Case Study

Sport Obermeyer,
Ltd.
Executive Summary
Sport Obermeyer, Inc. is a ski apparel company facing a dilemma in ordering production
of its products. The Company has high costs for both over-ordering and under-ordering in a
single season. The question currently facing management at Sport Obermeyer is to determine
the order quantity for its first phase of production. At this point in time, management has very
limited insight to the demand for particular styles for the upcoming ski season.

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Section A Sport Obermeyer: Product, Approach, and Processes
Product Characteristics
Sport Obermeyer, Ltd is a strong competitor in the U.S. skiwear market, offering a broad

range of ski apparel and accessories. Klaus Obermeyer, a German immigrant, was is the founder

and owner of the company. Through his teachings at the Aspen Ski School, he noticed that his

students were cold and miserable due to the impractical clothing they wore. In the off-season he

traveled to Germany to find durable and high performance ski clothing for his students and

eventually began creating his own products, including ski clothing and equipment. His goal was

to create high performance ski clothing and accessories that were stylish, similar to those that

could be found in Germany.

Sport Obermeyer, Ltds products differ from the other mainstays in the industry in that

they are targeted to a broad array of skiers within the target market. It is targeted towards five

different gender markets according to price, type of skier, and how fashion forward the

potential customers are. Within each gender, numerous styles are offered, each in several colors

and range of sizes. Its target is the middle- to high-end of the market and focuses strictly on

skiers rather than a broader market like many of its competitors. Through this strategy,

Obermeyer competes by offering an excellent price/value relationship, where value is defined as

both functionality and style.

Production Approaches

Production for Sport Obermeyer, Ltd starts with the design process. The design process

for a particular season actually starts in February, about a year and a half prior to when clothing

and accessories should be expected to be delivered to the stores for consumer purchase.

Obermeyers design team and upper management attend the international outdoors wear show in

Munich, Germany. The European market is much more fashion forward than the U.S. markets

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and is often a good indicator of the future American fashions. The Las Vegas show in March

also provides input into the design and design concepts are finalized by May.

Once the design concepts are finalized, Obersport begins production of sample garments.

These small quantities of sample garments are made with the actual materials used for final

production. Sales representatives then start to show the products to the retailers. Concurrent

with the sample production process, Obersport begins to determine material requirements to

place orders, as many of the materials take months to obtain. Initial production begins in

February of the current year. During the trade show in Las Vegas (March), most retailers place

their orders. Using the information from these orders, Obermeyer can then forecast the total

demand with the best possible accuracy. After completion of this forecast, Obermeyer places its

second and final production order.

In June and July, Obermeyers garments are shipped from Hong Kong to Seattle, and

then trucked to the Denver distribution center. In late August, Obermeyer ships orders to

retailers for sales to begin in September. Retailers may ask for replenishment of products if they

are able to sell all they have in stock. If Obermeyer has products available they will send the

retailer the replenishments.

Supply Chain Strategies

The supply chain in Sport Obermeyers world starts with its relationship with Obersport.

Sport Obermeyer contracts with Obersport who in turn purchases shell fabric and lining fabric

from its vendors. Shell fabric is typically purchased from many sources such as the United

States, Japan, Korea, Germany, Taiwan, Austria and Switzerland. The lining fabric is primarily

sourced from Korea or Taiwan. Obersport has the fabrics dyed as necessary and also works with

printing companies to develop screens which would be used as patterns on the outerwear. Other

components such as snaps, buttons and zippers, to name a few, are purchased from vendors and

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installed by Obersport. Many of these components are procured in Hong Kong, however, snaps

typically are procured from Germany and the zippers are purchased from a large Japanese zipper

manufacturer.

The product planning process is very critical to the overall success of this company; This

is due to the lead times of the materials and components, sensitivity of the timing of

Obermeyers sample production, raw material sourcing, and final production. Due to the lead

times of the materials and the sensitivity of the timing of Obermeyers sample production, then

raw material sourcing and final production, the product planning process is very critical to the

overall success of this company. They are dealing with suppliers from various countries, with

varying lead times depending on the material. Early decisions for colors and styles are a key to

starting the process and reducing the risk of late production. One tactic Obersport uses to limit

their risk is to carry excess stock of the miscellaneous components required.

Section B Pros and Cons of the Two-Phase Production Process

With Obermeyers two-phase production process there are definitive advantages and

disadvantages that must be weighed before starting initial production. The largest advantage of

the two-phased production process is Obermeyers ability to meet demand and provided their

products at the desirable time frame for retailers. If Obermeyer was to wait until all of the data

has been received from the Las Vegas show, there would be no way to provide the high quality,

unique product to their customers on time due to the long lead times they face with many of the

garments components. Another advantage to the two-phase production process is that it allows

Obermeyer time to confirm their research, and narrow the accuracy of the demand for each of

their products. This will allow them to be more profitable as they will not have as many unsold

or undersold garments when the season is over. The two-phase production process also allowed

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Obermeyer to maximize the production of the cutting and sewing phase as their capacity was

only 30,000 parkas a month. With a maximum production order of 200,000 parkas, it would not

be feasible to produce all the parkas necessary if they were to wait on all of the pertinent

feedback from the retailers before

One disadvantage is that Obermeyer relies heavily on the retailers input for the

production of their products and get no input from the consumers. If the customers do not agree

with the retailers style choices, there will be a large variance in the quantity of garments sold.

Another disadvantage to the two-phase production strategy is the longer Obermeyer waits to ship

their products there is more of a likelihood that they could be shipped back to China because a

quota restriction is imposed on each product category. Shipping their initial production order in

June or July, Obermeyer would likely not have an issue with the quota restrictions. There second

and final production order shipping in August may run a larger risk. A final disadvantage is held

in the cutting and sewing phase. Due to the minimum order quantities per style, 1200 in China,

and 600 in Hong Kong, and the final forecasted demand quantities, it is not likely that the

remaining production necessary in the final run will match these quantities exactly. There will

likely be instances where remaining production to meet the forecasted demand will be lower than

the minimum order quantity. This will cause management to have to make a decision based on

the profitability of the style in question.

At first glance, based on the information provided in this case, the styles which are the

best candidates for initial production include the following: Entice, Assault, Seduced and Anita.

The common thread for these styles is they all have a relatively high average forecast with a

particularly low expected loss if unsold. The four styles chosen account for approximately 56%

of the expected forecast for the ten styles. It would be our recommendation to not order styles

which have both a high standard deviation and a high expected loss if unsold. We would also

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recommend that when ordering the initial phase, it would not be wise to order more than the

average expected sales less one standard deviation until we can be sure that the retailers look

upon our styles in initial production favorably.

There are also disadvantages to consider with these four styles. One disadvantage is that

these four styles are the least profitable styles per unit. This decision is perhaps made to lessen

the risk taken by manufacturing other styles and not being able to sell the entire stock. Another

disadvantage includes a large standard deviation for a couple of the chosen styles, specifically

Seduced and Anita. Though these are two of the higher forecasted sellers, there is a stronger

possibility that the average forecasted demand for these items will not be met. The greatest risk

taken would be by producing Anita in the initial phase as it has the highest standard deviation

across all styles within our line.

Section C Initial Phase Production Order

When determining how many units to order of each style in the initial phase of

production, it is difficult to be confident in the order quantities. There is little on which to base

the estimates. At this juncture, Wally only has forecast information from his buying committee

(six people, including Wally). He has noticed though that the standard deviation of demand for a

style parka can be approximated using the standard deviation of the buying committees

estimates. He has found that historically, the standard deviation of demand for a style is

approximately twice the standard deviation of the estimate provided by the buying committee.

Since we have the buying committee information, we can derive the approximate standard

deviation of demand for each style. The styles with higher standard deviation of demand are

more risky to order now due to uncertainty of the demand forecasts. Styles Anita and Daphne

have the highest standard deviation of demand and styles Gail and Entice have the lowest.

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 The next important aspect Wally needs to consider is the cost of overproduction for each

style. At this point, there is no under-order cost because this is only the initial production phase.

Other orders will be placed later, when more information is available to better predict demand.

So for now we focus our attention on the over-order costs.

For Sport Obermeyers parkas, the over-order cost is equal to the purchase price minus

the salvage value for each parka. The estimated average loss on a parka left unsold at the end of

the season is approximately 8% of the wholesale price. The styles with the highest over-order

cost are Electra and Daphne and the lowest are Seduced and Entice.

Considering both of these important factors, Wally can determine the optimal order

quantity. For purposes of this sample, we assume all first phase production will be ordered from

the Hong Kong factory. For the first phase of production at the Hong Kong factory, the

minimum order is 10,000 units and the minimum production quantity for a particular style is 600

units. Because this is the first order of the season and Obermeyer is trying to minimize over-

order cost, Wally should try to order as close to the minimum total order as possible (10,000

units). When ignoring the 600 unit minimum per style, a variety of styles are ordered with only

the style, Stephanie, with zero units ordered. Even though at this point, it does not exclude the

style, Isis and Teri are below the 600-unit threshold. See Exhibit 1 for complete calculations.

When we include the limitation that the minimum order quantity for each style is 600

units, the order changes. Now we are ordering seven styles, with no order for styles: Isis, Teri,

and Stephanie. Seduced is still ordered the most, but an even higher quantity is ordered. See

Exhibit 1 for complete calculations.

Table 1: Order Quantities

Without Min. Min. Production

Production Quantity =
Quantity 600/style

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 Gail 594 626
Isis 382 0
Entice 922 968
Assault 1,873 1,933
Teri 218 0
Electra 1,055 1,114
Stephanie 0 0
Seduced 3,112 3,219
Anita 1,241 1,424
Daphne 617 722
TOTAL 10,014 10,006

It can be inferred that one of the most important factors in consideration of which style to

order right now is which styles had the highest average estimated demand. It is safer to order

these styles, as long as they are ordered at the lower end of the estimate (approximately one

standard deviation below the mean). And a higher quantity can be ordered of each of these

styles, adding up to the minimum production of 10,000 units.

Section D: Suggested Operational Changes for Sport Obermeyer

Sport Obermeyer has a track record of under-producing their most popular items each

season, resulting in lost profits. They also have a pattern of over producing less desirable items

which then need to be sold at deep discounts in order to mitigate losses. Both of these problems

have roots in their inability to predict their product demand with 100% accuracy and

manufacture enough inventory before the sales season ends. Uncertainty and large lead times are

the two operational variables that make Just-In-Time production very difficult for a

manufacturer. Reduced lead times decrease the potential impact of uncertainty on production

because the manufacturer can be more responsive to market demand as it evolves. Similarly,

reduced uncertainty of market demands makes reducing lead times less important because Sport

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Obermeyer will have a better idea of what the actual demand will be and can manufacture goods

accordingly. Therefore, in order for Sport Obermeyer to improve their supply chain network,

they must find ways to reduce their lead time, reduce the amount of uncertainty in their product

demand, or both.

Sport Obermeyer operates in a market with a high degree of demand uncertainty, which

consequently requires manufacturers to use a pull production process in order to be successful.

They also work within a framework of low supply uncertainty which allows for the use of Just-

In-Time production. The result is a responsive supply chain that allows for increased production

of popular items. However, this system is greatly hindered by supplier lead times of up to 90

days, which makes being responsive to market demands very difficult. The system is also

hindered by the uncertain product line demand, which can only be predicted with any degree of

accuracy after 20% of the actual demand has been tallied. While Sport Obermeyers recalculated

sales projections become more accurate as more actual sales data becomes available, this

uncertainty, combined with long lead times, makes producing optimum amounts of each product

line very difficult.

The success of the Sport Obermeyer/Obersport/Alpine Factories supply chain relies on

the companies abilities to simultaneously deliver matching outfits and accessories to retailers

early in the selling season. The sales season lasts approximately 5 months, from September

through January with a peak in December and January. Skiwear fashion is considered to be a

one-year cycle. So Sport Obermeyer must reassess and redesign its product line each year,

resulting in a need for nearly a complete turnover in inventory each year. The current supply

chain system is functional because there is a great deal of interdependence and trust. This is

particularly true between Obermeyer and Raymond Tse who began Obersport, Ltd. as a joint

endeavor. Since Alpine Factories Inc. is ultimately responsible for the production of Sport

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Obermeyers product line and Sport Obermeyers production orders account for approximately

80% of all of Alpine Factories production, each company is heavily reliant on the other. As a

result, a natural profit and risk sharing system is already in place. In addition, their current

practices of pre-positioning with greige fabric to minimize 90-day lead times, keeping standing

inventories of snaps with long lead times and their use of the Hong Kong workers who are faster

and cross-trained are good steps towards maintaining an efficient supply chain. However, there is

a great deal of room for improvement to the overall supply chain system.

The companies in the Sport Obermeyer supply chain can take a number of measures in

order to improve existing inefficiencies. Zippers, finishing shell fabric and finished lining fabric

all have lead times between 45 and 90 days. Sport Obermeyer should work with the suppliers of

these items to find a way to reduce the lead times in order to increase their ability to be more

responsive to market demands.

From the manufacturing perspective, the production lines in China are long and

cumbersome because, unlike their counterparts in Hong Kong, the workers in China are not

cross-trained. Providing additional training to the line workers, particularly cross-training the

China workers, should reduce throughput times and ultimately reduce the lead time for

manufacturing the goods. Sport Obermeyer must also continue to improve and be innovative

with its production strategies in order to reduce production lead times. They can also provide

incentives to their suppliers for reduced lead times. For example, the manufacturing plants with

higher throughput rates can be given a higher portion of the production allocation in future years.

In this way, the more efficient workers will benefit from the increased work and Sport

Obermeyer benefits from reduced lead times.

From a sales perspective, Sport Obermeyer should develop a website through which they

can market their goods and make direct sales to consumers. Not only will this increase their

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sales, but it will provide them with a more accurate and earlier gauge of what the demands for

their product lines will be. Sport Obermeyer can also invite prior customers to participate in

surveys about prototype items to gauge their preferences for future fashion lines. This

information may help reduce uncertainty of demand.

Finally, and perhaps most perplexing, Sport Obermeyer loses one month of lead time

before the full scale production schedule due to the observance of the Chinese New Year at

manufacturing the plants. While it is understandable that the workers will want time off, it is still

worthwhile for Sport Obermeyer to investigate the option of providing workers with an increased

salary rate or a partial manufacturing schedule during January as an incentive to get the

employees to work during January as opposed to losing the entire month of lead time.

Section E: Sourcing in Hong Kong vs. China

There are a number of advantages for producing the skiwear in either China or Hong

Kong, and the decision should hinge greatly on the time clothing is needed. Each has advantages

that are long term and short term when it comes to deciding which labor force to utilize. These

advantages (and disadvantages) are as follows:

China has one major advantage. It is both a long term and short advantage. Labor is less

costly than in Hong Kong. The reason for this is there is an over abundance of labor available.

China also has a number of disadvantages. The quality and reliability of the final product

is a long term problem. This creates rework as well as the possibility of adverse consumer

reaction for a lesser quality product. China also requires larger minimal orders. This is a short

term disadvantage, because limited orders would not be made early on in production. And last,

but certainly not least would be the stringent U.S. restrictions. The government limits the

volume of certain products that come into the U.S. from certain countries, and China is one of

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them. If orders are late coming in to the country, compared to competitors, they may have entire

production loads turned away.

Hong Kong has only one major disadvantage and it is both a long and short term

problem. For many advantageous reasons, the labor is much more expensive in Hong Kong than

in China. These reasons are discussed below as advantages, but it cannot be ignored that the

labor rate, per hour, is twenty-four times greater than that of China.

Labor is more expensive in Hong Kong because of the several labor advantages. The

Hong Kong labor force is more skilled and works faster (50%) than its Chinese counterpart.

These are both long term advantages to using Hong Kong. They can produce nearly twice the

number of parkas per worker. The last two short term advantages that compliment one another

are the minimum order quantity is half that of Chinas and the labor force is capable of

performing more than one job function.

Overall, for making sure production levels are high, it appears that Wally should place his

initial order in China. Even though the labor force is slower and not as skilled, they can still

produce more garments overall for a lower price. The major drawback would be the U.S.

restrictions, but if items are turned back and/or have to be flown into the U.S. it would still be

cheaper per the estimated cost information provided. Wally should concentrate his efforts in

China. As time passes, if the capacity increases, the overflow can go to Hong Kong. This is

advantageous because the minimum order is lower in Hong Kong.

The recommendation would be to have as many items as possible produced in China,

particularly the largest volume items because the costs would be lowest, even if there were errors

in production that needed to be corrected. Production in China should start with Assault, Electra,

Seduced, Anita, and Daphne. If for any reason China cannot handle the full load, as may be

apparent in the disadvantages, Hong Kong could take the smaller additional production

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requirements as needed. Wally would need Hong Kong to produce the smaller forecasted items

because a number of them drop below the minimal order number for China if the average

forecast falls to the low end.

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