Leclub Francais Case

The retail price of a bottle of wine is typically 10 Euro. A bottle of wine that is being sold allows Le Club to earn a 50% gross margin on the retail price and pays 5 Euro to the wine grower. Customers do not have to pay transportation costs and hence a cost of 1.25 Euro is being covered by Le Club. The profit remaining that Le Club earns is 3.75 Euro per bottle. The maximum number of days that a firm can wait before settling a bill is 75 days. While this would not affect Le Club if the forecasted demand matches the actual demand, it is difficult to accurately forecast the actual demand. Hence, Le Club would find its cash position affected. The rest of the report showcases how the firm would be affected by having one bottle too few/many in the inventory.

Underage Cost

Customers can place their order for wine through a variety of channels such as mail, phone, fax or over the internet. However, with a large portion of the firm’s customers in their 60s, orders by mail can be frequent and customers may be unaware of the availability of the wine. Some of the customers demand may be unfulfilled and would be classified to be lost. This results in Le Club missing out on its associated profit margins. Hence, underestimating the demand forecast can result in revenue that is being missed out on.

Calculation: Consider a 10 Euro retail price for 1 bottle of Cotes Du Rhone(6).

Exhibit 1 shows that the forecasted demand for this type of wine is 10,000 while the actual demand is 11,280, meaning an excess inventory of 1,280 bottles.

Profits from the sale of wine: 5 Euro (profit) x 10,000 = 50,000 Euro

Profits after transportation and handling costs: 50,000 - (1.25x10,000) = 37,500 Euro

If Le Club managed to satisfy the actual demand, profits earned would be 11,280x(5-1.25) = 42,300 Euro, a 12.8% higher profit than having too few inventory. This 12.8 percent will be included in cost.

Overage Cost

When Le Club over-forecasts its demand, it faces an excess in inventory and brings about additional costs in addition to its unearned revenue. With the unsold inventory, Le Club has to store its excess bottle of wines in a warehouse and the direct and indirect warehouse operation cost is 0.10 Euro per bottle per month. There are currently over 200,000 bottles held in the warehouse, causing Le Club to face an equivalent cost of over 20000 Euro per month. Furthermore, the lack of collected payment may not allow Le Club to fully settle the bill for the wine-grower, affecting its cash position. Some types of wine may face an underestimation in the forecasted demand. However, the idiosyncratic taste of French wines does not allow one brand wine in excess to replace another brand that is lacking in inventory. Hence, the excess bottles of wines that are being stored would likely require significant discounts and would be discounted in a future catalog in order to liquidate the inventory. The discount would vary depending on the type of wine. With the aforementioned situations in place, this could potentially cause Le Club to operate at a loss.