the time it takes title to the goods (i.e., the point when U.S. Customs paperwork releases the merchandise from the carrier’s bonded facility) until it is sold to specialty food retailers. Assuming Hiriam Importers sells on an FOB origin basis, the retailers will incur the shipping costs. However, with each order Hiriam will incur ordering costs related to processing the order for shipment.
1) Carrier terminal fees are a flat $35 per shipment for ocean carriers and a flat $25 per shipment for air carriers.
2) Customhouse brokerage fees for any Hiriam import shipment will be $175.
3) The appropriate Harmonized Tariff Schedule number for this type of olive oil is 1509.10.2050. It carries a specific duty rate of $0.05 per kilogram on contents and container.
4) Cartage to Hiriam’s Newark-area distribution center is $1.65 per 100 pounds.
5) Ordering costs will work out to $0.03 per 250ml bottle and $0.04 per 500ml bottle.
6) Inventory holding costs will depend upon retailers’ reorders of the product and the shipping schedules. Due to this uncertainty, Hiriam estimates inventory holding costs at $2,500 for this first year. This will allow proforma financial statements to be constructed. Accounting adjustments will be made once all of the product is sold but will not concern the initial assessment of the supply chain.
Hiriam Importers typically strives to achieve a 40-50% markup on a selling price basis.
REFERENCES
1 Stamouli, Nektaria. “Greece’s Olive Oil Industry Offers A Lesson On Economic Hurdles.” The Wall Street Journal 18 Dec. 2017. Web. 18 Dec. 2017.
2 “Terra Creta.” Retrieved from http://www.terracreta.gr
3 “AGROVIM.” Retrieved from http://www.agrovim.gr
4 Stamouli, Nektaria. “Greece’s Olive Oil Industry Offers A Lesson On Economic Hurdles.” The Wall Street Journal 18 Dec. 2017. Web. 18 Dec. 2017.
5 Torrecilla, Jose S., “The Olive: It’s Processing and Waste Management.” New York: Nova Science Publishers, 2010.
6 “Terra Creta.” Retrieved from http://www.terracreta.gr
[i] “Bar Top” refers to a type of cork sealer for bottles. A cork shank is fitted with a top (plastic, wood, aluminum) and stoppers the bottle. These can be shrink-wrapped for security and to prevent inadvertent spillage.
[ii] An “all-inclusive” rate means that the entire transit from designated origin to designated destination is covered. If this constitutes a multimodal move, then all movements are part of the quoted rate.