MANAGING GROWTH AT SPORTSTUFF.COM (Source: Adapted from Chopra & Meindl (2016), pp. 151-152) At the end...

Transcribed Image Text:

MANAGING GROWTH AT SPORTSTUFF.COM (Source: Adapted from Chopra & Meindl (2016), pp. 151-152) At the end of 2017, Sanjay Gupta and his management team were busy evaluating the performance at SportStuff.com over the previous year. Total demand had grown by 50 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. Sanjay 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. SPORTSTUFF.COM Sanjay Gupta founded SportStuff.com in 2014 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 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 2014, 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 2014, 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 2017, SportStuff.com leased the entire warehouse and some storage space from the spot market (which was more expensive and not sustainable) to cater for the demand. Orders were being shipped to customers all over the United States from St. Louis. Management divided the United States into six customer zones for planning purposes. Demand from each customer zone in 2017 was as shown in Table 1. Sanjay estimated that the next four years would see a growth rate of about 50 percent per year, after which demand would level off. Table 1: Regional Demand at Sportstuff.com in 2017 Zone Northwest Southwest Upper Midwest Demand in 2017 350,000 220,000 170,000 230,000 360,000 Lower Midwest Northeast Southeast THE NETWORK OPTIONS 185,000 Sanjay 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 varied with 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 1 million units per year, whereas large warehouses could handle a flow of up to 2 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. 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 Denver St. Louis 320,000 0.25 510,000 0.25 260,000 0.25 430,000 0.25 230,000 0.25 380,000 0.25 Atlanta 230,000 0.25 380,000 0.25 Philadelphia 250,000 0.25 400,000 0.25 Sanjay estimated that the inventory holding costs at a warehouse (excluding warehouse expense) was about $650 VF, 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 facilities reduces the inventory held as compared with disaggregating throughput through many facilities. Thus, a warehouse handling 1million units per year incurred an inventory holding cost of $650,000 in the year. If your version of Excel Solver has problem solving non-linear objective function, you may use the following inventory holding costs: Range of F Inventory Cost 0-2 million units $250,000Y+0.330F $530,000Y+0.190F $678,000Y+0.155F 2-4 million units 4-6 million units Over 6 million units $798,000Y+0.125F If you can handle only a single linear inventory cost, you may use $475,000Y + 0.175F. For each facility, Y= 1 if the facility is used, 0 otherwise. SportStuff.com charged a flat fee of $3.5 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 3. 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 $2.50 $3.00 $4.00 $4.50 $5.50 $6.00 Denver $3.00 $3.00 $3.00 $3.50 $4.50 $5.00 St. Louis $4.50 $4.50 $3.50 $3.50 $4.00 $3.00 Atlanta $4.00 $4.00 $4.00 $3.00 $3.50 $4.00 Philadelphia $5.00 $5.50 $3.50 $4.00 $3.00 $4.50 MANAGING GROWTH AT SPORTSTUFF.COM (Source: Adapted from Chopra & Meindl (2016), pp. 151-152) At the end of 2017, Sanjay Gupta and his management team were busy evaluating the performance at SportStuff.com over the previous year. Total demand had grown by 50 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. Sanjay 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. SPORTSTUFF.COM Sanjay Gupta founded SportStuff.com in 2014 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 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 2014, 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 2014, 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 2017, SportStuff.com leased the entire warehouse and some storage space from the spot market (which was more expensive and not sustainable) to cater for the demand. Orders were being shipped to customers all over the United States from St. Louis. Management divided the United States into six customer zones for planning purposes. Demand from each customer zone in 2017 was as shown in Table 1. Sanjay estimated that the next four years would see a growth rate of about 50 percent per year, after which demand would level off. Table 1: Regional Demand at Sportstuff.com in 2017 Zone Northwest Southwest Upper Midwest Demand in 2017 350,000 220,000 170,000 230,000 360,000 Lower Midwest Northeast Southeast THE NETWORK OPTIONS 185,000 Sanjay 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 varied with 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 1 million units per year, whereas large warehouses could handle a flow of up to 2 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. 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 Denver St. Louis 320,000 0.25 510,000 0.25 260,000 0.25 430,000 0.25 230,000 0.25 380,000 0.25 Atlanta 230,000 0.25 380,000 0.25 Philadelphia 250,000 0.25 400,000 0.25 Sanjay estimated that the inventory holding costs at a warehouse (excluding warehouse expense) was about $650 VF, 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 facilities reduces the inventory held as compared with disaggregating throughput through many facilities. Thus, a warehouse handling 1million units per year incurred an inventory holding cost of $650,000 in the year. If your version of Excel Solver has problem solving non-linear objective function, you may use the following inventory holding costs: Range of F Inventory Cost 0-2 million units $250,000Y+0.330F $530,000Y+0.190F $678,000Y+0.155F 2-4 million units 4-6 million units Over 6 million units $798,000Y+0.125F If you can handle only a single linear inventory cost, you may use $475,000Y + 0.175F. For each facility, Y= 1 if the facility is used, 0 otherwise. SportStuff.com charged a flat fee of $3.5 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 3. 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 $2.50 $3.00 $4.00 $4.50 $5.50 $6.00 Denver $3.00 $3.00 $3.00 $3.50 $4.50 $5.00 St. Louis $4.50 $4.50 $3.50 $3.50 $4.00 $3.00 Atlanta $4.00 $4.00 $4.00 $3.00 $3.50 $4.00 Philadelphia $5.00 $5.50 $3.50 $4.00 $3.00 $4.50