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Homework 1-

• Gateway is a direct sales manufacturer of PCs that was
founded in 1985 with no retail footprint
• Late 1990s: Introduced aggressive strategy of opening
Gateway retail stores throughout the United States
• Goal: Avoid carrying any finished-goods inventory at retail
• By January 2002, Gateway had approximately 280 retail stores
in the US
• But by April 2004, Gateway closed all its retail outlets and
reduced number of configurations offered to customers
• Gateway were now looking to sell its PCs through electronic
1. Why did Gateway choose not to carry any finished-product
inventory at its retail stores?
2. What factors did Gateway consider when deciding which
plants to close?
3. Why did Gateway decide not to carry any finished product
inventory at its retail stores?
4. Should a firm with an investment in retail stores carry any
finished goods inventory?
5. Is the Dell model of selling directly without retail stores
always less expensive than a supply chain with retail
6. What are the supply chain implications of Gateway’s
decision to offer fewer configurations?
1. Why did Gateway choose not to carry any finished-
product inventory at its retail stores?
• Gateway had a strategy to avoid carrying finished goods inventory in retail
stores. This way customers had the opportunity to customize the
configurations they needed by working with the sales reps as well as having
the opportunity to try out any sample product within the store. The
company’s strategy aimed to design a supply chain that would match supply
and demand.
• The decision not to carry any finished-product inventory at its retail stores
was based on two factors:
• Allow for maximum flexibility in product configuration, and
• No need to keep inventory at the retail outlets.
• This flexibility in product configurations would allow the company to manage
shifts in customer demand, since the final product would only be configured
after the customer places the order.
• It would also allow the company to implement a Customer Relationship
Management strategy, since the company would know the specifics of the
customer’s needs and would be able to target a customer for future
1a. Why did Apple choose to carry inventory at its retail
• Apple on the other hand aimed to satisfy the customer’s need for immediate
purchase, plus provide him/her with the experience of a finished product
• Advantages / Disadvantages of Gateway strategy:
– Easier to customize; potentially offer wide variety of products
– Higher delivery time, since the product has to be configured and
– Lower inventory costs; Strategy that matches supply and demand
• Advantages / Disadvantages of Apple strategy:
– No delivery time, since the product is on the shelf
– Lower shipment costs, since the products can be bundled and shipped to
the retail store, from where they are picked up by the customer
– Limited product variety, since the products are already on the shelf
– Better customer service since the customer has the experience of trying
out the finished product, and can walk out of the store with a product in
1c. How does Gateway decide which production facility will
produce and ship a customer order?

• Given that the goal is to maximize the supply chain surplus (profitability), a
number of factors were taken in consideration in order to decide which
facility will produce and ship a customer order.
• The most important factor is the cost, including production and
transportation cost to the customer
• Other factors include availability of production capacity and know-how at a
specific facility, other orders in production to the specific customer or to
customers nearby, etc.
• Another strategy is to “allocate” product lines to specific facilities, and then
direct the orders to the facility “assigned” to the specific product. This way,
there is increased sophistication developed in each facility about a specific
product line, thus saving on production time, setup production costs,
inventory costs, and more
1b. What factors did Gateway consider when deciding
which plants to close?

• The decision as to which plants to close is based on a number of factors,

– Fixed cost of operating the plant,
– Variable production costs,
– Proximity to suppliers and transportation costs of raw materials to the plant,
– Proximity to the customers and transportation costs to the customers,
– Usage rates of the factories,
– Special skills available at a plant, and more.
• The problem is a network optimization problem, and can be modeled
using linear and binary variables
• Special attention has to be paid in:
– Forecasting future demand
– Accounting for factors that relate to regional or national characteristics, like labor
availability, labor costs, special tariffs, etc.
– Capturing special characteristics that might be available for each plant that are difficult
to express in a quantitative model, like special skills, synergies created with other
company units, etc.
2. Should a firm with an investment in retail stores carry any
finished-goods inventory?

• The decision should be based on customer preferences and on delivery

times and costs.
• If a region’s customers prefer online shopping, then a retail store does not
need to carry finished goods. Otherwise, it should. Similarly, if the delivery
time with respect to the customer’s needs is deemed to be high (e.g.
groceries), then there is a need to have finished goods inventory. On the
other hand, if the delivery time is reasonable/acceptable (e.g. furniture),
then the company could do without having finished goods inventory.
• Reasons not to keep finished goods inventory:
• Storage costs
• Maintenance costs
• Competitive turnover of finished goods when newer products are
2a. What are the characteristics of products that are most
suitable to be carried in finished-goods inventory?

• These would be products with some or all of the following characteristics:

– Products with a steady demand demand within the market
– Products with high demand within the market
– Products that address a need for “no waiting time” from the customer (e.g. groceries,
emergency items)
– Products with low inventory cost
– Products with an extended inventory life

• On the other hand, products that are best manufactured to order are products
with some or all of the following characteristics:
– Products that allow customization based on customers’ preferences and needs
– Products with highly uncertain or low demand demand within the market
– Products for which the customer can wait (e.g. furniture)
– Products with high storage and inventory cost
– Products with low inventory life
3. How does product variety affect the level of inventory a
retail store must carry?

• Product variety is directly related to inventory costs, and inversely related to

the physical inventory carried at the store for each individual product
• Higher variety means that more products have to be maintained at the
store and therefore, the quantity of each product will be smaller
• With higher product variety, the products and quantities stored at the store
have to be very carefully selected; otherwise there is significant risk of a)
left-over inventory, which will lead to mark-downs, or b) lost sales
4. Is the model of selling directly without retail stores always
less expensive than a supply chain with retail stores?

• The model of selling directly from a DC to the customer is generally less

expensive, because it avoids the high costs of the retail store operation. On
the other hand, shipping costs are generally less from a DC to the retail
store (because of distance, and combined shipments) vs. shipping costs to
individualized customers.
• Therefore, a number of factors are important in determining the cost
difference between the two configurations of a) selling directly from a DC to
the customer, and b) selling through retail stores.
• These factors include:
– The costs of operating a retail store in a region
– The shipping and distribution costs from the DC to the customers
– The easiness of the “return” policy between the two configurations
– The proximity of the retail stores to the customers, and therefore the % of sales where the
customer will pick up the goods by visiting the store
– The nature of the products and the customer preferences in buying online vs visiting a
retail shop
– The cost of IT infrastructure in the two configurations
5. What factors explain the success of Apple retail and the
failure of Gateway country stores?

• The strategy of producing a very wide variety of products proved to be

very “expensive”, and not necessarily addressing a big market segment:
most of the customer demand was for a small number of standardized
products. Apple followed the strategy of focusing on a smaller variety of
products, and captured (a major part of) the demand.
• The customer experience that Apple has been providing is an important
factor of differentiation; Gateway was not providing such a level of
customer service and experience.
• Delivery time was another factor that helped Apple, since the customer
was able to get the product while at the store.
• Apple was the only retailer of their products, thus guaranteeing excellent
service across the board.
• Finally, Apple was able to create big brand loyalty, an important factor in
improving sales.