Beginning as a single retail store in 1995, ChipSupreme (Chips) has grown to $50 million in annual revenues today. Chips was the brainchild of four entrepreneurial women who wanted to offer baked goods incorporating chocolate chips in both traditional and innovative ways. Traditional products include chocolate chip cookies, chocolate chip pie, and various types of cakes and muffins including chocolate chips. Innovative products include chocolate chip soft pretzels and chocolate chip bread. Chips also offers custom-designed versions of all of its products.

When Chips was a single store operation, all baking was done at the store as was all warehousing for finished products and raw material components. Today, with 30 retail stores, Chips utilizes a single bakery that produces all items that are normally stocked in the stores. Customization of these items (e.g., different colored icing or personalized writing) is still performed at each store. Chips owns and operates two distribution centers that are used to hold and ship different products to each store based on their demand and/or forecast. Picking is done manually because of the small package sizes and small quantities ordered by the stores. Items such as chocolate chip cookies come in 24-count packs and muffins come in 6-count packs. Stores typically do not order in full case quantities of any item, so most picking is broken case. Most shipments are small parcel or LTL based on these small order quantities and small package sizes.

Tami Barnes, manager of store operations for Chips, recently called a meeting with the other three founders to discuss expansion plans. "We've established ourselves well in our existing market areas and have very little competition," explained Tami. "I think it's time we investigate the expansion of our operations onto the Internet. I've seen what other bakery companies like Famous Amos Cookies have done using the Web, and I think we can break into that market." Beth Bower, manager of transportation and warehousing, was quick to respond. "Tami, we are already at capacity with our existing warehouses and shipping small units to households will drive our transportation costs through the roof." Teresa Lehman, manager of baking operations, was also skeptical of the idea. "I agree with Beth. Our bakery is currently running two shifts per day right now. Expanding our market using the Internet will really put a squeeze on our baking capacity, especially if you want to expand the product line." However, Janie Jones, chief financial officer, thought the idea had its merits. "Our growth has leveled off over the past few years. Our balance sheet is in good shape and we have a good line of credit. We really need to think about new markets to spur our growth. The Internet seems to be a natural fit for our products."

The four women continued to discuss how and if Chips should develop a Web site to sell to individual consumers over the Internet. Beth did agree that Chips certainly has the expertise at picking individual units and shipping by UPS. Teresa acknowledged that as long as the company maintained its current product offering in the short run, the bakery could take on some additional volume. Tami added that because the products sold in stores require no temperature control to maintain their freshness, selling them on the Internet would not cause any additional transportation or warehousing challenges. Tami also suggested that to compete in the on-line market, Chips should be willing to offer free shipping.

After a lengthy discussion, the four women agreed that the Internet was an endeavor worthy of consideration. Tami and Teresa were tasked to investigate which existing products and which potential new products should be offered on their Web site. Janie was given the challenge of determining price points for the Web site. And, finally, Beth was asked to determine the feasibility of offering free shipping to Internet consumers.

Answer the two case questions below - Upload to appropriate drop-box by Sunday midnight

1. You have been hired to design the distribution network for Chips that will allow itto operate in both the "brick-and-mortar" and "click-and-mortar" markets. Your recommendations should address both the start-up of the Web operations as well as its ongoing operations. Chips has asked you to determine the following:

• The pros and cons of using an integrated versus a dedicated network;
• Whether or not the Internet warehousing and/or the store warehousing should be outsourced;
• The feasibility of using store fulfillment or flow-through fulfillment to complement warehouse fulfillment; and
• The mechanics of implementing a "free shipping" policy.

2. You have also been asked to investigate the pros and cons of using an established Internet fulfillment house not only to host the Chips Web site but also to house the inventory and perform the shipping. Companies like Amazon perform these services for other companies. What would your recommendation be for using a company like Amazon to run Chips' online business?