Michael Gilkenson, Farida Jariwala, Sara Rogovin, Fabio Romero, Eric Timm Agenda Obermeyer Sports: The Company Challenges Inventory Management and Risk Pooling Potential Solutions History Klaus Obermeyer emigrated from Germany to Aspen, Colorado in 1947 He began teaching at the Aspen Ski School when he realized that many of his students were poorly supplied to handle the cold weather
His response was to begin producing functional, stylish ski clothing with his wife, Nome History In 1961, the first Sport Obermeyer factory warehouse opened in Aspen
Sports Obermeyer came with innovations such as soft-shell jackets, double lens goggles, and the first waterproof- breathable fabrics
Customers of Sport Obermeyer are mostly retail stores in urban areas, retail stores near ski resorts, large department stores like Nordstrom, and mail retailers like REI
Industry Over the years, Sport Obermeyer developed into a main competitor in the U.S. skiwear market In 1992 Sport Obermeyer owned 45 percent of the childrens skiwear market and 11 percent of the adults skiwear market
Styles Obermeyer products were divided into different genders: mens, womens, boys, girls, and preschoolers Within each gender Obermeyer classified their customers according to: Price Type of skier How fashion forward the market was The company targeted the middle to high end of the skiwear market, and designed the majority of their products exclusively for use while skiing Skiing is a celebration of life Klaus Obermeyer Oct 92 Sample Production Nov 92 1 st production order placed Mar 93 Las Vegas Show for 93-94 season Apr 93 - Jul 93 Additional orders received. Dec 93 Feb 94 Replenishment orders received Production Timeline Feb 92 Design process begins Mar 92 Las Vegas Show for 92-93 season May 92 Final concept Jul 92 Obersport receives sketches Aug 92 Prototype production Sep 92 Final designs Prototype Production Sample and Full Scale Production Agenda Obermeyer Sports: The Company Challenges Inventory Management and Risk Pooling Potential Solutions Challenges Poor Forecasting Under producing popular items Over producing unpopular items Long lead times on products Supply Chain: Understanding tradeoffs between China and Hong Kong Key differences Decrease supplier base Too many parka shell designs?
Poor Forecasts Obermeyer Forecasts When over-forecasted leftover parkas were sold at a loss that averaged 8% of wholesale price.
Impact of Lead Times on Inventory Sport Obermeyer has 4-month lead time from order point to delivery Use single period inventory model No reorder point so forecasting is more vital Advantages of reducing lead times
CHINA OR HONG KONG?
Supply Chain: Understanding tradeoffs between China and Hong Kong
China Benefits: lower wage rates Disadvantages: slower production, number of workers required, line instability, strict quota restrictions Hong Kong Benefits: shorter production lines, faster assembly, less required workers, ability to produce smaller quantities quicker Disadvantages: High wage rates
Supply Chain: Understanding tradeoffs between China and Hong Kong
Discussion Question 1 How should Wally think (both short-term and long-term) about sourcing in Hong Kong vs. China? What kind of sourcing policy do you recommend? Decrease Supplier Base Ex: Griege Shell Fabric comes from 7 different locations USA, Switzerland, Germany, Austria, Taiwan, Korea, Japan
Results of Decreasing the Number of Suppliers 1. Benefit: Decrease lead times increase speed of production 2. Challenge: suppliers going out of business Increased risk, not as diversified supplier base Lose Money Completely stop production Lose clients/retailers
Too Many Parka Shell Designs? Pride themself in broad range of styles/prints Attracts consumers Raises profits and reputation Produce specialties Decrease shell designs Advantage: Reduce the number of suppliers Lower lead times Faster, more even production Disadvantage: Lower customer base
Agenda Obermeyer Sports: The Company Challenges Inventory Management and Risk Pooling Potential Solutions Challenges of Forecasting The three rules of forecasting 1. The forecast is always wrong. 2. The longer the forecast horizon, the worse the forecast. 3. Aggregate forecasts are more accurate. Methods of Forecasting Time series Use past behavior to predict future behavior Causal Demand as a function of economy, weather, etc. Risk pooling Offsets demand variability Market research
Discussion Question 2 If you were working with Wally which forecasting method(s) would you recommend using to eliminate under/over forecasting? Service Level vs. Inventory Investment Tradeoff Effective Inventory Management Policy Sport Obermeyer uses forecasting to determine how much to produce Currently using a single period model Similar to newsvendor problem
Strengths -High-quality products -Wide variety of products leads to high adaptability market fluctuations Weaknesses -Poorly-structured supply chain -High lead times -Poor forecasting methods Opportunities -Expansion into non-North American markets -Technological advancements in forecasting software -Technological advancements in manufacturing processes Threats -Tariffs and sanctions imposed on international commerce -Competitors offering goods of same quality at lower price -Operate in a niche, luxury industry Agenda Obermeyer Sports: The Company Challenges Inventory Management and Risk Pooling Potential Solutions Obermeyer vs. Competition Obermeyer 11% market share for adult ski wear Create styles of quality clothing focused on durable, high- performance ski clothing Columbia 23% market share for adult ski wear Produce lower-price, high-volume-per-style
1992-1993 Initial Strategy Forecast demand using a model with 10% of actual demand Commit half of production in November and second half in March Variation in demand much lower where Buying Committee had similar forecasts
1992-1993 Initial Strategy Poll individuals of Buying Committee Large variation between individual forecasts Delphi Method Compile and summarize individuals forecasts Poll individuals again after seeing results Iterate until consensus
Discussion Question 3 What ideas do you have on how to improve Wallys forecasting and inventory management issues? Electronic Inventory Tracking System Track Sports Obermeyers Sales Data Maximize Sports Obermeyers Profits Air Deliver Parkas from Hong Kong $47.42 Profit Per Parka that would not be made otherwise. Expand into South America Maximize profits on popular products An additional season to sell Minimize downside risk Sell remaining inventory of unpopular North American products at wholesale Decrease Sample Production Reduce time in design phase Use graphics in web design as replacement for physical samples Sample making process would be reduced by 30-40 days Earlier full-scale production Use of cost effective suppliers for initial product supply Allow Wally to accomplish goal of 50% production through China Actual Response Used computerized system to slash time for order processing Pre-positioned raw materials Held sneak preview of upcoming line Kept everything undifferentiated Encouraged same types of raw materials
Results The Changes Wally made in the following years led to an increase in profits by 50%, and thus a 50% increase in profit margin to 36% No. 1 Customer Rating Over-production decreased from 25,000 to 22,000 Under-production decreased from 7,500 to 800 Compared to Columbia who has an average profit margin across all products of 4.15%, Obermeyer Sport
Total Industry The U.S. snow sports retail brought in $3.3 billion in the 2010-11 season, a $3 million increase from the 2007-08 Snow sports sales increased 8% in units and 12% in dollars Leaner inventories, like Sport Obermeyers revised inventory/forecasting model, allowed prices to continue to grow Final inventories were 19% leaner Equipment prices 10% higher Season finished with retail margins: up 10% for equipment 10% for accessories 4% for apparel goods sold