IE511 02a Ppuncertainty

Production Planning under Uncertainty
IIKIE
Sport Obermeyer - Aspen, Colorado (November 1992)

need to commit to specific order quantities for each skiwear item for the coming
years line, first real indicator will be at the Vegas Trade Show in March. How well the
demand is predicted for different styles and colors determines the ultimate success of
the line. A mixture of analysis, experience, intuition, and speculation is used. By Nov
1992 production commitment for 1993-1994 line of fashion skiwear must be made,
even before the current season is full underway. There is a trade-off between using
Current Information
Future Information Update
vs
customer information
more consumer
on current line
exposure at retailers
(92-93 line)
(93-94 line)
Sport Obermeyer needs to decide how to allocate production between Hong Kong and
China facilities. Chinese facilities used to handle one third of the total production the
share of which will be increased to one half on the basis of low cost advantage despite
the concerns of quality and reliability (plus export quotas).
In Tsuen Wan, New Territories, Hong Kong a joint venture was established in 1985 to
coordinate Sport Obermeyers Far East operations. A new factory complex recently
completed at Lo Village, Guangdong, China with new facilities, new workers, and
training still going on. Demand, worker skill levels, and productivity are all hard to
predict.
Prod. Plan. under Uncertainy 1
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Lo Village
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Klaus Obermeyer, a German engineer, emigrated to the US in 1947 and started

teaching at the Aspen Ski School. He noticed the inadequateness of the ski clothes his
students wore compared to those worn in his native Germany.
During summer months he began to travel to Germany to find durable, high
performance ski clothing and equipment for his students. Klaus also designed and
introduced a variety of skiwear and ski equipment products. He was credited with
making the first goose-down vest out of an old comforter, for example, in the 1950s. In
early 1980s, he popularized the ski brake, a simple device replacing the cumbersome
run-away straps.
Over the years, Sport Obermeyer developed into a preeminent competitor in the US
skiwear market; estimated sales in 1992 were $32.8 million. The company held a
commanding 45 percent share of the childrens skiwear market and an 11 percent
share of the adult skiwear market. Columbia Sportswear was a lower-price, highvolume-per-style competitor whose sales had increased rapidly during the previous
three years. By 1992 Columbia had captured about 23 percent of the adult ski-jacket
market.
IIKIE
Obermeyer offered a broad line of fashion ski apparel:

parkas, vests, ski suits, shells, ski pants, sweaters, turtlenecks, and accessories
Parkas were considered the most critical design component of a collection as
other garments were fashioned to match their style and color.
Obermeyer products were offered in five different genders: men, women, boy, girl,
and preschooler. The company had segmented each gender market according to
price, type of skier, and how fashion-forward the market was. For example, the
company divided its adult male consumer into four types:
Fred: conservative, tends to buy basic styles and colors, likely to wear the
same outfit multiple seasons
Rex: high-tech, wealthy, image-conscious, tends to use the latest technologies
in fabrics, features, and ski equipment
Biege: hard-core mountaineering-type skier, places technical performance
above all else, despises any nonfunctional design elements
Klausie: flamboyant, high-profile skier or snowboarder, wears the latest
styles, often in bright colors such as neon pink or lime green.
Within each gender, numerous styles were offered, each in several colors and a
range of sizes. For each gender, total number of SKUs = (#styles)(#colors)(#sizes).
IIKIE
Womens parkas
Mens parkas
IIKIE
Womens parkas
800
Total Number of SKUs
Total Number 600

of SKUs
400
200
78-79
80-81
82-83
84-85
86-87
88-89
90-91
92-93
Number of Styles
Number of
Styles
20
10
78-79
8
Average Num of
Colors and Sizes 6
per Style
80-81
82-83
84-85
86-87
Avg.Num.of
Colors per Style
88-89
90-91
92-93
Avg.Num.of Sizes per

Style-Color Combo
4
78-79
80-81
82-83
84-85
86-87
88-89
90-91
92-93
IIKIE
Obermeyer competed by offering an excellent price/value relationship:
value = functionality + style

functionality is critical to the serious skier: products has to be warm and waterproof,
yet not constrain the skiers ability to move his or her arms and legs freely.
Targeted middle to high end of the skiwear market. Unlike some of its competitors
who made outerwear for both skiing and casual street wear, Obermeyer sold over 85
percent of its products to customers for use while skiing.
Effective implementation of this production strategy relied on several logistics related
activities, including delivering matching collections of products to retailers at the same
time and delivering products to retail stores early in the selling season:
to allow customers to view and purchase coordinated items at the same time
to maximize the number of squarefootage days products were available at retail
IIKIE
Klaus Obermeyers management approach:

harmony with the environment
delegation of managerial decisions to people who can cope with risk
Klaus is regarded as the heart and soul of the company
Nome Obermeyer is a successful designer, was regarded for her feel for fashion.
Wally Obermeyer worked part-time for the company and worked as a skipatrol
on Aspen Mountain. Graduated Harvard Business School in 1986 and focussed his
efforts on developing a hydro-electric power generating plant in Colorado. After the
power plant was established he joined Sport Obermeyer full time in 1989 as vice
president.
Wallys management approach relied more heavily on formal data-gathering and
analytical techniques, whereas Klaus took a more intuitive style that was heavily
informed by his executive industry experience.
IIKIE
Order Cycle
products are sold primarily through specialty ski-retail stores, located either in urban
areas or near ski resorts, and direct mail retailers. Most retail sales of skiwear occured
between September and January, with peak sales occuring in December and January.
Design Process (Feb-Jul91)
sense of fashion conceived, sketches drawn, prototypes produced, design finalized
Sample Production (Aug-Dec91)
sample production ordered to subcontractors
sales representatives start to show samples to retail sites
Raw Material Orders, Sourcing, and Production (src:Jul-Nov91 prod:Feb-Jul&Aug92)
sourcing for initial production (typically half of the annual production)
long fabric supply lead times before cutting & sewing can begin
Retailer Ordering Process (Nov91-Mar92 & Apr-Jun92)

by the end of the Las Vegas show (March) about 80 percent of the orders are
in remaining of the orders are in by April and May
IIKIE
Shipment to Obermeyer Warehouse (Jun-Jul Aug 1992)

shipment to US from Hong Kong and China occurs during June and July
later shipments occur via air cargo
US quota on Chinese imports, not company specific but product category specific
Shipment to Retail, Retail Replenishment Orders (Aug-Dec 1992 & Feb1993)
by end of August Sport Obermeyer starts to send orders to retailers
by December or January retailers expecting to sell more than their initial
order begin placing replenishment orders. These orders are filled if
Obermeyer had the items in stock
by February Obermeyer starts offering discounts while the retailers start
marking down prices
deeper mark downs occur as the season progresses
IIKIE
Order Cycle Timeline

Sample
Production
Design Process
Raw Material Orders &

Sourcing
Production
Retailer Ordering Process

(big vol retailers) (the rest)
Shipment to
Obermeyer
Ship. Replnishmnts
to Ret.
to Ret.
Feb
1991
Apr
1991
Jun
1991
Aug
1991
Nov
1991
Dec
1991
Feb
1992
Apr
1992
Jun
1992
Aug
1992
Nov
1992
Dec
1992
Feb
1993
IIKIE
Committee Forecasting: is a technique widely used by companies producing fashion

products (only one opportunity of selling) with short lifecycles. A committee of experts
work together to estimate the sales for the upcoming season. Each expert first
forecasts the total sales for the season then breaks down the total among individual
products, namely estimating which products will preferred over others. After
individual forecasts are made the committee goes over the whole forecast together.
Finally averages and standard deviations of each style are computed.
It has been observed in practice that: i) when experts agree (low standard deviation)
the forecast has relatively low error, and ii) when experts do not agree (high standard
deviation) the forecast has relatively high error.
High
Error
AvgError=180
2000
AvgError=760
1500
Forecast
Error 1000
Low
Error
500
0
100
200
300
400
Std.Dev. of Individual Forecasts
Low
High
Aggreement
Aggreement
Season
Sales
Total Sales of Womens parkas
4000
3000
2000
1000
IIKIE
Initial Forecast
each data point represents the
forecast and actual season sales
for a particular parka at the style
and color level. For example
parka A had an initial forecast of
2800 and season sales of 1000
units.
A
0
1000
2000
3000
4000
Initial Forecast
Season
Sales
4000
IIKIE
Updated Forecast
after observing the first 20% of
demand, the revised forecast for
parka A was 1100 units.
3000
2000
1000
A
0
1000
2000
3000
4000
Updated Forecast
Season
Sales
4000
IIKIE
Final Forecast
after observing the first 80% of
demand, the final forecast for
parka A was 1020 units.
3000
2000
1000
1000
2000
3000
4000
Final Forecast
IIKIE
The Supply Chain

Textile and
Accessories
Suppliers
Apparel
Manufacturers
Obersport
Sport
Obermeyer
Retailers
prepositioning: greige fabric, monthly delivery requirement specifics t.b.d. later

lead times: dying 6-8 weeks, printing 6-9 weeks
zippers 8-13 weeks, components 2-4 weeks
production:
capacity of prod. lines
workers
min. order requirements
wages
Hong Kong
faster & more flexible
highly trained
smaller
higher
China
slower & less flexible
inexperienced
larger
lower
Cost Breakdown: materials

operations (China vs Hong Kong)
freight, duty, insurance, agents fee, etc (China vs Hong Kong)
Profit per unit sold:

Loss per unit unsold:
about 24% of the wholesale price

about 8% of the wholesale price
IIKIE
A Sample Problem
Wally decides to look at the following sample problem to build intuition about how to
make production decisions. This is smaller version of the companys problem. The
Buying Committees forecasts for the sample of 10 womens parkas are given below.
Since these style represent about 10 percent of Obermeyers total demand, to make
this smaller version representative of the larger problem he assumed he had cutting
and sewing capacity of 3000 units per month (10 percent of the actual capacity) during
the seven month production period. Using these assumptions Wally needed to commit
10,000 units for the first phase of production. The remaining 10,000 units could be
deferred until the after the Las Vegas show. The Chinese factory requires a minimum
of 1200 units for each style ordered whereas the Hong Kong factory requires only 600
units.
Wally studied the buying committees forecasts, wondering how he could estimate the
risk associated with early production of each style. Was there some way he could use
the differences among each members forecast as a measure of demand uncertainty?
IIKIE
Sample Buying Committee Forecast: 10 Styles of Womens Parkas

Style
Price
Tom
Wally
Avg
StDv
2*StDv
Gail
$110
900
1000
900
1300
800
1200
1017
194
388
Isis
$99
800
700
1000
1600
950
1200
1042
323
646
Entice
$80
1200
1600
1500
1550
950
1350
1358
248
496
Assault
$90
2500
1900
2700
2450
2800
2800
2525
340
680
Teri
$123
800
900
1000
1100
950
1850
1100
381
762
Electra
$173
2500
1900
1900
2800
1800
2000
2150
404
807
Stephanie
$133
600
900
1000
1100
950
2125
1113
524
1048
Seduced
$73
4600
4300
3900
4000
4300
3000
4017
556
1113
Anita
$93
4400
3300
3500
1500
4200
2875
3296
1047
2094
$148
1700
3500
2600
2600
2300
1600
2383
697
1394
20000
20000
20000
20000
20000
20000
20000
Daphne
Totals
Laura Carolyn
Greg Wendy
Laura Kornashiewicz: marketing director; Carolyn Gray: customer service manager; Greg Hunter: production
manager; Wendy Hemphill: production coordinator; Tom Tweed: sales representative; Wally Obermeyer:
vice president
IIKIE
A Sample Problem
An examination of demand from previous years indicated that the forecast accuracy
was the highest for those styles for which the Buying Committee had the highest level
of aggreement. Technically he found that the standard deviation of demand for a style
was approximately twice the standard deviation of the Buying Committees forecasts
for that style.
With this in mind he constructed a

forecast distribution for each style as
a normal random variable with the
mean equal to the Buying Committee
members forecasts and standard
deviation twice that of the Buying
Committees forecasts.
std.dev=807
mean=2150
Forecast distribution for the Electra parka
IIKIE
Where to Produce
To complete the planning decision, Wally would also need to decide which styles to
make in Hong Kong and which would be better to produce in China. This year,
Obermeyer expected to produce about half of all its products in China. Longer term,
Wally wondered whether producing in China would constraint Obermeyers ability to
manage production and inventory risks. Would Chinas larger minimum order sizes
limit the companys ability to increase the range of products it offered or to manage
inventory risk? Was Obermeyers trend toward increased production in China too risky
given the uncertainty in Chinas trade relationship with the US?
IIKIE
Discussion Questions
1. Using the sample data given, make a recommendation for how many units of each
style Wally should make during the initial phase of production. Assume that all of
the 10 styles in the sample problem are made in Hong Kong and that Wallys initial
production commitment must be at least 10,000 units. Ignore price differences
among styles in your initial analysis.
2. Can you come up with a measure of risk associated with your ordering policy? This
measure should be quantifiable.
3. Repeat your methodology and assume now that all 10 styles are made in China.
What is the difference (if any) between the two initial production commitments?
5. How would you take into account the minimum order requirements?
6. What operational changes would you recommend to Wally to improve
performance?
7. How should Wally think (both short-term and long-term) about sourcing in Hong
Kong versus China? What kind of sourcing policy do you recommend?
IIKIE
Let EPi(Qi) = E[Profiti(Qi)] for convenience. How can we solve the following problem? Is
this problem meaningful?
max
Expected
Profit
Invested
Capital
max
EPi (Qi )
ci Qi
Maximum profitability is achieved when we guarantee certainty of regular season

sales. But that means taking no risk at all hence producing a minimum amount of
products. We can phrase the question as a search problem: given a target profit ratio
tp, can we achieve the target value?
Expected
Invested
tp
Capital
Profit
EPi (Qi ) tp ci Qi
We can also rephrase the problem as determining the maximum expected profit we
can achieve given a certain budget. Similarly production capacity may impose a similar
constraint:
max Expected Profit
s.t. Invested Capital K
EPi (Qi )
s.t. ci Qi K
max
IIKIE
Similarly production capacity may impose a similar constraint.

max EPi (Qi )
max Expected Profit
s.t. Total Production C

s.t. Qi C
We can approach this problem using Lagrange multipliers and exploit separability.
max EPi (Qi )
min max EPi (Qi ) Qi C
0 Q
s.t. Qi C
When we approach the inner maximization problem by writing the optimality
conditions we can get for all products i:
d
EPj (Q j ) Q j C 0
dQi j
d
EPi (Qi ) 0
dQi
dEPi (Qi )
Qi* dEPi1 (* )
IIKIE
This reduces the optimization problem into a line search problem. Find * such that
Q*(*) values sum up to C:
Find * such that
Qi* (* ) C
i
where Qi* (* ) dEPi1 (* )
Here is how we calculate
Qi* (* )
dEPi
where si = pi ci = unit shortage cost

oi = ci qi = unit overage cost
pi = regular sales price
ci = unit production cost
qi = salvage price
s
(* ) Fi 1 i
s o
1 si *
i
i
i s o
i i
EPi = Exp. Profit of style i

dEPi = marg Exp.Profit of style i
Fi(Qi) = style i demand cdf
In this line search, value of * may result with a probability value less than 0 (i.e. when
* > si). Such cases must be handled using managerial input deciding whether to not
produce such styles at all or produce at least a minimum amount.
IIKIE
There are interesting extensions of this problem, some of them are described below:
Minimum Order Quantities

Contract manufacturers may impose lower limits on order quantities on orders in
order to justify loss of production capacity during line changeovers motivated by
operational efficiency.
Multiple Production Sites
For each site the selection of which product to be produced poses a trade off between
risk pooling effects and responsiveness. Contract amounts must be selected
accordingly to allow optimum assignment of products to sites.
Quick Response Methodology
Production can be scheduled to occur at two (or more) phases. First phase uses an
initial demand forecast and produces some amount of some or all styles. Consecutive
phases wait for market signals and update the forecast then committ to production of
again some or all styles using this more accurate forecast.
Mean-Variance Analysis
The trade off between expected profit versus financial overage risk can be explicitly
handled in an optimization model. Maximum tolerable risk can be used as a constraint
where the objective is maximizing the expected profit.
Quick Response Strategy
IIKIE
Quick Response Strategy & Reactive Capacity

Quick Response Strategy aims to reduce the cost of uncertainy by reducing
replenishment lead times and improving forecast quality. One popular approach is to
divide the production capacity into two segments: speculative capacity and reactive
capacity. Speculative capacity is the production time period over which items with
relatively better forecasts or with less financial risks are produced. Over time the
company collects more information on customer demand and improves its forecast.
Based on the improved forecasts the company revises and updates its production
targets. Then reactive capacity is the production time period over which more
production is scheduled taking into account the updated production targets. The
company should secure enough speculative and reactive capacity from the
manufacturer so that the forecast update can be leveraged.
Production Committment
based on
Initial Demand Forecast
Production Committment
based on
Updated Demand Forecast
Speculative
Production Capacity
Initial Dem.
Forecast
Update Dem.
Forecast
Reactive
Production Capacity
Regular
Selling Season
Time
Line
IIKIE
Unlimited but Expensive Reactive Capacity

We place an order with the manufacturer. We keep on collecting additional demand
information. Then we place a second order with the manufacturer using our updated
demand forecast but the manufacturer now charges a premium of ei (an extra
payment per product).
Our first order is still a newsvendor type problem. Although overage cost is still the
same, the shortage cost becomes now the premium of the manufacturer. We will
order less than we would (premium must be less than our profit, our original shortage
cost) in the first order.
The following analysis assumes that once we obtain the updated demand forecast we
know with certainty the demand for each style. Therefore we would not incur any
shortage cost (unlimited capacity) but overages are still possible. For simplicity we also
assume that the demand distribution after the forecast update has the same normal
distribution before the update. But also notice that at the time we need to place the
first order since we do not have a better one we must use the initial forecast.
We first place an order of size Qi of style i, update the forecast, order additional units
of size Ri if needed, ship all realized demand at regular sales price and sell the
remaining products, if any, at the salvage price. Notice that Ri is essentially the
shortage with respect to the initial demand given that we order Qi units.
IIKIE
Then for style i we obtain:

EPQRUi (Qi ) Epi Di ci Qi (ci ei ) Ri qi Overage(Qi )
pi i ci Qi (ci ei ) EShortage(Qi ) qi EOverage(Qi )
where ei = premium paid for any units produced in the second order (ci + ei < pi)
Marginal analysis reveals a newsvendor type cost structure:
d
EPQRUi (Qi ) c i (c i ei ) P(Di Qi ) qi P(Di Qi )
dQi
ei P(Di Qi ) (c i qi ) P(Di Qi )
ei (ei oi ) F (Qi )
e
Finally the optimum first order is: Q*i Fi1 i
ei oi
What is the risk of having a Profit less than a target proportional to the avg. demand?
P(PQRUi t i ) ?
IIKIE
Example: Consider the following initial forecast. A 10% premium is charged on the
orders placed with the reactive capacity. Let us find the unlimited reactive capacity
order quantities. We first find the unconstrained optimum orders, corresponding exp.
profits, mismatch costs. The last column gives the loss risk at 12% of the unit cost.
Avg
StDv
Q*
EP
94
1646
827
2204
139925
37843
0.134
152
110
1325
861
1777
87939
41911
0.236
155
103
68
3232
1616
3332
89875
31485
0.156
Kennedy
243
147
106
2730
1919
3740
170771
91309
0.256
Lexington
187
117
70
3677
1177
3970
204128
53262
0.082
McKenzie
177
99
65
2455
1596
3276
129008
62482
0.226
Niki
140
90
57
1741
601
1897
67809
19241
0.103
Prague
125
85
58
3034
1214
3632
113666
54398
0.208
St. Tropez
170
117
86
1250
462
1404
51610
14640
0.129
Ute
100
68
51
2910
960
3288
75753
17367
0.090
28520 1130483
423939
Style
Price
Cost
Aiden
238
130
Aston
250
Ibiza
Totals
Discount
24000
Mm.Cost
Risk
IIKIE
Example: (cont) First order quantities are calculated taking into account a premium
charge of 10%. Exp.Profit for the styles in the first order are calculated via the EPQRU
formula. Mismatch cost equals maximum profit minus EPQRU. The last column gives
the loss risk at 12% margin over average demand:
Style
Q EPQRU
Mm.Cost
R Risk
Aiden
1127
164487
13281
652
0.050
Aston
786
113696
16154
678
0.103
Ibiza
2174
107979
13381
1031
0.038
Kennedy
1518
227143
34937
1519
0.118
Lexington
2684
238087
19303
1124
0.014
McKenzie
1252
170450
21040
1411
0.097
Niki
1265
79689
7361
549
0.020
Prague
2024
145978
22086
1421
0.068
972
59679
6571
355
0.027
2367
85354
7766
714
0.015
16170
1392542
161880
9455
St. Tropez
Ute
Totals
IIKIE
Limited Reactive Capacity at No Extra Cost

In contrast to the unlimited reactive capacity case, in the case of limited reactive
capacity the manufacturer may not charge extra for the second order but may impose
a minimum order quantity (per style) restriction. The minimum order restrictions are
usually placed by the manufacturer in order to limit the changeover costs or the
production time lost due to changeovers. Let us discuss the following cases we may
face when there is a minimum order requirement, m:
Case Q* < m : We have to order these kind of items in the first order (speculative
capacity). Reactive capacity is valuable and we would like to save it for risky (hard to
predict with high profit margin) products. Unless updated forecast points to a second
order that is greater than Q* + m (which means roughly a realized error greater than m
in the initial forecast), we will only order these items in the first order. We may also
decide to not produce these items at all.
Case m < Q* < 2m : These are the riskiest items. If we order these items with the
speculative capacity, we may not be able to adjust the total quantity as the adjustment
is likely to be less than m. On the other hand if we have many items like this we may
not be able to postpone their production to the reactive capacity and end up taking
some risk and committing a certain amount for some of such items in the first phase.
IIKIE
Case Q* > 2m : These items do not pose much risk. We can safely order some amount
with the speculative capacity. We can easily determine an amount such that the
adjustment quantity to be ordered with the reactive capacity after the demand update
is received is likely to be greater than m.
Heuristic #1: We commit to production of as many of the least risky items as possible
in the speculative capacity (depending on how much speculative capacity we have
secured). Once the updated forecast is available we order the most risky items for the
first time using the new information and place orders for the items that were ordered
with the speculative capacity if the adjustment quantities are higher than the
minimum order quantity or close enough so that we order the minimum anyway.
Heuristic #2: We order each item either with the speculative capacity or the reactive
capacity but not both. This is the so called order once constraint. We sort all items in
ascending order of a risk measure then commit to production of a number of items
from the top such that the total quantity is approximately equal to the amount we
would like to in the speculative capacity. After the updated forecast is available we
order the rest of the items. The risk measure we use is the unit mismatch cost:
Unit Mismatch MismatchCo st(Q* )
Cost
Q*
IIKIE
Example: Let us this time find the limited reactive capacity order quantities on the
same initial forecast used in the previous example. First order will consist of about half
of the total order quantity. We report here again the unconstrained optimum orders,
corresponding exp. profits, mismatch costs. The last column gives the loss risk at 12%
of the unit cost.
Avg
StDv
Q*
EP
94
1646
827
2204
139925
37843
0.093
152
110
1325
861
1777
87939
41911
0.179
155
103
68
3232
1616
3332
89875
31485
0.082
Kennedy
243
147
106
2730
1919
3740
170771
91309
0.201
Lexington
187
117
70
3677
1177
3970
204128
53262
0.038
McKenzie
177
99
65
2455
1596
3276
129008
62482
0.180
Niki
140
90
57
1741
601
1897
67809
19241
0.050
Prague
125
85
58
3034
1214
3632
113666
54398
0.137
St. Tropez
170
117
86
1250
462
1404
51610
14640
0.057
Ute
100
68
51
2910
960
3288
75753
17367
0.033
28520 1130483
423939
Style
Price
Cost
Aiden
238
130
Aston
250
Ibiza
Totals
Discount
24000
Mm.Cost
Risk
IIKIE
Example: (cont) We first calculate the unit mismatch costs. Then we add styles to the
initial order one by one in ascending order of the unit mismatch cost until the total
initial order is approximately 12000 units. Exp.Profit for the styles in the first order are
the unconstrained optimum values. For the styles left to be produced with the reactive
capacity, Exp.Profit is the maximum profit and there is no mismatch cost or risk:
Q EPQRL
Style
Mm.Cost/Q*
Mm.Cost
Risk
Aiden
17.2
177768
0.000
Aston
23.6
129850
0.000
Ibiza
9.4
3332
89875
31485
0.082
Kennedy
24.4
262080
0.000
Lexington
13.4
3970
204128
53262
0.038
McKenzie
19.1
191490
0.000
Niki
10.1
1897
67809
19241
0.050
Prague
15.0
168064
0.000
St. Tropez
10.4
1404
51610
14640
0.057
5.3
3288
75753
17367
0.033
13892
1418426
135996
Ute
Totals
IIKIE
Examine the following plots. Product styles are ordered in ascending order of the unit
mismatch cost. The light shaded bars denote the less risky first order and the darker
shaded bars denote the more riskier styles left to be produced with reactive capacity.
We notice that unit mismatch cost roughly increases as Gross Margin (s), or as Critical
Ratio, or as Coefficient of Variation increases:
120
Gross Margin
80
0.8
Critical Ratio
0.70
Coefficient of Variation
0.7
0.5
0.20
Ute
Ibiza
Niki
St. Trp.
Lexing.
Prague
Aiden
McKnz
Aston
Kenn.
0.6
Ute
Ibiza
Niki
St. Trp.
Lexing.
Prague
Aiden
McKnz
Aston
Kenn.
40
Ute
Ibiza
Niki
St. Trp.
Lexing.
Prague
Aiden
McKnz
Aston
Kenn.
0.55
There are 210 = 1024 different ways to place the initial order under the order once
constraint. Exp.Profit value versus total first order size is plotted in the graph on the
next page. The rules of Heuristic#2 describes 11 initial orders out of the 210 possible
orders. These 11 initial orders are all Pareto-optimal and are denoted with red
diamond markers in the plot on the next page.
IIKIE
Expected Profit
Total Initial Order Size


IE511 02a Ppuncertainty

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Production Planning under Uncertainty

Sport Obermeyer - Aspen, Colorado (November 1992)

Production Planning under Uncertainty

Prod. Plan. under Uncertainy 2

Production Planning under Uncertainty

Klaus Obermeyer, a German engineer, emigrated to the US in 1947 and started

Prod. Plan. under Uncertainy 3

Production Planning under Uncertainty

Obermeyer offered a broad line of fashion ski apparel:

Production Planning under Uncertainty

Production Planning under Uncertainty

Total Number 600

Avg.Num.of Sizes per

Prod. Plan. under Uncertainy 6

Production Planning under Uncertainty

Obermeyer competed by offering an excellent price/value relationship:

value = functionality + style

Prod. Plan. under Uncertainy 7

Production Planning under Uncertainty

Klaus Obermeyers management approach:

Prod. Plan. under Uncertainy 8

Production Planning under Uncertainty

Retailer Ordering Process (Nov91-Mar92 & Apr-Jun92)

Production Planning under Uncertainty

Shipment to Obermeyer Warehouse (Jun-Jul Aug 1992)

Prod. Plan. under Uncertainy 10

Production Planning under Uncertainty

Order Cycle Timeline

Raw Material Orders &

Retailer Ordering Process

Prod. Plan. under Uncertainy 11

Production Planning under Uncertainty

Committee Forecasting: is a technique widely used by companies producing fashion

Prod. Plan. under Uncertainy 12

Production Planning under Uncertainty

Total Sales of Womens parkas

Prod. Plan. under Uncertainy 13

Production Planning under Uncertainty

Total Sales of Womens parkas

Prod. Plan. under Uncertainy 14

Production Planning under Uncertainty

Total Sales of Womens parkas

Prod. Plan. under Uncertainy 15

Production Planning under Uncertainty

The Supply Chain

prepositioning: greige fabric, monthly delivery requirement specifics t.b.d. later

Cost Breakdown: materials

Profit per unit sold:

about 24% of the wholesale price

Production Planning under Uncertainty

Prod. Plan. under Uncertainy 17

Production Planning under Uncertainty

Sample Buying Committee Forecast: 10 Styles of Womens Parkas

Production Planning under Uncertainty

With this in mind he constructed a

Production Planning under Uncertainty

Prod. Plan. under Uncertainy 20

Production Planning under Uncertainty

Prod. Plan. under Uncertainy 21

Production Planning under Uncertainty

Maximum profitability is achieved when we guarantee certainty of regular season

Prod. Plan. under Uncertainy 22