MBA 542 Case Study 1

Prafulla Shahi
Swaminathan Kandaswamy
James MacMartin
SportStuff.com currently has a small warehouse (WH) in St. Louis with a capacity of handling 2 million
units per year. Recent data has shown a steady rise in demand for affordable sports equipment with a
forecast of 80% annual growth for the next three years. This increase in demand will be uniform for all
six regions that SpotStuff.com serves. Anticipating this growth, the company is looking to increase its
capacity by leasing more warehouses with an objective of minimizing cost.

SportStuff.com has several options for leasing warehouses. It can lease small or large warehouses in five
different locations, with different variable and fixed costs per warehouse. The costs include an annual
fixed cost, a variable cost per unit, and an annual inventory holding cost directly related to the number of
units flowing through the warehouse per year. SportStuff.com charges its customers a flat $3 charge per
shipment. UPS handles all its outbound shipments and charges SportsStuff.com based on the origin and
destination of the shipment. Small and large warehouses have a capacity of 2 million and 4 million
respectively. These costs affect the decision of leasing a particular location and capacity of warehouse
directly. Moreover, UPSs shipment charges, projected demand, etc. may not stay consistent with
expectations and need to be analyzed to make a more robust decision.
For choosing its warehouses, we have to make several assumptions:

Inbound shipments are not likely to change based on warehouse selection.

To simplify calculations, only one warehouse, large or small, can be leased in one city.

Fixed and variable costs dont change with respect to time.

There is no charge for opening and closing WH.

There is no administrative charge for changing the WH location.

SportsStuff.com can choose to lease all warehouses in St. Louis for any anticipated demand. If this is the
case, and if the projected demand is realized, the company will incur an average increase in cost per year
of about 65%. The average percentage increase goes as high as 72% if UPSs shipping rates get doubled.
Year Total Cost ($) Percentage cost increase/year
2007
1,260,615
2008
1,919,812
52%
2009

3,317,271

73%

2010

5,596,144

69%

If other locations are considered, we recommend the following:

2007: Use existing capacity
2008: Close small WH in St. Louis and open large WH in St. Louis

MBA 542 Case Study 1

Prafulla Shahi
Swaminathan Kandaswamy
James MacMartin
2009: Close large WH in St. Louis, open small WH in seattle, and open large WH in Atlanta.
2010: Close small WH in Seattle, open small WH in Philadelphia, open large WH in Denver, and keep large
WH in Atlanta.
Units produced in each warehouse is shown in table below:

Seattle

2007

2008

2009

2010

1,684,800

Denver
0
0
0
3,991,974
St. Louis
1,425,000 2,565,000
0
0
Atlanta
0
0
2,932,200 2,329,854
Philadelphia
0
0
0
1,988,771
If we consider UPS increasing their shipping costs by 100%, we recommend the following:
2007: Use existing capacity
2008: Open small WH in Seattle and keep small WH in St. Louis.
2009: Close WH in St. Louis, open large WH in Atlanta, and keep small WH in Seattle.
2010: Close small WH in Seattle, open large WH in Seattle, open small WH in Philadelphia, and keep the
large WH in Atlanta
Warehouse allocation as shown in table below:

Seattle

2007

2008

2009

2010

936,000

3,058,854

Denver
0
0
2,203,200
0
St. Louis
1,425,000 1,629,000
0
0
Atlanta
0
0
2,413,800 3,262,974
Philadelphia
0
0
0
1,988,771

In addition to our recommendations with the current constraints we have analyzed a few different
scenarios. The first is how the network would change if we increase our shipping charge to reflect UPS
increased costs. This change would lower overall cost and change our allocations for 2009 and 2010. In
2009 we would recommend opening a large WH in Denver and a small WH in Philadelphia. In 2010 we
would use the same network as 2009 with the addition of a large WH in Atlanta.

MBA 542 Case Study 1

Prafulla Shahi
Swaminathan Kandaswamy
James MacMartin
Another scenario we analyzed reflects what would happen should our demand be more or less than the
predicted 80% (Cost shown in Chart 2). If the demand were to increase by 40% annually, we would suggest
the company to continue small WH at St. Louis and switch to a large WH in 2009. The large WH would
work the following years until the demand exceeds 4,000,000 units. Should the annual demand increase
by 120%, we recommend opening a large WH in St. Louis in 2008 which would close the following year.
In 2009 we would recommend opening a large facility in Denver and Atlanta. In 2010 the Denver facility
would close and large warehouses in Seattle and Philadelphia would be opened in addition to the Atlanta
WH.

Chart 2: Cost per year with different demand increase

rates
$5,000,000
$4,500,000

Total Cost per year

$4,000,000
$3,500,000
$3,000,000
$2,500,000
$2,000,000
$1,500,000
$1,000,000
$500,000
$-

2007

2008

2009

2010

Year
40% Anticipated Demand

120% Anticipated Demand

80 % Anticipated Demand

An important thing our analysis showed was that should the demand increase accordingly and remain
constant from 2010 on we should plan to open a small WH in Philadelphia and a large WH in Atlanta. If
we are able to increase our customer shipping charge with increases in UPS costs than opening a large
WH in Denver would be idea to fulfill the remaining demand. Most of our analysis was dependent on the
fact that opening and shutdown cost were zero when in reality there would be costs associated with such
activities. So our last recommendation would be to determine these cost before opening and closing year
to year.