Sport Obermeyer’s Dilemma
Sport Obermeyer is engaged in maximizing its business practices, which includes a complex multi-national supply chain. Minimum quantities, long lead times, and US import regulations are complicated by multiple suppliers from various countries. Wally Obermeyer is responsible for Sport Obermeyer’s operations. Historically, forecasts were developed on prior experience, intuition, and speculation. The lack of a competent forecast have led to unpurchased ski wear and inventory levels unable to meet demand for popular styles. It is evident Sport Obermeyer needs to update their plan to effectively manage its supply chain to maximize profit.
Sport Obermeyer’s dilemma is to determine how many of each of ten styles should be produced in November and where they should be produced. Sport Obermeyer has been around since the late 1940’s and they must update their strategy to leverage available technology, while marketing to a new strategy that reduces expenses while maximizing profit. Wally concluded from his employee’s recommendations that the demand for a specific style in previous years was twice the standard deviation of the buying committee’s forecast for each style. Wally accepted that he could use this forecast as representation of total expected future demand.
We analyzed average demand (ignoring price differences) and its’ applicable standard deviation (SD). China’s minimum order requirement of 1,200 units per style increases risk of incurring overage costs at the end of the season. Based on the data provided, we recommend that initial production should be placed with the Hong Kong factory. Minimum order of 600 units should be placed for those Parka styles with a higher SD (Anita, Daphne, Seduced, Stephanie and Electra) in order to reduce risks associated with the variability of the forecasted demand. Orders for the remaining styles should be placed based on average forecasted demand.
When conducting analysis to maximize profit, we used a simulation model and applied the minimum order constraints and average forecasted demand for each style without considering the difference in production costs due to location (hourly wages, etc.), we determined it would be more profitable for SO to manufacture the parkas in Hong Kong. Table 1 provides the suggested order quantity per style and the projected profit for each location as compared to the annual average demand forecast.
Table 1
Although ordering from the China factory will produce a higher profit, we are restrained by a minimum order of 1,200 units per style which exceeds some of the parkas annual demand. The order quantity that maximizes total expected profit is not necessarily equal to the average demand. The large minimum quantity per style imposed by the China plant would not be an issue if SO was placing the entire