Case study of Sport obermeyer ltd Executive Summary This is a case study of Sport Obermeyer: a high-end fashion skiwear design and merchandising company. Though Sport Obermeyer ski wears were profitable, they still lack the experience for the short-life-cycle products with uncertain demand and shortening the lead time. The Sport Obermeyer Company has to compete in the fierce environment of global market. With increasing demands and raising competition, the company has to have an edge on the market. Thus the company needs to increase productivity to meet the operational changes.
Also, some of the company’s unfavorable situations are resulted from the company’s inaccurate forecasting and inappropriate production planning. The company can enhance production and increase the ability to deal with the planning and production stages. According to the case, what the company should do now is: 1. to deal with styles of irregular demand; 2. to deal with limited supplier capacity; 3. to reduce the lead time. This report describes challenges in managing short-life cycle products with uncertain demand for operations at a ski wear design and merchandising company and its supply partner.
In this report, some recommendations of operational improvement, for example, accurate forecasting, improvement of inventory efficiency, shortening the lead time of production and raw material, efficient small lot production and information integration. Also, the report provides details about information and material flows that provide an opportunity to assess operational improvements of Sport Obermeyer, including comparisons between sourcing products in Hong Kong and China. Table of Contents 1. Introduction and Background6 2. Objectives7 3. Issues Identified7 4.
Analysis and Discussion11 5. Recommendations13 6. Conclusion15 References16 Appendices17 List of Figures 1. Figure-1 Process of Sport Obermeyer’s product cycle10 List of Tables 1. Table-1 Comparison between the two sourcing location11 2. Table-2 Comparison in annual production quantity between the two sourcing location12 3. Table-3Comparison in cost of production between the two sourcing location12 Body of Report Introduction or Background This case has described the forecasting, planning, and production processes of the global skiwear supply channel of Obermeyer.
Sport Obermeyer is a leading manufacturer of fashion skiwear for both adults and children. It is a high-end fashion skiwear design and merchandising company headquartered in Aspen, Colorado. Obermeyer offers a broad line of fashion ski apparel, including parkas, vests, ski suits, shells, ski pants, sweaters, turtlenecks, and accessories. Over the years, Sports Obermeyer has developed into a dominant competitor. And its estimated sales in 1992 were $32. 8 million. The company holds 45% share of children’s skiwear and 11% of adult Skiwear market.
It has a global supply chain extending over US, China, Hong Kong, Japan, Germany, Korea, etc. Sports Obermeyer competes by offering an excellent price/ value relationship, where value was defined as both functionality and style, and targeted the middle- to high-end of the skiwear market. The company sells the vast majority of its products to customers for use while skiing. Management believes that the effective implementation of its product strategy relies on several logistics-related activities, including delivering matching collections of products to retailers at the ame time, and delivering products to retail stores early in the selling season. Sports Obermeyer sells its products primarily through specialty ski-retail stores, located either in urban areas or near ski resorts. Obermeyer also serves a few large department stores and direct mail retailers. Most U. S. retail sales of ski-wear occur between September and January, with peak sales occurring in December and January. Most retailers requested full delivery of their orders prior to the start of the retail season. Nearly two years of planning and production activity takes place prior to the actual sale of products to consumers.
The whole order cycle includes the design process, sample production, raw material sourcing and production, retailer ordering process, shipment to Obermeyer warehouse, shipment to retail, and retail replenishment orders. Obermeyer sources most of it outerwear products through Obersport. And the company has worked with a Hong Kong-based company Obersport to “pre-position” (purchase prior to the season an hold in inventory) greige fabric as part of a wider effort to cope with manufacturing leadtimes. The company now needs to make decisions about where to produce (Hong Kong or Mainland in China).
And some issues such as improvements of its production planning, mismatching of supply and demand, coordination issues through the supply chain, etc should be paid more attention on. Objectives The objectives of this paper are: 1. To identify the present problems for Sport Obermeyer ; 2. To analyze the cause of these problems; 3. To make recommendations to solve these problems; 4. To evaluate these recommendations. According to the case, demand forecasting, production planning, material handling, inventory efficiency etc. of Obermeyer should be promoted to achieve the maximum profit through the supply chain. Issues Identified
Obermeyer is facing great deal of problems at present. First of all, take a look at following situations. Obermeyer has to make decision about the exact production plan of this year when winter is about to come every year. Unfortunately, all of this is to be finished without information of consumer’s reaction towards product. This happens because if Obermeyer puts off the delivery of goods, there will be a dramatic decrease in the number of consumer who purchases the company’s product. Whether the production line can achieve the ultimate success depends on whether Obermeyer has got the ability to forecast accurately the demand in the market.
However, the initial reaction from the retailers is available at least in the March next year after a major trade show for ski equipment and apparel held in Las Vegas, Which is much later than the Obermeyer’s production time of most products. The twenty-five largest retail customers were invited to sneak preview in February the year before. Their early purchase orders were used to improve initial forecasts. The members of the buying committee made independent forecasts for different products rather than trying to reach a consensus. Products for which individual committee members differed the most were modeled as having the most uncertainty.
Further more, by February, Obermeyer started to offer replenishment items to retailers at a discount. Similarly, retailers start marking down prices on remaining stock in an attempt to clear their shelves by the end of each season. As the season progresses, retailers offer deeper discounts; items remaining at the end of this season will be held over to the following year and sold at a loss. Obermeyer uses a variety of methods to liquidate the inventory at year-end, including large shipment containers of garments well below manufacturing cost to markets in South Africa and engaging in barter trade.
This occurs when on the other hand, the most marketable products are often out of stock because that the company can not make accurate forecast and this will lead to great loss on company’s revenue. As for the order sizes and timing, Obermeyer splits orders into two lots. The first order amounting to 10000 units placed approximately 10 months before the selling season. The second order, another 10,000 units, placed right after Vegas show, 6 months before the selling season. And there’s high demand variability as it gets closer to the selling season.
The Obermeyer Company relies heavily on the Vegas show to reveals 80% of the demand which enable the company to forecast demand more accurately. Moreover, Obermeyer offers a broad line of fashion ski apparel, including parkas, vests, ski suits, shells, ski pants, sweaters turtlenecks and accessories. Parkas are considered the most critical design component of a collection; the other garments in collection were fashioned to match the style and colors of parkas. Also, Obermeyer products are offered in five different genders and the company segment each gender market according to price, type of skier and how fashion-forward the market is.
All these things add to the complexity in supply and demand forecasting. Another situation related here is about the order cycle. Obermeyer sells its products primarily through special ski-retail stores and it also a few large department stores and direct mail retailers. Most U. S. retail sales of ski wear occurred between September and January, with peak sales occurring in December and January. Most retailers request full delivery of their orders prior to the start of the retail season; Obermeyer attempts to deliver coordinated collection of its merchandise into retail stores by early September.
Nearly two years of planning and production activity take place prior to the actual sales of products to consumers. Many things can happen in such a long period of time. Obermeyer offers a variety of services including Deliver matching collections simultaneously and Deliver early in the season. As for the supply chain, Obermeyer contracts with fabric suppliers to manufacture a specified amount of fabric of a given type each month; Obermeyer will later specify how it wants the fabric to be dyed or to be printed.
It’s noticeable that Obermeyer has to take possession of all fabric it contracted for whether or not it is actually needed. Prior to the start of the season, Obermeyer will work with its subcontractors to prepare a small batch for each color that is required in a given color. The preparation for each of this takes two weeks; the procedure at times has to be repeated if the quality of the lap-dip is not found to be satisfactory by Obermeyer managers or designers. Secondly, Obermeyer is also facing the following situations.
A typical Obermeyer product requires many cutting and sewing steps and the allocation of operations to workers differed from one factory to another depending on the worker’s level of skill and the degree of worker cross-training. Also, because lead times for obtaining raw materials proved difficult to shorten, the company began to predict what materials it would require and pre-position them in a warehouse in the Far East. Workers in Hong Kong worked about 50% faster than their Chinese counterparts.
In addition to being more highly skilled, Hong Kong workers are typically trained in a broader range of tasks. Thus, a parka line in Hong Kong that requires ten workers to complete all operations might require 40 workers in mainland China. Longer production line in China leads to greater imbalance in these lines; hence, a Hong Kong sewer’s actual output during a given period was nearly twice that of a Chinese worker. So, it’s a problem of how to reasonably allocate the production capacity in mainland China and Hong Kong.
The management believes that the effective implementation of its product strategy relies on several logistics-related activities, including delivering matching collections of products to retailers at the same time to allow consumers to view and purchase coordinate items at the same time, and delivering products to retail stores early in the selling season to maximize the number of “square footage days “products were available in retail. These things mentioned above are all closely related to production planning.
To complete the planning decision, The company needs to decide which styles to make in Hong Kong and which will be better to produce in China. And considering the long term, Obermeyer wonders whether producing in China will constrain its ability to manage production and inventory risks. Will China’s larger minimum order size s limit the company’s ability to increase the range of product it offers or to manage inventory risks? There also exists the important question of quotas here. This has strong connection with Obermeyer’s decision of Force delivery earlier in the season.
And if the quotas are used the up the last man definitely loses. [pic] Figure-1 Process of Sport Obermeyer’s product cycle Last but not least, it’s very important to take the information integration among the whole supply chain into consideration along with the forecast problem and production planning. Lacking of information sharing through the supply chain also results in some problems to the Obermeyer. Relationship with all the supply chain members can play vital role. Analysis and Discussion A large part of situations result from inaccurate forecasting and nappropriate production planning. Inaccurate forecasts lead to the severe influence consequence of deep discount and lost sales while the production planning problem that Obermeyer faces is a complex optimization problem under uncertainty. Of course, short life cycle of the products has to be taken into consideration. So, here, take a close look at the characteristics of the Obermeyer and the business the company engaged in. The company offers products of short life cycle and seasonal sales. The characteristics of short life cycle products bring the problem of high demand uncertainty.
There is limited or non existing demand data for forecasting. Thus, the impact of demand uncertainty will lead to exacerbated problem of long production lead time. Also the company has to hold wide range of products to meet the demand of consumers. The figure below indicates that it takes two years between the production and the delivery of orders. The long-term forecasts are usually less accurate and have a larger standard deviation of error relative to the mean than short-term forecast (see Appendix: Exhibit 1). The longer lead time also brings difficulties for the manager to take into account current information.
There also are situations mentioned above urged the company to make analysis and comparison in various factor between the mainland China and Hong Kong. As it’s mentioned in the figure following: Hong Kong has got much higher cost than mainland, and that Hong Kong has smaller lot sizes in mainland China, the flexibility is not that well in mainland China as in Hong Kong and also the quality of production in Hong Kong is much high than that in mainland China, the productivity in Hong Kong is also higher than that of mainland China while the production line in mainland China is much longer than that in Hong Kong. |Hong Kong |Mainland | |Costs |More expensive |Cheaper | |Lot sizes |Smaller |Larger | |Flexibility |More flexible |Less flexible | |Quality of Production |Higher |Lower | |Productivity Higher |Lower | |Production Line |Shorter |Longer | Table-1 Comparison between the two sourcing location As the Obermeyer Company has to make decisions of where to produce the products, several analyses are made here. Each Chinese line employs 40 workers; the same number is 10-12 in Hong Kong. The key factor to choose the sourcing location is the annual production capacity and the cost. The average hourly wage of Hong Kong’s workers is HK$30, as that of Mainland workers is RMB 0. 91.
Assume that the peak production period is 3 months during a year (12 weeks). And there are 52 weeks per year. The conclusion is drawn here: | |Hong Kong |Mainland | |Working Hours |48 hrs/week |58. 5 hrs/week | |Weekly (nonpeak) |19 parkas |12 parkas | |Maximum overtime allowed |200 hrs/year |12*4*6. 5=312 hrs/year | |Actual Labor Content per Parka |2. 5 hours |3. 6 hours | |Paid Labor Time per Parka |2. 53 hrs |4. 88 hrs | |Line Configuration |10-12 people/line |40 people/line | |Weekly (peak)/ |~85 parkas |~86 parkas | |Annual Quantity |10730-12876 parkas |768*40=30720 parkas | Table-2 Comparison in annual production quantity between the two sourcing location
Through tough calculation, it can be seen that: in spite of lower productivity of a worker in China (12 vs. 19 parkas per worker), a Chinese line produces more than twice the number of parkas produced in Hong Kong (10730-12876 parkas in Hong Kong VS 30720 parkas in mainland China). Here is another comparison. Assume that Obermeyer produces 200000 parkas each year. |Cost |Hong Kong |Mainland | |Labor Cost/Garment |HK$75. 6 |RMB 4. 45 | |Cost of production |1938461 US Dollar |156140 US Dollar |
Table-3 comparison in cost of production between the two sourcing location According to the table above, the difference in the cost of production between Hong Kong and mainland China is very obvious. The cost of production in mainland China is 156140 US Dollar which is much lower than that in Hong Kong which is 1938461 US Dollar. The third thing to be taken into consideration along with the forecast problem and production planning is the information integration among the whole supply chain. Lacking of information sharing through the supply chain also results in some problems to the Obermeyer. Obermeyer performance highly depends on the market reaction.
Thus it is crucial for Obermeyer to be in touch with the consumer. Obermeyer needs to have more ways to get more information as early as possible. No clear indication of what the end consumers’ reaction to the line will be difficulties for Obermeyer to forecast accurately. Meanwhile, there seems few or no feedbacks from the retailer. This leads to problem for the company to forecast as well as to make production plans. The long lead time of these materials needed by the production process also makes the whole cycle time even much longer. And inventory availability of these components is quite vital to the company’s production since any stockout of them will lead to production postponement. Recommendations
Regarding the various issues and the analysis mentioned above, the Obermeyer Company obviously needs to make improvements in several aspects i. e. improve forecast accuracy and inventory efficiency information integration and sharing along the whole supply chain; also, lead time should definitely be reduced. And here are some recommendations. First of all, information should be paid attention to. Information serves as the connection between various stages of the supply chain, allowing them to coordinate and maximize total supply chain profitability. It’s also crucial to Obermeyer’s operation of each stage of supply chain. The company should use information on demand to create a schedule that allows the company to produce the right products in an efficient manner.
Obermeyer needs to decide how many units to produce of each product, i. e. style, color, size, etc. By having enough information of the demand, the Obermeyer Company can eliminate unsold product which are costly to the company. And accurate forecasting using historical data on sales record, unnecessary cost can be avoided to a large extent. Obermeyer can use Electronic Data Interchange to to receive supply order. It’s not only efficient, it also can decrease the time needed to get products to customer which is more faster and accurate. And information sharing can also be achieved by EDI system; better visibility can improve decisions of the Obermeyer. Also the company can apply the Point-of-sales system.
This allows Obermeyer to collect data about sales, thus makes the production plan more appropriate and correct to achieve to maximum profit. But the disadvantage here for the information system is that it’s too expensive. And the installment of the system requires a long period of time and it’s highly demanded on the information technology. Secondly, another problem of sourcing also exists. As the analysis above shows, it’s better for the company to choose mainland China for setting the sewing and cutting facility since the cost of production in mainland China is much lower. And despite the low productivity, Chinese can produce more than twice the number of that in Hong Kong. But the drawbacks here is that the quality of the parkas produced in mainland China is hard to control since Chinese labors are low skilled and with low flexibility. But we apply for the method of employment training to increase the flexibility and the number of workers per line can be cut down. Labor cost can thus be reduced. Thirdly, here comes the problem of excessive production quantity. And the solution we offer is to reduce minimum production lot size by accurate forecasting. Another thing needs to be mentioned here is that the Obermeyer Company can use postponement strategy in dealing with those styles with unpredictable demand. It’s important to make accurate forecast on those styles.
This allows the company to be as responsive to the market as possible where the pay-off is the greatest. Those popular products can be produced more according to the historical record. Those less marketable product can be produced in smaller quantity thus to decrease the risk. The will enable the Obermeyer to work in a more efficient way. But the problem is that when the demand for the less marketable product raise all of a sudden, supply and the demand will be mismatched. Finally, some other measures can be taken to decrease the lead time. Cutting material lead time plays a key role in the whole process. Obermeyer has to identify the risk of supplying the correct materials to the factory.
Stable contract with the material suppliers is thus quite important. The Obermeyer can stock the raw material of reasonable ratio to decrease the reorder number. Meanwhile, to those non-standard zippers, the company can redesign the products which use same zippers to eliminate the risk. The company can also encourage the designers to use the same kinds of raw materials in their patterns in this way. The company does not need to work with different shades since customers generally do not notice subtle differences in patterns since they pay more attention on the parkas’ overall appearance, quality and special features. Also air craft can be applied for the shipment of some materials to reduce the lead time.
But in doing so, there will be dramatic increase in the transportation and inventory cost. Conclusions It is quite important for the Obermeyer Company to deal with every existing member within the supply chain to achieve the maximized supply chain profit. Each of the methods used by Obermeyer to gain increased market insight onto product demand are the different production-scheduling systems such as quick-response programs, just-in-time inventory systems, manufacturing resource planning, and etc. The forecasting, planning, and production processes of the global skiwear supply channel of Obermeyer are quite crucial. In doing so , the Obermeyer company needs to take all factors nto consideration: gaining early market information, sharing information with its supply chain members, good production planning on materials, appropriate sourcing, applicable technology and improved inventory efficiency can help the company to get competitive advantages and survive the fierce struggle in the global market environment. Reference: 1. Chopra S. and Meindl P. (2007) Supply Chain Management: Strategy, Planning, and Operations, 3rd Edition, Pearson Prentice-Hail. 2. M. L. Fisher, J. H. Hammond, W. Obermeyer, and A. Raman, (1994) “Making supply meet demand in an uncertain world, Harvard Business Review, May-June, 83-92. M. L. Fisher, and A. Raman (1996) Reducing the cost of demand uncertainty through accurate response to early sales. Operations Research 44, 87-99. 3. Monczka, R. , Trent, R. , and Handfield, R. (2005). Purchasing and Supply Chain Management, Thomson-South-Western, Third Edition Appendix: [pic] ———————– Sales Sales
Full-scale Production Discounts, Sales in South America Apr/94 Replenishment Orders Received Dec/93 Early Sept/93 Full Delivery To Retailers Shipment of Finished Goods Addition Retail Orders [? ]RTVjr’? s? o? $68PRhjlO? eUI? ¬? “‡“‡€xjx? a? a? S? SKa? hB`hB`o([pic]hB`hB`5? CJ aJ o([pic]hB`5? CJ aJ h” hB`5? CJ aJ o([pic]hB`5? ? o([pic] h¤2)hB`hB`5? ;? >*CJ4aJ4hB Les Vegas Show & Receive Initial Order & Place 2nd Production Order Cut and Sew Begins June-July/93 Apr-June/93 Mar/93 Feb/93 1st Production Order Designs Finalized Sketches to Obersoport Concept Finalized Les Vegas Show Design Process Begins Nov/92 Sept/92 Jul/92 May/92 Mar/92 Feb/92