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1 Sport Obermeyer. 2 Sport Obermeyers Time Line and Speculative versus Reactive Production Speculative ProductionReactive Production.

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Presentation on theme: "1 Sport Obermeyer. 2 Sport Obermeyers Time Line and Speculative versus Reactive Production Speculative ProductionReactive Production."— Presentation transcript:

1 1 Sport Obermeyer

2 2 Sport Obermeyers Time Line and Speculative versus Reactive Production Speculative ProductionReactive Production

3 3 Speculative Production: Overstock 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 Q=750. During the Speculative Production, Sport Obermeyer should be more concerned about 750 Q Pr{Overstock}=Pr{DQ} =0.841

4 4 Speculative Production: Guidelines 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 5 The Effect of a Parkas Standard 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. During Speculative Production, Q Pr{Overstock}=Pr{D { "@context": "http://schema.org", "@type": "ImageObject", "contentUrl": "http://images.slideplayer.com/5/1528403/slides/slide_5.jpg", "name": "5 The Effect of a Parkas Standard 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.", "description": "During Speculative Production, Q Pr{Overstock}=Pr{D

6 6 The Effect of a Parkas Mean 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. During Speculative Production, Pr{Overstock}=Pr{D { "@context": "http://schema.org", "@type": "ImageObject", "contentUrl": "http://images.slideplayer.com/5/1528403/slides/slide_6.jpg", "name": "6 The Effect of a Parkas Mean 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.", "description": "During Speculative Production, Pr{Overstock}=Pr{D

7 7 The Effect of a Parkas Unit 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 8 Speculative Production: Summary of Guidelines for Choosing a 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 9 Speculative Production: Equalizing over 2 Parkas the 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 Pr{Overstock of Andy} = Pr{Overstock for Peter}? Q=2500 – k500Q=1000 - k250

10 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 11 Solving Wallys Sample Problem (with k=0) Too much! Go to Excel file.

12 12 Solving Wallys Sample Problem (with k=2) Too little!

13 13 Solving Wallys Sample Problem (with k=1) Too much!

14 14 Solving Wallys Sample Problem (with k=1.0608) Just right!

15 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 16 Minimum Order Quantities (continued) Let Mean denote a parkas mean demand. Let min Q 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 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 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 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 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 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 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 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 24 Sport Obermeyers Relationship 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.


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