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Case_Sport_Stuff

Case_Sport_Stuff - CASE STUDY(fit MANAGING GROWTH AT...

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Unformatted text preview: CASE STUDY (fit. MANAGING GROWTH AT SPORTSTUFF.COM In December 2000, Sanjay Gupta and his management team were busy evaluating the performance at SportStuffcom over the previous year. Demand had grown by 80 per- cent. 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 perfor- mance 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 1996 with a mis- sion 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 very well received in the market- place, demand grew rapidly, and by the end of 1996, the company had sales of $0.8 million. By this time a variety of new and used products were being sold and the com— pany received significant venture capital support. In June 1996, 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 1999. SportStuficom 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 1999 was as shown in Table 5—15. Sanjay estimated that the next three years would see a growth rate of about 80 percent per year, after which demand would level off. THE NETWORK OPTIONS 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 ware— house. Four potential locations for warehouses were identi- fied in Denver, Seattle, Atlanta, and Philadelphia. Ware- houses 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 ware- houses 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 5-16. Zane Demand in 1999 Northwest 320,000 Southwest 200,000 Upper Midwest 160,000 Zone 7 Demand in 1999 Lower Midwest 220,000 Northeast 350,000 Southeast 175,000 Small Warehouse Large Warehouse Fixed Cost Variable Cost Fixed Cost Variable Cost Location ($/ year) ($/ Unit F low) ($lyear) ($/Un it Flaw) Seattle 300,000 0.20 500,000 02 Denver 250,000 0.20 420,000 0.2 St. Louis 220,000 0.20 375,000 0.2 Atlanta 220,000 0.20 375,000 0.2 Philadelphia 240,000 0.20 400,000 0.2 a w 36C the 1.01 cost of l flint QL‘ l. CHAPTER 5 O Network Design in the Supply Chain Southwest $2.50 $2.50 $3.50 $4.(){) $5.00 . w MM ., I“. > W. North west $2.00 $2.50 $3.50 $4.00 $4.50 Seattle Denver St. Louis AI lanta Philadelphia Sanjay estimated that the inventory holding costs at a warehouse (excluding warehouse expense) was about $600 F, where F is the number or units flowing through the warehouse per year. Thus, a warehouse handling 1.000.000 units per year incurred an inventory holding cost or $6()().()UU in the course of the year. If your version of Excel has problems solving the nonlinear objective function. use the following inventory Costs: Range of F 0—2 million 24 million 4—6 milli()n Over 6 ruillion Inventory Cost $250,000 + 0.310F $530.0LX) + 0.1701“ $678,0()O + 0.133F $798,000 + 0.1 1314‘ QUESTIONS I. What is the cost SportStuff com incurs if all Warer houses leased are in St. Louis? $3.50 $2.50 $2.50 $3.()() $3.00 . mam.» Mm- Upper Midwat Lo wzr Ml dwest $4.00 $3.00 $2.50 $2.50 $3.50 Southeast $5.50 $4.50 $3.50 $2.50 $4.00 If you can handle only a single linear inventory cost. you should use $475,000 + 0.165F. SportStuff.com charged as flat tee of $3 per ships merit sent to a customer. An average customer order contained four units. SportStufficom in turn contracted with UF’S to handle ail its Outbound shipments. [JPS charges were based on both the origin and the destina— tion of the shipment and are Shown in Table 5r17. Management estimated that inbound transportation costs for shipments from suppliers were likely to remain unchanged, no matter what warehouse configuration was sclcctcd. 2. What supply chain network configuration do you recommend for SportStuff.cOln? ...
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