Obermeyer Case Study: Forecasting Future Demand with Limited Uncertainty
Obermeyer Case Study
Considering all the factors estimated in the case, the current problems are how to forecast the future demand with limited uncertainty as well as would that be too risky if increasing production in China due to China’s larger minimum order requirement and intense trade relationship with US. To solve those problems, we can first lay out what information and conditions we have:
The minimum order quantity is 600 in Hong Kong and 1200 in China. The average cost of producing in Hong Kong and China is $60.08 and $51.92 respectively. The expected profit is 24% of wholesale price and unsold item with expected loss 8% of wholesale price. For example, the average forecast of Electra Parka is with mean 2150 and standard deviation 807.
So we have underage cost for Electra Parka is 173*0.24=$41.52 and overage cost $13.84 Therefore F(q)=41.52/(41.52+13.84)=0.75. Since the demand is D forecast is D~N(2150, 807^2). This gives Z~0.68. Therefore the optimal order of quantity is 2150+807*0.68=2698. Considering for all ten styles, given the Q*=mean+z*std, we will have the following table:
AverageForecast
Std
2*Std
Optimal Order
Gail
1017
194
388
1162.5
Isis
1042
323
646
1284.25
Entice
1358
248
496
1544
Assault
2525
340
680
2780
Teri
1100
381
762
1385.75
Electra
2150
404
808
2453
Stephanie
1113
524
1048
1506
Seduced
4017
556
1112
4434
Anita
3296
1047
2094
4081.25
Daphne
2383
697
1394
2905.75
Total Order
20001
23536.5
Therefore the total optimal order of ordering would be 23536.
So given this minimum order of quantity, we would be able to calculate the total cost under each scenario. If producing in Hong Kong, then we can order 40*600=24000 units optimally. On the other hand, if producing in China, we can order 20*1200=24000 units optimally. Therefore from this point of views, the minimum order of quantity has a lesser impact on total cost. In addition, producing in China has greater
Considering all the factors estimated in the case, the current problems are how to forecast the future demand with limited uncertainty as well as would that be too risky if increasing production in China due to China’s larger minimum order requirement and intense trade relationship with US. To solve those problems, we can first lay out what information and conditions we have:
The minimum order quantity is 600 in Hong Kong and 1200 in China. The average cost of producing in Hong Kong and China is $60.08 and $51.92 respectively. The expected profit is 24% of wholesale price and unsold item with expected loss 8% of wholesale price. For example, the average forecast of Electra Parka is with mean 2150 and standard deviation 807.
So we have underage cost for Electra Parka is 173*0.24=$41.52 and overage cost $13.84 Therefore F(q)=41.52/(41.52+13.84)=0.75. Since the demand is D forecast is D~N(2150, 807^2). This gives Z~0.68. Therefore the optimal order of quantity is 2150+807*0.68=2698. Considering for all ten styles, given the Q*=mean+z*std, we will have the following table:
AverageForecast
Std
2*Std
Optimal Order
Gail
1017
194
388
1162.5
Isis
1042
323
646
1284.25
Entice
1358
248
496
1544
Assault
2525
340
680
2780
Teri
1100
381
762
1385.75
Electra
2150
404
808
2453
Stephanie
1113
524
1048
1506
Seduced
4017
556
1112
4434
Anita
3296
1047
2094
4081.25
Daphne
2383
697
1394
2905.75
Total Order
20001
23536.5
Therefore the total optimal order of ordering would be 23536.
So given this minimum order of quantity, we would be able to calculate the total cost under each scenario. If producing in Hong Kong, then we can order 40*600=24000 units optimally. On the other hand, if producing in China, we can order 20*1200=24000 units optimally. Therefore from this point of views, the minimum order of quantity has a lesser impact on total cost. In addition, producing in China has greater