The main focus of the Sport Obermeyer case is the production and manufacturing process of skiwear. Sport Obermeyer, a luxury skiwear design and manufacturing company based in Aspen, Colorado, sells its products through department stores and ski shops. The company has a worldwide supply network, with the majority of its products being outsourced through a joint venture between Obermeyer and its Hong Kong partner in China. This case examines how information flows throughout all the members in the supply chain.
Wally in Obermeyer had the challenge of forecasting demand and placing orders with suppliers before obtaining sufficient market information. Prior to making decisions, Wally needed to understand how to accurately forecast market demand based on previous records and how to efficiently allocate orders between operations in Hong Kong and China. This was crucial to maintain a flexible production line and minimize costs. Therefore, a recommendation is needed for the optimal number of units for each style that Wally should produce during the initial phase of production.
Assuming that all ten styles in the sample problem are manufactured in HK, Wally’s initial production commitment needs to be at least 10,000 units. To minimize the company’s risk of overstock due to inaccurate demand forecasts in the first-phase production, it is advisable to order a minimum of 10,000 units. According to Exhibit 10, the total quantity of all ten styles combined is 20,000 units. Therefore, the objective is to reduce this by half while also considering the mean and standard deviation of each style.
To produce only half of the forecast, it must be lower than the average forecast for each style. The formula “Mean – K*Standard deviation” can calculate this, taking into account the standard deviation. In Exhibit 10, Wally discovered that the standard deviation of demand for a style was approximately double the standard deviation of the Buying Committee’s forecasts for that style. The constant “K” ensures that the total units produced for all styles equals 10,000.
Using Microsoft Excel to calculate the value of K yields a result of 1.0608, which can be used to determine the appropriate quantities of each style. The textile industry relies heavily on accurately forecasting demand in order to optimize profits and mitigate the risk of excess inventory. Unfortunately, the case study presents two major challenges in this regard: a lack of sufficient information and lengthy production lead times.
The information gradually becomes more evident as the peak season approaches, but the long lead time for production hinders the company from producing when sufficient data is available. To enhance the company’s performance, a more precise demand forecast is crucial from the outset. Currently, Wally relies only on individual forecasts for his initial production decision. However, Exhibit 5 illustrates how demand forecasts improve as more information is obtained.
Given the limited information available, Wally may consider using historical statistical deviations between initial and final forecasts, which provide the closest approximation to actual demand, in order to make informed decisions. In industries like textiles and fashion, where trends evolve rapidly, individuals with extensive experience and a strong understanding of customer preferences are better equipped to accurately predict future trends. Therefore, it is beneficial to involve retailers, particularly salespersons or store managers, in the demand forecasting process. Giordano has successfully utilized this strategy to forecast demand as well.
In addition, it is necessary to enhance the lead time for production. Various recommendations have been proposed, such as the need to order raw materials well in advance due to lengthy lead times from certain suppliers, which could take up to 3 months. Considering the remaining stages in the production process, the company must initiate the ordering of initial raw materials in November and commence production in February. This initial batch represents fifty percent of Obermeyer’s overall production. However, by March, approximately 80% of the annual volume will be known.
Hence, if the company could complete the entire process from delivering raw material to finished goods more quickly, it would be able to produce when demand can be accurately predicted at almost 100%. However, this approach would incur additional costs for expediting raw material procurement and shipping finished goods at a faster rate. On the positive side, it would reduce the waste of excess inventory and enhance market responsiveness, ultimately leading to increased market share through better demand forecasting accuracy.
One idea would be to have a local production plant near retailers for last-minute production, a common occurrence in this industry. The article also talks about maintaining a “safety stock” of affordable materials. The company could increase this type of stock, such as zippers, but to do so it would need to simplify its patterns and designs so that different skiwear products can use the same type of zippers.
Obermeyer faces challenges in being both flexible in production line and stock control due to their wide variety of choices to target diverse customers’ needs. One problem they face is the minimum order required by suppliers, which may be alleviated by improving process design and equipment flexibility. Furthermore, Obermeyer can consider seeking smaller subcontractors who offer lower minimum order and are more under Obermeyer’s control.
However, producing in Hong Kong has the drawback of increased monitoring and quality control expenses. When comparing production in Hong Kong to China, it can be summarized as more costly, requiring smaller minimum order quantities, faster, and more adaptable. Considering the wide range of product styles and rapid changes in Obermeyer’s products, these advantages make Hong Kong an ideal location for production, with the exception of the higher expenses involved. Therefore, Hong Kong appears to be a preferable choice for Obermeyer.
The company had anticipated that approximately 50% of its products would be manufactured in China due to a rising trend in mainland China’s manufacturing industry. This choice was influenced by the company’s belief that Chinese workers’ productivity would greatly improve over time, making them superior to workers elsewhere. By utilizing economies of scale, the company projected that they could procure goods of equivalent quality from China at a significantly reduced cost compared to Hong Kong, potentially within a few years.
Despite the necessity of the Hong Kong plant for Obermeyer, it is possible that China will continue to increase their minimum order size as they grow larger. This would create a challenge for a company with numerous patterns and styles, as they may not be able to meet the high volume requirements for each type. Additionally, the uncertain trade relationship between China and the US makes it too risky for Obermeyer to shift a significant portion of its production to China.
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The production is predicted to primarily be situated in Hong Kong initially but will gradually transition to China over time. However, the Hong Kong facility will still serve as a contingency for small orders and unforeseen risks that may occur in mainland China. In conclusion, there are advantages and disadvantages to the suggested actions and analysis, so the company should weigh the costs and benefits before making a final decision. It is essential to thoroughly assess all pertinent factors prior to any determinations.