Case Study: Sport Obermeyer

Prepared by: Shaheen Sardar

SCM Lab. Department of Industrial and
Management Engineering, Hanyang University,
South Korea.
Company History:

1947: Klaus Obermeyer, a German

immigrant began teaching at the Aspen
(U.S.) Ski School

“Skiing is a celebration of life”

Klaus Obermeyer
Company History:
1985: Obersport; a joint venture in Hong Kong, the company began
to increase productivity to meet their new demands.
Women’s Collection
Competitors

The Jacobs Corporation

founded by David L. Jacobs Biography

Competitors

The North Face, Inc.

: subsidiary of VF Corporation
Competitors

Burton Snowboards

founded by Jake Burton Carpenter

Innovative Burton
outerwear performance meets
leading Motorola Bluetooth ®
technology
 Sport Obermeyer
• Sport Obermeyer – a high end fashion skiwear designer and
merchandising company
• Commitment for producing line of fashion skiwear for 1993-94

Long lead times:

 Long lead times: It’s November 1992 and the company is starting to make
firm commitments for its 1993 – 1994 season.
 Based on experience, Intuition and sheer speculation
 No feedback from retailers (Las Vegas trade show in March 1993)
 Inaccurate forecasts of retailer demand

• Company’s inability to predict correctly (which product would become

best seller) resulted in:

 Excess merchandise and sold at deep discount

 Or company ran out of most popular items (lost sales)
 Problem Statement

• How can Sport Obermeryer Ltd.:

 Improve its forecasting method

 Achieve a more dynamic manufacturing

capability in order to reduce final inventory

 Increase profits

 Become more competitive in the industry

Manufacturing Structure:
Sport Obermeyer Ltd.

Obersport Ltd.

Alpine Ltd
• Hong Kong
• Macau Other subcontractors
• China

Lo Village
COMPANY
NETWORK:

Recently, a number of
contractual ventures
were added and a new
complex in Lo Village
Guangdong China
Product and Segmentation:
Product Variety:
 Obermeyer Product
Fashion Ski Apparel
• Parkas, Vests, Sweater, ski suits, shells, ski pants, turtlenecks and
accessories
• Parkas : Most critical design
• Products offered in five different genders (Men, Women, Boys, Girls,
Preschoolers)
• Company segmented each gender market according to price, type of
skier and fashion forwardness.
• U.S. Skiwear estimated sales in 1992: US$ 32.8 million
• Obermeyer’s Share:
• 45% of children skiwear mkt.
• 11% of adult skiwear mkt.

• Offering an excellent price/ value relationship to target group

 Obermeyer Product
• Example (Adult man)
– Fred (conservative, basic)
– Rex (rich, latest fabrics and technologies)
– Beige (mountaineering type skier, high technical performance)
– Klausie (showy, latest fashions)
• Each Gender
– Styles
– Colors
– Sizes
• Total Number of SKU’s (stock-keeping units): ~800
• Deliver matching collections simultaneously
• Deliver early in the season
The Supply Chain (Asia to Aspen (U.S.))
• Obermeyer sourced most of its products through Obersport

• Obermeyer would contract with 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

• Obersport: Joint venture between Sport Obermeyer and its Hong Kong partner.

• Obersport is responsible for fabric and component sourcing for apparel

production and monitoring product quality at subcontractor factories.

Textile and Apparel

Accessories Obersport Retailers
Manufactures
Suppliers
 The Supply Chain
Textile and Produce, dye and print shell and lining fabrics, supply
Accessories insulation, zippers, thread, logo patches and snaps.
Suppliers

Apparel Subcontractors, receive production orders and

Manufacturers materials from Obersport. Cut, sew and final assembly.

Responsible for material and production sourcing in the

Obersport Far East. It also acts as a distribution centre for
materials and finished goods.

Sport Product design, production planning and sales.

Obermeyer

Retailers Purchase from Sport Obermeyer and sell products to

consumers.
 Product Transportation
Hong Kong
products made in June and Warehouse
July were transported by
ships

Seattle goods produced in

August were air-shipped
then transported by trucks

Obermeyer’s Denver
Cost $5 per parka
Warehouse
orders were finally shipped via
small-package carriers such as
UPS (United Parcel Service) at the
end of August 1993
Retailers
 Retailers

Delivering products by
Specialty Ski-
Retail Stores Most sales occur between
early September September and January

Sport Department
Consumers
Obermeyer Stores

Direct Mail
Retailers
 Production Options
• Hong Kong • Mainland (Guangdong, Lo Village)
– More expensive – Cheaper
– Smaller lot sizes – Larger lot sizes
– Faster – Slower
– More flexible – Less flexible
Obersport Limited

Obersport Ltd
• To coordinate production of sport obermeyer’s
products in Far East
• Responsible for fabric and component sourcing

Joint Venture formed in 1985 by

• Klaus Obermeyer’s Son – Wally (Harvard

Educated)
• Raymond Tse – Owner of Alpine- 80% order of
Sport obermeyer
• Klaus entrusts Raymond Tse to make all
decisions regarding production and investment
Planning and Production Cycle:

Feb 92 Mar 92 May 92 Jul 92 Sep 92

Prototype, Sample Production

Design Process Las Vegas Concept Sketches sent Designs

begins Show Finalise to Obersport Finalised

Nov 92 Mar 93 Apr 93 - Jul 93 Dec 93-Feb 94

Full scale production
Place 1st Production Las Vegas Additional Replenishment
Order with Obersport Show orders received orders received
 The Effect of Minimum Order Quantities

• Ideally, during Speculative Production, we want to order

a specific quantity of a parka style, and then, during
Reactive Production, we want to “fine tune” the parka’s
remaining supply by ordering as few or as many as the
indicated by the revised forecast after Las Vegas.
• However, a large minimum order quantity for a
particular style of parka forces us to order either many
parkas or none.
• Thus, a minimum order quantity significantly reduces the
ability to “fine tune” during Reactive Production.
 Sport Obermeyer’s Time Line
and
“Speculative” versus “Reactive” Production

"NOW" Las Vegas

Initial Revised
Forecast Forecast 27 Months

9 months 5 months 5 months 8 months

Feb … Oct Nov … Mar April … Aug Sept Oct Nov Dec Jan Feb Mar Apr
1992 … 1992 1992 … 1993 1993 … 1993 1993 1993 1993 1993 1994 1994 1994 1994
Design of "Speculative" "Reactive" Selling of
1993-94 Production Production 1993-94 Line
Line. of 1993-94 Line of 1993-94 Line (peak selling in Dec & Jan)

In Feb 1993, In Feb 1994,

start design start design of
of 1994-95 1995-96 line.
line.

“Speculative” Production “Reactive” Production

Production Process:
Asia
6 weeks 6 weeks

Fabric Fabric Dyer Cut/Sew Denver Retailer

Producer Factory Warehouse

Un-dyed greige goods 6 weeks Consumer

Components Procurement lead time

Greige Shell Fabric 45 – 90 days
Finishing of Shell Fabric (Dying & Printing) 45 – 60 days
Finished Lining Fabric 45 – 60 days
Insulation 2 – 3 weeks
Zippers Standard (HK) 60 days, Custom (JP) 90+ days
Thread 30 days
Logo Patches, Drawcords, Hang Tags, etc. 15 – 30 days
Snaps (undyed) 1 – 2 months
Dyeing of Snaps 15 – 30 days
 Ordering and Shipment Process:
6 weeks

Factories in Seattle Denver

Hong Kong warehouse warehouse

Order 20% Order 80%

in Apr-Jun 93 in Mar 93

Forecasts

800 Ski
Product Forecast Retailers Retailers
Sketches Committee order in
Apr-Jun 93
Sales and Replenishing Process:

Aug 93 Sep 93 Oct 93 Nov 93 Dec 93 Feb 94

Sales

Peak Sales Re-Sales

Stock outs (+24 % of whole sale price)

Market downs (-8% of wholesale price)

 Parkas
• Obermeyer produce 200,000
parkas every year
• Capacity: 3,60,000 each year
• 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
 Issue faced by Wally
• How to make best use of forecasts by various members for production
commitment

• 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

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

Obermeyer Landed Cost:

Cost FOB Obersport $42.68

Agent’s fee (to Obersport, 7%) $2.98

Freight (Ocean Carrier) $1.40
Duty, insurance and miscellaneous $4.90
Total landed cost $51.92

Cost FOB Obersport:

Material $30.00

Labour $0.78
Transportation within China and $2.00
China overhead
China quota, obersport profit and $9.90
overhead
Total $42.68
 Parkas
• Wally studied the committee forecasts
• Estimated the early production of each style
• Demand and forecasts for last year analyzed
• Standard deviation of demand was twice the standard
deviation of buying committee forecasts
• 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 WOMEN’S
PARKA – Individual Forecast

Style Price Laura Carolyn Greg Wendy Tom Wally

Gail $110 900 1,000 900 1,300 800 1,200

Isis $99 800 700 1,000 1,600 950 1,200

Entice $80 1,200 1,600 1,500 1,550 950 1,350

Assault $90 2,500 1,900 2,700 2,450 2,800 2,800

Teri $123 800 900 1,000 1,100 950 1,850

Electra $173 2,500 1,900 1,900 2,800 1,800 2,000

Stephanie $133 600 900 1,000 1,100 950 2,125

Seduced $73 4,600 4,300 3,900 4,000 4,300 3,000

Anita $93 4,400 3,300 3,500 1,500 4,200 2,875

Daphne $148 1,700 3,500 2,600 2,600 2,300 1,600

Totals 20,000 20,000 20,000 20,000 20,000 20,000

COMMITTEE FORECAST- 10 STYLES OF WOMEN’S
PARKA – Individual Forecast

Style Average Forecast Standard deviation 2 x Standard

Deviation

Gail 1,017 194 388

Isis 1,042 323 646

Entice 1,358 248 496

Assault 2,525 340 680

Teri 1,100 381 762

Electra 2,150 404 807

Stephanie 1,113 524 1,048

Seduced 4,017 556 1,113

Anita 3,296 1,047 2,094

Daphne 2,383 697 1,349

Totals 20,000
 Parkas
• Wally also had to decide the location for production for each
style ( Hong Kong or China)
• It was planned this year to produce 50% of products in China
• There was risk of managing production and inventory in
longer term
• The larger minimum order size of China limits the capacity of
company’s ability to increase the range of products
• China trade relationship with USA - Risky
COMPARISON OF OPERATIONS IN
HONG KONG AND CHINA

Topic Hong Kong China

Hourly wage HK$30 RMB 0.91

Exchange rate HK$7.8 = US$1 RMB (Renminbi) 5.7

= US$1
Working hours 8 hours/day, 6 9 hours/day, 6.5
days/week days/week
Total = 48 Total = 58.5
hours/week hours/week
Maximum overtime During peak production
allowed = 200 periods, workers work
hours/years 13 hours/day, 6.5
days/week
Weekly (non-peak 19 parkas 12 parkas
output/worker)
 COMPARISON OF OPERATIONS IN
HONG KONG AND CHINA

Topic Hong Kong China

Actual labour content -2.35 hours -3.6 hours
per parka (incl repair
work)
Paid labour time per -2.53 hours/parka -4.88 hours/parka
parka (incl repair
work)
Labour cost /garment HK$75.6 RMB 4.45
Line configuration 10-12 people/line 40 people/line
Training Cross-trained Trained for single
operation only
Min order quantity 600 units in same style 1200 units in same style
Repair rate 1-2% -10%
Challenges Wage rate, Workforce Workforce
Low unemployment Less quality and
Younger worker prefer cleanliness conscious
office job Training requirements
 Sport Obermeyer’s Relationship with
Obersport
• In this global supply chain,
• Sport Obermeyer operates in the US and specializes in
the demand side by coordinating activities such as
• monitoring fashion trends,
• designing the parkas, and
• selling the parkas by entering into relationships with retailers.
• Obersport operates in Hong Kong and China and
specializes in the supply side by coordinating activities
such as
• procuring fabric and components (e.g., zippers) and
• arranging for production using either independent
subcontractors or factories of Alpine (a company owned by
Obersport’s managing director).
 Sport Obermeyer’s Relationship with
Obersport (Continued)
• Global supply chains are frequently composed of
different companies, with each company having a
• a different geographical location,
• a different knowledge set
• a different skill set, and/or
• a different set of business relationships.
• Sport Obermeyer should NOT eliminate its business
relationship with Obersport. Instead, it should retain
its relationship and seek to improve the coordination
between Sport Obermeyer’s demand-side activities
and Obersport’s supply-side activities.
SWOT Analysis
Strengths:
• History of product innovation
• Buying committee forecasts balance
expectations
• Experienced leadership and focused
management team
• Deliver products to retailers early in
the selling season
• Variety of SKUs, with color/size
product diversity
• Use of greige fabric delays product
differentiation
Opportunities:
• Aggressive marketing campaign
• Expanding sales to European/
South American markets
• Sponsorship of major winter
sports events
Weaknesses:
• Excessively long lead times,
though this is the nature of the
industry
• Minimum order quantity at
Chinese manufacturers
• Leftover unpopular merchandise
at end of selling period.
• Stock outs on most popular
items during peak selling
Threats:
• Competition from value-
oriented sellers like Columbia.
• Regulatory limits of goods that
can be imported into US.
 Case Discussion Questions

1. Using the sample data given in Table 2-20, make a

recommendation for how many units of each style Wally

should make during the initial phase of production. Assume

that all of the 10 styles in the sample problem are made in

Hong Kong and that Wally’s initial production commitment

must be at least 10,000 units. Ignore price differences among

styles in your initial analysis.

2. Can you come up with a measure of risk associated with your

ordering policy? This measure should be quantifiable.

 Case Discussion Questions

3. Repeat your methodology and assume now that all 10 styles

are made in China. What is the difference (if any) between

the two initial production commitments?

4. What operational changes would you recommend to Wally to

improve performance?

5. How should Wally think (both short-term and long-term)

about sourcing in Hong Kong versus China? What kind of

sourcing policy do you recommend?

 Solving Wally’s Sample Problem (with k=0)
DETERMINING SPECULATIVE PRODUCTION QUANTITIES
k =0 <---Find value of k that makes last column sum to about 10,000

STANDARD FIRST-PERIOD
MEAN OF DEVIATION PRODUCTION QUANTITY
DEMAND OF DEMAND

STYLE
  Max (0,   k )
Gail 1017 388 1017
Isis 1042 646 1042
Entice 1358 496 1358
Assault 2525 680 2525
Teri 1100 762 1100
Electra 2150 807 2150
Stephanie 1113 1048 1113
Seduced 4017 1113 4017
Anita 3296 2094 3296
Daphne 2383 1394 2383
Sum---> 20,001 20,001 <---Sum

Too much!
 Solving Wally’s Sample Problem (with k=2)
DETERMINING SPECULATIVE PRODUCTION QUANTITIES
k =2 <---Find value of k that makes last column sum to about 10,000

STANDARD FIRST-PERIOD
MEAN OF DEVIATION PRODUCTION QUANTITY
DEMAND OF DEMAND

STYLE
  Max (0,   k )
Gail 1017 388 241
Isis 1042 646 0
Entice 1358 496 366
Assault 2525 680 1165
Teri 1100 762 0
Electra 2150 807 536
Stephanie 1113 1048 0
Seduced 4017 1113 1791
Anita 3296 2094 0
Daphne 2383 1394 0
Sum---> 20,001 4,099 <---Sum

Too little!
 Solving Wally’s Sample Problem (with k=1)
DETERMINING SPECULATIVE PRODUCTION QUANTITIES
k =1 <---Find value of k that makes last column sum to about 10,000

STANDARD FIRST-PERIOD
MEAN OF DEVIATION PRODUCTION QUANTITY
DEMAND OF DEMAND

STYLE
  Max (0,   k )
Gail 1017 388 629
Isis 1042 646 396
Entice 1358 496 862
Assault 2525 680 1845
Teri 1100 762 338
Electra 2150 807 1343
Stephanie 1113 1048 65
Seduced 4017 1113 2904
Anita 3296 2094 1202
Daphne 2383 1394 989
Sum---> 20,001 10,573 <---Sum

Too much!
 Solving Wally’s Sample Problem (with k=1.0608)
DETERMINING SPECULATIVE PRODUCTION QUANTITIES
k = 1.0608 <---Find value of k that makes last column sum to about 10,000

STANDARD FIRST-PERIOD
MEAN OF DEVIATION PRODUCTION QUANTITY
DEMAND OF DEMAND

STYLE
  Max (0,   k )
Gail 1017 388 605
Isis 1042 646 357
Entice 1358 496 832
Assault 2525 680 1804
Teri 1100 762 292
Electra 2150 807 1294
Stephanie 1113 1048 1
Seduced 4017 1113 2836
Anita 3296 2094 1075
Daphne 2383 1394 904
Sum---> 20,001 10,000 <---Sum
Just right!
Question 1. and 3. Comparison units of each style
when produced in HK and China
Differences between production in HK and China

• Inventory

• Total Cost

• Operation Time

• Quality (% Repair)
Question 1. and 3. The differences between
production in HK and China
Question 1 (Alternative approach)
• We have three types of products:
-Low risk: risk % between 0 and 40
-Medium risk: risk % between 41 and 59
-High risk: risk % above 60
• To minimize the risk, we decided to order the
following quantity:
-Low risk items: 75% of the average forecast
-Medium risk items: 50% of the average forecast
-High risk items: 25% of the average forecast
Question 1 (Alternative approach)
2. Can you come up a measure of risk
associated with an your ordering
policy? This measure should be
quantifiable.
What’s the result if there is
demand forecasting uncertainty?

-Stock outs (-24 % whole sale price)

-Market downs( -8% of wholesale price)
-(Old) designs
-High inventory holding cost
-Unable to fully profit from hit products
Why does risk happen?

Forecasts are always uncertain

Standard Standard
deviation deviation

Demand Average
How we assess
forecast certainty?

1 . Based on historical data

- Past forecast error
- Variability of demand
2. Rather than producing one joint
forecast, each member of
the purchasing committee produces his/her
own forecast .

Obermeyer’s Buying committee

3. The deviation in views (of Buying committee) is
good estimator of forecast reliability

Table of standard deviation vs. Coefficient of variation

C.V. = Standard Deviation / Mean
4. How is this information helpful?

“Risk –based
production planning”

- Using Early production Capacity (Speculative capacity)

for Assault and Seduced
- Reserve later production Capacity (reactive capacity) for
Daphne and Anita as demand become more apparent
4. What operational changes would
you recommend to Wally to improve
performance?
KEY Problems:
• Ski Clothes is fashionable product, Its life cycle
is short
• Long time of planning and production activities
• Uncertain forecasting due to customer demand
• Fashion taker >> No R&D
OPERATIONAL Changes:
• Reducing number of styles handled and to
predict customer demand for individual style.

• To create promotion strategy to persuade

retailers to order.
OPERATIONAL Changes:
PRODUCTION SYSTEM

•Increasing production Quality of China to be

closed to Hong Kong.

• To reduce lead time of production especially

the preparation of raw materials.
 Lead time reduction
Asia

Fabric Fabric Dyer Cut/Sew Denver Retailer

Producer Factory Warehouse

undyed greige goods Consumer

Sport Obermeyer

• Fabric dyer lead time of several months

• Dyer has long lead time on greige goods and needed to keep their
capacity utilized year round but can change colors overnight
• Obermeyer can predict total annual sales and sales of basic colors,
but can’t predict fashion colors
Solution:
• Offer dyer one year commitment on greige goods
and capacity
• Dye basic colors early in year and fashion colors
late in season on few days notice
OPERATIONAL Changes:
SUPPLY CHAIN SYSTEM

• Increase bargaining power with suppliers by

ordering via big supplier that can commit on
timeline

• Collect stock raw materials which is base on

Ski cloth production
OPERATIONAL Changes:
•Increase distribution channel to a country
that have different period of product usage

•Increase services level requirements

•Establish DC in Seattle to reduce lead time

and cost from inland transportation from
Seattle to Denver
Original distribution process

Seattle

Hong Kong

Establish Distribution
Center in Seattle without
through Denver
OPERATIONAL Changes:
INFORMATION SYSTEM

• Collect the data backward and analyze the

demand of the show in Vegas and compare
with actual purchase.

• Speedup data/information analysis and

utilize historical data / Committee
forecasting / Research and Trend & Market
Movement.
5. How should Wally think (both
short term and long term) about
sourcing in Hong Kong versus China?
What kind of sourcing policy do
you recommend?
 Production Options
• Hong Kong • China
(Guangdong, Lo Village)
– Faster
– Lower labor cost
– More flexible
– Larger lot sizes
– High / Reliable
– Better for lower risk
Quality
designs
– Better for higher
risk designs
• Concern
• Concern – Quality & Reliability
– Smaller lot sizes
– Slower
– Higher labor cost
– Less flexible
 Where is better?
Short term Long term

Hong Kong China

 Recommendations to Wally

RECOMMENDATION #1. Improve the demand forecasts made

internally by the Buying Committee in November (1992) just
before Speculative Production.

Instead of using just a simple average of the individual forecasts

made by Laura, Carolyn, Greg, Wendy, Tom and Wally use a
weighted average, with the weights reflecting past accuracy.
 Recommendations to Wally
(continued)

RECOMMENDATION #2. Obtain market feedback earlier than Las

Vegas, thereby converting some Speculative Production to
Reactive Production.
Sport Obermeyer can invite selected retailers to come in January
to Aspen for an all-expenses-paid “Early Order Weekend”, where
there is time for a “sneak preview” of the new line, some
recreational skiing and socializing, and then the early placement
of orders at a discount.

To maximize the value of the market feedback, Sport Obermeyer’s

“guest list” should include both large and small retailers and both
urban and resort retailers.
 Recommendations to Wally
(continued)
RECOMMENDATION #3. Decrease lead times for both raw
materials and finished goods, thereby allowing more time to
utilize existing capacity.
Since the business strategy should emphasize
Dependability more than Cost, lead-times can be reduced
using some or all of the following methods:
•Choose suppliers of raw materials more on the basis of D
than C.
•Speed up orders through information sharing with
suppliers.
•Speed up shipments using faster (but more expensive)
shippers.
•Establish some local (but more expensive) production
capacity for “last minute” production.
 Recommendations to Wally
(continued)

RECOMMENDATION #3 (continued)

Other ways to reduce lead times include:

From the items with long lead times, increase the amount of
“safety stock” inventory for those items that are inexpensive
(e.g., buttons) and/or shared by many parkas (e.g., black fabric).

Simplify the parkas’ designs so that they can share as many

components as possible. For example, are 100,000 varieties of
zippers really necessary?
 Recommendations to Wally
(continued)

RECOMMENDATION #4. Increase production capacity by:

• Using more subcontractors,

• Using more overtime in China, and/or
• 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.
 Recommendations to Wally
(continued)

RECOMMENDATION #5. Decrease minimum order quantities,

thereby improving the ability to “fine tune” during Reactive
Production.

Minimum order quantities occur because there are long “set-up

times” when switching from the production of one style of parka
to another, thereby making it uneconomical to have “short runs”.
 Recommendations to Wally
(continued)

RECOMMENDATION #5 (continued)

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).
Thank You