Inventory and St. Louis
Background of SportStuff. com SportStuff. com is founded in 1996 by Sanjay Gupta. The company is supplying affordable sports equipment for the parents to their children. Sanjay Gupta created the idea of this business because the parents complained that the children grow rapidly. It was not efficient and wasting money to replace the sports equipment for the children frequently. Since parents had to replace new expensive skates, skis, jackets, and shoes so often that it became of the rapid growth of children.
Therefore, the company purchased used equipment from families and any surplus equipment from manufacturers and retailers and sold them over the Internet. The business realized the needs of the target customers, parents. Therefore, the company was accepted by the public and the business grew rapidly. They had made $0. 8 million business within one year. The successful starting of the business attracted and received significant venture capital support. In 1999, the company had leased the warehouse and the orders were packed and shipped by UPS to the customers all over the United States.
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Main Problem of SportStuff. com In January 2000, Sanjay Gupta and his management team evaluated the performance of the company in 1999. They estimated that the growth rate of the business will be about 80 percent per year in the following three years. Although the company were pleased with the growth in sales and profit, the increasing cost would be greater than the revenue if the supply chain network design didn’t change simultaneously. If the supply chain network design stayed the same, the company would lose sales without the appropriate capability.
Also, in order to meet the increasing demand, the cost will increase at the same time, like laboring cost, inventory cost, transportation cost and fixed facility cost. Therefore, the supply chain network design of sportstuff. com has to change to meet the demand. The allocation of warehouse will involve different cost and affect the efficiency and responsiveness of the company. Alternatives In order to meet the demand growth, there are two options for sportstuff. com to allocate their warehouse. The first option is leasing more warehouse space in St. Louis itself.
Another option is leasing warehouses all over the United States. They both will cause different costs and benefits for the company. The evaluation of the costs and benefits is critical. If the company leased more warehouse space in St. Louis, it would lead to higher efficiency rather than responsiveness. Leasing more warehouse space in St. Louis will centralize the facility. The company can enjoy economies of scales of centralized facility and inventory. When the inventory was kept in a large size warehouse, the inventory cost will be lower than the decentralized inventory.
Also, the availability of the products will be high. The large number of the products are kept in the large warehouse will be more responsive. However, Leasing more warehouse space in St. Louis will incur others costs as well. Firstly, the transportation cost will be high, since the centralized warehouse is more far to the end user. The distance of the delivery will be longer and the size to the single end user is small. In order to meet the growth of the demand the business may increase the frequency of deliveries. It will increase the transportation cost. Secondly, the centralized warehouse will lead to long response time.
The single warehouse will be far from some states and the end users. The long distance increase the respond time to meet the demand change. Thirdly, the returnability will be slow since the customers are far from the warehouse when they want to return the undesired products. The customers are all over the world and have to ship or air the product to the warehouse in St, Louis. It takes time and reduces the satisfaction of the customers. Lastly, the information system will be complicated. Since the centralized warehouse has to handle the greater market demand comparing to before. The orders is handled in the warehouse will be much greater.
The information system has to be good enough to ordinate and connect the different stages within the supply chain. For leasing warehouses in the other five locations, including that in St. Louis, increasing the number of the facilities but not the size would have higher responsiveness. More facilities close to the end user can shorten the response time and the transportation cost can be lower. However, the facility cost will increase by building more new warehouses. The inventory cost will increase too, since the decentralized inventory will be greater than consolidate all the inventories in one big warehouse.
Therefore, leasing more facilities beside in St. Louis will be more responsive but less efficient for the company. Analysis In the following part, the total cost will be calculated for Option 1: Leasing more warehouse space in St. Louis itself and Option 2: Leasing warehouses all over the United States. The total cost for the next three years of both options included the facility cost, inventory holding cost and the UPS charges. In the calculation, we assumed that the inbound transportation costs of shipments from suppliers were stay the same for both options.
Also, we assumed that the delivery is between warehouses to end users only. The transportation cost between warehouse to warehouse is not in the case. Year 2000 Total Demand = 2,565,000 Option 1: Lease 2 Large Warehouses in St. Louis Option 2: Lease 1 Small Warehouse in Seattle and St. Louis respectively Shipment Charge earned by SportStuff. com =$3×2, 565,000/4 =$1,923,750 Shipment charged by UPS: ($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(936000)+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 Total cost: 1,688,625+1,373,225+1,033,000-1,923,750 =$2,171,100 Year 2001 Total Demand = 4,617,000 Option 1: Lease 1 Large and 1 Small Warehouses in St. Louis Costs of warehouse and inventory = 220,000+375,000+0. 2(4,617,000)+250,000+0. 31(617,000)+530,000 +0. 170(4,000,000) = $3,169,670 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 Total cost = $11,498,495 Option 2: Lease 1 Small Warehouse in Seattle, St. Louis and Atlanta respectively Shipment Charge earned by SportStuff. om =$3×4, 617,000/4 =$3,462,750 Shipment charged by UPS =($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) =$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 Facility cost ($300,000+$0. 2×1,684,800)+ (220,000+$0. 2×2,000,000)+(220,000+$0. 2x 932,200) =$1,663,400 Total cost: 2,897,775+2,186,805+1,663,400-3,462,750 =$3,285,230 Year 2002 Total Demand = 8,310,600 Option 1: Lease 2 Large and 1 Small Warehouses in St. Louis
Costs of warehouse and inventory = 220,000+2(375,000)+0. 2(8,310,600)+250,000+0. 31(310,600) +2(530,000+0. 170(4,000,000)) = $5,398,406 Transportation cost = (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 Total cost = $18,093,941 Option 2: Lease 1 Small Warehouse in Seattle, Denver, St. Louis, Atlanta and Philadelphia respectively Shipment Charge earned by SportStuff. com $3×8,310,600/4 = $6,232,950 Shipment charged by UPS ($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. x2,000,000/4) =$4,965,995 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 Facility cost ($300,000+$0. 2×1,982,880)+( $250,00+$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 Total cost: 4,965,995+3,746,249+ 2,892,120-6,232,950=$5,371,414 Recommendation According to the part of “Analysis”, we can see that the total cost of Option 1 was lower in 2000 and that of Option 2 was lower in 2001 and 2002. nd from all the three years, we can see that the sum of warehouse and inventory costs were lower in Option 1, while the transportation costs were lower in Option 2. The difference was mainly because of the difference in efficiency and responsiveness of the two supply chain network. Therefore we recommend that SportStuff. com should choose Option 2, which was leasing a small warehouse in each of the places including Seattle, Denver, St. Louis, Atlanta and Philadelphia. As Sanjay had the willingness and ability to