Sport Obermeyer makes high-end fashion skiwear offering a wide variety designs and colors.

The company was known for having strong designs, however they faced difficulty in predicting
the market response to their designs. This made it tricky to determine production quantities.
Often, inaccurate forecasts would result in over-produced styles being sold at deep discounts
and underproduced styles having a stockout, thus affecting their overall profitability.

Accurate demand prediction has been the Achilles’ heel for the company with actual demand
varying heavily. Furthermore, the large lead times given by suppliers act as a hindrance to
efficient operations of the company as they must initiate few processes without proper feedback
collection which leaves less scope to judge the performance of the past year. For e.g. the design
for the 1993-94 line began in Feb 1992, at this time company had no idea how well the line for
1992-93 was received by customers.

Predicting Production Quantities

Based on the facts given in the case, the production commitment for the first half of the
projected demand for 93-94 has been determined. Using the data given in Exhibit 10, the
average wholesale price across different styles is estimated to be $112.20. Sale of a parka
results in earning of 24% of wholesale price whereas units left unsold are sold at a loss of 8%
of wholesale price. Therefore,

Cost of understocking = 24% * $112.20 = $26.93

Cost of overstocking = 8% * $112.20 = $8.98

Using mean and standard deviation of forecasted demand, the order quantity is calculated for
each style using the newsvendor inventory model. (Details attached in Appendix 1).

Three possible scenarios have been evaluated, considering that the initial order is for 10,000
units

1) No minimum order size on each style

2) Production will take place in Hong Kong, so every style must have a minimum order of
600 units
3) Production will take place in China, so every style must have a minimum order of 1200
units

Since the production quantity is estimated when demand is uncertain, it is necessary to quantify
the risk associated with the determined order quantity. Coefficient of variation measures the
spread of the data set. The wider the spread, the tougher it becomes to forecast the data, whereas
a narrower distribution makes forecasting more reliable. Therefore, coefficient of variation is
used as a measure of risk. Figure 1 illustrates the spread of forecasted demand for the ten parka
styles.

Coefficient of variance

Gail 0.38
Isis 0.62
Entice 0.37
Assault 0.27
Teri 0.69
Electra 0.38
Stephanie 0.94
Seduced 0.28
Anita 0.64
Series10
0
0
0
-1 0
-1 0
0

00
00
00
00
00
00
00
00
00
00
00
00
00
00
00
00
00
00

40
80
00
60
20

12
16
20
24
28
32
36
40
44
48
52
56
60
64
68
72
-8
-4
-2

Figure 1: Distribution of forecasted demand for parka styles

Table 1 illustrates the ordering decisions and risk associated with them in the three possible
scenarios.

Mean Scenario 1 Scenario 2 Scenario 3

Style SD Risk (CoV)
demand Q* Q* Q*
Gail 1017 388 0.38 600 600 1200
Isis 1042 646 0.62 400 600 1200
Entice 1358 496 0.37 900 800 1200
Assault 2525 680 0.27 1800 1800 1700
Teri 1100 762 0.69 300 600 0
Electra 2150 807 0.38 1300 1200 1200
Stephanie 1113 1048 0.94 0 0 0
Seduced 4017 1113 0.28 2800 2700 2300
Anita 3296 2094 0.64 1000 900 0
Daphne 2383 1394 0.58 900 800 1200
Total 10000 10000 10000

Improving Operational Efficiency

To increase operational efficiency and increase overall profitability we recommend Sport

Obermeyer to take the following steps:
 • Improve demand forecasts by using more robust models such as historical accuracy of
prediction rather than simple averages of demand estimates by individuals.
• Reduce the number of designs being handled – This would help plan purchasing
decisions better.
• Move to big suppliers who can commit to provide shorter lead times and handle last
minute emergency orders to improve responsiveness.
• Obtain feedback from retailers before the Las Vegas show, with initiatives such as
holding prelaunch previews of new lines to better predict the demand early on.

Long & Short-Term Decisions on Sourcing

The key factors affecting the decision about sourcing from Hong Kong versus China are:

• Obermeyer Landed Cost per garment is 15% lower for China than Hong Kong
• However, Hong Kong supports 50% smaller lot sizes than China
• Quality and reliability remain a concern for China.

In the short term, we recommend Obermeyer to source higher risk items (i.e items with higher
demand variability) and low demand items from Hong Kong as the more flexible production
and lower batch size will allow Obermeyer to maximize expected payoffs. Whereas, for lower
risk items (i.e. items with low demand variability) and high demand items, we recommend
Obermeyer to source from China.

In the long term, we recommend Obermeyer to improve its demand forecasts and other aspects
of its supply chain to improve lead times and reliability, and move more of its sourcing to
China, as it will lead to lower overall costs and higher profits.
Appendix 1: Estimating Order Quantity (for Production in Hong Kong)