CSCMP ACADEMIC CASE STUDY SERIES

Case studies can supplement a course and be used to teach application of supply chain management concepts to real-world situations. Others can use the case studies to learn about supply chain challenges and to analyze the situation to develop solutions.

Expanding Warehouse Operations at Goodwill Industries

An Academic Learning Case Study written for the Council of Supply Chain Management Professionals

Prepared by:

Anthony Ross, PhD

Professor of SCM and Rockwell Automation Endowed Chair Director, Supply Chain Management Institute

Sheldon B. Lubar School of Business

University of Wisconsin-Milwaukee

Mark Kosfeld, MBA

Associate Director, Supply Chain Management Institute Sheldon B. Lubar School of Business

University of Wisconsin-Milwaukee

Council of Supply Chain Management Professionals

333 East Butterfield Road, Suite 140

Lombard, Illinois 60148 USA

+1 630.574.0985 | education@cscmp.org | cscmp.org

Expanding Warehouse Operations at Goodwill Industries

Steve Burns hung up the phone. Boy, that was another rough one, he muttered to himself. He had just ended a conference call with Jason Makowski, the District VP, who was not happy to learn that two more temporary storage facilities were added to the distribution system during the last month. That brings to seven the total number of temporary storage facilities currently in use. This is in addition to the main company warehouse that Steve Burns oversees.

Steve turned in his chair to look out his second floor office window overlooking the warehouse floor and stared at the piles of inventory that were staged in his facility. It was Spring Cleaning time in Wisconsin and donations were through the roof, quite literally. Jason doesnt want to incur the additional expense for the two additional storage locations. I get it, but where am I supposed to go with all this merchandise? Steve thought to himself. Then come winter, this place is going to be a ghost town and the stores are going to be screaming for product. But what should he do? Jason would be driving down tomorrow from the district office to the warehouse for another of his 7am morning meetings.

Steve knew that donations were significantly lower in the winter months than during the spring months (see Figure 1). Donations typically begin to ramp up in March and peak in May and June. Donation volumes also experience a secondary peak in November and December with the approaching end-of-year deadline for qualifying IRS tax deductions for donations to charitable organizations.

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Expanding Warehouse Operations at Goodwill Industries

Figure 1: Average Monthly Data for Goodwill Industries

INDUSTRY BACKGROUND

The used merchandise sector is a multibillion-dollar industry. It is comprised of large and small enterprises operating as either niche retailers specializing in specific categories of items, or as general merchandise-type retailers. The industry origins date back to the late 19th Century when faith-based charities began collecting, repairing and re-selling used items to needy families at very low price points. There were only a very few organizations providing such services and the focus was on supporting their faith-based missions. The industry was relatively small, quiet and unknown until the post-war 1950s industrialization period in the US when retailing took on a new meaning to American consumers. Used merchandise stores generally found appeal among working-class to upper-middle income households. By the 1980s, status-conscious consumers began consigning and donating their used items to used merchandise retailers (UMRs). During the 1990s, environmentally-conscious consumers turned to recycling and this boosted interest and consumption of recycled or used merchandise including vintage clothing. During the 2000s, new resale shops were opening in direct response to industry growth of 5% annually. By 2004,

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Expanding Warehouse Operations at Goodwill Industries

employment-level was up 12.3% over the year 2000 level of 114,000 workers employed. The used merchandise business, a recession-proof branch of the retail industry, continued the growth spurt that began in the early 2000s when UMR retail spending reached $17 Billion by 2013 as total US retail sector spending approached $4 trillion (see Figure 2). In 2008, the National Association of Resale and Thrift Shops (NARTS) reported more than 25,000 resale, consignment, and thrift stores across the USA of a total 55,000+ total retail establishments. The macro economic uncertainty of the 2010s brought the same trends with people buying more during economic expansion and less during recessionary periods as shown in Figures 2 and 3 for the recessionary periods of 92-93, 01-02, and 08-09.

Figure 2: Used Merchandise Store Sales ($ Billions)

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Expanding Warehouse Operations at Goodwill Industries

Figure 3: Total Retail Sales 1992-2013 (excl. autos)

4,500 4,000 3,500 3,000 2,500 2,000 1,500 1,000

500 -

Sales

Year

Many consumers enjoy shopping at used merchandise stores because of the 50-80% savings off the cost of similar goods in new condition. Profit margins for these retailers used goods are surprisingly higher than for new goods they might sell. The supply chains in the UMR sector also differ from the traditional retail supply chain in that the customers can often times be the suppliers of re-saleable merchandise. This presents a unique symbiotic opportunity for these UMR companies to convert customers into donors and donors into customers. The industry is relatively fragmented and specialized into the clothing and household goods sub-lines with companies like Salvation Army, and Goodwill Industries accepting items in both categories. By comparison, UMRs such as Play-it-Again Sports only accept high-end used sports equipment; Once Upon a Child only accepts gently-used baby items; MusicGoRound only accepts used musical instruments and related sound equipment and systems; Habitat For Humanity through its related company Restore accepts functioning household appliances, repairable furniture,

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1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

Billion US dollars

Expanding Warehouse Operations at Goodwill Industries

construction equipment and supplies. Given this fragmentation of the sector, some stores closed during the 2009 economic crisis. However, growth in sales for the remaining stores exceeded 70% in 2009. As a result, employment needs began to trend upward (See Figure 4).

Figure 4: Used Merchandise Retail Sector Employment and Payroll Data

GOODWILL INDUSTRIES BACKGROUND

Goodwill was founded in 1902 in Boston by Rev. Edgar J. Helms, a Methodist minister and early social innovator. Helms collected used household goods and clothing in wealthier areas of the city, then hired and trained those who were poor to mend and repair the used goods. The goods were then resold or were given to the people who repaired them. The system worked, and the Goodwill philosophy of a hand up, not a hand out was born. Dr. Helms vision set an early course for what today has become a $4 Billion nonprofit organization. Helms described Goodwill Industries as an industrial program as well as a social service enterprise...a provider of employment, training and rehabilitation for people of limited employability, and a source of temporary assistance for individuals whose resources were depleted.

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Expanding Warehouse Operations at Goodwill Industries

Goodwills network of 165 independent, community-based Goodwill divisions in the United States and Canada offers customized training and services for individuals who want to find a job, pursue a credential or degree, and strengthen their finances. Each local division must be accredited, apply for membership and meet certain criteria established by Goodwill Industries International (GII). The division headquartered in southeast Wisconsin covers some 30 counties in the state plus several other counties extending south into and west of Chicago, Illinois. It is the largest independently-operated division in the GII system (www.goodwill.org/about-us/).

THE DISTRIBUTION AND INVENTORY PROBLEM

Steve Burns arrived the following day to find Jasons crimson Mercedes parked beside the warehouse and in Steves assigned space. In their meeting that morning they discussed the facility space issues. Jason majored in finance while a college, but he recalled a supply chain class he had taken. During the logistics segment of the course he was exposed to methods for locating facilities. One of them was the center of gravity method (COG). Unable to remember the specifics of this method, the previous day he had contacted his former professor who provided the attached template. Steve added the latitude and longitude coordinates of the 54 stores and $2.31/mile fully-burdened transportation rate he was incurring to provide delivery service support to the stores. Therefore, distances and costs between each store and proposed location could be estimated. Jason also recalled a conversation with his professor that the center of gravity method assumes straight line distances between warehouses and stores so a factor of 1.21 is commonly used to estimate true road distances traveled between two locations.

All 54 Goodwill stores also act as donation centers. If each store achieved its required donation volume target then no distribution center would be necessary. But, since some stores receive excess donations and other stores receive an insufficient amount of donations, the distribution center becomes a cost-effective means to rebalance the donated merchandise across the system. To minimize transportation expense, donations are first sold locally. Stores receiving more donations that they can make available for sale on the selling floor route this merchandise to the distribution center for sale at a store in need of merchandise.

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Expanding Warehouse Operations at Goodwill Industries

Donations received from local citizens are placed in a large, reusable containers (gaylords) which are then stored in the back room of each store. When inventory on the sales floor runs low, the store manager decides how many gaylords should be produced. Producing a gaylord at Goodwill requires back room associates to search/sort/select the items in the gaylord that should be ticketed and moved to the selling floor. Since this is used merchandise, product condition varies greatly and a number of judgement calls are made when selecting which items make it to the selling floor. Unlike a traditional retail supply chain where the value of the merchandise is known when its ordered from the supplier, Goodwill doesnt know the value of its merchandise until each Gaylord is produced. This what is the value of our inventory? question is something company executives wrestle with on a daily basis. Historical averages are used to estimate the value of the gaylords in inventory at each Goodwill store, but these averages are affected by the judgement calls that take place at each store. For example, during lean donation periods of the year a store manager may direct the associates to be more aggressive with producing merchandise. This means that more items from each gaylord will be ticketed and made available for sale, thus increasing the value of the gaylord. The opposite may also happen during heavy donation periods when only the best donations are produced, thus decreasing the value of the gaylord.

Despite its recognized drawbacks, Goodwill uses the historical average value of a Gaylord to estimate the value of its inventory. But, even then not every item that is produced will be sold. Thus, Goodwill also tracks sellable donations. These are the items that were produced and bought by a customer. The ratio between the sellable donations and production is the sell-thru percentage. In Wisconsin, Goodwill Industrys retail stores experience a 55% sell-thru rate as depicted by the dotted line in Figure 5. Its the value of donations after accounting for the sell-thru rate that should be compared to the sales plan. Donations received in the April-June timeframe are stored to be used to support sales the following January-March. This creates the inventory problem Steve and Jason are facing. When and at what rate should they begin building inventory stocks, and how much of the inventory should be stored?

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Expanding Warehouse Operations at Goodwill Industries

Figure 5 Average Monthly Data Accounting for Sell-thru

The Racine Distribution Center (RDC) that Steve Burns is in charge of has 44,000 square feet of storage space and supports the 54 stores in the Southeast Wisconsin and Chicago region (see Figure 6) with an annual operating cost of $936,000. The seven leased facilities total 70,000 square feet of additional storage space and Steve Burns estimates the costs incurred for the additional space plus transportation between these facilities and the RDC is $560,000 annually. Although Goodwill Industries is an international organization, there is no integration of supply operations across the divisions since they act as separate companies in their respective non- compete regions. Within each division, stores not only generate revenue from the sale of donated products, but also accept donations from individuals and select for-profit retailers. The accompanying data file reports the average monthly sales and donation volumes for all 54 retail stores in the region.

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Expanding Warehouse Operations at Goodwill Industries

Figure 6 Map of Goodwill Industries Warehouse and Stores

One option Jason and Steve considered in their meeting is the expansion of the RDC. Steve Burns received three estimates from local construction companies to expand the facility and the most favorable estimate would expand the facility by 30,000 square feet at a cost of $2.2 million. Although each construction company submitted a different design for expansion, all three companies showed that a 30,000 square-foot in-place expansion was the maximum available at the current RDC location. The RDC annual operating costs would increase about $200,000, but Steve would be able to exit four of the seven facilities leasing contracts saving $260,000 annually.

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Expanding Warehouse Operations at Goodwill Industries

A second option under consideration is to build a second distribution facility. A second facility would reduce Goodwills transportation expense, but the capital expenditure facility cost incurred for the entire year may be more expensive than just leasing space. Goodwill estimates construction costs for a new facility to be $5 million with annual operating costs of $600,000. The company uses a 20-year life for depreciation of building construction projects. Annual operating costs at the RDC are expected to drop to $500,000 if a second facility is built.

Locating facilities with fixed and variable cost structures and inventory requirements is common in many sectors such as food, clothing and agricultural products where goods are distributed to downstream retail locations. But what differs with Goodwill, is that the ratio of sales (demand) to citizens donations (supply) varies by store meaning that three types of stores exist: those with a surplus of donations, those with approximately the same amount of donations and sales (Goodwill calls these stores self-sustaining), and those with donation volumes less than sales volumes. Excess donations from some stores are brought to the RDC and then redistributed to the stores that are short of donations. As shown in the sales and donations data file, even though Goodwill, on the whole, receives more donations than sales during the spring months of April through June, several stores (such as store #s 15 and 32) receive fewer donations (after accounting for the 55% sell-thru) than sales during this same time period. The same is true of the winter months of January through March when the company experiences higher sales than donations (again, accounting for sell-thru) at Stores 4 and 25, for example. Thus, an analysis at a store level is needed to fully understand the network.

Goodwills retail stocking policy is to allow merchandise to spend a maximum of four weeks on the sales floor. If the donated item doesnt sell after four weeks, it is sent back (pulled- back) to the warehouse. At this point, Steve Burns has a decision to make. The unsold merchandise can be sent (pushed-out) to a different store in an attempt to still generate revenue from the item. The average selling price for an item sold in its first four weeks on the selling floor is $4.03. Donated items that are pulled-back and then pushed-out to a different store have an average selling price of $2.27. The company goal is to maintain a minimum of $3 million worth of

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Expanding Warehouse Operations at Goodwill Industries

donations at any time during the year. This equates to about one weeks worth of supply and at times re-routing unsold merchandise to a different store is necessary to maintain this minimum level of inventory in the system. The other option available to Steve is to sell the item to the secondary market. The secondary market is a set of companies that buys excess stock items and then sells these items in developing countries. The secondary-market companies pay roughly $0.28 per item.

During their morning meeting Jason also challenged Steve to formulate a quarterly inventory strategy. We keep leasing space to hold the excess donations received, but do we need all this product to support the sales plan? Jason questioned as he pointed to the piles of inventory outside Steves office. He pulled out the quarterly sales plan for the next four quarters (Figure 7). I need you to hold the appropriate amount of inventory each quarter to support this sales plan. Dont jeopardize our sales next winter, but I dont need you to incur excessive cost to do so either. Without a quarterly inventory plan, we wont know what to hold and what we can or should sell to the secondary market.

Figure 7 Goodwill Quarterly Sales Plan

Quarter

Q2: Apr-Jun (current) Q3: Jul-Sep

Q4: Oct-Dec

Q1: Jan-Mar

Sales Plan (millions) $22.6

$25.2

$25.7

$22.8

As Jason got in his vehicle and drove away, Steve knew he had both a facility and inventory problem to solve. The plan needs to be created soon because another five truckloads of donations just arrived from the stores that morning and Steves staff is asking where they should put it.

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Expanding Warehouse Operations at Goodwill Industries

Questions:

1. Characterize Goodwills business model. Compare and contrast Goodwills business model with that of its competitors.

2. Recommend a facility strategy for Goodwill. What are the annual transportation and facility costs Goodwill is incurring with its current strategy? Should Goodwill expand the RDC, build a second facility or continue with the current leasing strategy? If Goodwill were to build a second permanent distribution center, where should it be located? Which stores should be assigned to the RDC and which ones should be assigned to the new distribution center? What would be the annual transportation cost and facility cost?

3. What other issues/factors must Steve and Jason should consider besides transportation and warehouse costs when making the decision for question 2?

4. Develop a quarterly inventory strategy for Steve. What is the recommended level of inventory to hold each quarter (be sure to consider holding inventory for the following quarter(s) if sales are projected to be greater than sellable donations)? How should this inventory level be achieved each quarter? Assume the company had the bare minimum $3 million of inventory entering the current Q2 quarter.

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