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Analysis of Issues

To address the two major issues, the application will be illustrated using the current
problem faced by the company in deciding what to send to the manufactures for the
first production run for 10 styles of womens parkas. The forecast by the committee
presents the estimate by 6 members on the potential demand which totals up to
20,000 parkas. The requirement for the first production order is 10,000parkas. First,
the quantity for each style needs to be decided upon. The deciding factor given the
current situation should be to minimize the risk of overproducing. Overproducing as
stated earlier resulted in a salvage value that comes at loss of about 8% of the
wholesale price. Essentially minimizing the risk of overproducing is also minimizing
the risk of making a loss. Assuming normal distribution in the demand forecast, the
approach taken is through the use of the formula: (average demand forecast +
standard deviation*k) which essentially aims to reduce overproduction. The average
demand forecast is the simple average of the 6 individual member estimates and
the standard deviation used is twice of the standard deviation based on 6 individual
members past experience. The k value is a variable that will be adjusted for all
styles in order to establish the minimum order requirement of 10,000 and basically
denotes the no. of standard deviations to the left of demand. The higher the k value
means less the risk of overproducing. The model will also favor products that exhibit
low coefficient of variation.

Referring to the appendix, Table 1


Illustrates the quantity for each style utilizing the highest k value of 1.0607 that can
be achieved without any limitations on where to produce. Assuming no limitations,
the chance of overproducing any product is about 15%.
In Table 2, we look at the production solely in Hong Kong where the minimum
requirement is 600. Notice the k value is now 0.9675 instead of 1.0607. This was
expected because any product before that was less than 600 implied that it should
not be made in the first production order and instead should be deferred to the
second production order when better data can be obtained. For Hong Kong alone,
the chance of overproducing is 17%.
Table 3, Presents the production quantity if made only in China. Here the minimum
requirement is 1200 which is twice the requirement of Hong Kong. Here is the k
value is 0.717 or 24% chance of overproducing.
In deciding how to allocate production between the two locations, the aim is still to
minimize the chance of overproducing but also take into account that 50% of the
parkas will be made in China and the other50% in Hong Kong.

Table 4, Presents the possible breakdown. The quantities follow the same figures
obtained from table 2 when producing in Hong Kong alone. The reason is Hong Kong
has the highest k value and enough quantity falls above 1200 to allocate to China.
In fact, there are 4 styles that fall above1200 which makes them eligible to be
produced in China. The allocation was based simply on quantity due to lack of data
on each style specifically. This same procedure can be scaled to the other lines to
determine the order quantity.

Recommendations:
The following are major recommendations that Sport Obermeyer should implement:
Long term actions can be taken in order to better address the major issues at hand.
First is addressing the long lead time of suppliers which is causing the company to
have to hold more raw materials inventory. To reduce the lead time would require
working with the supplier. Either share information in order for supplier to better
forecast your needs and/or encourage supplier to increase the frequency of delivery.
Instead of waiting until the whole order is completed and then shipped to the
manufacturer, shipping could occur after x% is completed. This reduces inventory
holding cost for both sides (partly offsetting the higher transportation cost). To
further incentive this action of frequent delivery is by providing more business to
fewer suppliers through consolidation or through a joint venture of opening a new
plant close to the manufacturer. The shorter lead time would allow full scale
production to occur earlier which also means products in China can be shipped out
earlier thus reducing the chance of having to ship by airplane due to quota
restriction. The issue of minimal feedback from the market can be addressed by
taking actions to obtain demand figures earlier.
Instead of having to wait until the Las Vegas Show in March which is several months
after having to send in the first production order, the company should invite its
largest clients that account for 80% of their revenue for an early view of the
upcoming product line. This will be an all paid expense by the company to bring
them all for a single day event. While this does cost the company, the gains from
getting early commitment from their clients will help eliminate if not significantly
minimize the chances of overproducing. Addressing the long lead time and minimal
feedback ultimately addresses the demand uncertainty.
Finally for the issue of production planning which has partially been addressed with
the obtaining demand figures earlier, an additional long term initiative is to
negotiate lower minimum order quantities with the manufacturers. As illustrated in
the tables, lower order quantities means less risk for the company and also
improves the flexibility during reactive production like replenishment orders in
December to February. This would require working with the manufacturers to reduce
their changeover times or designing the product with the focus on utilizing as many
shared components as possible to reduce the need for changeover.

5) Hong Kong Vs. China

Long-term sourcing to China for cost benefits but not sourcing entirely to China due
to quota restrictions in US and the low labour productivity
Short-term increased demand for specific SKU should be sourced to Hong Kong for
timely delivery and lower minimum order quantity
Sourcing policy:
Continue sourcing in both China and Hong Kong with more focus on China for cost
benefits, sourcing more
Demand SKUs to Hong Kong for timely delivery.