1. Homework 1- Gateway

2. Introduction
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 stores
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 retailers

3. Problems
Why did Gateway choose not to carry any finished-product inventory at its retail stores?
What factors did Gateway consider when deciding which plants to close?
Why did Gateway decide not to carry any finished product inventory at its retail stores?
Should a firm with an investment in retail stores carry any finished goods inventory?
Is the Dell model of selling directly without retail stores always less expensive than a supply chain with retail stores?
What are the supply chain implications of Gateway’s decision to offer fewer configurations?

4. 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 products.

5. 1a. Why did Apple choose to carry inventory at its retail stores?
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 produced
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 hand.

6. 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

7. 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, including:
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.

8. 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 introduced.

9. 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

10. 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

11. 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

12. 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.
During the Operation phase - firms allocate inventory or production to individual orders, set a date that an order is to be filled, allocate an order to a particular shipping mode and shipment, etc.