SPORTSTUFF.COM Sanjay Gupta founded SportStuff.com in 2004 with a mission of supplying parents with more affordable sports equipment for their...

SPORTSTUFF.COMSanjay Gupta founded SportStuff.com in 2004 with a mission of supplying parents with moreaffordable sports equipment for their children. Parents complained about having to discardexpensive skates, skis, jackets, and shoes because children outgrew them rapidly. Sanjay'sinitial plan was for the company to purchase used equipment and jackets from families and anysurplus equipment from manufacturers and retailers and sell these over the Internet. The idea wasvery well received in the marketplace, demand grew rapidly, and by the end of 2004 the companyhad sales of $0.8 million. By this time a variety of new and used products were sold and thecompany received significant venture capital support.In June 2004, Sanjay leased part of a warehouse in the outskirts of St. Louis to manage thelarge amount of product being sold. Suppliers sent their product to the warehouse. Customer orderswere packed and shipped by UPS from there. As demand grew, SportStuff.com leased morespace within the warehouse. By 2007, Sportstuff.com leased the entire warehouse andshipped to customers all over the United Sates. Management divided the United States into 6customer zones for planning purposes. Demand for each customer zone in 2007 was as shownin Table 1. Sanjay estimated that the next three years would see a growth rate of about 80 percent peryear, after which demand would level off.THE NETWORK OPTIONSSanjay and his management team could see that they needed more warehouse space to cope withthe anticipated growth. One option was to lease more warehouse space in St. Louis itself. Otheroptions included leasing warehouses all over the country. Leasing a warehouse involvedfixed costs based on the size of the warehouse and variable costs that varied with thequantity shipped through the warehouse. Four potential locations for warehouses wereidentified in Denver, Seattle, Atlanta, and Philadelphia. Warehouses leased could be eithersmall (about 100,000 sq. ft.) or large (200,000 sq. ft.). Small warehouses could handle a flowof up to 2 million units per year whereas large warehouses could handle a flow of up to 4million units per year. The current warehouse in St. Louis was small. The fixed and variablecosts of small and large warehouses in different locations are shown in Table 2.Sanjay estimated that the inventory holding costs at a warehouse (excluding warehouse expense)was about $600 √