Sport Obermeyer, Ltd.

Sec A - Group 7

Q1. Using the sample data given in Exhibit 10, make a recommendation for how many units of each style Wally
Obermeyer should order during the initial phase of production. Assume that all ten styles in the sample problem are
made in Hong Kong, and that Obermeyer's initial production commitment must be at least 10,000 units. (Ignore price
differences among styles in your initial analysis)

Using newspaper vendor model for demand estimation:

Given:
1. Actual forecast should have the same mean and twice the standard distribution of Buying committee forecast.
2. Average forecast values and standard deviation
3. 80% sales by volume happens a few weeks after Las Vegas show

Assumptions:
1. Normally distributed demand.
2. No product inventory held after the season ends, selling at a loss of $9.

Case stands reference to the fact that all the produced ski wear was either sold to the wholesaler during the season
or sold in discount during end of the season and since the lead time is large enough to replenish the orders during the
season. Hence a demand estimation before September is required

Style Average forecast Standard deviation 2 x Standard deviation

Gail 1017 194 388
Isis 1042 323 646
Entice 1358 248 496
Assault 2525 340 680
Teri 1100 381 762
Electra 2150 404 807
Stephanie 1113 524 1048
Seduced 4017 556 1113
Anita 3296 1047 2094
Daphne 2383 697 1394
Totals 20000

Cost of underproduction (Cu) = Selling price - Cost of production = $27

Cost of overproduction (Co) = Cost of production – salvage value = $9

Service level = Cu/(Cu + Co) = 27/36 = 0.75

Z = NORMSINV (0.75) = 0.6744

Order quantity = Average forecast + Z*(Average forecast)

Style Average Standard 2 x Standard Order

forecast deviation deviation Quantity
Gail 1017 194 388 1278.6672
Isis 1042 323 646 1477.6624
Entice 1358 248 496 1692.5024
Assault 2525 340 680 2983.592
 Teri 1100 381 762 1613.8928
Electra 2150 404 807 2694.2408
Stephanie 1113 524 1048 1819.7712
Seduced 4017 556 1113 4767.6072
Anita 3296 1047 2094 4708.1936
Daphne 2383 697 1394 3323.1136
Totals 20000 26359.2432

Production Cycle Event Las Vegas show on Mar 93 will give better prediction of demand
Feb 93 – Aug 93 Order received Sept 93 hence second order should be placed after Mar 93
Apr 93 – Nov 93 Order received Dec 93

Hence, we need to order on:

Feb 93 – 80% of x = 0.8x (80% sales by volume happens a few weeks after Las Vegas show)
Apr 93 – 20% of x = 0.2x (subject to change after the Las Vegas show demand estimation)

Average Standard 2 x Standard Coefficient of variance (L =

Style Order Quantity
forecast deviation deviation 1week)
Gail 1017 194 388 1278.6672 0.381514258
Isis 1042 323 646 1477.6624 0.619961612
Entice 1358 248 496 1692.5024 0.365243004
Assault 2525 340 680 2983.592 0.269306931
Teri 1100 381 762 1613.8928 0.692727273
Electra 2150 404 808 2694.2408 0.375813953
Stephanie 1113 524 1048 1819.7712
0.941599281
Seduced 4017 556 1112 4767.6072 0.2768235
Anita 3296 1047 2094 4708.1936 0.635315534
Daphne 2383 697 1394 3323.1136 0.58497692
Totals 20000 26359.2432

Highlighted styles have higher covariance and hence will be preferred to make in Hongkong and less variance Styles
can be manufactured at China with respective order quantities and since all the order quantities are more than 600
all the Styles can be manufactured at either of the two locations depending on the coefficient of variance.

Hence, we need to order on:

Feb 93 – 80% of x = 0.8x (80% sales by volume happens a few weeks after Las Vegas show)
Apr 93 – 20% of x = 0.2x (subject to change after the Las Vegas show demand estimation)
Q2. What Operational changes would you recommend to Wally to improve performance?

About the Supply Chain:

Demand Uncertainty
Low (Functional High (Innovative
products) Product)

Low (Stable Efficient Supply Responsive Supply

Process) Chain Chain
Supply
Uncertainty High (Evolving Risk Hedged Supply Agile Supply Chain
Process) Chain

This product is a fashion apparel, with high innovation in product design but low innovation in process involved in
production. This industry experiences high demand uncertainty due to change in market trend which makes holding
inventory economically unviable. This type of products requires a responsive supply chain to adapt market trends,
since is a seasonal product the time horizon provided for the manufacturer is quite sufficient. Obersport is dealing
with high lead time from its suppliers which results in high lead time for Sport Obermeyer. Variety of components are
involved in the manufacturing process like buckles, snaps, zippers, buttons, pull strings, D-rings etc. multiple suppliers
are involved in this supply chain.

Recommendations to improve the Supply Chain by making the supply chain more responsive.

 Decrease lead time involved in the Production Process.

 Identifying new suppliers for manufacturer and increasing the pool of suppliers and improving supplier
relationship.

 Create a common sourcing platform between manufacturer and supplier for seamless communication which
would speed up the procurement process.

 Training Chinese laborers to increase the efficiency which would reduce the lead time involved in this channel

 Postponement of dying process and components like snaps and zippers will improve the lead time with
standardized production process.

Creating a multi-layer Channel for production one using manufacturers from China and other from Hong Kong, which
can be used in fulfilling the demand of different order cycle (1. Initial order, 2. Replenishment order) preferably Chinese
manufacturers can be used for initial Order since the order quantity is high and Chinese manufacturer have minimum
order quantity and efficiency is low which will result in high lead time. For the replenishment order Hong Kong
manufactures can be used as the operate with high efficiency and relatively less lead time.
Q3. How should Obermeyer management think (both short-term and long-term) about sourcing in Honk Kong versus
China?

Some Facts about Production facility:

1. Production efficiency is higher in Hong Kong and cost of production is higher due to high wages ($3.84)
2. China have a cost advantage over Hong Kong due to low wages ($0.17)
3. There is a minimum quantity involved in each plant, Hong Kong -600 units and China – 1200 units
4. Employees in Hing Kong are cross trained which offers flexibility in this production plant
5. US Government have import restriction for products produced from China
6. According to Wally’s assumption he needs to commit 10,000 units for the first phase of production and the
rest 10,000 after the Las Vegas show
7. Hong Kong plant offered high quality and low defects compared to production plant in China

HONGKONG

Short term

1) Smaller minimum Quantities can be ordered from Hongkong, can be used for replenishment orders as the
number are low compared to the phase-1 orders

2) The replenishment orders can be produced faster compared to china (efficiency of work force) which would
Decrease the lead time of the finished Parkas

Long term

1) As the cost of production is higher in Hong Kong only lesser quantities should be produced and phase-1 orders
should be avoided but it offers high flexibility than China which is required for this type of product. Sports
Obermeyer must choose between cost and flexibility.

CHINA

Short term

1) Since there is a minimum order quantity involve in China. Obermeyer can produce their high demand products
with less uncertainty in china and use HK for low demand products with high uncertainty. They can use this
production plant for products with less coefficient of variation in phase I.

Long term

China should be seen for long term as the production costs are cheaper compared to Hongkong. Work force in china
needs to improve with appropriate training to maintain the quality of the products.

Benefits in China:

1) Lower production costs

2) Lower overtime costs

 3) Higher working hours

Challenges in China:

1) China has less trained staff

2) It requires more people and time to produce the same as Hongkong

3) Quality issues

RECOMMENDATION

China should be focused for long term because the production costs are to low compared to Hongkong. The staff
should be trained in China as that of the staff of Hongkong factory and efficiency should be increased so as the import
quota can be utilized by the Obersport products. Hence should focus on developing and training its Chinese suppliers
for long term practice and reducing the lead time of the Chinese suppliers.