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Managing Grow at Sportswun.com In December 2008, Sanjay Gupta and his management customer zones for planning purposes. Demand from team were busy evaluating the performance at Sport- cach customer zone in 2007 was as shown in Table 5-15, Stuff.com over the previous year. Demand had grown by Sanjay estimated that the next three years would see 80 percent. This growth, however, was a mixed blessing growth rate of about 80 percent per year, after which The venture capitalists supporting the company were demand would level off. very pleased with the growth in sales and the resulting increase in revenue, Sanjay and his team, however, could The Network Options clearly see that costs would grow faster than revenues if Sanjay and his management team could see that they demand continued to grow and the supply chain network was not redesigned. They decided to analyze the perfor- needed more warehouse space to cope with the antici- mance of the current network to see how it could be pated growth. One option was to lease more warehouse redesigned to best cope with the rapid growth antici space in St. Louis itself. Other options included leasing warehouses all over the country. Leasing a warehouse pated over the next three years. involved fixed costs based on the size of the warehouse SportStuff.com and variable costs that depended on the quantity shipped through the warehouse. Four potential locations for Sanjay Gupta founded SportStuff.com in 2004 with a warehouses were identified in Denver, Seattle, Atlanta mission of supplying parents with more affordable sports and Philadelphia. Leased warehouses could be either equipment for their children. Parents complained about small (about 100,000 sq. ft.) or large (200,000 sq. ft.). having to discard expensive skates, skis, jackets, and Small warehouses could handle a flow of up to 2 million shoes because children outgrew them rapidly. Sanjay's units per year, whereas large warehouses could handle a initial plan was for the company to purchase usedequip flow of up to 4 million units per year. The current ware- ment and jackets from families and surplus equipment house in St. Louis was small. The fixed and variable from manufacturers and retailers and sell these over the costs of small and large warehouses in different loca- Internet. The idea was well received in the marketplace, tions are shown in Table 5-16. demand grow rapidly, and, by the end of 2004, the com- Sanjay estimated that the inventory holding costs pany had sales of $0.8 million. By this time, a variety of at a warehouse (excluding warehouse expense) was new and used products were being sold, and the com- about $600 VF, where Fis the number of units flowing pany received significant venture capital support through the warehouse per year. This relationship is In June 2004, Sanjay leased part of a warehouse in based on the theoretical observation that the inventory the outskirts of St. Louis to manage the large amount of held at a facility (not across the network) is proportional product being sold. Suppliers sent their product to the to the square foot of the throughput through the facility warehouse, Customer orders were packed and shipped As a result, negating throughput through a few facili by UPS from there. As demand grew, SportStuff.comties reduces the inventory held as compared with disag. leased more space within the warehouse, Ry 2007. garegating throughput through many facilities. Thus, a Sportstull.com leased the entire warehouse and onders warehouse handling I million units per year incurred an were being shipped to customers all over the United inventory holding cost of $600.000 in the course of the States. Management divided the United States into six year. If your version of Excel has problem solving the Zone Northwest Southwest Upper Midwest Demand in 2007 320,000 200,000 160,000 Zone Lower Midwest Northeast Southeast Demand in 2007 220,000 350,000 175.000 140 Chapter 5. Network Design in the Supply Chain TABLE 5-16 Location Seattle Denver St. Louis Atlanta Philadelphia Fixed and Variable Costs of Potential Warehouses Small Warehouse Large Warehouse Fixed Cost Variable Cost Fixed Cost Variable Cost (5/year) (S/Unit Flow) (S/year) (S/Unit Flow) 300.000 0.20 500.000 020 250,000 0. 20 4 20,000 0 .20 2 20,000 0.20 375,000 0 .20 220,000 0.20 375,000 3 0.20 240,000 0.20 400,0003 33 0.20 nonlinear objective function, use the following inventory costs: Range of F 0-2 million 2-4 million 4-6 million More than 6 million Inventory Cost 5250,000Y+0.310F $250,000Y+0.310F $530,000Y + 0.170 $678,000Y + 0.1331 $798,000Y + 0.1136 with UPS to handle all its outbound shipments. UPS charges were based on both the origin and the destina- tion of the shipment and are shown in Table 5- 17. Man agement estimated that inbound transportation costs for shipments from suppliers were likely to remain unchanged, no matter what warehouse configuration was selected. Study Questions 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. SportStuff.com charged a flat fee of $3 per ship- ment sent to a customer. An average customer order con- tained four units. SportStuff.com, in turn, contracted Study Questions 1. What is the cost SportStuff.com incurs if all warehouses leased are in St. Louis? 2. What supply chain network configuration do you recom mend for SportStuff.com? Why? 3. How would your recommendation change if transportation costs were twice those shown in Table 5-17? TABLE 5-17 UPS Charges per Shipment (Four Units) Northwest Southwest Upper Midwest Seattle $2.00 $2.50 $3.50 Denver $2.50 $2.50 $2.50 St. Louis $3.50 $3.50 $2.50 Atlanta $4.00 $4.00 $3.00 Philadelphia $4.50 $5.00 $3.00 Lower Midwest $4.00 $3.00 $2.50 $2.50 $3.50 Northeast $5.00 $4.00 $3.00 53.00 $2.50 Southeast $5.50 $4.50 $3.50 $2.50 $4.00 CASE STUDY Designing the Production Network at CoolWipes Matt O'Grady, vice president of supply chain at Cool Wipes, thought that his current production and distribu tion network was not appropriate, given the significant increase in transportation costs over the past few years. Compared to when the company had set up its produc- tion facility in Chicago, transportation costs had