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Sport Obermeyer

(Case Analysis Sample prepared by Feng Tian)

Sport Obermeyer was founded by Klaus Obermeyer in 1947 and has grown to a $32.8 million business till 1992. It focuses on providing fashion ski apparel, and is a major player in the U.S. skiwear market. As the rest of the fashion industry, Sport Obermeyer is facing problems like short product life cycle and more product varieties. The challenge to them is how to deliver the right product to customer on time. If they under-produce a popular product, they will miss critical profit. While over production of an unpopular item will bring write off to them by the end of the season. Two factors make it is hard to achieve their goal of delivering the right items to the market on time. The first one is the poor forecast, and the second one is the very long planning and production cycle. In recent years, greater product variety and more intense competition has made accurate predictions increasingly difficult. The long lead time only makes it even hard to make the right decision. The Sport Obermeyer supply chain and the time line is shown in Appendix A. The planning and production cycle of Sport Obermeyer is as long as two years. (See Table 2-14 of the case.) The first production order usually is placed (Nov. of previous year) long before they received any order from retailers (Mar of every year). This makes it hard for Sport Obermeyer to make accurate forecast of demand. There are two reasons that cause this problem. The first one is limited production capacity. As mentioned in case, average production quantity is about 200,000 units, while the monthly production capacity of Sport Obermeyer is just 30,000 units. This means it takes at least 7 months production to achieve the required quantity. To deliver items to retailers on time (August of every year), Sport Obermeyer has to start production early. The other reason is the long lead time of some raw materials. Currently, Sport Obermeyer adopts a two-order production strategy. The first order placed in November of previous year is a speculative order. This order is placed solely depends on its own demand forecast. The second order is placed in March after it has received order from retailer after the annual Las Vegas show. Although at this time, the order represents 80% only annual sales, the updated demand forecast at this time is very accurate. The second order can be considered as a reactive order. First, we will address the problem of how to allocate production over these two orders based on current constraints. The key of the allocation is to make sure that the production of first order is not wasted, i.e. do not produced too many units of unsalable styles in the first order. Basically, we hope that the first order production is a safe bet. Basic criterions to select what to produce in the first order are: cheaper ones (less waste), less demand uncertainty ones (lower forecast standard deviation), and higher volume ones (less likely to over produce). If we assume that all womens parkas are sold for the same price, we can define a risk factor as the average demand

minus first production divided by standard deviation. Notice that the higher this number is, the safer the first production is. Considering the minimum batch size requirement, we come out a first order allocation plan for the womens parkas as shown in Appendix B. Notice that for all products that we plan to product in the first order, we achieve a risk factor at 1.94. This means that this quantity is roughly two standard deviations below the forecasted demand, which is a relatively safe bet. There are several approaches to improve the result of the whole supply chain. Here we discuss the major effects of improving forecasting, reducing procurement lead time, and expanding production capacity. A more accurate forecast will be very helpful to improve Sport Obermeyers financial result. It can help Sport Obermeyer to produce the right amount of each style. However, current forecasting process has a huge time gap between initial forecast and the final accurate forecast. As shown in Figure 2-17, if we can get 20% order from retailers, the forecast will be much accurate than the initial one. So the key is to let the retailers see samples earlier and encourage them to place order earlier. Considering the sample production starts from October of previous year, we should not wait till the March Las Vegas show to let retailer see samples. We can even give early orders discount to give retailers incentive to order early. Reducing procurement time can be achieved through two ways. The first one is for those items that are small and cheap, like the snaps, we can build up our own inventory to avoid long lead time. For those we cannot carry bulk, like the zippers, we should try to use common parts across different styles. This pools the demand together and reduces the variance. We can also try to dye and print those commonly used color and pattern early to postpone the differentiation. All these processes can help us pool uncertainty and improve raw material procurement accuracy. The last thing we want to address here is the capacity expansion. As we mentioned early, one of the major reason caused current two order process is the capacity. If we can expand the production capacity, then we can delay more production to after the Las Vegas show. The capacity expansion can be achieved by training workers to improve their productivity, hiring temporary workers, buying capacity from outside manufacturer, and expanding our current capacity. However, for the last approach, we need to consider how to use the capacity during the off-peak season. When considering where to produce, we need to compare the Hong Kong factory and China factory by cost, flexibility, and quality. Currently China facility has much lower labor cost. However, its workers have lower level of skill and degree of cross-training. This make it has a longer production line, and requires a higher minimum batch size. These issues can be solved through training and experience built-up in future. However, there is one critical issue to consider if we want to move whole production to China. This is the quota limitation. Will we be able to finish all production and ship all goods to U.S. before all quotas are consumed?

Appendix A: Sport Obermeyer Supply Chain

Appendix B: The first order quantity of womens parkas Average Standard Risk Factor First Forecast Deviation Hong Order China Quantity Kong * ** Gail 1017 194 2.15 -0.94 640 Isis 1042 323 1.37 -0.49 0 Entice 1358 248 3.06 0.64 877 Assault 2525 340 5.66 3.90 1865 Teri 1100 381 1.31 -0.26 0 Electra 2150 404 3.84 2.35 1368 Stephanie 1113 524 0.98 -0.17 0 Seduced 4017 556 6.15 5.07 2940 Anita 3296 1047 2.57 2.00 1270 Daphne 2383 697 2.56 1.70 1040 Total 10000 Style Risk Factor 1.94 3.23 1.94 1.94 2.89 1.94 2.12 1.94 1.94 1.93

* Risk Factor (Hong Kong) = (Average Forecast 600) / Standard deviation ** Risk Factor (China) = (Average Forecast 1200) / Standard deviation