AEREN FOUNDATION’S Maharashtra Govt. Reg. No.

: F-11724

A N I S O 9 0 0 1 : 2 0 0 0 C E R T I F I E D I N T E R N

Assignment for SUPPLY CHAIN

MANAGEMENT

CASE 1

1. MANAGING GROWTH AT SPORTSTUFF.COM

In December 2000, Sanjay Gupta and his management team were busy evaluating the
performance at SportStuff.com over the last year. Demand had grown by 80 percent
over the year. 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 1996 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 very well received in the marketplace,
demand grew rapidly, and by the end of 1996 the company had sales of $0.8 million.
By this time a variety of new and used products were sold and the company received
significant venture capital support.
In June 1996, Sanjay leased part of a warehouse in the outskirts of St. Louis to
manage the large amount of product being sold. Suppliers sent their products 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 1999,
SportStuff.com leased the entire warehouse and orders were 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 1999 was as shown in
Table. Sanjay estimated that the next three years would see a growth rate of about 80
percent per year, after which demand would level off.
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 sized of the warehouse and
variable costs the varied with the quantity shipped through the warehouse. Four
potential locations for warehouse were identified in Denver, Seattle, Atlanta, and
Philadelphia. Warehouses leased could be either 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 (b).

TABLE a) Regional Demand at SportStuff.com for 1999

Zone Demand in 1999 Zone

Demand in 1999
Northwest 320,000 Lower Midwest 220,000
Southwest 200,000 Northeast 350,000
Upper Midwest 160,000 Southeast 175,000
TABLE b) Fixed and Variable Costs of Potential Warehouses
Small Warehouse Large Warehouse

Fixed Variable Fixed Variable

Cost Cost Cost Cost
Location ($/year) ($/unit flow) ($ / year)
($/unit flow)

Seattle 300,000 0.20 500,000 0.2

Denver 250,000 0.20 420,000 0.2
St. Louis 220,000 0.20 375,000 0.2
Atlanta 220,000 0.20 375,000 0.2
Philadelphia 240,000 0.20 400,000 0.2

TABLE c) UPS Charges per Shipment (Four Units)

North South Upper Lower North South
West West Midwest Midwest East East

Seattle $2.00 $2.50 $3.50 $4.00 $5.00 $5.50

Denver $2.50 $2.50 $2.50 $3.00 $4.00 $4.50
St. Louis $3.50 $3.50 $2.50 $2.50 $3.00 $3.50
Atlanta $4.00 $4.00 $3.00 $2.50 $3.00 $2.50
Philadelphia $4.50 $5.00 $3.00 $3.50 $2.50 $4.00

Sanjay estimated that the inventory holding costs at a

warehouse (Excluding warehouse expense) was about $600 √F
where F is the number of units flowing through the warehouse per
year. Thus, a warehouse handling 1,000,000 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:
Range of F Inventory Cost
0 – 2 million $250,000 + 0.310F
2 – 4 million $530,000 + 0.170F
4 – 6 million $678,000 + 0.133F
Over 6 million $798,000 + 0.113F
If student can handle only a single linear inventory cost they should
use $475,000+0.1565F.
 SportSuff.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 charges were based on
both the origin and the destination of the of the of the shipment and
are shown in Table (c) Management estimated that inbound
transportation costs for shipments from suppliers were likely to
remain unchanged, no matter what the warehouse configuration
selected.

QUESTIONS :-
1. What is the cost SportStuff.com incurs if all warehouses
leased are in St. Louis ? What supply chain network
configuration do you recommend for SportStuff.com ?

CASE 2

Julie Williams had a lot on her mind when she left the conference
room at Specialty Packaging Corporation (SPC). Her divisional
manager had informed her that she would be assigned to a team
consisting of SPS’s marketing vice president and several staff
members from their key customers. The goal of this team was to
improve supply chain performance, as SPC had been unable to meet
all the demand of their customers over the past several years. This
often left SPC’s customers scrambling to meet new client demands.
Julie had little contact with SPC’s customers and wondered how she
would add value to this process. She was told by her division
manager that the team’s first task was to establish a collaborative
forecast using data from both SPC and their customers. This
forecast would serve as the basis for improving their performance as
they could use this more accurate forecast for their production
planning. With this in place, SPC would have a key tool to improve
delivery performance.
SPC
SPC turns polystyrene resin into recyclable /disposable containers for
the food industry. Polystyrene is purchased as a commodity in the
form of resin pellets. The resin is unloaded from bulk rail containers
or overland trailers into storage silos. Making the food containers is
a two – step process. First, resin is conveyed to an extruder, which
converts it into polystyrene sheet wound into rolls. The plastic
comes in two formed – clear and black. The rolls are either used
immediately to make containers or are put into storage. Second, the
rolls are loaded onto thermoforming presses, which from the sheet
into containers and trim the containers from the sheet. The two
manufacturing steps are shown in Figure.

Over the past five years, the plastic packaging business has grown
steadily. Demand for containers made from clear plastic comes from
grocery stores, bakeries, and restaurants. Demand for black plastic
trays comes from caterers and grocery stores, who use them as
packaging and serving trays. Demand for clear plastic containers
peaks in the summer months, whereas demand for black plastic
containers peaks in the fall. Capacity on the extruders is not
sufficient to cover demand for sheets during the peak seasons. As a
result, the plant is forced to build inventory of each type of sheet in
anticipation of future demand. Table(b) and Figure(c) display
historical quarterly demand for each of the two types (clear and
black) of containers. This demand data was modified from SPC’s
sales data by the team to take into account the lost sales when SPC
was out of stock. Without the customers involved in this team, SPC
would never have known this information as they did not keep track
of lost orders.

QUESTION :-
As a first step in the team’s decision making, they want to
forecast quarterly demand for each of the two types of
containers for the years 2003 to 2005. Based on historical
trends, demand is expected to continue to grow until 2005,
after which it is expected to plateau. Julie must select the
appropriate forecasting method and estimate the likely
forecast error. Which method should she choose ?

FIGURE a) Manufacturing Process at SPC

Step 1 Step 2

Thermo-
Resin Extruder Roll
forming
Storage Storage
Press

TABLE b) Quarterly Historical Demand for Clear and Black

Plastic Containers

Black Plastic Demand Clear Plastic

Demand
Year Quarter (‘000 Ibs.)
(‘000 Ibs.)

1998 I 2,250 3,200

II 1,737 7,658
III 2,412 4,420
IV 7,269 2,384
1999 I 3,514 3,654
II 2,143 8,680
III 3,459 5,695
IV 7,056 1,953
2000 I 4,120 4,742
II 2,766 13,673
III 2,556 6,640
IV 8,253 2,737
2001 I 5,491 3,486
 II 4,382 13,186
III 4,315 5,448
IV 12,035 3,485
2002 I 5,648 7,728
II 3,696 16,591
III 4,843 8,236
IV 13,097 3,316

FIGURE c) Plot of Quarterly Demand for Clear and Black

Plastic Containers
 CASE 3

MINTENDO GAME GIRL

It is late June, and Sandra, head of operations at Mintendo, and Bill,

head of sales of We ‘R’ Toys, are about to get together to discuss
production and marketing plans for the next six months. Mintendo is
the manufacture of the popular Game Girl handheld electronic game
that is sold exclusively through We ‘R’ Toys retail stores. The
second half of the year is critical to Game Girl’s success because a
majority of their sales occur during the holiday shopping period.
Sandra is worried about the impact that the upcoming holiday
surge in demand will have on her production line. Costs to
subcontract assembly of the Game Girls are expected to increase
and she has been trying to keep costs down given the her bonus
depends on the level of production costs.
Bill is worried about competing toy stores gaining share during
the Christmas buying season. He has seen many companies lose
their share by failing to keep prices in line with the performance of
their products. He would like to maximize the Game Girl market
share.
Both Sandra and Bill’s teams produce a joint forecast of
demand over the next six months, as shown in Table a.
 We ‘R’ Toys sells Game Girls for $50 a piece. At the end of
June, the company has an inventory of 50,000 Game Girls. Capacity
of the production facility is set purely by the number of workers
assembling the Game Girls. At the end of June, the company has a
work force of 300 employees, each of whom work eight hours of non
overtime at $15/hour for twenty days each month. Work rules
require that no employee work more than forty hours of overtime a
month. The various costs are shown in Table b.

Sandra, concerned about controlling costs during the periods of

surging demand over the holidays, proposes to Bill that the price be
lowered by $5 for the month of September. This would likely
increase September’s demand by 50 percent due to new customers
attracted to Game Girl. Additionally, 30 percent of each of the
following two months of demand would occur in September as
forward buys. She strongly believes that this leveling of demand will
help the company.
Bill counters with the idea of offering the same promotion in
November, during the heart of the buying reasons. In this case, the
promotion increases November’s demand by 50 percent due to new
customers attracted to Game Girl. Additionally, 30 percent of
December’s demand would occur in November as forward buying.
Bill wants to increase revenue and sees no better way to do this
than to offer a promotion during the peak season.

TABLE a) Demand for Game Girls

Month Demand Forecast
July 100,000
 August 110,000
September 130,000
October 180,000
November 250,000
December 300,000

TABLE b) Costs for Mintendo/We ‘R’ Toys

Item Cost
Material cost $12/unit
Inventory holding cost $4/unit/month
Marginal cost of a stockout $10/unit/month
Hiring and training costs $3000/worker
Layoff cost $5000/worker
Labour hours required .25/unit
Regular time cost $15/unit

Over time cost $22.50/hour

Cost of subcontracting $18/unit

QUESTION :-
1. Which Option delivers the maximum profit for the
supply chain:Sandra’s plan, Bill’s plan, or no promotion
plan at all ? How does the answer change if a discount of
$10 must be given to reach the same level of impact that the
$5 discount received ? Suppose Sandra’s fears about
increasing outsourcing costs come to fruition and the
cost rises to $22/unit for subcontracting. Does this
change the decision when the discount is $5 ?

CASE 5

DELIVERY STRATEGY AT MOONCHEM

John Kresge was very concerned as he left the meeting at
MoonChem, a manufacturer of specialty chemicals. The year-end
meeting had evaluated financial performance and discussed the fact
that the firm was achieving only two inventory turns a year. A more
careful look revealed that over half the inventory MoonChem owned
was consignment inventory with its customers. This was very
surprising given that only 20 percent of its customers carried
consignment inventory. John Kresge was Vice President of Supply
Chain and thus responsible for inventory as well as transportation.
He decided to take a careful look at how consignment inventory was
managed and come up with an appropriate plan.

MOONCHEM OPERATIONS
MoonChem is a manufacturer of specialty chemicals used in a
variety of industrial applications. MoonChem has eight
manufacturing plants and forty distribution centers. The plants
manufacture the base chemicals and the distribution centers mix
them to produce hundreds of end – products that fit customer
specifications. In the specialty chemicals market, MoonChem has
decided to differentiate itself in the Midwest region by providing
consignment inventory to its customers. MoonChem would like to
take this strategy national if it proves effective. MoonChem keeps
the chemicals required by each customer in the Midwest region on
consignment at the customers’ sites. Customers use the chemicals
as needed and MoonChem ensures replenishment to ensure that the
customers do not run out of inventory. In most instances,
consumption of chemicals by customers is very stable. MoonChem
is paid for the chemicals as they are used. Thus, all consignment
inventories belong to MoonChem.

DISTRIBUTION AT MOONCHEM
MoonChem currently uses Golden trucking, a full truckload carrier
for all its shipments. Each truck has a capacity of 40,000 pounds and
Golden charges a fixed rate given the origin and destination,
irrespective of the quantity shipped on the truck. Currently
MoonChem sends full truckloads to each customer to replenish their
consignment inventory.

THE ILLINOIS PILOT STUDY

John decided to take a careful look at his distribution operations. He
decided to focus on the state of Illionois, which was supplied from
the Chicago distribution center. He broke up the state of Illinois into
a collection of zip codes that were contiguous, as shown in Figure
10.10. He decided to restrict attention within the Peoria region,
which was classified as zip code 615.A careful study of the Peoria
region revealed two large customers, six medium-sized – customers,
and twelve small customers. The annual consumption at each type
of customer is as shown in Table (a).Golden currently charges $400
for each shipment from Chicago to Peoria and MoonChem’s policy is
to send a full truckload to each customer when replenishment of
consignment inventory is needed.
John checked with Golden to find out what it would take to
include shipments for multiply customers on a single load. Golden
informed him that they would continue to charge $350 per truck and
would then add $50 for each drop-off that Golden was responsible
for. Thus, if Golden carried a truck that had to make one delivery,
the total charge would be $400.However,if a truck had to make four
deliveries, the total charge would be $550.
Each pound of chemical in consignment cost MoonChem $1 and
MoonChem had a holding cost of 25 percent. John wanted to
analyze different options for distribution available in the Peoria
region to decide on

the optimal distribution available in the Peoria region to decide on

the optimal distribution policy. The detailed study of the Peoria
region would provide the blueprint for the distribution strategy that
MoonChem planned to roll out nationally.
FIGURE b) Illionois Zip Code Map

QUESTIONS
1. What is the current annual cost of MoonChem’s strategy
of sending full truckloads to each customer in the Peoria
region to replenish consignment inventory ? Consider
different delivery options and evaluate the cost of each.
What delivery option do you recommend for MoonChem ?
How does your recommendation impact consignment
inventory for MoonChem ?