Company Background
• Sport Obermeyer designs and merchandises high-end skiwear from its Aspen, Colorado headquarters. • The products are sold in U.S. department stores and specialty ski shops.
• Although it has a global supply network, most production is done in Hong Kong and China by its partner, Obersport.

Sport Obermeyer
Supply Chain Management
MGT 690
June 5, 2010

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Obersport

The Supply Chain
Shell
Fabric

• Established in 1985.
• It is a joint venture between Sport
Obermeyer and a Hong Kong based partner.
• Obersport handles the raw materials and production for all of Sport Obermeyer’s production in the Far East.
• Production is done in independent subcontractors located in Hong Kong and
China.

Lining
Fabric
Insulation
Materials

Cut/Sew

Distribution
Center

Retailers

Snaps
Zippers
Others

Textile Suppliers

Obersport

Obermeyer

Retailers

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Planning Cycle

Planning Cycle Cont.

• Design begins in February of the year before the garments will appear in stores.
• As soon as designs are finalized, samples are produced and shown to retailers during the
Las Vegas show. The show is usually held in
March.
• Concurrently, materials and components are ordered for the initial production order.
• Usually receive 80% of the annual order volume the week after Las Vegas show.

• During June and July the garments are transported to Obermeyer’s Denver warehouse. This takes approximately six weeks. • Around the end of August, Obermeyer ships orders to retailers.
• Products go on sale during September. Peak times are December through January.
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Time Line

Production Planning

(See Table 2-14, p. 68)

• Annual production is approximately 200,000 units. • Maximum production capacity available for cutting and sewing is 30,000 units a month.
• The minimum production quantity per style in
China is 1200 units and Hong Kong is 600 units. • Estimates that earnings are 24% of wholesale price for each unit sold and losses from discounted units are 8% of wholesale price.
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What makes it difficult for Sport
Obermeyer to manage its supply chain?

Production Planning

10 Styles of Women’s Parkas
(See Table 2-20, page 75)

• Long lead times

high inventory

– Global supply chain (distance / time)

•
•
•
•

Early commitment
Large lot sizes
Short life cycle
Uncertain demand
– Perishable product: one season
– Historic data useless
– Late demand signal

• How should Wally think about how much of each style he should order in November?

• Limited capacity
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How many units of each style Obermeyer should order during the initial phase of production? (use the sample data in Table 2-20). [Note: no minimum quantities]

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Speculative v Reactive
Capacity

• Class responses varied significantly
–
–
–
–

Focus on reducing risk
Gail: 500, 629, 1017
Assalut: 1300, 1845, 2525
Daphne: 1150, 989, 2300

Speculative
Production Capacity

Initial Forecast

Reactive Production
Capacity

Las Vegas Orders

• Most generally agreed that orders should be placed for styles with the lowest variability and cost (lowest risk)
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Production Planning

Which Units are Lowest Risk?

• Use a risk-based production sequencing strategy: • Highest demand
– More likely that unit will sell

• Less variable (lower σ/µ)
• Less expensive
– Lower overage costs
– In speculative capacity, you are worried about being over – being under not a problem, because you can always use reactive capacity

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How Should We Measure
Risk?

– Produce the least risky items during the first production period using speculative production capacity. That is capacity employed prior to observing additional indicators of market demand.
– After observing retailer demand in Las Vegas,
Wally should update demand forecasts for the remaining units and produce those with the greatest expected return during the second production period using reactive production capacity. 14

Production Planning
No Minimum Order Quantities

• In the first production period, we are primarily concerned with markdown risk:
– If we under-produce during the initial production period, we have a second production opportunity.
• What is the relationship between risk and
– Product price
– Demand uncertainty
– Expected demand

• If all styles have the same wholesale price, an effective strategy is to produce up to the same demand percentile for each style.
– Why?

• That is, for style i make µ i − kσ i
• In this case, the strategy takes into account demand uncertainty and expected demand.
• Find the best k so that total production is no more than 10,000 units.
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Production Planning
With Minimum Order Quantities

Production Planning

No Minimum Order Quantities

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• Ranking products by risk is complicated significantly when imposing minimum order size constraints.
Why?
• Ideally, we would like to make a specific quantity of a style and then “finely tune” the supply of that style by making a few or many units during the second period when market information is available.
• However, in each production period, large production minimums force us to make either many units of a given style or none.
• Thus, our ability to finely tune the supply of each product is diminished by imposing large minimum order quantities.
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Production Planning
With Minimum Order Quantities

Effect of Minimum Order Quantity on
Stockout and Markdown Costs

• Consider the following styles:
– Anita (Avg= 3296, Std Dev=2094, CV= 0.65)
– Gail (Avg= 1017, Std Dev= 388, CV= 0.38)

• If only one production run is allowed, which should Sport Obermeyer produce first?
– Without minimum order quantity, Sport
Obermeyer should produce Gail before Anita
– With minimum order quantity of 1200 units, Sport
Obermeyer should produce Anita before Gail
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Does your answer change if all ten styles in the sample are made in Hong Kong?

• Hong Kong requires lower order quantities • More flexibility in ordering higher risk styles (i.e. those with lower forecasted demand or higher cost)
• Higher overall costs

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What operational changes would you recommend to
Wally to improve performance (and lower risk)?

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Effect of Minimum Order Quantity on
Stockout and Markdown Costs

• Reduce lead times
– Computerize processes
– Reduce minimum production lot-sizes
– Do not commit initial production orders to unproven factory (rework, ramp-up)
– Look for subcontractors who can delivery at a faster rate to fill in gaps
– Use standardized products
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How should Obermeyer management think about sourcing in Hong Kong versus China in the shortterm?

How should Obermeyer management think about sourcing in Hong Kong versus China in the longterm?

Hong Kong

China

Hong Kong

China

• Shorter production time • Smaller orders better for initial forecast • Better for higher risk designs • Lower overall costs
• Better for lower risk designs • Higher quality products • Low unemployment means higher wages

• Unstable political environment • Import quotas
• Higher minimum order quantities
• Work to increase efficiency/skills 25

If Wally wants to improve his ability to produce what the market wants, which constraints should he address?

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Reactive Capacity: Effect on Costs

• U.S. government import quotas
• Long lead times…reduce
– Materials
– Products

•
•
•
•

Large minimum order quantities
Short product life cycle (1 year)
Long planning cycle (2 years)…reduce
Early ordering commitment (without actual demand data)…reduce
• Limited capacity

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Increasing Reactive Capacity
Increasing Reactive Capacity

Speculative production capacity

Original Reactive capacity

Base case
Prod’n LT

Material LT

– How can we increase reactive capacity?

1st Prod’n Order

• Increase total capacity.

New Info / 2nd prod’n order

Delivery LT

Additional Reactive capacity

Increase Total Capacity

» How? What can be done with the excess?

• Increase the number of working hours.
» What are the dangers of this approach?

• Use more subcontractor capacity during the peak season. Additional Reactive capacity

Decrease Lead Times

– How does this impact in-house capacity?

• Decrease manufacturing lead time.
• Decrease raw material lead time.

Obtain Information Earlier

Additional Reactive capacity

» How?

• Obtain market information earlier.
» How?

New Info
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Nov/92

Mar/93

Jun/93

Aug/93

Sept/93

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What recommendations would you make to Wally?
• Develop improved forecasting technique
• Collect/use POS data
• Seek out partnerships to facilitate shorter lead times for raw materials
• Work on better integration of supply chain
– Try to reduce the number of vendors for greige fabric and other materials

• Work with Chinese facilities to reduce minimum orders and improve worker skills
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Strategies for Accurate
Response

Accurate Response
• Develop a probabilistic forecast
• Assess markdown and stockout costs
• Determine appropriate production quantities • Reduce minimum order sizes
• Increase reactive capacity
– Lead time reduction
– Early market intelligence

– Produce lower risk items early

• Evaluate early demand indicators
• Update forecast demand
• Determine final production quantities
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Other Coordination Issues to
Think About
• What business is Sport Obermeyer in?

How Obermeyer Responded

– What must management be good at?

• What business is Obersport in?
– What must management be good at?
– What services does it provide Sport
Obermeyer?
– Could Sport Obermeyer deal directly with the factories in Lo Village?
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Obermeyer’s First Response
• Operational Changes

Results of First Response

• Early Write Program

– Slashed time for order processing and computing raw material requirements by introducing computerized systems
– Pre-positioned raw materials in Far East
– Began using air freight as delivery due dates approached – Invited 25 largest retail customers to Aspen for sneak preview of upcoming line in order to solicit early orders
– Since 1990 these orders have resulted in
20% of Obermeyer’s total sales

Reduced delivery lead times by more than a month Gained important early demand information
• But was it enough?
No– about half of production still based on forecasts Track record not particularly good

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Did it pay off?
Obermeyer Results

Additional Changes

Before

After

Accurate
Response

• Kept raw materials and production capacity undifferentiated as long as possible
• Booked production capacity well in advance without specifying exact styles until later (assumed risk of supplying raw materials to factories)
• Merged design and production departments to broaden strategy
• Encouraged designers to use same types of raw materials • Recorded orders for out of stock products

Accurate
Response

Total production (units)

121,432

124,805

Over-production (units)

25,094

22,036

Under-production (units)

7,493

792

Over-production as % of sales

1.74%

1.30%

Under-production of % of sales

1.56%

0.18%

3.30%

1.48%

Total cost as % of sales
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Summary

Obermeyer Results (cont.)

• Intelligent forecast process:
• Improved profits by 50% by reducing inventory costs to 1.48% of sales (from
3.3% of sales) - Profit margins in industry around
3% of sales
• No. 1 customer rating.

Dealer Confidence Index
Apparel, 1/94
Sports Research Inc.

Obermeyer
Bogner
White Stage
Helly Hansen
Nordica 2.63
Marker
North Face
Columbia
Descente
Roffe
Couloir
…
Head

– obtain early signal;
– forecast uncertainty as input to production planning;
– forecast update.

2.94
2.88
2.82
2.80

• Power of risk-based production planning.
• Use inventory to establish de-coupling point in supply chain (e.g., stock of raw materials in HK).
• Material commonality to improve flexibility.
• Coordinated demand and supply roles.

2.56
2.55
2.52
2.48
2.40
2.37
…
1.74
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