GB570 Unit 10 Value Chain Report Example

Take Title at the Mill: A Unit 10 Value Chain Report on Moving One Boundary in an Olive Oil Chain

[Student Name]

Purdue University Global

GB570: Managing the Value Chain

Unit 10 Value Chain Report

[Instructor Name]

[Date]

The company, its suppliers, its customers and every figure are composite and illustrative; the frameworks, regulations and sources cited are real.

Executive Summary

Alder Quay should take ownership of its single-origin oil at the mill gate, beginning with the next harvest, and contract its Lisbon exporter to store, filter, test and ship that oil for a service fee. The change covers about 610 tonnes a year, the oil that goes into the 500 ml single-origin bottle: about 366 tonnes from Lagar da Ribeira, the Serpa mill that is majority-owned by Alder Quay, and about 244 tonnes from two other Alentejo mills under purchase contracts.

The change would reduce the cost of that oil by about $299,000 a year. Owning the oil from harvest until shipment would add about $153,000 a year in carrying cost, leaving a net gain of about $146,000. It requires no new capital beyond working capital of about $1.7 million on average.

It would also put the oil in Alder Quay's name in the exporter's tanks, with segregation and cleaning records owed to Alder Quay as owner, and it would make parcel and temperature records a condition of every mill contract.

The cost Alder Quay must accept is price risk. A 25 percent fall in bulk prices after harvest would leave it holding about $425,000 of oil above replacement cost. The report recommends accepting that risk, and it names the evidence that would reverse the recommendation within two years.

The Chain in Brief

The term's analysis followed one 500 ml bottle from the groves near Serpa to a Chicago grocery shelf. The bottle sells for $17.99. Growers capture about $1.95, the mill $0.60, the exporter $0.55, freight and import $0.30, Alder Quay $6.40, the distributor $1.50 and the grocery chain $6.69 (Unit 2). Alder Quay earns about 60 percent of all operating profit along the chain, about $1.95 a bottle, and the protections behind that profit are shelf placement, a recognized name, a blend specification and the single-origin promise (Unit 3).

Three later findings shape this report. The Unit 7 analysis found that buying a stake in Lagar da Ribeira cut the downgraded share of reserved lots by more than two-thirds, but left the stage between the mill and Chicago in the exporter's hands. The Unit 8 audit found that the single-origin claim, the harvest date and the cold extraction claim all weaken at the same points: the mills Alder Quay does not own and the exporter's tank transfers. And the Unit 5 review found Alder Quay dependent on one exporter that also supplies a grocery customer's store brand.

Three Candidate Boundary Moves

Three ways of moving a boundary were examined during the term, and they are compared here on equal terms: net annual value, control gained and risk added.

Build a tank farm near Évora (Unit 4). Net value about $113,000 a year after depreciation and carrying cost, on $2.6 million of capital. Control gained is high, since Alder Quay would own the tanks. Risk added is substantial: the facility would run at 58 percent of capacity, Alder Quay would take on currency exposure and testing credibility, and a 4 percent price cut by the exporter would turn the saving into a loss of about $122,000.

Ship directly to two grocery chains (Unit 9). Net value about $97,000 a year, with no capital. Control gained is limited to delivery and ordering; it does nothing for the oil. Risk added is the distributor's response in its other accounts, where a 5 percent volume loss would cost about $137,000, more than the gain.

Take title at the mill and buy the exporter's services. Net value about $146,000 a year, with working capital but no fixed capital. Control gained is high where the audit found gaps, since Alder Quay would own the oil in the tanks and set the terms for every mill. Risk added is price exposure on a harvest of owned oil.

The third move leads on value and on control. The first loses because the steel adds little that the exporter cannot provide; Williamson (1985) would note that general-purpose tanks are the kind of asset markets supply well. The second loses because it moves a function that does not touch the oil and puts at risk a relationship that still carries most of the volume.

The boundary worth moving is the one between owning the oil and buying it; the tanks and trucks can stay with the firms that run them.

The Recommendation in Detail

Who holds title, and when. Alder Quay would buy oil from the three mills at the mill gate, at a price set by contract each harvest, and title would pass when the oil is pumped into the exporter's tanker at the mill. From that point until it is loaded in a container for Chicago, the oil would belong to Alder Quay.

What the exporter does, and for what fee. The exporter would store Alder Quay's oil in dedicated tanks under nitrogen, filter it, send samples to an accredited laboratory and a recognized sensory panel, and prepare it for shipment. Its fee would be about $0.52 a kilogram, about the cost of those services plus a margin. The exporter would lose its trading margin on these lots but keep a steady service income, and it would still sell Alder Quay the oil for its larger products.

How lots stay segregated. Each lot would keep its mill batch number through every transfer. Before any of its oil enters a tank, the exporter would owe Alder Quay a signed record that the tank was emptied and cleaned, and Alder Quay could inspect those records at any time. That clause answers the three undocumented transfers found in Unit 8.

Who bears loss in storage. Small losses in filtration and tank residue, typically under 1 percent, would fall on Alder Quay as owner. Losses above an agreed threshold, or any contamination, would fall on the exporter.

What the mills must provide. Every mill contract would require parcel-level delivery records and automated temperature logs, so that the single-origin and cold extraction claims rest on evidence at the tier where those conditions occur. Lagar da Ribeira already meets this standard; the two contracted mills would be given one harvest to meet it.

Gereffi et al. (2005) classify chain relationships by how complex the information exchanged is and how easily it can be codified. This change moves Alder Quay's relationship with its mills from a market link mediated by the exporter to a relational one, where the buyer specifies the process, and it makes the exporter a captive service provider for these lots rather than a trader.

Financial Exhibit

Today Alder Quay pays about $6.52 a kilogram for Lagar da Ribeira's lots, after the nominated-lot discount, and $6.77 for the other mills' oil, about $4.04 million a year for the 610 tonnes. Under the new arrangement it would pay $5.57 at the mill, $0.52 to the exporter and about $0.04 for its own harvest buying and contract management, a total of $6.13 a kilogram, about $3.74 million. The gross saving is about $299,000.

Owning a harvest means paying for nearly all of the 610 tonnes in winter and shipping it to Chicago month by month. The oil held would average about $1.7 million in value, and carrying that balance at Alder Quay's 9 percent hurdle rate costs about $153,000 a year. The net gain is about $146,000 a year, roughly 24 cents for each kilogram covered.

Risk: The Trade Accepted

Bulk olive oil prices move sharply with Iberian harvests. Under the current arrangement, Alder Quay buys at an annual contract price, and the exporter carries the risk of prices moving while it holds stock. Under the new arrangement, Alder Quay carries it. If bulk prices fell 25 percent after Alder Quay had bought a harvest, it would be holding about 305 tonnes on average, worth about $425,000 more than its competitors would pay for the same oil later in the year. A rise in prices would produce a gain of similar size.

The report recommends accepting this risk for three reasons. It is symmetric, so over several harvests gains and losses tend to offset. Alder Quay's retail price is high enough that a one-year cost disadvantage of this size, about 22 cents a bottle, would not force a price change. And the traceability benefits do not depend on prices at all. Chopra and Meindl (2016) note that supply chain decisions which add risk are justified when the firm is better placed than its partners to manage the risk or gains something it cannot otherwise get, and Alder Quay gains proof of its label.

Currency exposure is a second, smaller risk. Mill purchases would be in euros, about €3.2 million a year at recent rates, so a 10 percent fall in the dollar would add about $340,000 to cost. Alder Quay could reduce this risk later with forward contracts placed when harvest prices are set, an option this report leaves for the next budget year.

What Would Reverse the Recommendation

Three findings within two years would justify returning to the current arrangement. The first would be a net gain well below $146,000 over two harvests, because the exporter's service fee or carrying costs turned out higher than estimated. The second would be failure of the two contracted mills to provide parcel and temperature records after one harvest, which would remove much of the traceability benefit. The third would be two consecutive harvests of falling prices, which would suggest that the price risk is not symmetric in this market and that Alder Quay is poorly placed to carry it.

Conclusion

Over the term, the analysis found that the stages which make Alder Quay's oil worth $17.99, the grove and the mill, keep the least of its price, and that the firm's most valuable protections depend on claims it cannot fully prove. Taking title at the mill addresses the second problem directly and earns money while doing it. It moves one boundary, between owning the oil and buying it, and leaves the tanks, trucks and shelves with the firms that run them.

References

Chopra, S., & Meindl, P. (2016). Supply chain management: Strategy, planning, and operation (6th ed.). Pearson.

Gereffi, G., Humphrey, J., & Sturgeon, T. (2005). The governance of global value chains. Review of International Political Economy, 12(1), 78-104. https://doi.org/10.1080/09692290500049805

Williamson, O. E. (1985). The economic institutions of capitalism: Firms, markets, relational contracting. Free Press.