Tommys Dresses to Go

Founded by enigmatic designer Tommy Haverford, Tommys Dresses to Go (TDG) 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 TDGs website which displays the available dresses and their rental prices. On average, TDG sees rental demand of 100 dresses per day. The number of webpage visitors to the webpage 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, TDG keeps 5 days demand (i.e., 500 dresses, assuming original demand for 100 dresses per day) in their Read- to-go Inventory, which includes different styles and sizes. This number must be large due to a variety of dresses TDG keeps as well as the policy that TDG ships two dresses (same style in two different sizes) to satisfy a customers request for one dress. When taking a rental order, TDG requires that a customer specify two sizes for each dress she requeststhe most likely and second most likely size. This minimizes the customers 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 TDG). At the end of rental period, the customer returns the two dresses in a pre-labeled UPS package. Return shipping takes one day, and again costs $5, borne by TDG.

Upon its return, a dress is sent immediately for basic cleaning. The basic cleaning is performed at InstaClean laundry located next door to TDGs fulfillment center. InstaClean 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 InstaClean, they are inspected for such damages. This inspection process, performed at Designers Den, is time consuming and management has expressed frustration over number of dresses that are either waiting to be inspected or are getting inspected. The Designers Den takes long time for inspecting dresses, as workers there are busy figuring out latest trends to be incorporated in TDGs dress portfolio. The marginal cost of inspection is zero, since salaries of workers at Designers Den are paid irrespective of the number of dresses they inspect, and they carry out inspection in their spare time. 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 Ready-to-go Inventory. And the damaged dresses are sent across town to MaxiClean laundry who specializes in repairing such dresses. Since MaxiClean is farther way, TDG typically batches a number of dresses before sending them to MaxiClean. MaxiClean charges $10 for repairing each dress, after which the dress is placed back in the Ready-to-go Inventory.

Customers typically want dresses from the current fashion trends (and without any wear and tear). To meet this need, TDG regularly buys new dresses and writes-off old dresses. An average new dress costs TDG $750 (substantially discounted from the average retail price of $1000). A new dress has an average life of 125 rental days. TDG depreciates cost of a new dress over 125 days in a straight-line fashion (this is the same as saying that TDG incurs $750/125 = $6 per day on each dress it owns).

While there is enough demand for its service, TDG continues to bleed money. As a new CEO, your responsibility is to figure out how to show signs of profitability of this business before 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:

1. 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 TDG to buy more dresses.
2. Improving inspection: Currently dresses wait for long time in the Designers Den for the inspection process, since people working there have other tasks at higher priority (they are responsible for figuring out what dresses TDG should purchase for upcoming seasons). One suggestion is to have a pool of workers in Designers Den dedicated to carrying out inspection. This will cost around extra $6 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 TDGs operations and business model to achieve profitability?Additional Information: An internal audit conducted by TDG uncovered the following information about internal processing at the fulfillment center.

1. InstaClean takes a day to perform basic cleaning of a returned dress.
2. On average there are 1200 returned dresses at Designers Den. 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 MaxiClean due to batching. On average there are 75 dresses waiting to be sent to MaxiClean.
4. After receiving dresses, MaxiClean 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 MaxiClean after they are processed. On average there are 75 such dresses at MaxiClean.
5. The time to ship dresses to/from InstaClean and MaxiClean 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). TDGs cost of an average dress is $750, which is depreciated over 125 days in straight line fashion.

ALL THE INFORMATION NECESSARY TO SOLVE THE QUESTIONS IN PROVIDED ABOVE!!! THE QUESTIONS (3 OR 4) ARE BELOW:

Read Tommy's Dresses to Go (TDG) Download Tommy's Dresses to Go (TDG)case and submit a write-up addressing the following questions about case:

1. Draw a detailed process flow diagram that captures all the stages of TDG's operations?
2. What is average number of dresses at different stages of TDG's operations? What is the total average number of dresses TDG owns? (Note that this is the number of dresses TDG needs in order to do business)
3. Using your answer from Question 2, complete the profit and loss statement. What is daily profit earned by TDG (excluding expenses in salaries and rental)?

• Additional OPTIONAL questions
  • Which of the proposed solution would you choose? Explain your reasoning.