Rent-A-Dress: Renting Fashion for Cheap Rent-A-Dress (RAD) rents out designer fashion apparel to customers who would like to wear elegant dresses on special occasions but do not wish to purchase them. For example, a customer can rent a $1000 dress for $25 per day for a 10-day rental period. To rent a dress, a customer visits the RAD website which displays the available dresses and their rental prices. On average, RAD sees rental demand of 100 dresses per day. The number of web page views is actually very large, but not everyone rents. Many leave the website, not finding the dresses they want. To ensure that enough customers do find dresses, RAD keeps 5 days' demand (i.e., 500 dresses) in their "Rental-Ready Inventory", which includes different styles and sizes. This number must be large due to a variety of dresses RAD keeps as well as the policy that RAD ships two dresses (same style in two different sizes) to satisfy a customer's request for one dress. When taking a rental order, RAD requires that a customer specify two sizes for each dress she requests the most likely and second most likely size. This minimizes the customer's hassle in returning a dress because of fit issues. Once a customer places a rental order, two dresses (one style in two sizes) are sent to customer via UPS next-day delivery (one-day shipping that costs $5, borne by RAD). At the end of rental period, the customer returns the two dresses in a prelabeled UPS package. Return shipping takes one day, and again costs $5, borne by RAD. Upon its return, a dress is sent immediately for basic cleaning. The basic cleaning is performed at Quick Clean laundry located next door to RAD's fulfillment center. Quick Clean charges $5 per dress for performing this service. Some of the returned dresses are damaged, and require some repair before they can be rented to customers. After dresses are returned from Quick Clean, they are inspected for such damages. This inspection process, performed at "Dress Studio", is time consuming and management has expressed frustration over number of dresses that are either waiting to be inspected or are getting inspected. The "Dress Studio" takes long time for inspecting dresses, as workers there are busy figuring out latest trends to be incorporated in RAD's dress portfolio. The marginal cost of inspection is zero, since "Dress Studio" workers' salaries are paid irrespective of the number of dresses they inspect. In the inspection process, on average 25% of the dresses are found to be damaged. The dresses found to be in good condition (i.e., not damaged) are placed back in Rental-Ready Inventory. And the damaged dresses are sent across town to Max Clean laundry who specializes in repairing such dresses. Since Max Clean is farther way, RAD typically batches a number of dresses before sending them to Max Clean. Max Clean charges $10 for repairing each dress, after which the dress is placed back in the Rental-Ready Inventory. Customers typically want dresses from the current fashion trends (and without any wear and tear). To meet this need, RAD regularly buys new dresses and writes-off old dresses. An average new dress costs RAD $750 (substantially discounted from the average retail price of $1000). A new dress has an average life of 125 rental days. RAD depreciates cost of a new dress over 125 days in a straight-line fashion (this is the same as saying that RAD incurs $750/125 = $6 per day on each dress it owns). While there is enough demand for its service, Rent-A-Dress continues to bleed money. As a new CEO, your responsibility is to figure out how to show signs of profitability of this business before 2 going for the next round of funding. Various proposals have been put forward to improve profitability. The following two competing proposals are on your table: (i) Five-day rentals: A survey of customers who visit the website but do not rent suggests that there is demand for a 5-day rental. For example, for a $1000 dress, customers are willing to pay $30 per day for a 5-day rental period. The demand for 5-day rentals is estimated to be 100 per day. One downside of this proposal is that it will eat away some of the 10-day rental demand (around 20 per day). However, the total demand increases to 180 per day, a substantial increase of 80%. Furthermore, satisfying this additional demand would require RAD to buy more dresses. (ii) Improving inspection: Currently dresses wait for long time in the "Dress Studio" for the inspection process, since people working there have other tasks at higher priority (they are responsible for figuring out what dresses RAD should purchase for upcoming seasons). One suggestion is to have a pool of workers in "Dress Studio" dedicated to carrying out inspection. This will cost around extra $2 per dress, but will reduce the time taken at the inspection process to one third. Which of the two proposals would you pursue? What other changes would you make to RAD's operations and business model to achieve profitability? Additional Information: An internal audit conducted by RAD uncovered the following information about internal processing at the fulfillment center. 1. Quick Clean takes a day to perform basic cleaning of a returned dress. 2. On average there are 1000 returned dresses at "Dress Studio". These dresses are either waiting to be inspected or are being inspected. 3. Dresses identified as damaged typically have to wait for a while before they are sent to Max Clean due to batching. On average there are 100 dresses waiting to be sent to Max Clean. 4. After receiving dresses, Max Clean takes an average of 2 days to repair and clean them. But after this, the dresses are also picked up in batches. Due to this, dresses again wait at Max Clean after they are processed. On average there are 100 such dresses at Max Clean. 5. The time to ship dresses to/from Quick Clean and Max Clean can be assumed to be negligible (zero). 6. While there is variation in the cost as well as rental fee of a dress, you can assume an average dress has retail value of $1000. An average dress is rented out for $25 per day (2.5% of retail value) for 10-day rental period, and for $30 per day (3% of retail value) for 5-day rental period if you adopt proposal (i). RAD's cost of an average dress is $750, which is depreciated over 125 days in straight line fashion