Sport Obermeyer Case 45601n

PRODUCTION FOR INITIAL PHASE – HONG KONG & CHINA

Production decision based on individual forecasts of Buying Committee

Minimum order quantity different for Hong Kong (600 units) and China (1200 units)

Initial Production Commitment must be at least 10000 units

Risk Factor (Covariance) used to differentiate production schedule of products

No price difference between styles

PRODUCTION FOR INITIAL PHASE – HONG KONG & CHINA

Sample data

Recommended Quantity

Adjusted Quantity

•Cost of overestimation and profit foregone due to underestimation was used to calculate the required service level (no stock-outs) and recommended quantity •The recommended quantity was split into reactive and non-reactive production to find out adjusted quantity Minimum order quantity different for Hong Kong (600 units) and China (1200 units)

• Adjusted quantity revised as per minimum order requirements for Hong Kong and China •Initial production quantity is greater in case in China

RISK MEASUREMENT Demand forecasting uncertainty results in stock-out and markdown costs

Higher the standard deviation of forecasted data, higher would be risk of monetary losses due to costs of stockouts and markdowns

Each member of buying committee provides individual forecast for each product

Covariance: A Measure of Risk: Lower the covariance of forecasted demand, lower will be the forecasting error and the product will be safer to produce in the initial period (even without the availability of additional sales data) Hence, nonreactive capacity should be filled with the styles which are expected to have more accurate demand forecast

RECOMMENDED CHANGES FOR IMPROVED PERFORMANCE

1

• Postpone differentiating raw material & factory production capacity to as close to the buying season as possible • Book total capacity without specifying exact styles unless clear market signals are obtained

2

• Reduction in variety of Zippers used (due to long lead times & risk of blocking an entire range in case of non-availability) • Use of standard colors such as black which worked well as a fashionable contrast

3

4

• Encourage designers to use same kind of raw materials, in a pre-defined range of shades, owing to higher consumer sensitivity to appearance, fabric, style rather than shade variations

• Computerized tracking of extremely popular styles that were out of stock, invaluable aid in improving future forecasts & better cost estimates for insufficient inventory

SOURCING POLICY – HONG KONG v/s CHINA HONG KONG >Faster Production >Greater Flexibility >Labor Productivity >Reliable Quality

CHINA >Lower Labor Cost > Standard Lot Sizes

>Higher Labor Cost

>Concerns over quality & reliability

>Smaller Lot Sizes

>Slower production > Less Flexibility

Recommended for production: Short Term in Hong Kong; Long Term in China