IELM 4410 Global Supply Chain Management

Case Study

Sport Obermeyer
 Company Background
• Klaus Obermeyer founded
Obermeyer in 1947 when he
was among the first ski
instructors on Aspen Mountain

SKIING IS A CELEBRATION OF LIFE"

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 Sport Obermeyer, Ltd
• Sport Obermeyer is a high-end skiwear design and
merchandising company headquartered in Aspen,
Colorado.
• It sells its products through U.S. department stores and
ski shops.
• Although the company has a global supply network,
most of its critical products are sourced through Hong
Kong-based company, Obersport.
– Obersport is a joint venture between Sport Obermeyer and a
Hong Kong partner.
– Obersport manages supply and production operations in Hong
Kong and China.
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 Obermeyer Product
• Product lines: parkas, vests, ski suits, shells, ski pants,
sweaters, turtlenecks and accessories
• Product variety within a line: 5 genders (Men, Women,
Boys, Girls, Preschoolers), segmented within each
gender -- styles, colors and sizes

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 Style Due to Customer Types

Type Characteristics Buying Frequency Driver

Fred Conservative, basic styles 1 every many years past sales

Rex Image-conscious 2-3 years technology

technology conscious

Biege Mountaineering-type 2-3 year technical

performance

Klausie High profile once a year fashion

fashion-conscious trend

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End of Season Problem

Scenario Outcome

Overstock 8% of sales price

Stockout 24% of sales price

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 The Supply Chain

Shell
Fabric

Lining
Fabric

Insulation Cut/Sew Distr Ctr Retailers

Materials

Snaps

Zippers

Others

Textile Suppliers Obersport Obermeyer Retailers

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 Product Transportation
Hong Kong
Warehouse

by ships

Seattle
air-shipped
by trucks
Obermeyer’s Denver
Warehouse
orders were finally shipped via
small-package carriers such as
UPS (United Parcel Service) at
the end of August 1993
Retailers
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 Forecast Process
• Independent versus
consensus forecasts
• Forecast update

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 Order Planning Cycle

Time Obermeyer Obersport

Feb. 92 Design begins
July 92 Sketches done Order fabric
Sep. 92 Design finalized Prototype prod
Nov. 92 1st order placed Start work
Mar. 93 Las Vegas show, Full scale prod
2nd order placed
June 93 More retail orders Ship to US
Sep. 93 Selling season

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Comparison of Operations in HK & China

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 Production Planning
• Obermeyer produces about 200,000 units a year.
• Limited production capacity (about 50% of total
capacity) available after the information from Las
Vegas becomes available.
• The minimum production quantity for a style is 1,200
units in China and 600 units in Hong Kong.
• If Obermeyer had to commit all production prior to
observing the Las Vegas show, is it a newsvendor
problem?

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Time Line

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 How to Measure Risk?
• In the first production period, we are primarily
concerned with markdown risk, why?

• What is the relationship between risk and

– Product price
– Demand uncertainty
– Expected demand

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Risk-based Production Sequencing Strategy
• Produce the least risky items during the first production
period using speculative production capacity, i.e.,
capacity employed prior to observing additional
indicators of market demand.
• After observing retailer demand in Las Vegas, Wally
should update demand forecasts for the remaining units
and produce those with the greatest expected return
during the second production period using reactive
production capacity.

Speculative Reactive
Production Capacity Production Capacity

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Initial forecasts Las Vegas Orders
 Production Planning Sample Problem
Production Planning for 10 Styles of Women’s Parkas
Individual Forecasts
Style Price Laura Carolyn Greg Wendy Tom Wally Average Std. Dev 2X Std Dev
Gail $ 110.00 900 1,000 900 1,300 800 1,200 1,017 194 388
Isis $ 99.00 800 700 1,000 1,600 950 1,200 1,042 323 646
Entice $ 80.00 1,200 1,600 1,500 1,550 950 1,350 1,358 248 496
Assault $ 90.00 2,500 1,900 2,700 2,450 2,800 2,800 2,525 340 680
Teri $ 123.00 800 900 1,000 1,100 950 1,850 1,100 381 762
Electra $ 173.00 2,500 1,900 1,900 2,800 1,800 2,000 2,150 404 807
Stephanie $ 133.00 600 900 1,000 1,100 950 2,125 1,113 524 1,048
Seduced $ 73.00 4,600 4,300 3,900 4,000 4,300 3,000 4,017 556 1,113
Anita $ 93.00 4,400 3,300 3,500 1,500 4,200 2,875 3,296 1047 2,094
Daphne $ 148.00 1,700 3,500 2,600 2,600 2,300 1,600 2,383 697 1,394
Total 20,000 20,000 20,000 20,000 20,000 20,000 20,000

Cut and Sew Capacity

3000 Units/month
7 month period

First Phase Commitment

only 10,000 units can be produced after
10,000 units observing demand in the Las Vegas show. At
Second Phase Commitment
10,000 units
least 10,000 units must be ordered immediately.

How should Wally think about how much of each style he should
commit for the first phase of production? 17
Production Planning – No Minimum Order
Quantities
• If all styles have the same wholesale price, an effective
strategy is to produce up to the same demand percentile
for each style. (optimal strategy shown by Fisher &
Raman in 1994)
– Assuming normal distribution for each style’s forecast, apply
this strategy by producing the mean of a style’s forecast
minus the same number of standard deviations of that style’s
forecast
– That is, for style i make 𝝁𝒊 − 𝒌𝝈𝒊
• In this case, the strategy takes into account demand
uncertainty and expected demand.
• Vary k to find the level that gives us the desired total
first period production
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Production Planning – No Minimum Order
Quantities
• For each style, we produce Max(0, 𝜇 − 𝑘𝜎), where k is chosen so
that the sum of the first period production quantities equals the
desired level. To produce a total of 10,000 units prior to the Las
Vegas show, we would use a simple search technique to find that
k=1.06

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Production Planning with Minimum Order
Quantities
Let “Mean” denote a parka’s mean demand.
Let “m” denote the parka’s minimum order quantity.
Consider the following three cases:
0 <= Mean <= m <= Mean <= 2m <= Mean
Case 2 Case 3 Case 1

Category 1: Safety factor = (mean -2m)/standard deviation

Category 2: Safety factor = (m- mean)/standard deviation
Category 3: Safety factor = 0

During Speculative Production, which of the above three

cases are “safe” to order, and which are “risky”?
© Fisher, Obermeyer, Hammond, and Raman 20
First Period Production Quantity Heuristic
• Step 1: Compute safety factor for each style

• Step 2: Rank styles by safety factor in decreasing order

• Step 3: Try the first n styles for n =1, 2, … so that the

total production quantity is closest to first period
capacity
– Production quantity = max{ m, μi – m – kn σi },
where kn is the safety factor of style n in trial n (the
smallest safety factor), m is the minimum order
quantity
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 Sample Problem – Result (1/6)
How many units of each style Wally should order during the
initial phase of production?
Assume all 10 styles in the sample problem are made in HK, and
the initial production commitment must be at least 10,000 units.

Style μi σi Safety factor

Seduced 4017 1113 2.53
Assault 2525 680 1.95
Electra 2150 807 1.18
Antia 3296 2094 1.00
Daphne 2383 1394 0.85
Entice 1353 496 0.32
Gail 1017 388 0
Isis 1042 646 0
Teri 1100 762 0
Stephanie 1113 1048 0
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 Sample Problem – Result (2/6)
• Case 1: Produce 1 style
Mean Std. Deviation Safety Factor First Period Total First Period
Production Production
Quantities
Seduced 4,017 1,113 2.53 600.00 600

• Case 2: Produce 2 styles

Mean Std. Deviation Safety Factor First Period Total First Period
Production Production
Quantities
Seduced 4,017 1,113 2.53 1248.29
Assault 2,525 680 1.95 600.00 1,848

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 Sample Problem – Result (3/6)
• Case 3: Produce 3 styles
Mean Std. Deviation Safety Factor First Period Total First Period
Production Production
Quantities
Seduced 4,017 1,113 2.53
Assault 2,525 680 1.95
Electra 2,150 807 1.18

• Case 4: Produce 4 styles

Mean Std. Deviation Safety Factor First Period Total First Period
Production Production
Quantities
Seduced 4,017 1,113 2.53
Assault 2,525 680 1.95
Electra 2,150 807 1.18
Anita 3,296 2,094 1.00
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 Sample Problem – Result (4/6)
• Case 5: Produce 5 styles
Mean Std. Deviation Safety Factor First Period Total First Period
Production Production
Quantities
Seduced 4,017 1,113 2.53
Assault 2,525 680 1.95
Electra 2,150 807 1.18
Anita 3,296 2,094 1.00
Daphne 2,383 1,394 0.85

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 Sample Problem – Result (5/6)
• Case 6: Produce 6 styles
Mean Std. Deviation Safety Factor First Period Total First Period
Production Production
Quantities
Seduced 4,017 1,113 2.53
Assault 2,525 680 1.95
Electra 2,150 807 1.18
Anita 3,296 2,094 1.00
Daphne 2,383 1,394 0.85
Entice 1,358 496 0.32

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 Sample Problem – Result (6/6)
• Case 7: Produce 7 styles
Mean Std. Deviation Safety Factor First Period Total First Period
Production Production
Quantities
Seduced 4,017 1,113 2.53
Assault 2,525 680 1.95
Electra 2,150 807 1.18
Anita 3,296 2,094 1.00
Daphne 2,383 1,394 0.85
Entice 1,358 496 0.32
Gail 1,017 388 0.00

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Risk-based Production Planning

Speculative Reactive
capacity capacity

Stable Risky
HK Small Batch Small Batch

China Stable Risky

Large Batch Large Batch

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 Methods of Adding Reactive Capacity
a. Base Case Speculative Capacity Reactive Capacity

Las Vegas Show Last Production Order Commences

b. Increase Total Capacity

Speculative Capacity Reactive Capacity

Las Vegas Show Last Production Order Commences

c. Decrease Lead Time

Speculative Capacity Reactive Capacity

Las Vegas Show Last Production Order Commences

d. Obtain Information Earlier

Speculative Capacity Reactive Capacity

Early Write Program Last Production Order Commences

 What Obermeyer Did
• Early Write program gets sales information one month
in advance of Las Vegas Show.
• More stocking of raw materials in HK.
• Risk-based production planning with forecast
uncertainty captured by independent expert estimates
used.
• Increase commonality of zipper by 5-fold. Increase raw
materials sharing across styles.

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