3. case-sports obermeyer
TRANSCRIPT
1
How to deal with products having highly uncertain
demand pattern and short product life cycle?
2
Functional vs Innovative Products ?
3
Cost of lost sale
Risk of obsolescence
Forecast accuracy
Product variety
Product life cycle
High
Low
Low
Low
High
High
High
Low
ShortLong
Functional Innovative
Products differ
4
And supply strategies differ
Factory focus
Inventory Strategy
Lead-time focus
Supplier selection
Product-design strategy
Low cost preferred over short lead-time
High utilization
High turns
Low cost
Maintain buffer capacity
Significant buffer stocks of components and FGs
Speed & flexibility
Aggressively shorten lead-time
Modular to enable postponed differentiation
Integral for max performance at min cost
Physically efficient
Market responsive
5
match
matchmismatch
mismatch
Life cycle > 2 yearsGross Margin < 35%Low Product Variety
Functional Products
Life cycle < 1 yearGross Margin > 35%High Product Variety
Innovative ProductsR
esp
on
sive
S
up
ply
Ch
ain
Eff
icie
nt
Su
pp
ly C
hai
n
Supply predictable demand efficiently at lowest cost
Respond quickly to unpredictable demand to minimize stockouts, markdowns, and obsolete inventory
Need to match supply strategy with product type
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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
7
Sport ObermeyerA 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
8
A page from Sport
Obermeyer’s product catalog
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Next year’s catalog
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Obermeyer’s styles are fashion-forward and change every year
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Factories in China and Hong Kong
DC in Denver
800 Ski Retailers
The Obermeyer supply chain stretches from Asia to Aspen
12
Obermeyer’s planning calendar (For
targeted season of Sept, 09-Jan, 10)
• 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: August-September, 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
13
Problems at Obermeyer• Long Product Development Cycle
• Inaccurate Forecasts
• High Stock outs as well as high mark downs
• Hong Kong vs. China
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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
15
Which parka family sold best?
Black Voodoo sold 4000
Sold 4
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Initial forecasts are highly inaccurate …
but improve dramatically with just a little sales data
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Sample buying committee projections: Which product is more predictable?
Gail
Isis
Laura Carolyn
Greg Wendy Tom Wally Average
Std. Dev.
900
800
1000 900 1300 800 1200 1017 194
700 1000 1600 950 1200 1042 323
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How to think about supply chain improvementProduct
Availability
Responsive Supply Chain
Inventory
Accurate Forecasts
How does product availability drive revenue?
Optimize cost of lost margin, carrying and obsolescence
Track & improve the accuracy of forecasts that drive decisions e.g. parts lead time demand
Create a framework for inventory efficiency e.g. common parts, short lead times, efficient small lot production
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• 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
???
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What is the solution?
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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
22
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
23
Lead time reduction
• 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 can’t 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
Fabric Producer
Fabric Dyer
Cut/Sew Factory
Denver Warehouse
Retailer
undyed goodsSport Obermeyer
Asia
Consumer
24
Revised planning calendar
25
Desk top tool run by user
Factories in China
DC in Denver
800 Ski Retailers
Product Sketches
Forecast Committee
Forecasts
Order 50% in November (For
Dec, Jan)
Order 50% in April (For Sept,
Oct, Nov)
Retailers order in
Feb & April
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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.
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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 committee’s forecast for that style
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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?)
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Risk based production
• What is risk?– How to quantify risk?
• How to predict what people will buy?
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How to quantify risk? • Standard Deviation and Co-efficient of
Variation• Expected profit value
– 0.24 P *pi +0.08 P* (1-pi)
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Similarity with “Newspaper boy problem”?
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Production Planning for Short Life Cycle Products
It’s undesirable to make things that do not sell & also not to make things that sell….– Find Probability of Sale
• How to find µ and σ?
• How much to produce & When– Cannot postpone till demand is known– What should be the strategy?
• Production Capacity– Speculative & Reactive– How to use Speculative?
µ
33
How to solve?• Can the entire production happen
after Las Vegas??
• Speculative and reactive production capacity– How much?
• How to allocate?
34
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
35
Buying Committee Forecasts
Style Price Avg. Forecast (µ)
2 × SD (σ) or SD of actual demand
CV
Gail 110 1017 388 0.3815
Isis 99 1042 646 0.6200
Entice 80 1358 496 0.3650
Assault 90 2525 680 0.2693
Teri 123 1100 762 0.6927
Electra 173 2150 807 0.3753
Stephanie 133 1113 1048 0.9416
Seduced 73 4017 1113 0.2770
Anita 93 3296 2094 0.6353
Daphne 148 2383 1394 0.5850
20000
36
How to find production numbers for 10,000 units?
Can it be Σ (µ -σ)
or
Σi µi -k σi = Speculative Capacity?
How to find the value of k?
k = 1.0607 (to make the speculative capacity equal to 10,000)
37
Equally risky recommended quantities Style Equally Risky
quantity (µi –kσi) = Speculative Capacity
Avg. Forecast (µ)
2 × SD (σ) CV
Gail 606 1017 388 0.3815
Isis 357 1042 646 0.6200
Entice 832 1358 496 0.3650
Assault 1804 2525 680 0.2693
Teri 292 1100 762 0.6927
Electra 1295 2150 807 0.3753
Stephanie 02 1113 1048 0.9416
Seduced 2837 4017 1113 0.2770
Anita 1075 3296 2094 0.6353
Daphne 905 2383 1394 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
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Creating a safety factor (Ref. Articles by Fisher et al., 1994)
Safety Factor = Max (µ-2m, m-µ, 0)/ σ
Categorize styles into three types1. Expected Demand is more than twice the minimum
order quantity (m), SAFEST
2. Expected Demand is less than the minimum order quantity, MODERATE RISK
3. Expected Demand is less than twice m but more than m. RISKIEST
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Safety Factors for m=600
Style µ σ Equal Risk Q
Safety Factors
Seduced 4017 1113 2837 2.530997
Assault 2525 680 1804 1.948529
Electra 2150 807 1295 1.1772
Anita 3296 2094 1075 1.000955
Daphne 2383 1394 905 0.848637
Entice 1358 496 832 0.318548
Gail 1017 388 606 0
Isis 1042 646 357 0
Teri 1100 762 292 0
Stephanie 1113 1048 2 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, µ-600-(Min SF × σ)]
• 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
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Iteration I Style µ σ SF Min. SF Q Total
Quantity
Seduced 4,017 1,113 2.53 2.53 601 601
43
Iteration II Style µ σ SF Min. SF Q Total
Quantity
Seduced 4,017 1,113 2.53 1,247
Assault 2,525 680 1.95 1.95 600 1,847
44
Iteration III Style µ σ SF Min. SF Q Total
Quantity
Seduced 4,017 1,113 2.53 2104
Assault 2,525 680 1.95 1123
Electra 2150 807 1.18 1.18 600 3827
45
Iteration IV Style µ σ SF Min. SF Q Total
Quantity
Seduced 4,017 1,113 2.53 2304
Assault 2,525 680 1.95 1245
Electra 2,150 807 1.18 743
Anita 3,296 2,094 1.00 1.00 602 4894
46
Iteration V Style µ σ SF Min. SF Q Total
Quantity
Seduced 4,017 1,113 2.53 2472
Assault 2,525 680 1.95 1348
Electra 2,150 807 1.18 865
Anita 3,296 2,094 1.00 919
Daphne 2383 1394 0.8487 0.8487 600 6204
47
Iteration VI Style µ σ SF Min. SF Q Total
Quantity
Seduced 4,017 1,113 2.53 3063
Assault 2,525 680 1.95 1709
Electra 2,150 807 1.18 1293
Anita 3,296 2,094 1.00 2030
Daphne 2383 1394 0.8487 1340
Entice 1358 496 0.318 0.318 600 10,035
48But How to REDUCE?
Minimum Production Lot size Constraint
• How will the markdowns & stock out vary with production lot
Minimum order Quantity
Sto
ck o
ut
as a
per
cen
tage
of
sale
s
49
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?
50But How to AUGMENT?
Augmenting Reactive Production Capacity
• How will the markdowns & stock out vary with reactive capacity?
Reactive Capacity (as a percentage of sales)
Mar
kd
own
/ Sto
ck o
ut
as a
per
cen
tage
of
sale
s
51
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
52
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)
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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?
54
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
•
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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?
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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?