6Competitors The Jacobs Corporation founded by David L. Jacobs Biography
7CompetitorsThe North Face, Inc.: subsidiary of VF Corporation
8Competitors Burton Snowboards founded by Jake Burton Carpenter Innovative Burtonouterwear performance meetsleading Motorola Bluetooth ®technology
9Sport ObermeyerSport Obermeyer – a high end fashion skiwear designer and merchandising companyCommitment for producing line of fashion skiwear forLong lead times:Long lead times: It’s November 1992 and the company is starting to make firm commitments for its 1993 – 1994 season.Based on experience, Intuition and sheer speculationNo feedback from retailers (Las Vegas trade show in March 1993)Inaccurate forecasts of retailer demandCompany’s inability to predict correctly (which product would become best seller) resulted in:Excess merchandise and sold at deep discountOr company ran out of most popular items (lost sales)
10Problem Statement How can Sport Obermeryer Ltd.: Improve its forecasting methodAchieve a more dynamic manufacturing capability in order to reduce final inventoryIncrease profitsBecome more competitive in the industry
11Manufacturing Structure: Sport Obermeyer Ltd.Obersport Ltd.Alpine LtdHong KongMacauChinaLo VillageOther subcontractors
12COMPANY NETWORK:Recently, a number of contractual ventures were added and a new complex in Lo Village Guangdong China
15Obermeyer Product Fashion Ski Apparel Parkas, Vests, Sweater, ski suits, shells, ski pants, turtlenecks and accessoriesParkas : Most critical designProducts offered in five different genders (Men, Women, Boys, Girls, Preschoolers)Company segmented each gender market according to price, type of skier and fashion forwardness.U.S. Skiwear estimated sales in 1992: US$ 32.8 millionObermeyer’s Share:45% of children skiwear mkt.11% of adult skiwear mkt.Offering an excellent price/ value relationship to target group
16Obermeyer Product Example (Adult man) Each Gender Fred (conservative, basic)Rex (rich, latest fabrics and technologies)Beige (mountaineering type skier, high technical performance)Klausie (showy, latest fashions)Each GenderStylesColorsSizesTotal Number of SKU’s (stock-keeping units): ~800Deliver matching collections simultaneouslyDeliver early in the season
17The Supply Chain (Asia to Aspen (U.S.)) Obermeyer sourced most of its products through ObersportObermeyer would contract with fabric supplier for specified amount of fabric each monthLead time taken into account for all materialsMost tasks performed only after production quantity planned by ObermeyerObersport: Joint venture between Sport Obermeyer and its Hong Kong partner.Obersport is responsible for fabric and component sourcing for apparel production and monitoring product quality at subcontractor factories.Textile and Accessories SuppliersApparelManufacturesObersportRetailers
18Textile and Accessories Suppliers Apparel Manufacturers The Supply ChainTextile and Accessories SuppliersApparel ManufacturersSport ObermeyerRetailersObersportProduce, dye and print shell and lining fabrics, supply insulation, zippers, thread, logo patches and snaps.Subcontractors, receive production orders and materials from Obersport. Cut, sew and final assembly.Responsible for material and production sourcing in the Far East. It also acts as a distribution centre for materials and finished goods.Product design, production planning and sales.Purchase from Sport Obermeyer and sell products to consumers.
19Product Transportation Hong Kong WarehouseSeattleObermeyer’s Denver Warehousethen transported by trucksgoods produced in August were air-shippedRetailersorders were finally shipped via small-package carriers such as UPS (United Parcel Service) at the end of August 1993Cost $5 per parkaproducts made in June and July were transported by ships
20Retailers Specialty Ski-Retail Stores Department Stores Direct Mail RetailersConsumersMost sales occur between September and JanuaryDelivering products by early SeptemberSport Obermeyer
21Production Options Hong Kong Mainland (Guangdong, Lo Village) More expensiveSmaller lot sizesFasterMore flexibleMainland (Guangdong, Lo Village)CheaperLarger lot sizesSlowerLess flexible
22Obersport Limited Obersport Ltd To coordinate production of sport obermeyer’s products in Far EastResponsible for fabric and component sourcingJoint Venture formed in 1985 byKlaus Obermeyer’s Son – Wally (Harvard Educated)Raymond Tse – Owner of Alpine- 80% order of Sport obermeyerKlaus entrusts Raymond Tse to make all decisions regarding production and investment22
23Planning and Production Cycle: Feb Mar May Jul Sep 92Prototype, Sample ProductionDesign Process Las Vegas Concept Sketches sent Designsbegins Show Finalise to Obersport FinalisedNov Mar Apr 93 - Jul Dec 93-Feb 94Full scale productionแก้ Scale of time linePlace 1st Production Las Vegas Additional ReplenishmentOrder with Obersport Show orders received orders received
24The 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 parka’s 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.
25“Speculative” Production “Reactive” Production Sport Obermeyer’s Time Line and “Speculative” versus “Reactive” Production“Speculative” Production“Reactive” Production
27Retailers order in Apr-Jun 93 Ordering and Shipment Process:6 weeksFactories in Hong KongSeattle warehouseDenver warehouseOrder 20% in Apr-Jun 93Order 80% in Mar 93Forecasts800 Ski RetailersRetailers order in Apr-Jun 93Product SketchesForecast Committee
28Peak Sales Stock outs (+24 % of whole sale price) Sales and Replenishing Process:Aug Sep Oct Nov Dec Feb 94SalesPeak SalesRe-SalesStock outs (+24 % of whole sale price)Market downs (-8% of wholesale price)
29Parkas Obermeyer produce 200,000 parkas every year Capacity: 3,60,000 each yearEarn 24% of wholesale price on eachUnsold in season: sold at a loss of 8%Profit of US$ 27 and loss of US$9 on each parkasBuying committee forecasts for 10 style of Parkas
30Issue faced by WallyHow to make best use of forecasts by various members for production commitmentHow to allocate production between factories at Hong Kong and ChinaLast year 1/3rd Parkas was made in China.Company plan to produce 50% parkas in China aslabor cost in China is lowrequire larger minimum ordersome concern of quality and reliability is there
31ESTIMATED COST INFORMATION FOR ROCOCO PARKA (IF ASSEMBLED IN CHINA) Obermeyer Landed Cost:Cost FOB Obersport$42.68Agent’s fee (to Obersport, 7%)$2.98Freight (Ocean Carrier)$1.40Duty, insurance and miscellaneous$4.90Total landed cost$51.92Cost FOB Obersport:Material$30.00Labour$0.78Transportation within China and China overhead$2.00China quota, obersport profit and overhead$9.90Total
32Parkas Wally studied the committee forecasts Estimated the early production of each styleDemand and forecasts for last year analyzedStandard deviation of demand was twice the standard deviation of buying committee forecastsForecast distribution for each style as a normal random variableWith mean equal to average of committee forecastsStandard deviation twice of committee forecasts
33COMMITTEE FORECAST- 10 STYLES OF WOMEN’S PARKA – Individual Forecast PriceLauraCarolynGregWendyTomWallyGail$1109001,0001,3008001,200Isis$997001,600950Entice$801,5001,5501,350Assault$902,5001,9002,7002,4502,800Teri$1231,1001,850Electra$1731,8002,000Stephanie$1336002,125Seduced$734,6004,3003,9004,0003,000Anita$934,4003,3003,5004,2002,875Daphne$1481,7002,6002,300Totals20,000
34COMMITTEE FORECAST- 10 STYLES OF WOMEN’S PARKA – Individual Forecast Average ForecastStandard deviation2 x Standard DeviationGail1,017194388Isis1,042323646Entice1,358248496Assault2,525340680Teri1,100381762Electra2,150404807Stephanie1,1135241,048Seduced4,017556Anita3,2961,0472,094Daphne2,3836971,349Totals20,000
35ParkasWally also had to decide the location for production for each style ( Hong Kong or China)It was planned this year to produce 50% of products in ChinaThere was risk of managing production and inventory in longer termThe larger minimum order size of China limits the capacity of company’s ability to increase the range of productsChina trade relationship with USA - Risky
36COMPARISON OF OPERATIONS IN HONG KONG AND CHINA TopicHong KongChinaHourly wageHK$30RMB 0.91Exchange rateHK$7.8 = US$1RMB (Renminbi) 5.7 = US$1Working hours8 hours/day, 6 days/week9 hours/day, 6.5 days/weekTotal = 48 hours/weekTotal = 58.5 hours/weekMaximum overtime allowed = 200 hours/yearsDuring peak production periods, workers work 13 hours/day, 6.5 days/weekWeekly (non-peak output/worker)19 parkas12 parkas
37COMPARISON OF OPERATIONS IN HONG KONG AND CHINA TopicHong KongChinaActual labour content per parka (incl repair work)-2.35 hours-3.6 hoursPaid labour time per parka (incl repair work)-2.53 hours/parka-4.88 hours/parkaLabour cost /garmentHK$75.6RMB 4.45Line configuration10-12 people/line40 people/lineTrainingCross-trainedTrained for single operation onlyMin order quantity600 units in same style1200 units in same styleRepair rate1-2%-10%ChallengesWage rate, WorkforceLow unemploymentYounger worker prefer office jobWorkforceLess quality and cleanliness consciousTraining requirements
38Sport Obermeyer’s Relationship with Obersport In this global supply chain,Sport Obermeyer operates in the US and specializes in the demand side by coordinating activities such asmonitoring fashion trends,designing the parkas, andselling 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 asprocuring fabric and components (e.g., zippers) andarranging for production using either independent subcontractors or factories of Alpine (a company owned by Obersport’s managing director).
39Sport Obermeyer’s Relationship with Obersport (Continued) Global supply chains are frequently composed of different companies, with each company having aa different geographical location,a different knowledge seta different skill set, and/ora 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 Obermeyer’s demand-side activities and Obersport’s supply-side activities.
40SWOT Analysis Strengths: History of product innovation Buying committee forecasts balanceexpectationsExperienced leadership and focusedmanagement teamDeliver products to retailers early inthe selling seasonVariety of SKUs, with color/sizeproduct diversityUse of greige fabric delays product differentiationWeaknesses:Excessively long lead times, though this is the nature of the industryMinimum order quantity at Chinese manufacturersLeftover unpopular merchandise at end of selling period.Stock outs on most popular items during peak sellingOpportunities:Aggressive marketing campaignExpanding sales to European/ South American marketsSponsorship of major winter sports eventsThreats:Competition from value-oriented sellers like Columbia.Regulatory limits of goods that can be imported into US.
41Case Discussion Questions Using the sample data given in Table 2-20, make a recommendation for how many units of each style Wally should make during the initial phase of production. Assume that all of the 10 styles in the sample problem are made in Hong Kong and that Wally’s initial production commitment must be at least 10,000 units. Ignore price differences among styles in your initial analysis.Can you come up with a measure of risk associated with your ordering policy? This measure should be quantifiable.41
42Case Discussion Questions Repeat your methodology and assume now that all 10 styles are made in China. What is the difference (if any) between the two initial production commitments?What operational changes would you recommend to Wally to improve performance?How should Wally think (both short-term and long-term) about sourcing in Hong Kong versus China? What kind of sourcing policy do you recommend?42
43Solving Wally’s Sample Problem (with k=0) Too much!
44Solving Wally’s Sample Problem (with k=2) Too little!
45Solving Wally’s Sample Problem (with k=1) Too much!
46Solving Wally’s Sample Problem (with k=1.0608) Just right!
47Question 1. and 3. Comparison units of each style when produced in HK and China
48Differences between production in HK and China InventoryTotal CostOperation TimeQuality (% Repair)
49Question 1. and 3. The differences between production in HK and China
50Question 1 (Alternative approach) We have three types of products: -Low risk: risk % between 0 and 40 -Medium risk: risk % between 41 and 59 -High risk: risk % above 60To minimize the risk, we decided to order the following quantity: -Low risk items: 75% of the average forecast -Medium risk items: 50% of the average forecast -High risk items: 25% of the average forecast
522. Can you come up a measure of risk associated with an your ordering policy? This measure should be quantifiable.
53What’s the result if there is demand forecasting uncertainty? Stock outs (-24 % whole sale price)Market downs( -8% of wholesale price)(Old) designsHigh inventory holding cost-Unable to fully profit from hit products
54Why does risk happen? Forecasts are always uncertain Demand Average Standard deviationStandard deviationDemand Average
55How we assess forecast certainty? 1 . Based on historical data - Past forecast error- Variability of demand
562. Rather than producing one joint forecast, each member of the purchasing committee produces his/her own forecast .Obermeyer’s Buying committee
573. The deviation in views (of Buying committee) is good estimator of forecast reliability Table of standard deviation vs. Coefficient of variationC.V. = Standard Deviation / Mean
584. How is this information helpful? “Risk –basedproduction planning”- Using Early production Capacity (Speculative capacity) for Assault and Seduced- Reserve later production Capacity (reactive capacity) for Daphne and Anita as demand become more apparent
594. What operational changes would you recommend to Wally to improve performance?
60KEY Problems:Ski Clothes is fashionable product, Its life cycle is shortLong time of planning and production activitiesUncertain forecasting due to customer demandFashion taker >> No R&D
61OPERATIONAL Changes:Reducing number of styles handled and to predict customer demand for individual style.To create promotion strategy to persuade retailers to order.
62OPERATIONAL Changes: PRODUCTION SYSTEM Increasing production Quality of China to be closed to Hong Kong.To reduce lead time of production especially the preparation of raw materials.
63Lead time reduction Fabric dyer lead time of several months Fabric ProducerFabric DyerCut/Sew FactoryDenver WarehouseRetailerundyed greige goodsSport ObermeyerAsiaConsumerFabric dyer lead time of several monthsDyer has long lead time on greige goods and needed to keep their capacity utilized year round but can change colors overnightObermeyer can predict total annual sales and sales of basic colors, but can’t predict fashion colorsตัดปัญหา show แต่ solution
64Offer dyer one year commitment on greige goods and capacity Solution:Offer dyer one year commitment on greige goods and capacityDye basic colors early in year and fashion colors late in season on few days noticeตัดปัญหา show แต่ solution
65OPERATIONAL Changes: SUPPLY CHAIN SYSTEM Increase bargaining power with suppliers by ordering via big supplier that can commit on timelineCollect stock raw materials which is base on Ski cloth production
66OPERATIONAL Changes:Increase distribution channel to a country that have different period of product usageIncrease services level requirementsEstablish DC in Seattle to reduce lead time and cost from inland transportation from Seattle to Denver
67Original distribution process SeattleEstablish DistributionCenter in Seattle withoutthrough DenverHong Kong
68OPERATIONAL Changes: INFORMATION SYSTEM Collect the data backward and analyze the demand of the show in Vegas and compare with actual purchase.Speedup data/information analysis and utilize historical data / Committee forecasting / Research and Trend & Market Movement.
695. How should Wally think (both short term and long term) about sourcing in Hong Kong versus China? What kind of sourcing policy do you recommend?
70Production Options China Hong Kong Concern Concern Faster (Guangdong, Lo Village)Lower labor costLarger lot sizesBetter for lower risk designsConcernQuality & ReliabilitySlowerLess flexibleHong KongFasterMore flexibleHigh / Reliable QualityBetter for higher risk designsConcernSmaller lot sizesHigher labor cost
71Where is better? Short term Long term China Hong Kong เพิ่มลูกเล่น ให้ดาวใหญ่ขึ้นและกระพริบในแต่ละที่
72Recommendations to Wally RECOMMENDATION #1. Improve the demand forecasts made internally by the Buying Committee in November (1992) just before Speculative Production.Instead of using just a simple average of the individual forecasts made by Laura, Carolyn, Greg, Wendy, Tom and Wally use a weighted average, with the weights reflecting past accuracy.
73Recommendations 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 a “sneak 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 Obermeyer’s “guest list” should include both large and small retailers and both urban and resort retailers.
74Recommendations 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.Speed up orders through information sharing with suppliers.Speed up shipments using faster (but more expensive) shippers.Establish some local (but more expensive) production capacity for “last minute” production.
75Recommendations 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?
76Recommendations to Wally (continued) RECOMMENDATION #4. Increase production capacity by:Using more subcontractors,Using more overtime in China, and/orExploring 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.
77Recommendations 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”.
78Recommendations to Wally (continued) RECOMMENDATION #5 (continued)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).