Case Study sport obermeyer, Ltd. ASPEN, COLORADO Wally Obermeyer deftly balanced his office keys and a large printout of forecasting data as he wheeled his mountain bike through the front entrance of Sport Obermeyer’ headquarters in Aspen, Colorado. It was a crisp November morning in 1992; Wally paused for just a moment to savor the fresh air and beauty of the surrounding mountains before closing the door behind him. Wally had arrived at work eatly to start one of the ‘most critical tasks Sport Obermeyer, a fashion skiwear manufacturer, faced each yeat—committing to specific production quantities for each skiwear item the com- pany would offer in the coming year’s line. The task required carefully blending analysis, experience, intu- ition, and sheer speculation: This morning Sport Ober- meyer would start to make firm commitments for pro- ducing its 1993-1994 line of fashion skiweat with scant information about how the market would react to the line. In fact, no clear indications had yet emerged about how end-consumers were responding to the company’s ctirrent 1992-1998 line. Despite the attrac- tion of waiting for market information, Wally knew that further procrastination would delay delivery to retailers and that late delivery would reduce the expo- sure consumers would have to Obermeyer products. As usual, Obermeyer’s new line offered strong de- signs, but the ultimate success of the line was highly dependent on how well the company was able to pre~ dict market response to different styles and colors. Feedback from retailers on the 1993-1994 line would not begin to surface until the Las Vegas trade show next March, long after many of Obermeyer's products had entered production. Wally mused: How appropriate that our fate is always determined in Las Vegas. Like most fashion apparel manufacturers, we face a “fashion gamble” each year. Every fall we start ‘manufacturing well in advance of the selling season, knowing full well that market trends may change in the meantime, Good gamblers calculate the odds before putting their money down. Similarly, whether we win or lose the fashion gamble on a particular ski parka depends on how accurately we predict each parka’s salability. Inaccurate forecasts of retailer demand had become a growing problem at Obermeyer: In recent years greater product variety and more intense competition had made accurate predictions increasingly difficult, Two scenarios resulted—both painful. On the one hand, at the end of each season, the company was sad- dled with excess merchandise for those styles and col- ors that retailers had not purchased; styles with the worst selling records were sold at deep discounts, often well below their manufactured cost. On the other hand, the company frequently ran out of its most pop- ular items; although popular products were clearly de- sirable, considerable income was lost each year be- cause of the company’s inability to predict which products would become best-sellers, Wally sat down at his desk and reflected on the re- sults of the day-long “Buying Committee” meeting he had organized the previous day. This year Wally had changed the company’s usual practice of having the committee, which comprised six key Obermeyer man- agers, make production commitments based on the group's consensus. Instead, hoping to gather more complete information, he had asked each member in- dependently to forecast retailer demand for each Ober- meyer product. Now it was up to him to make use of the forecasts generated by the individuals in the group. He winced as he noted the disctepancies be~ tween different commitiee members’ forecasts. How could he best use the results of yesterday's efforts to make appropriate production commitments for the ‘coming year's line? ‘A second issue Wally faced was how to allocate pro- duction between factories in Hong Kong and China. Last year, almost a third of Obermeyer’s parkas had been made in China, all by independent subcontractors in Shenzhuen. This year, the company planned to pro- luce half of its parkas in China, continuing production by subcontractors and starting production in a new plant in Lo Village, Guangdong. Labor costs in China were extremely low, yet Wally had some concerns about the quality and reliability of Chinese operations. He also knew that plants in China typically required larger minimum order quantities than those in Hong Kong and were subject to stringent quota restrictions by the US. government. How should he incorporate all of these differences into a well-founded decision about where to source each product? Professors Janice H. Hammond and Ananth Raman prepated this ease as the basis for class discussion rather than to illustrate either effective or ineffective handling of an administrative situation. Data in the case have been disguised, Copyright © 1994 by the President and Fellows of Harvard College, No part ofthis publication may be reproduced, stored ina relrieval system, used in a spreadsheet, or transmitted in any forrn or by any means—eleetronic, mechanical, photocopying, recording, or olkerwise--without the permission of Harvard Business School, Published with permiscion, 470‘Tsuen Wan, New Territories, Hong Kong Raymond Tse, managing director, Obersport Limited, was anxiously awaiting Sport Obermeyer’s orders for the 1993-1094 line. Once the orders arrived, he would have to translate them quickly into requirements for specific components and then place appropriate com- ponent orders with vendors. Any delay would cause problems: increased pressure on his relationship with vendors, overtime at his or his subcontractors’ facto- ties, or even late delivery to Sport Obermeyer. Obersport Ltd. was a joint venture established in 1985 by Klaus Obermeyer and Raymond Tse to coardi- nate production of Sport Obermeyer products in the Far East. (See Exhibit 1.) Obersport was responsible for fabric and component sourcing for Sport Obermeyer’s entire production in the Far East. The materials were then cut and sewn either in Raymond Tse’s own, “Alpine” factories or in independent subcontractors lo- cated in Hong Kong, Macau, and China, Raymond was owner and president of Alpine Ltd., which included skiwear manufacturing plants in Hong Kong as well as a recently established facility in China. Sport Ober- meyer’s orders represented about 80 percent of Alpine’s annual production volume. Lo Village, Guangdong, China Raymond Tse and his cousin, Shiu Chuen Tse, gazed with pride and delight at the recently completed fac- tory complex. Located amongst a wide expanse of rice paddies at the perimeter of Lo Village, the facility would eventually provide jobs, housing, and recre- ational facilities for more than 300 workers. ‘This facility was Alpine's first direct investment in manufacturing capacity in China. Shiu Chuen had lived in Lo Village all of his life-— the Ise family had fesided there for generations. Ray- mond’s parents, former landowners in the village, had moved to Hong Kong before Raymond was born, re- turning to the village for several years when Raymond was a young boy during the Japanese occupation of Hong Kong in World War II In 1991, Raymond Tse had visited Lo Village for the first time in over 40 years. The villagers were delighted to see him. In addition to their personal joy at seeing Raymond, they hoped to con- vince him to bring some of his wealth and managerial lelent to Lo Village. After discussions with people in the community, Raymond decided to build the factory, so far investing over US61 million in the facility. Working with Alpine's Hong Kong management, Shiu Chuen had hired 200 workers for the factory's first full year of operation. The workers had come from. the local community as well as distant towns in neigh- boring provinces; most had now arrived and were in training in the plant. Shiu Chuen hoped he had planned appropriately for the orders Alpine’s cus- tomers would assign to the plant this year; planning ‘Sport Obermeyer, Lid, 74 had been difficult since demand, worker skill levels, and productivity levels were all hard to predict. SPORT OBERMEYER, LTD. Sport Obermeyer's origins traced back fo 1947, when Klaus Obermeyer emigrated from Germany to the United States and started teaching at the Aspen Ski School. On frigid, snowy days Klaus found many of his students cold and miserable due to the impractical cloth. ing they wore—garments both less protective and less stylish than those skiers wore in his native Germany. During summer months, Klaus began to travel to Germany to find durable, high-performance ski cloth- ing and equipment for his students. An engineer by ‘raining, Klaus also designed and introduced a variety of skiwear and ski equipment products; he was cred- ited with making the first goose-down vest out of an old down comforter, for example, in the 1950s. In the early 1980s, he popularized the “ski brake,” a simple device replacing cumbersome “run-away straps”; the brake kept skis that had fallen off skiers from plunging down the slopes. Over the years, Sport Obermeyer de. veloped into a preeminent competitor in the US. ski- wear market: estimated sales in 1992 were $32.8 mil- lion. The company held a commanding 45 percent share of the children’s skiwear market and 11 percent share of the adult skiwear market. Columbia Sports- Wear was a lower-price, high-volume-per-style com- petitor whose sales had increased rapidly during the previous three years. By 1992 Columbia had captured about 23 percent of the adult ski-jacket market, Obermeyer offered a broad line of fashion ski ap- parel, including parkas, vests, ski suits, shells, ski Pants, sweaters, turtlenecks, and accessories (see Ex- hibit 2 for examples). Patkas were considered the most ctitical design component of a collection; the other gar- ‘ments were fashioned to match their style and color. Obermeyer products were offered in five different “genders”: men’s, women’s, boys’, girls’, and Preschoolers’. The company segmented cach “gender” market according to price, type of skier, and how “fash- ion-forward” the market was. For example, the com- any divided its adult male customers into four types, dubbed Fred, Rex, Biege, and Klausie. A “Fred” was the most conservative of the four types; Freds had a tendency to buy basic styles and colors and were likely ‘to wear the same outfit over multiple seasons, “High- tech” Rex was an affluent, image-conscious skier who liked to sport the latest technologies in fabrics, features, and ski equipment. In contrast, “Biege” was a hard-core mountaineering-type skier who placed technical perfor- mance above all else and shunned any nonfunctional design elements. A “Klausie” was a flamboyant, high- Profile skier or snowboarder who wore the latest styles, often in bright colors such as neon pink or lime green.472 Part Six Case Studies EXHIBIT 1 ‘Map of facilities (Hong Kong and Guangdong). ECONOMIC ZONE “ <) “> a oO ° o Pam ge CHINA ‘SEA 25 50 km eS i) Szuuna special % ew ot