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SPORT OBERMEYER CASE

507121109- Gl MAMOLU 507121122-Sevcan YILDIRIM

Sport Obermeyer A high end fashion skiwear designer and merchandising company.

Commitment for producing line of fashion skiwear for 1993-94

Based on experience, intuition and sheer speculation No feedback from retailers Inaccurate forecasts of retailer demand

FASHON GAMBLE

THE

CHALLENGES
Its November 92 and the company is starting to make firm commitments for its 93 94 season.

Long lead times:

Little or no feedback from market

First real signal at Vegas trade show in March

Inaccurate forecasts
Deep discounts Lost sales

PRODUCTS

Parkas, Vests, Sweater, ski suits, shells, ski pants, turtlenecks and accessories Parkas : Most critical design Products were offered in five different genders Company segmented each gender market according to price, type of skier and fashion forwardness US Skiwear estimated sales in 1992: US$ 32.8 million Obermeyers Share:

45% of children skiwear mkt. 11% of adult skiwear mkt.

Offering an excellent price/ value relationship to target group

THE PROCESS

Design (February 92) Prototypes (July 92) Final Designs (September 92) Sample Production, Fabric & Component orders (50%) Cut & Sew begins (February, 93) Las Vegas show (March, 93 80% of orders) SO places final orders with OL OL places orders for components Alpine & Subcons Cut & Sew Transport to Seattle (June July) Retailers want full delivery prior to start of season (early September 93) Replenishment orders from Retailers

THE SUPPLY CHAN


Textile and accesories suppliers Apperal manufacturers Obersport Sport Obermeyer Retailers

Obermeyer sourced most of its products through Obersport Obermeyer also give contract to fabric supplier for specified amount of fabric each month Lead time taken into account for all materials Most tasks performed only after production quantity planned by Obermeyer

SPORT OBERMEYERS TIME LINE


AND

SPECULATIVE VERSUS REACTIVE PRODUCTION

"NOW" Initial Forecast

Las Vegas Revised Forecast

27 Months

9 months Feb Oct 1992 1992 Design of 1993-94 Line.

5 months Nov Mar 1992 1993

5 months April Aug 1993 1993

Sept 1993

Oct 1993

Nov 1993

"Speculative" Production
of 1993-94 Line

"Reactive" Production
of 1993-94 Line

8 months Dec Jan 1993 1994 Selling of

Feb 1994

Mar 1994

Apr 1994

1993-94 Line (peak selling in Dec & Jan)

In Feb 1993, start design of 1994-95 line.

In Feb 1994, start design of 1995-96 line.

PARKAS

Obermeyer produce 200,000 parkas every year Capacity: 30000 unit per month Earn 24% of wholesale price on each Unsold in season sold at a loss of 8% Profit of US$ 27 and loss of US$9 on each parkas Buying committee forecasts for 10 style of Parkas

SSUES FACED BY WALLY

How to make best forecast How to allocate production between factories at Hong Kong and China Last year 1/3rd Parkas was made in China. Company plan to produce 50% parkas in China as

labor cost in China is low require larger minimum order some concern of quality and reliability is there

COMPARISON OF OPERATIONS IN HONG KONG AND CHINA


Topic Hourly wage Exchange rate Working hours Hong Kong HK$30 HK&7.8 8 hours/day, 6 days/week Total = 48 hours/week
Maximum overtime allowed = 200 hours/years

China RMB 0.91 RMB (Renminbi) 5.7 = US$1 9 hours/day, 6.5 days/week Total = 58.5 hours/week
During peak production periods, workers work 13 hours/day, 6.5 days/week 12 parkas

Weekly (nonpeak output/worker)

19 parkas

COMPARISON OF OPERATIONS IN HONG KONG AND CHINA


Topic Actual labour content per parka (incl repair work) Paid labour time per parka (incl repair work) Labour cost /garment Line configuration Training Min order quantity Repair rate Challenges Hong Kong -2.35 hours -2.53 hours/parka HK&75.6 10-12 people/line Cross-trained 600 units in same style 1-2%
Wage

China -3.6 hours -4.88 hours/parka RMB 4.45 40 people/line Trained for single opn. only 1200 units in same style -10%
Workforce Less

rate, Workforce Low unemployment Younger worker prefer office job

quality and cleanliness conscious Training requirements

ESTIMATED COST INFORMATION FOR ROCOCO PARKA (IF ASSEMBLED IN CHINA)


Obermeyer Landed Cost: Cost FOB Obersport Agents fee (to Obersport, 7%) Freight (Ocean Carrier) Duty, insurance and miscellaneous Total landed cost Cost FOB Obersport: Material Labour Transportation within China and China overhead China quota, obersport profit and overhead Total $30.00 $0.78 $2.00 $9.90 $42.68 $42.64 $2.98 $1.40 $4.90 $51.92

PARKAS

There was risk of managing production and inventory in longer term

The larger minimum order size of China limits the capacity of companys ability to increase the range of products

China trade relationship with USA - Risky

Wally ask comitee members that what demand will be for each products and take their forecast Wally studied on the committee forecasts Estimated the early production of each style Demand and forecasts for last year analysed

Forecast distribution for each style as a normal random variable


With mean equal to average of committee forecasts Standard deviation twice of committee forecasts

COMMITTEE FORECAST- 10 STYLES OF WOMENS PARKA Individual Forecast


Style Gail Isis Entice Assault Teri Electra Stephani e Seduced Anita Daphne Totals $73 $93 $148 4,600 4,400 1,700 20,000 4,300 3,300 3,500 20,000 3,900 3,500 2,600 20,000 4,000 1,500 2,600 20,000 4,300 4,200 2,300 20,000 3,000 2,875 1,600 20,000 Price $110 $99 $80 $90 $123 $173 $133 Laura 900 800 1,200 2,500 800 2,500 600 Carolyn 1,000 700 1,600 1,900 900 1,900 900 Greg 900 1,000 1,500 2,700 1,000 1,900 1,000 Wendy 1,300 1,600 1,550 2,450 1,100 2,800 1,100 Tom 800 950 950 2,800 950 1,800 950 Wally 1,200 1,200 1,350 2,800 1,850 2,000 2,125

COMMITTEE FORECAST- 10 STYLES OF WOMENS PARKA Individual Forecast


Style Average Forecast Standard deviation 2 x Standard Deviation Gail Isis Entice Assault Teri Electra Stephanie Seduced Anita Daphne Totals 1,017 1,042 1,358 2,525 1,100 2,150 1,113 4,017 3,296 2,383 20,000 194 323 248 340 381 404 524 556 1,047 697 388 646 496 680 762 807 1,048 1,113 2,094 1,349

SOLUTIONS OF PROBLEMS

Finding first order quantities Recommends to the Wally Sourcing Honkong-China

WITH THE RESTRICTION


An item must be either in the first order or second one. To choose which products be assigned which order we need mismatch cost

To calculate Mismatch cost we must calculate Batch Size Expected lost sales Expected left over inventory For every individual products

FOR GAIL

f we take Cu Co like Roccoco parkas cause of the resembling each other Cu=27 Co=9 F(Q)= 0,75 z=0,68

Q1= 1017+0,68*388=1280,84 Exp. Lost Sales= 388*57,35 Exp. Sales= 1017-55,35=959,65 Exp. Leftover nv. =1280,84- 959,65

Mismatch Cost=C0* Exp. Leftover nv. +Cu* Exp. Lost Sales


=4439,16 Mismatch Cost/ Batch Size=3,469

f we calculate this for all products and sort in ascending order we can see that Assault Q=2987,4 Seduced Q=4773,84 Daphne Q=3330,92

Should be in first order with this quantities First order =11092,16 And the rest must be in second order.

DETERMINING SPECULAIVE PRODUCTION


QUANTITIES
z=2 Mean of Demand 1017 1042 1358 2525 1100 2150 1113 4017 3296 2383 20001 Standard Deviation of Demand 388 646 496 680 762 807 1048 1113 2094 1394 First Period Production Quantity Max (0, -z) 241 0 336 1165 0 536 0 1791 0 0 4099
Too little

STYLE Gail Isis Entice Teri Assault Electra Stephanie Seduced Anita Daphne Sum

DETERMINING SPECULATIVE PRODUCTION


QUANTITIES
z=1, Mean of Demand 1017 1042 1358 2525 1100 2150 1113 4017 3296 2383 20001 Standard Deviation of Demand 388 646 496 680 762 807 1048 1113 2094 1394 First Period Production Quantity Max (0, -z) 629 396 862 1845 338 1343 65 2904 1075 989 10573
Too much!

STYLE Gail Isis Entice Teri Assault Electra Stephanie Seduced Anita Daphne Sum

z=1,0608 Mean of Demand 1017 1042 1358 2525 1100 2150 1113 4017 3296 2383 20001 Standard Deviation of Demand 388 646 496 680 762 807 1048 1113 2094 1394 First Period Production Quantity Max (0, -z) 605 357 832 1804 292 1294 1 2836 1975 904 10000
Just right!

STYLE Gail Isis Entice Teri Assault Electra Stephanie Seduced Anita Daphne Sum

RECOMMENDATONS
1)

Instead of using just a simple average of the individual forecasts made by Laura, Carolyn, Greg, Wendy, Tom & Wally use a weighted average, with the weights reflecting past accuracy.

2) Decrease lead times for both raw materials and finished goods, thereby allowing more time to utilize existing capacity.

Choose suppliers of raw materials more on the basis of dependability than cost . Expedite orders through information sharing with suppliers. Expedite shipments using faster (but more expensive) shippers. Establish some local (but more expensive) production capacity for last minute production. From the items with long lead times, increase the amount of safety stock

3)

Increase production capacity by:


Using Using

more subcontractors, more overtime in China,

Exploring

an alliance with a swimwear manufacturer who can supply excess capacity when Sport Obermeyer needs it and consume capacity when Sport Obermeyer has excess capacity.

4)

Decrease minimum order quantities, thereby improving the ability to fine tune during Speculative Production
Sport Obermeyer can decrease the minimum order quantities by providing incentives to its suppliers to have more flexible production lines.

This increased flexibility can come from:

Improved process design (e.g., a cellular production system). Improved equipment (e.g., more flexible cutting machines).

SOURCING

Products with exhaustive property and needed skill in manufacturing (like Biege parkas) should be produced in Hong Kong

Products which are fashinoble and relatively easy produce can be manufactured in China

High demand products suitable for China facilities because of high order quantity restrictions

Also should be noted that products from China will be ordered in early dates risk for this products will be increased. So that this products should have lower mismacth/quantity ratio