Implications of sourcing from Hong Kong versus China?

In order to decide which styles to produce in Hong Kong and China, initially we do a risk
assessment for all the styles with respect to their average forecast. To analyze the risk
associated with each style, we benchmark coefficient of variation as 0.2. Any style that
falls below 0.2 is considered to be low risk and those greater than 0.2 are considered as
high risk items. Low risk items would be produced in China and high risk items would be
produces in Hong Kong as they have skilled workforce, efficiency and minimum production
requirements.
a. In the initial phase, for the lower risk styles, 80% of the forecasted quantity should
be ordered first as the forecast is accurate and remaining 20% will be ordered after
Las Vegas show. The high risk styles can be produced in Hong Kong as the Hong
Kong workers are more skilled, produce quality items and also minimum production
requirement is 600 units as compared to 1200 units in china. As the maximum
demand to be met here is 20,000 (10% of Obermeyers total demand), the styles
with less than 1200 units requirement must be produced in Hong Kong.

b. Sourcing all products from Hong Kong

At Hong Kong the minimum production quantity is 600 units per style. As the maximum
demand here is 20,000 (10% of Obermeyers actual demand), the order quantities are
adjusted so that it meets the plants MOQ. Hence for the styles Daphne, Isis, Teri and
Stephanie the initial order quantity is raised to 600 and their 2 nd order quantity is the
remaining forecasted demand.

c. Sourcing all products from China

At China the minimum production quantity is 1200 units per style and this requires Entice,
Gail, Daphne, Isis, Anita, teri and Stephanie to raise their order quantity in the first order.
The second order quantity is the remaining forecasted demand. This makes the total units
produced 20,529 units which is greater than the maximum demand of 20,000 units. From
the initial assessment when sourcing from China, four styles need to be ordered in excess
of the average forecast in order to meet minimum production quantity.

Where to Produce from:

1. We recommend to produce higher risk styles (Daphne, Isis, Anita, Teri and
Stephanie) in Hong Kong because it has trained workers, efficiency and minimum
production quantities. This is also beneficial because a majority of the higher risk
lines require smaller total quantity orders which Hong Kong is better able to produce
as compared to China. (600 versus 1,200 units minimum production quantity
respectively).
2. The MOQ makes Gail (low risk) style to be produced in Hong Kong as it has less than
1200 units. But as its COV is low and less risky, production in China made sense at
first assessment. However the minimum production quantity in China exceeds the
avg. forecast for Gail. Hence five high risk items and one low risk item should be
produced at the Hong Kong plant. The remaining low risk items should be produced
at the China plant which includes Assault, Seduced, Entice and Electra. This makes
the total quantity ordered for the first order to 12,026 units and second order
quantity at 7974 units. This meets the total demand of maximum of 20,000 units. At
this point in time, the quantity ordered for the first order will remain constant per
the average forecast. However, the second order quantities will fluctuate after
orders are placed following the Las Vegas trade show.

3. Although the maximum demand is 20,000 as set by Wally, the production capacity
is 21,000 units for the production period (30,000 x 7 months). Hence extra quantity
of Gail could be produced without having to cut into production of other styles.
Cost produce at Hong Kong is $60.08 whereas for China it is $51.92.
The cost difference between Hong Kong and China for producing 1017 units is
$8296.
Sourcing Gail from China would require 183 units more than the forecasted demand.
However the cost savings of producing them in China outweigh the cost of selling
the excess at an 8% loss.

4. In order to adhere to Wallys 20,000 units of maximum demand, Gail can be

produced in Hong Kong. But in reality the company has total production capacity of
210,000 parkas, hence it is more cost efficient to overproduce from China in cases
such as Gail.