Mondavi Procurement Management

Mondavi Procurement Management

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Mondavi Procurement Management
Procurement is the complete process or action of acquiring or obtaining material, property, or services at the operational level, such as purchasing, contracting, and negotiating directly with the source of supply. Procuring goods and services is a larger process than just the label price of wine; the process to buy those items includes major organizational costs, often accounting for half of the product price. When allowing for the vast number of purchases Mondavi makes in a year, it is easy to see how these costs can spiral out of control without careful management.
This paper will describe the contract administration policies, procedures, tools and termination procedure for the Robert Mondavi Winery, external influences on the procurement management process, the role of risk management in contract administration, and how effective procurement management can lead to successful outsourcing by Mondavi.
Mondavi Contract Administration Policies and Procedures
Contract administration policies and procedures for Mondavi and their suppliers revolve around both sides determining what policies and procedures should be included in the contract. Though the legal department generally handles policy and procedures for Mondavi, they are generally negotiated before being turned over for legal to review. They are included in the final draft of the contract and can include guidelines for product return, refund methods due to returning of a product, and the process Mondavi has for accepting the product. The policy and procedures also includes the final cost and methods of payment. Risk management for Mondavi and the supplier is also included in policies and procedures.

Mondavi Contract Administration Tools
Mondavi and the supplier use many different tools in the contract administration process to ensure that the contractual agreement is met. Mondavi's contract administrator applies the tools most relevant to the supplies being acquired, and to the specific supplier Just as each project is unique, the contract administration process tool is also a unique checks and balances for the current project.
A specific example that describes how the tools apply to the administration process is the project involving the packing machine supplied by Orion. Mondavi used a buyer performance review to determine if Orion could deliver a packing machine to solve the problem of damaged cases. This report contained specific points Mondavi wanted to review with Orion on their packing machine. The performance review revolved around seeing the machine in action performing the duties it was designed to accomplish. Using this method, Mondavi determined that Orion's machine still had a problem with crushing cases; because Mondavi insisted on this review process Orion was able to make the needed mechanical adjustments.

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Mondavi also used the inspecting as a tool for the contract administration process. This inspecting related to Mondavi's payment plan. Orion and Mondavi set up the contract that the packing machine would work at the winery for a specified amount of time subject to packing teams spot-checking cases. Orion technicians were available to make adjustments to the machine when needed during that trial period. Mondavi's terms were that payments be made to Orion while the machine was being quality checked.
There are many other forms of contract administration processes. As stated earlier, Mondavi Wineries tends to remain faithful to suppliers used previously. Since they do reuse suppliers Mondavi relies on past experiences to determine contract administration processes.
Contract Termination Procedure
Before closing out a contract between two parties, often there are activities and responsibilities that must be met before the contract is considered terminated. "This procedure is developed to provide a step-by-step methodology that addresses the terms and conditions of the contracts and any required completion or exit criteria for contract closure" (PMBOK). Robert Mondavi, like most other companies includes such criteria in its contracts with its growers and suppliers. Several types of contract terminations exist including evergreen, rolling contracts and end of contracts. Typically Mondavi uses "End of Contracts", where once the contract tasks are completed the contract is finished.
These contracts signed by Mondavi are often long-term, whether they are dealing with grape growers or equipment suppliers. An example of this took place in 1966 after Robert Mondavi left Krug Winery. Mondavi met with several of Krug's grape suppliers and convinced them to provide grapes for Mondavi's new company. Mondavi signed these growers to long term contracts to provide Mondavi with the grapes he needed to produce fine wines in the years to come. This was unique to the California wine industry, because most of the deals between vineyards and wineries were handshake deals. Even in 1996, many small wineries were caught off guard when Mondavi purchased Sierra Madre Vineyard; several of these small wineries had handshake deals with Sierra Madre and could not purchase the same quantity of grapes from Mondavi that they had grown accustomed to in the past from Sierra Madre (Berger, 1996). Robert Mondavi has always done business this way, through a contract with specifications to the length and details of the contract.

External Influences to Procurement Management
There are a number of external influences on the procurement management processes in the wine industry; key is the price of fuel. The United States has been experiencing high sticker prices at the gas pump. This has created a trickle down effect to the Mondavi procurement process, from shipment to the making of wine bottles. Petroleum is a major component to making and shipping the glass, sand, and limestone used in the making of wine bottles (Erica Harrop 2006). In a typical year, 7 to 8% of a wine bottle cost is credited to the fuel used to create it, however, with today's fuel prices, the same fuel component is being pushed to approximately 19 to 20% of the price of the bottle (Erica Harrop 2006). Every year the wine industry is slapped with energy surcharges to include this year's increases associated to the transportation of the glass from the production location.
Another external influence is fluctuating exchange rates (Jody Purdom 2006). The US currency continues to decline against the Euro and the Australian dollar. The US dollar has sloped nearly 40% since 2004. This has an impact on the price of European supplies used in US wine making, such as German filters, Italian grape crushing equipment, and French oak barrels and corks. The European manufacturers and importers of these supplies have little choice but to pass the increased costs to the purchaser (Jody Purdom 2006).
Other external influences are the environment, fertilizer and supply-in-demand. The organic market is a booming industry that is much in demand. According to Peter Mondavi Jr. the winery is converting to organic fertilizers to meet the organic requirements together with eschewing, bioengineering, pesticides, irradiation and man made fertilizers. Mondavi has made this business decision primarily to make a higher quality wines and to meet Mondavi's concern for the environment, to include neighbors, family and vineyard workers.
Contract Administration Risk Management
The role of risk management in the contract administration process is to conduct a risk assessment that identifies the company's assets and resources available to a particular project. Risk management must assess exposure to loss and calculate the value of assets and resources. Current risk must be measured, then projected and communicated as potential future exposure to the project. Risk management must also develop and implement a proactive loss and control program, and establish incentives for all team members to participate in risk management. It is crucial monitor the effectiveness of the risk controls implemented.
Another role of risk management in the contracting administration process is in the area of finance. The importance of understanding the various financial implications and taking advantage of all available resources is essential; this includes having a plan to maintain appropriate financial catastrophe mitigation. Allocating risk costs among the various operating units on an equitable, understood, and acceptable basis is also key; this cost allocation creates and sustains management's commitment to risk management throughout the life of the procurement process. Successful risk management entails the adaptation of a clear risk management structure, and clearly targeted periodic objectives, simultaneously maintaining sound communications with all affected levels of management.
Risk management in contract administration is often one of the most neglected parts of the procurement process, and requires dedication and persistence. The intensity and manner of risk management will depend on the type of contract involved. Small dollar contracts with short durations or procurements for a one-time purchase may take less risk management administration than those for large dollar projects of a lengthy duration or more complexity. Risk contract administration is a critical element in the procurement cycle.
Effective Procurement Management Leads to Successful Outsourcing

Mondavi with its successful procurement process can use the benefits of outsourcing when and if it is the prudent way to conduct business. Effective procurement will help Mondavi identify all contract actions, requirements, cost estimates, lead times, issues, and risk management actions. When outsourcing, Mondavi could identify all potential acquisition transactions from each supplier and discuss contracting approach, administrative requirements, and lead times for each action needed to the project. The company with this information could develop a list for procurement: identify cost, schedule, type, and quality requirements. Mondavi would then deal with performance, specification, administrative, and delivery issues.
For successful outsourcing to take place Mondavi would establish a procurement point of contact for each project. Both companies would deliver plans, assumptions, and schedule for review to bring together a cohesive plan of operation. An effective procurement management plan will follow-up with contractors to ensure compliance with delivery, performance, cost requirements, manage changes, and maintain good records. The contract administrator will tract and report contract awards, milestones, deliverables, and establish controls to verify and manage specifications as necessary.
The establishment of a project office function to track contract modifications, deliverables, contract correspondence, and establish a subcontract management role is a key by-product of an effective procurement management plan for outsourcing. The transferring of established procedures to potential suppliers as well as understanding proper procedures can help any company recognize what systems to look for to see if the supplier has the right stuff to be successful. Knowing what to look for in a potential outsource supplier helps to save money and time; allowing Mondavi to concentrate its efforts on only qualified suppliers.
Conclusion
In this paper we described how the Mondavi contract administration process includes polices and procedures to be included in the contract, in conjunction with the legal department. Typical policies and procedures for Mondavi include return policy and payment methods, and risk management procedures. Mondavi uses several different tools to administer the contract process, tailored to the specific product and supplier for each project. Due to the long-term nature of most of their contracts, Mondavi tends to use the end of contract termination process, which closes the contract once all tasks are completed.
Several external influences to the procurement management process were identified, including fuel costs for Mondavi and their suppliers, currency exchange rates, and environmental considerations. Risk management plays a critical role on the contract administration and procurement processes, from assessing project exposure, to ensuring key players appreciate the importance of risk mitigation strategies. Finally, with its strong procurement management process, Mondavi is well positioned to manage successful outsourcing initiatives.

References

Berger. D (1996) Handshake deals can leave you out in the central coast cold. Wine Business Monthly.
Harrop. E. (2006) Saver Glass shows their stuff at the Unified Grape Symposium. Design 2 Market News.
PMBOK (2004) 3rd Ed. A guide to the project management body of knowledge, Project Management Institute.
Purdom. J. (2006) Wine cards catch on, Wine Business.com
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