Obermeyer Case Study

Sports Obermeyer case study.

Assignement 1

Using the sample data given in Exhibit 10, make a recommendation for how many units

of each style Wally Obermeyer should order during the initial phase of production.

Assume that all ten styles in the sample problem are made in Hong Kong and that

Obermeyer's initial production commitment must be at least 10,000 units. Ignore price

differences among styles in your initial analysis.

Obermeyer's supply chain

The Obermeyer case is a complex one because this company has to deal with uncertain demand and its main challenge is to have accurate forecasts for the following season. Why is it so complex? First, most retail sales of skiwear occur between September and January, with peak sales in December and January. Second, the production line is long. It takes one year and a half for Obermeyer to bring new products to the market. So this means that some garments are sold two years after the design process. Everyone knows that the fashion industry is always changing and such lead time isn't good.

Fortunately, Obermeyer already tried to bridge this problem thanks to two main decisions. On the one hand, Obermeyer decided to outsource most of its outerwear products through Obersport. This latter started to produce greige fabric in order to cope with the long lead time. On the other hand, Obermeyer divided his production in two. The first production phase, the most uncertain one, is decided by the Buying Committee. Members from this committee try to predict the demand and launch the production so that ski garments can be shown at the Las Vegas show. The second production phase takes place after the Las Vegas trade show. Indeed, most retailers place their orders after this event and Obermeyer usually receives 80% of its annual volume at that time. The second production phase will be thus more accurate thanks to these orders. This underlines the importance of showing relevant products in Las Vegas and of forecasting the good trend.

Determining the optimal order quantities

To determine the optimal order quantities, I'll use the newsvendor model. Indeed, this model is used when there is an uncertain demand and a zero initial inventory which is the case here. However, I decided to use the second extension of the Newsvendor model: the multiple planning periods. In fact, I suppose that the Obermeyer company will lose the customer if he is not satisfied. It is true that there is normally one period (the initial production phase) but we can consider multiple periods if we consider the different seasons. In this point of view, there is thus a huge importance of seducing the customers in the trade show and of satisfying them in order to keep them.

The goal is to determine the value of the decision variable that minimizes the expected value of the total cost. The decision variable will be "Q" which corresponds to the number of units of each style Wally Obermeyer should order during the initial phase of production. The model is composed by two cost contributions. First, the holding cost/overage cost ( c_o) which is the cost per unit remaining at the end of the season. In this case, parkas that are unsold at the end of the season are sold at a loss that averaged 8% of the wholesale price : 8%($112,50)=$9. Second, the shortage cost/underage cost ( c_u) which is the cost per unit short at the end of the season. If there is a shortage in the parkas, there will be a lost profit ( S_price-c) and a backordering or a penality cost (p). The lost profit is equal to the selling price minus the cost or to the margin = $27. However I could not find the value of p and so I arbitrarily chose the margin as value of backordering cost.

Now that we have defined