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.
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.
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...