Peter Parker founded Gadget.com in Missouri of the United States in 2013 with a mission of supplying techno-savvy millennials with affordable consumer electronic gadgets. Like any other perishable consumer product, trendy electronic gadgets can become obsolete very quickly. So, if they are too expensive, consumers will be reluctant to purchase them.
Parker’s initial plan was for the company to purchase relatively cheap and trendy gadgets with acceptable quality from China and sell them over the Internet. The idea was very well received in the marketplace. Demand grew rapidly and, by the end of 2013, the company had sales of $1 million. This performance attracted some investors and soon the company received significant venture capital support. In the beginning, Parker leased part of a warehouse on the outskirts of St. Louis to store and manage the products sold on the Internet.
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Suppliers from China sent their products to the warehouse which were received and shelved. Customer orders received via the Internet were picked and packed and shipped by UPS from the warehouse. As demand grew, Gadget.com leased more space within the warehouse. By 2022, Gadget.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.
As the demand grows, management was thinking of renting more warehouses in St. Louis and/or other cities. Putting all the warehouses in St. Louis – a centralized distribution design – might be more efficient and easier for coordination while placing the warehouses in different cities – a decentralized distribution design – might provide more responsive customer services.
The total demand from 2013 to 2022 is shown in Table 1 whereas Table 2 shows the demand from each customer zone in 2022. Parker expected that the current growth in total demand would continue up to 2025, after which demand would level off. The growth rates were estimated to be 60%, 40%, and 20% in 2023, 2024, and 2025 respectively.
He also believed that the growth in demand would be homogeneous across the six customer zones in the next three years. In other words, the same growth rate could be applied to all six demand zones in the same year.
Table: Total Customer Demand from 2013 to 2022
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Table: Regional Demand at Gadget.com for 2022
What will the total costs for Gadget.com be in 2023, 2024, and 2025 under each of the following options?
(a) Keeping the existing small warehouse in St. Louis with additional warehouse(s) all rented in St. Louis as well;
(b) Keeping the existing small warehouse in St. Louis with additional warehouse(s) all rented in other cities, i.e., in St. Louis, there is only one small warehouse; and
(c) Not keeping any warehouse in St. Louis with new warehouses all rented in other cities.
Based on the findings of Q1, which option would you recommend to Gadget.com for the next three years from 2023 up to 2025 entirely from a cost-saving perspective?
If Gadget.com decides that there is no need to adopt the lowest cost option if there is strong justification for using another option, will you change your recommendation? If yes, which option will you recommend and why? Support your argument with a good discussion using some relevant references.
To simplify administrative work, Gadget.com is thinking of not charging a shipment fee from customers but asking them to pay the shipment charges directly to UPS based on origin and destination using the rates shown in Table 4. In other words, shipment costs will be totally borne by the customers. With this idea in mind, will you change your recommendation in Q2? If yes, which option will you recommend and what will the supply network configurations in 2023, 2024, and 2025 be? If not, why?
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