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Slides_for_class_3 - Value Added Hedging Demand Food...

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1 Variable planting to cover high risk months Incremental plantings range from 105% to 120% Raw Material Plantings as percent of Requirements 95% 100% 105% 110% 115% 120% 125% JanJanFeb March Apr May JunJunJulyAugAug Sept OctOctNov DecDec Weeks Percent of Requirements Value Added Hedging Demand Hedge Supply Food Service requires uninterrupted supply for their menu items (McDonalds, Subway, Taco Bell, etc.) Pricing is adjustable, to a large degree, during extreme market conditions (Franchises go crazy) Sell the value of uninterrupted supply, at much more predictable costs, and with high food safety assured Charge an “over supply fee” based on a cost/pound rate Fee is the equivalent of 25-75% prior year’s incremental pricing (a savings) Form a commodity desk to sell excess supply in the field
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Role of variable planting percentage Variable planting percentage = percent excess supply  Range from 5-20% by month over course of the year in  example on last page How would you calculate this percentage? How would you use the percentage, once calculated? Externally, with customers and suppliers? Internally, with sales and raw product sourcing teams? 2
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Challenges How does the overbuy approach impact the spot market? Will this impact affect the cost of the overbuy approach? How will this impact evolve as the overbuy program expands and is replicated by  Fresh Express’ competitors? Who will care, and how might they react? What happened: Growers felt the pain immediately and rallied to “fight back” Boycott Fresh Express? Quite typical: Incumbents feel pain and leverage the power of their position  faster than new entrants can leverage the new opportunity What would you do? Hint: Do all current and prospective customers of Fresh Express require  the high service level of current customers like Subway? 3
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Produce: A commodity product “At the market” pricing and availability Non-branded suppliers Packaged salads: A consumer packaged good Branded, fixed price, guaranteed on-shelf availability Higher margin Exciting opportunity for major grocery chains like Safeway As a supplier, pros and cons of packaged salads / consumer packaged goods model? Hint: Assess how Fresh Express’ profit margin, and The consumer’s buying decision (packaged salad vs. unprocessed produce) are impacted by variations in supply price (raw product) and availability Solution: Overbuy? Ability to change price to keep it above price of unprocessed produce?
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This note was uploaded on 06/16/2010 for the course MS&E 369 taught by Professor Blakejohnson during the Spring '08 term at Stanford.

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Slides_for_class_3 - Value Added Hedging Demand Food...

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