Problem Identification

The product line was distributed among five genders with each gender further segmented through price,
type of skier & degree of fashion forwardness (approx. 800 SKUs & 20 styles). Moreover given the
overall need to deliver early & deliver matching collections simultaneously, Sport Obermeyer faced the
following major issues.
1) Measuring demand uncertainty accentuated by the fact that there were long lead times of suppliers
and minimal feedback from the market. The long lead time by suppliers which range from as low as 2
weeks to as high as 3 months pose two problems for the company! The first problem is the need to
forecast raw material usage for longer periods of time which increases the risk of inaccuracy. The second
problem is the need to keep more raw materials inventory on hand to cope with the variability which
raises inventory cost. The minimal feedback from the market early on in the process increases the
degree of variability in the forecast due to less actual demand and more speculation.
2) Production allocation between factories in Hong Kong & other regions in China and more specifically
allocation of quantity of each product in these factories. The long lead time compounds into this issue in
having to decide on mostly speculative forecasting what quantities to make in the first production order.
The second production order occurs approximately 3 to 4 months later after the Las Vegas Show when
the order is based less on speculation and more on actual demand. Overproducing results in a loss of
about 8% of the wholesale price. Differences of quality, cost, productivity, minimum requirements, and
quota affect the decision on which location should produce what line of product.

Analysis of Issues
To address the two major issues, the application will be illustrated using the current problem faced by
the company in deciding what to send to the manufactures for the first production run for 10 styles of
women’s parkas. The forecast by the committee presents the estimate by 6 members on the potential
demand which totals up to 20,000 parkas. The requirement for the first production order is 10,000
parkas. First, the quantity for each style needs to be decided upon. The deciding factor given the current
situation should be to minimize the risk of overproducing. Overproducing as stated earlier resulted in a
salvage value that comes at loss of about 8% of the wholesale price. Essentially minimizing the risk of
overproducing is also minimizing the risk of making a loss.
Assuming normal distribution in the demand forecast, the approach taken is through the use of the
formula: (average demand forecast – standard deviation*k) which essentially aims to reduce over
production. The average demand forecast is the simple average of the 6 individual member estimates
and the standard deviation used is twice of the standard deviation based on 6 individual members past
experience. The k value is a variable that will be adjusted for all styles in order to establish the minimum
order requirement of 10,000 and basically denotes the no. of standard deviations to the left of demand.
The higher the k value means less the risk of overproducing. The model will also favor products that
exhibit low coefficient of variation.
Referring to the appendix, Table 1 illustrates the quantity for each style utilizing the highest k value of
1.0607 that can be achieved without any limitations on where to produce. Assuming no limitations, the
chance of overproducing any product is about 15%. In Table 2, we look at the production solely in Hong
Kong where the minimum requirement is 600. Notice the k value is now 0.9675 instead of 1.0607. This
was expected because any product before that was less than 600 implied that it should not be made in
the first production order and instead should be deferred to the second production order when better
data can be obtained. For Hong Kong alone, the chance of overproducing is 17%. Table 3 presents the
production quantity if made only in China. Here the minimum requirement is 1200 which is twice the
requirement of Hong Kong. Here is the k value is 0.717 or 24% chance of overproducing.
In deciding how to allocate production between the two locations, the aim is still to minimize the chance
of overproducing but also take into account that 50% of the parkas will be made in China and the other
50% in Hong Kong. Table 4 presents the possible breakdown. The quantities follow the same figures
obtained from table 2 when producing in Hong Kong alone. The reason is Hong Kong has the highest k
value and enough quantity falls above 1200 to allocate to China. In fact, there are 4 styles that fall above
1200 which makes them eligible to be produced in China. The allocation was based simply on quantity
due to lack of data on each style specifically. This same procedure can be scaled to the other lines to
determine the order quantity.

Recommendations
The following are major recommendations that Sport Obermeyer should implement:
 Long term actions can be taken in order to better address the major issues at hand. First is addressing
the long lead time of suppliers which is causing the company to have to hold more raw materials
inventory. To reduce the lead time would require working with the supplier. Either share information
in order for supplier to better forecast your needs and/or encourage supplier to increase the
frequency of delivery. Instead of waiting until the whole order is completed and then shipped to the
manufacturer, shipping could occur after x% is completed. This reduces inventory holding cost for
both sides (partly offsetting the higher transportation cost). To further incentive this action of
frequent delivery is by providing more business to fewer suppliers through consolidation or through a
joint venture of opening a new plant close to the manufacturer. The shorter lead time would allow full
scale production to occur earlier which also means products in China can be shipped out earlier thus
reducing the chance of having to ship by airplane due to quota restriction.
 The issue of minimal feedback from the market can be addressed by taking actions to obtain demand
figures earlier. Instead of having to wait until the Las Vegas Show in March which is several months
after having to send in the first production order, the company should invite its largest clients that
account for 80% of their revenue for an early view of the upcoming product line. This will be an all
paid expense by the company to bring them all for a single day event. While this does cost the
company, the gains from getting early commitment from their clients will help eliminate if not
significantly minimize the chances of overproducing. Addressing the long lead time and minimal
feedback ultimately addresses the demand uncertainty.
 Finally for the issue of production planning which has partially been addressed with the obtaining
demand figures earlier, an additional long term initiative is to negotiate lower minimum order
quantities with the manufacturers. As illustrated in the tables, lower order quantities means less risk
for the company and also improves the flexibility during reactive production like replenishment orders
in December to February. This would require working with the manufacturers to reduce their
changeover times or designing the product with the focus on utilizing as many shared components as
possible to reduce the need for changeover.