Case 2
Case 2
Case 2
Assignment 02
Case 02: Sport Obermeyer
Question 1: Using the sample data of Exhibit 10 make recommendations for how
many units of each style Wally Obermeyer should order during the initial phase of
production? Assume all ten styles are made in Hong Kong, and that Obermeyer’s
initial commitment must be at least 10,000 units. (Ignore the price difference
between units in your initial analysis.)
Answer:
We assume that the data is normally distributed. Now if we take into the equation for
standard normal distribution is µ - kσ, where µ is the average value and σ is the standard
deviation. Now value of k is generally 0,1, 2, 3 and so on, showing the level of standard
deviation. Now for k = 1, 68% of the data will lie between µ±σ, for k = 2, 95% of the
data will lie in between µ±2σ. Now we test for value of k does the total production sum
up to around 10000.
i) Case 1: k = 0
This value is acceptable. If we test for k = 2, the value will fall below 10000.
Therefore, the company should approximately produce the above mentioned units.
Question 2: Can you come up with a measure of risk associated with your ordering
policy? This measure should be quantifiable.
Answer:
Here are the relationship between risk and demand uncertainty:
- Stock outs (-24% whole sale price)
- Market downs (-8% of wholesale price
- Old designs
- High inventory holding cost
- Unable to fully profit from the products
How can we assesing forecast certainty?
- Based on historical data: Past forecast error. Variability of demand.
- Rather than producing one joint forecast, each member of the purchasing
commitee produces his/her own forecast.
- The deviation in views is good estimator of forecast reliability.
Question 3: Repeat your methodology and assume now that all 10 styles are made in
China. What is the difference between the two initial production commitments?
The differences between production in HK and China
Question 4: What operational changes would you recommend to Wally to improve
performance?
Answer:
- Reducing number of styles handled and to predict customer demand for individual
style.
- To create promotion strategy to persuade retailers to order.
- Increasing production quality of China to be closed to Hong Kong
- To reduce lead time of production especially the preparation of raw materials.
- Increasing bargaining power with suppliers by ordering via big supplier that can
commit on timeline.
- To collect stock raw materials which is base on Ski cloth production.
- Increasing distribution chanel to a country that have different period of product
usage.
- Increase services level requirements.
- Establish DC in Seattle to reduce lead time and cost from inland transportation
from Seattle to Denver.
- Collect the data backward and analyze the demand of the show in Vegas and
compare with actual purchase.
- Expedition of data and information and utilize historical data / Committee
forescasting / Research and Trend & Market Movement.
- Computerize processes
- Reduce minimum production lot-sizes
- Do not commit initial production orders to unproven factory (rework, ramp-up)
- Look for subcontractors who can delivery at a faster rate to fill in gaps
- Use standardized products
Question 5: How should Wally think (both short term and long term) about
sourcing in Hong Kong versus sourcing in China?
This year, Wally was expecting to produce about half its products in China. However
in the short run, the company should source its materials from Honk Kong and in the long
run from China. Now, the reasons for sourcing from Hong Kong in the short run are:
1) China had the constraint of large minimum order sizes which could limit the
company’s ability to increase the range of products it offered or manage the
inventory risks. In China, the minimum order size was 1200, where as in Hong
Kong it was 600.
2) The workforce in Hong Kong was twice as productive as compared to the Chinese.
Therefore, a parka line in Hong Kong that required 10 workers to complete all
operations would typically require 40 workers in China.
3) Also, the workers in Hong Kong were able to ramp up their production faster than
the Chinese workers. Therefore, this ability, coupled with shorter production lines,
enabled the Hong Kong factory to produce smaller orders more efficiently.
4) Also, the company could procure the YKK zippers from the Hong Kong factory
faster than from Chin, because the factory of standard YKK zippers was located in
Hong Kong. Therefore, on a short term basis, it would be easier for the company
to source the products from Hong Kong itself.
However, to source materials in the long run, the company should look towards China,
because long term will involve large orders. The wages in China were $.16 per hour as
compared to $3.84 per hour in Hong Kong. Therefore, if the company wanted to process
large orders, it should look towards China rather than Hong Kong dispite the lower
productivity of the Chinese workers.
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