Liquid Gold: Calambra Olive Oil (B)

Abstract

The Liquid Gold cases are an adaptation of the original Calambra Olive Oil cases (UVA-QA-0440 and UVA-QA-0442). This version has been written to support a modified classroom experience. The cases describe the start-up of Calambra, a company built to sell a premier brand of olive oil. Frank Lockfeld, the founder, has to determine how much olive oil to make for the second year’s production. Unfortunately, he has to make this decision before learning the results of the first year’s sales. Thus, there is enormous uncertainty around the decision. The A case (UVA-QA-0587) tells the start-up story and presents enough information for students to do a sensitivity analysis to decide which of the many uncertainties are most important. This leads to a discussion of tornado diagrams. The B case (UVA-QA-0588) provides information on those critical uncertainties. This leads to a class on spreadsheet modeling and simulation modeling, searching for an optimal order quantity, adjusting for risk, etc. It also enables a discussion of a key general business issue: the difference between make-to-order and make-to-inventory businesses and the fundamental flaw in most business plans that leads to gross overestimates of potential profitability.

Excerpt

UVA-QA-0588

Rev. May 23, 2010

LIQUID GOLD: CALAMBRA OLIVE OIL (B)

You:  Okay, the Tornado chart shows we need to think more about demand—particularly the 1994 demand, the sales price, and the broker discount. Let’s talk about demand first. Do you mind if I tape our conversation? That way, I can review the tape and make sure I remember what you say.

Frank: That’s fine with me.

Demand Assessment

You: Great. Let’s start with demand. Do you still think you will sell all of the 1993 oil? What are the chances of this?

. . .

Keywords: decision analysis, spreadsheet modeling, monte carlo simulation, simulation