Assessment $1-$ Part B$-$ Case Study$-2-$ Managing Growth at Y & Co$.$

In December $2008,$ Mr$.$ Thomson and his management team were busy in evaluating the performance at Y & co$.$ over the previous year. Demand had grown by $80$ percent. This 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. Thomson and his team, however, could clearly 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.

Y & Co$.$

Thomson founded Y &Co$.$ 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. Thomson$$s initial plan was for the company to purchase used equipment and

Jackets from families and any 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\mathrm{.}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 $2004,$ Thomson leased part of a warehouse in the outskirts of St$.$ Louis to manage a 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, Y & Co$.$ leased more space within the warehouse. By $2007,$ Y & Co$.$ 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. The demand from each customer zone in $2007$ was as shown in Table $1.$ Thomson estimated that the next three years would see a growth rate of about $80$ percent per year, after which demand would level off.

Table $1$: Regional Demand at Y & Co$.$ 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 $175,000$

The Network Options

Thomson and his management team could see that they needed more warehouse space to cope with the anticipated 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, warehouses. Leased could be either small $($about $100,000$ sq$.$ ft$.)$ or large $(200,000$ 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 warehouse in St$.$ Louis was small. The fixed and variable costs of small and large warehouses in different locations are shown in Table $2.$

Thomson estimated that the inventory holding costs at a warehouse $($excluding warehouse expense$)$ was $$475,000$Y $+0\mathrm{.}165$F$.$ where F is the number of units flowing through the warehouse per year. For each facility, Y$=1$ if the facility is used, $0$ otherwise.

Y & Co$.$ charged a flat fee of $$3$ per shipment sent to a customer. An average customer order contained four units. Y & Co$.$ 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 $3.$

Table $2$: 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

$300,000$

$0\mathrm{.}20$

$500,000$

$0\mathrm{.}20$

Denver

$250,000$

$0\mathrm{.}20$

$420,000$

$0\mathrm{.}20$

St$.$ Louis

$220,000$

$0\mathrm{.}20$

$375,000$

$0\mathrm{.}20$

Atlanta

$220,000$

$0\mathrm{.}20$

$375,000$

$0\mathrm{.}20$

Philadelphia

$240,000$

$0\mathrm{.}20$

$400,000$

$0\mathrm{.}20$

Management estimated that inbound transportation costs for shipments from suppliers were likely to remain unchanged, no matter what warehouse configuration was selected.

Table $3$: UPS Charges per Shipment $($Four Units$)$

Northwest

Southwest

Upper Midwest

Lower Midwest

Northeast

Southeast

Seattle

$$2\mathrm{.}00$

$$2\mathrm{.}50$

$$3\mathrm{.}50$

$$4\mathrm{.}00$

$$5\mathrm{.}00$

$$5\mathrm{.}50$

Denver

$$2\mathrm{.}50$

$$2\mathrm{.}50$

$$2\mathrm{.}50$

$$3\mathrm{.}00$

$$4\mathrm{.}00$

$$4\mathrm{.}50$

St$.$ Luis

$$3\mathrm{.}50$

$$3\mathrm{.}50$

$$2\mathrm{.}50$

$$2\mathrm{.}50$

$$3\mathrm{.}00$

$$3\mathrm{.}50$

Atlanta

$$4.$