Sport Obermeyer – Case Report

Module One, Session Six
Supply Chain Inventory Management

Darcy Shannon
October 27, 2010

Sport Obermeyer – Case Report

Executive Summary

In order to minimize the degree of stock outs, and markdowns, I have decided for the initial Hong Kong order to produce those products that have the smallest standard deviation when comparing the Buying Committee Forecasts. An attempt will also be made to purchase the lowest cost items within this group, as initial order size of 10,000 units allows. Combined, this will allow for the least amount of risk Obermeyer is exposed to when using the limited information they have for the initial order. The ideal products to order are those with enough forecast quantity that the minimum quantity order will be less than the forecast and also leave enough room for a reorder of the minimum quantity or more if required. Exhibit 1 shows the proposed initial order.

More importantly, I have also decided that Sport Obermeyer, as a company, needs to focus on two distinct issues going forward. 1. Change the purchasing strategy from a speculative system, (trying to “guess” what will sell) to a reactive system (knowing what is required and producing it). 2. Work with suppliers to reduce delivery times and minimum order quantities. This will include both raw material lead time and production capacity.

Hong Kong is a much more mature manufacturing environment. They have embraced better manufacturing practices that allow for a higher quality product with a shorter turnaround. Because of these practices, they are able to more rapidly tool up for new products. I have decided that Obermeyer needs to refocus on its Hong Kong based supply lines.

Sport Obermeyer – Case Report

Immediate Issue

To have the ability to purchase, and receive at the correct time, a level of product that is best suited to minimize stock outs and markdowns. Place an initial 10,000 piece order from the Hong Kong supplier using the limited amount of data currently available.

Systematic Issues

Obermeyer currently commits 50% of yearly production based on forecasts that are little more than intuition. Until the Las Vegas show, no real attempt is made to find out what the market will demand. Past success of the “intuitive” figures is not even considered. The second part of production is used as clean up and catch up. Try and fix the mistakes made in the first round and get as much product shipped as Las Vegas numbers demand.

It seems that Obermeyer, through Obersport, has opted to add a Chinese supplier based primarily on manufacturing cost savings. China has cheaper labor and capacity. This has created confusion in the ordering process. Cheap labor, large minimums, long lead times vs. higher quality product, short minimums, faster turnaround.

Environmental and Root Cause Analysis

Not being able to accurately predict early season ordering pushed Obermeyer to seek out manufacturing with excess capacity. It almost looks like they went in two directions at the same time, maybe without knowing it. They sought out cheaper suppliers to compensate for the need to carry excess inventory to meet demand (speculative) while at the same time seeking more capacity to allow for more rapid fulfillment (reactive).

Alternatives and/or Options

There is a not much of an argument for holding off all production until after the Vegas show. Unfortunately, because of limited capacity this guarantees stock outs. We know that loss of profit from a stock out is $27 and the loss from a markdown is $9. For every stock out it would take 3 mark downs to equal the losses. Even with limited forecast info, it makes sense in the current situation to place a speculative order and risk markdowns rather than suffer definite stock outs.

Sport Obermeyer – Case Report

Assuming stock of raw materials is a non issue (safety stock of long lead time raw materials should be increased), partner with a similar manufacturing company to share capacity. Perhaps a manufacturer of summer wear. Theoretically, they should have excess capacity in the months when Obersport needs it. Since they sell into a different season, they would be more open to a capacity partnership of some kind. Stock of raw materials is much less risky than stocking finished goods. There is a cost to carry this but chances are the material can be used on many different styles and even into the next season.

Look at reducing the number of styles available as well as the variety of raw materials. Is it really necessary to have so many varieties of buttons and zippers?

Recommendation and Implementation

Attempt to get more market info earlier in the year. Invite retailers to submit forecasts; give them something in return so they have an incentive. Perhaps a discount on first order, a ski vacation, etc. Tie the reward to the success of their predictions. If their predictions h help, they will save significant amount of money for Obermeyer on incorrect ordering on the pre-Vegas order.

Increase stock on raw materials. As noted above, the risk is low with this. The material has along life and can be processed for different styles. Any items with lead times that could possibly restrict post Vegas manufacturing abilities should be targeted and stock increased.

The Hong Kong factory should be more informed about the issues with manufacturing capacity. They have lost 50% of the business to Chinese competition. This should make them more than open to discussions on what they need to do to get it back. More staff, more machinery, more automation, more shifts; these are just a few of the things that need to be examined. Possible incentives could be offered to the manufacturer but I feel the main incentive is to get some of that 50% business back.

As with capacity, discuss a reduction of minimum order size with Hong Kong factory. Perhaps min order size can be smaller but at a premium price. More price breaks on order sizes. Again this could be done with machinery or production flow efficiencies. The premium price can obviously not exceed the losses due to mark downs and stock outs though otherwise it is a just a wash at best.

Sport Obermeyer – Case Report

Monitor and Control

Success of order forecast is an easy one to monitor. A post season study of stock outs and mark downs will show ordering errors. How minimum order size impacts these numbers should be looked at carefully as this is not bad forecasting but manufacturing issues. Both initial and second order should also be carefully examined as compared to stock outs and mark downs. A post season study should be done that looks at what would have happened if there was no initial order and all manufacturing happened after Vegas.

Look at the individual success of the Buying Committee Members. Are some very good, are some way off in left field? Use this info to better use these forecasts next season.

Conclusion

Obermeyer’s issues an all be traced back to manufacturing capacity. Because there is currently not enough capacity to produce when better data is available, they are forced to forecast and produce at least some product early. Exhibit A in the readings manual shows how much better the forecasting gets the closer into the season, and into the season you get. The trick is to build in as much capacity as possible to so you can wait until these better figures show up.

The Hong Kong Supplier is in a much better position to realize this and work with Obermeyer to overcome it. Proper planning and negotiates could realize gains for both them and Obermeyer.

Sport Obermeyer – Case Report

Exhibit 1 Sport Obermeyer - Initial 10,000 pc order. Hong Kong Produced. 600 pc minimum order/garment
|Style | |Average Forecast |
| |Price | |