ISYE 4301 Case Study | Sport Obermeyer

ISYE 4301: Supply Chain Economics Case Study | Sport Obermeyer

Group :
!ordan "#ery
$ichael Gil%enson
"lina Corne&o
'abio (omero
'arida !ari)ala
Sara (o*o#in
Eric +imm
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ISYE 4301 Case Study | Sport Obermeyer
Table of Contents
,a*e +itle
Obermeyer -e*innin*s
. Obermeyer Challen*es
. Challen*es and $ethods o/ 'orecastin*
0 E//ecti#e In#entory $ana*ement ,olicy
11 Sports Obermeyer 123123 Initial Strate*y
11 Our Solutions
1 Obermeyer1s "ctual (esponse
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ISYE 4301 Case Study | Sport Obermeyer
Obermeyer -e*innin*s
E#erythin* started )hen 4laus Obermeyer emi*rated /rom Germany to "spen5 Colorado
in 124.6 7e be*an teachin* at the "spen S%i School5 and throu*h his teachin*5 he /ound that
many o/ his students )ere poorly supplied to handle the cold )eather6 7is response )as to be*in
producin* /unctional5 stylish s%i clothin* )ith his )i/e5 8ome6
Obermeyer is credited /or ma%in* the /irst *oose3do)n #est and populari9ed the :s%i
bra%e;6 In 12<15 the /irst Sport Obermeyer /actory )arehouse opened in "spen5 and the
inno#ations continued )ith :so/t3shell; &ac%ets5 double lens *o**les5 and the /irst )aterproo/3
breathable /abrics6 Customers o/ Sport Obermeyer are mostly retail stores in urban areas5 near s%i
resorts5 some lar*e department stores li%e 8ordstrom5 and mail retailers li%e (EI6
"ll the items o/ the company are pro#ided and produced in "sia6 In China they ha#e
independent subcontractors in Shen9hen and =o >illa*e6 Other production locations are in 7on*
4on* and $acau6 Obermeyer products )ere di#ided into di//erent :*enders;: men1s5 )omen1s5
boys15 *irls15 and preschoolers16 Each *ender )as then /urther se*mented by price5 type o/ s%ier5
and ho) :/ashionable; the mar%et )as6 ?nli%e its competitors5 Sport Obermeyer tar*eted the
middle to hi*h end o/ the s%i)ear mar%et and desi*ned the ma&ority o/ their products e@clusi#ely
/or use )hile s%iin*5 not to be )orn on the street6 O#er the years5 Sport Obermeyer de#eloped
into a main competitor in the ?6S6 s%i)ear mar%et and by 122 Sport Obermeyer o)ned 4A
percent o/ the children1s s%i)ear mar%et and 11 percent o/ the adult1s s%i)ear mar%et6
In 1225 Sport Obermeyer1s *ross pro/it mar*in )as 4B6 +he chan*es Cally made in
the /ollo)in* years led to an increase in pro/its by A0B5 and thus a A0B increase in pro/it mar*in
to 3<B6 -y contrast5 one o/ Sport Obermeyer1s bi**est competitors5 Columbia Sports)ear5 as a
hi*h3#olume5 lo)er3Duality manu/acturer5 has an a#era*e pro/it mar*in across all products o/
461AB6 +he s%i)ear mar%et is E363 billion6
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ISYE 4301 Case Study | Sport Obermeyer
Obermeyer Challen*es
Some o/ the challen*es that Sport Obermeyer /aced )ere conseDuences o/ poor
/orecastin*6 Each year Obermeyer had to decide on production Duantities /or each o/ its products
prior to %no)in* the product1s actual demand6 -elo) is a *raph o/ the /orecasts and actual
demands throu*hout the production process6 "s production continues5 the /orecasts *et more
accurate endin* in almost a linear /ashion a/ter obser#in* 00 percent o/ sales6
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ISYE 4301 Case Study | Sport Obermeyer
It )as necessary5 ho)e#er5 to start production so retailers )ould recei#e products early
/or customers to be e@posed to its products /or a decent amount o/ time6 Obermeyer earned
appro@imately 4 percent o/ )holesale price prior to ta@ on each par%a the company sold6
=e/to#er par%as )ere sold at a loss that a#era*ed 0 percent o/ )holesale price6 In addition5 these
le/to#ers incurred hi*h in#entory holdin* costs6 Ob#iously Obermeyer did not )ant to e@ceed
demandF Obermeyer also did not )ant to be short o/ demand because )hen it did not produce
enou*h to meet demand it )as missin* out on pro/it6
Greater product #arieties made it harder to accurately predict demand6 Cally5 the #ice
president5 as%ed each member o/ the :-uyin* Committee; to /orecast retailer demand /or each
product6 'orecasts #aried *reatly amon* the indi#iduals as sho)n belo)6
Sample Buying Committee Forecasts for the different styles of Womens Parkas
7istory sho)ed that /orecast )as the most accurate )hen the consensus amon* the
members )as the *reatest6 Cally also noticed that the standard de#iation o/ demand /or a
particular style )as about t)ice the standard de#iation o/ the -uyin* Committee1s /orecasts /or
that style6 +hus5 Cally created a /orecast distribution /or each style as a normal random #ariable
)ith the a#era*e o/ the committee1s /orecast bein* the mean and the standard de#iation bein*
t)ice that o/ the committee1s standard de#iation6
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ISYE 4301 Case Study | Sport Obermeyer
One o/ the main issues that Sport Obermeyer )as /aced )ith )as their supply chainF they
)ere challen*ed )ith the decision o/ )here to produce the bul% o/ their products6 In Sport
Obermeyer1s supply chain system5 they outsourced their products throu*h Obersport5 a &oint
#enture established by 4laus Obermeyer and (aymond +se5 to assist in the production o/ Sport
Obermeyer products in the 'ar East6 Obersport supported t)o locations /or manu/acturin* Sport
Obermeyer1s products: +suen Can5 7on* 4on* and Guan*don*5 China6 Obersport )as
responsible /or the /abric and component sourcin*6 +hey purchased the outer shell /abric /rom
#endors in the ?nited States5 !apan5 4orea5 Germany5 "ustria5 +ai)an5 and S)it9erland6 +he
linin* /abric )as purchased primarily /rom 4orea and +ai)an6 Obersport outsourced other
components such as insulation materials5 G3rin*s5 buc%les5 snaps5 buttons5 9ippers5 pull3strin*s
)ith attached castin*s5 and labelsHta*s /rom Germany5 !apan6
+he t)o /actories /or cuttin* and se)in* )ere +suen Can5 7on* 4on* and Guan*don*5
China6 +he speed o/ this production depended ma&orly on the /actory in )hich it )as produced6
Cor%ers in the 7on* 4on* /actory )or%ed about A0 percent /aster than those in China6 7o)e#er5
the )a*e rates /or China )ere much lo)er than in 7on* 4on*6 "nother disad#anta*e o/ China1s
production is that they reDuired 40 )or%ers compared to 7on* 4on*1s 10 )or%ers6 +hese lon*er
production lines in China led to pronounced instability in assembly6 "dditionally the 7on* 4on*
/actory )as able to initiate production much Duic%er than the Chinese )or%ers6 +his Duality
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ISYE 4301 Case Study | Sport Obermeyer
&oined )ith short production lines5 allo)ed the 7on* 4on* /actory to produce small orders
Duic%er and more e//iciently6 +he table belo) sho)s a complete comparison bet)een operations
in 7on* 4on* and China6
+here are t)o Duestions that Obermeyer needed to ans)er6 'irstly5 )hich styles should be
produced in China and )hich in 7on* 4on*I Gurin* 122 Obermeyer predicted that
appro@imately hal/ o/ all o/ their products )ould be produced in China6 7o)e#er5 lon* term this
may not be the best strate*y /or Obermeyer6 ,roducin* in China could constrain their ability to
produce Duic%ly as )ell as mana*e production and in#entory6 I/ more products )ere produced in
7on* 4on*5 Sport Obermeyer )ould ha#e the /le@ibility to produce smaller order Duantities more
Duic%ly5 as )ell as a *uaranteed hi*her Duality o/ )or%6 +here are many /actors to consider )hen
decidin* )here to produce6 7on* 4on* has bene/its such as more rapid production5 smaller )or%
numbers5 and increased line stabilityF their only disad#anta*e )as the hi*h )a*e rates6 On the
other hand5 China had slo)er production and *reater line imbalances due to the hi*her number o/
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ISYE 4301 Case Study | Sport Obermeyer
)or%ers per line5 in addition to import restrictionsF their only ad#anta*e bein* considerably lo)er
)a*e rates6
+he second Duestion to be ans)ered )as )hether or not it )ould be better /or Obersport
to outsource to a smaller number o/ suppliers6 'or e@ample5 Obersport ordered *rei*e shell /abric
/rom . di//erent countries5 insulation /rom 4 suppliers5 and /inished linin* /rom 3 di//erent
suppliers5 not to mention the di//erent companies that supplied 9ippers5 lo*os5 snaps5 etc6 Is this
the least costly approach to *ather the components into one locationI Suppose Obersport
decreased their supplier base6 +his in turn )ould decrease lead times and increase the speed o/
production6 7o)e#er a smaller supplier base correlates )ith a *reater ris%6 I/ they outsource shell
/abric5 /or e@ample5 /rom one supplier and the supplier *oes out o/ business5 then Obersport is le/t
in an e@tremely di//icult position6 +hey )ould lose money5 completely stop production5 and lose
clients6
+he Duestion o/ )hether or not Obersport has too many suppliers leads to another
Duestion6 Goes Obermeyer ha#e too many par%a shell desi*nsI +his can be ar*ued both )ays6
Sport Obermeyer prided itsel/ in the /act that they o//ered such a broad ran*e o/ par%a styles6 +his
attracted many di//erent types o/ consumers and raised pro/it and distinction6 Obermeyer sold the
ma&ority o/ its products to specialty s%i retailers due to the /act that they produced speci/ically s%i
eDuipment rather than e#eryday )inter &ac%ets and pants6 Gecreasin* the types o/ shell desi*ns
and styles could lo)er their customer base since they are )ell %no)n /or that particular reason6
7o)e#er5 )ith a decrease in shell desi*ns the number o/ suppliers )ould be reduced5 leadin* to
lo)er lead times5 and /aster5 more e#en production6
Challen*es and $ethods o/ 'orecastin*
Ge#isin* an accurate /orecast /or demand o/ their array o/ products )as another
challen*e that Sport Obermeyer /aced6 +he inability to accurately predict /uture demand led to
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ISYE 4301 Case Study | Sport Obermeyer
problems up and do)n their supply chain6 'or e@ample5 they o/ten could not meet demand /or
popular items and had e@cess o/ less popular items that they )ere /orced to sell at a loss6
Sport Obermeyer1s problems )ith /orecastin* are not uniDue6 'orecastin* is ine@act and
most o/ten incorrect6 +he company1s need to /orecast many production cycles in ad#ance
e@acerbated their problemsJas )ell as their need to predict /ashion trends years into the /utureJ
as the lon*er the /orecast hori9on is5 the more li%ely it )ill be )ron*6
One o/ Sport Obermeyer1s bi**est problems in /orecastin* is predictin* )hich styles o/
coats )ill be most popular in a *i#en season6 Other companies cope )ith customer #ariability
throu*h ris% poolin*5 )hich utili9es a central distribution system that reduces a**re*ate demand
#ariability across all mar%ets6 Companies also utili9e time3series methods in )hich they analy9e
past beha#ior in order to predict /uture beha#ior6 +hey mi*ht analy9e beha#ior o/ speci/ic types o/
customers or o/ sales o/ speci/ic types o/ items6 +hese methods )ould be #ery bene/icial /or Sport
Obermeyer6 'inally5 companies also use causal methods that attempt to /orecast /uture demand as
a /unction o/ data unrelated to sales Ksuch as G8,5 unemployment rate5 or )eatherL6
E//ecti#e In#entory $ana*ement ,olicy
"nother challen*e associated )ith de#isin* an optimal in#entory policy is the tradeo//
bet)een ser#ice le#el and in#entory le#el6 +he hi*her the ser#ice le#el5 the hi*her the in#entory
le#el6 " company can determine a tar*et ser#ice le#el across all products and then de#elop
optimi9ation models that determine ser#ice le#els /or indi#idual products and ma@imi9e pro/it6
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ISYE 4301 Case Study | Sport Obermeyer
As service level increases, cost of inventory increases.
Sport Obermeyer must cope )ith #ariable lead times in their production cycle6 +heir /ull3
scale production be*ins in 'ebruary and the /irst shipment o/ /inished *oods does not occur until
!une6 Some o/ the lead times on indi#idual elements o/ their products are as much as 20 days6
+his #ariability a//ects the company1s ability to maintain in#entory le#els capable o/ satis/yin*
demand but not )ildly e@ceedin* it6
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Lead tmes o! "arous
ISYE 4301 Case Study | Sport Obermeyer
+he /act that their o#erall lead3time is /our months means that they can only produce
once in a *i#en season6 I/ they )ere able reduce lead times across their entire supply chain5 they
)ould be able to react to customer demand /or speci/ic products and reorder them5 )hich )ould
ma@imi9e their pro/its6
Sport Obermeyer is currently operatin* under a sin*le period model o/ in#entory
mana*ement6 +hat is5 their product has a short li/ecycle and they only order once a season6 +hus5
their ability to accurately /orecast is that much more important6 +hrou*h more accurate
/orecastin*5 they )ould be able to better predict the beha#ior o/ customer demand and determine
the order Duantity that ma@imi9es their pro/its6
-elo) is a SCO+ KStren*ths5 Cea%nesses5 Opportunities5 +hreatsL analysis /or
Obermeyer6 +he *oal o/ Obermeyer is to use their stren*ths and pursue opportunities to eliminate
)ea%nesses and threats6
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ISYE 4301 Case Study | Sport Obermeyer
Sports Obermeyer 123123 Initial Strate*y
"/ter much debate Sports Obermeyer decided to /orecast their M23M23 demand by
creatin* a model based on a sample o/ their product line and e@trapolatin* that data to the rest o/
their product lines6 Sports Obermeyer loo%ed at the /orecastin* data /or the ten )omen par%a
desi*ns5 )hich represented about 10 percent o/ Sport Obermeyer1s total demand6 +o ma%e this
plan more realistic he scaled the production capacity to 10 percent o/ actual capacity6 'rom this
/orecast he decided to commit hal/ o/ his production in 8o#ember5 the 1
st
production period5 and
the
nd
hal/ in march once he had #isited the =as >e*as /ashion sho) and per/ected his /orecast5 in
the
nd
production period6 "/ter this e@periment Cally reali9ed that the actual #ariation bet)een
style demands )as much lo)er )here the buyin* committee had similar /orecasts6
"s mentioned5 Obermeyer polled indi#idual board members about their retailer demand
/orecast /or each Obermeyer product6 Cally then used the indi#idual /orecasts to come up )ith an
appropriate estimation6 +he only issue )ith his /orecast )as that there )as a lar*e #ariation
bet)een indi#idual /orecasts6 "s an e@tension to this ori*inal strate*y5 Cally could ha#e used the
Gelphi method to compile and summari9e the indi#idual1s /orecasts and to let the indi#iduals
chan*e their /orecasts a/ter seein* the summary6 "/ter multiple iterations a more uni/orm
consensus should be achie#ed6
Our Solutions
+he team1s /irst strate*y is to implement an electronic in#entory trac%in* system in the
)inter months be/ore pea% season6 +he electronic database )ould supply Sport1s Obermeyer )ith
real time sales data that )ould allo) them to spot trends early in the )inter season6 +his strate*y
is to ma@imi9e Sport1s Obermeyer1s pro/its by ensurin* that there )ill be no stoc%3outs durin* the
pea% season6 In the case study5 Cally mentions that i/ he is noti/ied o/ demand early enou*h5
7on* 4on* has the capability o/ producin* and air deli#erin* par%as )ith a month lead time6
"lthou*h the pro/it mar*in )ill not be as hi*h on these items5 this method )ould ensure that there
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ISYE 4301 Case Study | Sport Obermeyer
are no stoc% outs and the remainin* pro/it mar*in is more than enou*h to o//set the air
transportation and premium labor costs in 7on* 4on* KE4.64 pro/it per par%a that )ouldn1t ha#e
been made other)iseL6
+he team1s second strate*y is to e@pand into the South "merican $ar%ets6 +his strate*y1s
/ocus is to continue to ma@imi9e pro/its on Sport Obermeyer1s popular products and to pre#ent
do)nside ris% on the 8orth "merican o#erstoc%ed products that )ould ha#e normally been sold
at e@treme discounts6 Since the seasons are /lopped the o#erstoc%ed 8orth "merican products are
in season in South "merica and can no) be sold at )holesale #alue6 -y implementin* this
strate*y you )ould reduce the e@pected loss on unsold par%as5 currently 0 percent less than
)holesale5 and continue the production o/ the popular products5 )hich sell on an a#era*e o/ 4
percent pro/it6
+he team1s third strate*y is to reduce time in the desi*n phase6 Currently5 Sport1s
Obermeyer o//ers se#eral preliminary samples /or the ne@t year1s product desi*ns6 I/ Sport1s
Obermeyer manu/actured /e)er samples and created di*ital samples )ith specs5 Sport1s
Obermeyer could reduce the sample ma%in* process by 30340 days5 )hich )ould allo) startin*
production sooner and usin* China5 the cost e//ecti#e suppliers5 to produce the initial product
supply6 +his su**estion )ould help Cally accomplish his *oals o/ ha#in* A0 percent o/
production throu*h China and ha#in* an early start production date6
Obermeyer1s "ctual (esponse
Obermeyer decided to install a computeri9ed system to slash time /or order processin*5
pre3position ra) materials5 hold snea% pre#ie) o/ upcomin* lines5 and tal%ed to desi*ners to
encoura*e the use o/ the same types o/ ra) materials and %eep e#erythin* undi//erentiated until
close to the end o/ production6 +he computeri9ed system5 pre3positionin* o/ ra) materials5 and
the snea% pre#ie) o/ upcomin* lines helped increase /orecastin*6 +he computeri9ed systems
helped Obermeyer understand the popular trends6 +he pre3positionin* o/ ra) materials shortened
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ISYE 4301 Case Study | Sport Obermeyer
lead3time to start production earlier6 +he snea% pre#ie) o/ the upcomin* line brou*ht in 0B o/
orders rather than )aitin* until the $arch /ashion sho) to *et 00B o/ the orders6 ?sin* the same
ra) materials and undi//erentiatin* the desi*ns cut do)n lead3time and decrease the number o/
supplies6
+he chan*es Cally made in the /ollo)in* years led to an increase in pro/its by A0B to a
pro/it mar*in o/ 3<B6 +he company1s customer ratin* increased to number one6 O#er3
production decreased /rom A5000 to 5000 and under3production decreased /rom .5A00 to 0006
+he methods helped predict popular products more easily than be/ore5 but the methods did not
help decrease o#er3production as )ell as they had hoped6 $o#in* the mar%et to South "merica
could help decrease the o#er3production si*ni/icantly6
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