Can you come up with a measure of risk associated with your ordering policy? This measure should be quantifiable.
One of the best measures of the risk associated with the ordering policy in this case would be Coefficient of Variation (CV). CV is the ratio of the standard deviation to the expected mean. It shows us the volatility and the variation in the data per unit of mean. However, in the context of this case the CV would be defined as the volatility of each of the types of different styles of Parkas per unit of that style. It would determine the variability of the demand or the ordering policy risk. The higher the volatility, the more certain and accurate the company would have to be to determine the demand for the coming seasons of 1993-1994.
The case states that around 80% of the retailers of the company would be placing their orders in the second phase of the Las Vegas trade show. The CV has been computed for all the different parkas as shown in exhibit 2 and we can see that Isis, Teri, Stephanie, Anita and Daphne are those styles that have the maximum volatility (risk) within their forecasted demand. Therefore, the future capacity for all of these products should be reserved by the company because they have higher degree of deviation. If the demand increases in future years, which is more likely to happen, then the company will have safety stock to meet that demand.
Repeat your methodology and assume now that all 10 styles are made in China. What is the difference (if any) between the two initial production commitments?
The minimum production quantity for the different types of the Parkas is 1200 units in China and 600 units in Hong Kong. Therefore, to analyze the above scenario we have adjusted the EOQs for each style of the parka produced in Hong Kong for all such orders, which have a value of less than 600 units. Similarly, for the China factory the company has adjusted all the EOQ’s of each product to increase their size to minimum 1200 units. We can now see that there is a difference in the EOQ of the two countries as shown in exhibit 3 in appendices and there are a number of reasons for this difference.
First, the workers in Honk Kong are paid higher wages and they are more skillful. Their efficiency in production methods is also much higher as compared to the workers in China. The wage rates in China are too low, which could affect their morale. This is the reason due to which the order quantities in Hong Kong are muchlower than in China. Apart from this, based on the risk based production sequence, Sport Obermeyer should focus on producing those products in its initial phase, which have lower volatility. After the first phase is over, the company should analyze how the retailers respond and then a new forecast should be prepared in phase 2 to accommodate to the reactive production capacity of the retailers………………………..
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