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Sport Obermeyer
The Sport Obermeyer case includes the following facts: The Gail-style parka has wholesale price
$110. Obermeyer earns 24% of wholesale price on each parka it sells, and units left unsold at the
end of the selling season are sold at a loss that averages 8% of the wholesale price. Demand for the
parka is normally distributed with mean 1017 and standard deviation 388.
1. Suppose that Sport Obermeyer is only able to do a single production run, and it does so well in
advance of the selling season (during the case discussion, we referred to it as Obermeyer only having
“speculative capacity”). Suppose Obermeyer produces 1281 of the Gail-style parka. What is
Obermeyer’s expected profit on the Gail-style parka?
2. (a) Suppose that Obermeyer was able to delay making its production decisions until it observed
the actual demand for the Gail-style parka. (This would be the case if Obermeyer had unlimited
short-lead time “reactive capacity.”) What would be Obermeyer’s expected profit on the Gail-style
parka?
(b) What is the value to Sport Obermeyer—measured in terms of increase in expected profit—of
being able to delay production decisions until the actual demand is observed (i.e., of having reactive
capacity instead of speculative capacity) for the Gail-style parka?
HUJI-BagZone
After graduating from HUJI, Sam has set up his own e-commerce venture called HUJI-BagZone.
He sells genuine leather handbags handmade by Italian artisans in Italy. He has been able to
streamline the manufacturing processes, thanks to the Operational skills he learnt in the operations
course. His per unit cost of production (including manufacturing and labor costs) is $100. His
venture is quite new and in a unique space. As such, there is very high uncertainty in the demand.
Sam forecasts the demand to follow a Normal distribution with a mean of 50,000 units and a
standard deviation of 15,000 units. He also decides to sell off any left-over inventories at a steeply
discounted value of $50 in the local market. Sam decides to sell the bags at a unit price of $200.
Now Sam is faced with a difficult question of manufacturing the right quantity of bags that
maximizes the profit in face of uncertainty of demand.
(a) What should be the quantity of the bags manufactured by Sam to maximize profits?
Disappointed by the profits and low production capacity, Sam decides to
• outsource the regular bags from other suppliers; and
• add a GPS unit to the bag to make it into a premium bag.
He contacts two manufacturers, one in China, to whom orders must be placed 3 months in
advance, and the other, local. In case the demand realization is higher than the quantity ordered, he
can source from the local manufacturer at a higher price. The overseas and local manufacturers
charge $100 and $150 respectively, and only supply a regular version of the handbag without GPS
unit included. The cost of manufacturing for both overseas and local manufacturers is $70. After
receiving the bags, he spends another $50 to add the GPS unit and make it into the premium
version. (This can be done just-in-time when the demand arrives). The retail price of the bag is
$335, and any leftovers can be salvaged for a discounted price of ‘80% off’ of the retail price.
Demand of the premium bag is forecasted to be normally distributed with mean of 50,000 and
standard deviation of 15,000.
(b) Calculate the economic consequences of ordering one unit too few and one unit too much from
China (underage and overage costs).
(c) What quantity should HUJI-BagZone source locally on average?
(d) Find the profits of HUJI-BagZone if they order the optimal quantity.
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