From a quality standpoint, production in Hong Kong would be ideal considering the repair rate in China is five to ten times greater than it is in Hong Kong. Although the costs of repair are relatively low, Obermeyer is a high quality apparel company, and its customers in all likelihood want durable products. Not only would this keep customers happy in the short term, but it would greatly increase the chance that they would return for more Obermeyer products in the future.
Thinking strategically in the long term, Obermeyer may want to begin training workers in China to bring them to the quality of workers in Hong Kong. Despite the fact that there would be training costs involved, the improvement in long run quality and productivity of the workers would be balanced considering their wage is more than twenty times lower. If these workers were then able to produce faster, Obermeyer could produce fast enough at the low cost and ship product before the import quota is filled.
Since there is an import quota in goods coming from China, it may be more beneficial in the long run to have the first round of orders produced in China before the quota runs out. On that same note, the minimum order quantity in Hong Kong is half that of China, and so there is a less likely chance that Obermeyer would have unsold products at the end of the season. One benefit from a materials procurement standpoint is the fact that six of the nine components needed to produce a parka are manufactured in Hong Kong.
By assembling the parkas in the same country, transportation costs and lead times could be decreased, minimizing the possibility of the bull whip effect for those products. Also, the preparation for manufacturing in China takes longer than in Hong Kong, another benefit to having first round orders produced in China and second round in Hong Kong. One of the major advantages of producing in China is the fact that the total landed cost is less than the cost of production in Hong Kong.
In the example of the Rococo Parka, TLC was $60. 08 in Hong Kong compared to $51. 92 in China, the difference being $8. 16. This number is important to look at relative to the cost of the loss on unsold parkas, which is 9 dollars. This means that the cost of an unsold product produced in China is a mere 84 cents as compared to the full 9 dollars in Hong Kong. Clearly the cost of overproducing in China is far less than in Hong Kong, in fact, it is than 1 percent Obermeyer’s price.
Courtney from Study Moose
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