Sport Obermeyer

1
Sport Obermeyer
2
Sport Obermeyers Time LineandSpeculative
versus Reactive Production
Speculative Production
Reactive Production
3
Speculative ProductionOverstock versus Stockout?
Assume that Sport Obermeyer is in the
Speculative Production phase, forecasts that
demand (D) for the Andy parka has a Normal
Probability Distribution with a mean of 1000 and
a standard deviation of 250, and has decided that
the Andy parkas Speculative Production should be
Q750.
PrStockoutPrDQ 0.841
PrOverstockPrD0.159
750 Q
During the Speculative Production, Sport
Obermeyer should be more concerned about
4
Speculative ProductionGuidelines for Choosing a
Parka to Produce
In this slide and the next 4 slides, we will
assume that Sport Obermeyer is in the Speculative
Production phase and must decide whether to
produce the Andy parka or the Peter parka. We
will also assume that a parkas demand has a
Normal Probability Distribution. We will
investigate how this decision is affected by the
parkas standard deviation of demand, the parkas
mean demand, and the parkas unit cost of
production.
5
The Effect of a ParkasStandard Deviation of
Demand
Assume that Andy and Peter have the same unit
cost of production and the same mean demand of
1000, but that Andys demand has a standard
deviation of 100 while Peters demand has a
standard deviation of 200.
PrOverstockPrDArea to Left of Q
Q
During Speculative Production,
6
The Effect of a ParkasMean Demand
Assume that Andy and Peter have the same unit
cost of production and the same standard
deviation for demand of 200, but that Andys
demand has a mean of 1000 while Peters demand
has a mean of 1200.
PrOverstockPrDArea to Left of Q
Q
During Speculative Production,
7
The Effect of a ParkasUnit Cost of Production
Assume that Andy and Peter have the same mean
demand of 1000 and the same standard deviation
for demand of 1000, but that Andys demand has
unit cost of production of 10 while Peters
demand has a unit cost of production of 20.
During Speculative Production,
8
Speculative ProductionSummary of Guidelines for
Choosinga Parka to Produce
In the previous 3 slides, we have seen that a
parka is a better candidate for Speculative
Production if It has a relatively ______
standard deviation of demand. It has relatively
______ mean demand. It has a relatively ______
unit cost of production.
9
Speculative ProductionEqualizing over 2
Parkasthe Probability of an Overstock
Assume that Andy and Peter have the same unit
cost of production but that Andys demand has a
mean of 1000 standard deviation of 250, Peters
demand has a mean of 2500 standard deviation of
500.
QUESTION How can we set the production
quantities so that PrOverstock of Andy
PrOverstock for Peter?
10
Solving Wallys Sample Problem (on page 8 of the
Case)
Using the concept on the previous slide and the
sample data in Exhibit 10, we will determine for
Wally the order quantity for each style during
Speculative Production. To simply, we will
assume that all 10 styles in the sample problem
are made in Hong Kong, no style has a minimum
order quantity, all styles have the same unit
cost of production, and total Speculative
Production must be about 10,000 units.
11
Solving Wallys Sample Problem (with k0)
Go to Excel file.
Too much!
12
Solving Wallys Sample Problem (with k2)
Too little!
13
Solving Wallys Sample Problem (with k1)
Too much!
14
Solving Wallys Sample Problem (with k1.0608)
Just right!
15
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 parkas 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.
16
Minimum Order Quantities(continued)
Let Mean denote a parkas mean demand. Let
minQ denote the parkas minimum order
quantity. Consider the following three cases
During Speculative Production, which of the above
three cases are safe to order, and which are
risky?
Case 1
Case 2
Case 3
17
Recommendations to Wally
RECOMMENDATION 1. Improve the demand forecasts
made internally by the Buying Committee in
November just before Speculative Production.
Instead of using just a simple average of the
individual forecasts made by Laura, Carolyn,
Greg, Wendy, Tom, Wally, use a weighted
average, with the weights reflecting past
accuracy.
18
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
asneak 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 Obermeyers guest list should include
both large and small retailers and both urban and
resort retailers.
19
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. Expedite orders through
information sharing with suppliers. Expedite
shipments using faster (but more expensive)
shippers. Establish some local (but more
expensive) production capacity for last minute
production.
20
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?
21
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.
22
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. 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).
23
Sport Obermeyers 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 Obersports managing
director).
24
Sport ObermeyersRelationship 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 Obermeyers
demand-side activities and Obersports
supply-side activities.