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MBA 638-002: Operations Management

eBags: Managing Growth
Case Study 5

Patrick Johnson, Amina Mirzohoshim, Frank Park, Raja Pattamatta, Rita Thakur 4/25/2011

eBags, the online luggage- and travel-products store, started as a business idea by Jon Nordmark in the spring of 1998. Nordmark convinced Peter and Eliot Cobb, Frank Steed, and Andy Youngs to join his venture, using their collective industry knowledge from being top executives with Samsonite USA and American Tourister. With a personal investment of $50k from each of them to startup and $6.8M in funding early the following year from venture capitalists, such as Benchmark Capital, they were able to launch eBags.com in March of 1999. With continued venture capital investments eBags raised over $30M in funding that same year, averaging a monthly sales growth of 98% and broadening “their product offering from six to fifty-six brands. By early 2004, eBags was the largest online provider of bags and accessories…” (Schroeder, Goldstein, & Rungtusanatham, 2010) (Schroeder, Goldstein, & Rungtusanatham, 2010) (Schroeder, Goldstein, & Rungtusanatham, 2010) (Schroeder, Goldstein, & Rungtusanatham, 2010) Business Model:

eBags’ business model provided a diverse collection of products in one online retail location. Their website made it possible for customers to search for products without spending time and money on traveling to different stores and locations. eBags’ online storefront shortened their supply chain and therefore offered the opportunity for significant cost-savings. Two types of processes were incorporated into the business model: drop –ship fulfillment and private label supply chain. In the drop-ship model, inventory was managed at the manufacturer or distributor level. eBags was serving as the intermediary for the customer. The customer placed orders on the website, and eBags electronically transmitted the order to the vendor. The vendor, in turn, shipped orders directly to the customer using eBags’ shipping account. After that, eBags pulled tracking number from the shipper’s system and sent shipment confirmation to the customer, who was then billed. Upon billing the customer, eBags was billed by and made a payment to the vendor. The model eliminated risk of inventory obsolesces, thereby reducing holding costs. (Schroeder, Goldstein, & Rungtusanatham, 2010) Due to existing tradeoffs in the drop-ship model in earning lower profit margins than traditional retailers and the inability to control the shipping schedules of the manufactures, eBags developed a private label model. With the private label, eBags incorporated a traditional speculative inventory model. The private label maintained about 1,000 SKUs in an eBags warehouse in Dallas, Texas. To reduce inventory holding costs, eBags tried to maintain a two-month sales level of private-label inventory to minimize production runs. By global-sourcing the manufacture of the private label through a network of low-cost Asian manufacturers and tight inventory management, eBags could satisfy the cost-conscious customer, while enjoying a healthy profit margin. (Schroeder, Goldstein, & Rungtusanatham, 2010) Entering the Footwear Business:

The footwear industry was highly competitive and extremely fragmented, similar to the luggage industry. Footwear was three times larger than the luggage and travel accessory market in the year 2003. In many ways, the product extension into footwear seemed like a logical option to eBags. By leveraging its strengths in marketing and merchandising, eBags was confident that it could exploit the footwear industry by providing one-stop shopping for consumers. However, there are some unique challenges with footwear compared to luggage. One of the challenges is to increase customer awareness. The name eBags did not suggest to the average customer that footwear could be purchased on the website. The cost involved in serving shoe customers is higher than serving...
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