Business Paper

1. Using the sample data given in Exhibit 10, make a recommendation for how many units of each style Wally Obermeyer should order during the initial phase of production. Assume that all ten styles in the sample problem are made in Hong Kong, and that Obermeyer’s initial production commitment must be at least 10,000 units. (Ignore price differences among styles in your initial analysis.)

The idea here is to avoid overproduction by minimizing the chance of demand being lower than units produced in phase I. Underproduction can be adjusted by producing more of the underproduced item in phase II. Given that the set of demands X for each style is independently normally distributed, we wish to find a set of productions Y, totalling at least 10,000, such that the probabilities of demand X being less than production Y for each of the ten styles are minimized. The problem is formally:

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Fortunately for us, a fair estimate of optimal production can be reached by taking the mean subtracting standard deviation (SD) of the demand distribution for each style, which totals to 10,573 (See Exhibit 1.1). By producing at mean subtracting SD, we lower the probability of overproduction, or P(X

As a bonus answer, we simulated demand fluctuations in order to estimate the probability and units of overproduction. The result was roughly 75% chance of overproduction with mean, median, and standard deviation of units overproduced at 544, 320, and 675, respectively (See Exhibit 1.3).

2. What operational changes would you recommend to Wally to improve performance?

The two main challenges that Sport Obermeyer currently faces are 1) long lead time and 2) inaccurate demand forecast. Reducing long lead time would increase operational efficiencies, while developing a better forecasting system would allow Sport Obermeyer to avoid selling excess merchandise at deep discounts and missing sales opportunities for highly demanded products. The following are recommendations to improve on its operational performance.

Reduce Long Lead Time

• Partner with suppliers who are able to guarantee a shorter lead time for raw materials (i.e. deliver faster).
• Utilize faster delivery/shipping methods, such as air freight. It would be more costly but would also secure products imported to the U.S. from China before the available quota is used up.
• Use part/material commonality to standardize the materials used in production (e.g. do not need so many zipper styles).
• Set up warehouse/distribution centers:

• U.S. - Establish one in Denver directly instead of having shipments arrived at Seattle then transported via truck to the Denver warehouse (i.e. saves 6 weeks and reduce domestic transportation cost).
• Asia - Faster delivery and reduce cost by setting up warehouse/distribution channels near manufacturing site in China and Hong Kong.

• Invite main retailers on an all expenses paid trip one or two months before the Las Vegas trade show; present them with the newest designs and have them place orders in advance. This would allow Sport Obermeyer to get an an idea of the demand and speed up the production process (i.e. speculative vs. reactive production).
• Better production schedule alignment between Obermeyer and its vendors. Obermeyer currently operates on the push system by predicting customer needs, while its vendors operates on the pull system by waiting for instructions from Obermeyer.  

Increase Accuracy in Demand Forecasts

• Reduce the number of styles that it sells to better predict customer demand for each style.
• Set up a real time communication channel to collect customer feedback from retailers, which may help predict the future trend better.
• Improve safety stock level and operation flexibility. Change 80% of the operation to made-to-order and predict the safety stock level accordingly. In addition, have Hong Kong factories ready for pop up orders as they are more efficient and flexible.  
• Design an ERP system that would “streamline the data flows throughout the organization and supply chain” to make sure real-time operating information is available.

Others

• During the initial production, Sport Obermeyer should reduce risks of wasting money by choosing to produce products that are least expensive and with the lowest demand uncertainty.

3. How should Obermeyer management think (both short-term and long-term) about sourcing in Hong Kong versus China?

Given the many differences between the Hong Kong (HKG) plant and the China plant, it is vital that we utilize the factories according to their strengths and weaknesses (See Exhibit 2).

For short term strategy and goal:

• The HKG plant operates with advantages of being faster, more flexible, highly reliable in terms of quality should be given orders for design with higher risk relating to forecast number. Slowly, the HKG plant should transform and focus on more complex designs, which would require higher labor skill levels. However, due to its high labor cost and less flexible working hours to support peak production seasons, the HKG plant will have financial and workforce constraints, which limits itself to handle smaller batches or more customized lines yielding higher margin.
• The China plant operates with an advantages of having lower labor cost and a much flexible working schedules (such as overtime hours) providing buffers for unexpected surge of demand. However, quality and cleanliness are the major concern. Hence, the plant should start with allocating simpler/standardized designs, which would require fewer skills. At the same time, workers should have continuous training in their production skills to improve their efficiency and execution ability. Consequently, they are able to gradually align themselves with the workers in HKG in the long-term.

For long term strategy and goal:  

China:

• Obermeyer should dedicate more to the training program in China so that the quality and production increase. This way, Obermeyer can produce more complex parkas in China rather than in Hong Kong, where returns are smaller. In few years time, Obermeyer may shift most of its production lines to China for lower operating expenses and thus enjoy a higher return. Process re-engineering for a simpler/standardize SOP may shorten the learning curve.
• Obermeyer can also take the advantage of China’s lower labor costs, flexible working hours and larger productions while taking the strain off of its Hong Kong plants. Utilizing the overtime hours will be a good approach to increase the overall productivity.
• Obermeyer can establish a complementary product such as swimwear to increase the total capacity in China or find a complementary alliance to share the resources as the peak season for one is the low season for the other.
• Surveying for supplies providers in China. It will shorten the lead time and increase the flexibility if Obermeyer could find local suppliers closer to the manufacturing site rather than ordering components from all over the world.  

Hong Kong:

• Given that the United States does not place a limit on imports from Hong Kong, a logistics center should be set up in H.K.. Since Hong Kong has more flights and transportation hubs to different destinations worldwide and has a relatively simple custom declaration process, Obermeyer is able to attain shorter distribution times to its retailers.
• The logistic center will be the first contact with retailers or customers. Maybe it is a good idea to establish CRM division in HKG (also due to its multi-lingual environment and cheaper labor compared to the headquarter in U.S.). This will increase the visibility of market demand and need. Thus providing valuable information for better forecasting.

Exhibit 1.1 Table of Production Estimation