7 China Colorado US Retailer November Pre year November March August Design clothesMake forecastsOrder textiles & stylesNovemberTake OrdersMake FabricAssemble ClothesMarchMake orders to Sport O.Las Vegas showAugustDeliver to ColoradoWarehouseDistribute to retailersSeptemberRetail SeasonFebruary
15 Production Strategy A Account for production minimum If we assume same wholesale price, we want to produce the mean of a style’s forecast minus the same number of standard deviations of that forecast i.e., mi-ksi (k is same for all).Approach: produce up to the same demand percentile (k) for all suits.Sum (m-ks)each style = 10,000 (meet production minimum)Determine k for all styles
17 But what about the batch size minimums? Large production minimums force us to make either many parkas of a given style or none.How do we consider the batch size minimums for the second order cycle?
18 Strategy B: Categories for Risk Assessment m= minimum order quantity (600 here)SAFE: Styles where demand is more than 2X the minimum order quantity (we’ll have a second order commitment)SOS: Sort of Safe=expected demand is less than minimum order quantity. “If we make ‘em at all, make ‘em first” (have to make minimum)RISKY: demand is between C1 & C2.
19 Compute risk for each style Rank styles by risk ApproachCompute risk for each styleRank styles by riskFigure out the amount of non-risk suitsto produce in the first run
21 Modified ApproachDetermine how many styles to make to give total first period production quantity.Assess each case by determining the optimal quantities for non-risk suits using Production Quantity = Max(600, mi-600-k*si)Same approach as before (determine the appropriate k so that lot size <10,000)
22 Example: Production Quantity = Max(600, mi-600-k*si) ; k =.33
23 Should we make more suits? Production minimum order is 10,000?Pros?Cons?
24 Sport Obermeyer Savings from using this risk adjustment Model’s DecisionsSport O DecisionsTotal Production (units)124,805121,432Over-production (units)22,03625,094Under-production (units)7927493Over-production(% of sales)1.3%1.73%Under-production.18%1.56%Total Cost (% of sales)1.48%3.30%
25 Team Breakout 2What supply chain & operations changes can be implemented to reduce stock-outs and mark-downs?Design, production, forecasting, etc.?Specific: How are you going to do it, Actions?
26 Operational Changes to Reduce Markdown and Stock-out Costs Reducing minimum production lot-size constraintsHow ?
34 Accurate Response Program Using buying committee to develop probabilistic forecast of demand and variance (fashion risk)Assess overage and underage costs to develop relative costs of stocking too little or too muchUse Model to determine appropriate initial production quantities (low risk first)“Read” early demand indicatorsUpdate demand forecastDetermine final production quantities