Background of SportStuff. com
SportStuff.com, founded in 1996 by Sanjay Gupta, offers affordable sports equipment for parents to provide for their children. Gupta came up with the idea for this business after receiving complaints from parents about the frequent need to replace sports equipment due to their children’s rapid growth. This constant need for new expensive skates, skis, jackets, and shoes became inefficient and costly for parents.
Thus, the company acquired used equipment from families and excess equipment from manufacturers and retailers, which they then sold online. Recognizing the needs of their target customers, parents, the company gained acceptance from the public and experienced rapid growth. They achieved a business worth $0.8 million in just one year, attracting considerable venture capital support. In 1999, a warehouse was leased and orders were efficiently packed and shipped by UPS to customers all across the United States.
Main Problem of SportStuff. com
Sanjay Gupta and his management team assessed the company’s performance in 1999 and projected an 80 percent annual growth rate for the next three years. While they were satisfied with the sales and profit growth, they realized that without updating the supply chain network design, the increasing costs would exceed the revenue. This could result in lost sales unless they made the necessary improvements.
Moreover, with the rise in demand, sportstuff.com will experience higher expenses including labor, inventory, transportation, and fixed facility costs. As a result, adjustments must be made to the supply chain network design of sportstuff.com to adequately meet this demand. The distribution of warehouses will impact expenses and impact how efficient and responsive the company can be. In order to address the increasing demand, sportstuff.com has two choices for allocating warehouses. The first option involves leasing more warehouse space exclusively in St. Louis.
Another option that the company can consider is leasing warehouses all over the United States. Both options, leasing warehouses all over the United States and leasing more warehouse space in St. Louis, will have different costs and benefits for the company. It is crucial to evaluate these costs and benefits carefully.
If the company decides to lease more warehouse space in St. Louis, it would result in higher efficiency compared to responsiveness. By leasing more warehouse space in St. Louis, the facility will be centralized. This centralization brings advantages such as economies of scale for the company’s facility and inventory.
Having a large warehouse for inventory storage will lead to lower inventory costs compared to a decentralized inventory approach.
Additionally, the availability of products will be considerably higher due to the large number of items stored in the spacious warehouse. However, expanding warehouse space in St. Louis will result in additional expenses. Firstly, transportation costs will rise as the centralized warehouse is located further away from end users. Deliveries will have to cover a greater distance, despite being smaller in quantity for individual end users. Meeting the growing demand might necessitate more frequent deliveries, further increasing transportation costs. Secondly, a centralized warehouse will result in longer response times.
The presence of a single warehouse located far from certain states and end-users results in increased response time to address changes in demand. Additionally, the distance between customers and the warehouse hinders the return process for unwanted products, as customers must ship or air them to St. Louis. This delay diminishes customer satisfaction. Moreover, the information system becomes more complex due to the centralized warehouse’s need to handle a larger market demand. Consequently, the volume of orders processed in the warehouse significantly increases.
The information system needs to effectively coordinate and connect various stages in the supply chain. Adding more facilities in locations such as St. Louis, without increasing their size, would improve responsiveness. Having more facilities near the end-user reduces response time and lowers transportation costs. However, constructing additional warehouses would increase facility costs. Additionally, inventory costs would also rise due to greater decentralized inventory compared to consolidating all inventories in one large warehouse.
Therefore, leasing additional facilities in St. Louis will result in a more responsive but less efficient company. Analysis: The following section calculates the total cost for Option 1: Leasing more warehouse space in St. Louis itself, and Option 2: Leasing warehouses across the United States. The total cost for the next three years of both options includes facility costs, inventory holding costs, and UPS charges. The calculation assumes that inbound transportation costs from suppliers remain the same for both options. Additionally, it assumes that deliveries occur only between warehouses and end users, excluding transportation costs between warehouses.
Year 2000 Total Demand was 2,565,000.
Option 1: Lease two large warehouses in St. Louis
Option 2: Lease one small warehouse in both Seattle and St. Louis.
The total Shipment Charge earned by SportStuff.com is $1,923,750.
UPS shipment charges: ($2×576,000/4 + $2.5×360,000/4) + ($2.5×288,000/4 + $2.5×396,000/4 + $3×630,000/4 + $3.5×315,000/4) = $1,688,625
Inventory Cost: (single linear) =475,000+0.165(936,000)+475,000+0.165(1,629,000) =$1,373,225
Facility cost: 300,000+ $0.2×936,000+$220,000+$0.2×1,629,000 =$1,033,000
The total cost is $2,171,100 (1,688,625 + 1,373,225 + 1,033,000 – 1,923,750), and the total demand for the year 2001 is 4,617,000.
Option 1: Renting a large warehouse and a small warehouse in St. Louis will cost $3,169,670. The breakdown is as follows: the warehouse costs $220,000, inventory costs $375,000 (twice the value of inventory – $4,617,000), miscellaneous expenses totaling $250,000 (31 times the value of inventory – $617,000), and additional expenses totaling $530,000 (170 times the worth of inventory – $4,000,000).
The transportation cost is determined by multiplying specific values with various factors, adding them together, and then dividing the sum by 4. The equation can be expressed as:
Transportation cost = (3(4,617,000) + 3.5(1,036,800 + 648,000 + 567,000) + 2.5(518,400 + 712,800) + 3(1,134,000))/4 = $8,328,825
The cost amounts to $11,498,495.
Option 2: Lease a small warehouse in Seattle, St. Louis, and Atlanta individually.
The Shipment Charge earned by SportStuff.com is $3 multiplied by 4,617,000 divided by 4, which equals $3,462,750.
The total cost of the shipment charged by UPS is determined by adding together multiple charges. This involves ($2×1,036,800/4+$2.5×648,000/4) + ($2.5×518,400/4+$2.5×497,096/4+$3×984,504/4) + ($2.5×215,704/4+$3×149,496/4+$2.5×567,000/4), which equals $2,897.77.
Inventory Cost: (single linear) (475,000+0.165×1,684,800)+(475,000+0.165×2,000,000)+(475,000+0.165×932,200) = $2,186,805
The total cost of the facility is calculated by adding three components. The first component is found by multiplying $300,000 with the sum of 0.2 and 1,684,800. The second component is obtained by multiplying $220,000 with the sum of 0.2 and 2,000,000. Lastly, the third component is determined by multiplying $220,000 with the sum of 0.2 and 932,200. Adding these three components gives a total cost of $1,663,400.
Total cost: $3,285,230
Year 2002 Total Demand was 8,310,600.
There are three warehouses available for lease in St. Louis: two spacious warehouses and one compact warehouse.
The total expenses for the warehouse and inventory add up to $5,398,406. The breakdown is as follows:
- Warehouse cost: $220,000
- Inventory cost: $2(375,000)
- Inventory cost factor: 0.2 multiplied by the value of 8,310,600
- Holding cost: $250,000
- Ordering cost factor: 0.31 multiplied by the value of 310,600
- Additional inventory cost: 2 multiplied by the sum of $530,000 and 0.170 multiplied by the value of 4,000,000
The transportation cost is calculated as follows: (3(8,310,600)+3. 5(1,866,240+1,166,400+1,020,600)+2. 5(933,120+1,283,040) +3(2,041,200))/4 = $12,695,535.
The total cost for Option 2, which involves leasing one small warehouse in Seattle, Denver, St. Louis, Atlanta, and Philadelphia respectively, amounts to $18,093,941.
The shipment charge earned by SportStuff.com is $6,232,950. It is calculated as $3 multiplied by 8,310,600 divided by 4.
The UPS Shipment cost is $4,965,995 and is calculated by adding different components: ($2 × 1,866,240/4 + $2.5 × 116,640/4) + ($2.5 × 1,049,760/4 + $2.5 × 933,120/4) + ($2.5 × 1,283,040/4 + $3 × 41,200/4) + ($2.5 × 1 ,020 ,600 /4) + ($2×2 ,000 ,000 /4).
Inventory Cost: (single linear) (475,000+0.165×1,982,880)+(475,000+0.165×1982,880)+(475,000+0.165×1,324,240)+(475,000+0.165×1,020,600)+(475,000+0.165×2,000,000) =$3,746,249
The total facility cost is calculated by adding the following amounts: ($300,000 + $0.2 × 1,982,880) + ($250,000 + $0.2 × 1,982,880) + ($220,000 + $0.2 × 1,324,240) + ($220,000 + $0.2 × 1,020,600) + ($240,000 + $0.2 × 2,000,000) = $2,892,120.
The overall cost is determined by adding the following values: 4,965,995 + 3,746,249 + 2,892,120 – 6,232,950 = $5,371,414.
Recommendation
The “Analysis” section indicates that Option 1 had lower total costs in 2000, while Option 2 had lower total costs in both 2001 and 2002. Overall, Option 1 had lower warehouse and inventory costs throughout all three years, whereas Option 2 had lower transportation costs. This difference was mainly caused by the varying efficiency and responsiveness of the two supply chain networks. Therefore, we advise SportStuff.com to choose Option 2, which involves leasing small warehouses in Seattle, Denver, St. Louis, Atlanta, and Philadelphia.
