Case discussion Questions:

1. Some assumptions:

 All 10 styles in sample problem are made in Hong Kong.

 Wally’s initial production commitment must be >= 10000 units.

 All styles have same price/unit cost.

As per the probability distribution curve given in the case, the span is over µ ± kσ where µ is the
mean, σ is the standard dev. and k is the factor of spread.

Initial demand given is 20000 and therefore, during initial phase of production, demand is µ-kσ.

Total demand is 10007 with k = 1.06. Here, I have replaced the negative demand with zero.

Please find the calculations in the excel sheet attached, the hyperlink of which is given below.

Calculations_SportsObermeyer.xlsx

2. Lead time for Obermeyer’s parka components = min (lead times) = 15 days.

Minimum Order Quantity = 600 units in Hong Kong and 1200 in China.

The order of assignment is risky when the expected demand calculated is more than the
minimum order quantity which is 600 in this case. Thus it is risky in case of Gail, Entice,
Assault, Electra, Seduced, Anita, Daphne.

Let us quantify the risks involved in each of these:

Probability (demand>minimum order quantity) = Probability (stock out)

Probability (demand<minimum order quantity) = Probability (over stocked) = 1- Probability

(stock out)

Please see the calculations for probabilities in

Calculations_SportsObermeyer.xlsx

Here, I have taken a normal distribution with mean as 600 = minimum order quantity

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 Therefore, area greater than 600 shall be probability of stock out and vice versa.

3. Now, if all 10 samples are made in China, the minimum order quantity changes to 1200.

Here, I have taken a normal distribution with mean as 1200 = minimum order quantity

Therefore, area greater than 1200 shall be probability of stock out and vice versa.

I have summed various probabilities of stock out in China as well as Hong Kong.

Seeing various probabilities, the stock out risk is much more in Hong Kong than China. Risk is

maximum with Assault, Electra, Seduced and Anita.

Probability of stocking out or over-stocking is same as the risk associated with the inventory i.e.
whether it gets finished early or not and its relationship with demand.

4. To improve the performance, some of the operational changes recommended are:

a. Improve operations in Hong Kong and China both by decreasing stock out risk in Hong Kong.
Wage rate must be improved in Hong Kong and young workforce must be encouraged with
lesser unemployment probabilities. More quality and cleanliness consciousness must be infused
within Chinese workers. Trainings requirements were also needed in China. Operations from
China might be increased but not at the risk of trade relations from US.

b. For some of the parka components like insulation or lining fabric, lead time might be reduced
since their usage and minimums are too low while lead times are high.

c. Cut down on some of the operations in Hong Kong and start assembling more of the
components of parka in China due to lower cost there and a difference of $7.3. But the materials
need to be exported quicker due to quota restrictions. As long as the quota restriction was not
reached, China could be used as a favorable destination for assembling.

d. Improvement of forecasting methods was increasingly needed since over-stocking as well as

stock-out, both, were the problems being observed. Delphi method, time series analysis with
weighted averages, exponential smoothing and forecast errors could be incorporated in the
techniques.

e. Lead times might be reduced by using air as a transport alternative; however an additional
$3.6 might be incurred with this alternative. Judging the cost, air might not be a good option and
thus stock must be kept in reservoir and must be transferred by freight.

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 5. In the short term, Wally might think of continuing to source 50% both in Hong Kong and

China however in long term more material/parkas might be sourced from China due to lower

costs and a well established network there. Hedge strategies might be useful in this case since

any loss from cost angles in China can be offset by benefits from Hong Kong. Also, in vice versa

scenario, any loss in Hong Kong from under stocking etc. might be offset by Chinese stocks.

Since, there are speculations of Chinese trade relations with US, whole of the business must

not be shifted to China, instead a trade-off between both is preferred. Minimum Order quantity,

being more in China, a better forecast was needed there.

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