Case study
Managing growth at SportStuff.com
In December 2008, Sanjay Gupta and his management team were busy evaluating the performance at
SportStuff.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.
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 any 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-1. Sanjay estimated that the
next three years would see a growth rate of about 80 percent per year, after which demand would level
off.
Zone
Northwes
t Southwest Upper Midwest Lower Midwest
Northeas
t Southeast
Demand in 2007 320,000 200,000 160,000 220,000 350,000 175,000
Table-1 Regional demand at SportStuff.com for 2007
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. Warehouses leased 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 2.
Small Warehouse Large Warehouse
Location
Fixed
cost($/year)
Variable cost
($/unit)
Fixed
cost($/year)
Variable cost
($/unit)
Seattle 300,000 0.2 500,000 0.2
Denver 200,000 0.2 420,000 0.2
St. Louis 220,000 0.2 375,000 0.2
Atlanta 220,000 0.2 375,000 0.2
Philadelphi
a 400,000 0.2 400,000 0.2
Table- 2: Fixed and Variable costs of potential Warehouses
Sanjay estimated that the inventory holding costs at a warehouse (excluding warehouse expense) was
about $600, where F is the number of units flowing through the warehouse per year. 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 . 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-
3. Management estimated that inbound transportation costs for shipments from suppliers were likely to
remain unchanged, no matter what warehouse configuration was selected.
Table-3 UPS charges per shipment (four units)
Q.1 : What is the cost SportStuff.com incurs if all warehouses leased are in St. Louis?
Q.2 : What supply chain network configuration do you recommend for SportStuff.com? Why?
Q.3 : How would your recommendation change if transportation costs were twice those shown in Table-
3?