Productivity issues in China

Let us get straight to the point. Sport Obermeyer, a fashion skiwear manufacturer wants to make more money. The recommendations suggested by us are simple and will go a long way in helping the company realizing its goals. This report tackles four broad issues that are faced by Sport Obermeyer, the issues are:  Production planning for their short life cycle products.

  Operational changes to reduce costs of mismatched supply and demand. Coordination issues in their global supply chain. Production in Hong Kong vs. China Each of the issues mentioned above have been dealt with individually and the recommendations are explained in the report.After a careful study of the problem we have concluded that the main troublesome area to be considered is the Production planning stage. We have suggested an entirely new Planning and Production Cycle that is streamlined and more responsive to customer moods. This involves a three-stage production cycle as opposed to a two-stage one.

The recommendations in this report are based on Qualitative analysis as we think that if the basics are done right, the numbers will fall into place. Introduction Sport Obermeyer is a fashion skiwear manufacturer based in Aspen, Colorado.Their products are manufactured in facilities in Hong Kong and China. Obersport, a joint venture between Sport Obermeyer and a Chinese businessman, is responsible for fabrics and component sourcing for Sport Obermeyer. Sport Obermeyer has suppliers spread all over the world and thus has a global Supply Chain. Sport Obermeyer wants to increase profits by accurately forecasting customer demand and accordingly adjusting the production cycle.

This report recommends some operation, strategic and tactical changes that will help Sport Obermeyer to achieve its means.Our descriptions of the problems faced by Sport Obermeyer are listed in the next section along with recommendations to solve them or to improve the process. The recommendations are explained with the help of figures wherever possible. The revised Production and Planning cycle is shown in the appendix.

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Problem Description and Recommendations In this section of the report, we list out the problems that we have identified and also suggest recommendations to overcome them. As mentioned earlier, the major problem that we are trying to solve is the Production Cycle.The other issues that arise as a result of that have also been taken care of. We think that the planning and production cycle is not efficient enough. There is almost two years of planning before the products are actually sold which still results in uncertainty.

We recommend a three-stage production process as opposed to the existing two-stage one. The recommended planning and production cycle is shown in Table 1 in the appendix. The first stage will occur from Nov’92 thru Feb’93 and will be based on a combination of past historical data and forecasts by the management of Sport Obermeyer and some important retailers.What we mean by that is that the styles with least risk involved will be produced in this stage. Also the forecasts will not just be limited to within Sport Obermeyer but will involve the retailers as well as they are the link that interacts with the customers. Around 25% of the products will be manufactured in this stage. The second stage will occur from Mar’93 thru Jun’93 or after the Las Vegas show when the demand is more certain. This stage will produce 60% of all products.

This is a relatively low-risk production stage, as the retailer orders are already known.The third stage is the new stage that we have recommended. It is this stage that uses Sport Obermeyer’s reactive capacity to its full extent and will balance the uncertainty and result in increased profits. This stage occurs from Oct’93 thru Nov’93. This is just before the peak selling period starts and after one month of the retail selling period. Hence, the demand will be almost 100% certain at this stage.

This stage will produce the remaining 15% of all products and these will exclusively be those that are selling like hot cakes.The products in this stage will be shipped by air to reach the retailers in time. The comparison of the existing and the recommended Production Schedules are displayed in Graph 1. This three-stage production process will result in the reactive capacity rising to 75%. As seen in Graph 2, the markdown costs will fall to around 2. 5% of the sales if the reactive capacity is around 75%. Compare this with the 7. 5% markdown costs when the reactive capacity is 25%.

This three-phased production strategy involves a risk-based production planning strategy in the first two stages.The individual products are divided into three categories. They are: Category 1: Styles for which expected demand is more than twice the minimum order quantity- Produced in the 1st stage Category 2: Styles for which expected demand is less than the minimum order quantity- Produced in the 1st and 2nd stage Category 3: Styles for which expected demand is less than twice the minimum order quantity and more than the minimum order quantity – Produced in the 2nd and 3rd stage. We have a bold recommendation for the peak selling period.The retailers can observe the sales for the three months prior to the peak period and can offer slight discounts on designs not selling very well. This will ensure that the designs sell and are not sold at heavily marked-down prices at the end of the season.

In addition to this, in order to reduce the losses due to markdown costs, the unsold parkas can be either sold in the southern hemisphere during the winter there or can be saved for less fashionable places for next year, where the buyers would not mind sacrificing fashion for quality.The location of the production operations assumes increased importance in this three-stage scenario. We have recommended a production distribution in such a manner that the bulk of the production is carried out in China, as the costs are cheaper. In the first production stage, the entire production is carried out in China. The reason for this shift towards HK in the third stage is because the workers are faster and are better trained. Also the minimum order quantities are lesser.

This policy will result in approximately 60% of all orders being produced in China and 40% in Hong Kong. This distribution while keeping costs down also falls within the import quota restrictions as Sport Obermeyer can import its share of products from China before its competitors use up the quota. Some of the processes can also be automated in the factories.

This will involve a lot of investment, but it would be beneficial in the long run as the production time would decrease.We also think that the productivity of the plants in China can be increased in a couple of ways. The Chinese factories employ 40 workers/line compared to Hong Kong’s 10-12 workers/line. If the Chinese workers are cross-trained to do more than one task, then lesser workers can be used in a line.

This will free up more workers for other tasks. Collaboration in Obermeyer’s Supply Chain Another factor that can influence the production planning is the minimum order quantities. The minimum order quantity for a style was 1200 units in China and 600 units in Hong Kong.This proves to be a hindrance in effective planning and can be improved favorably by forging Strategic Alliances with the production plants. As shown in Graph 2, if the minimum order quantities can be brought down to around 300 units, the markdown costs reduce to 5. 15% of the sales. This is a big savings when compared to the 6.

4% of markdown costs when the minimum order quantity is 1200 units. Increased collaboration within the supply chain and the partners understanding each other’s needs and respecting their limitations will definitely result in more profits across the chain.

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