Sun after stormA Case Study on Even’ Star Organic Farm

Dream ChasersFrom Sun Yat-sen University

ZHANG WeiHUANG PeilongPENG WeijianLIU Mengning

Introduction

Members of IMAMembers of IMA

Manager of Even’ StarManager of Even’ StarBrett

Outline

Goal: To help Even’ Star Organic Farm maximize profits in the long run.Goal: To help Even’ Star Organic Farm maximize profits in the long run.

A. Case OverviewA. Case Overview

• B1 A STORM Framework• B1 A STORM FrameworkB. Current Situation AnalysisB. Current Situation Analysis

D. Strategy PositioningD. Strategy Positioning

E. Utilization & ImplementationE. Utilization & Implementation

F. uNcertaintyF. uNcertainty

• A1 Storm before Sun• A1 Storm before Sun

• C1 Quantitative Method• C1 Quantitative Method

• C2 Qualitative Method• C2 Qualitative Method

• C1 A Differentiation Strategy• C1 A Differentiation Strategy

C. Apportion AnalysisC. Apportion Analysis

• E1 Short-Term Decision• E1 Short-Term Decision

• E2 Mid-Term Planning• E2 Mid-Term Planning

• E3 Long-Term Strategy• E3 Long-Term Strategy

• F1 Weather Conditions• F1 Weather Conditions

• F2 Petrol Price Increase• F2 Petrol Price Increase

A1 Case overview

Strategy Analysis

Utilization &Implementation

uNcertainty

Strategy Analysis

Utilization &Implementation

uNcertainty

Social Conditions

Technical Conditions

Organizational Conditions

Revenue Conditions

Market Conditions

Social Conditions

Technical Conditions

Organizational Conditions

Revenue Conditions

Market Conditions

A STORM Framework Analysis

A STORM Framework Analysis

A SUN Solution A SUN Solution

Current Situation

Strategy Analysis

Case Overview

Utilization & Implementation uNcertaintyApportion

Analysis

Apportion Analysis

Industry Retrospect: Growing Consumption of Organic Products

Huge Gap between Supply and Demand:

B1 Social Conditions

Strategy Analysis

CurrentSituation

Case Overview

Organic Product has a blooming futureOrganic Product has a blooming future

Introductory Growth Maturity

Organic Farming

Total Market Sales

Decline

Utilization & Implementation

ApportionAnalysis

uNcertaintySTORM

FrameworkSTORM

Framework

Covered with black plastic$ 133 per acre

Stored in containers

Irrigation$ 50 per acre

In the greenhouse$ 1 per seed

$ 700 per acre

B2 Technical Conditions – Planting Procedure

SeedsSeeds

SeedlingsSeedlingsContainersContainers

ProduceProduce

1

2

3

4

Yield is seriously infected by weather conditionsYield is seriously infected by weather conditions

Strategy Analysis

CurrentSituation

Case Overview

Utilization & Implementation

ApportionAnalysis

uNcertaintySTORM

FrameworkSTORM

Framework

180 miles

70 miles

220 miles

6 hours

2 hours

8 hours

Distance Time

B2 Technical Conditions – Transportation

Transportation of Product Truck $ 7000 Variable Cost: $ 0.13+ $ 0.21= $ 0.34 per Mile Depreciation of Truck $7,000

for100,000 Miles$7,000for100,000 Miles

Strategy Analysis

CurrentSituation

Case Overview

Utilization & Implementation

ApportionAnalysis

uNcertaintySTORM

FrameworkSTORM

Framework

Restaurant is the most time and distance consumingRestaurant is the most time and distance consuming

B3 Organizational Conditions

Planting Work

Transporta- tion Work

Packing Work

BrettBrett

BrettBrett

BrettBrett Part-time LaborersPart-time Laborers

$ 10 per person$ 44 per week

3 days per week

4 days per week

Brett works almost everyday without rest.Brett works almost everyday without rest.

Strategy Analysis

CurrentSituation

Case Overview

Utilization & Implementation

ApportionAnalysis

uNcertaintySTORM

FrameworkSTORM

Framework

50 +Every week

B4 Market Conditions

Selling Price HighLow

Community-SupportedAgriculture Community-SupportedAgriculture

Farmer’s MarketFarmer’s Market

RestaurantsRestaurants

Upscale restaurantsFixed product catalogue every week

High risk/high return10% spoilage rate

Restaurant CSA Farmer’s Market

CSA is getting popular in the USCSA is getting popular in the US

Advantages for farmers:1.Get to spend time marketing the food early in the year2.Receive payment early in the season, which helps with the farm's cash flow3.Have an opportunity to get to know the people who eat the food they grow

Strategy Analysis

CurrentSituation

Case Overview

Utilization & Implementation

ApportionAnalysis

uNcertaintySTORM

FrameworkSTORM

Framework

B5 Revenue Conditions – Channels

Strategy Analysis

CurrentSituation

Case Overview

Utilization & Implementation

ApportionAnalysis

uNcertaintySTORM

FrameworkSTORM

Framework

Restaurant

CSA

Farmer’sMarket

Restaurants make up 56% of the revenue

Restaurants have the highest margin per week

Restaurants have the highest margin and revenue per week.Restaurants have the highest margin and revenue per week.

B5 Revenue Conditions – Channels

Strategy Analysis

CurrentSituation

Case Overview

Utilization & Implementation

ApportionAnalysis

uNcertaintySTORM

FrameworkSTORM

Framework

Rate of Return (Revenue/ Variable cost)

Time is most effectively used in Restaurants

CSA shares the highest rate of return.

More time of CRM can be spent in the restaurant channel and the CSA has the highest potential of Profitability.

More time of CRM can be spent in the restaurant channel and the CSA has the highest potential of Profitability.

B5 Revenue Conditions – Produce

Strategy Analysis

CurrentSituation

Case Overview

Utilization & Implementation

ApportionAnalysis

uNcertaintySTORM

FrameworkSTORM

Framework

Farmer’s Market

Profit structure of each Breed

CSA Restaurants

Yield

Tomatoes’ output has far exceeded the others and its elasticity of demand is relatively little. Tomatoes’ output has far exceeded the others and its elasticity of demand is relatively little.

Social Conditions

Technical Conditions

Organizational Conditions

Revenue Conditions

Market Conditions

Social Conditions

Technical Conditions

Organizational Conditions

Revenue Conditions

Market Conditions

STORM ConditionsSTORM Conditions

Strategy Analysis

Apportion Analysis

Case Overview

Utilization & Implementation

CurrentSituation

uNcertainty

Apportion Analysis

Strategy Analysis

Apportion Analysis

Case Overview

Utilization & Implementation

CurrentSituation

uNcertainty

Classify Relevant Cost and Non-relevant Costs

Cost of seed &seedlingFertilizer costPlant, care &harvestPackagingFuelMaintenance &repairDepreciation of tangible assetsCommunication cost

Cost of seed &seedlingFertilizer costPlant, care &harvestPackaging

Cost of seed &seedlingFertilizer costPlant, care &harvest

FuelMaintenance & repairDepreciation of tangible assetsCommunication cost

FuelMaintenance & repairDepreciation of tangible assetsPreparation for the truck

Relevant Cost

Non-relevant Cost

The Restaurant Channel

The CSA Channel

The Farmers’ Market Channel

We should focus on the relevant costWe should focus on the relevant cost

Strategy Analysis

Apportion Analysis

Case Overview

Utilization & Implementation

CurrentSituation

uNcertainty

Caselot for CSA

Items Percentage of Last Season

Percentage of This Season

Tomatoes (large) 12.50% 12.50%Tomatoes (small) 8.25% 14.12%

Watermelon 10.00% 5.00%Okra 5.00% 9.00%Basil 5.00% 7.00%

Cucumbers 16.67% 5.00%Sweet potatoes 10.00% 11.00%Winter squash 18.75% 21.68%

Foundation of Adjustment:1.Different profit margin of different crops2.Variability and Abundance3.Long term CRM (Focus on CSA)

C1. Quantitative Analysis – Linear Programming

Tomatoes (large)

Watermelon

Basil

The Restaurant Channel

Tomatoes (small)

Cucumber

Sweet potatoes

Winter squash

Okra

The CAS Channel The Farmers’ Market Channel

▪ 2.175X

▪ 3.5X

▪ 0.4X

▪ 0.15X

▪ 0.2X

▪ 0.9X

▪ 0.33X

▪ 0.225X

▪ 0.125Y

▪ 0.141Y

▪ 0.05Y

▪ 0.094Y

▪ 0.07Y

▪ 0.15Y

▪ 0.11Y

▪ 0.22Y

▪ 31-(2.175X+0.125Y)

▪ 45-(3.5X+0.141Y)

▪ 13.33-(0.4X+0.05Y)

▪ 5.6-(0.15X+0.094Y)

▪ 4.8-(0.2X+0.07Y)

▪ 22.33-(0.9X+0.15Y)

▪ 7.11-(0.33X+0.11Y)

▪ 8.88-(0.225X+0.22Y)

Step One List all the constrained conditions & objective functionStep One List all the constrained conditions & objective functionStep One List all the constrained conditions & objective functionStep One List all the constrained conditions & objective function

Strategy Analysis

Apportion Analysis

Case Overview

Utilization & Implementation

CurrentSituation

uNcertainty

Constrained ConditionConstrained Condition

0 ≤ 130.06-(7.883X+0.8617Y) ≤ 40

0≤5+1.183X+0.6208Y≤24

1. Constrained by products1. Constrained by products

2. Constrained by working hours2. Constrained by working hours

3. Constrained by truck capacity3. Constrained by truck capacity

Objective FunctionObjective Function

0 ≤ 31-(2.175X+0.125Y) ≤310 ≤ 45-(3.5X+0.141Y) ≤ 450 ≤ 13.33-(0.4X+0.05Y) ≤ 13.33

0 ≤ 5.6-(0.15X+0.094Y) ≤ 5.60 ≤ 4.8-(0.2X+0.07Y) ≤ 4.80 ≤ 22.33-(0.9X+0.15Y) ≤ 22.330 ≤ 7.11-(0.33X+0.11Y) ≤ 7.110 ≤ 8.88-(0.225X+0.22Y) ≤ 8.88

Quantitative Analysis – Linear Programming

Z=3081.47-32.918X-0.62601Y

Step One List all the constrained conditions & objective functionStep One List all the constrained conditions & objective functionStep One List all the constrained conditions & objective functionStep One List all the constrained conditions & objective function

Strategy Analysis

Apportion Analysis

Case Overview

Utilization & Implementation

CurrentSituation

uNcertainty

Step Two Feasible Region within the restrained conditions Step Two Feasible Region within the restrained conditions

Quantitative Analysis – Linear Programming

Strategy Analysis

Apportion Analysis

Case Overview

Utilization & Implementation

CurrentSituation

uNcertainty

（ 8.98 ， 31.63）

Quantitative Analysis – Linear Programming

Step Three Optimal solution of linear programmingStep Three Optimal solution of linear programming

Because of integer programmingOptimal solution: Quantity of Restaurants served: X=9 Quantity of CSA subscribers: Y=32Maximized relevant profits per week: Z=3081.47-32.918×9-0.62601×32 ≈$ 2764.18

Strategy Analysis

Apportion Analysis

Case Overview

Utilization & Implementation

CurrentSituation

uNcertainty

Quantitative Analysis – Planned Sales Structure

　 Cases

Tomatoes (large) 19.58

Tomatoes (small) 31.50

Watermelon 3.60

Okra 1.35

Basil 1.80

Cucumbers 8.10

Sweet potatoes 3.00

Winter squash 2.03

The Restaurant Channel

The Restaurant Channel

The CSA ChannelThe CSA Channel

The Farmers' Market Channel

The Farmers' Market Channel

Average Weekly Restaurant Delivery Composition(Total for 9 Customers)

Average Make-up of a Single CSA “Box”(Total for 32 Subscribers)

Average Weekly Sales

　 Approximate % of a Standard Harvest Case

Tomatoes (large) 12.50%

Tomatoes (small) 14.12%

Watermelon 5%

Okra 9%

Basil 7%

Cucumbers 5.00%

Sweet potatoes 11%

Winter squash 21.68%

Cases

Tomatoes (large) 7.43

Tomatoes (small) 8.98

Watermelon 8.13

Okra 1.24

Basil 0.76

Cucumbers 12.63

Sweet potatoes 0.44

Winter squash 0

Strategy Analysis

Apportion Analysis

Case Overview

Utilization & Implementation

CurrentSituation

uNcertainty

9 3 2

Qualitative Analysis

Strategy Analysis

Apportion Analysis

Case Overview

Utilization & Implementation

CurrentSituation

uNcertainty

Solvency

Significant debtSignificant debt Time of Cash-in FlowTime of Cash-in Flow

Restaurant Channel: CSA Channel: Receive $400 from each subscriber at the beginning of the 15-week season.Farmers’ Market Channel: Cash sale

To buy and build the farm, Brett spent a lot from saving and assumed significant debt.

Increase the sales of CSA channel and Farmers’ market while decrease the sales of restaurant channel.

Increase the sales of CSA channel and Farmers’ market while decrease the sales of restaurant channel.

To improve the cash flow performanceTo improve the cash flow performance

Opportunity Cost

Brett hope the farm would become profitable enough to support them both comfortably in the near future.

Brett hope the farm would become profitable enough to support them both comfortably in the near future.

ChannelTime consumed

(hours per week)

The restaurants 14.83

CSA 8.9

Farmer markets 27

In total 50.73

Qualitative Analysis

Strategy Analysis

Apportion Analysis

Case Overview

Utilization & Implementation

CurrentSituation

uNcertainty

Personal SatisfactionPersonal Satisfaction

Proper working hours and schedule should be made.e.g. working hours≤ 48h per week

Proper working hours and schedule should be made.e.g. working hours≤ 48h per week

Qualitative Analysis

Trend of Different Channels

The restaurant channel: additional 10 potential restaurants in the coming season

The restaurant channel: additional 10 potential restaurants in the coming season

Strategy Analysis

Apportion Analysis

Case Overview

Utilization & Implementation

CurrentSituation

uNcertainty

The CSA channel: 33 to 90 potential subscribers growth rate of 220% of CSA channel in general

The CSA channel: 33 to 90 potential subscribers growth rate of 220% of CSA channel in general

The farmers’ market channel: high risk and high profit with large demandThe farmers’ market channel: high risk and high profit with large demand

Very GoodVery Good

GoodGood

IncreaseIncrease

IncreaseIncrease

Case Overview

Utilization & Implementation

CurrentSituation

uNcertaintyApportionAnalysis

Strategy Analysis

StrategyVISION: to provide high-quality & hi-end organic

productVISION: to provide high-quality & hi-end organic

product

Food with high quality

1.A huge gap in the market 2.A sharp increase in potential customers

A sharp decrease in yield next year

uncertainties in weather and other related factors

S

W

O

T

Internal ExternalDifferentiation Strategy

Strategy Analysis

Case Overview

CurrentSituation

uNcertaintyApportionAnalysis

Utilization & Implementation

Short-term decision – Planned Sales Structure

　 Cases

Tomatoes (large) 19.58

Tomatoes (small) 31.50

Watermelon 3.60

Okra 1.35

Basil 1.80

Cucumbers 8.10

Sweet potatoes 3.00

Winter squash 2.03

The Restaurant Channel

The Restaurant Channel

The CSA ChannelThe CSA Channel

The Farmers'’ Market ChannelThe Farmers'’

Market Channel

Average Weekly Restaurant Delivery Composition(Total for 9 Customers)

Average Make-up of a Single CSA “Box”(Total for 38 Subscribers)

Average Weekly Sales

　 Approximate % of a Standard Harvest Case

Tomatoes (large) 12.50%

Tomatoes (small) 14.12%

Watermelon 5%

Okra 9%

Basil 7%

Cucumbers 5.00%

Sweet potatoes 11%

Winter squash 21.68%

Cases

Tomatoes (large) 7.43

Tomatoes (small) 8.98

Watermelon 8.13

Okra 1.24

Basil 0.76

Cucumbers 12.63

Sweet potatoes 0

Winter squash 0

93 8

3 2

Slight adjustment due to strategic concerns.Slight adjustment due to strategic concerns.

The Resturant

Channel

The CSA Channel

Farmers' Market

ChannelTotal

Revenue 2113.99 921.00 1298.82 4333.81

Cost of sales(including packaging) (1233.26) (385.59) (481.84) (2100.69)

Gross profit 880.73 535.41 816.98 2233.12 Less Operating expenses: Depreciation of tangible assets (15.05) (4.90) (20.30) (40.25) Fuel (45.15) (14.70) (60.90) (120.75)

Maintance and repair (27.95) (9.10) (37.70) (74.75)

General and adminstrative expense(communicaiton) (3.69) (0.70) 0.00 (4.39)

Total operating expenses (91.84) (29.40) (118.90) (240.14)Operating profit for week 788.89 506.01 698.08 1992.98

Short-term decision – Forecast Income Statement

Strategy Analysis

Case Overview

CurrentSituation

uNcertaintyApportionAnalysis

Utilization & Implementation

Brett’s Timetable 6:00

-7:00

7:00-

8:00

8:00-

9:00

9:00-

10:00

10:00-

11:00

11:00-

12:00

12:00-

13:00

13:00-

14:00

14:00-

15:00

15:00-

16:00

16:00-

17:00

17:00-

18:00

18:00-

19:00

19:00-

20:00

20:00-

21:00

Monday

Tuesday

Wednesday

Thursday

Friday

Saturday

Sunday

Farmers’ MarketFarmers’ Market

Farmers’ MarketFarmers’ Market

Leisure DayLeisure Day

PackingPacking

Communication (CSA)

Communication (CSA)

TEL(Restaurant)

TEL(Restaurant)

Transportation (CSA)

Transportation (CSA)

FarmManagement

FarmManagement

FarmManagement

FarmManagement

FarmManagement

FarmManagement

Strategy Analysis

Case Overview

CurrentSituation

uNcertaintyApportionAnalysis

Utilization & Implementation

Save unnecessary time so as to take care of the farm and rest Save unnecessary time so as to take care of the farm and rest

Mid-Term Planning

Sensitivity AnalysisSensitivity Analysis

Variable Value Price Added per Unit Limitation Increment

AllowedDecrement

Allowed

Truck’s Capacity 40 5 40 62.77 12.97

Advice:Purchase a New Truck in 2 yearsEstimated Cost: $10,000Capacity: 30 Cases per TripValue Added: $5×30 × 2= $300 per Week

Strategy Analysis

Case Overview

CurrentSituation

uNcertaintyApportionAnalysis

Utilization & Implementation

Purchase a new truck to enhance capacity.Purchase a new truck to enhance capacity.

Analysis: Transportation to Restaurants per Week:

• Gasoline Cost: $0.21 × 220 = $46.2• Depreciation & Maintenance Costs: ($0.07+&0.13)×220= $ 44• Time Consuming: 3.5 + 0.5 × 10 = 8 (hrs)• Opportunity Cost: $10 × 8 = $80(Based on 10 restaurants and gasoline price stays)

Advice: Outsource the Transportation to Restaurants• Cost Added: $ 150 per week• Profit Added: $46.2+$44+$80-$150 = $20.2 per week

Mid-Term PlanningTransportation OutsourceTransportation Outsource

The numbers of restaurants are increasing .Oil prices are soaring!The numbers of restaurants are increasing .Oil prices are soaring!

Strategy Analysis

Case Overview

CurrentSituation

uNcertaintyApportionAnalysis

Utilization & Implementation

Outsource transportation to restaurants to save time and cost.Outsource transportation to restaurants to save time and cost.

Strategy Analysis

Case Overview

Utilization & Implementation

CurrentSituation

uNcertaintyApportionAnalysis

uNcertainty - Weather Conditions

Worst ConditionWorst ConditionBest ConditionBest Condition Average ConditionAverage Condition

1. Weather1. Weather

Weather: rainyResult: half products unsold ; 50% of unsold spoiled.

Weather: normalResult: overall spoilage rate is about 10%.

Weather: sunnyResult: sell out all the product.

Weather of Summer(Jun to Aug) in South Maryland:

Average rainfall/precipitation: 286.5 mmAverage rainy days: 22.3 days

Strategy Analysis

Case Overview

Utilization & Implementation

CurrentSituation

uNcertaintyApportionAnalysis

uNcertainty - Weather Conditions

Best

Average

condition Revenue & Profit per week Action

Worst

Rainy days 20<X<30

Rainy days X<20

Rainy days X>20

Revenue: $4478.12Profit: $2137.29

Revenue: $4333.81Profit: $1992.98

Revenue:$3756.55Profit: $1415.73

Shift the scale from farmers’ market to restaurants and CSA channel.

Make preparation for different weather conditions.Make preparation for different weather conditions.

uNcertainty

2. Gasoline Price2. Gasoline PriceThe pump price is raised

Enlarge the sale scale of CSA.

Decrease the delivery of long distance restaurants.

Outsource the delivery service.

What to doWhat to do

IfIf

ThenThen The cost of delivery increases

2009 Nov

$ 2.65 per gallon

2010 Nov

$ 2.82 per gallon

2011 Nov

$ ?

10% increased

Still increasing

Strategy Analysis

Case Overview

Utilization & Implementation

CurrentSituation

uNcertaintyApportionAnalysis

Increasing Price of fertilizer Mitigation:Grow those crops that use less fertilizer.Raise the price slightly.

Rapid InflationMitigation:Increase the price

Pay attention to the other uncertaintiesPay attention to the other uncertainties

uNcertainty

Strategy Analysis

Case Overview

Utilization & Implementation

CurrentSituation

uNcertaintyApportionAnalysis

A STORM framework Analysis

Social Conditions

Technical Conditions

Organizational Conditions

Revenue Conditions

Market Conditions

Social Conditions

Technical Conditions

Organizational Conditions

Revenue Conditions

Market Conditions

A. Case OverviewA. Case Overview

B. Current Situation AnalysisB. Current Situation Analysis

D. Strategy PositioningD. Strategy Positioning

E. Utilization & ImplementationE. Utilization & Implementation

F. uNcertaintyF. uNcertainty

C. Apportion AnalysisC. Apportion Analysis

Summary

A SUN Solution

Management Accounting Approaches such as Linear Programming and Sensitivity Analysis are applied to help Even’ Star Organic Farm go from storm to sun.

Management Accounting Approaches such as Linear Programming and Sensitivity Analysis are applied to help Even’ Star Organic Farm go from storm to sun.

Thank You for Your Time!

Dream ChasersFrom Sun Yat-sen University

ZHANG WeiHUANG PeilongPENG WeijianLIU Mengning