Managing Growth at SportStuff.com

In December 2008, Sanjay Gupta and his management team were busy evaluating the performance at Sport- Stuff.com over the previous year. Demand had grown by 80 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.

1. SportStuff.com

Sanjay Gupta founded SportStuff.com in 2004 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 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 2004, 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 2004, 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 2007, SportStuff.com 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 2007 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.

2. 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 depended on the quantity shipped through the warehouse. Four potential locations for warehouses were identified in Denver, Seattle, Atlanta, and Philadelphia. Leased warehouses 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 warehouses 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.

Sanjay estimated that the inventory holding costs at a warehouse (excluding warehouse expense) was about $600 1F, 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 1 million units per year incurred an inventory holding cost of $600,000 in the course of the year. If your version of Excel has problems solving the nonlinear objective function, use the following inventory costs:

If you can handle only a single linear inventory cost, you should use $475,0007 + 0.165/L For each facility, Y = 1 if the facility is used, 0 otherwise.

SportStuff.com charged a flat fee of $3 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 5-17. Management estimated that inbound transportation costs for shipments from suppliers were likely to remain unchanged, no matter what warehouse configuration was selected.

Source: Chopra Sunil, Meindl Peter (2014), Supply Chain Management: Strategy, Planning, and Operation, Pearson; 6th edition.