Sport Obermeyer Essay
Sport Obermeyer is a fashion ski-wear manufacturer, with a 45 percent share of the children’s skiwear market and an 11 percent share of the adult skiwear market in 1992. It offers a broad line of fashion ski apparel, including parkas, vests, ski suits, shells, ski pants, sweaters, turtlenecks, and accessories. The parkas are the most critical design component of a collection – the other garments were fashioned to match their style and colour (Hammond and Raman, 1994). Within Fisher’s (1997, 2006) framework, Obermeyer would be classified under innovative product. Innovative products have relatively high margins, very few substitutes, if any, shorter lead-times from suppliers, frequent stock-out situations, drastic markdowns to clear excess inventory, and a highly unstable and unpredictable demand pattern. Examples of innovative products are fashion apparel like ski parkas, Beanie Babies, Furbies, and Pokemon toys – all of which last for as long as the craze lasts (Fisher, 1997; Reddy, 2000; Yücesan Van Wassenhove, 2002).
In contrast, functional products are commodities that have predictable and stable demand patterns, such as toothpaste and light bulbs. These products have many substitutes and usually offer low margins for the retailer, long lead-times to order from suppliers, rare stock-out options, and typically insignificant price markdown (unless it is part of a pricing promotion). Cost and quality primarily drive supply-design for functional products, focusing towards reducing costs. Inventory build-ups at any point in the supply are not supposed to occur (Fisher, 1997; Reddy, 2000).
Pursuant to Fisher’s (1997) framework, innovative-product supply chains should focus toward supplying products with minimal lead-times. This focus on lead times lets retailers respond better to spikes in demand, minimize forced markdowns and avoid obsolete inventory costs (Reddy, 2000).Obermeyer’s styles are very fashion-forward and change every year (Fisher, 2006). These products are deemed innovative since there is no historical scanner data existing to help project future sales, like in the case of functional products (Reddy, 2000). In the case of Obermeyer, even though the firm decided to commit to producing its 1993-1994 line of fashion skiwear, it actually had very little information about how the market would react to the line.
Feedback would come only in March 1993 after the Las Vegas trade show, long after many of its products entered production. Production after all would start November the previous year (1992) and would continue until September 1993 when it was slated to be shipped to the company’s retailers in DC in Denver (Hammond and Raman, 1994; Fisher, 2006). Even though Obermeyer wanted to establish a specific production quantity for each skiwear item for its 1993-1994 line, they did not even have any clear indications about how end-consumers actually responded to their current 1992-1993 line. By the time September 1993 rolls along – as what the company has been experiencing every year during fall – Obermeyer constantly has to risk a “fashion gamble” since they start manufacturing in advance of the selling season, despite knowing that market trends may change in the meantime (Hammond and Raman, 1994).
This advanced manufacturing period of Obermeyer is a very dangerous risk the company undertakes since it does not help them manage or better predict unstable market demands. Manufacturing in Obermeyer requires a long lead-time which does not account for market changes that may occur prior to shipment to its retailers. Unlike functional products, where the demand is predictable, market mediation is relatively easy and a good match can be more easily achieved between product specification and market needs. Companies producing functional products are able to mainly focus on minimizing physical costs within the supply chain in order to meet demand at the lowest cost, creating a physically efficient process.
On the other hand, however, companies like Obermeyer, which offers innovative products, should be able to respond to uncertain market reaction to innovation – such as new designs. In Obermeyer’s case their designs change every year, and such innovation multiplies the risk and possible costs of shortages or excess supplies. Since market mediation dominates costs for innovative products such as Obermeyer, they should be given priority. It is also vital that Obermeyer acquires information about its marketplace in order to become as responsive as possible (Gullberg and Lundvall, 2003; Porter, 1985).As reflected in the case study, this lack of information due to inaccurate forecasts always lead to the same two-fold dilemma for Obermeyer. First, the company experienced excess merchandise for styles and colours that retailers had not purchased every year.
Inaccurate forecasts of retailer demand, partly due to greater product variety and more intense competition, lead to increasingly difficult accurate predictions. Styles with worst selling records were sold at deep discounts, often well below manufacture costs. Second, the company frequently ran out of its most popular items, which although clearly desirable, resulted in considerable income loss each year because of the company’s inability to predict which products would become best-sellers (Hammond and Raman, 1994).In addition, Wally Obermeyer also has to deal with two issues: 1) making sense of the discrepancies between the individual “Buying Committee” member’s forecasts so that he could make more appropriate production commitments for the coming year’s line; and 2) how to allocate production between factories in Hong Kong and China.
Since the company planned to produce half of its parkas in China, where labour costs were lower, there were there other factors to consider – such as concerns about quality and reliability of Chinese operations, and larger minimum order quantity requirements and more stringent US quota restrictions in China plants (Hammond and Raman, 1994). The problem with moving their operations to the China plants is that in doing so, Obermeyer actually follows an efficient supply chain strategy, and in fact their operations show elements of functional supply chain management – longer production lead-times, high set-up costs, and larger batch sizes – which is ironic considering theirs is an innovative product. Longer production lead-times, high set-up costs, and larger batch sizes – all factors that the company has been experiencing and will continue to experience once they re-allocate their operations in China – will allow an efficient firm to produce at a low unit cost, but often at the expense of market responsiveness. This may not be an issue with a company selling functional products, wherein market response is not a primary element since demand patterns are more stable, but for an innovative product this may be fatal. As an innovative product company, Obermeyer needs to shift towards a responsive supply chain which will allow for short production lead-times, low set-up costs, and small batch sizes to allow it to respond more quickly to differing market demands (Randall, Morgan, and Morton, 2003).
Even though this will most likely result in higher unit cost, the company will at least save up cost on its excess merchandise and unsold products.In addition, an arm’s-length transaction relationship among supply-chain partners may be sufficient for functional product supply chains, but for innovative product supply chains such as Obermeyer’s also requires a close, trusting relationship among the supply chain partners – whether in DC or in China – to work, and often involve partners in product development activities (Reddy, 2000; Bensaou, 1999; Ross, 1997). One recommendation for shortening lead-time in Obermeyer, which is mainly due to a long fabric dyer lead-time which lasts for several months (the company can predict total annual sales and sales of basic colours but cannot predict fashion colours), would be to offer dyer one year commitment on greige goods and capacity, and to dye basic colours early during the year and fashion colours late in the season to adjust to market demands and fashion trends on few days notice (Fisher, 2006). Not only will this shorten lead-time, but it will also improve commitment among the partners in the supply chain.
Thus, the Obermeyer case study shows that the company displays all the classic characteristics of an innovative product as defined by Fisher (2006) – high cost of lost sale, high risk of obsolescence, low forecast accuracy, high product variety and short product life cycle. Clearly, Obermeyer also suffers from ineffective supply chain management, which is defined by the Global Supply Chain Forum as “the integration of business processes from end-user through original suppliers that provides products, services, and information that add value for customers” (Lambert and Ellram, 1998, p. 504). It involves forming a strategic partnership between retailers and suppliers, to ensure positive effects on the overall performance of the supply chain, with activity integration as one of its major elements (Cavinato, 1991; Kotzab and Schnedlitz, 1999; Alvarado and Kotzab, 2001). Following the recommendations by Fisher on appropriate supply strategies for innovative products such as Obermeyer’s, the company has to adapt to become more market responsive rather physically efficient (which is more appropriate for functional products). To become more market responsive, the company needs its factory focus to zero in on maintaining buffer capacity, and its lead-time focus is to aggressively shorten lead-time in order to minimize the risk of varying market demands during their manufacturing stage.
It supplier selection should also consider speed and flexibility, and its product-design strategy should be more modular in order to enable postponed differentiation (Fisher, 2006; Stock and Lambert, 2001)).Fisher suggests the two types of supply chains – functional and innovative – to help an organization determine an appropriate supply-chain design to support varying demand patterns and in explaining mismatches between product attributes and supply-chain design (Reddy, 2000). Obermeyer should focus their supply strategy on the very innovative quality of their product, and should in fact keep in mind when they develop their supply strategy that they are marketing an innovative product, not a functional one.