How to deal with products having highly uncertain demand pattern and short product life cycle?

Functional vs Innovative Products ?

Products differ

Cost of lost sale Risk of obsolescence Forecast accuracy Product variety Product life cycle

Low Low

High High Low High Short

High Low

Long

Functional

Innovative

And supply strategies differ

Factory focus Inventory Strategy Lead-time focus Supplier selection High utilization High turns Low cost preferred over short lead-time Maintain buffer capacity

Significant buffer stocks of components and FGs

Aggressively shorten lead-time Speed & flexibility Modular to enable postponed differentiation

Low cost
Integral for max performance at min cost

Product-design strategy

Physically efficient

Market responsive
4

Need to match supply strategy with product type

Life cycle > 2 years Gross Margin < 35% Low Product Variety

Life cycle < 1 year Gross Margin > 35% High Product Variety
Innovative Products

Functional Products
Efficient Supply Chain

Supply predictable demand efficiently at lowest cost

match

mismatch

Respond quickly to unpredictable demand to minimize stockouts, markdowns, and obsolete inventory

Responsive Supply Chain

mismatch

match

So as to minimize total of two types of costs

Physical Production/Distribution Costs Production Costs Transportation Costs Facility Utilization rates Inventory carrying cost on pipeline and cycle stocks Supply/Demand Mismatch Costs
Lost revenue and profit margin when supply is less than demand

Product and parts scrapped or sold at a loss when supply exceeds demand
Inventory carrying cost on safety stocks
6

Sport Obermeyer
A classis example of innovative product with highly uncertain demand and short product life cycle. Also highlights the importance of: Shorter lead times Smaller minimum order requirements Increased reactive capacity Improved market information Reducing the expected costs of stock outs and markdowns
7

A page from Sport Obermeyers product catalog

Next years catalog

Obermeyers styles are fashion-forward and change every year

10

The Obermeyer supply chain stretches from Asia to Aspen

Factories in China and Hong Kong

DC in Denver

800 Ski Retailers

11

Obermeyers planning calendar

targeted season of Sept, 09-Jan, 10)

(For

Designing

starts in February, 08 and Finalizes in September, 08

Production starts in November 07, about six months ahead of Las Vegas Show Las Vegas Fashion Show: March every year (March, 09) Bulk receiving of orders from retailers after Las Vegas in March-April, 09 Shipping of finished products from China / Hong Kong: AugustSeptember, 09 Normal Sales Season: Sept-Oct-Nov 09

Peak Sales Season: December, -09 and January, 10

Replenishment: In February, 10 by Obermeyer at discounted rates and simultaneously markdowns by the retailers
12

Problems at Obermeyer
Long

Product Development Cycle

Inaccurate Forecasts

High Stock outs as well as high mark downs

Hong Kong vs. China

13

Cost of Under and Over Production

Rococo Parka
Wholesale Price: $112.50 Profit Margin: (24% of wholesale price)= $27
Expected loss on each unsold parka: (8% of wholesale price)= $9

14

Which parka family sold best?

Black Voodoo sold 4000

Sold 4
15

Initial forecasts are highly inaccurate

but improve dramatically with just a little sales data

16

Sample buying committee projections: Which product is more predictable?

Laura
Gail 900

Carolyn

Greg

Wendy

Tom

Wally

Average

Std. Dev.

1000

900

1300

800

1200

1017

194

Isis

800

700

1000

1600

950

1200

1042

323

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How to think about supply chain improvement

Product Availability
How does product availability drive revenue?

Inventory
Optimize cost of lost margin, carrying and obsolescence

Accurate Forecasts
Track & improve the accuracy of forecasts that drive decisions e.g. parts lead time demand

Responsive Supply Chain

Create a framework for inventory efficiency e.g. common parts, short lead times, efficient small lot production 18

???
How should Wally think about how much of each style he should order in November Production Planning How do we do production planning? (OM)

What can be done to mitigate the risk?

What are the issues of global supply chains? Choosing between Hong Kong & China
19

What is the solution?

20

Risk-based production sequencing

It refers to using speculative production capacity to make low-risk products Postpone the production of higher-risk products until additional market information reduces their demand uncertainty Define the risk of producing a unit to be the expected cost of mismatched supply and demand for that unit As additional market information is available, the uncertainty about the sale of a product is reduced Generate probabilistic forecasts based on the subjective forecasts of a set of individuals
21

Early write
Bring 25 (out of 800) largest retailers to Aspen in February. Accounts for 20% of sales. Put them up at the Ritz Carlton They interact with Klaus Obermeyer, an industry icon and founder of the company They get an advance preview of the line They order early
22

Lead time reduction

Asia
Fabric Producer Cut/Sew Factory Denver Warehouse Fabric Dyer Retailer

undyed goods

Consumer Sport Obermeyer

Fabric dyer lead time of several months was a problem for Obermeyer Dyer has long lead time on greige goods and needed to keep their capacity utilized year round but can change colors overnight Obermeyer can predict total annual sales and sales of basic colors, but cant predict fashion colors

Solution Offer dyer one year commitment on greige goods and capacity Dye basic colors early in year and fashion colors late in season on few days notice
23

Revised planning calendar

24

Desk top tool run by user

Factories in China
Order 50% in November (For Dec, Jan)

DC in Denver
Order 50% in April (For Sept, Oct, Nov)

800 Ski Retailers Retailers order in Feb & April

Forecasts
Product Sketches Forecast Committee

25

Elements of the Obermeyer process

Early orders are highly predictive Early write: bring 25 largest retailers to Aspen to order early Cut lead times on expensive, long lead time component dyed fabric Use committee forecast process to forecast forecasting errors Risk based production sequencing Replace point forecast by probability distribution Make predictable volume early. Set production volumes based on likely forecast accuracy and cost of over and under production.

26

Observations from past years Demand and Forecast

Distribution

show bell shaped normal distribution

curve Standard Deviation of the demand for a style is approximately twice the SD of the buying committees forecast for that style

27

FACTORS AFFECTING UNPREDICTABILITY

Short Life Time of Products (shrinking PLC) SKU proliferation

RESULT : Markdowns as high as 30% and also some lost sale (How much?)

28

Risk based production

What is risk?
How to quantify risk?

How to predict what people will buy?

29

How to quantify risk?

Standard Deviation and Co-efficient of Variation Expected profit value
0.24 P *pi +0.08 P* (1-pi)

30

Similarity with Newspaper boy problem?

31

Production Planning for Short Life Cycle Products

Its undesirable to make things that do not sell & also not to make things that sell.
Find Probability of Sale
How to find and ?

How much to produce & When

Cannot postpone till demand is known What should be the strategy?

Production Capacity
Speculative & Reactive How to use Speculative?

32

How to solve?
Can the entire production happen after Las Vegas?? Speculative and reactive production capacity
How much?

How to allocate?
33

How to solve?
How to allocate? Product price Demand uncertainty Expected Demand

How to rank the parkas based on risk Risk based production sequencing Make low risk products and postpone the production of high risk products until additional market information is available Grade parkas based on risk
Do it for each variant
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Buying Committee Forecasts

Style Price Avg. Forecast () 1017 1042 1358 2525 2 SD () or SD of actual demand 388 646 496 680 CV

Gail Isis Entice Assault

110 99 80 90

0.3815 0.6200 0.3650 0.2693

Teri
Electra Stephanie

123
173 133

1100
2150 1113

762
807 1048

0.6927
0.3753 0.9416

Seduced
Anita Daphne

73
93 148

4017
3296 2383

1113
2094 1394

0.2770
0.6353 0.5850

20000
35

How to find production numbers for 10,000 units?

Can it be ( -) or i i -k i = Speculative Capacity? How to find the value of k? k = 1.0607 (to make the speculative capacity equal to 10,000)
36

Equally risky recommended quantities

Style Equally Risky quantity (i ki) = Speculative Capacity 606 357 832 1804 Avg. Forecast () 2 SD () CV

Gail Isis Entice Assault

1017 1042 1358 2525

388 646 496 680

0.3815 0.6200 0.3650 0.2693

Teri
Electra Stephanie

292
1295 02

1100
2150 1113

762
807 1048

0.6927
0.3753 0.9416

Seduced
Anita Daphne

2837
1075 905

4017
3296 2383

1113
2094 1394

0.2770
0.6353 0.5850

10,005

20000
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But there are minimum order quantity also?

Find a safety factor for each style Higher the safety factor safer to make it early

38

Creating a safety factor

(Ref. Articles by Fisher et al., 1994)

Safety Factor = Max (-2m, m-, 0)/ Categorize styles into three types
1. 2. Expected Demand is more than twice the minimum order quantity (m), SAFEST Expected Demand is less than the minimum order quantity, MODERATE RISK Expected Demand is less than twice m but more than m. RISKIEST
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3.

Safety Factors
Style
Seduced Assault Electra

for m=600

Equal Risk Q

Safety Factors

Anita
Daphne Entice

Gail
Isis Teri Stephanie

4017 2525 2150 3296 2383 1358 1017 1042 1100 1113

1113 680 807 2094 1394 496 388 646 762 1048

2837 1804 1295 1075 905 832 606 357 292 2

2.530997 1.948529 1.1772 1.000955 0.848637 0.318548 0 0 0 0

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Calculation of production qty.

Starting with the safest style, compute the order quantity using the following formula: Order Qty. = Max [(600, -600-(Min SF )] For example, if we produce only Seduce then Min. SF would be 2.531 If we produce Seduce, Assault and Electra then Min. SF would be 1.177 Total the aggregate quantity, if it has not reached 10,000 then add one more style Repeat this till we get an aggregate total of 10,000 parkas
41

Iteration I
Style Seduced 4,017 1,113 SF 2.53 Min. SF 2.53 Q 601 Total Quantity 601

42

Iteration II
Style Seduced Assault 4,017 2,525 1,113 680 SF 2.53 1.95 1.95 Min. SF Q 1,247 600 1,847 Total Quantity

43

Iteration III
Style Seduced Assault Electra 4,017 2,525 2150 1,113 680 807 SF 2.53 1.95 1.18 1.18 Min. SF Q 2104 1123 600 3827 Total Quantity

44

Iteration IV
Style Seduced Assault Electra 4,017 2,525 2,150 1,113 680 807 SF 2.53 1.95 1.18 Min. SF Q 2304 1245 743 Total Quantity

Anita

3,296

2,094

1.00

1.00

602

4894

45

Iteration V
Style Seduced Assault Electra 4,017 2,525 2,150 1,113 680 807 SF 2.53 1.95 1.18 Min. SF Q 2472 1348 865 Total Quantity

Anita
Daphne

3,296
2383

2,094
1394

1.00
0.8487 0.8487

919
600 6204

46

Iteration VI
Style Seduced Assault Electra 4,017 2,525 2,150 1,113 680 807 SF 2.53 1.95 1.18 Min. SF Q 3063 1709 1293 Total Quantity

Anita
Daphne Entice

3,296
2383 1358

2,094
1394 496

1.00
0.8487 0.318 0.318

2030
1340 600 10,035

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Minimum Production Lot size Constraint

How will the markdowns & stock out vary with production lot
Stock out as a percentage of sales

Minimum order Quantity

But How to REDUCE?

48

Reducing Minimum Lot size by

Postponement Flexible manufacturing systems
GT, CELL DESIGNS etc.

Investment in Technology (sewing technology) Examine why HK min order qty is less than China?
49

Augmenting Reactive Production Capacity How will the markdowns & stock out vary with reactive capacity?
Markdown/ Stock out as a percentage of sales

Reactive Capacity (as a percentage of sales)

But How to AUGMENT?

50

Augmenting Reactive Capacity

Increasing reactive capacity only
Flexible work force, overtime, layoffs Risky in Hong Kong (why?) Subcontractors : Good option?

Total Capacity Augmentation

Increase year round capacity What is the problem? Complimentary products
51

Augmenting Reactive Capacity

Decrease Raw Material and Manufacturing Lead Times
Risk Pooling : Greige Fabric Store fabric that is used by many products Store accessories like zippers Redesign the Product (to minimise varieties)

52

SCM Co-ordination

How should Obermeyer management think short term & long term- about sourcing from Hong Kong vs China? What is the role of Sports Obermeyer & OberSports Manufacturer? Marketer? Designer Co-ordinator? Supply chains work well with lesser intermediaries. So is it necessary to have Obersports?
53

Obersport :The Value proposition

How should we decide on disinter mediation & re-intermediation in a supply chain What is the value of an intermediary
Aggregation Economies Place, Time utility Transaction Cost Analysis

54

Role of Obersport
Is there any value addition by Obersport? How should Obermeyer change its strategies if it is planning to source more from China?

55

Hongkong Vs China
Wage rate Productivity & Line fill rate Worker ability Rejects & quality Minimum order size Throughput Time Surge Capacity WHAT IS THE IDEAL STRATEGY?
56