From Sun Yat-sen University Sun after storm A Case Study on Even’ Star Organic Farm Dream Chasers From Sun Yat-sen University ZHANG Wei HUANG Peilong PENG Weijian LIU Mengning

Introduction Manager of Even’ Star Brett Members of IMA

Outline A. Case Overview A1 Storm before Sun B1 A STORM Framework B. Current Situation Analysis C1 Quantitative Method C2 Qualitative Method C. Apportion Analysis C1 A Differentiation Strategy D. Strategy Positioning E1 Short-Term Decision E2 Mid-Term Planning E. Utilization & Implementation E3 Long-Term Strategy F1 Weather Conditions F. uNcertainty F2 Petrol Price Increase Goal: To help Even’ Star Organic Farm maximize profits in the long run.

Utilization & Implementation Case Overview Current Situation Apportion Analysis Strategy Analysis Utilization & Implementation uNcertainty A1 Case overview A STORM Framework Analysis Social Conditions Technical Conditions Organizational Conditions Revenue Conditions Market Conditions Apportion Analysis A SUN Solution Strategy Analysis Utilization &Implementation uNcertainty

Utilization & Implementation Case Overview Current Situation Apportion Analysis Strategy Analysis Utilization & Implementation uNcertainty STORM Framework B1 Social Conditions Industry Retrospect: Growing Consumption of Organic Products Huge Gap between Supply and Demand: Introductory Growth Maturity Organic Farming Total Market Sales Decline Organic Product has a blooming future

Utilization & Implementation Case Overview Current Situation Apportion Analysis Strategy Analysis Utilization & Implementation uNcertainty STORM Framework B2 Technical Conditions – Planting Procedure Stored in containers Covered with black plastic $ 133 per acre 2 Seedlings 4 Containers 1 Seeds In the greenhouse $ 1 per seed $ 700 per acre Irrigation $ 50 per acre 3 Produce Yield is seriously infected by weather conditions

B2 Technical Conditions – Transportation Case Overview Current Situation Apportion Analysis Strategy Analysis Utilization & Implementation uNcertainty STORM Framework 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 180 miles 70 miles 220 miles 6 hours 2 hours 8 hours Distance Time Restaurant is the most time and distance consuming

B3 Organizational Conditions Case Overview Current Situation Apportion Analysis Strategy Analysis Utilization & Implementation uNcertainty STORM Framework B3 Organizational Conditions Planting Work Brett 3 days per week Transporta- tion Work Brett 4 days per week 50 + Every week Packing Work Brett Part-time Laborers $ 10 per person $ 44 per week Brett works almost everyday without rest.

Utilization & Implementation Case Overview Current Situation Apportion Analysis Strategy Analysis Utilization & Implementation uNcertainty STORM Framework B4 Market Conditions Low High Selling Price Restaurant CSA Farmer’s Market Restaurants Community-Supported Agriculture Upscale restaurants Fixed product catalogue every week Advantages for farmers: 1.Get to spend time marketing the food early in the year 2.Receive payment early in the season, which helps with the farm's cash flow 3.Have an opportunity to get to know the people who eat the food they grow Farmer’s Market High risk/high return 10% spoilage rate CSA is getting popular in the US

B5 Revenue Conditions – Channels Case Overview Current Situation Apportion Analysis Strategy Analysis Utilization & Implementation uNcertainty STORM Framework B5 Revenue Conditions – Channels Restaurants have the highest margin and revenue per week. Restaurants make up 56% of the revenue Restaurant CSA Farmer’s Market Restaurants have the highest margin per week

B5 Revenue Conditions – Channels Case Overview Current Situation Apportion Analysis Strategy Analysis Utilization & Implementation uNcertainty STORM Framework B5 Revenue Conditions – Channels 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.

B5 Revenue Conditions – Produce Case Overview Current Situation Apportion Analysis Strategy Analysis Utilization & Implementation uNcertainty STORM Framework B5 Revenue Conditions – Produce Yield Farmer’s Market Profit structure of each Breed CSA Restaurants Tomatoes’ output has far exceeded the others and its elasticity of demand is relatively little.

Utilization & Implementation Case Overview Current Situation Apportion Analysis Strategy Analysis Utilization & Implementation uNcertainty Social Conditions Technical Conditions Organizational Conditions Revenue Conditions Market Conditions STORM Conditions Apportion Analysis

Classify Relevant Cost and Non-relevant Costs Case Overview Current Situation Apportion Analysis Strategy Analysis Utilization & Implementation uNcertainty Classify Relevant Cost and Non-relevant Costs Relevant Cost Non-relevant Cost The Restaurant Channel The CSA Channel The Farmers’ Market Channel We should focus on the relevant cost Cost of seed &seedling Fertilizer cost Plant, care &harvest Packaging Fuel Maintenance &repair Depreciation of tangible assets Communication cost Cost of seed &seedling Fertilizer cost Plant, care &harvest Packaging Cost of seed &seedling Fertilizer cost Plant, care &harvest Fuel Maintenance & repair Depreciation of tangible assets Communication cost Fuel Maintenance & repair Depreciation of tangible assets Preparation for the truck

Utilization & Implementation Case Overview Current Situation Apportion Analysis Strategy Analysis Utilization & Implementation uNcertainty Caselot for CSA Foundation of Adjustment: Different profit margin of different crops Variability and Abundance Long term CRM (Focus on CSA) Items Percentage of Last Season This Season Tomatoes (large) 12.50% Tomatoes (small) 8.25% 14.12% Watermelon 10.00% 5.00% Okra 9.00% Basil 7.00% Cucumbers 16.67% Sweet potatoes 11.00% Winter squash 18.75% 21.68%

C1. Quantitative Analysis – Linear Programming Case Overview Current Situation Apportion Analysis Strategy Analysis Utilization & Implementation uNcertainty C1. Quantitative Analysis – Linear Programming Step One List all the constrained conditions & objective function Tomatoes (large) Watermelon Basil The Restaurant Channel Tomatoes (small) Cucumber Sweet potatoes Winter squash Okra The CAS Channel The Farmers’ Market Channel 2.175X 0.125Y 31-(2.175X+0.125Y) 3.5X 0.141Y 45-(3.5X+0.141Y) 0.4X 0.05Y 13.33-(0.4X+0.05Y) 0.15X 0.094Y 5.6-(0.15X+0.094Y) 0.2X 0.07Y 4.8-(0.2X+0.07Y) 0.9X 0.15Y 22.33-(0.9X+0.15Y) 0.33X 0.11Y 7.11-(0.33X+0.11Y) 0.225X 0.22Y 8.88-(0.225X+0.22Y)

Quantitative Analysis – Linear Programming Case Overview Current Situation Apportion Analysis Strategy Analysis Utilization & Implementation uNcertainty Quantitative Analysis – Linear Programming Step One List all the constrained conditions & objective function Constrained Condition 0 ≤ 31-(2.175X+0.125Y) ≤31 1. Constrained by products 0 ≤ 45-(3.5X+0.141Y) ≤ 45 0 ≤ 13.33-(0.4X+0.05Y) ≤ 13.33 0 ≤ 5.6-(0.15X+0.094Y) ≤ 5.6 0 ≤ 4.8-(0.2X+0.07Y) ≤ 4.8 0 ≤ 22.33-(0.9X+0.15Y) ≤ 22.33 0 ≤ 7.11-(0.33X+0.11Y) ≤ 7.11 0 ≤ 8.88-(0.225X+0.22Y) ≤ 8.88 2. Constrained by working hours 0≤5+1.183X+0.6208Y≤24 3. Constrained by truck capacity 0 ≤ 130.06-(7.883X+0.8617Y) ≤ 40 Objective Function Z=3081.47-32.918X-0.62601Y

Utilization & Implementation Case Overview Current Situation Apportion Analysis Strategy Analysis Utilization & Implementation uNcertainty Quantitative Analysis – Linear Programming Step Two Feasible Region within the restrained conditions （8.98，31.63）

Quantitative Analysis – Linear Programming Case Overview Current Situation Apportion Analysis Strategy Analysis Utilization & Implementation uNcertainty Quantitative Analysis – Linear Programming Step Three Optimal solution of linear programming Because of integer programming Optimal solution: Quantity of Restaurants served: X=9 Quantity of CSA subscribers: Y=32 Maximized relevant profits per week: Z=3081.47-32.918×9-0.62601×32 ≈$ 2764.18

Utilization & Implementation Case Overview Current Situation Apportion Analysis Strategy Analysis Utilization & Implementation uNcertainty Quantitative Analysis – Planned Sales Structure The Restaurant Channel The CSA Channel The Farmers' Market Channel 9 3 2 Average Weekly Restaurant Delivery Composition (Total for 9 Customers) Average Make-up of a Single CSA “Box” (Total for 32 Subscribers) Average Weekly Sales 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 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

Utilization & Implementation Case Overview Current Situation Apportion Analysis Strategy Analysis Utilization & Implementation uNcertainty Qualitative Analysis Solvency Significant debt Time 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. To improve the cash flow performance Increase the sales of CSA channel and Farmers’ market while decrease the sales of restaurant channel.

Utilization & Implementation Case Overview Current Situation Apportion Analysis Strategy Analysis Utilization & Implementation uNcertainty Qualitative Analysis Opportunity Cost Channel Time consumed (hours per week) The restaurants 14.83 CSA 8.9 Farmer markets 27 In total 50.73 Brett hope the farm would become profitable enough to support them both comfortably in the near future. Proper working hours and schedule should be made. e.g. working hours≤ 48h per week Personal Satisfaction

Utilization & Implementation Case Overview Current Situation Apportion Analysis Strategy Analysis Utilization & Implementation uNcertainty Qualitative Analysis Trend of Different Channels The restaurant channel: additional 10 potential restaurants in the coming season Good Increase The CSA channel: 33 to 90 potential subscribers growth rate of 220% of CSA channel in general Very Good Increase The farmers’ market channel: high risk and high profit with large demand

Utilization & Implementation Case Overview Current Situation Apportion Analysis Strategy Analysis Utilization & Implementation uNcertainty Strategy VISION: to provide high-quality & hi-end organic product S O 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 Internal Differentiation Strategy External W T

Utilization & Implementation Case Overview Current Situation Apportion Analysis Strategy Analysis Utilization & Implementation uNcertainty Short-term decision – Planned Sales Structure 3 8 The Restaurant Channel The CSA Channel The Farmers'’ Market Channel 9 3 2 Average Weekly Restaurant Delivery Composition (Total for 9 Customers) Average Make-up of a Single CSA “Box” (Total for 38 Subscribers) Average Weekly Sales 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 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 Winter squash Slight adjustment due to strategic concerns.

Short-term decision – Forecast Income Statement Case Overview Current Situation Apportion Analysis Strategy Analysis Utilization & Implementation uNcertainty Short-term decision – Forecast Income Statement The Resturant Channel The CSA Channel Farmers' Market Channel Total 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

Utilization & Implementation Case Overview Current Situation Apportion Analysis Strategy Analysis Utilization & Implementation uNcertainty Brett’s Timetable 6:00 - 7:00 8:00 9:00 10:00 11:00 12:00 13:00 14:00 15:00 16:00 17:00 18:00 19:00 20:00 21:00 Monday Tuesday Wednesday Thursday Friday Saturday Sunday Leisure Day Communication (CSA) Farm Management TEL (Restaurant) Packing Farm Management Transportation (CSA) Farm Management Farmers’ Market Farmers’ Market Save unnecessary time so as to take care of the farm and rest

Utilization & Implementation Case Overview Current Situation Apportion Analysis Strategy Analysis Utilization & Implementation uNcertainty Mid-Term Planning Sensitivity Analysis Variable Value Price Added per Unit Limitation Increment Allowed Decrement Truck’s Capacity 40 5 62.77 12.97 Advice: Purchase a New Truck in 2 years Estimated Cost: $10,000 Capacity: 30 Cases per Trip Value Added: $5×30 × 2= $300 per Week Purchase a new truck to enhance capacity.

Utilization & Implementation Transportation Outsource Case Overview Current Situation Apportion Analysis Strategy Analysis Utilization & Implementation uNcertainty Mid-Term Planning Transportation Outsource Outsource transportation to restaurants to save time and cost. 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 The numbers of restaurants are increasing . Oil prices are soaring! !

uNcertainty - Weather Conditions Case Overview Current Situation Apportion Analysis Strategy Analysis Utilization & Implementation uNcertainty uNcertainty - Weather Conditions Weather of Summer (Jun to Aug) in South Maryland: Average rainfall/precipitation: 286.5 mm Average rainy days: 22.3 days 1. Weather Best Condition Average Condition Worst Condition Weather: sunny Result: sell out all the product. Weather: normal Result: overall spoilage rate is about 10%. Weather: rainy Result: half products unsold ; 50% of unsold spoiled.

uNcertainty - Weather Conditions Case Overview Current Situation Apportion Analysis Strategy Analysis Utilization & Implementation uNcertainty uNcertainty - Weather Conditions condition Revenue & Profit per week Action Best Revenue: $4478.12 Profit: $2137.29 Rainy days X<20 Average Rainy days 20<X<30 Revenue: $4333.81 Profit: $1992.98 Make preparation for different weather conditions. Worst Shift the scale from farmers’ market to restaurants and CSA channel. Rainy days X>20 Revenue:$3756.55 Profit: $1415.73

Utilization & Implementation Case Overview Current Situation Apportion Analysis Strategy Analysis Utilization & Implementation uNcertainty uNcertainty 2. Gasoline Price The pump price is raised If 2011 Nov $ ? Then The cost of delivery increases What to do Still increasing 2010 Nov $ 2.82 per gallon Enlarge the sale scale of CSA. Decrease the delivery of long distance restaurants. 10% increased 2009 Nov $ 2.65 per gallon Outsource the delivery service.

Utilization & Implementation Case Overview Current Situation Apportion Analysis Strategy Analysis Utilization & Implementation uNcertainty uNcertainty Increasing Price of fertilizer Mitigation: Grow those crops that use less fertilizer. Raise the price slightly. Rapid Inflation Mitigation: Increase the price Pay attention to the other uncertainties

A STORM framework Analysis Summary A STORM framework Analysis A. Case Overview Social Conditions Technical Conditions Organizational Conditions Revenue Conditions Market Conditions B. Current Situation Analysis C. Apportion Analysis D. Strategy Positioning E. Utilization & Implementation A SUN Solution F. uNcertainty Management Accounting Approaches such as Linear Programming and Sensitivity Analysis are applied to help Even’ Star Organic Farm go from storm to sun.

From Sun Yat-sen University Thank You for Your Time! Dream Chasers From Sun Yat-sen University ZHANG Wei HUANG Peilong PENG Weijian LIU Mengning