Operations and Production Management

Written Analysis of the Case

Sports Obermeyer, LTD.

Submitted by:
Areesh Shahid - 16724

Submitted to:
Mr. Kamran Mumtaz
Case Background:
The case describes an operations issue being faced by SO Ltd, a fashion skiwear manufacturer. The
primary issue of concern is that the company has no metric to gauge the market acceptability of its
products before going into the next production cycle. In fact, the company had no idea about how
customers had received its previous years offering, and hence was unable to commit which variants and
SKUs to produce for the upcoming year. This case fittingly calls this a fashion gamble. In short, the two
key issues to be resolved by the protagonist of the Mr. Wally Obermeyer, are as follows:

1. How to make production commitments for the coming year’s line.

2. How to allocate production between the factories in Hong Kong and China.

Company and Management Background:

Sports Obermeyer was established in 1947 by K. Obermeyer. Over the years, the company became
famous for fashionable ski-wear as the US market was lagging behind Europe in fashion, a gap that Klaus
filled. In 1992, the company had a market share of 45% in children wear and 11% in adult wear.

The company’s operations strategy is focused on two areas: Flexibility and Delivery. Effective
implementation of the company’s product strategy relied on several logistics related activities.
Delivering the end product to the retailers was a time sensitive activity as it would lose out on sales if it
under produced and incur losses on inventory write-downs and discounted sales if it overproduced.
Also, the company would ensure that the retailer gets replenished with the requisite product, be it by air
mail or UPS packages. Also, the company more than 700 SKUs and produces products for different
market segments called ‘genders’. Also the company continually adjusts its forecasts and when certain
events unfold, such as the Las Vegas show, as also shown in Exhibit 5. This shows that the company is
focused on flexibility as well.

The founder of the company, Klaus Obermeyer, believed that the company should achieve harmony
with the external environment and not try to fight. On the other hand, his son Wally Obermeyer, being
an MBA, believes in concrete data analysis, which is contrary to his father’s intuitive decision making
style. This analytical tendency is evident in his quantitative mechanisms to predict demand.
The Timeline:
The timeline of Sports Obermeyer Ltd can be summarized as follows:

1. Prototype Development (July 1992)

2. Design Finalization (September 1992)
 Sample Produced
3. Beginning of the first production order (February 1993)
4. Las Vegas Show (March 1993)
 80% of the order received
5. Remaining Order Received (April and May 1993)
6. Shipment to warehouse (June and July 1993)
7. Shipment to Retail (August 1993)
 Via small package carriers
8. Replenishment orders (February 1994)

Analysis of Production Facilities:

Obersport, a combined venture between Sports Obermeyer and Raymond Tse, MD Obersport, was
responsible for fabric component sourcing for the company. There were two options for sourcing,
Hong Kong Alpine factories and factory complex in Guangdong, China. The problem with the Chinese
facility was that the worker skill was low. Also, Hong Kong workers were cross trained and could
multi task. Hong Kong sewers output was nearly twice that of a Chinese worker. However, Chinese
labor was far expensive than Hong Kong’s. The information regarding cost in USD is as follows:

In USD Hong Kong China

Hourly Wage $3.85 $0.16
Labor cost per garment $9.69 $0.78

Production Planning: The Critical Fractal Method

We used the critical fractal method to calculate the probability of Sport Obermeyer’s fulfillment of the
customer demand. As per the following calculations, for the Rococo Parka, there is a 25% chance that
the company would not be able to meet the demand. Putting it another way, there is a 3/4th chance of
fulfilling demand.

Cost 85.50
Sales Price $112.50
Overage Cost $9.00
Underage Cost $27.00
Probability of meeting demand* 75.00%
i.e.
*Underage/(Overage+Underage costs)
Labor Efficiency:
In order to quantitatively ascertain which plant is more efficient in terms of labor productivity, the
following calculations for determining the labor utilization have been done for both China and Hong
Kong facilities.

Labor Utilization Hong Kong China

Output (parkas) per worker per 19.0 12.0
week
Labor content per parka in 2.35 3.6
hours
Workers per line 11 40
Hours per week 48 58.5
Direct Labor 491.2 1728
Available Time 528 2340
Labor Utilization 93.02% 73.85%

It is evident that Hong Kong is much more labor efficient from the above calculations as its labor
utilization is 93% as compared to the 74% of Chinese facilities. The analysis has been performed based
on hours available and hours worked per week.

Order Determination and Allocation between Facilities:

The two major roadblocks that need urgent attention in this case are the quantity of parkas to produce
in two tranches of orders. The first is before the Las Vegas event, a time when orders are not certain.
The second order would be after the event, a time when more information about demand would be
available.

The second issue is to determine how much to source from Hong Kong and how much from China. For
both these issues we need to decide within stated constraints mentioned in the case. As the sample
problem focuses on only 10% of the total demand, our production capacity and minimum order quantity
(MOQ) estimates would be updated to match this assumption. This means that the MOQ of both the
plants would be 60 and 120 for Hong Kong and China respectively, and the cutting and sewing capacity
would be 3000 units/month.

First of all we refer to exhibit 10 of the case in which the individual forecasts of the buying committee
are provided for 10 styles of Women Parka, along with the average and standard deviation of the
forecasts. In order to make the standard deviation comparable across the styles, we use the metric
Coefficient of variation (CV), which divides the standard deviations by the respective averages. We then
sort the data based on the CV figures. This gives us the following table:
 Style Avg. Std. Dev. CV Facility 1st Order 2nd Order Total
Forecast In %
Assault 2525 340 13.47 China 2020 505 2525
Seduced 4017 556 13.85 China 3213 803 4017
Entice 1358 248 18.24 China 1087 272 1358
Electra 2150 404 18.78 China 1720 430 2150
Gail 1017 194 19.09 China 813 203 1017
Daphne 2383 697 29.24 HK 477 1907 2383
Isis 1042 323 31.02 HK 208 833 1042
Anita 3296 1047 31.77 HK 659 2637 3296
Teri 1100 381 34.62 HK 220 880 1100
Stephanie 1113 524 47.09 HK 223 890 1113
Totals 20,000 10,640 9,360 20,000

All styles with low CV indicates that 20% should be produced in China as China has low cost of
production. It is recommended that higher risk items be produced at the HK plant because these items
will be produced more quickly and will be off better quality.

Recommendations:
A. Enhance Chinese plant productivity by sending personnel from HK plant to the Chinese plant
similarly to the TMC case. This technology and skill migration would help the Chinese facility to
come at par with the HK facility. Combined with its low cost of production, this facility could
become the preferred one for Sports Obermeyer.
B. Perform market research to gauge consumer demand and reception to the designs and variants
to be offered by Sports Obermeyer in the upcoming year.