ISYE 4301: Supply Chain Economics Case Study - Weebly

[Pages:14]ISYE 4301: Supply Chain Economics

Case Study | Sport Obermeyer

Group 2: Jordan Avery Michael Gilkenson Alina Cornejo Fabio Romero Farida Jariwala Sara Rogovin Eric Timm

ISYE 4301 Case Study | Sport Obermeyer

Table of Contents

Page Title 2 Obermeyer Beginnings 7 Obermeyer Challenges 7 Challenges and Methods of Forecasting 8 Effective Inventory Management Policy 11 Sports Obermeyer '92-'93 Initial Strategy 11 Our Solutions 12 Obermeyer's Actual Response

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ISYE 4301 Case Study | Sport Obermeyer

Obermeyer Beginnings Everything started when Klaus Obermeyer emigrated from Germany to Aspen, Colorado

in 1947. He began teaching at the Aspen Ski School, and through his teaching, he found that many of his students were poorly supplied to handle the cold weather. His response was to begin producing functional, stylish ski clothing with his wife, Nome.

Obermeyer is credited for making the first goose-down vest and popularized the "ski brake". In 1961, the first Sport Obermeyer factory warehouse opened in Aspen, and the innovations continued with "soft-shell" jackets, double lens goggles, and the first waterproofbreathable fabrics. Customers of Sport Obermeyer are mostly retail stores in urban areas, near ski resorts, some large department stores like Nordstrom, and mail retailers like REI.

All the items of the company are provided and produced in Asia. In China they have independent subcontractors in Shenzhen and Lo Village. Other production locations are in Hong Kong and Macau. Obermeyer products were divided into different "genders": men's, women's, boys', girls', and preschoolers'. Each gender was then further segmented by price, type of skier, and how "fashionable" the market was. Unlike its competitors, Sport Obermeyer targeted the middle to high end of the skiwear market and designed the majority of their products exclusively for use while skiing, not to be worn on the street. Over the years, Sport Obermeyer developed into a main competitor in the U.S. skiwear market and by 1992 Sport Obermeyer owned 45 percent of the children's skiwear market and 11 percent of the adult's skiwear market.

In 1992, Sport Obermeyer's gross profit margin was 24%. The changes Wally made in the following years led to an increase in profits by 50%, and thus a 50% increase in profit margin to 36%. By contrast, one of Sport Obermeyer's biggest competitors, Columbia Sportswear, as a high-volume, lower-quality manufacturer, has an average profit margin across all products of 4.15%. The skiwear market is $3.3 billion.

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ISYE 4301 Case Study | Sport Obermeyer

Obermeyer Challenges Some of the challenges that Sport Obermeyer faced were consequences of poor

forecasting. Each year Obermeyer had to decide on production quantities for each of its products prior to knowing the product's actual demand. Below is a graph of the forecasts and actual demands throughout the production process. As production continues, the forecasts get more accurate ending in almost a linear fashion after observing 80 percent of sales.

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ISYE 4301 Case Study | Sport Obermeyer

It was necessary, however, to start production so retailers would receive products early for customers to be exposed to its products for a decent amount of time. Obermeyer earned approximately 24 percent of wholesale price prior to tax on each parka the company sold. Leftover parkas were sold at a loss that averaged 8 percent of wholesale price. In addition, these leftovers incurred high inventory holding costs. Obviously Obermeyer did not want to exceed demand; Obermeyer also did not want to be short of demand because when it did not produce enough to meet demand it was missing out on profit.

Greater product varieties made it harder to accurately predict demand. Wally, the vice president, asked each member of the "Buying Committee" to forecast retailer demand for each product. Forecasts varied greatly among the individuals as shown below.

Sample Buying Committee Forecasts for the different styles of Women's Parkas

History showed that forecast was the most accurate when the consensus among the members was the greatest. Wally also noticed that the standard deviation of demand for a particular style was about twice the standard deviation of the Buying Committee's forecasts for that style. Thus, Wally created a forecast distribution for each style as a normal random variable with the average of the committee's forecast being the mean and the standard deviation being twice that of the committee's standard deviation.

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ISYE 4301 Case Study | Sport Obermeyer

One of the main issues that Sport Obermeyer was faced with was their supply chain; they were challenged with the decision of where to produce the bulk of their products. In Sport Obermeyer's supply chain system, they outsourced their products through Obersport, a joint venture established by Klaus Obermeyer and Raymond Tse, to assist in the production of Sport Obermeyer products in the Far East. Obersport supported two locations for manufacturing Sport Obermeyer's products: Tsuen Wan, Hong Kong and Guangdong, China. Obersport was responsible for the fabric and component sourcing. They purchased the outer shell fabric from vendors in the United States, Japan, Korea, Germany, Austria, Taiwan, and Switzerland. The lining fabric was purchased primarily from Korea and Taiwan. Obersport outsourced other components such as insulation materials, D-rings, buckles, snaps, buttons, zippers, pull-strings with attached castings, and labels/tags from Germany, Japan.

The two factories for cutting and sewing were Tsuen Wan, Hong Kong and Guangdong, China. The speed of this production depended majorly on the factory in which it was produced. Workers in the Hong Kong factory worked about 50 percent faster than those in China. However, the wage rates for China were much lower than in Hong Kong. Another disadvantage of China's production is that they required 40 workers compared to Hong Kong's 10 workers. These longer production lines in China led to pronounced instability in assembly. Additionally the Hong Kong factory was able to initiate production much quicker than the Chinese workers. This quality

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ISYE 4301 Case Study | Sport Obermeyer

joined with short production lines, allowed the Hong Kong factory to produce small orders quicker and more efficiently. The table below shows a complete comparison between operations in Hong Kong and China.

There are two questions that Obermeyer needed to answer. Firstly, which styles should be produced in China and which in Hong Kong? During 1992 Obermeyer predicted that approximately half of all of their products would be produced in China. However, long term this may not be the best strategy for Obermeyer. Producing in China could constrain their ability to produce quickly as well as manage production and inventory. If more products were produced in Hong Kong, Sport Obermeyer would have the flexibility to produce smaller order quantities more quickly, as well as a guaranteed higher quality of work. There are many factors to consider when deciding where to produce. Hong Kong has benefits such as more rapid production, smaller work numbers, and increased line stability; their only disadvantage was the high wage rates. On the other hand, China had slower production and greater line imbalances due to the higher number of

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ISYE 4301 Case Study | Sport Obermeyer

workers per line, in addition to import restrictions; their only advantage being considerably lower wage rates.

The second question to be answered was whether or not it would be better for Obersport to outsource to a smaller number of suppliers. For example, Obersport ordered greige shell fabric from 7 different countries, insulation from 4 suppliers, and finished lining from 3 different suppliers, not to mention the different companies that supplied zippers, logos, snaps, etc. Is this the least costly approach to gather the components into one location? Suppose Obersport decreased their supplier base. This in turn would decrease lead times and increase the speed of production. However a smaller supplier base correlates with a greater risk. If they outsource shell fabric, for example, from one supplier and the supplier goes out of business, then Obersport is left in an extremely difficult position. They would lose money, completely stop production, and lose clients.

The question of whether or not Obersport has too many suppliers leads to another question. Does Obermeyer have too many parka shell designs? This can be argued both ways. Sport Obermeyer prided itself in the fact that they offered such a broad range of parka styles. This attracted many different types of consumers and raised profit and distinction. Obermeyer sold the majority of its products to specialty ski retailers due to the fact that they produced specifically ski equipment rather than everyday winter jackets and pants. Decreasing the types of shell designs and styles could lower their customer base since they are well known for that particular reason. However, with a decrease in shell designs the number of suppliers would be reduced, leading to lower lead times, and faster, more even production.

Challenges and Methods of Forecasting Devising an accurate forecast for demand of their array of products was another

challenge that Sport Obermeyer faced. The inability to accurately predict future demand led to

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