Mondavi Procurement Management

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.

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