Sport Obermeyer Minimum
Wally Obermeyer is facing a challenge in accurately forecasting the market response and demand for the upcoming season. Historically, the company founder, Klaus Obermeyer, relied minimally on forecast data, and more on intuition and artistic tastes. In comparison, his son Wally prefers to make decisions based on analytical techniques and information gathering.
If Wally’s approach proves successful, it can change how Sport Obermeyer approaches its manufacturing processes, secure its position long-term as the middle- to high-end producer of skiwear, increase profits, and better meet the company’s objective of delivering matching collections to retailers at the same time and earlier in the season. Sport Obermeyer has many challenges to overcome. Forecasting is problematic since production commitments are required in November, but the bulk of the orders are not placed by retailers until the Las Vegas trade show in the following March.
Also, the market trends are seasonal, changing frequently, and adding to the difficulty in forecasting. The company cannot postpone production completion dates due to the quota limit on importation of goods from China, where a bulk of its production occurs. Adding further complications to the manufacturing decisions, the company has a new manufacturing facility coming online in Hong Kong, and must determine what products, and how much of those products should be manufactured in each of the facilities. Issues with vendors of raw materials must be addressed.
There are long lead times for some vendors, and because of that, excess inventory is maintained in the manufacturing facilities. The company must also maintain a competitive edge with the growing pressure from competitors, specifically Columbia. Sport Obermeyer has relied on a buying committee comprised of key manager to forecast production demands, and make decisions regarding production commitments. Historically, this committee has done fairly well in predicting which styles will be popular, and forecasting has been best for the styles on which agreement was greatest between the committee members.
In order to take the greatest advantage of this committee, Wally Obermeyer is utilizing the Delphi method. This method will give Wally the opportunity to determine which members of the committee have the greatest accuracy. While it may not pay off in the immediate decisions, over several years, he will be able to determine which members’ opinions should receive the greatest weight when making production decisions. In the meantime, a decision must be made regarding the upcoming season.
Wally should proceed with the minimum order necessary, one-half of the total expected demand for the season (10,000 units), to keep up with production demands. Since the minimum production quantity for a style is 600 units from the Hong Kong facility, Wally should initially only consider production of styles predicted to exceed this limit until the bulk of the order come in following the Las Vegas show. In doing so, the risk of overproducing a style, and being forced to sell it at a deficit will be mitigated. Past data indicates the buying committee’s forecast is accurate within two standard deviations.
Using these forecasts, Sport Obermeyer should delay production of the Isis, Teri, and Stephanie styles since they demand is forecasted to be low for them, and proceed with the remainder of the items in consideration (See Table 1 for quantities relating to each style). Forecasting also has difficulties due to the delay in information from retailers regarding which products are most popular. Long-term, and if financially feasible, Sport Obermeyer should consider providing retailers responsible for the majority of purchases of their good with software that will provide Sport Obermeyer with real-time data on sales of its product.
By doing so, the company will better be able to predict what items are desired for replenishment orders, and greatly reduce goods sold to South America at prices below manufacturing costs. Furthermore, Sports Obermeyer can approach retailers sooner regarding replenishment orders based upon the data it has collected. If replenishment orders are received sooner, then the cost of shipment is greatly reduced since fewer will require air shipment. Lastly, the company should take an active role in influencing the demand of products it forecasts as being most popular to ensure these items are in high demand.
Sport Obermeyer should pressure its sales force to promote these items by providing incentives, such as bonuses, to its personnel. If need be, the company can also provide discounts for large bulk orders to retailers. Lastly, the company should heavily promote these items via advertisements campaigns. Sport Obermeyer needs to be able to keep up with production demand, and in the case the company is overly successful in pushing the styles it predicts to be in highest demand, resulting in Sport Obermeyer needs to be able to meet the production demands generated.
The manufacturing facility in China can produce goods much more cheaply than the facility in Hong Kong, but the quality and startup time are inferior to the Hong Kong facility. Obersport, a joint venture of Sport Obermeyer, is responsible for monitoring quality of the raw materials, and coordinating production Sport Obermeyer products in the Far East. Obersport should implement and expand upon its current quality control and quality assurance practices.
Sport Obermeyer should pare down the variation in its products to reduce the frequency in changing manufacturing lines resulting in the facility in China being able to complete orders faster. Sport Obermeyer needs to reduce the planning time required for each season. Currently, planning for a season must start two years in advance. This is a hindrance to the company since forecasting data improves as the start of the season being planned for becomes closer. Reducing the number of vendors for raw materials, as well as the variety of styles available will shorten the time for planning.
Furthermore, Sport Obermeyer will be ordering more from a few vendors, giving them greater buyer power to negotiate discounts, resulting in increased profits. Reducing the variety in the raw materials used should increase quality in addition to speeding up production. Long-term, after lead time and vendor issues are resolved, Sport Obermeyer should consider spinning off another brand within the company to be marketed separately from its current line. As costs for manufacturing are reduced due to a more streamlined production process, Sport Obermeyer will be better able to compete at the same price point as Columbia.
By creating a new brand, the company will not risk reducing the reputation for quality associated with Sport Obermeyer, but will be able to compete directly with Columbia and take part of its market share. This move will increase sales for Sport Obermeyer, as well as limit the growth of Columbia. Furthermore, Sport Obermeyer should consider producing street wear for both the current high-end brand and the lower-end brand that will compete with Columbia. This will expand the markets to which Sport Obermeyer is competing in, and increase visibility of the brands since the clothing will be worn year round.
Sport Obermeyer places production orders three times each season. The first order is placed prior to the Las Vegas trade show, the second is placed the week following the trade show, and the third comes at the end of the season when replenishment orders are made. Short-term, until quality and vendor issues are resolved, Sport Obermeyer should place the first order with the Hong Kong manufacturing facility. The labor in the Hong Kong facility is significantly higher than the facility in China, but the quality is better in Hong Kong.
Also, the Hong Kong facility is able to produce goods faster. The second order should be placed with the facility in China to take advantage of the markedly reduced labor costs. The third order should be placed in Hong Kong since these orders need to be produced quickly to reduce the use of expensive air shipment in lieu of using an ocean carrier. Long-term, if Sport Obermeyer elects to pursue a spinoff brand, the lower quality product should be manufactured in China to take advantage of the reduced cost of production.
The Hong Kong labor force should have increased labor skills by this point, and production output should be optimized. The Hong Kong facility should continue to produce the high-end Sport Obermeyer lines. Even though the cost of production will be greater in the Hong Kong facility, the revenues generated by this facility should be greater since the high-end clothing can be offered at a higher price point. Sport Obermeyer has many problems to address, but with just a few adjustments, they can be rectified. By paring down the variety of options in the lines, quality will be increased.
Forecasting is improved by implementing the Delphi method in the Buying Committee, and adding a weighted accuracy measurement to the Committee members in future seasons. Reducing the number of vendors remedies the excessively long lead times, and provides Obersport with buyer power to negotiate discounts. Providing the primary purchasers of Sport Obermeyer products with free software for tracking sales allows Sport Obermeyer to better predict replenishment orders, and eliminates much of the use of air carriers, as well as eliminates overproduction of goods that are sold below manufacturing cost.
By creating a second brand, Sport Obermeyer can compete directly with Columbia, and not tarnish the image of quality associated with its current lines. Lastly, Sport Obermeyer can drive sales toward the items it predicts will be popular by offering incentives to sales personnel, large customers, and launching advertisement campaigns to also eliminate overproduction and lost revenues.
