CASE STUDY - Managing Growth at SportStuff.com
In December 2008, Sanjay Gupta and his management team were busy evaluating the performance at sport Stuff.com over the previous year. Demand had grown by growth, however, was a mixed blessing.
The venture capitalists supporting the company were very pleased with the growth in sales and the resulting increase in revenue. Sanjay and his team, however, could dearly see that costs would grow faster than revenues if demand continued to grow and the supply chain network was not redesigned. They decided to analyze the performance of the current network to see how it could be redesigned to best cope with the rapid growth anticipated over the next three years.
SportStuff.com
Sanjay Gupta founded SportStuff.com in 2004 with a mission of supplying parents with more affordable sports equipment for their children. Parents complained about having to discard expensive skates, skis, jackets, and shoes because children outgrew them rapidly. Sanjay's initial plan was for the company to purchase used equipment and jackets from families and surplus equipment from manufacturers and retailers and sell these over the Internet. The idea was well received in the marketplace, demand grew rapidly, and, by the end of 2004, the company had sales of $0.8 million. By this time, a variety of new and used products were being sold, and the company received significant venture capital support.
In June 2004, Sanjay leased part of a warehouse in the outskirts of St. Louis to manage the large amount of product being sold. Suppliers sent their product to the warehouse. Customer orders were packed and shipped by UPS from there. As demand grew, SportStuff.com leased more space within the warehouse. By 2007, SportStuff.com leased the entire warehouse and orders were being shipped to customers all over the United States. Management divided the United States into six customer zones for planning purposes. Demand from each customer zone in 2007 was as shown in Table 5-15. Sanjay estimated that the next three years would sec a growth rate of about 80 percent per year. after which demand would level off.
The network Options
Sanjay and his management team could sec that they needed more warehouse space to cope with the antici-pated growth. One option was to lease more warehouse space in St. Louis itself. Other options included leasing warehouses all over the country. Leasing a warehouse involved fixed costs based on the size of the warehouse and variable costs that depended on the quantity shipped through the warehouse. Four potential locations for warehouses were identified in Denver, Seattle, Atlanta. and Philadelphia. Leased warehouses could be either small (about 100.000 sq. ft.) or large (200,(X00 sq. ft.). Small warehouses could handle a flow of up to 2 million units per year, whereas large warehouses could handle a flow of up to 4 million units per year. The current ware-house in St. Louis was small. The fixed and variable costs of small and large warehouses in different loca-tions are shown in Table 5-16.
Sanjay estimated that the inventory holding costs at a warehouse (excluding warehouse expense) was about $600 rootF, where F is the number of units flowing through the warehouse per year. This relationship is based on the theoretical observation that the inventory held at a facility (not across the network) is proportional to the square root of the throughput through the facility. As a result, aggregating throughput through a few facili¬ties reduces the inventory held as compared with disag¬gregating throughput through many facilities. Thus, a warehouse handling I million units per ycar incurred an inventory holding cost of $600,000 in the course of the year. If your version of Excel has problems solving thenonlinear objective function, use the following inventory costs:
| Table 5-15 Regional Demand at SportStuff.com for 2007 |
| Zone |
Demand in 2007 |
Zone |
Demand in 2007 |
| Northwest |
320,000 |
Lower Midwest |
220,000 |
| Southwest |
200,000 |
Northeast |
350,000 |
| Upper midwest |
160,000 |
Southeast |
175,000 |
If you can handle only a single linear inventory cost. you should use $475,000Y + 0.165F. For each facility, Y = 1 if the facility is used, 0 otherwise.
| Table 5-16 Fixed and variable costs of Potential Warehouses |
|
|
Small Warehouse |
Large Warehouse |
| Location |
Fixed Cost($/year) |
Variable Cost($/Unit Flow) |
Fixed Cost($/year) |
Variable Cost($/Unit Flow) |
| Seattle |
300,000 |
0.2 |
500,000 |
0.2 |
| Denver |
250,000 |
0.2 |
420,000 |
0.2 |
| St. Louis |
220,000 |
0.2 |
375,000 |
0.2 |
| Atlanta |
220,000 |
0.2 |
375,000 |
0.2 |
| Philadelphia |
240,000 |
0.2 |
400,000 |
0.2 |
SportStuff.com charged a flat fee of $3 per shipment sent to a customer. An average customer order contained four units. SportStuff.com, in turn, contracted with UPS to handle all its outbound shipments. UPS charges were based on both the origin and the destination of the shipment and are shown in Table 5-17. Management estimated that inbound transportation costs for shipments from suppliers were likely to remain unchanged, no matter what warehouse configuration was selected.
Study Questions
1. What is the cost SportStuff.com incurs it all warehouses leased are in St. Louis?
2. What supply chain network configuration do you recommend for SportStuff.com? Why?
3. How would your recommendation change if transportion costs were twice those shown in Table 5-17
| Table 5 -17 UPS Charges per Shipment (Four Units) |
|
|
|
|
Northwest |
Southwest |
Upper midwest |
Lower Midwest |
Northeast |
Southeast |
| Seattle |
$2.00 |
$2.50 |
$3.50 |
$4.00 |
$5.00 |
$5.50 |
| Denver |
$2.50 |
$2.50 |
$2.50 |
$3.00 |
$4.00 |
$4.50 |
| St. Louis |
$3.50 |
$3.50 |
$2.50 |
$2.50 |
$3.00 |
$3.50 |
| Atlanta |
$4.00 |
$4.00 |
$3.00 |
$2.50 |
$3.00 |
$2.50 |
| Philadelphia |
$4.50 |
$5.00 |
$3.00 |
$3.50 |
$2.50 |
$4.00 |